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As filed with the Securities and Exchange Commission on January 12, 2001
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-3
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
FLEET HOME EQUITY LOAN CORPORATION
(Exact name of registrant as specified in its Charter)
United States 04-3544150
(State or other jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
100 Federal Street
Boston, Massachusetts 02110
(617) 434-2200
(Address, including zip code, and telephone number, including area
code, of principal executive offices)
William C. Mutterperl, Esq.
General Counsel
FleetBoston Financial Corporation
100 Federal Street
Boston, Massachusetts 02110
(617) 434-9587
(Name, address, including zip code, and telephone number, including
area code, of agent for service)
With a copy to:
Gail G. Watson, Esq.
Brown & Wood LLP
One World Trade Center
New York, New York 10048
(212) 839-5300
Approximate date of commencement of proposed sale to the public:
From time to time on or after the effective date of the registration
statement, as determined by market conditions.
If the only securities being registered on this form are being
offered pursuant to dividend or interest reinvestment plans please
check the following box. [ ]
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, other than securities offered only in
connection with dividend or interest reinvestment plans, please check
the following box. [X]
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b), under the Securities Act, please
check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for
the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, please check the following box and
list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to
Rule 434, please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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===================================================================================================================================
TITLE OF EACH CLASS OF AMOUNT TO BE PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED OFFERING PRICE AGGREGATE REGISTRATION
PER UNIT(1) OFFERING PRICE(1) FEE
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<S> <C> <C> <C> <C>
Asset-Backed Certificates and $1,000,000 100% $1,000,000 $250
Asset-Backed Notes.................
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(1) Estimated for the purpose of calculating the registration fee.
This Registration Statement is also being used to register securities that may
be sold in secondary market transaction by an affiliate of the Registrant. The
Registrant hereby amends this Registration Statement on such date or dates as
may be necessary to delay its effective date until the Registrant shall file a
further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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THE INFORMATION IN THIS PROSPECTUS SUPPLEMENT IS NOT COMPLETE AND MAY BE
CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN
OFFER TO SELL THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED JANUARY 12, 2001.
Prospectus Supplement dated __________ __, ____
To Prospectus dated _____________ __, ____
$____________
[ ] HOME EQUITY LOAN TRUST ____-_,
as Issuer
$________ Home Equity Loan Asset-Backed Certificates, Series ____-_
$_______ Home Equity Loan Asset-Backed Notes, Series ____-_
Fleet National Bank, Fleet Home Equity Loan Corporation,
as seller and servicer as depositor
<TABLE>
<CAPTION>
[Certificates] Principal [Certificate][Note] Price to Underwriting Proceeds to the
[Notes] Balance Rate Public(1) Discount Depositor(2)
------- ------- ---- --------- -------- ------------
<S> <C> <C> <C> <C> <C>
$ % % % %
Total $ $ $ $
</TABLE>
----------
(1) Plus accrued interest, if any, at the [certificate] [note] rate from
______ __, _____.
(2) Before deducting expenses, payable by the depositor, estimated to be
$__________.
[The underwriter listed below will offer the securities at varying prices to be
determined at the time of sale. The proceeds to the depositor from the sale of
the securities will be approximately [$ ], before deducting expenses. The
underwriter's commission will be the difference between the price it pays to the
depositor for the securities and the amount it receives from the sale of the
securities to the public.]
REVIEW THE INFORMATION IN RISK FACTORS BEGINNING ON PAGE S-10 OF THIS PROSPECTUS
SUPPLEMENT AND ON PAGE 2 OF THE PROSPECTUS.
- For complete information about the [certificates][notes] read both this
prospectus supplement and the prospectus. This prospectus supplement must be
accompanied by the prospectus if it is being used to offer and sell the
[certificates][notes].
THE [CERTIFICATES][NOTES]
- the certificates represent beneficial interests in a trust, whose assets
are a pool of [adjustable][fixed] rate home equity revolving credit line
loans and property relating to those loans
- the notes are secured by assets of the trust
- currently have no trading market
- are obligations of the trust only and are not obligations of the
depositor, the seller, the servicer or any of their affiliates
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CREDIT ENHANCEMENT
- will be provided in the form of [overcollateralization] [letter of credit]
[surety bond]
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is a
criminal offense.
[This prospectus supplement and the accompanying prospectus may be used by Fleet
Securities, Inc. or one of its affiliates in connection with offers and sales of
the securities in market-making transactions.]
[UNDERWRITER]
______________, 200_
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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 any other information.
We are not offering the securities in any state where an offering of the
securities is not permitted.
We do not claim that the information in this prospectus supplement and
prospectus is accurate as of any date other than the dates stated on the
respective covers.
Dealers will deliver a prospectus supplement and prospectus when acting as
underwriters of the securities and with respect to their unsold allotments or
subscriptions. In addition, all dealers selling the securities will be required
to deliver a prospectus supplement and prospectus for ninety days following the
date of this prospectus supplement.
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PAGE
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PROSPECTUS SUPPLEMENT
Summary................................................................. 5
Risk Factors............................................................ 10
The Trust............................................................... 12
The [Letter of Credit][Surety Bond] Issuer.............................. 13
Fleet National Bank..................................................... 13
Maturity and Prepayment Considerations.................................. 16
Description of the HELOCs............................................... 17
Description of the Securities........................................... 22
The Servicing Agreement................................................. 27
The Indenture........................................................... 30
The Trust Agreement..................................................... 35
Administration Agreement................................................ 36
The Indenture Trustee................................................... 36
The Owner Trustee....................................................... 36
Use of Proceeds......................................................... 36
Federal Income Tax Consequences......................................... 36
State Tax Consequences.................................................. 37
ERISA Considerations.................................................... 37
Legal Investment Considerations......................................... 39
Underwriting............................................................ 39
Legal Matters........................................................... 40
Rating.................................................................. 40
Annex I................................................................. 42
PROSPECTUS
Risk Factors............................................................ 2
Description of the Securities........................................... 6
The Trusts.............................................................. 9
Enhancement............................................................. 14
</TABLE>
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<TABLE>
<S> <C>
Fleet Home Equity Loan Corporation...................................... 18
Fleet National Bank..................................................... 18
Servicing of Loans...................................................... 27
The Agreements.......................................................... 36
Legal Aspects of the Loans.............................................. 48
Use of Proceeds......................................................... 62
Federal Income Tax Consequences......................................... 63
State Tax Considerations................................................ 99
ERISA Considerations.................................................... 100
Legal Investment........................................................ 106
Ratings................................................................. 106
Plan of Distribution.................................................... 106
Legal Matters........................................................... 106
Available Information................................................... 107
Incorporation of Documents by Reference................................. 107
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SUMMARY
This summary highlights selected information from this document and does
not contain all of the information that you need to consider in making your
investment decision. To understand all of the terms of the offering of the
securities, read carefully this entire document and the accompanying prospectus.
THE TRUST
[ ] Home Equity Loan Trust _____-__ will be created pursuant to a [trust
agreement] between the depositor and the owner trustee. The trust will own a
pool of [home equity revolving credit line loans] including the outstanding
balances as of the cut-off date and any additional outstanding balances
generated under those credit line loans. The trust will issue the securities
on [closing date].
THE SELLER
Fleet National Bank
100 Federal Street
Boston, Massachusetts 02110
We refer you to "Fleet National Bank" in the prospectus.
THE SERVICER
[Fleet National Bank
100 Federal Street
Boston, Massachusetts 02110]
We refer you to "Fleet National Bank" in this prospectus supplement and to
"Fleet National Bank, Loan Servicing" and "Collections" in the
prospectus.
THE DEPOSITOR
Fleet Home Equity Loan Corporation
100 Federal Street
Boston, Massachusetts 02110
We refer you to "Fleet Home Equity Loan Corporation" in the prospectus.
THE INDENTURE TRUSTEE
[ ]
THE OWNER TRUSTEE
[ ]
THE [CERTIFICATE / NOTE] INSURER
[ ]
We refer you to "The [Letter of Credit][Surety Bond] Issuer."
CUT-OFF DATE
[Date]
TRUST PROPERTY
The property of the trust will include:
- a pool of [adjustable] [fixed] rate home equity loan revolving credit
line loans made or to be made in the future under home equity revolving
credit line loan agreements, and secured primarily by [second] [deeds of
trust] [mortgages] on residential properties that are primarily one-to
four-family properties. We sometimes refer to these credit line loans as
mortgage loans or home equity lines of credit.
- payments on the mortgage loans received after the cut-off date.
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- any additions to the loan balances of the mortgage loans during the life
of the trust.
- property that secured a mortgage loan which has been acquired by
foreclosure or deed in lieu of foreclosure.
- the benefit of the [surety bond] [letter of credit].
- [rights of the depositor under the purchase agreement by which the seller
sells the mortgage loans to the depositor. Under some circumstances, if
the representations and warranties made by the seller about the mortgage
loans are breached, then the seller will be obligated to repurchase those
mortgage loans.]
- benefits under any hazard insurance policies covering the mortgaged
properties.
- amounts on deposit in certain accounts.
- all proceeds from the items above.
THE MORTGAGE LOANS
On [the closing date], ______________, the trust will acquire a pool of
mortgage loans. The information below is based on the pool of mortgage loans
as it existed on the [cut-off date].
- number of mortgage loans: ________
- aggregate principal balance: $_________
- principal balance range: $__ to $__
- average principal balance: $______
- loan rate range: ___% to ___%
- weighted average loan rate: ____%
- credit limit utilization rate range: __% to __%
- weighted average credit limit utilization rate: ___%
- weighted average combined loan-to-value ratio: ____%
We refer you to "Fleet National Bank" and "Description of the HELOCs."
DISTRIBUTIONS TO SECURITYHOLDERS
You will be entitled to receive payments of interest each month. The amount
of principal you will be entitled to receive will vary depending on a number
of factors, including the payments on the mortgage loans. Each month the
[servicer] [trustee] will calculate the amounts to be paid to the
securityholders. If you hold a [note][certificate] on the day preceding a
distribution date, or if the securities are no longer book-entry securities,
the last day of the month preceding a distribution date, you will be entitled
to receive payments on the distribution date in the next month. The
distribution date will be the ____ day of each month or, if that day is not a
business day, the next succeeding business day, starting on _____________,
____.
INTEREST ACCRUAL PERIODS
Interest for the first distribution date will accrue on the unpaid principal
balance of the securities at the applicable rate from the closing date to the
first distribution date. After the first distribution date, interest will
accrue from and including the preceding distribution date to but excluding
the current distribution date. [Interest will be calculated on the basis of
the actual number of days in each interest accrual period divided by 360.]
APPLICATION OF COLLECTIONS
On each distribution date, collections on the mortgage loans will be applied
in the following order of priority:
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[(1) to the servicer, the servicing fee;
(2) as payment for the accrued interest due and any overdue accrued
interest, with interest thereon;
(3) as principal on the securities, the excess of principal collections over
additional balances created during the preceding collection period. This
amount will be allocated between the notes and certificates, pro rata,
based on their respective principal balances;
(4) as principal of the securities, payment for any amounts unrecoverable
as losses on the mortgage loans;
(5) the premium on the [surety bond];
(6) reimbursement of prior draws made on the [surety bond]; and
(7) any remaining amounts to the seller.]
FINAL SCHEDULED DISTRIBUTION DATE
[Certificates] [Date]
[Notes] [Date]
We expect the actual final distribution date for each security will be
significantly earlier than its final scheduled distribution date.
TERMINATION OF TRUST
The trust will terminate on the distribution date following the earlier of
(i) ______________________ and (ii) the final payment or other liquidation of
the last mortgage loan in the trust.
CREDIT ENHANCEMENT
[Letter of Credit] [Surety Bond]
On the closing date, [enhancer] will issue a [letter of credit] [surety bond]
to the trust. In the event that, on any distribution date, amounts on deposit
in the collection account with respect to the preceding collection period
which are available to be distributed on the [notes][certificates] are
insufficient to provide for the payment of the amount required to be
distributed to the holders on that distribution date, the [indenture][owner]
trustee will draw on the [letter of credit] [surety bond], to the extent of
the [letter of credit] [surety bond] amount for that distribution date, in an
amount equal to the deficiency.
We refer you to "The [Letter of Credit] [Surety Bond] Issuer" in this
prospectus supplement and "Enhancement" in the prospectus.
[Letter of Credit] [Surety Bond] Amount
The amount available under the [letter of credit] [surety bond] for the
initial distribution date will be $_________. For each other distribution
date, the amount available will equal the lesser of (1) a percentage of the
pool balance and (2) an amount based on the original amount available, less
amounts previously drawn and plus amounts paid to the [enhancer] as
reimbursement.]
OPTIONAL REPURCHASE
On any distribution date after the principal balance is reduced to an amount
less than or equal to $ ________, [5]% of the initial principal balance, the
[servicer] will have the option of purchasing the mortgage loans.
We refer you to "Description of the Securities -- Optional Repurchase" in
this prospectus supplement and "Description of the Securities -- Optional
Redemption, Purchase of Trust Assets or Securities, Termination of Trust" and
"The Agreements -- Termination" in the prospectus.]
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REGISTRATION OF SECURITIES
We will issue the securities in book-entry form. You will hold your interests
through a depository. While the [certificates/notes] are book-entry they will
be registered in the name of the depository.
Beneficial interests in these [certificates/notes] may be purchased in
minimum denominations of [$] and integral multiples of [$].
The circumstances under which definitive certificates will replace the
book-entry certificates are described in this prospectus supplement.
We refer you to "Risk Factors -- Consequences of Owning Book-Entry
Securities."
[FEDERAL INCOME TAX CONSEQUENCES
[In the opinion of [tax counsel], for federal income tax purposes, the
securities will be characterized as indebtedness, and the trust should be
characterized as an owner trust and will not be characterized as an
association, publicly traded partnership taxable as a corporation or as a
taxable mortgage pool. Each holder of a security, by the acceptance of a
security, will agree to treat the security as indebtedness and the trust as
an owner trust for federal, state and local income and franchise tax
purposes.]
We refer you to "Federal Income Tax Consequences" and "State Tax
Consequences" in this prospectus supplement and "Federal Income Tax
Consequences" and "State Tax Considerations" in the prospectus concerning the
application of federal, state and local tax laws.]
ERISA CONSIDERATIONS
[Subject to the considerations described under "ERISA Considerations" in this
prospectus supplement and the prospectus, the notes may be transferred to an
employee benefit or other plan or arrangement subject to the Employee
Retirement Income Security Act of 1974 or to Section 4975 of the Internal
Revenue Code of 1986.][[Subject to the considerations described under "ERISA
Considerations" in this prospectus supplement and the prospectus,] the
certificates [may][may not] be transferred to an employee benefit or other
plan subject to the Employee Retirement Income Security Act of 1974 or
Section 4975 of the Internal Revenue Code of 1986.]
We refer you to "ERISA Considerations" in this prospectus supplement and in
the prospectus.
RATING
Before the securities can be issued, [the trust] must obtain a rating on the
securities of:
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Rating Agency
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Class [ ] [ ]
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<S> <C> <C>
[certificates] [ ] [ ]
[notes] [ ] [ ]
</TABLE>
The ratings obtained for the securities address credit risk. When evaluating
credit risk, the rating agencies evaluate the likelihood of whether or not
you will receive your interest and principal payments. Credit risk does not
relate to the likelihood of prepayments on the mortgage loans. Prepayments
affect the timing of payments to you, such that your actual return could
differ substantially from your anticipated return on your investment.
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We refer you to "Rating" and "Risk Factors -- Rating of the Securities Does
Not Assure Payment" in the prospectus.
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RISK FACTORS
CONSEQUENCES OF OWNING BOOK-ENTRY SECURITIES
Limit on Liquidity of Securities. Issuance of the securities in book-entry
form may reduce the liquidity of the securities in the secondary trading market
since investors may be unwilling to purchase securities for which they cannot
obtain physical securities.
Limit on Ability to Transfer or Pledge. Since transactions in the
securities can be effected only through DTC, Clearstream, Euroclear,
participating organizations, indirect participants and banks, your ability to
pledge your security to persons or entities that do not participate in the DTC,
Clearstream or Euroclear system or otherwise to take actions in respect of the
securities, may be limited due to lack of a physical security representing the
securities.
Delays in Distributions. As a beneficial owner, you may experience some
delay in your receipt of distributions of interest on and principal of your
securities since distributions will be forwarded by the trustee to DTC and DTC
will credit distributions to the accounts of its participants which will credit
them to the accounts of the beneficial owners either directly or indirectly
through indirect participants.
We refer you to "Description of the Securities -- Book-Entry Securities."
CASH FLOW LIMITED IN EARLY YEARS OF MORTGAGE LOANS
During the draw down period under the related credit line agreements,
borrowers generally are not required to make monthly payments of principal,
although minimum payments will at least equal and may exceed accrued interest.
As a result, collections on mortgage loans may vary. As of the cut-off date, the
weighted average remaining draw down period by outstanding principal balance is
___ months. ____% of the mortgage loans by outstanding principal balance as of
the cut-off date may permit the related borrowers to extend their draw down
periods for one or two additional five year terms. Collections on the mortgage
loans may also vary due to seasonal purchasing and payment habits of borrowers.
As a result there may be limited collections available to make payments to you.
LIMITED INFORMATION REGARDING PREPAYMENT HISTORY
All of the mortgage loans may be prepaid in whole or in part at any time.
Home equity loans have been originated in significant volume only during the
past few years and neither the seller nor the servicer is aware of any publicly
available studies or statistics on the rate of prepayment of home equity loans.
Home equity loans usually are not viewed by borrowers as permanent financing and
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. In addition, substantially all of
the mortgage loans contain due-on-sale provisions which may affect the rate of
prepayment.
We refer you to "Maturity and Prepayment Considerations."
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SERVICER'S ABILITY TO CHANGE THE TERMS OF THE MORTGAGE LOANS
The servicer may agree to changes in the terms of a mortgage loan,
provided that the changes (i) do not adversely affect the interest of the
holders, and (ii) are consistent with prudent business practice. There can be no
assurance that changes in applicable law or the marketplace for home equity
loans or prudent business practice will not result in changes in the terms of
the mortgage loans.
In addition, the servicer may, subject to some limitations, increase the
credit limit of a mortgage loan, reduce the loan rate of a mortgage loan or
consent to the placing of another lien senior to that of the mortgage loan.
Increasing the credit limit and consenting to the placing of another lien senior
to that of the mortgage loan may increase the combined loan-to-value ratio of
that mortgage loan and, accordingly, may increase the risk of owning the
mortgage loan. Reducing the loan rate of a mortgage loan will reduce the cash
flow available to absorb losses.
We refer you to "The Servicing Agreement, Modifications to HELOCs" and
",Consent to Senior Liens."
[DELINQUENT MORTGAGE LOANS INCLUDED IN TRUST PROPERTY MAY BE MORE LIKELY TO
DEFAULT THAN NON-DELINQUENT MORTGAGE LOANS
The trust will include mortgage loans which are up to ___ days delinquent.
As of the cut-off date, the aggregate loan balance of the delinquent mortgage
loans was $__________. [In addition, the mortgage loans in all likelihood
include obligations of borrowers who are or are about to become bankrupt or
insolvent.] If there are not sufficient funds from interest collections to cover
the realized losses for any collection period and the [letter of credit] [surety
bond] amount has been reduced to zero or [the enhancer] defaults, the
[certificate] [note] principal balance will be reduced which, unless otherwise
later reimbursed, will result in a loss to you.]
[RATINGS ON SECURITIES BASED PRIMARILY ON CLAIMS-PAYING ABILITY OF THE
[ENHANCER]
The rating on the securities depends primarily on the claims paying
ability of the [enhancer]. Therefore, a reduction of the rating assigned to the
claims-paying ability of the [enhancer] may have a corresponding reduction on
the ratings assigned to the securities. A reduction in the rating assigned to
the securities would reduce the market value of the securities and may affect
your ability to sell them. The rating on your security addresses credit risk and
does not address the likelihood of prepayments.
We refer you to "Rating."]
[INTEREST PAYABLE ON THE [SECURITIES] AND INTEREST PAYABLE ON THE MORTGAGE
LOANS DIFFER
Interest payable on the mortgage loans may be insufficient to pay interest
on the securities. Interest payable on the securities will accrue at a
[variable] rate [based on LIBOR]. Interest payable on the mortgage loans will
accrue at a [variable] rate based on the [prime] rate plus a designated margin
[or, at a fixed rate]. LIBOR and the prime rate may not respond to the same
economic factors and there is no necessary correlation between them. If the
spread between LIBOR and the prime rate [or fixed rate] is reduced or
eliminated, the interest payable on the
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securities also may be reduced. In addition, the weighted average life of the
securities may be affected. If that happens, the value of your securities may be
temporarily or permanently reduced.]
[GEOGRAPHIC CONCENTRATION INCREASES RISK THAT CERTIFICATE YIELDS CAN BE
IMPAIRED
The concentration of the related mortgaged properties in one or more
geographic regions may increase the risk of loss to your securities. The
mortgaged properties relating to the mortgage loans are located in __ states and
the District of Columbia. However, __% of the mortgaged properties, by principal
balance as of the cut-off date, are located in ______ and ________. If these
states experience in the future weaker economic conditions or greater rates of
decline in real estate values than the United States generally, then the
mortgage loans may experience higher rates of delinquencies and foreclosures
than would otherwise be the case. A region's economic condition and housing
market may be adversely affected by a variety of events, including natural
disasters such as earthquakes, hurricanes, floods and eruptions, and civil
disturbances, such as riots.]
[POSSESSION BY SELLER OF LOAN DOCUMENTS MAY ADVERSELY AFFECT THE SECURITY
INTEREST OF THE TRUST
The seller will maintain possession of the documentation relating to each
mortgage and no assignment of any mortgage is required to be recorded in the
name of the trustee, unless the seller's long-term debt rating is reduced below
[describe]. Within 30 days of such reduction in rating, the seller is required
to deliver the mortgage documents to the trustee and to either record the
assignments or deliver a legal opinion to the effect that recordation of the
assignments is not necessary in order to perfect the interest of the trust in
the mortgages. Prior to delivery and recording, the interest of the trustee in
the mortgages, the mortgage notes and any proceeds from the mortgage loans may
be subject to the claims of creditors or to sale to a third party, as well as to
a receiver or conservator appointed in the event of the insolvency of the
seller.
In an insolvency proceeding of the seller, if the mortgage notes have not
been delivered to the trustee and the mortgages have not been assigned of record
in the real property recording office to the trustee, the trust may be a general
unsecured creditor of the seller. If the trust were determined to be a general
unsecured creditor of the seller, the mortgages, the mortgage notes and the
proceeds from their sale would not be available to make payments on the
securities.]
THE TRUST
GENERAL
[ ] Home Equity Loan Trust ___________ is a business trust formed under
the laws of the State of [Delaware] by the trust agreement, dated as of ____,
between Fleet Home Equity Loan Corporation, the depositor, and [the owner
trustee] for the transactions described in this prospectus supplement. The trust
agreement constitutes the "governing instrument" under the laws of the [State of
Delaware] relating to business trusts. After its formation, the trust will not
engage in any activity other than (1) acquiring, holding and managing the trust
property described below, (2) issuing the notes and the certificates, (3) making
payments on the notes and
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the certificates and (4) engaging in other activities that are necessary,
suitable or convenient to accomplish these purposes.
The property of the trust will consist of:
- each of the home equity lines of credit or "HELOCs" that are
transferred by the depositor to the trust;
- collections on the HELOCs received after the cut-off date;
- the outstanding balances as of the cut-off date and any additional
balances generated under those HELOCs;
- mortgaged properties relating to the HELOCs that are acquired by
foreclosure or deed in lieu of foreclosure;
- [the collection account and] the distribution account, excluding, in
each case, net earnings thereon;
- the [letter of credit] [surety bond];
- an assignment of the depositor's rights under the purchase agreement,
including all rights of the depositor to purchase any additions to the
loan balances of the HELOCs; and
- benefits under any hazard insurance policies covering the mortgaged
properties.
- all proceeds from the items above.
The trust's principal offices are in _____________, in care of
________________________, as owner trustee, at [ ].
[Financials for Trust]
THE [LETTER OF CREDIT][SURETY BOND] ISSUER
The following information with respect to _______________
("_______________") has been furnished by __________________.
[Description of letter of credit/surety issuer]
FLEET NATIONAL BANK
THE FLEET NATIONAL BANK CONSUMER LOAN GROUP HOME EQUITY PROGRAM
We refer you to "Fleet National Bank" in the prospectus for information
about the seller's origination procedures and underwriting guidelines for the
HELOCs.
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SERVICING OF THE MORTGAGE LOANS
At [date], Fleet National Bank (the "Bank") serviced a total portfolio of
[ ] HELOCs, having an aggregate outstanding principal balance of approximately
[$ ]. These figures include HELOCs that were originated or acquired by the
Bank [and HELOCs that are serviced for third parties on a contractual basis].
We refer you to "Fleet National Bank" in the prospectus for information
with respect to the servicer's procedures and guidelines for the servicing of
HELOCs.
DELINQUENCY, FORECLOSURE AND LOSS EXPERIENCE
The tables below summarize the delinquency, foreclosure and loss
experience of HELOCs owned by the Bank. The data includes all HELOCs owned by
the Bank, whether originated, purchased or acquired as the result of bank
mergers and reflects HELOCs that were originated or underwritten under criteria
different from the HELOCs held by the trust. Accordingly, the delinquency and
loss figures presented below for [date] represent information for all HELOCs
currently owned by the Bank, but may not be representative of the HELOCs
included in this trust.
[The information in the tables below has not been adjusted to eliminate
the effect of the unseasoned nature of the HELOC portfolio during the periods
shown. Accordingly, loss and delinquency as percentages of aggregate principal
balance of HELOCs serviced for each period would be higher than those shown if a
group of HELOCs were artificially isolated at a point in time and the
information showed the activity only in that isolated group. However, since most
of the HELOCs in the Bank's HELOC portfolio will not be fully seasoned and since
the terms of most HELOCs will not call for payment of principal in full prior to
maturity, the delinquency and loss information for such an isolated group would
also be distorted to some degree.]
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<PAGE> 16
DELINQUENCY AND FORECLOSURE EXPERIENCE OF THE BANK'S PORTFOLIO OF HELOCs
<TABLE>
<CAPTION>
As of As of December 31,
--------------------- --------------------------------------------------------------------------
October 31, 2000 1999 1998 1997
--------------------- ---- ---- ----
Number Dollar Number Dollar Number Dollar Number Dollar
of Amount Of Amount Of Amount Of Amount
Loans (000) Loans (000) Loans (000) Loans (000)
------- ----------- ------- ----------- ------- ----------- ------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Loans Outstanding(1) 180,578 $ 4,849,725 119,918 $ 3,499,995 135,252 $ 3,264,603 149,237 $ 3,556,002
Delinquencies as a
Percentage of Loans
Outstanding(1)(2)
30-59 days past due .63% .80% .51% .62% .66% .99% .86% 1.19%
60-89 days past due .13 .17 .11 .15 .17 .22 .22 .31
90 days and more past due .14 .17 .14 .14 .45 .44 .42 .46
------- ----------- ------- ----------- ------- ----------- ------- -----------
Total Delinquencies .90% 1.14% .76% .91% 1.28% 1.65% 1.50% 1.96%
Foreclosure(1)(3) 138 $ 5,180 247 $ 12,406 283 $ 15,513 264 $ 15,460
REO Properties(1)(4) 17 $ 776 34 $ 2,146 32 $ 2,379 37 $ 2,128
</TABLE>
[(1) The "Loans Outstanding", "Delinquencies as a Percentage of Loans
Outstanding", "Foreclosure", and "REO Properties" related to the HELOCs
acquired by the Bank as a result of the merger of Fleet Financial Group,
Inc. and BankBoston Corporation are included as of March 31, 2000.
(2) "Delinquencies as a Percentage of Loans Outstanding" is based on the
number of payments contractually past due, excluding loans in foreclosure.
Delinquency categories include accounts on non-accrual and accounts with
respect to which the related borrower has declared bankruptcy.
(3) "Foreclosure" data represents the number of HELOCs or the dollar amount of
HELOCs in foreclosure.
(4) REO Properties ('real estate owned' properties) are properties relating to
HELOCs foreclosed or for which deeds in lieu of foreclosure have been
accepted, and held pending disposition.]
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<PAGE> 17
LOSS EXPERIENCE OF THE BANK'S PORTFOLIO OF HELOCS
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------
Ten Months Ended For the Year Ended December 31,
---------------- --------------------------------------------------------------
October 31, 2000 1999 1998 1997
---------------- ---- ---- ----
Dollar Amount Dollar Amount Dollar Amount Dollar Amount
(000) (000) (000) (000)
<S> <C> <C> <C> <C>
Average Loans Outstanding(1)(2) $4,871,926 $3,329,298 $3,410,029 $3,600,573
Gross Losses(1)(3) $ 3,102 $ 4,951 $ 4,028 $ 9,458
Recoveries(1)(4) $ 1,316 $ 1,232 $ 960 $ 1,472
---------- ---------- ---------- ----------
Net Losses(1)(5) $ 1,786 $ 3,719 $ 3,068 $ 7,986
========== ========== ========== ==========
Net Losses as a Percentage of .04% .11% .09% .22%
Average Loans Outstanding
</TABLE>
[(1) The "Average Loans Outstanding", "Gross Losses", "Recoveries", and "Net
Losses as a Percentage of Average Loans Outstanding" related to the HELOCs
acquired by the Bank as a result of the merger of Fleet Financial Group,
Inc. and BankBoston Corporation are included as of March 31, 2000.
(2) "Average Loans Outstanding" during the period is the arithmetic average of
the principal balances of the HELOCs outstanding on the last business day
of each month during the period.
(3) "Gross Losses" are amounts which have been determined to be uncollectible
relating to HELOCs for each respective period.
(4) "Recoveries" are recoveries from liquidation proceeds and deficiency
judgments.
(5) "Net Losses" represents "Gross Losses" minus "Recoveries".]
MATURITY AND PREPAYMENT CONSIDERATIONS
The sale and servicing agreement, except as otherwise described in this
prospectus supplement, provides that the [note][certificate]holders will be
entitled to receive on each distribution date distributions of principal
collections, in the amounts described in this prospectus supplement, until the
related principal balance is reduced to zero.
As described in this prospectus supplement, the actual maturity of the
[notes][certificates] will depend in part on the receipt of principal on the
HELOCs or the amounts realized on liquidation of defaulted HELOCs, which will
result in principal payments on the [notes][certificates]. All of the HELOCs may
be prepaid in full or in part at any time. [Any HELOC originated in ________,
__________ or ________ is subject to an early termination fee if it is prepaid
in full within the first [three] years of its origination date.] The early
termination fee [is $____][may vary]. [The Bank is not aware of any statistics
available on whether early termination fees actually discourage prepayment.]
The Bank is not aware of any publicly generated studies or statistics
available on the rate of prepayment of loans such as the HELOCs. Generally,
HELOCs are not viewed by mortgagors
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<PAGE> 18
as permanent financing. Accordingly, HELOCs 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, changes in the deductability of interest payments on HELOCs for
federal income tax purposes, prevailing interest rates, the availability of
alternative financing and homeowner mobility.
In addition, the trust's prepayment experience and the rate at which the
[notes][certificates] amortize will be affected by any repurchases of HELOCs by
the servicer pursuant to the sale and servicing agreement. Substantially all of
the HELOCs contain due-on-sale provisions, and the servicer intends to enforce
such provisions unless (i) such enforcement is not permitted by applicable law
or (ii) the servicer, in a manner consistent with reasonable commercial
practice, permits the purchaser of the mortgaged property to assume the HELOC.
To the extent permitted by applicable law, such assumption will not release the
original borrower from its obligations under the HELOC. The enforcement of the
due-on-sale provision will have the same effect as a prepayment of the related
HELOC.
Collections on the HELOCs may vary because, among other things, borrowers
may make payments during any month as low as the minimum monthly payment for
such month or as high as the entire outstanding principal balance plus accrued
interest and fees. In addition, borrowers may fail to make scheduled payments.
Collections on the HELOCs may also vary due to seasonal purchasing and payment
habits of borrowers. Accordingly, there may be times, especially during the
years that a substantial percentage of HELOCs are in the draw period, that very
little is distributed on the securities in respect of principal.
No assurance can be given as to the level of prepayments that will be
experienced by the trust and it can be expected that a portion of borrowers will
not prepay their HELOCs to any significant degree.
DESCRIPTION OF THE HELOCS
GENERAL
The HELOCs in the trust were originated under loan agreements and
disclosure statements (the "Credit Line Agreements") and are secured by
mortgages or deeds of trust, most of which are second mortgages or second deeds
of trust, on mortgaged properties. The mortgaged properties securing the HELOCs
consist primarily of residential properties that are one- to four-family
properties. [All] of the mortgaged properties are owner occupied. The HELOCs
were underwritten in accordance with the standards described under "Fleet
National Bank" in the prospectus.
The pool of HELOCs consists of approximately [ ] HELOCs with an aggregate
cut-off date pool balance of $___________. As of the cut-off date, each HELOC
had a loan rate of at least ____% per annum. The average cut-off date principal
balance was $_______, the minimum cut-off date principal balance was zero, the
maximum cut-off date principal balance was $_________, the minimum loan rate and
the maximum loan rate on the cut-off date were ____% and ____% per annum,
respectively, and the weighted average loan rate on the cut-off date was ____%
per annum. As of the cut-off date, the weighted average credit limit utilization
rate was ____%, the minimum credit limit utilization rate was zero and the
maximum credit limit utilization rate was
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<PAGE> 19
____%. The credit limit utilization rate is determined by dividing the cut-off
date principal balance of a HELOC by the credit limit of the related Credit Line
Agreement. The weighted average combined loan-to-value ratio of the HELOCs was
____% as of the cut-off date and the weighted average junior mortgage ratio was
approximately __%.
Approximately __% of the HELOCs were secured by a first mortgage on the
related mortgaged property and __% of the HELOCs were secured by junior liens.
No HELOC had a combined loan-to-value ratio greater than __%.
As of the cut-off date, no HELOC was delinquent ___ days or more.
HELOC POOL STATISTICS
The depositor has compiled the following additional information as of the
cut-off date with respect to the HELOCs to be included in the trust.
[Tabular Information]
HELOC TERMS
The general terms of the HELOCs are described under "Fleet National
Bank, CLG Home Equity Lines of Credit" in the prospectus.
[A borrower may make a draw under the HELOC, from time to time, by using
special checks or other means provided to the borrower. Each draw will be at
least $250, or if the remaining available balance under the credit limit is less
than $250, then up to the credit limit. The draws will be funded by the
[seller].]
[Minimum monthly payments may be required to be made during the draw
period, but these payments will not be sufficient to fully amortize the HELOC
during the draw period. Borrowers may exceed their monthly payment without
penalty and the excess funds will be deposited into an account and used towards
the minimum monthly payment for the following period. Other fees, including the
annual membership fees and late payment charges, may vary by state.]
[The borrower's right to make a draw under a HELOC may be suspended or
terminated or the borrower may be required to pay the entire balance due plus
all other accrued but unpaid charges immediately, if:
- the borrower fails to make any required payment by the due date;
- the total outstanding principal balance including all charges payable
exceeds the credit limit;
- the borrower made any statement or signature on any document which is
fraudulent or contained a material misrepresentation;
S-18
<PAGE> 20
- the borrower dies or becomes incompetent;
- the borrower becomes bankrupt or insolvent;
- the borrower becomes subject to any judgment, lien, attachment or
execution is issued against the mortgaged property;
- the borrower fails to obtain and maintain required property insurance;
or
- the borrower sells or transfers the mortgaged property or does not
maintain the property.
In addition, the borrower's right to make a draw under a HELOC may be
suspended or a borrower's credit limit may be reduced, if
- the value of the mortgaged property decreases for any reason to less
than a specified percentage of the original appraised value;
- the borrower is in default under the HELOC;
- government action impairs the originator's lien priority; or
- a regulatory agency has notified the originator that continued advances
would constitute an unsafe and unsound practice.
The credit limits may also be increased upon completion of a satisfactory
underwriting review.
The billing statement details all debits and credits and specifies the
minimum payment due and the available credit line. Notice of changes in the
applicable loan rate are provided to the borrower with the billing statements.
The payment due dates for the HELOCs vary throughout the month.
Interest accrued each month with respect to each HELOC adjusts based on
the index which is the prime rate published in The Wall Street Journal for the
day that the loan resets. If more than one prime rate is published, the highest
rate will be used. The weighted average gross margin for the HELOCs as of the
cut-off date was [__%]. All of the HELOCs are subject to a maximum loan rate
specified in the Credit Line Agreements. [No HELOC is subject to a minimum loan
rate or a periodic loan rate cap or floor.]
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
[With respect to each Collection Period, other than the first Collection
Period, the servicing compensation to be paid to the servicer in respect of its
servicing activities relating to the HELOCs, the servicing fee, will be paid
from interest collections in respect of the HELOCs and will be equal to ____%
per annum, the servicing fee rate, multiplied by the sum of the outstanding
principal balance of each HELOC as of the first day of each Collection Period.
[The servicing fee will be calculated on the basis of the actual number of days
in each interest accrual
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<PAGE> 21
period and a 360-day year.] With respect to the first Collection Period, the
servicer will receive from interest collections in respect of the HELOCs ______
of the amount calculated in the preceding sentence. All assumption fees, late
payment charges and other fees and charges, to the extent collected from
borrowers, will be retained by the servicer as additional servicing
compensation.
With respect to each distribution date, the "Collection Period" is the
prior calendar month.
The servicer will pay ongoing expenses associated with the trust and
incurred by it in connection with its responsibilities under the sale and
servicing agreement, including, without limitation, payment of the fees and
disbursements of the trustees, any custodian appointed by the trustees, the
registrar and any paying agent. In addition, the servicer will be entitled to
reimbursement for expenses incurred by it in connection with defaulted HELOCs
and in connection with the restoration of mortgaged properties related to
defaulted HELOCs. The servicer's right of reimbursement is senior to the rights
of holders of the securities to receive any proceeds from the liquidation of the
related mortgaged property.]
ASSIGNMENT OF HELOCS
At the time of issuance of the securities, the seller will sell to the
depositor and the depositor will transfer to the trust all of its right, title
and interest in and to each HELOC, including its right to purchase from the
seller any additional balances arising in the future, related Credit Line
Agreements, mortgages and other related documents, including all collections
received on or with respect to each HELOC on or after the cut-off date. The
trust, concurrently with the transfer, will deliver the securities. Each HELOC
transferred to the trust will be identified on a mortgage loan schedule
delivered to the owner trustee. The mortgage loan schedule will include
information including the principal balance as of the cut-off date for each
HELOC, as well as information with respect to the loan rate.
[The sale and servicing agreement will require within 30 days of a
reduction in the rating of the seller's [debt] below [ ] that the seller deliver
to the [indenture] trustee the HELOCs endorsed in blank and the related
documents. In lieu of delivery of original mortgages, the seller may deliver
true and correct copies of original mortgages which have been certified as to
authenticity by the appropriate county recording office where the mortgage is
recorded.
Under the terms of the sale and servicing agreement, at the same time that
the HELOCs are required to be delivered after a reduction in the seller's debt
rating, the seller will be required to prepare and record assignments of the
mortgages related to each HELOC in favor of the owner trustee, unless opinions
of counsel satisfactory to the rating agencies [and the [letter of
credit][surety bond] issuer] are delivered to the [indenture] trustee to the
effect that recordation of the assignments is not required in the relevant
jurisdictions to protect the interests of the trust in the HELOCs.
Within [ ] days of the date on which the HELOCs are delivered, the
[indenture] trustee will review the HELOCs and the related documents and if any
HELOC or related document is found to be defective in any material respect and
the defect is not cured within [ ] days following
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<PAGE> 22
notification of the defect to the seller and the depositor by the [indenture]
trustee, the seller will be obligated to [repurchase the HELOC and to deposit
the Repurchase Price (as defined below) into the collection account. Upon
retransfer, the principal balance of the HELOC will be deducted from the pool
balance. In lieu of any repurchase, the seller may substitute one or more
Eligible Substitute HELOCs (as defined below). Any repurchase or substitution
will be considered a payment in full of the defective HELOC. The obligation of
the seller to accept a retransfer of a defective HELOC is the sole remedy
regarding any defects in the HELOCs and related documents available to the owner
trustee or the holders.
With respect to any HELOC, the "Repurchase Price" is equal to the
principal balance of the HELOC at the time of any transfer described above plus
accrued and unpaid interest to the date of repurchase.]
[An "Eligible Substitute HELOC" is a HELOC substituted by the seller for a
defective HELOC which must, on the date of the substitution:
(i) have a principal balance, or in the case of a substitution of more
than one HELOC for a defective HELOC, an aggregate principal
balance, not [ ]% more and not [ ]% less than the principal balance
relating to the defective HELOC;
(ii) have a loan rate not less than the loan rate of the defective HELOC
and not more than [ ]% in excess of the loan rate of the defective
HELOC;
(iii) have a loan rate based on the same index with adjustments to the
loan rate made on the same interest rate adjustment date as that of
the defective HELOC;
(iv) have a margin that is not less than the margin of the defective
HELOC and not more than [ ] basis points higher than the margin for
the defective HELOC;
(v) have a mortgage of the same or higher level of priority as the
mortgage relating to the defective HELOC;
(vi) have a remaining term to maturity not more than [ ] months earlier
and not later than the remaining term to maturity of the defective
HELOC;
(vii) comply with each representation and warranty as to the HELOCs set
forth in the sale and servicing agreement, deemed to be made as of
the date of substitution; and
(viii) satisfy other conditions specified in the sale and servicing
agreement.
To the extent the principal balance of an Eligible Substitute HELOC is less than
the principal balance of the related defective HELOC, the seller will be
required to make a deposit to the collection account equal to the difference
(each, a "Substitution Adjustment Amount").]
[The seller will make representations and warranties as to the accuracy in
all material respects of information furnished to the [indenture] trustee with
respect to each HELOC. In addition, the seller will represent and warrant, on
the closing date, that, among other things: (1)
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<PAGE> 23
at the time of transfer to the seller, the seller has transferred or assigned
all of its right, title and interest in each HELOC and the related documents,
free of any lien, subject to exceptions; and (2) each HELOC was generated under
a Credit Line Agreement that complied, at the time of origination, in all
material respects with applicable state and federal laws. Upon discovery of a
breach of any representation and warranty which materially and adversely affects
the interests of the holders in a HELOC, the seller will have a period of [ ]
days after discovery or notice of the breach to effect a cure. If the breach
cannot be cured within the [ ]-day period, the seller will be obligated to
repurchase or substitute the defective HELOC from the trust. The same procedure
and limitations that are set forth above for the repurchase or substitution of
defective HELOCs will apply to the retransfer of a HELOC that is required to be
repurchased or substituted because of a breach of a representation or warranty
in the purchase agreement that materially and adversely affects the interests of
the holders.]
DESCRIPTION OF THE SECURITIES
GENERAL
The notes will be issued under an indenture dated as of ___________, ____,
between the trust and _______________, as indenture trustee. The certificates
will be issued under a trust agreement dated as of ______________, ____, by and
between the depositor and ______________, as owner trustee. The following
summaries describe provisions of the securities, indenture and trust agreement.
The summaries do not purport to be complete and are subject to, and qualified in
their entirety by reference to, the provisions of the applicable agreement. As
used in this prospectus supplement, agreement shall mean either the trust
agreement or the indenture, as the context requires.
The securities will be issued in fully registered, certificated form only.
The securities will be freely transferrable and exchangeable at the corporate
trust office of the owner trustee, with respect to the certificates or the
indenture trustee with respect to the notes.
BOOK-ENTRY SECURITIES
The [securities] will be in book-entry form. Persons acquiring beneficial
ownership interests in the [securities], or beneficial owners, will hold their
[securities] through DTC in the United States, or Clearstream or Euroclear in
Europe if they are participants of those systems, or indirectly through
organizations which are participants in those systems.
The book-entry [securities] will initially be registered in the name of
Cede & Co., the nominee of DTC. Unless and until definitive [securities] are
issued, it is anticipated that the only [security]holder under the [indenture]
will be Cede & Co., as nominee of DTC. Beneficial owners will not be
[security]holders as that term is used in the [indenture]. Beneficial owners are
only permitted to exercise their rights indirectly through participants and DTC.
The Depository Trust Company, "DTC", is a New York chartered limited
purpose trust company. Clearstream Banking, societe anonyme, "Clearstream", is a
professional depository incorporated in Luxembourg and subject to regulation by
the Luxembourg Monetary Institute. The Euroclear System, "Euroclear", was
created in 1968 by the Belgium office of the Morgan
S-22
<PAGE> 24
Guaranty Trust Company of New York and is operated by Euroclear Bank S.A./N.V.
Each of these depositories was created for the purpose of holding securities for
its participants and facilitating the clearance and settlement of securities
transactions through electronic book-entry notations.
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 such
purpose. In turn, the financial intermediary's ownership of that book-entry
[security] will be recorded on the records of the applicable depository, or of a
participating firm that acts as agent for the financial intermediary, whose
interest will in turn be recorded on the records of the depository, if the
beneficial owner's financial intermediary is not a participant of DTC, and the
records of Clearstream or Euroclear, as appropriate.
Payments on the [securities] and transfers of the securities take place
through book-entry notations. The [indenture][owner] trustee makes payments to
the holding depository, which in turn makes payments to its participants. The
participants will then, in turn, credit the payments to the accounts of
beneficial owners either directly or through indirect participants.
Consequently, beneficial owners of the book-entry [securities] may experience
delay in their receipt of payments. The payments will be subject to tax
reporting in accordance with relevant United States tax laws and regulations.
Transfers of the [securities] are made similarly through book-entry
notations. Each beneficial owner instructs its financial intermediary of the
transaction, and the information is eventually passed on to the holding
depository. Each financial intermediary and the depository will note the
transaction on its records and either debit or credit the account of the selling
and purchasing beneficial owners. Payments and transfers between DTC
participants, Clearstream participants and Euroclear participants will occur in
accordance with the rules and operating procedures of each depository. For
information on transfers between depositories, see "Annex I - Global Clearance,
Settlement and Tax Documentation Procedures" at the end of this prospectus
supplement.
Monthly and annual reports with respect to the 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 the depository, and to the financial
intermediaries to whose DTC accounts the book-entry [securities] of the
beneficial owners are credited.
DTC has advised the [indenture][owner] 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 pooling and
servicing 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 actions are taken on behalf of financial intermediaries whose
holdings include those book-entry [securities]. Clearstream or the Euroclear
operator, as the case may be, will take any other action permitted to be taken
by a [security]holder under the pooling and servicing agreement on behalf of a
Clearstream participant or Euroclear participant only in accordance with its
relevant rules and procedures and subject to the ability of the relevant
depositary to
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<PAGE> 25
effect actions on its behalf through DTC. DTC may take actions, at the direction
of its participants, with respect to some [securities] which conflict with
actions taken with respect to other [securities].
Definitive [securities] will be issued to beneficial owners of the
book-entry [securities], or their nominees, rather than to DTC, only if: (a) DTC
or the depositor advises the owner trustee and the indenture 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 depositor, the owner trustee or the indenture trustee is
unable to locate a qualified successor, (b) the depositor, at its sole option,
elects to terminate a book-entry system through DTC or (c) after the occurrence
of an event of default under the indenture, beneficial owners having percentage
interests aggregating not less than 51% of the principal balance of the
book-entry securities advise the indenture trustee and the owner trustee and DTC
through the financial intermediaries and the DTC participants in writing that
the continuation of a book-entry system through DTC, or a successor to DTC, is
no longer in the best interests of beneficial owners.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the indenture trustee and the owner trustee will be
required to notify all 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 indenture trustee and the owner trustee
will issue and authenticate definitive securities, and the indenture trustee or
owner trustee, as applicable, will recognize the holders of the definitive
securities as holders under the indenture or trust agreement, as applicable.
Although DTC, Clearstream and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of securities among participants of
DTC, Clearstream and Euroclear, they are under no obligation to perform or
continue to perform the procedures and the procedures may be discontinued at any
time.
DISTRIBUTIONS
On each distribution date, collections on the HELOCs will be applied in
the following order of priority:
[
(1) to the servicer, the servicing fee;
(2) as payment for the accrued interest due and any overdue accrued
interest, with interest thereon at the note rate or the pass-through rate,
as applicable, on the respective principal balances of the notes and the
certificates;
(3) as principal on the securities, the excess of principal
collections over additional balances created during the preceding
Collection Period, the amount to be allocated between the notes and
certificates pro rata, based on their respective principal balances;
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<PAGE> 26
(4) as principal on the securities, as payment for any realized
losses on the HELOCs;
(5) [as payment for the premium for the surety bond;]
(6) [to reimburse prior draws made on the surety bond;] and
(7) any remaining amounts to the seller.]
INTEREST
Note Rate. Interest will accrue on the unpaid principal balance of the
notes at ___% per annum from the closing date to the first distribution date and
after the first distribution date interest will accrue on the notes from and
including the preceding distribution date to but excluding the current
distribution date (each, an "interest accrual period") at [a floating rate equal
to LIBOR, as defined in this prospectus supplement, plus ___%] [___%]. [Interest
will be calculated on the basis of the actual number of days in each interest
accrual period and a 360-day year.] A failure to pay interest on any notes on a
distribution date and that continues for five days constitutes an event of
default under the indenture.
Pass-Through Rate. Interest will accrue on the unpaid principal balance of
the certificates at ___% per annum from the closing date to the day preceding
the first distribution date and after the first distribution date interest will
accrue on the certificates for each interest accrual period at [a floating rate
equal to LIBOR as defined in this prospectus supplement, plus ___%] [___%].
[Interest will be calculated on the basis of the actual number of days in each
interest accrual period and a 360-day year.] [A failure to pay interest on any
certificates on a distribution date and that continues for five days constitutes
an event of default under the trust agreement.]
TERMINATION OF TRUST
The trust will terminate on the distribution date following the earlier of
(i) _________________________ and (ii) the final payment or other liquidation of
the last HELOC in the trust.
OPTIONAL REPURCHASE
The HELOCs will be subject to optional repurchase by the servicer on any
distribution date after the principal balance is reduced to an amount less than
or equal to $___________, [5]% of the initial principal balance. The optional
repurchase price will be equal to the sum of the outstanding principal balance
and accrued and unpaid interest thereon at the weighted average of the loan
rates through the day preceding the final distribution date.
REPORTS TO SECURITYHOLDERS
[The indenture trustee and the owner trustee will prepare and mail to each
noteholder and certificateholder on each distribution date, a statement setting
forth for the notes and certificates, respectively, among other things:
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<PAGE> 27
- the aggregate amount of the distribution to the
[note][certificate]holders on each distribution date;
- the amount of interest included in the distribution and the related
interest rate on the securities;
- the amount, if any, of overdue accrued interest included in the
distribution, and the amount of interest thereon;
- the amount, if any, of the remaining overdue accrued interest after
giving effect to the distribution;
- the amount, if any, of the current shortfall in amounts to be
distributed as accrued interest;
- the amount, if any, of principal included in the distribution and the
outstanding principal balance of the securities following the
distribution;
- the amount, if any, of overdue payments of scheduled principal included
in the distribution;
- the amount, if any, of the remaining overdue principal amounts with
respect to the securities;
- the amount, if any, of the current shortfall in receipt of scheduled
principal payments on the trust assets;
- the amount, if any, of the reimbursement of previous realized losses
included in the distribution;
- the amount, if any, of the aggregate unreimbursed realized losses after
giving effect to the distribution;
- the amount, if any, received under any enhancement, and the remaining
amount available under the enhancement;
- the weighted average loan rate on the HELOCs as of the first day of the
month prior to the distribution date;
- the servicing fee for the distribution date;
- the pool balance as of the end of the preceding Collection Period;
- the number and aggregate principal balances of the HELOCs as to which
the minimum monthly payment is delinquent for 30-59 days, 60-89 days
and 90 or more days, respectively, as of the end of the preceding
Collection Period; and
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- the book value of any real estate which is acquired by the trust
through foreclosure or grant of deed in lieu of foreclosure.]
In the case of information furnished under the clauses following the
second through twelfth bullet points above, the amounts shall be expressed as a
dollar amount per security with a $1,000 denomination.
THE SERVICING AGREEMENT
[The servicer shall establish and maintain on behalf of the owner trustee
a collection account for the benefit of the holders. The collection account will
be an Eligible Account (as defined below). Subject to the investment provision
described in the following paragraphs, upon receipt by the servicer of amounts
in respect of the HELOCs, excluding amounts representing administrative charges,
annual fees, assessments, credit insurance charges, insurance proceeds to be
applied to the restoration or repair of a mortgaged property or similar items,
the servicer will deposit the amounts in the collection account. Amounts so
deposited may be invested in Eligible Investments, as described in the sale and
servicing agreement, maturing no later than one business day prior to the date
on which the amount on deposit in the collection account is required to be
deposited in the distribution account or on the distribution date if approved by
the rating agencies. Not later than the [fifth] business day prior to each
distribution date, the servicer will notify the owner trustee and the indenture
trustee of the amount of the deposit to be included in funds available for the
related distribution date.]
The owner trustee and the indenture trustee will establish one or more
distribution accounts into which amounts will be deposited [amounts withdrawn
from the collection account] for distribution to holders on a distribution date.
The distribution account will be an Eligible Account. Amounts on deposit in the
distribution account will be invested in Eligible Investments maturing on or
before the business day prior to the related distribution date.
An "Eligible Account" is an account that is:
- maintained with a depository institution whose debt obligations at the
time of any deposit have the highest short-term debt rating by the
rating agencies;
- one or more accounts with a depository institution which accounts are
fully insured by the Federal Deposit Insurance Corporation established
by the fund with a minimum long-term unsecured debt rating of [ ];
- a segregated trust account maintained with the owner trustee or an
affiliate of the owner trustee in its fiduciary capacity; or
- otherwise acceptable to each rating agency as evidenced by a letter
from each rating agency to the owner trustee, without reduction or
withdrawal of their then current ratings of the securities.
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Eligible Investments are specified in the sale and servicing agreement and
are limited to investments which meet the criteria of the rating agencies from
time to time as being consistent with their then current ratings of the
securities.
MODIFICATIONS TO HELOCS
Subject to applicable law, the servicer may change the terms of the HELOC
at any time, including, among other things, increasing the credit limit of a
HELOC or reducing the loan rate of a HELOC. Changes to the terms of a HELOC may
be agreed to by the servicer if the servicer has determined that such changes
are necessary, provided that such changes will not have a material adverse
effect on the interest of the securityholders.
[CONSENT TO SENIOR LIENS
The servicer, acting as agent for the trust, may permit the placement of a
subsequent senior mortgage on any mortgaged property, provided that (a) (i) the
mortgage relating to the HELOC was in a first lien position as of the cut-off
date and (ii) such action is consistent with prudent commercial practice; (b)
the mortgage relating to the HELOC succeeded to a first or second lien position
after the related HELOC was conveyed to the trust and, immediately following the
placement of such senior lien, the mortgage relating to the HELOC is in a second
or third lien position and the outstanding principal amount of the mortgage loan
secured by such senior lien and the rate at which interest accrues thereon are
no greater than those of the senior mortgage loan secured by the mortgaged
property as of the date the related HELOC was conveyed to the trust; (c) the
mortgage relating to the HELOC was in a second or third lien position as of the
cut-off date, the new senior lien secures a mortgage loan that refinances an
existing first or second mortgage loan immediately following such refinancing
and the interest rate on the replacement first or second mortgage loan are not
greater than that of the existing first or second mortgage loan at the date of
such refinancing; or (d) the mortgage relating to the HELOC was in a second or
third lien position as of the cut-off date, the new senior lien secures a
mortgage loan that refinances an existing first or second mortgage loan and the
then current combined loan-to-value ratio of the senior liens and the mortgage
does not exceed such ratio as of the applicable cut-off date and the ratio of
the mortgage to the mortgage plus all senior liens immediately following such
refinancing is at least equal to such ratio as of the cut-off date.]
ALLOCATIONS AND COLLECTIONS
All collections on the HELOCs will usually be allocated in accordance with
the Credit Line Agreements between amounts collected in respect of interest and
amounts collected in respect of principal. As to any distribution date, interest
collections will be equal to the aggregate of the amounts collected during the
related Collection Period, including net liquidation proceeds, allocated to
interest in the Credit Line Agreements. As to any distribution date, principal
collections will be equal to the sum of (i) the amounts collected during the
related Collection Period, including net liquidation proceeds, and allocated to
principal in the Credit Line Agreements and (ii) any Substitution Adjustment
Amounts.
Net liquidation proceeds with respect to a HELOC are equal to the
aggregate of all amounts received upon liquidation of the HELOC, including,
without limitation, insurance
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proceeds, reduced by related expenses, but not including the portion, if any, of
the amount that exceeds the principal balance of the HELOC at the end of the
Collection Period immediately preceding the Collection Period in which the HELOC
is liquidated plus accrued and unpaid interest thereon through the date of
liquidation.
With respect to any date, the pool balance will be equal to the aggregate
of the principal balances of all HELOCs as of that date. The principal balance
of a HELOC, other than a defaulted HELOC that is liquidated, on any day is equal
to the cut-off date principal balance of the HELOC, plus (i) any additional
balances transferred to the trust in respect of the HELOC minus (ii) all
collections credited against the principal balance of the HELOC in accordance
with the related Credit Line Agreement prior to that day. The principal balance
of a defaulted HELOC that is liquidated after final recovery of related
liquidation proceeds shall be zero.
HAZARD INSURANCE
[The sale and servicing agreement provides that the servicer will maintain
hazard insurance on the mortgaged properties relating to the HELOCs. While the
terms of the related Credit Line Agreements typically require borrowers to
maintain hazard insurance, the servicer will not monitor the maintenance of
hazard insurance.
The sale and servicing agreement requires the servicer to maintain for any
mortgaged property relating to a HELOC acquired upon foreclosure of a HELOC, or
by deed in lieu of foreclosure, hazard insurance with extended coverage in an
amount equal to the lesser of (1) the maximum insurable value of the mortgaged
property and (2) the outstanding balance of the HELOC plus the outstanding
balance on any mortgage loan senior to the HELOC at the time of foreclosure or
deed in lieu of foreclosure, plus accrued interest and the servicer's good faith
estimate of the related liquidation expenses to be incurred in connection
therewith. The sale and servicing agreement provides that the servicer may
satisfy its obligation to cause hazard policies to be maintained by maintaining
a blanket policy insuring against losses on the mortgaged properties. If the
blanket policy contains a deductible clause, the servicer will be obligated to
deposit to the collection account the sums which would have been deposited in
that account but for the deductible clause. [The servicer will initially satisfy
these requirements by maintaining a blanket policy.] As set forth above, all
amounts collected by the servicer, net of any reimbursements to the servicer,
under any hazard policy, except for amounts to be applied to the restoration or
repair of the mortgaged property, will ultimately be deposited in the collection
account.
The standard form of fire and extended coverage policy typically covers
physical damage to or destruction of the improvements on the property by fire,
lightning, explosion, smoke, windstorm and hail, and the like, strike and civil
commotion, subject to the conditions and exclusions specified in each policy.
Although the policies relating to the HELOCs will be underwritten by different
insurers and therefore will not contain identical terms and conditions, the
basic terms of the policies are dictated by state laws and most of the policies
typically do not cover any physical damage resulting from the following: war,
revolution, governmental actions, floods and other water-related causes, earth
movement, including earthquakes, landslides and mudflows, nuclear reactions, wet
or dry rot, vermin, rodents, insects or domestic animals, theft and, in some
cases vandalism. The foregoing list is merely indicative of kinds of uninsured
risks
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and is not intended to be all-inclusive or an exact description of the insurance
policies relating to the mortgaged properties.]
REALIZATION UPON DEFAULTED MORTGAGE LOANS
The servicer will foreclose upon or otherwise comparably convert to
ownership mortgaged properties securing the HELOCs that come into default when
in accordance with applicable servicing procedures under the sale and servicing
agreement, no satisfactory arrangements can be made for the collection of
delinquent payments. In connection with foreclosure or other conversion, the
servicer will follow practices as it deems necessary or advisable and as are in
keeping with its general servicing activities, provided the servicer will not be
required to expend its own funds in connection with foreclosure or other
conversion, correction of default on a related senior mortgage loan or
restoration of any property unless, in its sole judgment, foreclosure,
correction or restoration will increase net liquidation proceeds. The servicer
will be reimbursed out of liquidation proceeds for advances of its own funds as
liquidation expenses before any net liquidation proceeds are distributed to the
securityholders.
THE INDENTURE
The following summary describes all of the material terms of the
indenture.
EVENTS OF DEFAULT; RIGHTS UPON EVENT OF DEFAULT
[With respect to the notes, events of default under the indenture will
consist of:
- a default for five days or more in the payment of any interest on any
note;
- a default in the payment of the principal of or any installment of the
principal of any note when the same becomes due and payable;
- a default in the observance or performance of any covenant or agreement
of the trust made in the indenture and the continuation of the default
for a period of 30 days after notice of the default is given to the
trust by the indenture trustee or to the trust and the indenture
trustee by the holders of at least 25% in principal amount of the notes
then outstanding;
- any representation or warranty made by the trust in the indenture or in
any certificate delivered under the indenture having been incorrect in
a material respect as of the time made, and the breach not having been
cured within 30 days after notice of the breach is given to the trust
by the indenture trustee or to the trust and the indenture trustee by
the holders of at least 25% in principal amount of notes then
outstanding; or
- events of bankruptcy, insolvency, receivership or liquidation of the
trust.]
[The amount of principal required to be paid to noteholders under the
indenture will usually be limited to amounts on deposit in the distribution
account that are available to be paid
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as principal in accordance with the priorities described above under
"+Distributions." Therefore, the failure to pay principal on the notes
typically will not result in the occurrence of an event of default until the
final scheduled distribution date for the notes.] If there is an event of
default with respect to a note due to late payment or nonpayment of interest due
on a note, additional interest will accrue on the unpaid interest at the
interest rate on the note, to the extent lawful until the interest is paid. The
additional interest on unpaid interest shall be due at the time the interest is
paid. If there is an event of default due to late payment or nonpayment of
principal on a note, interest will continue to accrue on the principal at the
interest rate on the note until the principal is paid. If an event of default
should occur and be continuing with respect to the notes, [the issuer of the
[letter of credit][surety bond],] the indenture trustee or holders of a majority
in principal amount of notes then outstanding [with the consent of the issuer of
the [letter of credit][surety bond]] may declare the principal of the notes to
be immediately due and payable. The declaration may, under some circumstances,
be rescinded by the holders of a majority in principal amount of the notes then
outstanding. If the notes are due and payable following an event of default, the
indenture trustee may institute proceedings to collect amounts due or foreclose
on trust property or exercise remedies as a secured party. If an event of
default occurs and is continuing with respect to the notes, the indenture
trustee will be under no obligation to exercise any of the rights or powers
under the indenture at the request or direction of any of the holders of the
notes, if the indenture trustee reasonably believes it will not be adequately
indemnified against the costs, expenses and liabilities which might be incurred
by it in complying with the request. Subject to the provisions for
indemnification and limitations contained in the indenture, the holders of a
majority in principal amount of the outstanding notes will have the right to
direct the time, method and place of conducting any proceeding or any remedy
available to the indenture trustee, and the holders of a majority in principal
amount of the notes then outstanding may, in some cases, waive any default with
respect to the default, 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.
No holder of a note will have the right to institute any proceeding with
respect to the indenture, unless:
- the holder previously has given the indenture trustee written notice of
a continuing event of default;
- the holders of not less than 51% in principal amount of the outstanding
notes have made written request to the indenture trustee to institute
the proceeding in its own name as indenture trustee;
- the holder or holders have offered the indenture trustee reasonable
indemnity;
- the indenture trustee has for 60 days failed to institute the
proceeding; and
- no direction inconsistent with the written request has been given to
the indenture trustee during the 60-day period by the holders of a
majority in principal amount of the notes. In addition, the indenture
trustee and the noteholders, by accepting the notes, will covenant that
they will not at any time institute against the trust any
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bankruptcy, reorganization or other proceeding under any federal or
state bankruptcy or similar law.
With respect to the trust, neither the indenture trustee nor the owner
trustee in its individual capacity, nor any holder of a certificate representing
an ownership interest in the trust nor any of their respective owners,
beneficiaries, agents, officers, directors, employees, affiliates, successors or
assigns will, in the absence of an express agreement to the contrary, be
personally liable for the payment of the principal of or interest on the notes
or for the agreements of the trust contained in the indenture.
COVENANTS
[The indenture will provide that the trust may not consolidate with or
merge into any other entity, unless:
- the entity formed by or surviving the consolidation or merger is
organized under the laws of the United States, any state or the
District of Columbia;
- the entity expressly assumes the trust's obligation to make due and
punctual payments upon the notes and the performance or observance of
any agreement and covenant of the trust under the indenture;
- no event of default shall have occurred and be continuing immediately
after the merger or consolidation;
- the trust has been advised that the ratings of the securities then in
effect would not be reduced or withdrawn by any rating agency as a
result of the merger or consolidation; and
- the trust has received an opinion of counsel to the effect that the
consolidation or merger would have no material adverse tax consequence
to the trust or to any noteholder or certificateholder.
The trust will not, among other things:
- except as expressly permitted by the indenture, sell, transfer,
exchange or otherwise dispose of any of the assets of the trust;
- claim any credit on or make any deduction from the principal and
interest payable in respect of the notes, other than amounts withheld
under the Code or applicable state law, or assert any claim against any
present or former holder of notes because of the payment of taxes
levied or assessed upon the trust;
- dissolve or liquidate in whole or in part;
- permit the validity or effectiveness of the indenture to be impaired or
permit any person to be released from any covenants or obligations with
respect to the notes under the indenture except as may be expressly
permitted by the indenture; or
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- permit any lien, charge excise, claim, security interest, mortgage or
other encumbrance to be created on or extent to or otherwise arise upon
or burden the assets of the trust or any part of the assets of the
trust, or any interest in the assets of the trust or the proceeds of
the assets of the trust. The trust may not engage in any activity other
than as specified under "The Trust." The trust will not incur, assume
or guarantee any indebtedness other than indebtedness incurred under
the notes and the indenture.]
ANNUAL COMPLIANCE STATEMENT
The trust will be required to file annually with the indenture trustee a
written statement as to the fulfillment of its obligations under the indenture.
INDENTURE TRUSTEE'S ANNUAL REPORT
The indenture trustee will be required to mail each year to all
noteholders a report relating to any change in its eligibility and qualification
to continue as indenture trustee under the indenture, any amounts advanced by it
under the indenture, the amount, interest rate and maturity date of any
indebtedness owing by the trust to the indenture trustee in its individual
capacity, any change in the property and funds physically held by the indenture
trustee in its capacity as indenture trustee and any action taken by it that
materially affects the notes and that has not been previously reported, but if
none of those changes have occurred, then no report shall be required.
SATISFACTION AND DISCHARGE OF INDENTURE
The indenture will be discharged with respect to the collateral securing
the notes upon the delivery to the indenture trustee for cancellation of all the
notes or, with limitations, upon deposit with the indenture trustee of funds
sufficient for the payment in full of all the notes.
MODIFICATION OF INDENTURE
With the consent of the holders of a majority of the outstanding notes,
the trust and the indenture trustee may execute a supplemental indenture to add
provisions to, change in any manner or eliminate any provisions of, the
indenture, or modify, except as provided below, in any manner the rights of the
noteholders. Without the consent of the holder of each outstanding note
affected, however, no supplemental indenture will:
- change the due date of any installment of principal of or interest on
any note or reduce the principal amount of any note, the interest rate
specified on any note or the redemption price with respect to any note
or change any place of payment where or the coin or currency in which
any note or any interest on any note is payable;
- impair the right to institute suit for the enforcement of provisions of
the indenture regarding payment;
- reduce the percentage of the aggregate amount of the outstanding notes,
the consent of the holders of which is required for any supplemental
indenture or the consent of the holders of which is required for any
waiver of compliance with provisions of the
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indenture or of defaults under the indenture and their consequences as
provided for in the indenture;
- modify or alter the provisions of the indenture regarding the voting of
notes held by the trust, the seller or an affiliate of any of them;
- decrease the percentage of the aggregate principal amount of notes
required to amend the sections of the indenture which specify the
applicable percentage of aggregate principal amount of the notes
necessary to amend the indenture or other related agreements; or
- permit the creation of any lien ranking prior to or on a parity with
the lien of the indenture with respect to any of the collateral for the
notes or, except as otherwise permitted or contemplated in the
indenture, terminate the lien of the indenture on any collateral for
the notes or deprive the holder of any note of the security afforded by
the lien of the indenture.
- The trust and the indenture trustee may also enter into supplemental
indentures, without obtaining the consent of the noteholders, for the
purpose of, among other things, adding any provisions to or changing in
any manner or eliminating any of the provisions of the indenture or of
modifying in any manner the rights of the noteholders; provided that
the action will not materially and adversely affect the interest of any
noteholder.
VOTING RIGHTS
[At all times, the voting rights of noteholders under the indenture will
be allocated among the [notes] pro rata in accordance with their outstanding
principal balances.]
MATTERS REGARDING THE INDENTURE TRUSTEE, THE DEPOSITOR AND THE SELLER
Neither the depositor, the seller, the indenture trustee nor any director,
officer or employee of the depositor, the seller or the indenture trustee will
be under any liability to the trust or the related noteholders for any action
taken or for refraining from the taking of any action in good faith under the
indenture or for errors in judgment; provided, however, that none of the
depositor, the seller, the indenture trustee or any director, officer or
employee of the depositor, the seller or the indenture trustee will be protected
against any liability which would otherwise be imposed by reason of willful
malfeasance, bad faith or [gross] negligence in the performance of duties or by
reason of reckless disregard of obligations and duties under the indenture.
Subject to limitations set forth in the indenture, the indenture trustee and any
director, officer, employee or agent of the indenture trustee shall be
indemnified by the trust and held harmless against any loss, liability or
expense incurred in connection with investigating, preparing to defend or
defending any legal action, commenced or threatened, relating to the indenture
other than any loss, liability or expense incurred by reason of willful
malfeasance, bad faith or [gross] negligence in the performance of its duties
under the indenture or by reason of reckless disregard of its obligations and
duties under the indenture. Any indemnification by the trust will reduce the
amount distributable to the noteholders. All persons into which the
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indenture trustee may be merged or with which it may be consolidated or any
person resulting from the merger or consolidation shall be the successor of the
indenture trustee under each indenture.
THE TRUST AGREEMENT
The following summary describes all of the material terms of the trust
agreement.
AMENDMENT
The trust agreement may be amended by the seller, the depositor and the
owner trustee, without consent of the certificateholders, to cure any ambiguity,
to correct or supplement any provision or for the purpose of adding any
provisions to or changing in any manner or eliminating any of the provisions of
the trust agreement or of modifying in any manner the rights of the
certificateholders; provided, however, that the action will not, as evidenced by
an opinion of counsel satisfactory to the owner trustee, adversely affect in any
material respect the interests of any certificateholders. The trust agreement
may also be amended by the seller, the depositor and the owner trustee with the
consent of the holders of notes evidencing at least a majority in principal
amount of then outstanding notes and holders owning voting interests aggregating
not less than a majority of the aggregate voting interests for the purpose of
adding any provisions to or changing in any manner or eliminating any of the
provisions of the trust agreement or modifying in any manner the rights of the
holders.
VOTING INTERESTS
As of any date, the aggregate principal balance of all certificates
outstanding will constitute the voting interest of the trust, except that, for
purposes of determining voting interests, certificates owned by the trust or its
affiliates, other than the [seller], will be disregarded and deemed not to be
outstanding, and except that, in determining whether the owner trustee is
protected in relying upon any request, demand, authorization, direction, notice,
consent or waiver, only certificates that the owner trustee knows to be so owned
will be so disregarded. Certificates so owned that have been pledged in good
faith may be regarded as outstanding if the pledgee establishes to the
satisfaction of the owner trustee the pledgor's right so to act with respect to
the certificates and that the pledgee is not the trust or its affiliates.
MATTERS REGARDING THE OWNER TRUSTEE, THE DEPOSITOR AND THE SELLER
Neither the depositor, the seller, the owner trustee nor any director,
officer or employee of the depositor, the seller or the owner trustee will be
under any liability to the trust or the related securityholders for any action
taken or for refraining from the taking of any action in good faith under the
trust agreement or for errors in judgment; provided, however, that none of the
depositor, the seller, the owner trustee and any director, officer or employee
of the depositor, the seller or the owner trustee will be protected against any
liability which would otherwise be imposed by reason of willful malfeasance, bad
faith or [gross] negligence in the performance of duties or by reason of
reckless disregard of obligations and duties under the trust agreement. Subject
to limitations set forth in the trust agreement, the owner trustee and any
director, officer, employee or agent of the owner trustee shall be indemnified
by the trust and held harmless
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against any loss, liability or expense incurred in connection with
investigating, preparing to defend or defending any legal action, commenced or
threatened, relating to the trust agreement other than any loss, liability or
expense incurred by reason of willful malfeasance, bad faith or [gross]
negligence in the performance of its duties under the trust agreement or by
reason of reckless disregard of its obligations and duties under the trust
agreement. Any indemnification by the trust will reduce the amount distributable
to the holders. All persons into which the owner trustee may be merged or with
which it may be consolidated or any person resulting from the merger or
consolidation shall be the successor of the owner trustee under each trust
agreement.
ADMINISTRATION AGREEMENT
The ________________________, in its capacity as administrator, will enter
into the administration agreement with the trust and the owner trustee in which
the administrator will agree, to the extent provided in the administration
agreement, to provide notices and perform other administrative obligations
required by the indenture and the trust agreement.
THE INDENTURE TRUSTEE
[ ] is the indenture trustee under the indenture.
The mailing address of the indenture trustee is [ ],
Attention: Corporate Trust Department.
THE OWNER TRUSTEE
[ ] is the owner trustee under the trust agreement.
The mailing address of the owner trustee is [ ],
Attention: Corporate Trust Administration.
USE OF PROCEEDS
The net proceeds from the sale of the securities will be applied by the
depositor on the closing date towards the purchase price of the HELOCs, the
payment of expenses related to the sale and the purchase of the HELOCs and other
corporate purposes.
FEDERAL INCOME TAX CONSEQUENCES
In the opinion of [ ], special tax counsel to the trust, for federal
income tax purposes, the securities will be characterized as indebtedness and
the trust should be characterized as an owner trust and will not be
characterized as an association, a publicly traded partnership taxable as a
corporation or a taxable mortgage pool. Each securityholder will agree to treat
the securities as indebtedness and the trust as an owner trust for federal
income tax purposes. Alternative characterizations of the trust and the
securities are possible, and we suggest that prospective investors consult their
tax advisors regarding the federal income tax
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consequences of any possible alternative characterization. Based on their
anticipated offering prices, it is expected that the securities will not be
issued with original issue discount. The prepayment assumption to be used for
calculating the accrual of original issue discount and market discount and
amortization of bond premium will be [ ]. For additional information regarding
federal income tax consequences, see "Federal Income Tax Consequences" in the
prospectus.
STATE TAX CONSEQUENCES
In addition to the federal income tax consequences described in "Federal
Income Tax Consequences", potential investors should consider the state income
tax consequences of the acquisition, ownership, and disposition of the
securities. State income tax law may differ substantially from the corresponding
federal tax law, and this discussion does not purport to describe any aspect of
the income tax laws of any state. Therefore, we suggest that potential investors
consult their own tax advisors with respect to the various tax consequences of
investments in the securities.
ERISA CONSIDERATIONS
Section 406 of the Employee Retirement Income Security Act of 1974 and
Section 4975 of the Internal Revenue Code of 1986 (the "Code") prohibit a
pension, profit sharing or other employee benefit or other plan, including an
individual retirement account or a Keogh plan, that is subject to Title I of
ERISA or to Section 4975 of the Code from engaging in transactions involving
"plan assets" with persons that are "parties in interest" under ERISA or
"disqualified persons" under the Code with respect to the Plan. Some
governmental plans, although not subject to ERISA or the Code, are subject to
federal, state or local laws ("Similar Law") that impose similar requirements
(those plans subject to ERISA, Section 4975, or Similar Law referred to as
"Plans"). A violation of these "prohibited transaction" rules may generate
excise tax and other liabilities under ERISA and the Code or under Similar Law
for those persons.
ERISA also imposes duties on persons who are fiduciaries of Plans subject
to ERISA, including the requirements of investment prudence and diversification,
and the requirement that the Plan's investments be made in accordance with the
documents governing the Plan. Under ERISA, any person who exercises any
authority or control with respect to the management or disposition of the assets
of a Plan is considered to be a fiduciary of the Plan.
[Subject to the considerations discussed in "ERISA Considerations" in the
Prospectus, the notes may be purchased by a Plan. A fiduciary of a Plan must
determine that the purchase of a note is consistent with its fiduciary duties
under ERISA and does not result in a nonexempt prohibited transaction as defined
in Section 406 of ERISA or Section 4975 of the Code. Each Plan that purchases a
note will be [deemed/required] to represent that its purchase and holding of the
note [are eligible for the exemption provided under Prohibited Transaction Class
Exemption ("PTCE") 84-14. PTCE 90-1, PTCE 91-38, PTCE 95-60, PTCE 96-23 or a
similar prohibited transaction exemption/do not give rise to a nonexempt
prohibited transaction].
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<PAGE> 39
[In addition, the fiduciary of any Plan for which the underwriter, the
seller, any trustee, any provider of services to the trust or any of their
affiliates (a) has investment or administrative discretion with respect to Plan
assets; (b) has authority or responsibility to give, or regularly gives,
investment advice with respect to Plan assets for a fee and under an agreement
or understanding that the advice (i) will serve as a primary basis for
investment decisions with respect to the Plan assets and (ii) will be based on
the particular investment needs for the Plan; or (c) is an employer maintaining
or contributing to the Plan should consult with its counsel concerning whether
an investment in the notes may constitute or give rise to a prohibited
transaction before investing in a note.]
Any person that proposes to acquire a Note on behalf of or with plan
assets of any Plan should consult with counsel concerning the application of the
fiduciary responsibility provisions of ERISA and the prohibited transaction
provisions of ERISA and Section 4975 of the Code or the proposed investment.
[It is expected that the certificates will be considered equity interests
in the trust for purposes of the Plan Assets Regulation, and that the assets of
the trust may therefore constitute plan assets if certificates are acquired by
Plans. It is not expected that the certificates will constitute
"publicly-offered securities" and the trustee will not monitor ownership of the
certificates to ensure that ownership by benefit plan investors is not
significant.] [Furthermore, the trust does not contain only assets to which the
Exemption, described in the prospectus, applies.
As a result, certificates shall not be transferred and the trustee shall
not register any proposed transfer of certificates unless it receives (i) a
representation substantially to the effect that the proposed transferee is not a
Plan and is not acquiring the certificates on behalf of or with the assets of a
Plan, including assets that may be held in an insurance company's separate or
general accounts where assets in the accounts may be deemed "plan assets" for
purposes of ERISA, or (ii) an opinion of counsel in form and substance
satisfactory to the trustee and the seller that the purchase or holding of the
certificates by or on behalf of a Plan will not constitute a prohibited
transaction and will not result in the assets of the trust being deemed to be
"plan assets" and subject to the fiduciary responsibility provisions of ERISA or
the prohibited transaction provisions of ERISA and the Code or any Similar Law
or subject the trustee, the Certificate administrator or the seller to any
obligation in addition to those undertaken in the trust agreement.]
[It is expected that the Exemption, described in "ERISA Considerations" in
the prospectus, will apply to the acquisition and holding by Plans of the
certificates, and that all conditions of the Exemption other than those within
the control of the investors will be met. In addition, as of the date of this
prospectus supplement, there is no single mortgagor that is the obligor on five
percent of the obligations included in the trust by aggregate unamortized
principal balance of the assets of the trust.
The rating of a certificate may change. If the rating of a certificate
declines below BBB- or Baa3, the certificate will no longer be eligible for
relief under the Exemption, and consequently may not be purchased by or sold to
a Plan (although a Plan that had purchased the
S-38
<PAGE> 40
certificate when it had an investment-grade rating would not be required by the
Exemption to dispose of it).
Prospective Plan investors should consult with their legal advisors
concerning the impact of ERISA and the Code, the applicability of the Exemption,
and the potential consequences in their specific circumstances, prior to making
an investment in the certificates.]
LEGAL INVESTMENT CONSIDERATIONS
The appropriate characterization of the securities under various legal
investment restrictions, and thus the ability of investors subject to these
restrictions to purchase securities, may be subject to significant interpretive
uncertainties. All investors whose investment authority is subject to legal
restrictions should consult their own legal advisors to determine whether, and
to what extent, the securities will constitute legal investments for them. The
depositor makes no representation as to the proper characterization of the
securities for legal investment or financial institution regulatory purposes, or
as to the ability of particular investors to purchase securities under
applicable legal investment restrictions. The uncertainties described above, and
any unfavorable future determinations concerning legal investment or financial
institution regulatory characteristics of the securities, may adversely affect
the liquidity of the securities.
UNDERWRITING
Subject to the terms and conditions set forth in the underwriting
agreement, the depositor has agreed to sell to [ ], the underwriter, and the
underwriter has agreed to purchase from the depositor, the [securities]. The
underwriter is obligated to purchase all the [securities] if any are purchased.
The depositor has been advised by the underwriter that it presently intends to
make a market in the securities; however, it is not obligated to do so, any
market-making may be discontinued at any time, and there can be no assurance
that an active public market for the securities will develop.
The depositor has been advised by the underwriter that it proposes
initially to offer the securities to the public at the respective offering
prices set forth on the cover page of this prospectus supplement and to certain
dealers at such price less a discount not in excess of [ %] of the related
denominations. The underwriter may allow and such dealers may reallow a discount
not in excess of [ %] of the related denomination to certain other dealers.
After the initial public offering, such public offering price may change.
Proceeds to the depositor are expected to be $____________ from the sale
of the notes and $___________ from the sale of the certificates, before
deducting expenses payable by the depositor of $___________. In connection with
the purchase and sale of the securities, the underwriter may be deemed to have
received compensation from the depositor in the form of underwriting discounts,
concessions or commissions.
[The distribution of the securities by the underwriter will be effected
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 sale. The underwriter may
effect these transactions by selling the securities to or
S-39
<PAGE> 41
through dealers, and the dealers may receive from the underwriter compensation
in the form of underwriting discounts, concessions or commissions. The
difference between the purchase price for the securities paid to the depositor
and the proceeds from the sale of the securities realized by the underwriter
will constitute underwriting discounts and commissions.]
The underwriting agreement provides that the [depositor] will indemnify
the underwriter against liabilities, including liabilities under the Securities
Act of 1933, or contribute payments the underwriter may be required to make in
respect of liabilities, including liabilities under the Securities Act of 1933.
[The underwriter is an affiliate of the depositor and seller.]
[This prospectus supplement and the accompanying prospectus, may be
used by Fleet Securities, Inc. or one of its affiliates, in connection with
offers and sales of an indeterminate amount of the securities in
market-making transactions. In these transactions, Fleet Securities, Inc. or
one of its affiliates may act as a principal or an agent.]
LEGAL MATTERS
Certain legal matters with respect to the securities will be passed upon
for the depositor by [ ] and for the underwriter by [ ]. [ ] will pass upon
certain legal matters on behalf of the seller.
RATING
It is a condition to issuance that each class of the notes be rated be
rated not lower than _________ by [ ] and _______ by [ ]. It is a condition to
issuance that the certificates be rated at least "____" by [ ] and "____" by
[ ]. A securities rating addresses the likelihood of the receipt by
certificateholders and noteholders of distributions on the HELOCs. The rating
takes into consideration the structural, legal and tax aspects associated with
the certificates and notes. The ratings on the securities do not, however,
constitute statements regarding the possibility that certificateholders or
noteholders might realize a lower than anticipated yield. 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.
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<PAGE> 42
INDEX OF DEFINED TERMS
<TABLE>
<S> <C>
Code 37
Collection Period 20
Credit Line Agreements 17
Eligible Account 27
Eligible Investments 28
Eligible Substitute HELOC 21
events of default 30
HELOCs 13
interest accrual period 25
Plans 37
Repurchase Price 21
Similar Law 37
Substitution Adjustment Amount 21
</TABLE>
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<PAGE> 43
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
The globally offered [ ] Home Equity Loan Asset-Backed
Certificates, Series _____-__ and the globally offered [ ] Home
Equity Loan Asset-Backed Notes, Series _____-__ (together, the "Global
Securities") usually will be available only in book-entry form. Investors in the
Global Securities may hold these Global Securities through any of DTC,
Clearstream or Euroclear. The Global Securities will be tradeable as home market
instruments in both the European and U.S. domestic markets. Initial settlement
and all secondary trades will settle in same-day funds.
Secondary market trading between investors holding Global Securities
through Clearstream and Euroclear will be conducted in the ordinary way in
accordance with their normal rules and operating procedures and in accordance
with conventional eurobond practice, i.e., seven calendar day settlement.
Secondary market trading between investors holding Global Securities
through DTC will be conducted according to the rules and procedures applicable
to U.S. corporate debt obligations and prior mortgage pass-through certificates
issues.
Secondary cross-market trading between Clearstream or Euroclear and DTC
participants holding Certificates will be effected on a delivery-against-payment
basis through the respective Depositaries of Clearstream and Euroclear, in those
capacities, 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 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. ("Cede") 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, Clearstream and
Euroclear 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 similar 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 Clearstream or
Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global security
and no "lock-up" or restricted period. Global Securities will be credited to the
securities custody accounts on the settlement date against payment in same-day
funds.
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<PAGE> 44
SECONDARY MARKET TRADING
Since the purchaser determines the place of delivery, it is important to
establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
Trading between DTC Participants.
Secondary market trading between DTC participants will be settled using
the procedures applicable to prior mortgage pass-through certificates issues in
same-day funds.
Trading between Clearstream and/or Euroclear Participants.
Secondary market trading between Clearstream participants or Euroclear
participants will be settled using the procedures applicable to conventional
eurobonds in same-day funds.
Trading between DTC seller and Clearstream or Euroclear purchaser.
When Global Securities are to be transferred from the account of a DTC
participant to the account of a Clearstream participant or a Euroclear
participant, the purchaser will send instructions to Clearstream or Euroclear
through a Clearstream participant or Euroclear participant at least one business
day prior to settlement. Clearstream or Euroclear will instruct the respective
depositary, as the case may be, to receive the Global Securities against
payment. Payment will include interest accrued on the Global Securities from and
including the last coupon payment date to and excluding the settlement date, on
the basis of either the actual number of days in the accrual period and a year
assumed to consist of 360 days or a 360-day year of 12 30-day months as
applicable to the related class of Global Securities. For transactions settling
on the 31st of the month, payment will include interest accrued to and excluding
the first day of the following month. Payment will then be made by the
respective Depositary of the 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 Clearstream participant's or
Euroclear participant's account. The securities credit will appear the next day,
European time, and the cash debt will be back-valued to, and the interest on the
Global Securities will accrue from, the value date, which would be the preceding
day when settlement occurred in New York. If settlement is not completed on the
intended value date, i.e., the trade fails, the Clearstream or Euroclear cash
debt will be valued instead as of the actual settlement date.
Clearstream participants and Euroclear participants will need to make
available to the respective clearing systems the funds necessary to process
same-day funds settlement. The most direct means of doing so is to preposition
funds for settlement, either from cash on hand or existing lines of credit, as
they would for any settlement occurring within Clearstream or Euroclear. Under
this approach, they may take on credit exposure to Clearstream or Euroclear
until the Global Securities are credited to their accounts one day later.
As an alternative, if Clearstream or Euroclear has extended a line of
credit to them, Clearstream participants or Euroclear participants can elect not
to preposition funds and allow that credit line to be drawn upon the finance
settlement. Under this procedure, Clearstream
S-43
<PAGE> 45
participants or Euroclear participants purchasing Global Securities would incur
overdraft charges for one day, assuming they cleared the overdraft when the
Global Securities were credited to their accounts. However, interest on the
Global Securities would accrue from the value date. Therefore, in many cases the
investment income on the Global Securities earned during that one-day period may
substantially reduce or offset the amount of the overdraft charges, although
this result will depend on each Clearstream participant's or Euroclear
participant's particular cost of funds.
Since the settlement is taking place during New York business hours, DTC
participants can employ their usual procedures for sending Global Securities to
the respective European depositary for the benefit of Clearstream participants
or Euroclear participants. The sale proceeds will be available to the DTC seller
on the settlement date. Thus, to the DTC participants a cross-market transaction
will settle no differently than a trade between two DTC participants.
Trading between Clearstream or Euroclear Seller and DTC Purchaser.
Due to time zone differences in their favor, Clearstream participants and
Euroclear participants may employ their customary procedures for transactions in
which Global Securities are to be transferred by the respective clearing system,
through the respective Depositary, to a DTC participant. The seller will send
instructions to Clearstream or Euroclear through a Clearstream participant or
Euroclear participant at least one business day prior to settlement. In these
cases Clearstream or Euroclear will instruct the respective depositary, as
appropriate, to deliver the Global Securities to the DTC participant's account
against payment. Payment will include interest accrued on the Global Securities
from and including the last coupon payment to and excluding the settlement date
on the basis of 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 Clearstream participant or Euroclear participant the following
day, and receipt of the cash proceeds in the Clearstream participant's or
Euroclear participant's account would be back-valued to the value date, which
would be the preceding day, when settlement occurred in New York. Should the
Clearstream participant or Euroclear participant have a line of credit with its
respective clearing system and elect to be in debt in anticipation of receipt of
the sale proceeds in its account, the back-valuation will extinguish any
overdraft incurred over that one-day period. If settlement is not completed on
the intended value date, i.e., the trade fails, receipt of the cash proceeds in
the Clearstream participant's or Euroclear participant's account would instead
be valued as of the actual settlement date.
Finally, day traders that use Clearstream or Euroclear and that purchase
Global Securities from DTC participants for delivery to Clearstream participants
or Euroclear participants should note that these trades would automatically fail
on the sale side unless affirmative action were taken. At least three techniques
should be readily available to eliminate this potential problem:
S-44
<PAGE> 46
(a) borrowing through Clearstream or Euroclear for one day, until the
purchase side of the day trade is reflected in their Clearstream or Euroclear
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 Clearstream or Euroclear account in
order to settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of the trade so
that the value date for the purchase from the DTC participant is at least one
day prior to the value date for the sale to the Clearstream participant or
Euroclear participant.
U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of Global Securities holding securities through
Clearstream or Euroclear, or through DTC if the holder has an address outside
the U.S., will be subject to the 30% U.S. withholding tax that applies to
payments of interest, including original issue discount, on registered debt
issued by U.S. Persons, unless (i) each clearing system, bank or other financial
institution that holds customers' securities in the ordinary course of its trade
or business in the chain of intermediaries between the beneficial owner and the
U.S. entity required to withhold tax complies with applicable certification
requirements and (ii) 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 or Form W-8BEN).
Beneficial owners of Global Securities that are non-U.S. Persons can
obtain a complete exemption from the withholding tax by filing a signed Form W-8
(Certificate of Foreign Status) or Form W-8BEN (Certificate of Foreign Status of
Beneficial Owner for United States Tax Withholding). If the information shown on
Form W-8 changes, a new Form W-8 or W-8BEN must be filed within 30 days of the
change. After December 31, 2000, only Form W-8BEN will be acceptable.
Exemption for non-U.S. Persons with effectively connected income (Form
4224 or 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 4224 (Exemption from Withholding of Tax on Income
Effectively Connected with the Conduct of a Trade or Business in the United
States) or Form W-8ECI (Certificate of Foreign Person's Claim for Exemption from
Withholding on Income Effectively Connected with the Conduct of a Trade or
Business in the United States).
Exemption or reduced rate for non-U.S. Persons resident in treaty
countries (Form 1001 or Form W-8BEN).
Non-U.S. Persons that are Certificate Owners residing in a country that
has a tax treaty with the United States can obtain an exemption or reduced tax
rate (depending on the treaty
S-45
<PAGE> 47
terms) by filing Form 1001 (Ownership, Exemption or Reduced Rate Certificate) or
Form W-8BEN (Certificate of Foreign Status of Beneficial Owner for United States
Tax Withholding). If Form 1001 is provided and if the treaty provides only for a
reduced rate, withholding tax will be imposed at that rate unless the filer
alternatively files Form W-8. Form 1001 may be filed by the Certificate Owners
or his agent. After December 31, 2000, only Form W-8BEN will be acceptable.
Exemption for U.S. Persons (Form W-9).
U.S. Persons can obtain a complete exemption from the withholding tax
by filing Form W-9 (Payer's Request for Taxpayer Identification Number and
Certification).
U.S. Federal Income Tax Reporting Procedure.
The Certificate Owner of a Global Security or, in the case of a Form 1001
or a Form 4224 filer, his agent, files by submitting the appropriate form to the
person through whom it holds, the clearing agency, in the case of persons
holding directly on the books of the clearing agency. Form W-8, Form 1001 and
Form 4224 are effective until December 31, 2000. Form W-8BEN and Form W-8ECI are
effective until the third succeeding calendar year from the date the form is
signed.
The term "U.S. Person" means
- (i) a citizen or resident of the United States,
- (ii) a corporation or partnership organized in or under the laws of the
United States, any state of the United States or the District of Columbia,
other than a partnership that is not treated as a United States person under
any applicable Treasury Department regulations,
- (iii) an estate the income of which is includible in gross income for United
States tax purposes, regardless of its source,
- (iv) a trust if a court within the United States is able to exercise primary
supervision over the administration of the trust and one or more United
States trustees have authority to control all substantial decisions of the
trust.
- some trusts treated as United States persons before August 20, 1996 that
elect to continue to be so treated to the extent provided in regulations.
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. We suggest that investors consult their own tax advisors for
specific tax advice concerning their holding and disposing of the Global
Securities.
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<PAGE> 48
$____________________
[ ] HOME EQUITY LOAN TRUST ____-_
Issuer
$_________ HOME EQUITY LOAN
ASSET-BACKED NOTES,
SERIES ____-_,
$_________ HOME EQUITY LOAN
ASSET-BACKED CERTIFICATES,
SERIES ____-_
FLEET HOME EQUITY LOAN CORPORATION
Depositor
FLEET NATIONAL BANK
Seller and Servicer
_________________
PROSPECTUS SUPPLEMENT
[ , ___ ]
_____________________
[UNDERWRITER]
S-47
<PAGE> 49
THE INFORMATION IN THIS PROSPECTUS SUPPLEMENT IS NOT COMPLETE AND MAY BE
CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT
AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED JANUARY 12, 2001.
Prospectus Supplement dated ________ __, ____
To Prospectus dated _________ __, ____
$_______________
[ ] HOME EQUITY LOAN TRUST ____-_,
as Issuer
$_________ Home Equity Loan Asset-Backed Certificates, Series ____-_
Fleet National Bank, Fleet Home Equity Loan Corporation,
as seller and servicer as depositor
<TABLE>
<CAPTION>
Principal Price to Underwriting Proceeds to the
Certificates Balance Certificate Rate Public(1) Discount Depositor(2)
<S> <C> <C> <C> <C> <C>
$ % % % %
Total $ $ $ $
</TABLE>
----------
(1) Plus accrued interest, if any, at the certificate rate from _________
____, ______.
(2) Before deducting expenses, payable by the depositor, estimated to be
$________.
[The underwriter listed below will offer the certificates at varying prices to
be determined at the time of sale. The proceeds to the depositor from the sale
of the certificates will be approximately [$ ], before deducting expenses. The
underwriter's commission will be the difference between the price it pays to the
depositor for the certificates and the amount it receives from the sale of the
certificates to the public.]
REVIEW THE INFORMATION IN RISK FACTORS BEGINNING ON PAGE S-10 OF THIS PROSPECTUS
SUPPLEMENT AND ON PAGE 2 OF THE PROSPECTUS.
- For complete information about the certificates read both this prospectus
supplement and the prospectus. This prospectus supplement must be
accompanied by the prospectus if it is being used to offer and sell the
certificates.
THE CERTIFICATES
- the certificates represent beneficial interests in a trust, whose assets
are a pool of [adjustable][fixed] rate home equity revolving credit line
loans and property relating to those loans
- currently have no trading market
- are obligations of the trust only and are not obligations of the depositor,
the seller, the servicer or any of their affiliates
CREDIT ENHANCEMENT
- will be provided in the form of [overcollateralization] [letter of credit]
[surety bond]
<PAGE> 50
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is a
criminal offense.
[This prospectus supplement and the accompanying prospectus may be used by Fleet
Securities, Inc. or one of its affiliates in connection with offers and sales of
the certificates in market-making transactions.]
[UNDERWRITER]
____________, 200_
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<PAGE> 51
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 any other information.
We are not offering the certificates in any state where an offering of
the certificates is not permitted.
We do not claim that the information in this prospectus supplement and
prospectus is accurate as of any date other than the dates stated on the
respective covers.
Dealers will deliver a prospectus supplement and prospectus when acting
as underwriters of the certificates and with respect to their unsold allotments
or subscriptions. In addition, all dealers selling the certificates will be
required to deliver a prospectus supplement and prospectus for ninety days
following the date of this prospectus supplement.
<TABLE>
<CAPTION>
PAGE
PROSPECTUS SUPPLEMENT
<S> <C>
Summary ............................................................. 5
Risk Factors ........................................................ 11
The [Letter of Credit] [Surety Bond] Issuer ......................... 14
The Fleet National Bank ............................................. 14
Prepayment and Yield Considerations ................................. 16
Description of the HELOCs ........................................... 17
Description of the Certificates ..................................... 24
The Transferor ...................................................... 35
The Trustee ......................................................... 35
Use of Proceeds ..................................................... 35
Federal Income Tax Consequences ..................................... 35
ERISA Considerations ................................................ 35
Legal Investment Considerations ..................................... 37
Underwriting ........................................................ 37
Legal Matters ....................................................... 38
Rating .............................................................. 38
PROSPECTUS
Risk Factors ........................................................ 2
Description of the Securities ....................................... 6
The Trusts .......................................................... 9
Enhancements ........................................................ 14
Fleet Home Equity Loan Corporation .................................. 18
Fleet National Bank ................................................. 18
Servicing of Loans .................................................. 27
The Agreements ...................................................... 36
Legal Aspects of Loans .............................................. 48
Use of Proceeds ..................................................... 62
Federal Income Tax Consequences ..................................... 63
State Tax Considerations ............................................ 99
ERISA Considerations ................................................ 100
Legal Investment .................................................... 106
</TABLE>
S-3
<PAGE> 52
<TABLE>
<S> <C>
Ratings ............................................................. 106
Plan of Distribution ................................................ 106
Legal Matters ....................................................... 106
Available Information ............................................... 107
Incorporation of Documents by Reference ............................. 107
</TABLE>
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<PAGE> 53
SUMMARY
This summary highlights selected information from this document 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
certificates, read carefully this entire document and the accompanying
prospectus.
THE TRUST
[ ] Home Equity Loan Trust ____-_ will be created pursuant to a [pooling
and servicing agreement] among Fleet Home Equity Loan Corporation, as
depositor, Fleet National Bank, as seller and servicer, and [trustee]. The
trust will issue the certificates on [closing date]. Each certificate
represents an undivided interest in the trust. The [seller] will hold the
remaining undivided interest in the trust not represented by the
certificates.
THE SELLER
Fleet National Bank
100 Federal Street
Boston, Massachusetts 02110
We refer you to "Fleet National Bank" in the prospectus.
THE SERVICER
[Fleet National Bank
100 Federal Street
Boston, Massachusetts 02110]
We refer you to "Fleet National Bank" in this prospectus supplement and to
"Fleet National Bank, Loan Servicing" and "Collections" in the
prospectus.
THE DEPOSITOR
Fleet Home Equity Loan Corporation
100 Federal Street
Boston, Massachusetts 02110
We refer you to "Fleet Home Equity Loan Corporation" in the prospectus.
[THE TRANSFEROR
The transferor, which will initially be [Fleet National Bank] or one of its
affiliate, is the holder of the transferor interest.]
THE TRUSTEE
[ ]
[THE CERTIFICATE INSURER]
[ ]
We refer you to "The [Letter of Credit][Surety Bond] Issuer."
CUT-OFF DATE
[Date]
TRUST PROPERTY
The property of the trust will include:
- a pool of [adjustable] [fixed] rate home equity loan revolving credit
line loans made or to be made in the future under home equity revolving
credit line loan agreements, and secured primarily by [second] [deeds of
trust] [mortgages] on residential properties that are primarily one- to
four-family properties. We sometimes refer to these credit line loans as
mortgage loans or home equity lines of credit.
- payments on the mortgage loans received after the cut-off date.
- any additions to the loan balances of the mortgage loans during the life
of the trust.
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<PAGE> 54
- the [deed of trust][mortgage] related to each mortgage loan.
- property that secured a mortgage loan which has been acquired by
foreclosure or deed in lieu of foreclosure.
- the benefit of the [surety bond][letter of credit].
- [rights of the depositor under the purchase agreement by which the
seller sells the mortgage loans to the depositor. Under some
circumstances, if the representations and warranties made by the seller
about the mortgage loans are breached, then the seller will be obligated
to repurchase those mortgage loans.]
- benefits under any hazard insurance policies covering the mortgaged
properties.
- amounts on deposit in certain accounts.
- all proceeds form the items above.
THE MORTGAGE LOANS
On [the closing date], ___________, the trust will acquire a pool of
mortgage loans. The information below is based on the pool of mortgage
loans as it existed on the [cut-off date].
- number of mortgage loans: ________
- aggregate principal balance: $_________
- principal balance range: $__ to $__
- average principal balance: $______
- loan rate range: ___% to ___%
- weighted average loan rate: ____%
- credit limit utilization rate range: __% to __%
- weighted average credit limit utilization rate: ___%
- weighted average combined loan-to-value ratio: ____%
We refer you to "Fleet National Bank" and "Description of the HELOCs."
DISTRIBUTIONS TO CERTIFICATEHOLDERS
You will be entitled to receive monthly payments of interest at the
certificate rate, and monthly payments of principal during the amortization
period. These payments will be funded from a percentage of the payments
received with respect to the mortgage loans and possibly from draws on the
[letter of credit] [surety bond.]
The distribution date will be the ____ day of each month or, if that day is
not a business day, the next succeeding business day, starting on
__________ __, ____.
We refer you to "Description of the Certificates" in this prospectus
supplement and "Description of the Securities" in the prospectus.
Payments to you of principal will be based on the investor interest in the
trust. The investor interest is the aggregate undivided interest in the
trust represented by the certificates and will initially represent
$___________ of principal. The investor interest will decline as principal
is paid to the certificateholders during the amortization period, except as
described in this prospectus supplement. The transferor interest which
represents the remaining undivided interest in the trust is not represented
by the certificates.
On the ______ business day, but no later than the ______ calendar day, of
each month, the servicer will calculate, and instruct the trustee regarding
the amounts to be paid to you.
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The pool balance is the aggregate amount of the loan balances for the
mortgage loans, including the additional balances. The pool balance will
fluctuate from day to day because the amount of draws by borrowers and the
amount of principal payments by borrowers will usually differ on each day.
Because the transferor interest represents the interest in the trust not
represented by the certificates, the amount of the transferor interest will
fluctuate from day to day as draws are made and principal is paid under the
mortgage loans.
[The interest in the loan balances represented by the certificates will
never exceed the aggregate certificate principal balance. If, for example,
draws by borrowers under the HELOCs causes the aggregate loan balance held
by the trust to exceed the aggregate certificate balance, the excess will
be part of the transferor interest.]
INTEREST ACCRUAL PERIOD
Interest for the first distribution date will accrue on the unpaid
principal balance of the securities at the applicable rate from the closing
date to the first distribution date. After the first distribution date,
interest will accrue from and including the preceding distribution date to
but excluding the current distribution date. [Interest will be calculated
on the basis of the actual number of days in each interest accrual period
divided by 360.]
We refer you to "Description of the Securities" and "Risk Factors --
Enhancement May Be Insufficient to Cover Losses" in the prospectus.
PAYMENTS OF PRINCIPAL; REVOLVING PERIOD
You will not be entitled to receive payments of principal during the
revolving period. The revolving period is expected to last from the closing
date through __________ __, ____. The revolving period will terminate
earlier if an early amortization event occurs. In order to maintain the
certificate principal balance at $__________ during the revolving period,
principal collections allocable to the investor interest will be applied to
pay for any additional balances created during the related collection
period and any remaining payments of principal will be paid to the
transferor rather than the certificateholders. During the revolving period
the certificateholders will maintain the same investor interest in the
trust. Unless earlier terminated by the occurrence of an early amortization
event, the revolving period will end on ___________.
We refer you to "Description of the Certificates."
PRINCIPAL PAYMENTS; AMORTIZATION PERIOD
During the amortization period the principal collections allocated to the
investor interest will be paid to you and will no longer be applied to pay
for additional balances or paid to the transferor. The amortization period
will begin on __________ __, ____ or, if prior to that date an early
amortization event occurs, ____________. The amortization period will end
when the certificate principal balance has been reduced to zero or when the
trust terminates. The distributions of principal collections will be made
monthly on each distribution date starting on the distribution date in the
month following the month in which the amortization period commences.
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Payments to you of principal will be based on the investor interest in the
trust. The investor interest is the aggregate undivided interest in the
trust represented by the certificates and will initially represent
$___________ of principal. The investor interest will decline as principal
is paid to the certificateholders during the amortization period, except as
described in the prospectus supplement.
We refer you to "Description of the Certificates -- Early Amortization
Events" for a discussion of the events which might lead to the early
commencement of the amortization period.
On each distribution date you will be entitled to receive an amount equal
to the investor percentage multiplied by the principal collections received
during the preceding calendar month. On the last day of the revolving
period, the trustee will determine the investor percentage. The investor
percentage will equal the principal balance of the certificates divided by
the outstanding balance of the pool of mortgage loans.
Allocations based upon the investor percentage during the amortization
period may result in distributions of principal in amounts that are greater
relative to the declining balance of the certificate principal balance than
would be the case if a fixed investor percentage were not used to determine
the percentage of principal collections distributed in respect of the
investor interest.
We refer you to "Description of the Certificates -- Payments on Mortgage Loans;
Deposits to Collection Account."
FINAL SCHEDULED DISTRIBUTION DATE
[Certificates] [Date]
We expect the actual final distribution date for each certificate will be
significantly earlier than its final scheduled distribution date.
TERMINATION OF TRUST
The trust will terminate on the distribution date following the earlier of
(i) __________________ and (ii) the final payment or other liquidation of
the last mortgage loan in the trust.
CREDIT ENHANCEMENT
[Letter of Credit] [Surety Bond]
On the closing date, [enhancer] will issue a [letter of credit] [surety
bond] to the trust. In the event that, on any distribution date, amounts on
deposit in the collection account with respect to the preceding collection
period which are available to be distributed on the certificates are
insufficient to provide for the payment of the amount required to be
distributed to the holders on that distribution date, the trustee will draw
on the [letter of credit] [surety bond], to the extent of the [letter of
credit] [surety bond] amount for that distribution date, in an amount equal
to the deficiency.
We refer you to "The [Letter of Credit] [Surety Bond] Issuer" in this
prospectus supplement and "Enhancement" in the prospectus.
[[Letter of Credit] [Surety Bond] Amount
The amount available under the [letter of credit] [surety bond] for the
initial distribution date will be $__________.
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For each other distribution date, the amount available will equal the
lesser of (1) a percentage of the pool balance and (2) an amount based on
the original amount available, less amounts previously drawn and plus
amounts paid to the [enhancer] as reimbursement.]
OPTIONAL REPURCHASE
On any distribution date after the certificate principal balance is reduced
to an amount less than or equal to $________, [5]% of the initial
certificate principal balance, the investor interest will be subject to
optional retransfer to the [transferor]. The retransfer price will be equal
to the sum of the outstanding certificate principal balance and accrued and
unpaid interest thereon at the certificate rate through the day preceding
the final distribution date.
We refer you to "Description of the Certificates -- Optional Termination"
in this prospectus supplement and "Description of the Securities --
Optional Redemption, Purchase of Trust Assets or Securities, Termination of
Trust" and "The Agreements -- Termination" in the prospectus.
REGISTRATION OF CERTIFICATES
We will issue the certificates in book-entry form. You will hold your
interests through a depository. While the certificates are book-entry they
will be registered in the name of the depository.
Beneficial interests in these certificates may be purchased in minimum
denominations of [$] and in integral multiples of [$].
The circumstances under which definitive certificates will replace the
book-entry certificates are described in this prospectus supplement.
We refer you to "Risk Factors, Consequences of Owning Book-Entry
Certificates."
[FEDERAL INCOME TAX CONSEQUENCES
[Tax Counsel] is of the opinion that the certificates are debt of the
transferor for federal income tax purposes. The transferor will treat the
certificates as indebtedness for federal, state and local income and
franchise tax purposes.
Tax counsel is also of the opinion that the Trust will not be characterized
as an association, a publicly traded partnership taxable as a corporation
or a taxable mortgage pool.
We refer you to "Federal Income Tax Consequences" in this prospectus
supplement and "Federal Income Tax Consequences" and "State Tax
Considerations" in the prospectus concerning the application of federal,
state and local tax laws.]
ERISA CONSIDERATIONS
[We suggest that a fiduciary of any employee benefit or other plan or
arrangement subject to ERISA or Section 4975 of the Code carefully review
with its legal advisors whether the purchase or holding of certificates
could give rise to a transaction prohibited or not otherwise permissible
under ERISA or the Code.]
[The certificates may not be transferred to a fiduciary of any employee
benefit or
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other plan or arrangement subject to ERISA or Section 4975 of the Code.]
We refer you to "ERISA Considerations" in this prospectus supplement and in
the prospectus.
CERTIFICATE RATING
Before the certificates can be issued, the [trust] must obtain a rating on
the certificates of:
<TABLE>
<CAPTION>
Rating Agency
<S> <C> <C>
Class [ ] [ ]
----- ----------- -----------
[ ] [ ] [ ]
</TABLE>
The ratings obtained for the certificates address credit risk. When
evaluating credit risk, the rating agencies evaluate the likelihood of
whether or not you will receive your interest and principal payments.
Credit risk does not relate to the likelihood of prepayments on the
mortgage loans. Prepayments affect the timing of payments to you, such that
your actual return could differ substantially from your anticipated return
on your investment.
We refer you to "Rating" and "Risk Factors -- Rating of the Securities Does
Not Assure Payment" in the prospectus.
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<PAGE> 59
RISK FACTORS
CONSEQUENCES OF OWNING BOOK-ENTRY CERTIFICATES
Limit on Liquidity of Certificates. Issuance of the certificates in
book-entry form may reduce the liquidity of the certificates in the secondary
trading market since investors may be unwilling to purchase certificates for
which they cannot obtain physical certificates.
Limit on Ability to Transfer or Pledge. Since transactions in the
certificates can be effected only through DTC, participating organizations,
indirect participants and banks, your ability to pledge your certificate to
persons or entities that do not participate in the DTC or otherwise to take
actions in respect of the certificates, may be limited due to lack of a physical
certificate representing the certificates.
Delays in Distributions. As a beneficial owner, you may experience some
delay in your receipt of distributions of interest on and principal of your
certificates since the distributions will be forwarded by the trustee to DTC and
DTC will credit the distributions to the accounts of its participants which will
credit them to the accounts of the beneficial owners either directly or
indirectly through indirect participants.
We refer you to "Description of the Certificates -- Book-Entry
Certificates."
CASH FLOW LIMITED IN EARLY YEARS OF MORTGAGE LOANS
During the draw down period under the related credit line agreements,
borrowers generally are not required to make monthly payments of principal,
although minimum payments will at least equal and may exceed accrued interest.
As a result, collections on mortgage loans may vary. As of the cut-off date, the
weighted average remaining draw down period by outstanding principal balance is
___ months. ____% of the mortgage loans by outstanding principal balance as of
the cut-off date may permit the related borrowers to extend their draw down
periods for one or two additional five year terms. Collections on the mortgage
loans may also vary due to seasonal purchasing and payment habits of borrowers.
As a result there may be limited collections available to make payments to you.
LIMITED INFORMATION REGARDING PREPAYMENT HISTORY
All of the mortgage loans may be prepaid in whole or in part at any
time. Home equity loans have been originated in significant volume only during
the past few years and neither the seller nor the servicer is aware of any
publicly available studies or statistics on the rate of prepayment of home
equity loans. Home equity loans usually are not viewed by borrowers as permanent
financing and 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. In addition,
substantially all of the mortgage loans contain due-on-sale provisions which may
affect the rate of prepayment.
We refer you to "Prepayment and Yield Considerations."
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<PAGE> 60
SERVICER'S ABILITY TO CHANGE THE TERMS OF THE MORTGAGE LOANS
The servicer may agree to changes in the terms of a mortgage loan,
provided that the changes (i) do not adversely affect the interest of the
holders, and (ii) are consistent with prudent business practice. There can be no
assurance that changes in applicable law or the marketplace for home equity
loans or prudent business practice will not result in changes in the terms of
the mortgage loans.
In addition, the servicer may, subject to some limitations, increase
the credit limit of a mortgage loan, reduce the loan rate of a mortgage loan or,
if a lien senior to that of the mortgage loan has been paid or released, consent
to the placing of another lien senior to that of the mortgage loan. Increasing
the credit limit and consenting to the placing of another lien senior to that of
the mortgage loan may increase the combined loan-to-value ratio of that mortgage
loan and, accordingly, may increase the risk of owning the mortgage loan.
Reducing the loan rate of a mortgage loan will reduce the cash flow available to
absorb losses.
We refer you to "The Servicing Agreement, Modifications to HELOCs"
and ", Consent to Senior Liens."
[DELINQUENT MORTGAGE LOANS INCLUDED IN TRUST PROPERTY MAY BE MORE LIKELY TO
DEFAULT THAN NON-DELINQUENT MORTGAGE LOANS
The trust will include mortgage loans which are up to ___ days
delinquent. As of the cut-off date, the aggregate loan balance of the delinquent
mortgage loans was $__________. [In addition, the mortgage loans in all
likelihood include obligations of borrowers who are or are about to become
bankrupt or insolvent.] If there are not sufficient funds from interest
collections allocated to the investor interest to cover the realized losses for
any collection period and the [letter of credit] [surety bond] amount has been
reduced to zero or [the enhancer] defaults, the certificate principal balance
will be reduced which, unless otherwise later reimbursed, will result in a loss
to you.]
[RECHARACTERIZATION OF CERTIFICATES BY IRS COULD RESULT IN TAX LIABILITY
In the opinion of special tax counsel to the transferor, the
certificates are properly characterized as debt of the transferor for federal
income tax purposes. If the IRS were to contend successfully that the
certificates were not debt obligations of the transferor for federal income tax
purposes, the arrangement among the transferor and the certificateholders might
be classified for federal income tax purposes as either a partnership or an
association taxable as a corporation that owns the mortgage loans. Any tax
liability associated with any recharacterization will be an obligation of the
trust and will reduce the amount of money available to pay you and may result in
a loss to you. We refer you to "Federal Income Tax Considerations" in the
prospectus.]
[RATINGS ON CERTIFICATES BASED PRIMARILY ON CLAIMS-PAYING ABILITY OF THE
[ENHANCER]
The rating on the certificates depends primarily on the claims paying
ability of the [enhancer]. Therefore, a reduction of the rating assigned to the
claims-paying ability of the [enhancer] may have a corresponding reduction on
the ratings assigned to the certificates. A
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<PAGE> 61
reduction in the rating assigned to the certificates would reduce the market
value of the securities and may affect your ability to sell them. The rating on
your certificate addresses credit risk and does not address the likelihood of
prepayments.
We refer you to "Rating."]
[INTEREST PAYABLE ON THE CERTIFICATES AND INTEREST PAYABLE ON THE MORTGAGE LOANS
DIFFER
Interest payable on the mortgage loans may be insufficient to pay
interest on the certificates. Interest payable on the certificates will accrue
at a [variable] rate [based on LIBOR]. Interest payable on the mortgage loans
will accrue at a [variable] rate based on the prime rate plus a designated
margin, [or at a fixed rate]. LIBOR and the prime rate may not respond to the
same economic factors and there is no necessary correlation between them. If the
spread between LIBOR and the prime rate [or fixed rate] is reduced or
eliminated, the interest payable on the certificates also may be reduced. In
addition, the weighted average life of the certificates may be affected. If that
happens, the value of your certificates may be temporarily or permanently
reduced.]
[GEOGRAPHIC CONCENTRATION INCREASES RISK THAT CERTIFICATE YIELDS CAN BE IMPAIRED
The concentration of the related mortgaged properties in one or more
geographic regions may increase the risk of loss to your securities. The
mortgaged properties relating to the mortgage loans are located in __ states and
the District of Columbia. However, __% of the mortgaged properties, by principal
balance as of the cut-off date, are located in ______ and ________. If these
states experience in the future weaker economic conditions or greater rates of
decline in real estate values than the United States generally, then the
mortgage loans may experience higher rates of delinquencies and foreclosures
than would otherwise be the case. A region's economic condition and housing
market may be adversely affected by a variety of events, including natural
disasters such as earthquakes, hurricanes, floods and eruptions, and civil
disturbances, such as riots.]
[POSSESSION BY SELLER OF LOAN DOCUMENTS MAY ADVERSELY AFFECT THE SECURITY
INTEREST OF THE TRUST
The seller will maintain possession of the documentation relating to
each mortgage and no assignment of any mortgage is required to be recorded in
the name of the trustee, unless the seller's long-term debt rating is reduced
below [describe]. Within 30 days of such reduction in rating, the seller is
required to deliver the mortgage documents to the trustee and to either record
the assignments or deliver a legal opinion to the effect that recordation of the
assignments is not necessary in order to perfect the interest of the trust in
the mortgages. Prior to delivery and recording, the interest of the trustee in
the mortgages, the mortgage notes and any proceeds from the mortgage loans may
be subject to the claims of creditors or to sale to a third party, as well as to
a receiver or conservator appointed in the event of the insolvency of the
seller.
In an insolvency proceeding of the seller, if the mortgage notes have
not been delivered to the trustee and the mortgages have not been assigned of
record in the real property recording office to the trustee, the trust may be a
general unsecured creditor of the seller. If the trust were
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<PAGE> 62
determined to be a general unsecured creditor of the seller, the mortgages, the
mortgage notes and the proceeds from their sale would not be available to make
payments on the certificates.]
THE [LETTER OF CREDIT] [SURETY BOND] ISSUER
The following information with respect to _________ ______________
("___________") has been furnished by _____________.
[DESCRIPTION OF LETTER OF CREDIT/SURETY BOND ISSUER]
FLEET NATIONAL BANK
THE FLEET NATIONAL BANK CONSUMER LOAN GROUP HOME EQUITY PROGRAM
We refer you to "Fleet National Bank" in the prospectus for information
about the seller's origination procedures and underwriting guidelines for the
HELOCs.
SERVICING OF THE MORTGAGE LOANS
At [date], Fleet National Bank (the "Bank") serviced a total portfolio
of [ ] home equity lines of credit or "HELOCs", having an aggregate outstanding
principal balance of approximately [$ ]. These figures include HELOCs that were
originated or acquired by the Bank [and HELOCs that are serviced for third
parties on a contractual basis].
We refer you to "Fleet National Bank" in the prospectus for information
with respect to the servicer's procedures and guidelines for the servicing of
the HELOCs.
DELINQUENCY, FORECLOSURE AND LOSS EXPERIENCE
The tables below summarize the delinquency, foreclosure and loss
experience of HELOCs owned by the Bank. The data includes all HELOCs owned by
the Bank, whether originated, purchased or acquired as the result of bank
mergers and reflects HELOCs that were originated or underwritten under criteria
different from the HELOCs held by the trust. Accordingly, the delinquency and
loss figures presented below for [date] represent information for all HELOCs
currently owned by the Bank, but may not be representative of the HELOCs
included in this trust.
[The information in the tables below has not been adjusted to eliminate
the effect of the unseasoned nature of the HELOC portfolio during the periods
shown. Accordingly, loss and delinquency as percentages of aggregate principal
balance of HELOCs serviced for each period would be higher than those shown if a
group of HELOCs were artificially isolated at a point in time and the
information showed the activity only in that isolated group. However, since most
of the HELOCs in the Bank's HELOC portfolio will not be fully seasoned and since
the terms of most HELOCs will not call for payment of principal in full prior to
maturity, the delinquency and loss information for such an isolated group would
also be distorted to some degree.]
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DELINQUENCY AND FORECLOSURE EXPERIENCE OF THE BANK'S PORTFOLIO OF HELOCS
<TABLE>
<CAPTION>
As of As of December 31,
---------------------- ---------------------------------------------------------------------------
October 31, 2000 1999 1998 1997
---------------------- ---- ---- ----
Number Dollar Number Dollar Number Dollar Number Dollar
of Amount Of Amount Of Amount of Amount
Loans (000) Loans (000) Loans (000) Loans (000)
----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Loans Outstanding(1) 180,578 $ 4,849,725 119,918 $ 3,499,995 135,252 $ 3,264,603 149,237 $ 3,556,002
Delinquencies as a
Percentage of Loans
Outstanding(1)(2)
30-59 days past due .63% .80% .51% .62% .66% .99% .86% 1.19%
60-89 days past due .13 .17 .11 .15 .17 .22 .22 .31
90 days and more
past due .14 .17 .14 .14 .45 .44 .42 .46
------- ----------- -------- ----------- -------- ----------- -------- -----------
Total Delinquencies .90% 1.14% .76% .91% 1.28% 1.65% 1.50% 1.96%
Foreclosure(1)(3) 138 $ 5,180 247 $ 12,406 283 $ 15,513 264 $ 15,460
REO Properties(1)(4) 17 $ 776 34 $ 2,146 32 $ 2,379 37 $ 2,128
</TABLE>
[(1) The "Loans Outstanding", "Delinquencies as a Percentage of Loans
Outstanding", "Foreclosure", and "REO Properties" related to the HELOCs
acquired by the Bank as a result of the merger of Fleet Financial
Group, Inc. and BankBoston Corporation are included as of March 31,
2000.
(2) "Delinquencies as a Percentage of Loans Outstanding" is based on the
number of payments contractually past due, excluding loans in
foreclosure. Delinquency categories include accounts on non-accrual and
accounts with respect to which the related borrower has declared
bankruptcy.
(3) "Foreclosure" data represents the number of HELOCs or the dollar amount
of HELOCs in foreclosure.
(4) REO Properties (`real estate owned' properties) are properties relating
to HELOCs foreclosed or for which deeds in lieu of foreclosure have
been accepted, and held pending disposition.]
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LOSS EXPERIENCE OF THE BANK'S PORTFOLIO OF HELOCS
<TABLE>
<CAPTION>
---------------- ---------------------------------------------------
Ten Months Ended For the Year Ended December 31,
---------------- ---------------------------------------------------
October 31, 2000 1999 1998 1997
---------------- ---- ---- ----
Dollar Amount Dollar Amount Dollar Amount Dollar Amount
(000) (000) (000) (000)
<S> <C> <C> <C> <C>
Average Loans Outstanding(1)(2) $4,871,926 $3,329,298 $3,410,029 $3,600,573
Gross Losses(1)(3) $3,102 $4,951 $4,028 $9,458
Recoveries(1)(4) $1,316 $1,232 $960 $1,472
---------- ---------- ---------- ----------
Net Losses(1)(5) $1,786 $3,719 $3,068 $7,986
========== ========== ========== ==========
Net Losses as a Percentage of .04% .11% .09% .22%
Average Loans Outstanding
</TABLE>
[(1) The "Average Loans Outstanding", "Gross Losses", "Recoveries", and "Net
Losses as a Percentage of Average Loans Outstanding" related to the
HELOCs acquired by the Bank as a result of the merger of Fleet
Financial Group, Inc. and BankBoston Corporation are included as of
March 31, 2000.
(2) "Average Loans Outstanding" during the period is the arithmetic average
of the principal balances of the HELOCs outstanding on the last
business day of each month during the period.
(3) "Gross Losses" are amounts which have been determined to be
uncollectible relating to HELOCs for each respective period.
(4) "Recoveries" are recoveries from liquidation proceeds and deficiency
judgments.
(5) "Net Losses" represents "Gross Losses" minus "Recoveries".]
PREPAYMENT AND YIELD CONSIDERATIONS
The pooling and servicing agreement provides that the
certificateholders will not receive payments of principal until the distribution
date on ___________, the first distribution date after the first Collection
Period (as defined below) following the end of the revolving period or, if
earlier, the distribution date in the month after the first Collection Period of
an Early Amortization Event (as defined below). During the amortization period,
certificateholders will be entitled to receive on each distribution date the
investor percentage of the principal collections received in the preceding
Collection Period until the certificate principal balance is reduced to zero.
Allocations of principal collections based on the investor percentage, which is
fixed for the amortization period to equal the percentage derived from dividing
the outstanding Certificate Principal Balance by the aggregate outstanding pool
balance, in each case at the end of the revolving period, may result in
distributions of principal to the certificateholders greater than those that
would result from distributions of principal based upon the proportion that the
declining Certificate Principal Balance bears to the outstanding pool balance.
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As described in this prospectus supplement, the actual maturity of the
certificates will depend in part on the receipt of principal on the HELOCs or
the amounts realized on liquidation on defaulted HELOCs, which will result in
principal payments on the certificates. All of the HELOCs may be prepaid in full
or in part at any time. [Any HELOC originated in ________, __________ or
________ is subject to an early termination fee if it is prepaid in full within
the first three years of its origination date.] The early termination fee [is
$____][may vary]. [The Bank is not aware of any statistics available on whether
early termination fees actually discourage prepayment.]
The Bank is not aware of any publicly generated studies or statistics
available on the rate of prepayment of loans such as the HELOCs. Generally,
HELOCs are not viewed by mortgagors as permanent financing. Accordingly, HELOCs
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, changes in the deductability of interest
payments on HELOCs for federal income tax purposes, prevailing interest rates,
the availability of alternative financing and homeowner mobility.
In addition, the trust's prepayment experience and the rate at which
the certificates amortize will be affected by any repurchases of HELOCs by the
servicer pursuant to the sale and servicing agreement. Substantially all of the
HELOCs contain due-on-sale provisions, and the servicer intends to enforce such
provisions unless (i) such enforcement is not permitted by applicable law or
(ii) the servicer, in a manner consistent with reasonable commercial practice,
permits the purchaser of the mortgaged property to assume the HELOC. To the
extent permitted by applicable law, such assumption will not release the
original borrower from its obligations under the HELOC. The enforcement of the
due-on-sale provision will have the same effect as a prepayment of the related
HELOC.
Collections on the HELOCs may vary because, among other things,
borrowers may make payments during any month as low as the minimum monthly
payment for such month or as high as the entire outstanding principal balance
plus accrued interest and fees. In addition, borrowers may fail to make
scheduled payments. Collections on the HELOCs may also vary due to seasonal
purchasing and payment habits of borrowers. Accordingly, there may be times,
especially during the years that a substantial percentage of HELOCs are in the
draw period, that very little is distributed on the securities in respect of
principal.
No assurance can be given as to the level of prepayments that will be
experienced by the trust and it can be expected that a portion of borrowers will
not prepay their HELOCs to any significant degree.
DESCRIPTION OF THE HELOCS
GENERAL
The HELOCs in the trust were originated under loan agreements and
disclosure statements (the "Credit Line Agreements") and are secured by
mortgages or deeds of trust, most of which are second mortgages or second deeds
of trust, on mortgaged properties. The mortgaged properties securing the HELOCs
consist primarily of residential properties that are
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one- to four-family properties. [All] of the mortgaged properties are owner
occupied. The HELOCs were underwritten in accordance with the standards
described under "Fleet National Bank" in the prospectus.
The pool of HELOCs consists of approximately [ ] HELOCs with an
aggregate cut-off date pool balance of $___________. As of the cut-off date,
each HELOC had a loan rate of at least ____% per annum. The average cut-off date
principal balance was $_______, the minimum cut-off date principal balance was
zero, the maximum cut-off date principal balance was $_________, the minimum
loan rate and the maximum loan rate on the cut-off date were ____% and ____% per
annum, respectively, and the weighted average loan rate on the cut-off date was
____% per annum. As of the cut-off date, the weighted average credit limit
utilization rate was ____%, the minimum credit limit utilization rate was zero
and the maximum credit limit utilization rate was ____%. The credit limit
utilization rate is determined by dividing the cut-off date principal balance of
a HELOC by the credit limit of the related Credit Line Agreement. The weighted
average combined loan-to-value ratio of the HELOCs was ____% as of the cut-off
date and the weighted average junior mortgage ratio was approximately __%.
Approximately __% of the HELOCs were secured by a first mortgage on the
related mortgaged property and __% of the HELOCs were secured by junior liens.
No HELOC had a combined loan-to-value ratio greater than __%.
As of the cut-off date, no HELOC was delinquent ___ days or more.
HELOC POOL STATISTICS
The depositor has compiled the following additional information as of
the cut-off date with respect to the HELOCs to be included in the trust.
[Tabular Information]
HELOC TERMS
The general terms of the HELOCs are described under "Fleet National
Bank, CLG Home Equity Lines of Credit" in the prospectus.
[A borrower may make a draw under the HELOC, from time to time, by
using special checks or other means provided to the borrower. Each draw will be
at least $250, or if the remaining available balance under the credit limit is
less than $250, then up to the credit limit. The draws will be funded by the
[seller].]
[Minimum monthly payments may be required to be made during the draw
period, but these payments will not be sufficient to fully amortize the HELOC
during the draw period. Borrowers may exceed their monthly payment without
penalty and the excess funds will be deposited into an account and used towards
the minimum monthly payment for the following period. Other fees, including the
annual membership fees and late payment charges, may vary by state.]
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[The borrower's right to make a draw under a HELOC may be suspended or
terminated or the borrower may be required to pay the entire balance due plus
all other accrued but unpaid charges immediately, if:
- the borrower fails to make any required payment by the due date;
- the total outstanding principal balance including all charges
payable exceeds the credit limit;
- the borrower made any statement or signature on any document which
is fraudulent or contained a material misrepresentation;
- the borrower dies or becomes incompetent;
- the borrower becomes bankrupt or insolvent;
- the borrower becomes subject to any judgment, lien, attachment or
execution is issued against the mortgaged property;
- the borrower fails to obtain and maintain required property
insurance; or
- the borrower sells or transfers the mortgaged property or does not
maintain the property.
In addition, the borrower's right to make a draw under a HELOC may be
suspended or a borrower's credit limit may be reduced, if:
- the value of the mortgaged property decreases for any reason to
less than a specified percentage of the original appraised value;
- the borrower is in default under the HELOC;
- government action impairs the originator's lien priority; or
- a regulatory agency has notified the originator that continued
advances would constitute an unsafe and unsound practice.
The credit limits may also be increased upon completion of a
satisfactory underwriting review.
The billing statement details all debits and credits and specifies the
minimum payment due and the available credit line. Notice of changes in the
applicable loan rate are provided to the borrower with the billing statements.
The payment due dates for the HELOCs vary throughout the month.
Interest accrued each month with respect to each HELOC adjusts based on
the index which is the prime rate published in The Wall Street Journal for the
day that the loan resets. If more than one prime rate is published, the highest
rate will be used. The weighted average gross
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margin for the HELOCs as of the cut-off date was [__%]. All of the HELOCs are
subject to a maximum loan rate specified in the Credit Line Agreements. No HELOC
is subject to a minimum loan rate or a periodic loan rate cap or floor.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
[With respect to each Collection Period, other than the first
Collection Period, the servicing compensation to be paid to the servicer in
respect of its servicing activities relating to the HELOCs, the servicing fee,
will be paid from interest collections in respect of the HELOCs and will be
equal to ____% per annum, the servicing fee rate, multiplied the sum of the
outstanding principal balance of each HELOC as of the first day of each
Collection Period. [The servicing fee will be calculated on the basis of the
actual number of days in each interest accrual period and a 360-day year.] With
respect to the first Collection Period, the servicer will receive from interest
collections in respect of the HELOCs ______ of the amount calculated in the
preceding sentence. All assumption fees, late payment charges and other fees and
charges, to the extent collected from borrowers, will be retained by the
servicer as additional servicing compensation.
With respect to each distribution date, the "Collection Period" is the
prior calendar month.
The servicer will pay ongoing expenses associated with the trust and
incurred by it in connection with its responsibilities under the pooling and
servicing agreement, including, without limitation, payment of the fees and
disbursements of the trustee, any custodian appointed by the trustee, the
registrar and any paying agent. In addition, the servicer will be entitled to
reimbursement for expenses incurred by it in connection with defaulted HELOCs
and in connection with the restoration of mortgaged properties related to
defaulted HELOCs. The servicer's right of reimbursement is senior to the rights
of holders of the certificates to receive any related liquidation proceeds.]
ASSIGNMENT OF MORTGAGE LOANS
At the time of issuance of the certificates, the [seller] will transfer
to the trust all of its right, title and interest in and to each HELOC,
including any additional balances arising in the future conveyed by it to the
trust. The [seller] will also transfer all principal including net liquidation
proceeds, interest received on or with respect to each HELOC subsequent to the
closing date but not including amounts received in respect of taxes, insurance
premiums, assessments and similar items, as provided in the pooling and
servicing agreement. Investor percentage of interest collections on the HELOCs
during the period from the cut-off date to the second business day preceding the
closing date, but not in excess of the amount needed to distribute the required
interest to certificateholders on the first distribution date and to pay the
investor percentage of the servicing fee. The trustee, concurrently with this
transfer, will deliver the certificates and the transferor interest to the
transferor. Each HELOC under which a mortgage loan assigned to the trust was
generated will be identified in a schedule appearing as an exhibit to the
pooling and servicing agreement.
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[The pooling and servicing agreement will require within 30 days of a
reduction in the rating of the seller's [debt] below [ ] that the seller deliver
to the trustee the HELOCs endorsed in blank and the related documents. In lieu
of delivery of original mortgages, the seller may deliver true and correct
copies of original mortgages which have been certified as to authenticity by the
appropriate county recording office where the mortgage is recorded.
Under the terms of the pooling and servicing agreement, at the same
time that the HELOCs are required to be delivered after a reduction in the
seller's debt rating, the seller will be required to prepare and record
assignments of the mortgages related to each HELOC in favor of the trustee,
unless opinions of counsel satisfactory to the rating agencies [and the [letter
of credit][surety bond] issuer] are delivered to the trustee to the effect that
recordation of the assignments is not required in the relevant jurisdictions to
protect the interests of the trust in the HELOCs.
Within [ ] days of the date on which the HELOCs are delivered, the
trustee will review the HELOCs and the related documents and if any HELOC or
related document is found to be defective in any material respect and the defect
is not cured within [ ] days following notification of the defect to the seller
and the depositor by the trustee, the seller will be obligated to [repurchase
the HELOC and to deposit the Repurchase Price (as defined below) into the
collection account. Upon retransfer, the principal balance of the HELOC will be
deducted from the pool balance. In lieu of any repurchase, the seller may
substitute one or more Eligible Substitute HELOCs (as defined below). Any
repurchase or substitution will be considered a payment in full of the defective
HELOC. The obligation of the seller to accept a retransfer of a defective HELOC
is the sole remedy regarding any defects in the HELOCs and related documents
available to the trustee or the holders.
With respect to any HELOC, the "Repurchase Price" is equal to the
principal balance of the HELOC at the time of any transfer described above plus
accrued and unpaid interest to the date of repurchase.]
[An "Eligible Substitute HELOC" is a HELOC substituted by the seller
for a defective HELOC which must, on the date of the substitution:
(i) have a principal balance, or in the case of a substitution of
more than one HELOC for a defective HELOC, an aggregate
principal balance, not [ ]% more and not [ ]% less than the
principal balance relating to the defective HELOC;
(ii) have a loan rate not less than the loan rate of the defective
HELOC and not more than [ ]% in excess of the loan rate of the
defective HELOC;
(iii) have a loan rate based on the same index with adjustments to the
loan rate made on the same interest rate adjustment date as that
of the defective HELOC;
(iv) have a margin that is not less than the margin of the defective
HELOC and not more than [ ] basis points higher than the margin
for the defective HELOC;
(v) have a mortgage of the same or higher level of priority as the
mortgage relating to the defective HELOC;
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(vi) have a remaining term to maturity not more than [ ] months
earlier and not later than the remaining term to maturity of the
defective HELOC;
(vii) comply with each representation and warranty as to the HELOCs
set forth in the sale and servicing agreement, deemed to be made
as of the date of substitution; and
(viii) satisfy other conditions specified in the sale and servicing
agreement.
To the extent the principal balance of an Eligible Substitute HELOC is less than
the principal balance of the related defective HELOC, the seller will be
required to make a deposit to the collection account equal to the difference
(each, a "Substitution Adjustment Amount").]
[The seller will make representations and warranties as to the accuracy
in all material respects of information furnished to the trustee with respect to
each HELOC. In addition, the seller will represent and warrant, on the closing
date, that, among other things: (1) at the time of transfer to the seller, the
seller has transferred or assigned all of its right, title and interest in each
HELOC and the related documents, free of any lien, subject to exceptions; and
(2) each HELOC was generated under a Credit Line Agreement that complied, at the
time of origination, in all material respects with applicable state and federal
laws. Upon discovery of a breach of any representation and warranty which
materially and adversely affects the interests of the holders in a HELOC, the
seller will have a period of [ ] days after discovery or notice of the breach to
effect a cure. If the breach cannot be cured within the [ ]-day period, the
seller will be obligated to repurchase or substitute the defective HELOC from
the trust. The same procedure and limitations that are set forth above for the
repurchase or substitution of defective HELOCs will apply to the retransfer of a
HELOC that is required to be repurchased or substituted because of a breach of a
representation or warranty in the purchase agreement that materially and
adversely affects the interests of the holders.]
MODIFICATIONS TO CREDIT LINE AGREEMENTS
Subject to applicable law, the servicer may change the terms of the
HELOC at any time, including, among other things, increasing the credit limit of
a HELOC or reducing the loan rate of a HELOC. Changes to the terms of a HELOC
may be agreed to by the servicer if the servicer has determined that such
changes are necessary, provided that such changes will not have a material
adverse effect on the interest of the certificateholders.
[CONSENT TO SENIOR LIENS
The servicer, acting as agent for the trust, may permit the placement
of a subsequent senior mortgage on any mortgaged property, provided that (a) (i)
the mortgage relating to the HELOC was in a first lien position as of the
cut-off date and (ii) such action is consistent with prudent commercial
practice; (b) the mortgage relating to the HELOC succeeded to a first or second
lien position after the related HELOC was conveyed to the trust and, immediately
following the placement of such senior lien, the mortgage relating to the HELOC
is in a second or third lien position and the outstanding principal amount of
the mortgage loan secured by such senior lien and the rate at which interest
accrues thereon are no greater than those of the senior mortgage loan secured by
the mortgaged property as of the date the related HELOC was
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conveyed to the trust; (c) the mortgage relating to the HELOC was in a second or
third lien position as of the cut-off date, the new senior lien secures a
mortgage loan that refinances an existing first or second mortgage loan
immediately following such refinancing and the interest rate on the replacement
first or second mortgage loan are not greater than that of the existing first or
second mortgage loan at the date of such refinancing; or (d) the mortgage
relating to the HELOC was in a second or third lien position as of the cut-off
date, the new senior lien secures a mortgage loan that refinances an existing
first or second mortgage loan and the then current combined loan-to-value ratio
of the senior liens and the mortgage does not exceed such ratio as of the
applicable cut-off date and the ratio of the mortgage to the mortgage plus all
senior liens immediately following such refinancing is at least equal to such
ratio as of the cut-off date.]
[TRANSFERS OF ELIGIBLE ADDITIONAL MORTGAGE LOANS TO THE TRUST
If, for each of [five] consecutive business days during the revolving
period, the transferor interest for each day is less than [ ]% of the pool
balance, then not later than the first business day of the calendar month
beginning at least ten business days after the fifth business day, the seller
will be obligated to transfer Eligible Additional Mortgage Loans (as defined
below) to the trust.
The transferor is only obligated to transfer Eligible Additional
Mortgage Loans to the extent available in the [transferor's] portfolio, which
may be generated under home equity credit lines in any billing cycle, so that,
after giving effect to the transfer, the transferor interest will equal at least
[ ]% of the pool balance on that date. [An "Eligible Additional Mortgage Loan"
is a home equity loan that was originated under a HELOC that, as of the notice
date by the transferor to the trustee, the servicer and the [letter of credit]
[surety bond] issuer of its transfer to the trust, complies with the
representations and warranties described under "Assignment of Mortgage Loans"
above.] The transferor must satisfy the following conditions, among others, in
order to transfer Eligible Additional Mortgage Loans to the trust:
- the pool balance, after giving effect to the transfer, will
not exceed $___________;
- if the pooling and servicing agreement required the delivery
of mortgage files, then the mortgage files for the Eligible
Additional Mortgage Loans shall have been delivered to the
trustee or a custodian on its behalf; and
- the transferor shall have given notice of the proposed
transfer to the rating agency and the rating agency has not
notified the transferor in writing prior to the transfer date
that the transfer will result in a reduction or withdrawal of
its then-current rating for the certificates.
[In addition, the transferor may, at its election, transfer Eligible
Additional Mortgage Loans subject to satisfaction of the conditions described
above.]
[OPTIONAL RETRANSFERS OF MORTGAGE LOANS TO THE TRANSFEROR
Subject to the conditions specified in the pooling and servicing
agreement, the transferor may, at its option, require the retransfer of one or
more HELOCs which may have been generated under a HELOC in any billing cycle
from the trust to it on the last day of any
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Collection Period. The pool balance after giving effect to the retransfer must
not be less than the pool balance on the closing date. The retransfer will be
required to satisfy the following conditions, among others:
- no Early Amortization Event shall have occurred, and the
transferor shall reasonably believe that the retransfer will
not cause an Early Amortization Event to occur;
- as of the fifth business day prior to the proposed transfer,
not more than [10]%, based on the pool balance, of the HELOCs
after giving effect to the proposed transfer are delinquent
more than 30 days and the weighted average delinquency of all
of the HELOCs before and after giving effect to the proposed
transfer is not more than 60 days;
- the transferor shall have represented that no selection
procedures reasonably believed by the transferor to be adverse
to the interests of the certificateholders or the [letter of
credit] [surety bond] issuer were used to select the HELOCs to
be removed;
- the transferor shall have received evidence satisfactory to it
that the reassignment will not, as of the date of
reassignment, prevent the transfer of the HELOCs, including
any additional balances, to the trust from being recognized as
a sale under generally accepted accounting principles and
shall have received no evidence that the reassignment will, as
of the date of reassignment, prevent the transfer from being
recognized as a sale for regulatory purposes; and
- each rating agency shall have been notified of the proposed
retransfer and prior to the date of retransfer has not
notified the transferor in writing that the retransfer would
result in a reduction or withdrawal of its then-current rating
of the certificates.]
DESCRIPTION OF THE CERTIFICATES
The certificates will be issued in accordance with the pooling and
servicing agreement. The following summaries describe all of the material
provisions of the pooling and servicing agreement.
GENERAL
The certificates will be issued in denominations of [$ ] and in
integral multiples of [$ ] and will evidence specified undivided interests in
the trust. [Physical certificates, if issued, will be transferable and
exchangeable at the corporate trust office of the trustee, which will initially
act as certificate registrar. See " -- Registration of Certificates" below. 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 outstanding principal amount of the certificates (the "Certificate
Principal Balance") will be equal to the initial principal amount of the
certificates, minus the amount of principal payments paid to the
certificateholders, and minus the amount of any Certificate Loss Amounts
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which have not been reimbursed. See " -- Distributions on the Certificates"
below. Each certificate represents the right to receive payments of interest at
the certificate rate and payments of principal during the amortization period
funded from interest collections and principal collections, respectively,
allocated to the investor interest and draws on the [letter of credit] [surety
bond].
The transferor will own the interest not represented by the
certificates. The transferor interest will represent an undivided interest in
the trust, including the right to receive the transferor percentage of interest
collections and principal collections. The initial amount of the transferor
interest was determined, among other factors, to be able to absorb reductions in
the aggregate amount of loan balances in the trust without causing an Early
Amortization Event, which would result in the early commencement of the
amortization period. There can be no assurance that the transferor interest will
be sufficient for this purpose.
During the revolving period, the Certificate Principal Balance usually
will remain constant. See " -- Distributions on the Certificates" below. The
pool balance, however, will vary each day as principal is paid on the HELOCs,
liquidation losses are incurred, additional balances are drawn down by borrowers
under the HELOCs, mortgage loans are transferred or retransferred to the seller
or servicer or Eligible Additional Mortgage Loans are transferred to the trust.
Consequently, the amount of the transferor interest will fluctuate each day to
reflect the changes in the pool balance. During the amortization period, the
certificate principal balance will decline as the investor percentage of
principal collections is distributed to the certificateholders.
[BOOK-ENTRY CERTIFICATES
The certificates will be in book-entry form. Persons acquiring
beneficial ownership interests in the certificates, or beneficial owners, will
hold their certificates through DTC if they are participants of those systems,
or indirectly through organizations which are participants in those systems.
The book-entry certificates will initially be registered in the name of
Cede & Co., the nominee of DTC. Unless and until definitive certificates are
issued, it is anticipated that the only certificateholder will be Cede & Co., as
nominee of DTC. Beneficial owners are only permitted to exercise their rights
indirectly through participants and DTC.
The Depository Trust Company, "DTC", is a New York chartered limited
purpose trust company. DTC was created for the purpose of holding securities for
its participants and facilitating the clearance and settlement of securities
transactions through electronic book-entry notations.
The beneficial owner's ownership of a book-entry certificate 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 such
purpose. In turn, the financial intermediary's ownership of that book-entry
certificate will be recorded on the records of the applicable depository, or of
a participating firm that acts as agent for the financial intermediary, whose
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interest will in turn be recorded on the records of the depository, if the
beneficial owner's financial intermediary is not a participant of DTC.
Payments on the certificates and transfers of the certificates take
place through book-entry notations. The trustee makes payments to the holding
depository, which in turn makes payments to its participants. The participants
will then, in turn, credit the payments to the accounts of beneficial owners
either directly or through indirect participants. Consequently, beneficial
owners of the book-entry certificates may experience delay in their receipt of
payments. The payments will be subject to tax reporting in accordance with
relevant United States tax laws and regulations.
Transfers of the certificates are made similarly through book-entry
notations. Each beneficial owner instructs its financial intermediary of the
transaction, and the information is eventually passed on to the holding
depository. Each financial intermediary and the depository will note the
transaction on its records and either debit or credit the account of the selling
and purchasing beneficial owners. Payments and transfers between DTC
participants will occur in accordance with the rules and operating procedures of
the depository.
Monthly and annual reports with respect to the 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 the depository, and to the financial
intermediaries to whose DTC accounts the book-entry certificates of the
beneficial owners are credited.
DTC has advised the trustee that, unless and until definitive
certificates are issued, DTC will take any action permitted to be taken by the
holders of the book-entry certificates under the pooling and servicing agreement
only at the direction of one or more financial intermediaries to whose DTC
accounts the book-entry certificates are credited, to the extent that actions
are taken on behalf of financial intermediaries whose holdings include those
book-entry certificates. DTC may take actions, at the direction of its
participants, with respect to some certificates which conflict with actions
taken with respect to other certificates.
Definitive certificates will be issued to beneficial owners of the
book-entry certificates, or their nominees, rather than to DTC, only if: (a) DTC
or the depositor 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 certificates and the depositor or the
trustee is unable to locate a qualified successor, (b) the depositor, at its
sole option, elects to terminate a book-entry system through DTC or (c) after
the occurrence of an event of default under the pooling and servicing agreement,
beneficial owners having percentage interests aggregating not less than 51% of
the principal balance of the book-entry 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 a successor to DTC, is
no longer in the best interests of beneficial owners.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the trustee will be required to notify all beneficial
owners of the occurrence of the event and the availability through DTC of
definitive certificates. Upon surrender by DTC of the
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global certificate or certificates representing the book-entry certificates and
instructions for re-registration, the trustee will issue and authenticate
definitive securities, and the trustee will recognize the holders of the
definitive certificates as holders under the pooling and servicing agreement.
Although DTC has agreed to the foregoing procedures in order to
facilitate transfers of certificates among participants of DTC, it is under no
obligation to perform or continue to perform the procedures and the procedures
may be discontinued at any time.]
PAYMENTS ON MORTGAGE LOANS; DEPOSITS TO COLLECTION ACCOUNT
The servicer will follow the collection procedures with respect to the
HELOCs as it follows from time to time with respect to HELOCs in its servicing
portfolio comparable to the HELOCs. See "Servicing of Loans -- Collection
Procedures; Escrow Accounts" in the prospectus.
[The servicer will establish and maintain a separate collection account
in the name of the trustee for the benefit of the certificateholders and the
[letter of credit] [surety bond] issuer. See "Servicing of Loans -- Deposits to
and Withdrawals from the Collection Account" in the prospectus. [The collection
account will be established initially with the trust department of the trustee.]
Funds in the collection account may be invested in Eligible Investments
typically maturing not later than the business day preceding the next
distribution date. Eligible Investments consist of investments acceptable to
each rating agency for a structured transaction having the rating initially
assigned to the certificates. All net income and gain realized from these
investments will be paid to the servicer.]
[Investor Percentage and Transferor Percentage.
In accordance with the pooling and servicing agreement, the servicer
will allocate between the investor interest and the transferor interest all
amounts including any net liquidation proceeds collected under the HELOCs on
account of principal and the liquidation loss amount of the unrecovered loan
balance of any defaulted HELOC at the end of the Collection Period in which the
defaulted HELOC became a defaulted HELOC. A "defaulted HELOC" is a HELOC that
has been written off as uncollectible by the servicer. The Collection Period for
a distribution date is the calendar month preceding that distribution date or,
in the case of the first distribution date, the period from the cut-off date
through the last day of the calendar month preceding the month in which that
distribution date occurs. The servicer will make each allocation by reference to
the investor percentage and the transferor percentage applicable in each case
during a collection period.
For convenience, this prospectus supplement refers to the investor
percentage with respect to interest collections, principal collections and
liquidation loss amounts as if the investor percentage were the same percentage
at all times in each case. The investor percentage may be a different percentage
for each collection period, and will vary primarily as a result of changes in
the pool balance.
The investor percentage will be calculated as follows:
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Interest Collections and Liquidation Loss Amounts.
When used with respect to interest collections and liquidation
loss amounts at any time, and principal collections during the
revolving period, investor percentage means the percentage equivalent
of a fraction the numerator of which is the Certificate Principal
Balance and the denominator of which is the outstanding pool balance,
in each case as of the end of the immediately preceding collection
period, or, in the case of the first collection period, as of the
closing date.
When used with respect to principal collections during the
amortization period, investor percentage means the percentage
equivalent of a fraction the numerator of which is the amount of the
Certificate Principal Balance and the denominator of which is the pool
balance, in each case as of the end of the revolving period.
The transferor percentage will, in all cases, be equal to 100%
minus the applicable investor percentage.
As a result of the calculation described above, interest collections in
each collection period will be allocated to the certificateholders based on the
relationship of the Certificate Principal Balance to the outstanding pool
balance, which may fluctuate from month to month. During the amortization period
the amount of principal collections allocated to the investor interest will be
determined by reference to a fixed percentage which will be equal to the
investor percentage with respect to principal collections on the last day of the
revolving period.
Deposits in the Collection Account and Payments to the Transferor.
[On the closing date, the servicer will deposit in the collection
account funds in the amount of the investor percentage of interest collections
on the HELOCs received during the period from the cut-off date to the second
business day preceding the closing date, but not in excess of the amount needed
to distribute the required interest on the certificates and the investor
percentage of the servicing fee to be distributed on the initial distribution
date. On and after the closing date, the servicer will, subject to the following
paragraph, deposit on a daily basis upon receipt:
- the investor percentage of interest collections during each
collection period in the revolving period and
- the investor percentage of all interest collections and
principal collections during each collection period in the
amortization period.
The servicer will pay to the transferor within [two] business days of
its receipt:
- during each collection period in the revolving period, the
transferor percentage of all interest collections and, if the
transferor interest after giving effect to any transfers of
additional balances or Eligible Additional Mortgage Loans to
the trust on that day is equal to or greater than zero, the
transferor percentage of all principal collections and the
investor percentage of all principal collections and
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- during each collection period in the amortization period, the
transferor percentage of interest collections and, if the
transferor interest, after giving effect to any transfers of
additional balances or Eligible Additional Mortgage Loans to
the trust on that day, is greater than zero, the transferor
percentage of all principal collections.]
The trustee will establish and maintain a separate distribution
account. On the business day preceding each distribution date the servicer will
transfer amounts in the collection account for distribution to
certificateholders to the distribution account.
The trustee will deposit in the distribution account any amounts drawn
on the [letter of credit] [surety bond] as described below.
Any unallocated principal collections will be deposited and retained in
the collection account for payment to the transferor, during the revolving
period, if and when the transferor interest is greater than zero and, during the
amortization period, to the certificateholder.]
DISTRIBUTIONS ON THE CERTIFICATES
Beginning with the distribution date occurring on ____________,
distributions on the certificates will be made by the trustee out of amounts on
deposit in the distribution account on each distribution date to the persons in
whose names the certificates are registered at the close of business on the [day
prior to each distribution date] (the "Record Date"). Distributions will be
made:
- in immediately available funds to holders of certificates, the
aggregate principal balance of which is at least
$______________, by wire transfer or to the account of the
certificateholder at a domestic bank or other entity having
appropriate facilities, if the certificateholder has notified
the trustee in accordance with the pooling and servicing
agreement, or
- by check mailed to the address of the person entitled as it
appears on the certificate register maintained by the trustee
as certificate registrar.
However, the final distribution in respect of the certificates will be
made only upon presentation and surrender of the certificates at the office or
the agency of the trustee specified in the notice to certificateholders of the
final distribution.
As described in this prospectus supplement, the distribution amount is
calculated on the ______ business day, but no later than the _____ calendar day
of the month in which the related distribution date occurs (the "Determination
Date").
Distributions of Interest Collections and Required Amounts.
On each distribution date, the trustee will pay the following amounts
in the following order of priority to the following persons from the investor
percentage of all interest collections collected during the related collection
period, together with the insured amounts, if any, drawn on the [letter of
credit] [surety bond] for that distribution date.
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(1) [to the certificateholders, interest at the certificate rate
for the interest period preceding the distribution date on the
certificate principal balance outstanding immediately prior to
the distribution date;
(2) to the certificateholders, any interest on the certificates
accrued in accordance with clause (1) that has not been
previously distributed to certificateholders plus, to the
extent legally permissible, interest thereon at the
certificate rate applicable from time to time (an "Unpaid
Interest Shortfall");
(3) to the servicer, the investor percentage of the servicing fee
for the related interest period and all the accrued and unpaid
fees for previous interest periods;
(4) to the [letter of credit][surety bond] issuer for the portion
of the premium for the [letter of credit][surety bond] for the
related interest period;
(5) if the distribution date is in the revolving period, to the
transferor, the investor percentage of the aggregate of all
liquidation loss amounts incurred in the preceding collection
period; provided that the transferor interest, after giving
effect to any transfers of additional balances and Eligible
Additional Mortgage Loans on that date and to the distribution
of the liquidation loss amount is equal to or greater than
zero;
(6) if the distribution date is in the amortization period, to the
certificateholders, the investor percentage of the aggregate
of all liquidation loss amounts incurred in the preceding
collection period;
(7) to the [letter of credit][surety bond] issuer as reimbursement
for prior draws made under the [letter of credit][surety bond]
(with interest thereon);
(8) to the certificateholders, the aggregate of the amounts
allocable in clause (5) that were not previously distributed
in that clause (each, a "Certificate Loss Amount"); and
(9) to the certificateholders, accrued and unpaid interest on each
unreimbursed Certificate Loss Amount -- the interest being
calculated at the certificate rate for each interest period
during which the unreimbursed amount was outstanding.]
Any amounts remaining in the collection account that were allocated to
the certificateholders and were collected during or with respect to the
preceding collection period, after all other distributions have been made, will
be distributed to the [letter of credit] [surety bond] issuer.
A Certificate Loss Amount represents a loss of principal in respect of
defaulted HELOCs allocable to the investor interest and will arise when the
investor percentage of interest collections and the insured amounts are not
sufficient to cover that loss, in accordance with the priority of distributions
described above. As described under "General" above, any Certificate Loss
Amounts which have not been reimbursed will reduce the certificate principal
balance.
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The insured amount for each distribution date will be the lesser of
- the [Letter of Credit] [Surety Bond] Amount and
- the amount, if any, by which (a) the full amount distributable
on the distribution date in clauses (1) through (7) above
exceeds (b) the investor percentage of the interest
collections for the related collection period. The insured
amounts will be drawn on the [letter of credit] [surety bond].
Distributions of Principal.
On each distribution date after the first collection period in the
amortization period, the trustee will distribute to the certificateholders the
investor percentage of principal collections received in the preceding
collection period. In addition, the trustee will distribute to the
certificateholders on any distribution date during the amortization period any
retransfer deposit amount, or draws on the [letter of credit] [surety bond],
received in the preceding collection period and any unallocated principal
collections then on deposit in the distribution amount. The aggregate
distributions of principal to the certificateholders will not exceed the initial
Certificate Principal Balance.
[Calculation of Certificate Rate.
With respect to the initial distribution date, the certificate rate
will be as set forth on the cover page. After that date, on each distribution
date, the certificate rate will be equal to LIBOR as of the second London
Business Day prior to the immediately preceding Distribution Date plus 0.___%
per annum. However, if the certificate rate calculated as described in the
preceding sentence for any distribution date is greater than the weighted
average of the net loan rates for the HELOCs for the preceding collection
period, the certificate rate for that distribution date will be equal to the
weighted average of the net loan rates. The net loan rate for a HELOC is its
loan rate less the servicing fee rate [and the premium rate]. Interest payable
on any distribution date will accrue on the certificates from the preceding
distribution date, or, in the case of the first distribution date, from the
closing date, through the day preceding that distribution date (an "interest
period"). All calculations of interest accrued on the certificates will be made
on the basis of the actual number of days in an interest period and a year
assumed to consist of 360 days.
The term "Certificate Principal Balance" means (1) the original
principal amount of the certificates less (2) all amounts previously distributed
to certificateholders under " -- Distributions of Principal" above, less (3) the
aggregate of all unreimbursed Certificate Loss Amounts.
Calculation of LIBOR.
"LIBOR" with respect to any Distribution Date will be determined by the
trustee and will be equal to the offered rates for deposits in United States
dollars having a maturity of one month commencing on the second London Business
Day prior to the previous distribution date, which appear on the Reuters Screen
LIBO Page as of approximately 11:00 A.M., London Time, on the date of
calculation. If at least two offered rates appear on the Reuters Screen LIBO
Page,
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LIBOR will be the arithmetic mean, rounded upwards, if necessary, to the
nearest one-sixteenth of a percent, of the offered rates. If fewer than two
quotations appear, LIBOR with respect to that distribution date will be
determined at approximately 11:00 A.M., London time, on the determination date
on the basis of the rate at which deposits in United States dollars having a
maturity of one month are offered to prime banks in the London interbank market
by four major banks in the London interbank market selected by the trustee and
in a principal amount equal to an amount of not less than U.S. $1,000,000 and
that is representative for a single transaction in that market at that time. The
trustee will request the principal London office of each of those banks to
provide a quotation of its rate. If at least two quotations are provided, LIBOR
will be the arithmetic mean, rounded upwards, if necessary, to the nearest
one-sixteenth of a percent, of the quotations. If fewer than two quotations are
provided, LIBOR with respect to that distribution date will be the arithmetic
mean, rounded upwards as described above, of the rates quoted at approximately
11:00 A.M., New York City time, on the determination date by three major banks
in New York, New York selected by the trustee for loans in United States dollars
to leading European banks having a maturity of one month and in a principal
amount equal to an amount of not less than U.S. $1,000,000 and is representative
for a single transaction in that market at that time; provided, however, that if
the banks selected by the transferor are not quoting as mentioned in this
sentence, LIBOR in effect for the applicable period will be LIBOR in effect for
the previous period.]
For purposes of calculating LIBOR, a "London Business Day" will be any
business day on which dealings in deposits in United States dollars are
transacted in the London interbank market and "Reuters Screen LIBO Page" will be
the display designated as page "LIBO" on the Reuters Monitor Money Rates
Service, or another page as may replace the LIBO page on that service for the
purpose of displaying London interbank offered rates of major banks.
THE [LETTER OF CREDIT] [SURETY BOND]
On the closing date, the [letter of credit] [surety bond] issuer will
issue the [letter of credit] [surety bond] in favor of the trustee on behalf of
the trust to support payments on the certificates. On each Determination Date,
the servicer will determine the amounts required to be drawn on the [letter of
credit] [surety bond], up to the [letter of credit] [surety bond] amount, on the
related distribution date. On each distribution date, any amounts remaining in
the collection account with respect to the preceding collection period, after
all other distributions have been made as described above, will be distributed
to the [letter of credit] [surety bond] issuer. See "Distributions on
Certificates" above.
The amount available under the [letter of credit] [surety bond] amount
for the initial distribution date will be $ . For each distribution date after
that date, the [letter of credit] [surety bond] amount will equal the lesser of
(i) __% of the pool balance as of the first day of the preceding collection
period, after giving effect to any amounts distributed with respect to principal
of the HELOCs on the distribution date occurring in the preceding collection
period, and (ii) the [letter of credit] [surety bond] amount as of the first day
of the preceding collection period, minus any amounts drawn under the [letter of
credit] [surety bond] during the preceding collection period, plus any amounts
paid to the [letter of credit] [surety bond] issuer on the distribution date
occurring in the preceding collection period up to the amount of any previous
draws on the [letter of credit] [surety bond].
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EARLY AMORTIZATION EVENTS
As described above, the revolving period will continue until the close
of business on the last day of __________ unless an Early Amortization Event
occurs prior to that day. The term "Early Amortization Event" refers to any of
the following events:
[(a) failure on the part of the servicer or the transferor:
(1) to make any payment or deposit on the date required
under the pooling and servicing agreement within five
business days after the payment or deposit is
required to be made;
(2) to observe or perform in any material respect
particular covenants of the servicer or the
transferor; or
(3) to observe or perform in any material respect any
other covenants or agreements of the servicer or the
transferor set forth in the pooling and servicing
agreement, which failure, in each case, materially
and adversely affects the interests of the
certificateholders and which, in the case of clause
(3), continues unremedied for a period of 60 days
after written notice and continues to materially and
adversely affect the interests of the
certificateholders for that period;
(b) any representation or warranty made by the servicer or the
transferor in the pooling and servicing agreement proves to have been incorrect
in any material respect when made, as a result of which the interests of the
certificateholders are materially and adversely affected, which continues to be
incorrect in any material respect for a period of 60 days after written notice
and which continues to materially and adversely affect the interests of the
certificateholders for that period; provided, however, that an Early
Amortization Event shall not be deemed to occur if the transferor has accepted
retransfer of the related HELOC or all the HELOCs, if applicable, during this
period, or a longer period, not to exceed an additional 60 days, as the trustee
may specify, in accordance with the provisions of the pooling and servicing
agreement;
(c) the trust becomes subject to registration as an investment company
under the Investment Company Act of 1940;
(d) if the transferor fails to transfer to the trust Eligible
Additional Mortgage Loans by the time it is required to do so;
(e) an event of default under the trust agreement (as described in the
prospectus under "The Agreements -- Events of Default") occurs;
(f) the [letter of credit] [surety bond] amount is less than [ ]% of
the certificate principal balance; or
(g) if the average of the investor percentage of interest collections
for any three consecutive collection periods is less than the amounts to be
distributed to certificateholders as
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set forth in subsections (1) through (7) under "Distributions on the
Certificates -- Distributions of Interest Collections and Required Amounts"
above for the three distribution dates relating to the collection periods.]
[In the case of any event described in clauses (a) or (b), an Early
Amortization Event will be deemed to have occurred only if, after the expiration
of the applicable grace period, if any, described in the clauses, either the
trustee or holders of certificates evidencing percentage interests aggregating
more than 51% or the [letter of credit] [surety bond] issuer, but only if the
[letter of credit] [surety bond] is outstanding or the [letter of credit]
[surety bond] issuer has not been fully reimbursed for all amounts paid to the
trust by the [letter of credit] [surety bond] issuer), by written notice to the
transferor and the servicer, and to the trustee if given by the
certificateholders or the [letter of credit] [surety bond] issuer, declare that
an Early Amortization Event has occurred as of the date of the notice. In the
case of any event described in clauses (c), (d), (e) or (f), an Early
Amortization Event will be deemed to have occurred without any notice or other
action on the part of the trustee or the certificateholders or the [letter of
credit] [surety bond] Issuer immediately upon the occurrence of the event. On
the date on which an Early Amortization Event is deemed to have occurred, the
amortization period will commence and distributions of principal to the
certificateholders will begin on the first distribution date following the month
in which the Early Amortization Date occurs. If, because of the occurrence of an
Early Amortization Event, the amortization period begins earlier than
____________, the date on which the amortization period is scheduled to
commence, certificateholders will begin receiving distributions of principal
earlier than they would otherwise have under the pooling and servicing
agreement, which may shorten the final maturity of the certificates.]
TERMINATION OF TRUST
The trust will terminate on the distribution date following the earlier
of (i) __________________ and (ii) the final payment or other liquidation of the
last HELOC in the trust.
OPTIONAL REPURCHASE
The transferor may effect a retransfer of the certificateholders'
interest in each HELOC, and all property acquired in respect of any HELOC,
remaining in the trust for an amount equal to the sum of the certificate
principal balance plus accrued and unpaid interest thereon at the applicable
certificate rate through the day preceding the final distribution date if the
Certificate Principal Balance immediately prior to the final distribution date
is less than or equal to [ ]% of the original Certificate Principal Balance. The
purchase price will be distributed to the certificateholders in lieu of the
amount that would otherwise be distributed if the options were not exercised,
which will be applied as provided in the pooling and servicing agreement.
THE TRANSFEROR
The transferor is the holder of the transferor interest and will
initially be [Fleet National Bank] or one of its affiliates.
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THE TRUSTEE
[ ] is the trustee under the pooling and servicing agreement. The
mailing address of the trustee is [ ], Attention: Corporate Trust
Administration.
USE OF PROCEEDS
The net proceeds from the sale of the certificates, which are expected
to be $______________, will be applied by the depositor on the closing date
towards the purchase price of the HELOCs, the payment of expenses related to the
sale and the purchase of the HELOCs and other corporate purposes.
FEDERAL INCOME TAX CONSEQUENCES
In the opinion of [ ], special tax counsel to the trust, for federal
income tax purposes, the certificates will be treated as debt and the trust will
not be characterized as an association, a publicly traded partnership taxable as
a corporation, or a taxable mortgage pool. The trust and each certificateholder
will agree to treat the certificates as indebtedness for federal income tax
purposes. Alternative characterizations of the trust and the certificates are
possible, and we suggest that prospective investors consult their tax advisors
regarding the federal income tax consequences of any possible alternative
characterization. Based on their anticipated offering prices, it is expected
that the certificates will not be issued with original issue discount. The
prepayment assumption to be used for calculating the accrual of original issue
discount and market discount and amortization of bond premium will be [ ]. For
additional information regarding federal income tax consequences, see "Federal
Income Tax Consequences" in the prospectus.
ERISA CONSIDERATIONS
Section 406 of the Employee Retirement Income Security Act of 1974 and
Section 4975 of the Internal Revenue Code of 1986 (the "Code") prohibit a
pension, profit sharing or other employee benefit or other plan, including an
individual retirement account or a Keogh plan, that is subject to Title I of
ERISA or to Section 4975 of the Code from engaging in certain types of
transactions involving "plan assets" with persons that are "parties in interest"
under ERISA or "disqualified persons" under the Code with respect to the Plan.
Some governmental plans, although not subject to ERISA or the Code, are subject
to federal, state or local laws ("Similar Law") that impose similar requirements
(those plans subject to ERISA, Section 4975, or Similar Law referred to as
"Plans"). A violation of these "prohibited transaction" rules may generate
excise tax and other liabilities under ERISA and the Code or under Similar Law
for those persons.
ERISA also imposes duties on persons who are fiduciaries of Plans
subject to ERISA, including the requirements of investment prudence and
diversification, and the requirement that
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<PAGE> 84
the Plan's investments be made in accordance with the documents governing the
Plan. Under ERISA, any person who exercises any authority or control with
respect to the management or disposition of the assets of a Plan is considered
to be a fiduciary of the Plan.
Transactions involving the trust might be deemed to constitute
prohibited transactions under ERISA and the Code if assets of the trust were
deemed to be assets of a Plan. Under a regulation issued by the United States
Department of Labor (the "Plan Assets Regulation"), the assets of the trust
would be treated as plan assets of a Plan for purposes of ERISA and the Code
only if the Plan acquires an "equity interest" in the trust 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. It is expected that the certificates
will be considered equity interests in the trust for purposes of the Plan Assets
Regulation, and that the assets of the trust may therefore constitute plan
assets if certificates are acquired by Plans. It is not expected that the
certificates will constitute "publicly-offered securities" and the trustee will
not monitor ownership of the certificates to ensure that ownership by benefit
plan investors is not significant.
[Furthermore, the trust does not contain only assets to which the
Exemption, described in "ERISA Considerations" in the prospectus, applies.
As a result, certificates shall not be transferred and the trustee
shall not register any proposed transfer of certificates unless it receives
- a representation substantially to the effect that the proposed
transferee is not a Plan and is not acquiring the certificates
on behalf of or with the assets of a Plan, including assets
that may be held in an insurance company's separate or general
accounts where assets in those accounts may be deemed "plan
assets" for purposes of ERISA, or
- an opinion of counsel in form and substance satisfactory to
the trustee and the transferor that the purchase or holding of
the certificates by or on behalf of a Plan will not constitute
a prohibited transaction and will not result in the assets of
the trust being deemed to be "plan assets" and subject to the
fiduciary responsibility provisions of ERISA or the prohibited
transaction provisions of ERISA and the Code or any Similar
Law or subject the trustee, the certificate administrator or
the transferor to any obligation in addition to those
undertaken in the trust agreement.]
[It is expected that the Exemption will apply to the acquisition and
holding by Plans of the certificates, and that all conditions of the Exemption
other than those within the control of the investors will be met. In addition,
as of the date of this prospectus supplement, there is no single mortgagor that
is the obligor on five percent of the obligations included in the trust by
aggregate unamortized principal balance of the assets of the trust.
The rating of a certificate may change. If the rating of a certificate
declines below BBB- or Baa3, the certificate will no longer be eligible for
relief under the Exemption, and consequently may not be purchased by or sold to
a Plan (although a Plan that had purchased the
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<PAGE> 85
certificate when it had an investment-grade rating would not be required by the
Exemption to dispose of it).
We suggest that prospective Plan investors consult with their legal
advisors concerning the impact of ERISA and the Code, the applicability of the
Exemption, and the potential consequences in their specific circumstances, prior
to making an investment in the certificates.]
LEGAL INVESTMENT CONSIDERATIONS
The appropriate characterization of the certificates under various
legal investment restrictions, and thus the ability of investors subject to
these restrictions to purchase certificates, may be subject to significant
interpretive uncertainties. All investors whose investment authority is subject
to legal restrictions should consult their own legal advisors to determine
whether, and to what extent, the certificates will constitute legal investments
for them. The depositor makes no representation as to the proper
characterization of the certificates for legal investment or financial
institution regulatory purposes, or as to the ability of particular investors to
purchase certificates under applicable legal investment restrictions. The
uncertainties described above, and any unfavorable future determinations
concerning legal investment or financial institution regulatory characteristics
of the certificates, may adversely affect the liquidity of the certificates.
UNDERWRITING
Subject to the terms and conditions set forth in the underwriting
agreement, the depositor has agreed to sell to [ ], the underwriter, and the
underwriter has agreed to purchase from the depositor, the certificates. The
underwriter is obligated to purchase all the certificates if any are purchased.
The depositor has been advised by the underwriter that it presently intends to
make a market in the certificates; however, it is not obligated to do so, any
market-making may be discontinued at any time, and there can be no assurance
that an active public market for the certificates will develop.
The depositor has been advised by the underwriter that it proposes
initially to offer the certificates to the public at the respective offering
prices set forth on the cover page of this prospectus supplement and to certain
dealers at such price less a discount not in excess of [ %] of the certificate
denomination. The underwriter may allow and such dealers may reallow a discount
not in excess of [ %] of the certificate denomination to certain other dealers.
After the initial public offering, such public offering price may change.
Proceeds to the depositor are expected to be $____________ from the
sale of the certificates, before deducting expenses payable by the depositor of
$___________. In connection with the purchase and sale of the certificates, the
underwriter may be deemed to have received compensation from the depositor in
the form of underwriting discounts, concessions or commissions.
[The distribution of the certificates by the underwriter will be
effected 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 sale. The
underwriter may effect these transactions by selling the certificates
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<PAGE> 86
to or through dealers, and the dealers may receive from the underwriter
compensation in the form of underwriting discounts, concessions or commissions.
The difference between the purchase price for the certificates paid to the
depositor and the proceeds from the sale of the certificates realized by the
underwriter will constitute underwriting discounts and commissions.]
The underwriting agreement provides that the [depositor] will indemnify
the underwriter against liabilities, including liabilities under the Securities
Act of 1933, or contribute payments the underwriter may be required to make in
respect of liabilities, including liabilities under the Securities Act of 1933.
[The underwriter is an affiliate of the depositor and seller.]
[This prospectus supplement and the accompanying prospectus, may be
used by Fleet Securities, Inc. or one of its affiliates, in connection with
offers and sales of an indeterminate amount of the certificates in market-making
transactions. In these transactions, Fleet Securities, Inc. or one of its
affiliates may act as a principal or an agent.]
LEGAL MATTERS
Certain legal matters with respect to the certificates will be passed
upon for the depositor by [ ] and for the underwriter by [ ]. [ ] will pass upon
certain legal matters on behalf of the seller.
RATING
It is a condition to issuance that the certificates be rated at least
"____" by [ ] and "____" by [ ]. A securities rating addresses the likelihood of
the receipt by certificateholders of distributions on the HELOCs. The rating
takes into consideration the structural, legal and tax aspects associated with
the certificates. The ratings on the certificates do not, however, constitute
statements regarding the possibility that certificateholders might realize a
lower than anticipated yield. 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.
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<PAGE> 87
INDEX OF DEFINED TERMS
<TABLE>
<S> <C>
Certificate Loss Amount............................ 30
Certificate Principal Balance...................... 31
Code............................................... 35
Collection Period.................................. 20
Credit Line Agreements............................. 17
defaulted HELOC.................................... 27
Early Amortization Event........................... 33
Eligible Mortgage Loan............................. 23
Eligible Substitute HELOC.......................... 21
HELOCs............................................. 14
Investor Percentage................................ 28
LIBOR.............................................. 32
London Business Day................................ 32
Plans.............................................. 36
Record Date........................................ 29
Repurchase Price................................... 21
Similar Law........................................ 36
Substitution Adjustment Amount..................... 22
Unpaid Interest Shortfall.......................... 30
</TABLE>
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<PAGE> 88
$_________
[ ] HOME EQUITY
LOAN TRUST ____-_,
AS ISSUER
$_________ HOME EQUITY LOAN
ASSET-BACKED CERTIFICATES
SERIES ____-_
FLEET HOME EQUITY LOAN CORPORATION
DEPOSITOR
FLEET NATIONAL BANK
SELLER AND SERVICER
_________________
PROSPECTUS SUPPLEMENT
[ , ___ ]
_____________________
[UNDERWRITER]
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<PAGE> 89
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED JANUARY 12, 2001.
Prospectus
[LOGO]
FLEET HOME EQUITY LOAN CORPORATION
Asset-Backed Certificates
Asset-Backed Notes
Issuable in series
Fleet Home Equity Loan Corporation, as the depositor, may offer from time to
time under this prospectus and a prospectus supplement asset-backed notes and
asset-backed certificates which may be sold from time to time in one or more
series. Each series of securities will be issued in one or more classes.
The prospectus supplement will set forth the specific assets of the trust and
the sellers from whom the assets are acquired. The assets may include:
(a) one or more pools of:
- closed-end and revolving home equity loans and loans
the proceeds of which have been applied to the purchase
of the related mortgaged property, secured by mortgages
primarily on one- to four-family residential properties
and properties that include both residential and
income-producing non-residential units;
- home improvement installment sales contracts and
installment loan agreements which may be unsecured,
secured by mortgages primarily on one- to four-family
residential properties, or secured by purchase money
security interests in the related home improvements;
and
- mortgaged and asset backed securities, referred to in
this prospectus as the pooled securities.
(b) all monies due under the above assets, and
(c) funds or accounts established for the trust or one or more forms
of enhancement.
The prospectus supplement will state if the trust will make a REMIC or FASIT
election for federal income tax purposes.
FOR A DISCUSSION OF RISKS ASSOCIATED WITH AN INVESTMENT IN THE SECURITIES, SEE
RISK FACTORS ON PAGE 2.
Neither the SEC nor any state securities commission has approved or disapproved
the offered securities or determined if this prospectus is accurate or complete.
Making any contrary representation is a criminal offense.
<PAGE> 90
RISK FACTORS
You should carefully consider the following risk factors prior to any
purchase of the securities.
THE OFFERED SECURITIES ARE NOT SUITABLE INVESTMENTS FOR ALL INVESTORS
The offered securities are not a suitable investment if you require a
regular or predictable schedule of payments or payment on any specific date. The
offered securities are complex investments that should be considered only by
investors who, either alone or with their financial, tax and legal advisors,
have the expertise to analyze the prepayment, reinvestment, default and market
risk, the tax consequences of an investment and the interaction of these
factors.
LIMITED LIQUIDITY MAY RESULT IN DELAYS IN LIQUIDATIONS OR LOWER RETURNS
There will be no market for the securities of any series prior to its
issuance, and there can be no assurance that a secondary market will develop, or
if it does develop, that it will provide holders with liquidity of investment or
that any market will continue for the life of the securities. One or more
underwriters, as specified in the prospectus supplement, may expect to make a
secondary market in the securities, but they have no obligation to do so. Absent
a secondary market for the securities you may experience a delay if you choose
to sell your securities and the price you receive may be less than that which is
offered for a comparable liquid security.
PAYMENTS ON SECURITIES ARE LIMITED TO THE ASSETS OF TRUST
The securities will be payable solely from the assets of the trust,
including if applicable any amounts available due to any enhancement. There will
be no recourse to the depositor or any other person for any default on the notes
or any failure to receive distributions on the certificates. If payments from
the assets of the trust become insufficient to make payments on the securities,
no other assets would be available for payment of the deficiency and you could
experience a loss.
In addition, as specified in the prospectus supplement, trust assets
and any funds remaining after making all payments due on the securities and
other required payments may be released or remitted to the depositor, the
seller, the servicer, the provider of any enhancement or any other entitled
person and will not be available for making payments to securityholders.
We refer you to "The Agreements -- Assignment of Trust Assets."
ENHANCEMENT MAY BE INSUFFICIENT TO COVER LOSSES
Although enhancement is intended to reduce the risk of delinquent
payments or losses to holders of securities, the amount of the enhancement, if
any, will be limited as described in the prospectus supplement. The available
enhancement may decline or be depleted before the securities are paid in full,
and as a result, you may suffer losses. For example, enhancement may be
insufficient in cases of greater than anticipated losses or where the
enhancement provider is unable to meet its obligations.
2
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We refer you to "Enhancement."
TIMING AND RATE OF PREPAYMENTS MAY RESULT IN LOWER YIELD
The yield to maturity experienced by a holder of securities may be
affected by the rate of payment of principal of the trust assets. An investor
who purchases a security at a discount may realize a lower yield if prepayments
are less than anticipated. Conversely, an investor who purchases a security at a
premium may realize a lower yield if prepayments are greater than anticipated.
The rate and timing of principal payments of the securities of a series will be
affected by a number of factors, including the following:
- the extent of prepayments on the trust assets, which
prepayments may be influenced by a variety of factors,
- the manner of allocating principal payments among the classes
of securities as specified in the prospectus supplement and
- the exercise by the entitled party of any right of optional
termination. Prepayments may also result from repurchases of
these assets due to material breaches of the depositor's or
the seller's warranties.
Since borrowers generally can prepay their loans at any time, the rate
and timing of principal payments on the securities are highly uncertain.
Generally, when market interest rates increase, borrowers are less likely to
prepay their loans. This could result in a slower return of principal to you at
a time when you might have been able to reinvest those funds at a higher rate of
interest than the rates on your securities. On the other hand, when market
interest rates decrease, borrowers are generally more likely to prepay their
loans. This could result in a faster return of principal to you at a time when
you might not be able to reinvest those funds at an interest rate as high as the
rate of your securities.
We refer you to "Description of the Securities -- Weighted Average Life
of the Securities."
Interest payable on the securities on a distribution date will include
all interest accrued during the period specified in the prospectus supplement.
In the event interest accrues during the calendar month prior to a distribution
date, the effective yield to holders will be reduced from the yield that would
otherwise be obtainable if interest payable on the security were to accrue
through the day immediately preceding each distribution date, and the effective
yield at par to holders will be less than the indicated coupon rate.
We refer you to "Description of the Securities -- Payments of
Interest."
JUNIOR LIENS MAY RESULT IN LOSSES IN FORECLOSURE PROCEEDINGS
With respect to mortgages in the trust fund that are junior liens, the
proceeds from related liquidation, insurance or condemnation proceedings will be
available to satisfy the outstanding balance of the junior mortgage only to the
extent that the claims of senior mortgagees have been satisfied in full,
including any related foreclosure costs and any prior statutory liens. If the
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remaining proceeds are insufficient to pay the balance of the junior mortgage
and enhancement is not available to cover the losses, then:
- there will be a delay in distributions to you while a
deficiency judgment against the borrower is sought; and
- you may incur a loss if a deficiency judgment cannot be
obtained.
A junior mortgagee may not foreclose on the property securing a junior
mortgage unless it forecloses subject to the senior mortgages, in which case it
must either pay the entire amount due on the senior mortgages to the senior
mortgagees at or prior to the foreclosure sale or make payments on the senior
mortgages in the event the mortgagor is in default. The trust will not have any
source of funds to satisfy the senior mortgages or make payments due to the
senior mortgagees.
DECREASE IN VALUE OF MORTGAGED PROPERTY WOULD DISPROPORTIONATELY AFFECT JUNIOR
LIENHOLDERS
There are several factors that could adversely affect the value of
properties so that the outstanding balance of the related loan, together with
any senior financing on the properties, would equal or exceed the value of the
properties. Among the factors that could adversely affect the value of the
properties are an overall decline in the residential real estate market in the
areas in which the properties are located or a decline in the general condition
of the properties as a result of failure of borrowers to maintain adequately the
properties or of natural disasters or other events that are not necessarily
covered by insurance, including earthquakes, floods and civil disturbances such
as riots. That type of decline could extinguish the value of a junior interest
in property before having any effect on the related senior interest. If a
decline in value occurs, the rates of delinquencies, foreclosure and losses on
the affected mortgage loans may increase, resulting in losses in the securities.
COSTS FOR CLEANING ENVIRONMENTALLY CONTAMINATED PROPERTY MAY RESULT IN LOSSES
Under state and federal laws, an environmentally contaminated property
may give rise to a lien on the property to assure the costs of cleanup. These
laws may also impute liability for cleanup costs to the lender under certain
circumstances, even if the environmental damage was caused by a prior owner. Any
lien or costs attached to a contaminated property could result in a loss to
securityholders.
We refer you to "Legal Aspects of the Loans -- Environmental Risks" in
this prospectus for more detail.
STATE AND FEDERAL LAWS MAY LIMIT ABILITY TO COLLECT ON LOANS
Federal and state laws regulate interest rates and other charges and
require disclosures. In addition, other 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 involved, violations may limit collections
on the loans. In some cases,
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the borrower may be entitled to a refund of amounts previously paid and
recission of the loan and could subject the trust to damages and administrative
enforcement.
The home improvement contracts are also subject to federal and state
laws which protect a homeowner from defective craftmanship or incomplete work by
a contractor. These laws permit the borrower to withhold payment if the work
does not meet the quality and durability standards agreed to by the homeowner
and the contractor. These laws may have the effect of subjecting the trust to
all claims and defenses which the borrower had against the contractor.
We refer you to "Legal Aspects of the Loans" in this prospectus for
more detail.
RATING OF THE SECURITIES DOES NOT ASSURE PAYMENT
It will be a condition to the issuance of the offered securities that
they be rated in one of the four highest rating categories by each rating agency
identified in the prospectus supplement. The ratings of the securities will be
based on, among other things, the adequacy of the value of the trust assets and
any enhancement. The rating should not be deemed a recommendation to purchase,
hold or sell the securities, particularly since the ratings do not address
market price or suitability for an investor. There is no assurance that the
ratings will remain in effect over the life of the securities, and they may be
lowered or withdrawn.
We refer you to "Ratings" in this prospectus for more detail.
LIQUIDATION VALUE OF TRUST ASSETS MAY BE INSUFFICIENT TO SATISFY ALL CLAIMS
AGAINST TRUST
There is no assurance that the market value of the trust assets at any
time will equal the principal amount of the securities. In addition, under any
situation in which the trust assets are required to be sold, the proceeds will
be used to cover administrative costs before being used to make payments on the
securities. The net proceeds may be insufficient to pay the principal and
interest on the securities.
DISTRIBUTIONS AND RIGHTS OF INVESTORS MAY BE ADVERSELY AFFECTED BY INSOLVENCY OF
SELLER
If the seller were to become insolvent, a receiver or conservator for,
or a creditor of, the seller may attempt to reclaim the loans. Even if such an
attempt were unsuccessful, it could result in delays in distributions to you.
SERVICER DOES NOT MONITOR PAYMENT OF TAXES
Although the mortgage loans may require that each borrower pay all
property taxes on the related mortgaged property, the servicer has no obligation
to monitor the payment of property taxes. If a borrower is delinquent in paying
property taxes, a lien may be placed on the mortgaged property which would be
senior in priority to the mortgage securing the related mortgage note. After any
tax sale, the delinquent property taxes would be paid first out of any
liquidation proceeds, and the remaining funds may be insufficient to satisfy the
mortgage loan and any senior mortgage loan.
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DESCRIPTION OF THE SECURITIES
GENERAL
The securities will be issued in series. The notes will be issued under
an indenture, a form of which has been filed as an exhibit to the registration
statement of which this prospectus forms a part. The certificates will be issued
under either a pooling and servicing agreement or a trust agreement, forms of
which also have been filed as exhibits to the registration statement. A series
may consist of both notes and certificates. The term "Agreement" is used in this
prospectus to refer to, with respect to a series of certificates, the pooling
and servicing agreement or trust agreement, and with respect to a series of
notes, the indenture and the servicing agreement, as the context requires.
The following summaries, together with additional summaries under "The
Agreements" in this prospectus, describe all of the material provisions in the
Agreements common to each series of securities. Where particular provisions or
terms used in the Agreements are referred to, the actual provisions are
incorporated by reference as part of the summaries.
Each series of securities will consist of one or more classes of
securities, one or more of which may be:
- compound interest securities,
- fixed interest securities,
- variable interest securities,
- planned amortization class securities,
- targeted amortization class securities,
- accretion directed securities,
- zero coupon securities,
- principal only securities,
- interest only securities, or
- participation securities.
A series may also include one or more classes of subordinate securities.
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 prospectus supplement. Upon satisfaction of the conditions described in
the prospectus supplement, the transfer of the securities may be registered and
the securities may be exchanged at the office of the trustee without the payment
of any service charge other than any tax or governmental charge payable in
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connection with the registration of transfer or exchange. 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 prospectus supplement. Payments
may be made by check or wire transfer as described in the prospectus supplement.
The 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 on the securities will be made by the trustee, or a paying
agent on behalf of the trustee, as specified in the prospectus supplement.
Typically, all payments with respect to the trust assets for a series, together
with reinvestment income thereon, amounts withdrawn from any reserve fund, and
amounts available due to any other enhancement specified in the prospectus
supplement will be deposited directly into a separate collection account
established by the trustee or the servicer. The amount deposited to the
collection account may be net of amounts payable to the servicer and any other
person specified in the prospectus supplement. Amounts on deposit in the
collection account will be deposited into the distribution account and will be
available to make payments on securities of a series on the next distribution
date. See "The Trusts -- Collection and Distribution Accounts."
PAYMENTS OF INTEREST
The securities entitled to receive interest will bear interest from the
date and at the rate per annum specified, or calculated in the method described,
in the prospectus supplement. Interest on a class of securities will be payable
on the distribution date and in the priority specified in the prospectus
supplement. The rate of interest on the securities may be fixed or variable or
may change based on changes in the characteristics of the trust assets.
Principal only securities will be entitled to either nominal or no interest
distributions. Any interest on zero coupon securities that is not paid on a
distribution date will accrue and be added to the principal balance.
PAYMENTS OF PRINCIPAL
On each distribution date, principal payments will be made to those
securityholders entitled to principal, to the extent set forth in the prospectus
supplement. The principal payments will be made in accordance with the
prospectus supplement and will be allocated among the respective classes of a
series in the manner, at the times and in the priority described in the
prospectus supplement.
Interest only securities are entitled to either nominal or no principal
distributions. Interest only securities may be assigned a notional amount, but
that value will be used primarily for the calculation of interest payments and
will not represent the right to receive any distributions allocable to
principal.
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FINAL SCHEDULED DISTRIBUTION DATE
The final scheduled distribution date with respect to each class of
notes is the date by which the principal of the class of notes will be fully
paid. With respect to each class of certificates, the final scheduled
distribution date will be the date on which the entire aggregate principal
balance of the class of certificates is expected to be reduced to zero. These
calculations will be based on the assumptions described in the prospectus
supplement. The final scheduled distribution date for each class of securities
will be specified in the prospectus supplement.
The actual final distribution date of the securities of a series will
depend primarily upon the rate of principal payment of the loans and the pooled
securities in the trust. Since payments on the trust assets, including
prepayments, 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 any class will occur earlier, and may occur substantially
earlier, than its final scheduled distribution date. Furthermore, with respect
to the certificates, as a result of delinquencies, defaults and liquidations of
the trust assets in the trust, 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
the trust assets. See "Weighted Average Life of the Securities".
SPECIAL REDEMPTION
If specified in the prospectus supplement, in some cases, one or more
classes of securities may be subject to special redemption, in whole or in part,
if a determination is made that the amount of interest that will accrue on the
trust assets will be less than the amount of interest that will accrue on the
securities. In that event, the trustee will redeem the principal amount of
securities that will cause the available interest amount to equal the amount of
interest that will accrue on the securities outstanding after the redemption.
OPTIONAL REDEMPTION, PURCHASE OF TRUST ASSETS OR SECURITIES, TERMINATION OF
TRUST
The depositor or the servicer may, at its option, redeem, in whole or
in part, one or more classes of notes or purchase one or more classes of
certificates of any series, on any distribution date under the circumstances, if
any, specified in the prospectus supplement. Alternatively, if specified in the
prospectus supplement, the depositor, the servicer, or another entity designated
in the prospectus supplement may, at its option, cause an early termination of a
trust by repurchasing all of the trust assets from the trust. Prior notice of
the redemption, purchase or termination must be given by the depositor or the
trustee. The redemption, purchase or repurchase price will be described in the
prospectus supplement. In the event that a REMIC election has been made, the
trustee shall receive a satisfactory opinion of counsel that the optional
redemption, purchase or termination will be conducted so as to constitute a
"qualified liquidation" under Section 860F of the Code.
In addition, the prospectus supplement will describe any other
circumstances under which securityholders could be fully paid significantly
earlier than if payments or distributions were based solely on the payment
experience of the trust assets.
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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. The weighted average life of a
security will typically be influenced by the rate at which the amount financed
under the loans or the loans underlying the pooled securities, as applicable,
included in the trust 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 will describe the
prepayment standard or model, if any, used and may contain tables setting forth
the projected 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 based on the assumptions
stated in the prospectus supplement.
There is, however, no assurance that prepayments on the trust assets
will conform to any level of any prepayment standard or model specified in the
prospectus supplement. The rate of principal prepayments on pools of loans is
influenced by a variety of economic, demographic, geographic, legal, tax, social
and other factors.
The rate of prepayments of conventional housing loans and other
receivables has fluctuated significantly in recent years. If prevailing interest
rates fall significantly below the interest rates on the loans or the loans
underlying the pooled securities, such 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 addition, the weighted average life of the securities may
be affected by the varying interest rates and maturities of the loans or
underlying loans. If any loans or underlying loans 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 dates,
even in the absence of prepayments.
THE TRUSTS
GENERAL
The notes will be secured by the pledge of the assets of the trust, and
the certificates will represent interests in the trust assets, or in a group of
assets specified in the prospectus supplement. The trust of each series may
include the following assets:
- the loans;
- mortgage and asset backed securities, which are referred to in
this prospectus as the pooled securities;
- amounts available from the reinvestment of payments on the
trust assets as specified in the prospectus supplement;
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- enhancements, as described under "Enhancement";
- properties that secured a loan but which are acquired by
foreclosure or deed in lieu of foreclosure or repossession;
- the amount, if any, initially deposited in the collection
account or distribution account for a series as specified in
the prospectus supplement.
The securities will be non-recourse obligations of the trust.
Typically, the assets of each trust will serve as collateral for only one series
of securities. Noteholders may only proceed against that collateral in the case
of a default and may not proceed against any assets of the depositor, any of its
affiliates or any assets of the trust not pledged to secure the notes.
The loans and pooled securities for a series will be sold by the
depositor to the trust. Pooled securities generally will be purchased by the
depositor in secondary market transactions, not from the issuer of the
securities or an affiliate of the issuer. Loans may be purchased by the
depositor in privately negotiated transactions. Loans may be originated by or
acquired from an affiliate of the depositor. Loans relating to a series will be
serviced by the servicer specified in the prospectus supplement, which may be an
affiliate of the depositor and the seller.
Prior to the initial offering of the related series of securities, each
trust will have no assets or liabilities. No trust is expected to engage in any
activities other than acquiring, managing and holding the trust assets and other
assets contemplated in this prospectus and in the prospectus supplement and the
related proceeds, issuing securities and making payments and distributions
thereon and related activities. No trust is expected to have any source of
capital other than its assets and any related enhancement. The depositor
anticipates that each trust will be organized in either New York or Delaware.
THE LOANS
The term "loans" as used in this prospectus includes mortgage loans,
which may be closed-end home equity loans, revolving credit line home equity
loans - also called home equity lines of credit or "HELOCs"- and mortgage loans
the proceeds of which have been applied to the purchase of mortgaged property,
and home improvement contracts.
Mortgage Loans.
The property which secures repayment of the mortgage loans is referred
to as the "mortgaged properties". The mortgage loans may be subordinated to
other mortgages on the same mortgaged property. The mortgage loans may have
fixed interest rates or adjustable interest rates and may provide for other
payment characteristics as described in this section and in the prospectus
supplement.
As more fully described in the prospectus supplement, interest on each
HELOC is generally computed and payable monthly on an average outstanding
principal balance of the mortgage loan, as specified in the Agreement. Principal
amounts on the HELOCs may be drawn down up to a maximum amount as set forth in
the prospectus supplement or repaid from time to time. The HELOCs may be subject
to an early termination fee. If specified in the prospectus
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supplement, new draws by borrowers under the HELOCs will automatically become
part of the trust. As a result, the aggregate balance of the HELOCs will
fluctuate from day to day as new draws by borrowers are added to the trust and
principal payments are applied to the balances. The amounts of the draws and
payments will usually differ each day, as more specifically described in the
prospectus supplement.
Typically, the full principal amount of a closed-end loan is advanced
at origination of the loan and 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 prospectus supplement, interest on each
mortgage loan is calculated on the basis of an average outstanding principal
balance of the loan multiplied by its interest rate and further multiplied by a
fraction described in the prospectus supplement. The interest on the mortgage
loans may be calculated using the simple interest method, in which the portion
of each monthly payment allocated to interest depends upon the actual number of
days elapsed since the date of last payment. The original terms to stated
maturity of the loans usually will not exceed 360 months. The loans for a series
may include loans that do not amortize their entire principal balance by their
stated maturity in accordance with their terms and require a balloon payment of
the remaining principal balance at maturity. The loans for a series may also
include loans that do not have a specified stated maturity.
The mortgaged properties will include primarily single family
properties. The mortgaged properties may consist of:
- detached single family dwellings,
- two to four family dwellings,
- individual condominiums and cooperative apartments,
- townhouses,
- duplexes,
- row houses, and
- individual units in planned unit developments.
As specified in the prospectus supplement, each single family property will be
located on land owned in fee simple by the borrower or on land leased by the
borrower for a term of at least ten years longer than the term of the related
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.
The mortgaged properties may include non-owner occupied investment
properties and vacation and second homes. The mortgaged properties may also
include a small portion - no more than 5% - of mixed-use properties that are
partly income producing non-residential
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properties. At least 50% of the square footage of each of these properties are
residential. Also subject to the 5% limitation are properties containing five or
more residential units and no non-residential space. These mixed-use properties
may be owner occupied or investor properties and the loan purpose may be a
refinancing or a purchase. Some loans secured by mixed-use properties may also
incorporate personal guarantees and pledged liens on chattel paper as
collateral.
Typically, 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 loans secured by mortgaged
properties that are owner-occupied will be disclosed in the prospectus
supplement. The basis for a representation that a given percentage of the loans
are secured by a single family property that is owner-occupied usually is
either:
- the making of a representation by the mortgagor at origination
of the 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
- a finding that the address of the underlying mortgaged
property is the mortgagor's mailing address as reflected in
the servicer's records.
The initial combined loan-to-value ratio of a loan is computed in the
manner described in the prospectus supplement and will take into account the
amounts of any related senior mortgage loans.
Home Improvement Contracts.
The trust assets for a series may consist of home improvement
installment sales contracts and installment loan agreements originated by a home
improvement contractor in the ordinary course of business. The home improvement
installment sales contracts and installment loan agreements will be less than
10% of the amount of trust assets as of the cut-off date. The home improvement
contracts will either be unsecured or secured by the mortgages primarily on
single family properties which are usually subordinate to other mortgages on the
same mortgaged property or by purchase money security interests in home
improvements. The home improvement contracts will be fully amortizing and may
have fixed interest rates or adjustable interest rates and may provide for other
payment characteristics as described in this section and in the prospectus
supplement.
If applicable, the initial loan-to-value ratio of a home improvement
contract is computed in the manner described in the prospectus supplement.
Additional Information.
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The selection criteria which shall apply with respect to the loans,
including, but not limited to, the combined loan-to-value ratios or
loan-to-value ratios, original terms to maturity and delinquency information,
will be specified in the prospectus supplement.
Some loans may be delinquent upon transfer to the trust. Additional
loans may be periodically added to the trust, or will be repurchased
automatically if the asset is not an eligible asset, as described in the
prospectus supplement.
The prospectus supplement for each series will provide information on
the trust assets as of the date specified in the prospectus supplement,
including, among other things, and to the extent relevant:
(a) the aggregate unpaid principal balance of the loans or the
aggregate unpaid principal balance included in the trust for
the related series;
(b) the range and weighted average of credit limits, if any;
(c) the range and weighted average interest rate on the loans,
and, in the case of adjustable rate loans, the range and
weighted average of the current interest rates, margins and
the lifetime rate caps, if any, and the indices;
(d) the range and average outstanding principal balance of the
loans;
(e) the weighted average original and remaining term-to-stated
maturity of the loans and the range of original and remaining
terms-to-stated maturity, if applicable;
(f) the range and weighted average of combined loan-to-value
ratios or loan-to-value ratios for the loans, as applicable;
(g) the percentage, by principal balance as of the cut-off date,
of loans that accrue interest at adjustable or fixed interest
rates;
(h) any special hazard insurance policy, bankruptcy bond or other
enhancement relating to the loans;
(i) the percentage, by principal balance as of the cut-off date,
of loans that are secured by mortgaged properties, home
improvements or are unsecured;
(j) the geographic distribution of the mortgaged properties
securing the loans;
(k) the percentage of loans, by principal balance as of the
cut-off date, that are secured by each category of mortgaged
properties;
(l) the lien priority of the loans;
(m) the credit limit utilization rate of any HELOCs; and
(n) the delinquency status and year of origination of the loans.
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The prospectus supplement will also specify any other limitations on the types
or characteristics of loans for a series.
If information of the nature described above respecting the loans is
not known to the depositor at the time the securities are initially offered,
approximate or more general information of the nature described in the previous
paragraph 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
Commission within 15 days after the initial issuance of the securities.
POOLED SECURITIES
Trust assets may include mortgage or asset backed securities issued by
either private entities or by governmental entities, such as Ginnie Mae, Freddie
Mac, Fannie Mae, the Federal Housing Authority and the Veterans Administration.
The underlying assets of these pooled securities will be substantially similar
to the trust assets described in this prospectus. The prospectus supplement will
describe the material characteristics of the pooled securities and the material
characteristics of the underlying assets.
COLLECTION AND DISTRIBUTION ACCOUNTS
A separate collection account will be established by the trustee or the
servicer, in the name of the trustee, for each series of securities for receipt
of any initial deposits of cash, any amounts attributable to enhancements, any
amounts received with respect to the trust assets and any reinvestment income
earned on those amounts. Amounts on deposit in the collection account will be
used to pay the expenses of the trust and to make a deposit into the
distribution account for distribution to securityholders. Amounts deposited in
the distribution account will be used primarily for the payment of the
securities and the expenses of the trust not otherwise covered.
Excess funds in the collection account may be paid over to the
servicer, the depositor, the seller, any provider of enhancement with respect to
the series or any other entitled person in the manner and at the times
established in the prospectus supplement. The funds in the collection and
distribution accounts will be invested in Eligible Investments usually maturing
no later than the next distribution date. In no case will Eligible Investments
mature later than one year after their purchase. "Eligible Investments" will
include:
- obligations of the United States and government agencies,
- federal funds,
- certificates of deposit,
- commercial paper,
- demand and time deposits and banker's acceptances,
- repurchase agreements of United States government securities,
and
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- guaranteed investment contracts.
Notwithstanding any of the foregoing, amounts may be deposited and
withdrawn under any deposit agreement or minimum principal payment agreement as
specified in the prospectus supplement.
ENHANCEMENT
GENERAL
A series of securities may include enhancement for some or all
securityholders.
Enhancement will support the payment of principal and interest on the
securities, and may be applied for other purposes to the extent and under the
conditions set forth in the prospectus supplement. The enhancements may be
structured so as to protect against losses relating to more than one trust.
The specific terms and details of any enhancement in a series will be
described in the prospectus supplement.
SUBORDINATE SECURITIES
Enhancement for a series may consist of one or more classes of
subordinate securities. Generally, the rights of holders of subordinate
securities to receive distributions on any distribution date will be subordinate
in right and priority to the rights of holders of more senior securities and
will suffer losses prior to more senior securities.
INSURANCE
Enhancement for a series may consist of special hazard insurance
policies, bankruptcy bonds and other types of insurance relating to the trust
assets.
Pool Insurance Policy.
A pool insurance policy will cover most losses caused by default, but
will not cover the portion of the principal balance of any loan that is required
to be covered by any primary mortgage insurance policy. Generally, a pool
insurance policy will cover an amount equal to a percentage of the loan balance
on the cut-off date. Any payment under a pool insurance policy will reduce the
amount of coverage remaining.
Special Hazard Insurance Policy.
Although the terms of special hazard insurance policies vary to some
degree, they typically provide that, where there has been damage to property
securing a defaulted or foreclosed loan and title to which has been acquired by
the insured and to the extent the damage is not covered by the standard hazard
insurance policy or any flood insurance policy, if applicable, required to be
maintained with respect to the property, or in connection with partial
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loss resulting from the application of the coinsurance clause in a standard
hazard insurance policy, the special hazard insurer will pay the lesser of:
(a) the cost of repair or replacement of the property, or
(b) upon transfer of the property to the special hazard insurer,
the unpaid principal balance of the loan at the time of
acquisition of the property by foreclosure or deed in lieu of
foreclosure, plus accrued interest to the date of claim
settlement and expenses incurred by the servicer with respect
to the property.
If the unpaid principal balance plus accrued interest and expenses is paid by
the special hazard insurer, the amount of further coverage under the special
hazard insurance policy will be reduced by that amount less any net proceeds
from the sale of the property. Any amount paid as the cost of repair of the
property will reduce coverage by that amount. Special hazard insurance policies
typically do not cover losses occasioned by war, civil insurrection, some
governmental actions, errors in design, faulty workmanship or materials, nuclear
reaction, flood, if the mortgaged property is in a federally designated flood
area, chemical contamination and some other risks.
Restoration of the property with the proceeds described under clause
(a) above is expected to satisfy the condition under any pool insurance policy
that the property be restored before a claim under the pool insurance policy may
be validly presented with respect to the defaulted loan secured by the property.
The payment described under clause (b) above will render unnecessary
presentation of a claim in respect of the loan under any pool insurance policy.
Therefore, so long as the pool insurance policy remains in effect, the payment
by the special hazard insurer of the cost of repair or of the unpaid principal
balance of the related loan plus accrued interest and expenses will not affect
the total insurance proceeds paid to holders of the securities, but will affect
the relative amounts of coverage remaining under the special hazard insurance
policy and pool insurance policy.
Bankruptcy Bond.
In the event of a bankruptcy of a borrower, the bankruptcy court may
establish the value of the property securing the related loan at an amount less
than the then outstanding principal balance of the loan. The amount of the
secured debt could be reduced to that value, and the holder of the loan would
become an unsecured creditor to the extent the outstanding principal balance of
the loan exceeds the value so assigned to the property by the bankruptcy court.
In addition, other modifications of the terms of a loan can result from a
bankruptcy proceeding. See "Legal Aspects of the Loans." A bankruptcy bond will
cover losses resulting from a reduction by a bankruptcy court of scheduled
payments of principal of and interest on a loan or a reduction by that court of
the principal amount of a loan and will cover unpaid interest on the amount of a
principal reduction of that type from the date of the filing of a bankruptcy
petition. Typically, the aggregate amount of coverage will be reduced by
payments made under the bankruptcy bond and will not be restored.
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RESERVE FUNDS
A reserve fund may be established for the deposit of cash, letters of
credit, cash collateral accounts, Eligible Investments, or other instruments. A
reserve fund may also be funded over time through application of all or a
portion of the excess cash flow from the trust assets.
Amounts on deposit in a reserve fund will be applied by the trustee to
make payments on the securities of a series, to pay expenses, to reimburse
enhancers and for other purposes as described in the prospectus supplement.
MINIMUM PRINCIPAL PAYMENT AGREEMENT
The depositor may enter into a minimum principal payment agreement with an
entity under which the entity will provide payments on the securities in the
event that collections on the trust assets are not sufficient to make payments
on the securities.
DEPOSIT AGREEMENT
The depositor may enter into a guaranteed investment contract or an
investment agreement, or a "deposit agreement" under which amounts held in the
collection account, the distribution account or in any reserve fund would be
invested with an entity specified in the prospectus supplement. The purpose of a
deposit agreement is to accumulate available cash for investment so that the
cash, together with the investment income, can be applied to future
distributions on one or more classes of securities.
DERIVATIVE PRODUCTS
Derivative products may be included as assets of the trust. Derivative
products may consist of swaps to convert floating or fixed rate payments into
fixed or floating rate payments, and cap or floor agreements to provide
protection against changes in floating rates of interest payable on the trust
assets or the securities. Derivative products will not be the primary source of
payments for the securities.
OTHER INSURANCE, SURETY BONDS, GUARANTIES, LETTERS OF CREDIT AND SIMILAR
INSTRUMENTS OR AGREEMENTS
A trust may also include other forms of insurance, guaranties, surety
bonds, letters of credit or similar arrangements for the purpose of:
- maintaining timely payments to securityholders or providing
additional protection against losses on the trust assets,
- paying administrative expenses, or
- establishing a minimum reinvestment rate on the payments made in
respect of the assets or principal payment rate on the assets.
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These arrangements may include agreements under which securityholders are
entitled to receive amounts deposited in various accounts held by the trustee
upon the terms specified in the prospectus supplement.
FLEET HOME EQUITY LOAN CORPORATION
Fleet Home Equity Loan Corporation, the depositor, is a domestic C
corporation that was formed on January 9, 2001 in accordance with the laws of
the State of Delaware. The depositor is a wholly owned subsidiary of Fleet
National Bank. The depositor was formed for the limited purpose of purchasing,
holding, owning and selling interests in loans and engaging in any activities
incidental to, and necessary or convenient for the accomplishment of, such
purposes.
The principal office of the depositor is located at 100 Federal Street,
Boston, Massachusetts 02110, telephone number (617) 434-2200.
FLEET NATIONAL BANK
GENERAL
Fleet National Bank (the "Bank"), a seller and a servicer, is a wholly
owned subsidiary of FleetBoston Financial Corporation ("FleetBoston"), a
diversified financial services company organized under the laws of Rhode Island
and registered under the Bank Holding Company Act. The Bank is a national
banking association organized under the laws of the United States, and is the
successor to a number of banking institutions, the first of which was chartered
in 1784. All of the capital stock of the Bank is owned by FleetBoston.
FleetBoston's common stock is listed on the New York and Boston stock exchanges.
The notes or certificates are obligations of the trust and do not represent
interests in or obligations of the depositor, the Bank, FleetBoston or any
affiliate thereof.
The principal office of FleetBoston is located at 100 Federal Street,
Boston, Massachusetts 02110, telephone number (617) 434-2200.
The information presented in this section is specific to the Bank and all
references to loans in this section are to the loans that are originated or
underwritten in accordance with the Bank's guidelines. If the Bank is not the
seller to the depositor or if the loans were not originated by the Bank, the
material information with respect to that seller and the origination processes
and underwriting guidelines applicable to those loans will be detailed in the
prospectus supplement.
LOAN PROGRAM
The loans will have been originated by the Bank, either directly, or
through affiliates. The loans will have been originated in accordance with the
underwriting criteria specified under "Credit and Underwriting Guidelines" and
as further described in the related prospectus supplement.
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The Bank, through its affiliated banks, has originated adjustable rate
HELOCs since the early 1980's. The Bank's HELOCs are principally loans secured
by second liens on single family residences, condominiums and second/vacation
homes, although some non-purchase loans are secured by first or third position
liens. The Bank produces these lines primarily through the Consumer Lending
Group ("CLG") which originates loans through a network of retail branch offices
and direct solicitations to consumers. The Retail Distribution Group ("RDG")
maintains the origination channels to sell products as discussed in the section
"Product Management and Marketing". The RDG and the CLG work together to develop
specific sales and acquisition strategies using a number of external data
sources to identify potential opportunities. The CLG is ultimately responsible
for providing the procedure manuals, underwriting guidelines, promotional
materials and management information systems enhancements necessary to
facilitate the program's originations. CLG remains responsible for the
origination, underwriting and funding of all of the lines. Additional
information about underwriting criteria is included below under the caption
"Credit and Underwriting Guidelines".
The CLG is also responsible for establishing the policies and guidelines
used by the Loan Servicing Department to service the originations. This
department is a part of CLG. For more information about the servicing
department, see " -- Loan Servicing".
PRODUCT MANAGEMENT AND MARKETING
HELOCs were or will be originated utilizing a variety of marketing
strategies and product delivery channels. Product management and marketing
activities are conducted on a national level, with periodic adjustments in
response to local market competitive offerings and pricing practices. Marketing
strategies may include a combination of radio, newspaper, outdoor media, direct
mailings to existing and prospective customers, banking center merchandising,
television and other sales supporting tools. Applications may be received from
RDG or other Bank affiliate channels such as the Bank's first mortgage group and
Quick and Reilly, Inc.
Marketing activities include advertising, merchandising, and direct mail
campaigns. Advertising and merchandising support the traditional branch and
telephone solicitation channels. Direct mail campaigns to solicit HELOC
applicants began in 1995. The direct mail process generally begins with
statistical modeling in conjunction with outside vendors to determine the most
appropriate targets for the HELOC product. Pilot programs and test marketing
efforts are also done on a small scale to determine the potential of new market
areas. This effort is supported by two telemarketing areas and retail branches.
Solicitation methods include:
- direct mail campaigns focused on cross-selling CLG's HELOC product
to existing retail customers including deposit, first mortgage,
credit card, and brokerage customers;
- mailing solicitations for HELOCs to prospective customers, and
- follow-up telemarketing through two regional telemarketing locations
and one or more overflow locations.
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Customers and prospects are pre-selected on the basis of proprietary scoring
models developed by Fair, Isaac and Co., Inc. ("FICO score"), an independent
firm experienced in developing credit scoring models, and applying a specified
cutoff criteria as well as other credit risk screens based on internal credit
risk analyses. In addition, from time to time invitation-to-apply offers may be
mailed to customers or prospects whose applications are then processed through
standard underwriting procedures.
CLG HOME EQUITY LINES OF CREDIT
HELOCs generally are variable rate, open-ended, revolving lines of credit
secured by a lien position against the available equity of a borrower's related
residential real estate mortgaged property. A borrower may draw on a HELOC by
writing a check or receiving a substitute check from a branch, Homelink (a
FleetBoston Financial Corporation internet product), or by requesting funds to
be transferred to a pre-authorized depository account.
HELOCs originated by CLG are secured by a lien on the related mortgaged
property subject to maximum CLTV limitations. Beginning in January 1999, CLG
offers its customers credit lines that allow them to borrow against the value of
the real estate up to 100% of the property's value. CLG has primarily three
programs: FleetLine 80, FleetLine 90 and FleetLine 100. These lines have maximum
CLTVs as specified in the table below.
<TABLE>
<CAPTION>
Product Maximum CLTV
------- ------------
<S> <C>
FleetLine 80
Primary Residence 80.99%
Condominiums 70.99%
Second Home 65.99%
FleetLine 90
Primary Residence 89.99%
Condominiums 80.99%
Second Home 75.99%
FleetLine 100
Primary Residence 100%
Condominiums 89.99%
Second Home 85.99%
</TABLE>
The contractual term of a HELOC generally consists of a draw period, a
revolving open-ended period during which borrowings may be made periodically,
and a repayment period, during which the contract converts to a fixed principal
payment, variable rate, amortizing closed-
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ended loan. The contractual term of the draw period under the current Bank
programs is generally comprised of three renewable five year terms (two
renewable five year terms in Connecticut and one five year term in Tennessee).
Generally, there is no minimum draw amount. At the end of the draw period, which
in any event will not exceed fifteen years, the repayment period begins.
Currently, the outstanding balance of loans are repaid in monthly installments
equal to 1/180th of the outstanding balance of the loans at the end of the draw
period plus interest.
During the draw period, the minimum monthly payment due is equal to the
finance charges on the outstanding balance of the account during the billing
period plus insurance and other fees. The minimum payment during the repayment
period will generally equal the sum of interest accrued on the outstanding
balance during the billing period plus 1/180th of the outstanding principal
balance of the line at the end of the draw period plus other fees. If a HELOC is
repaid in full and terminated within one year (two years in New Hampshire,
Massachusetts, Connecticut and Florida), the borrower is generally required to
pay an early termination fee. Late charges are imposed on past due accounts.
Terms and amounts of late charges vary by state.
CLG customers have several channels through which payments can be made to
their account, including but not limited to:
- payment by check to lockbox remittance processing centers,
- through Homelink,
- payments by check submitted to tellers at local branches,
- automated debits to pre-authorized depository accounts,
- automated teller machines,
- by mail,
- through the automated voice response unit phone system, and
- through America Online, Inc. or other internet check writing service
providers.
Interest rates for HELOCs are established according to the products
described in the preceding chart and are the responsibility of CLG. Factors
considered in the price setting process include, among other things, targeted
product profitability and related returns, market competition, market
penetration, trends in market interest rates, and potential credit losses.
Pricing is based on the type of product (FleetLine 80, 90 or 100), the CLTV, the
creditworthiness of the borrower and the credit limit of the account being
originated.
In general, HELOCs bear interest at a variable rate, subject to a maximum
per annum interest rate depending upon governing state laws. Currently, the
interest rates on the HELOCs generally reset monthly on the first day of a
customer's billing cycle following a rate change.
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The daily periodic rate is 1/365th ( 1/366th in the case of leap years) of the
annual percentage rate, which represents the sum of a contractual defined index
plus a fixed percentage specified in the related credit line agreement. Interest
is calculated at a rate applied to an average outstanding balance, as specified
in the credit line agreement, of the account for each day of the billing cycle.
The index for the majority of loans originated is the prime rate as published by
the Wall Street Journal for the day that the loan resets. If more than one prime
rate is published, the highest rate will be used. No application fees or closing
costs are charged to the customer. The payment due date is determined by the
loan booking date, which varies throughout the month. This billing period is the
calendar month preceding the statement date.
CREDIT AND UNDERWRITING GUIDELINES
The following is a description of the CLG's current HELOC underwriting
standards. CLG's underwriting standards may change from time to time. HELOCs
originated through CLG are subject to standardized underwriting criteria and
approval processes. HELOCs are underwritten with a minimum credit limit of
$7,500 up to a maximum credit limit of $500,000, with CLTVs up to and including
100%. Product maximums and CLTV maximums are contingent upon risk assessment
criteria which take FICO score, debt-to-income and CLTV into consideration.
Condominium residences may be financed up to 89.99% CLTV, and second / vacation
homes may be financed up to 85.99% CLTV. Generally all HELOCs are in a second
lien position; however, some (non-purchase) first position liens and third
positions may exist.
Each applicant for a HELOC is required to complete an application, which
generally lists the applicant's mortgage liabilities, income, employment history
and other demographic and personal information. A customer may submit an
application through one of several distribution channels including branch,
telephone banking unit, mortgage broker, U.S. mail or through the Internet. Once
the application is received by the Bank's centralized underwriting department,
Consumer Credit Origination, a department within CLG located in Farmington,
Connecticut, and the data is entered into the application processing system, if
all necessary information is provided, a credit report is retrieved on-line. The
credit bureau report, along with the applicant's representation of collateral
value and income (where required) are systematically analyzed to determine
whether the application is denied, sent on for contingency processing (title,
flood, appraisal) or routed to an underwriter for further review. The
contingency processing and underwriting review are part of CLG's underwriting
activities managed by Consumer Credit Originations, utilizing policies developed
and monitored jointly with CLG's Credit Performance Management.
The credit approval process utilizes credit scoring and related techniques
and subjective assessments by experienced underwriters. Underwriters analyze the
equity position of the requested loan (including both the priority of the lien
and the CLTV) and the applicant's creditworthiness. The evaluation of
creditworthiness is designed to assess the applicant's ability and willingness
to repay the loan. Specific requirements relating to the evaluation are outlined
in the risk assessment criteria matrices developed by Credit Performance
Management, which are automated with the application processing system wherever
possible. This evaluation primarily consists of:
- reviewing and verifying customer information;
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- obtaining and reviewing an independent credit bureau report;
- reviewing the applicant's FICO score and, if applicable, the Bank's
proprietary custom credit score;
- reviewing and verifying the applicant's employment and reported
income through a review of recent W-2's, pay stubs, assessments of
tax returns and financial statements, when required;
- evaluating the applicant's gross debt to income ratio;
- reviewing the title status either by a written title search or
insured title policy to ensure that all liens (including mortgaged
property taxes), except for senior liens, are paid off prior to or
at time of settlement of the loan;
- obtaining and evaluating the value of the real estate through
independent appraisals or valuations; and
- evaluating flood risk and verifying flood insurance coverage, if
applicable.
Credit bureau information is reviewed for minimum acceptable credit scores
and consistent record of timely payments and to identify any major negative
events such as bankruptcy, repossession, foreclosure or a delinquency of greater
than 90 days, that have occurred within the past 5 years. Minimum acceptable
FICO scores are established through an on-going risk management and credit
scoring process.
In an effort to expedite the loan process and improve customer service,
automated links through the application processing system to specific vendors
(title, flood, appraisal and credit bureaus) are used, when available. All
loans, whether processed entirely in automated fashion or with manual
intervention, are subject to all the policies, procedures and authorization
controls required by CLG's underwriting standards.
Currently, the extent of required income verification is determined based
on an applicant's assessed credit risk (determined by credit score), loan
amount, whether or not self-employed, and the extent of unearned income. If
income verification is required, the following criteria are generally utilized.
If salaried, income is verified through W-2's or current pay stubs. For
applicants with superior credit risk assessments (FICO score greater than the
CLG's custom score), income is requested and placed in the customer's file, but
is not part of the decision making process. Income verification is required for
all other applicants, and if an applicant is self-employed, two previous years
of tax returns are required.
Currently, a gross debt to income ratio test is applied to each applicant
by dividing the applicant's monthly payments on all existing obligations,
including the proposed HELOC payment (based on a fully funded balance), by the
applicant's gross monthly income. Maximum ratios are assigned by CLTV as
follows:
- 55.99% for up to 80% CLTV,
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- 50.99% for up to 90% CLTV, and
- 45.99% for up to 100% CLTV.
Valuation methods are based upon the amount requested by
the applicant and the expected CLTV. Appraisal values are
generally determined in one of several methods:
- an appraisal completed on Fannie Mae form 1004 ("Uniform Residential
Appraisal Request"), consisting of a complete inspection by a
qualified appraiser which is usually performed if the amount of the
HELOC requested by the applicant is greater than $250,000,
- by reference to the assessed value of the related real estate
mortgaged property shown on the tax records of applicable governing
units, if the mortgaged property is located in a county and State in
which CLG, in its discretion, has determined that the assessed value
is a reliable indicator of the appraised value of the mortgaged
property,
- a "drive-by" appraisal, completed on Freddie Mac form 704,
consisting of an evaluation of comparable properties on the basis of
a visual inspection of the exterior of the related real estate
mortgaged property, or
- a broker's price opinion of automated appraisal techniques utilizing
pre-approved national vendors to validate and verify valuations of
the related real estate properties. To qualify for automated
appraisals, the requested loan amount must be less than $250,000.
A title search is performed covering at least the period from the
conveyance of the related real estate mortgaged property to the applicant from
the last owner before the applicant. A full title search may be requested
depending upon the loan amount requested by the applicant. Currently, title
insurance is not required to be obtained by the borrower unless title defects
are identified or the requested loan amount exceeds $1,000,000.
CLG requires a flood determination on all HELOCs. Flood insurance, with
the Bank named as loss payee, is required on all properties located in a Special
Flood Hazard Area as determined by the Federal Emergency Management Agency, in
an amount at least equal to the lesser of the total encumbrances up to the
maximum allowed under the National Flood Insurance Program, or replacement
coverage or value of the dwelling and improvements as defined by the evaluation
method used. Proof of flood insurance is required by providing either a copy of
the existing flood insurance policy or a copy of the application for flood
insurance and related proof of payment. Any mortgaged property located in a
flood zone is monitored until maturity.
In addition, adequate fire and casualty insurance coverage is required on
all dwellings and structural improvements with the appropriate affiliated bank
named as loss payee on all policies. The minimum coverage is the lesser of total
encumbrances or replacement coverage, or value of the dwelling and improvements.
No HELOC may close without a properly completed agreement to provide insurance
coverage. Verbal confirmation from the agent is required. Once verification has
taken place, no additional monitoring or forced placement is performed.
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QUALITY CONTROL
CLG has implemented an internal quality control process to ensure
adherence to policies and underwriting standards. The quality control process
includes self-audits of underwriting decisions, real estate verification
processes, documentation and other activities on samples of applications and
approved loans and is performed on a regular basis by Credit Performance
Management and CLG, as appropriate. Credit policy exceptions are monitored
regularly by senior management of Credit Performance Management and CLG, as
appropriate.
The CLG and Credit Performance Management perform an ongoing review and
monitoring of the Bank's automated and centralized consumer lending process. The
Credit Performance Management managers and review analysts are also all
experienced underwriters. The review process determines that lenders' decisions
are rendered in compliance with CLG consumer lending policy, Credit Performance
Management risk acceptance criteria, CLG underwriting procedures, and fair
lending laws and regulations. All applications selected for review are
re-underwritten by an analyst. The required conditions to closing such as the
title report and appraisal as well as the verifications are examined.
LOAN SERVICING
The Bank's loan servicing operations are centrally located in Utica, New
York. The functions performed by the Bank's loan servicing operations include:
producing borrower billing statements, posting of payments received, collateral
verification, post-closing quality control, account research and processing of
paid-off accounts.
Information on newly originated home equity lines of credit is
electronically transferred daily from the application processing system to the
consumer loan account system. Data integrity audits are performed daily on a
subset of all lines of credit originated on such day. The audit process includes
a review of borrower, property and loan balance information.
As a part of the servicing process, all borrower draw requests are
reviewed to ensure that the borrower's account is current and that the draw
request will not cause the outstanding balance to exceed the borrower's credit
limit. To protect borrowers, controls have been implemented which restrict
unauthorized access to account data and balance information.
COLLECTIONS
The Bank's Collection Servicing area is located in West Seneca, N.Y. Prior
to November 1, 2000, the Bank's collections on HELOC accounts were based upon
stage of delinquency and FICO score strategies for high risk customers.
Beginning in November 2000, the Bank began employing a strategy that prioritized
collections based on FICO score. Generally, at 10 days past due, an account is
moved from the consumer loan account system to the Bank's Collection Management
System which is utilized to manage the timing and extent of collection efforts.
The Collections Manager uses the Collection Management System to define a
variety of effective and efficient collection strategies by stratifying
delinquent accounts based on borrower FICO score, balance criteria and days past
due.
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Accounts tagged as high risk due to their most current FICO score receive
intensified collection activity based upon their balance and days
past-due-criteria. Depending on the collection history, the Collection
Management System typically tracks a history of collections efforts, borrower
responses, as well as relevant property information.
Typically, demand letters are sent to all borrowers at approximately 35
days delinquent for all high risk accounts, and 80 days delinquent for low risk
accounts. HELOCs are typically closed to further draws at approximately 60 days
delinquent and placed in non-accrual status at 180 days delinquent. An equity
associate typically orders a property valuation when an account is between 65-70
days delinquent for high risk accounts, and 100 days delinquent for low risk
accounts. A collection supervisor or above must approve the ordering of such
property valuation. By the time the account reaches 120 days delinquent, an
equity analysis is completed by an equity associate and the decision to either
refer the loan to the Foreclosure Department or charge-off the loan is made by a
collection supervisor or a more senior officer. The amount charged-off takes
into account all anticipated liquidation expenses (such as legal fees, real
estate taxes, and maintenance and preservation expenses).
Once referred to the Bank's Foreclosure Department, a foreclosure
specialist will obtain an updated property valuation, which may be an appraisal
or broker's price opinion or other type of calculation as appropriate in the
determination of the foreclosure specialist, if the appraisal in the file was
not produced within 12 months of borrower default. Generally, at 180 days past
due, such appraisal will be used as a basis for a write-down on the loan to 80%
of the loan to value. In addition, the foreclosure specialist will prepare and
send a foreclosure package to the foreclosure attorney approved for processing.
The foreclosure specialist assigned to the account will monitor the process with
the attorney. In the event of buying out a first mortgage lien, the foreclosure
specialist will obtain the foreclosure manager's approval. All short sale
requests will require the foreclosure manager's approval including the
customer's acknowledgement to pay on the deficiency balance when applicable.
Upon securing title to the property, the foreclosure specialist will transfer
the account to the Managed Asset Department for the lower of the appraised value
or net book balance. Any additional charge off will be taken prior to the
transfer to the Managed Asset Department and would take into account all
anticipated liquidation expenses (such as legal fees, real estate taxes,
maintenance and preservation expenses).
The Managed Asset Department is responsible for re-marketing and
liquidating properties obtained through foreclosure or deed in lieu of
foreclosure. Upon receiving these properties, the Managed Asset Department will
obtain an interior appraisal, and process an additional write-down if necessary.
If the mortgaged property was subject to a senior lien, the Managed Asset
Department is responsible to pay off the senior lienholder at the time of the
property transfer. If it is determined that the cost of maintaining or paying
off the senior lien exceeds the economic benefit of taking title, the Bank will
generally charge-off the entire unpaid principal amount of the loan and pursue
other collection efforts.
The Bank's servicing, collections and charge-off practices may change over
time in accordance with, among other things, the Consumer Lending Group's
business judgment, changes in the portfolio and applicable laws and regulations.
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SERVICING OF LOANS
GENERAL
The servicer will provide servicing functions with respect to the trust
assets under a servicing agreement or a pooling and servicing agreement. In
performing its functions, the servicer will exercise the same degree of skill
and care that it customarily exercises with respect to similar receivables or
loans owned or serviced by it. The servicer may also act as custodian,
responsible for maintaining custody of the loans and related documentation on
behalf of the trustee.
COLLECTION PROCEDURES; ESCROW ACCOUNTS
The servicer will make reasonable efforts to collect all payments required
to be made under the loans and will, consistent with the terms of the related
Agreement for a series and any applicable enhancement, follow the collection
procedures that it follows with respect to comparable loans held in its own
portfolio. The servicer may, in its discretion:
- waive any assumption fee, late payment charge, or other charge in
connection with a loan, and
- to the extent provided in the related Agreement, arrange with an
obligor a schedule for curing delinquencies by modifying the due
dates for scheduled payments on the loan.
The servicer, to the extent permitted by law, may establish and maintain
escrow or impound accounts with respect to loans in which payments by obligors
to pay taxes, assessments, mortgage and hazard insurance premiums, and other
comparable items will be deposited. If loans do not require those payments under
the loan documents, the servicer would not be required to establish any escrow
account with respect to those loans. Withdrawals from the escrow accounts are to
be made to effect timely payment of:
- taxes,
- assessments,
- mortgage and hazard insurance,
- refunds to obligors of amounts determined to be overages,
- interest to obligors on balances in the escrow account to the extent
required by law,
- amounts to repair or otherwise protect the property securing the
related loan, and
- amounts to clear and terminate the escrow account.
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DEPOSITS TO AND WITHDRAWALS FROM THE COLLECTION ACCOUNT; LOAN PAYMENT RECORD
Except as described below in connection with a loan payment record, the
trustee or the servicer will establish the collection account in the name of the
trustee. Typically, the collection account will be an account maintained:
- at a depository institution satisfactory to each rating agency
rating the securities or
- in accounts the deposits of which are insured to the maximum extent
available by the FDIC or which are secured in a manner meeting
requirements established by each rating agency.
The funds held in the collection account may be invested in Eligible
Investments. If so specified in the prospectus supplement, the servicer will be
entitled to receive as additional compensation any interest or other income
earned on funds in the collection account.
As specified in the prospectus supplement, the servicer, the trustee, the
depositor or the seller, as appropriate, will deposit into the collection
account on the business day following the closing date any amounts representing
scheduled payments due after the related cut-off date but received by the
servicer on or before the closing date. In addition, after the closing date,
within the time period specified in the prospectus supplement after the date of
receipt, the servicer, the trustee, the depositor or the seller, as appropriate,
will deposit into the collection account the following payments and collections
received or made by it, other than in respect of principal of and interest on
the trust assets due on or before the cut-off date:
- all payments on account of principal, including prepayments, on the
trust assets;
- all payments on account of interest on the trust assets after
deducting, at the discretion of the servicer but only to the extent
of the amount permitted to be withdrawn or withheld from the
collection account in accordance with the related Agreement, the
servicing fee;
- all amounts received by the servicer in connection with the
liquidation of trust assets or property acquired in respect of
liquidation, whether through foreclosure sale, repossession or
otherwise, including payments in connection with the trust assets
received from the obligor, other than amounts required to be paid or
refunded to the obligor under the terms of the applicable loan
documents or otherwise by law, exclusive of, in the discretion of
the servicer, but only to the extent of the amount permitted to be
withdrawn from the collection account in accordance with the related
Agreement, the servicing fee, if any;
- all proceeds under any title insurance, hazard insurance or other
insurance policy covering any trust asset, other than proceeds to be
applied to the restoration or repair of the related property or
released to the obligor in accordance with the related Agreement;
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- all amounts required to be deposited from any applicable reserve
fund under the related Agreement;
- all advances of delinquent payments of principal and interest on a
loan or of other payments specified in the Agreement made by the
servicer as required under the related Agreement; and
- all repurchase prices of any trust assets repurchased by the
servicer, the depositor or the seller under the related Agreement.
Typically, the servicer is permitted, from time to time, to make
withdrawals from the collection account for each series for the following
purposes:
- to reimburse itself for advances made by it under the related
Agreement; the servicer's right to reimburse itself is limited to
amounts received on or in respect of particular loans, including for
this purpose, liquidation proceeds and amounts representing proceeds
of insurance policies covering the related property, which represent
late recoveries of scheduled payments respecting which any advance
was made;
- to the extent provided in the related Agreement, to reimburse itself
for any advances that the servicer determines in good faith it will
be unable to recover from amounts representing late recoveries of
scheduled payments respecting which the advance was made or from
liquidation proceeds or the proceeds of insurance policies;
- to reimburse itself from liquidation proceeds for liquidation
expenses and for amounts expended by it in good faith in connection
with the restoration of damaged property and, in the event deposited
in the collection account and not previously withheld, and to the
extent that liquidation proceeds after the reimbursement exceed the
outstanding principal balance of the related loan, together with
accrued and unpaid interest thereon to the due date for the loan
next succeeding the date of its receipt of the liquidation proceeds,
to pay to itself out of the excess the amount of any unpaid
servicing fee and any assumption fees, late payment charges, or
other charges on the related loan;
- in the event it has elected not to pay itself the servicing fee out
of the interest component of any scheduled payment, late payment or
other recovery with respect to a particular loan prior to the
deposit of the scheduled payment, late payment or recovery into the
collection account, to pay to itself the servicing fee, as adjusted
under the related Agreement, from any scheduled payment, late
payment or other recovery, to the extent permitted by the related
Agreement;
- to reimburse itself for expenses incurred by and recoverable by or
reimbursable to it under the related Agreement;
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- to pay to the applicable person with respect to each trust asset
that has been repurchased or removed from the trust by the servicer,
the depositor or the seller under the related Agreement, all amounts
received in respect of the trust asset and not distributed as of the
date on which the related repurchase price was determined;
- to make payments to the trustee of the series for deposit into the
distribution account, if any, or for remittance to the
securityholders of the series in the amounts and in the manner
provided for in the related Agreement; and
- to clear and terminate the collection account under the related
Agreement.
In addition, if the servicer deposits in the collection account for a
series any amount not required to be deposited, it may, at any time, withdraw
the amount from the collection account.
If permitted under the terms of the related Agreement and described in the
prospectus supplement, the servicer will maintain collections on the trust
assets as part of its general funds until the business day prior to a
distribution date. The servicer will deposit such collections to the
distribution account on the business day prior to each distribution date. In
this case, the servicer will record on a loan payment record the amount received
for each category of deposit described above. In addition, the servicer will
make a similar record of each deduction for each category of withdrawal as
described above, from the amounts received in respect of the trust assets.
ADVANCES AND LIMITATIONS
The prospectus supplement will describe the circumstances, if any, under
which the servicer will make advances with respect to delinquent payments on
loans. The servicer may be obligated to make advances of, among other things,
delinquent payments of interest and principal, and those obligations may be
limited in amount, or may not be activated until a portion of a specified
reserve fund is depleted. Advances are intended to provide liquidity and, except
to the extent specified in the prospectus supplement, not to guarantee or insure
against losses. Accordingly, any funds advanced are recoverable by the servicer
out of amounts received on particular loans which represent late recoveries of
principal or interest, proceeds of insurance policies or liquidation proceeds.
If an advance is made and subsequently determined to be nonrecoverable from late
collections, proceeds of insurance policies, or liquidation proceeds from the
related loan, the servicer may be entitled to reimbursement from other funds in
the collection account, distribution account, or from a specified reserve fund.
MAINTENANCE OF INSURANCE POLICIES AND OTHER SERVICING PROCEDURES
Standard Hazard Insurance; Flood Insurance.
Except as specified in the prospectus supplement, the servicer will be
required to maintain or cause the obligor to agree to acquire and maintain a
standard hazard insurance policy providing coverage of the standard form of fire
insurance with extended coverage for other hazards as is customary in the state
in which the related property is located. The servicer is not
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required to verify that the obligor actually complies with this provision. The
standard hazard insurance policies will provide for coverage at least equal to
the applicable state standard form of fire insurance policy with extended
coverage for property of the type securing the loans. The standard form of fire
and extended coverage policy typically will cover physical damage to or
destruction of, the related property caused by fire, lightning, explosion,
smoke, windstorm, hail, riot, strike and civil commotion, as limited by each
policy. Because the standard hazard insurance policies relating to the loans
will be underwritten by different hazard insurers and will cover properties
located in various states, the policies will not contain identical terms and
conditions. The basic terms are usually determined by state law but will be
similar in many respects. Most hazard insurance policies typically do not cover
any physical damage resulting from:
- war,
- revolution,
- governmental actions,
- floods and other water-related causes,
- earth movement, including earthquakes, landslides, and mudflows,
- nuclear reaction,
- wet or dry rot,
- vermin,
- rodents,
- insects or domestic animals,
- theft, and
- in some cases, vandalism.
The foregoing list is merely indicative of some kinds of uninsured risks and is
not intended to be all inclusive. Uninsured risks not covered by a special
hazard insurance policy or other form of enhancement will adversely affect
distributions to securityholders. When a property securing a loan is located in
a flood area identified by HUD under the Flood Disaster Protection Act of 1973,
the servicer will be required to cause flood insurance to be maintained with
respect to the property, to the extent available and, if the insurance is placed
by the servicer, the associated premiums may be added to the balance of the
related loan.
The standard hazard insurance policies covering properties securing loans
typically will contain a "coinsurance" clause which, in effect, will require the
insured at all times to carry hazard insurance of a specified percentage,
usually 80% to 90%, of the full replacement value of the property, including the
improvements on any property, in order to recover the full amount of
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any partial loss. If the insured's coverage falls below this specified
percentage, the clause will provide that the hazard insurer's liability in the
event of partial loss will not exceed the greater of:
- the actual cash value, i.e., the replacement cost less physical
depreciation, of the property, including the improvements, if any,
damaged or destroyed or
- the proportion of the loss, without deduction for depreciation, as
the amount of insurance carried bears to the specified percentage of
the full replacement cost of the property and improvements.
Since the amount of hazard insurance to be maintained on the improvements
securing the loans declines as the principal balances owing thereon decrease,
and since the value of the properties will fluctuate in value over time, the
effect of this requirement in the event of partial loss may be that hazard
insurance proceeds will be insufficient to restore fully the damage to the
affected property.
Typically, coverage will be in an amount at least equal to the greater of
the amount necessary to avoid the enforcement of any co-insurance clause
contained in the policy and the outstanding principal balance of the related
loan. The servicer typically will also maintain on REO property that secured a
defaulted loan and that has been acquired upon foreclosure, deed in lieu of
foreclosure, or repossession, a standard hazard insurance policy in an amount
that is at least equal to the maximum insurable value of the REO property. No
earthquake or other additional insurance will be required of any obligor or will
be maintained on REO property acquired in respect of a defaulted loan, other
than under the applicable laws and regulations as shall at any time be in force
and shall require that additional insurance.
Any amounts collected by the servicer under any policies of insurance,
other than amounts to be applied to the restoration or repair of the property,
released to the obligor in accordance with normal servicing procedures or used
to reimburse the servicer for amounts to which it is entitled to reimbursement,
will be deposited in the collection account. In the event that the servicer
obtains and maintains a blanket policy insuring against hazard losses on all of
the loans, written by an insurer acceptable to each rating agency which assigns
a rating to the series, it will conclusively be deemed to have satisfied its
obligations to cause to be maintained a standard hazard insurance policy for
each loan or related REO property. This blanket policy may contain a deductible
clause, in which case the servicer will, in the event that there has been a loss
that would have been covered by the policy absent the deductible clause, deposit
in the Collection Account the amount not otherwise payable under the blanket
policy because of the application of the deductible clause.
REALIZATION UPON DEFAULTED LOANS
The servicer will use its reasonable best efforts to foreclose upon,
repossess or otherwise comparably convert the ownership of the properties
securing the loans that come into and continue in default and as to which no
satisfactory arrangements can be made for the collection of delinquent payments.
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In connection with a foreclosure or other conversion, the servicer will
follow the practices and procedures it deems necessary or advisable and are
normal and usual in its servicing activities with respect to comparable loans
serviced by it. However, the servicer will not be required to expend its own
funds in connection with any foreclosure or towards the restoration of the
property unless it determines that:
- the restoration or foreclosure will increase the liquidation
proceeds in respect of the related loan available to the
securityholders after reimbursement to itself for the expenses and
- the expenses will be recoverable by it either through liquidation
proceeds or the proceeds of insurance.
Notwithstanding anything to the contrary in this prospectus, in the case of a
trust for which a REMIC election has been made, the servicer shall liquidate any
property acquired through foreclosure within three years after the acquisition
of the beneficial ownership of the property. While the holder of a property
acquired through foreclosure can often maximize its recovery by providing
financing to a new purchaser, the trust will have no ability to do so and none
of the servicer, the depositor or the seller will be required to do so.
The servicer may arrange with the obligor on a defaulted loan, a
modification of the loan to the extent provided in the prospectus supplement.
Those modifications may only be entered into if they meet the underwriting
policies and procedures employed by the servicer in servicing receivables for
its own account and meet the other conditions set forth in the prospectus
supplement.
ENFORCEMENT OF DUE-ON-SALE CLAUSES
Typically, when any property is about to be conveyed by the obligor, the
servicer will, to the extent it has knowledge of the prospective conveyance,
exercise its rights to accelerate the maturity of the related loan under the
applicable "due-on-sale" clause, if any, unless it reasonably believes that the
clause is not enforceable under applicable law or if the enforcement of the
clause would result in loss of coverage under any primary mortgage insurance
policy. In that event, the servicer is authorized to accept from or enter into
an assumption agreement with the person to whom the property has been or is
about to be conveyed, by which the person becomes liable under the loan and by
which the original obligor is released from liability and the person is
substituted as the obligor and becomes liable under the loan. Any fee collected
in connection with an assumption will be retained by the servicer as additional
servicing compensation. The terms of a loan may not be changed in connection
with an assumption.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
The servicer will be entitled to a periodic fee as servicing compensation
in an amount described in the prospectus supplement. The servicing fee may be
fixed or variable. In addition, the servicer may be entitled to servicing
compensation in the form of assumption fees, late payment charges and similar
items, and excess proceeds following disposition of property in connection with
defaulted loans.
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When an obligor makes a principal prepayment in full between due dates on
a loan, the obligor will usually be required to pay interest on the amount
prepaid only to the date of prepayment. If and to the extent provided in the
prospectus supplement, in order that one or more classes of the securityholders
of a series will not be adversely affected by any resulting shortfall in
interest, the amount of the servicing fee may be reduced to the extent necessary
to include in the servicer's remittance to the trustee for deposit into the
distribution account an amount equal to one month's interest on the related loan
less the servicing fee. If the aggregate amount of the shortfalls in a month
exceeds the servicing fee for that month, a shortfall to securityholders may
occur.
The servicer will be entitled to reimbursement for expenses incurred by it
in connection with the liquidation of defaulted loans. The related
securityholders will suffer no loss by reason of those expenses to the extent
expenses are covered under related insurance policies or from excess liquidation
proceeds. If claims are either not made or paid under the insurance policies or
if coverage has been exhausted, the securityholders will suffer a loss to the
extent that liquidation proceeds, after reimbursement of the servicer's
expenses, are less than the outstanding principal balance of and unpaid interest
on the loan which would be distributable to securityholders. In addition, the
servicer will be entitled to reimbursement of expenditures incurred by it in
connection with the restoration of property securing a defaulted loan. This
right of reimbursement is prior to the rights of the securityholders to receive
any proceeds of insurance policies, liquidation proceeds or amounts derived from
other enhancement.
The rights of the servicer to receive funds from the collection account,
whether as the servicing fee or other compensation, or for the reimbursement of
advances, expenses or otherwise, typically are not subordinate to the rights of
securityholders of the series.
EVIDENCE AS TO COMPLIANCE
If specified in the prospectus supplement, the applicable Agreement for
each series will provide that each year, a firm of independent public
accountants will furnish a statement to the trustee to the effect that the firm
has examined documents and records relating to the servicing of the loans by the
servicer and that, on the basis of the examination, the firm is of the opinion
that the servicing has been conducted in compliance with the Agreement, except
for exceptions the firm believes to be immaterial and any other exceptions that
are set forth in the statement.
If specified in the prospectus supplement, the applicable Agreement for
each series will also provide for delivery to the trustee an annual statement
signed by an officer of the servicer to the effect that the servicer has
fulfilled its obligations under the Agreement throughout the preceding calendar
year.
TERMINATION AND LIABILITY OF THE SERVICER
In the event of an event of default under either a servicing agreement or
a pooling and servicing agreement, the servicer may be replaced by the trustee
or a successor servicer. Events of default and the rights of the trustee upon a
default under the Agreement for the related series will be substantially similar
to those described under "The Agreements -- Events of Default; Rights Upon
Events of Default -- Pooling and Servicing Agreement; Servicing Agreement."
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The servicer usually does not have the right to assign its rights and
delegate its duties and obligations under the related Agreement unless the
successor servicer accepting the assignment or delegation:
- services similar loans in the ordinary course of its business,
- is reasonably satisfactory to the trustee for the related series,
- has a net worth of not less than the amount specified in the related
Agreement,
- would not cause any rating agency's rating of the securities for
each series in effect immediately prior to the assignment, sale or
transfer to be qualified, downgraded or withdrawn as a result of the
assignment, sale or transfer, and
- executes and delivers to the trustee an agreement, in form and
substance reasonably satisfactory to the trustee, which contains an
assumption by the successor servicer of the due and punctual
performance and observance of each covenant and condition to be
performed or observed by the servicer under the related Agreement
from and after the date of the agreement.
No assignment will become effective until the trustee or a successor servicer
has assumed the servicer's obligations and duties under the related Agreement.
To the extent that the servicer transfers its obligations to a wholly-owned
subsidiary or affiliate, the subsidiary or affiliate need not satisfy the
criteria set forth in this paragraph; however, in that case, the assigning
servicer will remain liable for the servicing obligations under the related
Agreement. Any entity into which the servicer is merged or consolidated or any
successor corporation resulting from any merger, conversion or consolidation
will succeed to the servicer's obligations under the related Agreement, provided
that the successor or surviving entity meets the requirements for a successor
servicer. However, the servicer may have the right to enter into subservicing
arrangements which will be referred to in the related Agreement. Any arrangement
will not relieve the servicer from its obligations under the servicing
agreement.
Typically, each Agreement will provide that neither the servicer, nor any
director, officer, employee or agent of the servicer, will be under any
liability to the trust, the depositor, the seller or the securityholders for any
action taken or for failing to take any action in good faith under the related
Agreement, or for errors in judgment; provided, however, that neither the
servicer nor any person will be protected against:
- any breach of warranty or representations made under the Agreement,
- the failure to perform its obligations in compliance with any
standard of care set forth in the Agreement, or
- liability which would otherwise be imposed by reason of willful
misfeasance, bad faith or gross negligence in the performance of
their duties or by reason of reckless disregard of their obligations
and duties.
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Each Agreement will further provide that the servicer and any director, officer,
employee or agent of the servicer is entitled to indemnification from the trust
and will be held harmless against any loss, liability or expense incurred in
connection with any legal action relating to the Agreement or the securities,
other than any loss, liability or expense incurred by reason of willful
misfeasance, bad faith or gross negligence in the performance of duties or by
reason of reckless disregard of obligations and duties. In addition, the related
Agreement will provide that the servicer is not under any obligation to appear
in, prosecute or defend any legal action which is unrelated to its servicing
responsibilities under the Agreement which, in its opinion, may involve it in
any expense or liability. The servicer may, in its discretion, undertake any
action which it may deem necessary or desirable with respect to the related
Agreement and the rights and duties of the parties and the interests of the
securityholders. In that event, the legal expenses and costs of the action and
any resulting liability may be expenses, costs, and liabilities of the trust and
the servicer may be entitled to be reimbursed out of the collection account.
THE AGREEMENTS
The following summaries describe the material provisions of the
Agreements. Where particular provisions or terms used in the Agreements are
referred to, the provisions or terms are as specified in the related Agreements.
ASSIGNMENT OF TRUST ASSETS
General.
At the time of issuance of the securities of a series, the depositor will
transfer, convey and assign to the trust all right, title and interest of the
depositor in the trust assets and other property to be transferred to the trust
for a series. The assignment will usually include all principal and interest due
on the trust assets after the cut-off date specified in the prospectus
supplement. The trustee will, concurrently with the assignment, execute and
deliver the securities.
Assignment of Loans.
Typically, the depositor will, as to each loan, deliver or cause to be
delivered to the trustee, or, as specified in the prospectus supplement, a
custodian on behalf of the trustee, the mortgage note endorsed without recourse
to the order of the trustee or in blank, the original mortgage with evidence of
recording indicated thereon and an assignment of the mortgage in recordable
form. In the case of any mortgage not returned from the public recording office,
a copy of the mortgage will be delivered, together with a certificate that the
original of the mortgage was delivered to the recording office. The trustee or a
custodian will hold the documents in trust for the benefit of the
securityholders.
The depositor will, as to each home improvement contract, deliver or cause
to be delivered to the trustee or the custodian the original home improvement
contract and copies of documents and instruments related to each home
improvement contract and, other than in the case of unsecured home improvement
contracts, the security interest in the property securing the home improvement
contract. In order to give notice of the right, title and interest of
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securityholders to the home improvement contracts, the depositor will execute or
cause the seller to execute a UCC-1 financing statement identifying the trustee
as the secured party and identifying all home improvement contracts as
collateral. Usually, the home improvement contracts will not be stamped or
otherwise marked to reflect their assignment to the trust. Therefore, if,
through negligence, fraud or otherwise, a subsequent purchaser were able to take
physical possession of the home improvement contracts without notice of the
assignment, the interest of securityholders in the home improvement contracts
could be defeated. See "Legal Aspects of the Loans -- The Home Improvement
Contracts."
With respect to loans secured by mortgages, if so specified in the
prospectus supplement, the depositor will, at the time of issuance of the
securities, cause assignments to the trustee of the mortgages relating to the
loans for a series to be recorded in the appropriate public office for real
property records, except in states where, in the opinion of counsel acceptable
to the trustee, recording is not required to protect the trustee's interest in
the related loans. If specified in the prospectus supplement, the depositor will
cause the assignments to be recorded within the time after issuance of the
securities as is specified in the prospectus supplement, in which event, the
Agreement may require the depositor to repurchase from the trustee any loan the
related mortgage of which is not recorded within that time, at the price
described under "-- Repurchase and Substitution of Defective Trust Assets" with
respect to repurchases by reason of defective documentation. The enforcement of
the repurchase obligation would constitute the sole remedy available to the
securityholders or the trustee for the failure of a mortgage to be recorded.
Each loan will be identified in a schedule appearing as an exhibit to the
related Agreement. The loan schedule will specify , among other things, with
respect to each loan:
- type of loan;
- the original principal amount and unpaid principal balance as of the
cut-off date;
- the current interest rate;
- the current scheduled payment of principal and interest;
- the maturity date, if any, of the related note; and,
- if the loan is an adjustable rate loan,
- the lifetime cap and floor, if any,
- the periodic cap and floor, if any,
- the current index, if applicable, and
- credit limit, if applicable.
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Assignment of Pooled Securities.
The depositor will cause the pooled securities to be registered in the
name of the trustee or its nominee or correspondent. The trustee or its nominee
or correspondent will have possession of any certificated pooled securities. The
trustee will not be in possession of or be an assignee of record of any
underlying assets for a pooled security. See "The Trusts -- Pooled Securities."
Each pooled security will be identified in a schedule appearing as an exhibit to
the related Agreement, which will specify the original principal amount,
outstanding principal balance as of the cut-off date, annual pass-through rate
or interest rate and maturity date for each pooled security conveyed to the
trust. In the Agreement, the depositor will represent and warrant to the trustee
regarding the pooled securities:
- that the information contained in the schedule is true and correct
in all material respects;
- that, immediately prior to the conveyance of the pooled securities,
the depositor had good title, and was the sole owner of the pooled
securities;
- that there has been no other sale by it of the pooled securities;
and
- that there is no existing lien, charge, security interest or other
encumbrance on the pooled securities.
Repurchase and Substitution of Defective Trust Assets.
If any document in the file relating to the trust assets delivered by the
depositor to the trustee or custodian is found by the trustee within the time
period specified in the Agreement, or promptly after the trustee's receipt of
any document permitted to be delivered after the closing date, to be defective
in any material respect and the depositor or the seller does not cure the
defect, the depositor or the seller will repurchase the trust asset or any
related property from the trustee at a price equal to:
(a) the lesser of:
- the outstanding principal balance of the trust asset and
- the trust's federal income tax basis in the trust asset and
(b) accrued and unpaid interest to the date of the next scheduled payment
on the trust asset at the rate set forth in the related Agreement less, if the
seller is the repurchaser and also the servicer, any unreimbursed advances
respecting the trust asset.
However, the purchase price shall not be limited in clause (a) above to the
trust's federal income tax basis if the repurchase at a price equal to the
outstanding principal balance of the trust asset will not result in any
prohibited transaction tax under Section 860F(a) of the Code.
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If provided in the prospectus supplement, the depositor or the seller may,
rather than repurchase the trust asset as described in the previous paragraph,
remove the trust asset from the trust and substitute in its place one or more
other trust assets provided, however, that:
- with respect to a trust for which no REMIC election is made, the
substitution must be effected within 120 days of the date of initial
issuance of the securities and
- with respect to a trust for which a REMIC election is made, after a
specified time period, the trustee must have received a satisfactory
opinion of counsel that the substitution will not cause the trust to
lose its status as a REMIC or otherwise subject the trust to a
prohibited transaction tax.
As specified in the prospectus supplement, any substitute trust asset
will, on the date of substitution:
- have an outstanding principal balance, after deduction of all
scheduled payments due in the month of substitution, not in excess
of the outstanding principal balance of the removed trust asset,
with the amount of any shortfall to be deposited to the collection
account in the month of substitution for distribution to
securityholders,
- have an interest rate not less than the interest rate of the removed
asset and not more than the rate specified in the prospectus
supplement,
- have a remaining term-to-stated maturity not greater than and not
less than the period specified in the prospectus supplement, and
- comply with all of the representations and warranties set forth in
the applicable Agreement as of the date of substitution.
The depositor or another entity will make representations and warranties
with respect to the trust assets. If the depositor or that entity cannot cure a
breach of any of those representations and warranties in all material respects
within the time period specified in the prospectus supplement after notification
by the trustee of the breach, and if the breach is of a nature that materially
and adversely affects the value of, or the ability of the servicer to realize
on, the trust asset, the depositor or that entity is obligated to repurchase the
affected trust asset or, if provided in the prospectus supplement, provide a
substitute trust asset under the same conditions and limitations provided for
purchases and substitutions. The cure, repurchase or substitution obligations
constitute the sole remedies available to the securityholders or the trustee for
a material defect in a document for a trust asset.
PRE-FUNDING ACCOUNT
If so provided in the prospectus supplement, the depositor will, on behalf
of the securityholders, deposit cash into a pre-funding account on the closing
date. The pre-funding account will be maintained with the trustee. The deposit
will not exceed 25% of the initial aggregate principal amount of the securities.
The money will be used by the trustee to purchase additional loans from the
seller from time to time during the funding period. Monies on deposit
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in the pre-funding account will not be available to cover losses on or in
respect of the loans. The funding period for a trust will begin on the closing
date and will end on the date specified in the prospectus supplement, which will
not be later than one year after the closing date. Monies on deposit in the
pre-funding account may be invested in Eligible Investments as specified in the
related Agreement. Earnings on investment of funds in the pre-funding account
will be applied as specified in the prospectus supplement and losses will be
charged against the funds on deposit in the pre-funding account. Any amounts
remaining in the pre-funding account at the end of the funding period will be
distributed to securityholders as a prepayment of principal, in the manner and
priority specified in the prospectus supplement.
In addition, if so provided in the prospectus supplement, on the closing
date the depositor will make a deposit to a capitalized interest account, which
will be maintained with the trustee. The funds on deposit in the capitalized
interest account will be used solely to cover shortfalls in interest that may
arise as a result of utilization of the pre-funding account. Monies on deposit
in the capitalized interest account will not be available to cover losses on or
in respect of the loans. To the extent that the entire amount on deposit in the
capitalized interest account has not been used to cover shortfalls in interest
by the end of the funding period, any remaining amounts will be paid to the
depositor or to another entity specified in the prospectus supplement.
REPORTS TO SECURITYHOLDERS
The trustee or other entity specified in the prospectus supplement will
prepare and forward to each securityholder on each distribution date, or as soon
after each distribution date as is practicable, a statement setting forth, to
the extent applicable to any series, among other things:
(a) the amount of principal distributed to holders of the
securities and the outstanding principal balance of the
securities following the distribution;
(b) the amount of interest distributed to holders of the
securities and the current interest rate on the securities;
(c) the amounts of (1) any overdue accrued interest included in
the distribution, (2) any remaining overdue accrued interest
with respect to the securities or (3) any current shortfall in
amounts to be distributed as accrued interest to holders of
the securities;
(d) the amounts of (1) any overdue payments of scheduled principal
included in the distribution, (2) any remaining overdue
principal amounts with respect to the securities, (3) any
current shortfall in receipt of scheduled principal payments
on the trust assets or (4) any realized losses or liquidation
proceeds to be allocated as reductions in the outstanding
principal balances of the securities;
(e) the amount received under any enhancement, and the remaining
amount available under the enhancement;
(f) the amount of additional balances acquired by the trust during
the prior collection period;
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(g) the amount of any delinquencies with respect to payments on
the trust assets;
(h) the book value of any REO property acquired by the trust; and
(i) other information as specified in the related Agreement.
The report to securityholders for any series of securities may include
additional or other information of a similar nature.
In addition, within a reasonable period of time after the end of each
calendar year, the servicer or the trustee will mail to each securityholder of
record at any time during the calendar year a report containing customary
information as may be deemed necessary or desirable for securityholders to
prepare their tax returns. The report will not be examined or reported upon by
independent public accountants.
EVENTS OF DEFAULT; RIGHTS UPON EVENT OF DEFAULT
Pooling and Servicing Agreement; Servicing Agreement.
As specified in the prospectus supplement, events of default under the
applicable Agreement for a series relating to the servicing of loans include:
- any failure by the servicer to deposit amounts in the
collection account and distribution account to enable the
trustee to distribute to the securityholders any required
payment, which failure continues unremedied for the number of
days specified in the prospectus supplement after the giving
of written notice of the failure to the servicer by the
trustee, or to the servicer and the trustee by the
securityholders evidencing not less than 25% of the aggregate
voting rights;
- any failure by the servicer duly to observe or perform in any
material respect any other of its covenants or agreements in
the applicable Agreement which continues unremedied for the
number of days specified in the prospectus supplement after
the giving of written notice of the failure to the servicer by
the trustee, or to the servicer and the trustee by the
securityholders evidencing not less than 25% of the aggregate
voting rights; and
- events of insolvency, readjustment of debt, marshalling of
assets and liabilities or similar proceedings and actions by
the servicer indicating its insolvency, reorganization or
inability to pay its obligations.
So long as an event of default relating to the servicing of loans remains
unremedied under the applicable Agreement, the trustee for the series or
securityholders evidencing not less than 51% of the aggregate voting rights may
terminate all of the rights and obligations of the servicer under the applicable
Agreement, other than its right to recovery of expenses and amounts advanced
under the terms of the Agreement, which rights the servicer will retain under
all circumstances, whereupon the trustee or other entity specified in the
prospectus supplement will succeed to all the responsibilities, duties and
liabilities of the servicer under the Agreement. In
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that case, the trustee or other entity specified in the prospectus supplement
will be entitled to reasonable servicing compensation not to exceed the original
servicing fee, together with other servicing compensation in the form of
assumption fees, late payment charges or otherwise as provided in the Agreement.
In the event that the trustee is unwilling or unable so to act, it may
select, or petition a court of competent jurisdiction to appoint a finance
institution, bank or loan servicing institution with a net worth specified in
the prospectus supplement to act as successor servicer under the provisions of
the applicable Agreement. The successor servicer would be entitled to reasonable
servicing compensation in an amount not to exceed the servicing fee as set forth
in the prospectus supplement, together with the other servicing compensation in
the form of assumption fees, late payment charges or otherwise, as provided in
the Agreement.
During the continuance of any event of default of a servicer under an
Agreement for a series of securities, the trustee will have the right to take
action to enforce its rights and remedies and to protect and enforce the rights
and remedies of the securityholders, and securityholders evidencing not less
than 51% of the aggregate voting rights may direct the time, method and place of
conducting any proceeding for any remedy available to the trustee or exercising
any trust or power conferred upon that trustee. However, the trustee will not be
under any obligation to pursue any remedy or to exercise any of the trusts or
powers unless the securityholders have offered the trustee reasonable security
or indemnity against the cost, expenses and liabilities which may be incurred by
the trustee. Also, the trustee may decline to follow any direction if the
trustee determines that the action or proceeding so directed may not lawfully be
taken or would involve it in personal liability or be unjustly prejudicial to
the nonassenting securityholders.
No securityholder, solely by virtue of their status as a securityholder,
will have any right under the applicable Agreement to institute any proceeding
with respect to the Agreement, unless the securityholder previously has given to
the trustee written notice of default and unless the securityholders evidencing
not less than 51% of the aggregate voting rights of the securities have made
written request upon the trustee to institute the proceeding in its own name as
trustee and have offered to the trustee reasonable indemnity, and the trustee
for 60 days has neglected or refused to institute any proceeding.
Indenture.
Events of default under the indenture for each series of notes include:
- a default for five (5) days or more in the payment of any
interest on any note of that series or the default in the
payment of principal of any note at the note's maturity;
- failure to perform in any material respect any other covenant
of the depositor or the trust in the indenture which continues
for a period of sixty (60) days after notice is given in
accordance with the procedures described in the prospectus
supplement;
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- any representation or warranty made by the depositor or the
trust in the indenture or in any certificate or other writing
delivered in connection with the series having been incorrect
in a material respect as of the time made, and the breach is
not cured within sixty (60) days after notice is given in
accordance with the procedures described in the prospectus
supplement;
- events of bankruptcy, insolvency, receivership or liquidation
of the depositor or the trust; or
- any other event of default provided with respect to notes of
that series.
If an event of default with respect to the notes of any series at the time
outstanding occurs and is continuing, either the trustee or the holders of a
majority of the then aggregate outstanding amount of the notes may declare the
principal amount or, if the notes are zero coupon securities, that portion of
the principal amount as may be specified in the terms of that series, of all the
notes to be due and payable immediately. That declaration may, under some
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, notwithstanding the acceleration, 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 and interest
on the notes as they would have become due if there had not been a declaration.
In addition, the trustee may not sell or otherwise liquidate the collateral
securing the notes 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 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 the
payments would have become due if the notes had not been declared
due and payable, 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 thirty (30) days or more in the
payment of principal or interest on the notes of a series, 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, in the event of a
default, the amount available for distribution to the noteholders would 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 securityholders of the notes after the occurrence of an event of default.
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Subject to the provisions of the indenture relating to the duties of the
trustee, in case an event of default occurs and continues with respect to a
series of notes, the trustee shall be under no obligation to exercise any of the
rights or powers under the indenture at the request or direction of any of the
noteholders, unless the noteholders 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. Subject to the
provisions for indemnification and limitations contained in the indenture, the
holders of a majority of the then aggregate outstanding amount of the notes
shall 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, and the holders of a
majority of the then aggregate outstanding amount of the notes may, in some
cases, waive any default, 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 TRUSTEE
The identity of the commercial bank, savings and loan association or trust
company named as the trustee for each series of securities will be set forth in
the prospectus supplement. The entity serving as trustee may have normal banking
relationships with the depositor or the servicer. In addition, for the purpose
of meeting the legal requirements of local jurisdictions, the trustee will have
the power to appoint co-trustees or separate trustees of all or any part of the
trust relating to a series of securities. In the event of an appointment of that
type, all rights, powers, duties and obligations conferred or imposed upon the
trustee by the Agreement relating to the series will be conferred or imposed
upon the trustee and each separate trustee or co-trustee jointly, or, in any
jurisdiction in which the trustee shall be incompetent or unqualified to perform
some acts, singly upon the separate trustee or co-trustee who shall exercise and
perform those rights, powers, duties and obligations solely at the direction of
the trustee. The trustee may also appoint agents to perform any of the
responsibilities of the trustee. The agents shall have any or all of the rights,
powers, duties and obligations of the trustee conferred on them by that
appointment; provided that the trustee shall continue to be responsible for its
duties and obligations under the Agreement.
DUTIES OF THE TRUSTEE
The trustee makes no representations as to the validity or sufficiency of
the Agreement, the securities or of any trust asset or related documents. If no
event of default has occurred, the trustee is required to perform only those
duties specifically required of it under the Agreement. Upon receipt of the
various certificates, statements, reports or other instruments required to be
furnished to it, the trustee is required to examine them to determine whether
they are in the form required by the related Agreement; however, the trustee
will not be responsible for the accuracy or content of any documents furnished
by it or the securityholders to the servicer under the Agreement.
The trustee may be held liable for its failure to act in accordance with
the standard of care specified in the prospectus supplement; provided, however,
that the trustee will not be personally liable with respect to any action taken,
suffered or omitted to be taken by it in good faith in
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accordance with the direction of the securityholders in an event of default. The
trustee is not required to expend or risk its own funds or otherwise incur any
financial liability in the performance of any of its duties under the Agreement,
or in the exercise of any of its rights or powers, if it has reasonable grounds
for believing that repayment of those funds or adequate indemnity against that
risk or liability is not reasonably assured to it.
RESIGNATION OF TRUSTEE
The trustee for a series may, upon written notice to the depositor, resign
at any time, in which event the depositor will be obligated to use its best
efforts to appoint a successor trustee. If no successor trustee has been
appointed and has accepted the appointment within 30 days after giving notice of
resignation, the resigning trustee may petition any court of competent
jurisdiction for appointment of a successor trustee.
The trustee may also be removed at any time:
- if the trustee ceases to be eligible to continue as trustee under
the Agreement,
- if the trustee becomes insolvent, or
- by the securityholders evidencing over 50% of the aggregate voting
rights of the securities in the trust upon written notice to the
trustee and to the depositor.
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.
AMENDMENT OF AGREEMENT
The Agreement for each series of securities may be amended by the parties
to the Agreement, without notice to or consent of the securityholders:
(a) to cure any ambiguity,
(b) to correct any defective provisions or to correct or
supplement any provision,
(c) to add to the duties of the depositor, the trustee or
servicer,
(d) to add any other provisions with respect to matters or
questions arising under the Agreement or related enhancement,
(e) to add or amend any provisions of the Agreement as required by
a rating agency in order to maintain or improve the rating of
the securities, or
(f) to comply with any requirement imposing by changes in
accounting policies that do not materially impact the
certificates or notes,
(g) to comply with any requirements imposed by the Code;
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provided that any amendment except under clauses (f) and (g) above, will not
adversely affect in any material respect the interests of any securityholders,
as evidenced by an opinion of counsel. Any amendment, except under clauses (f)
and (g) of the preceding sentence, shall be deemed not to adversely affect in
any material respect the interests of any securityholder if the trustee receives
written confirmation from each rating agency rating the securities that the
amendment will not cause the rating agency to reduce the then current rating.
The Agreement may also be amended by the parties to the Agreement with the
consent of the securityholders possessing not less than 51% of the aggregate
outstanding principal amount of the securities. If only some classes are
affected by the amendment, 51% of the aggregate outstanding principal amount of
each class affected, for the purpose of adding any provisions to or changing in
any manner or eliminating any of the provisions of the Agreement or modifying in
any manner the rights of securityholders; provided, however, that no amendment
of that type may, without the consent of securityholders of 100% of the affected
securities:
(a) reduce the amount or delay the timing of payments on any security
without the consent of the securityholder of the security or
(b) reduce the percentage required to consent to any amendment of that
type.
VOTING RIGHTS
The prospectus supplement will set forth the method of determining
allocation of voting rights with respect to a series.
LIST OF SECURITYHOLDERS
Upon written request of three or more securityholders of record, for
purposes of communicating with other securityholders with respect to their
rights under the Agreement, the trustee will afford the securityholders access
during business hours to the most recent list of securityholders of that series
held by the trustee. The request should be accompanied by a copy of the proposed
communication.
No Agreement will provide for the holding of any annual or other meeting
of securityholders.
REMIC ADMINISTRATOR
For any series with respect to which a REMIC election is made, preparation
of reports and other administrative duties with respect to the trust may be
performed by a REMIC administrator, who may be an affiliate of the depositor.
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TERMINATION
Pooling and Servicing Agreement; Servicing Agreement; Trust Agreement.
The obligations created by the Pooling and Servicing Agreement, the
Servicing Agreement or the Trust Agreement for a series will terminate upon the
distribution to securityholders of all amounts distributable to them under the
Agreement after the earlier of:
- the later of the final payment or other liquidation of the last
trust asset remaining in the trust and the disposition of all
property acquired upon foreclosure or deed in lieu of foreclosure or
repossession in respect of any trust asset or
- the repurchase by the servicer or other entity specified in the
prospectus supplement from the trustee of all trust assets and other
property at that time subject to the Agreements.
The Agreements for each series permit, but do not require, the servicer or other
entity specified in the prospectus supplement to purchase from the trust all
remaining trust assets at a price equal to:
- 100% of the aggregate principal balance of the trust assets,
- plus, with respect to any property acquired in respect of a trust
asset, if any, the outstanding principal balance of the related
trust asset at the time of foreclosure,
- minus related unreimbursed advances, or in the case of the trust
assets, only to the extent not already reflected in the computation
of the aggregate principal balance of the trust assets,
- minus unreimbursed expenses that are reimbursable under the terms of
the pooling and servicing agreement,
- plus accrued interest at the weighted average rate on the trust
assets through the last day of the due period in which the
repurchase occurs;
provided, however, that if an election is made for treatment as a REMIC under
the Code, the repurchase price may equal the greater of:
- 100% of the aggregate principal balance of the trust assets, plus
accrued interest thereon at the applicable net rates on the trust
assets through the last day of the month of the repurchase and
- the aggregate fair market value of the trust assets plus the fair
market value of any property acquired in respect of a trust asset
and remaining in the trust.
The exercise of the right will effect early retirement of the securities,
but the right to purchase the trust assets only vests when the principal balance
of the trust assets has been reduced to an amount set forth in the prospectus
supplement. In no event, however, will the trust
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created by the Agreements continue beyond the expiration of 21 years from the
death of the last survivor of persons identified in the Agreements. For each
series, the servicer or the trustee, as applicable, will give written notice of
termination of the Agreements to each securityholder, and the final distribution
will be made only upon surrender and cancellation of the securities at an office
or agency specified in the notice of termination. If provided in the prospectus
supplement, the depositor or another entity may effect an optional termination
of the trust under the circumstances described in the prospectus supplement. See
"Description of the Securities -- Optional Redemption, Purchase of Trust Assets
or Securities, Termination of Trust."
Indenture.
The indenture will be discharged with respect to a series of notes, except
with respect to continuing rights specified in the indenture, upon the delivery
to the trustee for cancellation of all the notes or, with limitations, upon
deposit with the trustee of funds sufficient for the payment in full of all of
the notes.
In addition to that discharge with limitations, the indenture may provide
that the trust will be discharged from any and all obligations in respect of the
notes, except for some administrative duties, upon the deposit with the trustee
of money 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 last scheduled
distribution date and any installment of interest on the notes in accordance
with the terms of the indenture and the notes. In the event of any defeasance
and discharge of notes, noteholders would be able to look only to that money or
direct obligations for payment of principal and interest, if any, on their notes
until maturity.
LEGAL ASPECTS OF THE LOANS
The following discussion contains summaries of the material legal aspects
of mortgage loans, home improvement installment sales contracts and home
improvement installment loan agreements which are general in nature. Because
some of these legal aspects are governed by applicable state law and each
state's laws differ, the summaries do not purport to be complete nor reflect the
laws of any particular state, nor encompass the laws of all states in which the
properties securing the loans are situated. The summaries are qualified in their
entirety by reference to the applicable federal and state laws governing the
loans.
If a seller or servicer for any series is not the Bank, the prospectus
supplement will describe any additional or differing material legal aspects that
apply to loans originated or serviced by such seller and servicer.
MORTGAGE LOANS
The mortgage loans for a series will be, and some home improvement
contracts for a series may be, secured by either mortgages or deeds of trust or
deeds to secure debt, depending upon the prevailing practice in the state in
which the property subject to a mortgage loan is
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located. The filing of a mortgage, deed of trust or deed to secure debt creates
a lien or title interest upon the real property covered by the instrument and
represents the security for the repayment of an obligation that is customarily
evidenced by a promissory note. However, in some states the mortgage or deed of
trust conveys legal title to the property to the mortgagee or to a trustee for
the benefit of the mortgagee subject to a condition subsequent, that is, the
payment of the indebtedness secured by that mortgage or deed of trust. It is not
prior to the lien for real estate taxes and assessments or other charges imposed
under governmental police powers and may also be subject to other liens under
the laws of the jurisdiction in which the mortgaged property is located.
Priority with respect to the instruments depends on their terms, the knowledge
of the parties to the mortgage and on the order of recording with the applicable
state, county or municipal office. There are two parties to a mortgage, the
mortgagor, who is the borrower/property owner or the land trustee, 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 mortgage loan, the land trustee, as fee owner
of the property, executes the mortgage and the borrower executes a separate
undertaking to make payments on the mortgage note. A deed of trust transaction
normally has three parties, the trustor, who is the borrower/property owner; the
beneficiary, who is the lender; and the trustee, a third-party grantee. Under a
deed of trust, the trustor grants the property, irrevocably until the debt is
paid, in trust, typically with a power of sale, to the trustee to secure payment
of the obligation. A deed to secure debt typically has two parties, under which
the borrower, or grantor, conveys title to the real property to the grantee, or
lender, typically with a power of sale, until the time when the debt is repaid.
The mortgagee's authority under a mortgage, the trustee's authority under a deed
of trust and the grantee's authority under a deed to secure debt are governed by
the law of the state in which the real property is located, the express
provisions of the mortgage, deed to secure debt or deed of trust, and, in some
deed of trust transactions, the directions of the beneficiary.
FORECLOSURE ON MORTGAGES
Foreclosure of a mortgage is usually accomplished by judicial action.
Typically, the action is initiated by the service of legal pleadings upon all
parties having an interest of record in the real property. Delays in completion
of the foreclosure occasionally may result from difficulties in locating and
serving necessary parties, including borrowers located outside the jurisdiction
in which the mortgaged property is located. 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, under 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 non-judicial power of
sale.
Foreclosure of a deed of trust or deed to secure debt is usually
accomplished by a non-judicial trustee's or grantee's sale, as applicable, under
a specific provision in the deed of trust or deed to secure debt which
authorizes the trustee to sell the property upon any default by the borrower
under the terms of the note or deed of trust or deed to secure debt. In some
states, foreclosure of a deed of trust or deed to secure debt also may be
accomplished by judicial action
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in the manner provided for foreclosure of mortgages. In some states, the trustee
or grantee, as applicable, must record a notice of default and send a copy to
the borrower-trustor and to any person who has recorded a request for a copy of
a notice of default and notice of sale. In addition, the trustee or grantee, as
applicable, in some states, prior to the sale, must provide notice to any other
individual having an interest of record in the real property, including any
junior lienholders. If the deed of trust or deed to secure debt is not
reinstated within any applicable cure period, a notice of sale must be posted in
a public place and, in most states, published for a specified period of time in
one or more newspapers in a specified manner prior to the date of sale. In
addition, some state laws require that a copy of the notice of sale be posted on
the property and sent to all parties having an interest of record in the
property. In some states, the borrower/trustor has the right to reinstate the
loan at any time following default until shortly before the trustee's sale. In
most cases, in those states, the trustor, borrower, or any person having a
junior encumbrance on the real estate, may, during a reinstatement period, cure
the default by paying the entire amount in arrears plus the costs and expenses
incurred in enforcing the obligation. State law usually controls the amount of
foreclosure expenses and costs, including attorney's fees, which may be
recovered by a lender. If the deed of trust is not reinstated, a notice of sale
must be posted in a public place and, in most states, published for a specified
period of time in one or more newspapers. In addition, some state laws require
that a copy of the notice of sale be posted on the property, recorded and sent
to all parties having an interest in the real property.
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.
Typically, 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 historically was equitable in nature, the court may exercise
equitable powers to relieve a mortgagor of a default and, in certain
circumstances, deny the mortgagee foreclosure on proof that either the
mortgagor's default was neither willful nor in bad faith or the mortgagee's
action established a waiver, fraud, bad faith, or oppressive or unconscionable
conduct so as to warrant a court of equity to refuse affirmative relief to the
mortgagee. Under some 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 counter-claims 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 is a remedy alternative to foreclosure,
the mortgagee being precluded from pursuing both at the same time.
In the case of foreclosure under either a mortgage, deed of trust or deed
to secure debt, the sale by the referee or other designated officer or by the
trustee or grantee, as applicable, is a public sale. However, because of the
difficulty potential third party purchasers at the sale have in
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determining the exact status of title, and because the physical condition of the
property may have deteriorated during the foreclosure proceedings, it is
uncommon for a third party to purchase the property at a foreclosure sale.
Rather, it is common for the lender to purchase the property from the trustee,
referee or grantee, as applicable, for an amount which may be less than or equal
to the unpaid principal amount of the mortgage note secured by the mortgage,
deed of trust or deed to secure debt 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 is available. In the same states, there is often a statutory
minimum purchase price which the lender may offer for the property and
generally, state law controls the amount of foreclosure costs and expenses,
including attorneys' fees, which may be recovered by a lender. After that
redemption period, 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
repairs at its own expense as are necessary to render the property suitable for
sale. The lender will commonly obtain the services of a real estate broker and
pay the broker's commission in connection with the sale of the property.
Depending upon market conditions, the ultimate proceeds of the sale of the
property may not equal the lender's investment in the property and, in some
states, the lender may be entitled to a deficiency judgment. In some cases, a
deficiency judgment may be pursued in lieu of foreclosure. Any loss may be
reduced by the receipt of any mortgage guaranty insurance proceeds.
ENVIRONMENTAL RISKS
Real property pledged as security to a lender may be subject to unforeseen
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 the costs of
clean-up. In several states a lien of that type has priority over the lien of an
existing mortgage against the property. In addition, under the federal
Comprehensive Environmental Response, Compensation and Liability Act of 1980,
the EPA may impose a lien on property where the EPA has incurred clean-up costs.
However, a CERCLA lien is subordinate to pre-existing, perfected security
interests.
Under the laws of some states, and under CERCLA, it is conceivable that a
secured lender may be held liable as an owner or operator for the costs of
addressing releases or threatened releases of hazardous substances at a
mortgaged property, even though the environmental damage or threat was caused by
a prior or current owner or operator. CERCLA imposes strict, as well as joint
and several, liability for those costs on several classes of potentially
responsible parties, including current owners and operators of the property who
did not necessarily cause or contribute to the contamination. Furthermore,
liability under CERCLA is not limited to the original or unamortized principal
balance of a loan or to the value of the property securing the loan. However,
CERCLA excludes from the definition of "owner or operator" a secured creditor
who holds indicia of ownership primarily to protect its security interest (the
"Secured Creditor Exclusion"). Thus, if a lender's activities begin to encroach
on the actual management of a contaminated facility or property, the lender may
incur liability as an owner or operator under CERCLA. Similarly, if a lender
forecloses and takes title to a contaminated facility or property, the lender
may incur CERCLA liability in various circumstances, including, but not limited
to, when it holds the facility or property as an
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investment, including leasing the facility or property to a third party, or
fails to market the property in a timely fashion.
If a lender is or becomes liable, it can bring an action for contribution
against any other responsible parties, including a previous owner or operator,
who created the environmental hazard, but those persons or entities may be
bankrupt or otherwise judgment proof. The costs associated with environmental
cleanup may be substantial and may result in a loss to securityholders.
Other federal and state laws in some circumstances may impose liability on
a secured party which takes a deed-in-lieu of foreclosure, purchases a mortgaged
property at a foreclosure sale, or operates a mortgaged property on which
contaminants other than CERCLA hazardous substances are present, including
petroleum, agricultural chemicals, hazardous wastes, asbestos, radon and
lead-based paint. These cleanup costs may be substantial. It is possible that
the cleanup costs could become a liability of a trust and reduce the amounts
otherwise distributable to the holders of the series of securities.
CERCLA does not apply to petroleum products, and the Secured Creditor
Exclusion does not govern liability for cleanup costs under federal laws other
than CERCLA, in particular Subtitle I of the federal Resource Conservation and
Recovery Act ("RCRA"), which regulates underground petroleum storage tanks,
except heating oil tanks. The EPA has adopted a lender liability rule for
underground storage tanks under Subtitle I of RCRA. Under this rule, a holder of
a security interest in an underground storage tank or real property containing
an underground storage tank is not considered an operator of the underground
storage tank as long as petroleum is not added to, stored in or dispensed from
the tank. In addition, under the Asset Conservation, Lender Liability and
Deposit Insurance Protection Act of 1996, the protections accorded to lenders
under CERCLA are also accorded to holders of security interests in underground
tanks. It should be noted, however, that liability for cleanup of petroleum
contamination may be governed by state law, which may not provide for any
specific protection for secured creditors.
Whether actions taken by a lender would constitute participation in the
management of a mortgaged property, or the business of a borrower, so as to
render the Secured Creditor Exclusion unavailable to a lender has been a matter
of judicial interpretation of the statutory language, and court decisions have
been inconsistent. In 1990, the Court of Appeals for the Eleventh Circuit
suggested that the mere capacity of the lender to influence a borrower's
decisions regarding disposal of hazardous substances was sufficient
participation in the management of the borrower's business to deny the
protection of the Secured Creditor Exclusion to the lender.
This ambiguity appears to have been resolved by the enactment of the Asset
Conservation, Lender Liability and Deposit Insurance Protection Act of 1996,
which was signed into law by President Clinton on September 30, 1996. The new
legislation provides that in order to be deemed to have participated in the
management of a mortgaged property, a lender must actually participate in the
operational affairs of the property or the borrower. The legislation also
provides that participation in the management of the property does not include
"merely having the capacity to influence, or unexercised right to control"
operations. Rather, a lender will lose the protection of the Secured Creditor
Exclusion only if it exercises decision-making control
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over the borrower's environmental compliance and hazardous substance handling
and disposal practices, or assumes day-to-day management of all operational
functions of the mortgaged property.
Traditionally, many residential mortgage lenders have not taken steps to
evaluate whether contaminants are present on any mortgaged property prior to the
origination of the loan or prior to foreclosure or accepting a deed-in-lieu of
foreclosure. Accordingly, the depositor has not made and will not make these
evaluations, or will make only very limited environmental assessments, prior to
the origination of the loans. Neither the depositor nor any replacement servicer
will be required by any agreement to undertake any of these evaluations prior to
foreclosure or accepting a deed-in-lieu of foreclosure. The depositor does not
make any representations or warranties or assume any liability for the absence
or effect of contaminants on any related real property or any casualty resulting
from the presence or effect of contaminants. However, the depositor will not be
obligated to foreclose on related real property or accept a deed-in-lieu of
foreclosure if it knows or reasonably believes that there are material
contaminated conditions on the property. A failure so to foreclose may reduce
the amounts otherwise available to securityholders of the related series.
RIGHTS OF REDEMPTION
In some states, after sale under a deed of trust or deed to secure debt or
foreclosure of a mortgage, the trustor or 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 non-statutory right that must be exercised
prior to the foreclosure sale. 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 would defeat the title of any purchaser at a
foreclosure sale, or of any purchaser from the lender subsequent to foreclosure
or sale under a deed of trust or deed to secure debt. 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 some states, there is no right to redeem property after a trustee's sale
under a deed of trust.
JUNIOR MORTGAGES; RIGHTS OF SENIOR MORTGAGES
The mortgage loans comprising or underlying the trust assets included in
the trust for a series will be secured by mortgages or deeds of trust which may
be second or more junior mortgages to other mortgages held by other lenders or
institutional investors. The rights of the trust, and therefore the
securityholders, 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 mortgage loan to be sold upon default of the
mortgagor, extinguishing the junior mortgagee's lien unless the junior mortgagee
asserts its subordinate interest in the property in foreclosure litigation and,
possibly, either reinstates or satisfies the defaulted senior mortgage. A junior
mortgagee may satisfy a defaulted senior loan in full or, in some states, may
cure the default and bring the senior loan current, in either event adding the
amounts expended to the balance due on the junior loan. In most states, absent a
provision in the mortgage or deed of trust, no notice of default is required to
be given to a junior mortgagee. Where applicable law or the
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terms of the senior mortgage or deed of trust do not require notice of default
to the junior mortgagee, the lack of any notice may prevent the junior mortgagee
from exercising any right to reinstate the loan that applicable law may provide.
The standard form of the mortgage, deed to secure debt or deed of trust
used by most institutional lenders confers on the mortgagee the right both to
receive all proceeds collected under any hazard insurance policy and all awards
made in connection with condemnation proceedings, and to apply the proceeds and
awards to any indebtedness secured by the mortgage, deed to secure debt or deed
of trust, in the order as the mortgagee 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 the 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. Proceeds in excess of the amount
of senior mortgage indebtedness, in most cases, may be applied to the
indebtedness of junior mortgages in the order of their priority.
Another provision sometimes found in the form of the mortgage, deed to
secure debt or deed of trust used by institutional lenders obligates the
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 of the property, and to appear in and defend any action or proceeding
purporting to affect the property or the rights of the mortgagee under the
mortgage. Upon a failure of the mortgagor to perform any of these obligations,
the mortgagee or beneficiary is given the right under some mortgages, deeds to
secure debt or deeds of trust to perform the obligation itself, at its election,
with the mortgagor agreeing to reimburse the mortgagee for any sums expended by
the mortgagee on behalf of the mortgagor. All sums so expended by the senior
mortgagee become part of the indebtedness secured by the senior mortgage.
The form of credit line, deed of trust or mortgage used by most
institutional lenders which make HELOC loans typically contains a "future
advance" clause, which provides, in essence, that additional amounts advanced to
or on behalf of the borrower by the beneficiary or lender are to be secured by
the deed of trust or mortgage. The priority of the lien securing any advance
made under the clause depends in most states on whether the deed of trust or
mortgage is called and recorded as a credit line deed of trust or mortgage. If
the beneficiary or lender advances additional amounts, the advance is entitled
to receive the same priority as amounts initially advanced under the deed of
trust or mortgage, notwithstanding the fact that there may be junior deed of
trusts or mortgages and other liens which intervene between the date of
recording of the deed of trust or mortgage and the date of the future advance,
and notwithstanding that the beneficiary or lender had actual knowledge of the
intervening junior deed of trusts or mortgages and other liens at the time of
the advance. In most states, the deed of trust or mortgage lien securing
mortgage loans of the type which includes HELOCS applies retroactively to the
date of the original recording of the deed of trust or mortgage, provided that
the total amount of advances under the home equity credit line does not exceed
the maximum specified principal amount of the recorded deed of trust or
mortgage, except as to advances made after receipt by the lender of a written
notice of lien from a judgment lien creditor of the trustor.
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When the borrower encumbers mortgaged property with one or more junior
liens, the senior lender is subjected to additional risk. First, the borrower
may have difficulty servicing and repaying multiple loans. In addition, if the
junior loan permits recourse to the borrower and the senior loan does not, a
borrower may be more likely to repay sums due on the junior loan than those on
the senior loan. Second, acts of the senior lender that prejudice the junior
lender or impair the junior lender's security may, in limited circumstances,
create a superior equity in favor of the junior lender. For example, if the
borrower and the senior lender agree to an increase in the principal amount of
the interest rate payable on the senior loan, the senior lender may lose its
priority to the extent an existing junior lender is disadvantaged by the
borrower's additional burden. Third, if the borrower defaults on the senior loan
or any junior loan or loans, the existence of junior loans and actions taken by
junior lenders can delay the taking of action by the senior lender. Moreover,
the bankruptcy of a junior lender may operate to stay foreclosure or similar
proceeds by the senior lender.
ANTI-DEFICIENCY LEGISLATION AND THE BANKRUPTCY CODE
Some states have imposed statutory prohibitions which limit the remedies
of a beneficiary under a deed of trust, a mortgagee under a mortgage or a
grantee under a deed to secure debt and afford relief to debtors, which may
interfere with or affect the ability of the secured lender to realize upon the
collateral or enforce 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.
In the case of a loan secured by a property owned by a trust where the
mortgage note is executed on behalf of the trust, a deficiency judgment against
the trust following foreclosure or sale under a deed of trust or deed to secure
debt, even if obtainable under applicable law, may be of little value to the
beneficiary, guarantee or mortgagee if there are not trust assets against which
the deficiency judgment may be executed. Some state statutes require the
beneficiary, grantee 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 some other states,
the lender has the option of bringing a personal action against the borrower on
the debt without first exhausting the security; however, in some of these
states, the lender, following judgment on the 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 bring a personal action against the borrower. Finally, other
statutory provisions limit any deficiency judgment against the former borrower
following a foreclosure sale to the excess of the outstanding debt over the fair
market value of the property at the time of the public sale. The purpose of
these statutes is to prevent a beneficiary, grantee 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 federal and state statutory provisions, including the federal bankruptcy
laws and state laws affording relief to debtors, may interfere with or affect
the ability of the secured mortgage lender to fully realize upon its collateral
or enforce a deficiency judgment. For example, with respect to federal
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bankruptcy law, the filing of a petition acts as a stay against the enforcement
of remedies for collection of a debt. Moreover, a court with federal bankruptcy
jurisdiction may permit a debtor through a rehabilitative plan 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 foreclosure
proceedings had occurred prior to the filing of the bankruptcy 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 mortgage loan may be modified. These courts have held that these
modifications may include reducing the amount of each monthly payment, changing
the rate of interest, altering or extending the repayment schedule, forgiving
all or a portion of the debt and reducing the lender's security interest to the
value of the residence, thus leaving the lender a general unsecured creditor for
the difference between the value of the residence and the outstanding balance of
the loan. In most cases, however, the terms of the loan secured only by a
mortgage on real property that is the debtor's principal residence may not be
modified under a plan confirmed under Chapter 13 except for mortgage payment
arrearages, which may be cured within a reasonable time period.
In a case under the Bankruptcy Code, the lender is precluded from
foreclosing or taking other collection or enforcement action without
authorization from the bankruptcy court. The lender's lien may be transferred to
other collateral. The priority of the loan may be subordinated to bankruptcy
court-approved financing. Payments made on the loan during the 90 days preceding
the bankruptcy filing may have to be returned to the borrower as avoidable
preferences. Additionally, the bankruptcy court can, in effect, invalidate
due-on-sale clauses through confirmed bankruptcy plans.
Applicable law provides priority to some tax liens over the lien of a
mortgage deed to secure debt or deed of trust. This may delay or interfere with
the enforcement of rights in respect of a defaulted loan. In addition,
substantive requirements are imposed upon lenders in connection with the
origination and the servicing of mortgage 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 Billing 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 some cases, this liability may affect assignees of the loans. In
particular, an originator's failure to comply with the Truth-in-Lending Act
could subject the trust (and other assignees of the loans) to monetary penalties
and could result in a rescission of a loan with respect to either the trust or
subsequent holders of the loans.
DUE-ON-SALE CLAUSES IN MORTGAGE LOANS
Due-on-sale clauses permit the lender to accelerate the maturity of the
loan if the borrower sells or transfers, whether voluntarily or involuntarily,
all or part of the real property securing the loan without the lender's prior
written consent. The enforceability of these clauses has been the subject of
legislation or litigation in many states, and in some cases, typically
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involving single family residential mortgage transactions, their enforceability
has been limited or denied. In any event, the Garn-St. Germain Depository
Institutions Act typically 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. As a result, due-on-sale
clauses have become enforceable except in those states whose legislatures
exercised their authority to regulate the enforceability of these clauses with
respect to mortgage loans 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
- 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, i.e.,
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 some categories of window
period loans. The Garn-St. Germain Act also prescribes nine specific instances
in which a mortgage lender covered by the Garn-St. Germain Act may not exercise
a due-on-sale clause, notwithstanding the fact that a transfer of the property
may have occurred. These include intra-family transfers, some transfers by
operation of law, leases of fewer than three years and the creation of a junior
encumbrance. Regulations promulgated under the Garn-St. Germain Act also
prohibit the imposition of a prepayment penalty upon the acceleration of a loan
under a due-on-sale clause.
In addition, under federal bankruptcy law, due-on-sale clauses may not be
enforceable in bankruptcy proceedings and may, under some circumstances, be
eliminated in any modified mortgage resulting from the bankruptcy proceeding.
ENFORCEABILITY OF PREPAYMENT AND LATE PAYMENT FEES
Forms of notes, mortgages, deeds to secure debt and deeds of trust used by
lenders may contain provisions obligating the borrower to pay a late charge or
additional interest 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 some states, there are or may be specific limitations upon the late
charges which a lender may collect from a borrower for delinquent payments.
In addition, under federal bankruptcy law, prepayment fees and late
payment fees may not be enforceable in bankruptcy proceedings and may, under
some circumstances, be eliminated in any modified mortgage resulting from the
bankruptcy proceeding.
EQUITABLE LIMITATIONS ON REMEDIES
In connection with lenders' attempts to realize upon their security,
courts have invoked general equitable principles. The equitable principles are
designed to relieve the borrower from the legal effect of his defaults under the
loan documents. Examples of judicial remedies that have been fashioned include
judicial requirements that the lender undertake affirmative and expensive
actions to determine the causes of the borrower's default and the likelihood
that the borrower
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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 his security if the default under
the security agreement is not monetary, including 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 mortgage loans may be prepaid in full or
in part without penalty. Some mortgage loans, depending upon the entity that
originated them, may be subject to limitations or prohibitions on the imposition
of a prepayment penalty or equivalent fee for or in connection with the
acceleration of a loan by exercise of a due-on-sale clause. A mortgagee to whom
a prepayment in full has been tendered may be compelled to give either a release
of the mortgage or an instrument assigning the existing mortgage. The absence of
a restraint on prepayment, particularly with respect to mortgage loans having
higher mortgage rates, may increase the likelihood of refinancing or other early
retirements of those mortgage loans.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980 ("Title V"), provides that state usury limitations shall not apply
to some types of residential first mortgage loans originated by some lenders
after March 31, 1980. Similar federal statutes were in effect with respect to
mortgage 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 that type of 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 mortgage loans covered by Title V. Some states have taken
action to reimpose interest rate limits or to limit discount points or other
charges.
Usury limits apply to junior loans in many states. Any applicable usury
limits in effect at origination will be reflected in the maximum interest rates
for the trust assets, as described in the prospectus supplement.
In most cases, the seller of a loan will have represented that the loan
was originated in compliance with then applicable state laws, including usury
laws, in all material respects. However, the interest rates on the loans will be
subject to applicable usury laws as in effect from time to time.
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THE HOME IMPROVEMENT CONTRACTS
General
The home improvement contracts, other than those home improvement
contracts that are unsecured or secured by mortgages on real estate are "chattel
paper" or constitute "purchase money security interests" each as defined in the
UCC. These home improvement contracts are referred to in this section as
"contracts". Under the UCC, the sale of chattel paper is treated in a manner
similar to perfection of a security interest in chattel paper. Under the related
Agreement, the depositor will transfer physical possession of the contracts to
the trustee or a designated custodian or may retain possession of the contracts
as custodian for the trustee. In addition, the depositor will make an
appropriate filing of a UCC-1 financing statement in the appropriate states to
give notice of the trustee's ownership of the contracts. Typically, the
contracts will not be stamped or otherwise marked to reflect their assignment
from the depositor to the trustee. Therefore, if through negligence, fraud or
otherwise, a subsequent purchaser were able to take physical possession of the
contracts without notice of the assignment, the trustee's interest in the
contracts could be defeated.
Security Interests in Home Improvements
The contracts that are secured by the financed home improvements grant to
the originator of the contracts a purchase money security interest in the home
improvements to secure all or part of the purchase price of the home
improvements and related services. A financing statement typically is not
required to be filed to perfect a purchase money security interest in consumer
goods. The purchase money security interests are assignable. A purchase money
security interest grants to the holder a security interest that has priority
over a conflicting security interest in the same collateral and the proceeds of
the collateral. However, to the extent that the collateral subject to a purchase
money security interest becomes a fixture, in order for the related purchase
money security interest to take priority over a conflicting interest in the
fixture, the holder's interest in the home improvement must be perfected by a
timely fixture filing. Under the UCC, a security interest usually does not exist
in ordinary building material incorporated into an improvement on land. Home
improvement contracts that finance lumber, bricks, other types of ordinary
building material or other goods that are deemed to lose that characterization,
upon incorporation of those materials into the related property, will not be
secured by a purchase money security interest in the home improvement being
financed.
Enforcement of Security Interest in Home Improvements
So long as the home improvement has not become subject to the real estate
law, a creditor can repossess a home improvement securing a contract by
voluntary surrender, by self-help repossession that is peaceful or, in the
absence of voluntary surrender and the ability to repossess without breach of
the peace, by judicial process. The holder of a contract must give the debtor a
number of days' notice, which varies from 10 to 30 days depending on the state,
prior to commencement of any repossession. The UCC and consumer protection laws
in most states place restrictions on repossession sales, including requiring
prior notice to the debtor and commercial reasonableness in effecting a
repossession sale. The law in most states also requires
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that the debtor be given notice of any sale prior to resale of the unit that the
debtor may redeem it at or before the resale.
Under the laws applicable in most states, a creditor is entitled to obtain
a deficiency judgment from a debtor for any deficiency on repossession and
resale of the property securing the debtor's loan. However, some states impose
prohibitions or limitations on deficiency judgments, and in many cases the
defaulting borrower would have no assets with which to pay a judgment.
Other statutory provisions, including federal and state bankruptcy and
insolvency laws and general equitable principles, may limit or delay the ability
of a lender to repossess and resell collateral or enforce a deficiency judgment.
Consumer Protection Laws
The so-called "holder-in-due-course" rule of the Federal Trade Commission
is intended to defeat the ability of the transferor of a consumer credit
contract which is the seller of goods which gave rise to the transaction and
related lenders and assignees to transfer the contract free of notice of claims
by the debtor. The effect of this rule is to subject the assignee of a contract,
including the trust with respect to the loans, to all claims and defenses which
the debtor could assert against the seller of goods. Liability under this rule
is limited to amounts paid under a contract; however, the obligor also may be
able to assert the rule to set off remaining amounts due as a defense against a
claim brought by the trustee against the obligor. Numerous other federal and
state consumer protection laws impose requirements applicable to the origination
and lending under the contracts, including the Truth in Lending Act, the Federal
Trade Commission Act, the Fair Credit Billing Act, the Fair Credit Reporting
Act, the Equal Credit Opportunity Act, the Fair Debt Collection Practices Act
and the Uniform Consumer Credit Code. In the case of some of these laws, the
failure to comply with their provisions may affect the enforceability of the
related contract. If the trust includes loans subject to these laws, it may be
subject to all of the claims and defenses which the borrower could assert
against the seller.
Applicability of Usury Laws
Title V provides that, with the following conditions, state usury
limitations shall not apply to any contract which is secured by a first lien on
some kinds of consumer goods. The contracts would be covered if they satisfy
conditions, among other things, governing the terms of any prepayments, late
charges and deferral fees and requiring a 30-day notice period prior to
instituting any action leading to repossession of the related unit.
Title V authorized any state to reimpose limitations on interest rates and
finance charges by adopting before April 1, 1983 a law or constitutional
provision which expressly rejects application of the federal law. Fifteen states
adopted that type of law prior to the April 1, 1983 deadline. In addition, even
where Title V was not so rejected, any state is authorized by the law to adopt a
provision limiting discount points or other charges on loans covered by Title V.
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INSTALLMENT CONTRACTS
The loans may also consist of installment contracts secured by real
property for purposes of the laws of the state in which the property is located.
Under an installment contract the seller (referred to in this section as the
"lender") retains legal title to the property and enters into an agreement with
the purchaser (referred to in this section as the "borrower") for the payment of
the purchase price, plus interest, over the term of the contract. Only after
full performance by the borrower of the contract is the lender obligated to
convey title to the property to the purchaser. As with mortgage or deed of trust
financing, during the effective period of the installment contract, the borrower
is typically responsible for maintaining the property in good condition and for
paying real estate taxes, assessments and hazard insurance premiums associated
with the property.
The method of enforcing the rights of the lender under an installment
contract varies on a state-by-state basis depending upon the extent to which
state courts are willing, or able under state statute, to enforce the contract
strictly according to the terms. The terms of installment contracts typically
provide that upon a default by the borrower, the borrower loses his or her right
to occupy the property, the entire indebtedness is accelerated, and the buyer's
equitable interest in the property is forfeited. The lender in that situation
does not have to foreclose in order to obtain title to the property, although in
some cases a quiet title action is in order if the borrower has filed the
installment contract in local land records and an ejectment action may be
necessary to recover possession. In a few states, particularly in cases of
borrower default during the early years of an installment contract, the courts
will permit ejectment of the buyer and a forfeiture of his or her interest in
the property. However, most state legislatures have enacted provisions by
analogy to mortgage law protecting borrowers under installment contracts from
the harsh consequences of forfeiture. Under those statutes, a judicial or
nonjudicial foreclosure may be required, the lender may be required to give
notice of default and the borrower may be granted some grace period during which
the installment contract may be reinstated upon full payment of the default
amount and the borrower may have a post-foreclosure statutory redemption right.
In other states, courts in equity may permit a borrower with significant
investment in the property under an installment contract for the sale of real
estate to share in the proceeds of sale of the property after the indebtedness
is repaid or may otherwise refuse to enforce the forfeiture clause.
In most cases, the lender's procedures for obtaining possession and clear
title under an installment contract in a given state are simpler and less
time-consuming and costly than are the procedures for foreclosing and obtaining
clear title to a property subject to one or more liens.
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 loans, incurred prior to the
commencement of military service for the duration of military
service,
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- may be entitled to a stay of proceedings on any kind of foreclosure
or repossession action in the case of defaults on those obligations
entered into prior to military service for the duration of military
service and
- may have the maturity of those obligations incurred prior to
military service extended, the payments lowered and the payment
schedule readjusted for a period of time after the completion of
military service.
However, the benefits noted above are subject to challenge by creditors and if,
in the opinion of the court, the ability of a person to comply with the
obligations is not materially impaired by military service, the court may apply
equitable principles accordingly. If a borrower's obligation to repay amounts
otherwise due on a loan included in a trust for a series is relieved under the
Soldiers' and Sailors' Civil Relief Act of 1940, none of the trust, the
servicer, the depositor nor the trustee will be required to advance those
amounts, and any consequent loss may reduce the amounts available to be paid to
the holders of the certificates of that series. As specified in the prospectus
supplement, any shortfalls in interest collections on loans or underlying loans
relating to the Private Securities, as applicable, included in a trust 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 loans or underlying loans in
proportion to the interest that each class of securities would have otherwise
been entitled to receive in respect of the loans or underlying loans had the
interest shortfall not occurred.
CONSUMER PROTECTION LAWS
Numerous federal and state consumer protection laws impose substantive
requirements upon mortgage lenders in connection with originating, servicing and
enforcing loans secured by residential properties. Theses laws include the
federal Truth-in-Lending Act and Regulation Z, Real Estate Settlement Procedures
Act and Regulation B, Equal Credit Opportunity Act, Fair Credit Billing Act,
Fair Credit Reporting Act and related statutes and regulations. In particular,
Regulation Z requires disclosures to borrowers regarding terms of the loans; the
Equal Credit Opportunity Act and Regulation B prohibit discrimination in the
extension of credit on the basis of age, race, color, sex, religion, martial
status, national origin, receipt of public assistance or the exercise of any
right under the Consumer Credit Protection Act; and the Fair Credit Reporting
Act regulates the use and reporting of information related to the borrower's
credit experience. These laws impose specific statutory liabilities upon lenders
who fail to comply therewith. In addition, violations of these laws may limit
the ability of the servicer to collect all or part of the principal of or
interest on the loans and could subject the servicer and in some cases its
assignees to damages and administrative enforcement.
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 purchase the trust assets,
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- to establish any reserve funds described in the prospectus
supplement,
- to pay costs of structuring and issuing the securities, including
the costs of obtaining enhancement, if any, and
- for general corporate purposes.
If specified in the prospectus supplement, the purchase of the trust assets for
a series may be effected by an exchange of securities with the seller of the
trust assets.
FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following is a summary of the material federal income tax consequences
of the purchase, ownership, and disposition of the securities and is based on
advice of tax counsel. The summary is based upon the provisions and regulations
of the Code, including, where applicable, proposed regulations, and the judicial
and administrative rulings and decisions now in effect, all of which may change
or be interpreted differently. The statutory provisions, regulations, and
interpretations on which this interpretation is based may change, and those
changes could apply retroactively.
The summary does not purport to deal with all aspects of federal income
taxation that may affect particular investors in light of their individual
circumstances, including investors that may be subject to special treatment
under federal income tax laws, including:
- financial institutions,
- banks,
- insurance companies,
- tax-exempt entities,
- regulated investment companies,
- dealers in securities or currencies,
- persons holding the securities as a hedge against currency risks or
as a position in a "straddle" for tax purposes,
- or persons whose functional currency is not the U.S. dollar.
This summary focuses primarily upon investors who will hold securities as
capital assets within the meaning of Section 1221 of the Code, but much of the
discussion is applicable to other investors as well. We suggest that prospective
investors consult their own tax advisers
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concerning the federal, state, local and any other tax consequences to them of
the purchase, ownership and disposition of the securities.
The federal income tax consequences to holders will vary
depending on whether
- the securities are classified as indebtedness;
- an election is made to treat the trust as a REMIC or a FASIT under
the Internal Revenue Code of 1986 (the "Code");
- the securities represent an ownership interest in some or all of the
trust assets; or
- an election is made to treat the trust as a partnership.
In all cases, each trust fund will be structured so as not to be subject
to an entity level tax, and Brown & Wood LLP is of the opinion that each trust
fund will not be characterized as an association, or publicly traded partnership
or taxable mortgage pool, taxable as a corporation.
The prospectus supplement will specify how the securities will be treated
for federal income tax purposes and will discuss whether a REMIC or FASIT
election will be made.
OPINIONS
Tax counsel is of the opinion that:
(a) If a prospectus supplement indicates that one or more classes
of 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 of the trust fund for federal income tax
purposes;
(b) If a prospectus supplement indicates that one or more REMIC
elections will be made with respect to the related trust fund, assuming
that these REMIC elections are timely made and all of the provisions of
the applicable Agreement are complied with
(1) each segregated pool of assets specified in the
applicable Agreement will constitute a REMIC for federal income tax
purposes,
(2) the class or classes of securities of the related series
which are designated as "regular interests" in the related
prospectus supplement will be considered regular interests in a
REMIC and as debt for federal income tax purposes and
(3) the class of securities of the related series which is
designated as the residual interest in the related prospectus
supplement will be considered the sole class of "residual interests"
in the applicable REMIC for federal income tax purposes;
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(c) If a prospectus supplement indicates that one or more FASIT
elections will be made with respect to the related trust fund, assuming
that these FASIT elections are timely made and all of the provisions of
the applicable Agreement are complied with
(1) each segregated pool of assets specified in the
applicable Agreement will constitute a FASIT for federal income tax
purposes,
(2) the class or classes of securities of the related series
which are designated as "regular interests" and "high yield
interest" in the related prospectus supplement will be considered
regular interests and high yield interests, respectively, in a FASIT
and as debt for federal income tax purposes and
(3) the class of securities of the related series which is
designated as the ownership interest in the related prospectus
supplement will be considered the sole class of "ownership
interests" in the applicable FASIT for federal income tax purposes;
(d) If a prospectus supplement indicates that a trust will be
treated as a grantor trust for federal income tax purposes, assuming
compliance with all of the provisions of the applicable Agreement,
(1) the trust will be considered to be a grantor trust under
Subpart E, Part 1 of Subchapter J of the Code and will not be
considered to be an association taxable as a corporation and
(2) a holder of the related securities will be treated for
federal income tax purposes as the owner of an undivided interest in
the assets included in the trust; and
(e) If a prospectus supplement indicates that a trust is to be
treated as a partnership for federal income tax purposes, assuming that
all of the provisions of the applicable Agreements are complied with, that
trust will be considered to be a partnership for federal income tax
purposes and will not be considered to be an association or publicly
traded partnership taxable as a corporation.
Each opinion is an expression of an opinion only, is not a guarantee of
results and is not binding on the Internal Revenue Service or any third party.
TAXATION OF DEBT SECURITIES
Status as Real Property Loans.
Typically, tax counsel will have advised the depositor that:
- securities held by a domestic building and loan association will
constitute "loans... secured by an interest in real property" within
the meaning of Code Section 7701(a)(19)(C)(v); and
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- securities held by a real estate investment trust will constitute
"real estate assets" within the meaning of Code Section 856(c)(5)(B)
and interest on these securities will be considered "interest on
obligations secured by mortgages on real property or on interests in
real property" within the meaning of Code Section 856(c)(3)(B).
The Small Business Job Protection Act of 1996, as part of the repeal of
the bad debt reserve method for thrift institutions, repealed the application of
Code Section 593(d) to any taxable year beginning after December 31, 1995.
Interest and Acquisition Discount.
Securities representing regular interests in a REMIC usually are 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, 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 will be referred to collectively as debt securities. If a
FASIT election is made, the material federal tax income consequences for
investors associated with the purchase, ownership and disposition of those
securities will be set forth under the heading "Federal Income Tax Consequences"
in the prospectus supplement.
Debt securities that are compound interest securities will, and other debt
securities may, be issued with original issue discount, which we refer to as
"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 on February 2, 1994, which we refer to as "OID Regulations".
A holder should be aware, however, that the OID Regulations do not adequately
address some issues relevant to prepayable securities, such as the debt
securities.
OID typically 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 OID in gross income as ordinary interest income as it
accrues under an accrual method of accounting. OID typically 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 the class will be treated as
the fair market value of the class on the closing date. The issue price of a
debt security also includes the amount paid by an initial debt security holder
for accrued interest that relates to a period prior to the issue date of the
debt security. The stated redemption price at maturity of a debt security
includes the original principal amount of the debt security, but usually will
not include distributions of interest if distributions constitute qualified
stated interest.
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Under the OID Regulations, qualified stated interest means interest
payable at a single fixed rate or qualified variable rate and those interest
payments are unconditionally payable at intervals of one year or less during the
entire term of the debt security. The OID Regulations state that interest
payments are unconditionally payable only if a late payment or nonpayment is
expected to be penalized or reasonable remedies exist to compel payment. Some
debt securities may provide for default remedies in the event of late payment or
nonpayment of interest. The interest on those debt securities will be
unconditionally payable and constitute qualified stated interest, not OID.
However, absent clarification of the OID Regulations, where debt securities do
not provide for default remedies, the interest payments will be included in the
debt security's stated redemption price at maturity and taxed as OID. Interest
is payable at a single fixed rate only if the rate appropriately takes into
account the length of the interval between payments. Distributions of interest
on debt securities on which deferred interest will accrue will not constitute
qualified stated interest payments and will be part of the stated redemption
price at maturity of those debt securities. Where the interval between the issue
date and the first distribution date on a debt security is either longer or
shorter than the interval between subsequent distribution dates, all or part of
the interest foregone, in the case of the longer interval, and all of the
additional interest, in the case of the shorter interval, will be included in
the stated redemption price at maturity and tested under the de minimis rule
described in the next paragraph. In the case of a debt security with a long
first period which has non-de minimis OID, all stated interest in excess of
interest payable at the effective interest rate for the long first period will
be included in the stated redemption price at maturity and the debt security
will usually have OID. We suggest that holders of debt securities consult their
own tax advisors to determine the issue price and stated redemption price at
maturity of a debt security.
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 multiplied by the weighted average 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 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 usually
must report de minimis OID pro rata as principal payments are received, and that
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.
Debt securities may provide for interest based on a qualified variable
rate. Under the OID Regulations, interest is typically treated as payable at a
qualified variable rate and not as contingent interest if,
- the interest is unconditionally payable at least annually,
- the issue price of the debt instrument does not exceed the total
noncontingent principal payments and
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- interest is based on a qualified floating rate, an objective rate, or a
combination of qualified floating rates that do not operate in a manner
that significantly accelerates or defers interest payments on the debt
security.
In the case of compound interest securities, some interest weighted securities,
and other debt securities, none of the payments under the instrument will be
considered qualified stated interest, and thus the aggregate amount of all
payments will be included in the stated redemption price.
The IRS recently issued final regulations governing the calculation of OID
on instruments having contingent interest payments. The regulations specifically
do not apply for purposes of calculating OID on debt instruments subject to Code
Section 1272(a)(6), such as the debt security. Additionally, the OID Regulations
do not contain provisions specifically interpreting Code Section 1272(a)(6).
Until the Treasury issues guidance to the contrary, the trustee intends to base
its computation on Code Section 1272(a)(6) and the OID Regulations as described
in this Prospectus. However, because no regulatory guidance currently exists
under Code Section 1272(a)(6), there can be no assurance that this methodology
represents the correct manner of calculating OID.
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 loans, the amount of OID
includible in income of a holder for an accrual period, which typically is 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 or OID, reduced by the total payments made with respect to the debt
security in all prior periods, other than qualified stated interest payments.
The amount of OID to be included in income by a holder of a debt
instrument, that is subject to acceleration due to prepayments on other debt
obligations securing those instruments, is computed by taking into account the
anticipated rate of prepayments assumed in pricing the debt instrument. The
amount of OID that will accrue during an accrual period on a this type of
security is the excess, if any, of the sum of
- the present value of all payments remaining to be made on the
security as of the close of the accrual period and
- the payments during the accrual period of amounts included in the
stated redemption price of the security, over the adjusted issue
price of the 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:
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- the original yield to maturity of the pay-through security, which is
determined on the basis of compounding at the end of each accrual
period and properly adjusted for the length of the accrual period,
- events which have occurred before the end of the accrual period, and
- 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 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 this type of security to take into account prepayments
with respect to the loans at a rate that is slower than the prepayment
assumption. Although OID will be reported to holders of these securities based
on the prepayment assumption, no representation is made to holders that loans
will be prepaid at that rate or at any other rate.
The depositor 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 loans, although the
OID Regulations do not provide for those adjustments. If the IRS were to require
that OID be accrued without the adjustments, the rate of accrual of OID for a
class of regular interest securities could increase.
Some classes of regular interest securities may represent more than one
class of REMIC regular interests. As specified in the prospectus supplement, 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 that 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 that OID by
comparable economic accruals of portions of the excess.
Effects of Defaults and Delinquencies.
Holders will be required to report income with respect to the securities
under an accrual method without giving effect to delays and reductions in
distributions attributable to a default or delinquency on the loans, except
possibly to the extent that it can be established that those amounts are
uncollectible. As a result, the amount of income, including OID, reported by a
holder of that security 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 deducted
as a result of a loan default. However, the timing and character of the losses
or reductions in income are uncertain and, accordingly, we suggest that holders
of securities consult their own tax advisors on this point.
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Interest Weighted Securities.
It is not clear how income should be accrued with respect to regular
interest securities or stripped securities, which we define under " - Tax Status
as a Grantor Trust; General", 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 loans underlying pass-through securities which we refer to
interest weighted securities. The depositor intends to take the position that
all of the income derived from an interest weighted security should be treated
as OID and that the amount and rate of accrual of the OID should be calculated
by treating the interest weighted security as a compound interest security.
However, in the case of interest weighted securities that are entitled to some
payments of principal and that are regular interest securities the IRS could
assert that income derived from an interest weighted security should be
calculated as if the security were a security 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 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.
Alternatively, the IRS could assert that an interest weighted security should be
taxable under the rules governing bonds issued with contingent payments. That
treatment may be more likely in the case of interest weighted securities that
are stripped securities. See " - Tax Status as a Grantor Trust - Discount or
Premium on Pass-Through Securities."
Variable Rate Debt Securities.
In the case of debt securities bearing interest at a rate that varies
directly, according to a fixed formula, with an objective index, it appears that
- the yield to maturity of those debt securities and
- in the case of pay-through securities, the present value of all
payments remaining to be made on those debt securities, should be
calculated as if the interest index remained at its value as of the
issue date of those securities.
Because the proper method of adjusting accruals of OID on a variable rate debt
security is uncertain, we suggest that holders of variable rate debt securities
consult their own tax advisers regarding the appropriate treatment of the
securities for federal income tax purposes.
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, which usually is 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. Market discount would accrue in a manner
to be provided in Treasury regulations but, until regulations are issued, market
discount typically would accrue either:
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- on the basis of a constant yield, in the case of a security subject
to prepayment, taking into account a prepayment assumption, or
- in the ratio of (a) in the case of securities or the loans
underlying pass-through security that have not been 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 the loans underlying
pass-through 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 the loans for a pass-through security, the excess of
interest paid or accrued to purchase or carry a security or the underlying loans
for a pass-through security with market discount over interest received on the
security is allowed as a current deduction only to the extent excess is greater
than the market discount that accrued during the taxable year in which interest
expense was incurred. The deferred portion of any interest expense usually will
be deductible when market discount is included in income, including upon the
sale, disposition, or repayment of the security or an underlying loan for a
pass-through security. A holder may elect to include market discount in income
currently as it accrues, on all market discount obligations acquired by holder
during the taxable year the election is made and after, in which case the
interest deferral rule will not apply.
Premium.
A holder who purchases a debt security, other than an interest weighted
security as described under " -- Taxation of Debt Securities; Interest Weighted
Securities", at a cost greater than its stated redemption price at maturity,
usually 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 1986 Act
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.
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 securities 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 after by the holder, and will be irrevocable without the consent of the
IRS. We suggest that purchasers who pay a premium for the securities consult
their tax advisers regarding the election to amortize premium and the method to
be employed. Recently, the IRS issued final regulations dealing with amortizable
bond premium. These regulations specifically do not apply to prepayable debt
instruments subject to Code Section 1272(a)(6) such as the securities. Absent
further guidance from the IRS, the trustee intends to account for amortizable
bond premium in the manner described above. We suggest that prospective
purchasers of the securities consult their tax advisors regarding the possible
application of these regulations.
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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 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 or after the year of the election. 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 for all debt instruments having amortizable bond premium that the holder
owns or acquires. The election to accrue interest, discount and premium on a
constant yield method for a debt security is irrevocable.
TAXATION OF THE REMIC AND ITS HOLDERS
In the opinion of tax counsel, if a REMIC election is made with respect to
a series of securities, then the arrangement by which the securities of that
series are issued will be treated as a REMIC as long as all of the provisions of
the applicable Agreement are complied with and the statutory and regulatory
requirements are satisfied. Securities will be designated as regular interests
or residual interests in a REMIC, as specified in the prospectus supplement.
If a REMIC election is made with respect to a series of
securities,
- securities held by a domestic building and loan association
typically will constitute "a regular or a residual interest in a
REMIC" within the meaning of Code Section 7701(a)(19)(C)(xi),
assuming that at least 95% of the REMIC's assets consist of cash,
government securities, "loans secured by an interest in real
property," and other types of assets described in Code Section
7701(a)(19)(C); and
- securities held by a real estate investment trust typically will
constitute "real estate assets" within the meaning of Code Section
856(c)(5)(B), and income with respect to the securities will be
considered "interest on obligations secured by mortgages on real
property or on interests in real property" within the meaning of
Code Section 856(c)(3)(B), assuming, for both purposes, that at
least 95% of the REMIC's assets are qualifying assets.
If less than 95% of the REMIC's assets consist of the qualifying assets
described above, then a security will be a qualifying asset in the proportion
that REMIC assets are qualifying assets.
REMIC EXPENSES; SINGLE CLASS REMICS
All of the expenses of a REMIC usually 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
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who is an individual or a pass-through interest holder, including some
pass-through entities but not real estate investment trusts, expenses will be
deductible only to the extent that expenses, plus other "miscellaneous itemized
deductions" of the holder, exceed 2% of the holder's adjusted gross income. In
addition, for taxable years beginning after December 31, 1990, the amount of
itemized deductions otherwise allowable for the taxable year for an individual
whose adjusted gross income exceeds the applicable amount, which amount will be
adjusted for inflation for taxable years beginning after 1990, will be reduced
by the lesser of:
- 3% of the excess of adjusted gross income over the applicable amount, or
- 80% of the amount of itemized deductions otherwise allowable for the
taxable year.
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. A
single class REMIC is one that either:
- would qualify, under existing Treasury regulations, as a grantor trust if
it were not a REMIC, treating all interests as ownership interests, even
if they would be classified as debt for federal income tax purposes, or
- is similar to a trust and which is structured with the principal purpose
of avoiding the single class REMIC rules.
As specified in the 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 usually is not 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 in " -- Taxation of Debt Securities; Interest and Acquisition
Discount", the regular interests usually are taxable as debt of the 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 adjustments. The taxable income or net loss typically will be the
difference between
- the gross income produced by the REMIC's assets, including stated interest
and any OID or market discount on loans and other assets, and
- deductions, including stated interest and OID accrued on regular interest
securities, amortization of any premium with respect to loans, and
servicing fees and other expenses of the REMIC.
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A holder of a residual interest security that is an individual or a pass-through
interest holder, including some pass-through entities, but not including real
estate investment trusts, will be unable to deduct servicing fees payable on the
loans or other administrative expenses of the REMIC for a given taxable year, to
the extent that the expenses, when aggregated with the holder's other
miscellaneous itemized deductions for that year, do not exceed two percent of
the holder's adjusted gross income.
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 day that
the interests are issued, which we refer to as the "start up day". The 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, and the market discount provisions apply to loans
originated after July 18, 1984. Subject to possible application of the de
minimis rules, the method of accrual by the REMIC of OID income on the 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 the discount in income, but without regard to the de minimis
rules. See "Taxation of Debt Securities". However, 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, 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 that date, it is possible that the
premium may be recovered in proportion to payments of loan principal.
Prohibited Transactions, Contributions and Foreclosure Income Taxes.
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.
Prohibited transactions include:
- the sale or other disposition of any qualified mortgage transferred to the
REMIC;
- 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; or
- the receipt of any fees or other compensation for services rendered by the
REMIC.
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In addition, a tax usually is imposed at the rate of 100% on amounts contributed
to a REMIC after the close of the three-month period beginning on the startup
day and at a rate equal to the highest corporate rate on any net income from
foreclosure property. Provisions of the pooling and servicing agreement are
intended to ensure that prohibited transaction, contributions and foreclosure
income taxes are not imposed. Therefore, we do not expect that those taxes will
be imposed. No assurance, however, can be given that no such tax will be
imposed. The holders of residual interest securities typically will be
responsible for the payment of any taxes imposed on the REMIC. To the extent not
paid by the holders or otherwise, however, taxes will be paid out of the trust
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 security representing 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 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 the income or loss. The reporting
of taxable income without corresponding distributions could occur, for example,
in REMIC issues in which the 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 interests 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 REMIC issues as a result of the fact that
interest expense deductions, as a percentage of outstanding principal on REMIC
regular interest securities, will typically increase over time as lower yielding
securities are paid, whereas interest income with respect to loans usually will
remain constant over time as a percentage of loan principal.
In any event, because the holder of a residual interest security 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
bond or 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
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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 limited in more ways under the Code, accordingly, we suggest
that they consult their tax advisers.
Distributions.
Distributions on a residual interest security, whether at their scheduled
times or as a result of prepayments, usually will 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, or some 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 may be limited in more ways.
See "Tax Treatment of Foreign Investors."
The Small Business Job Protection Act of 1996 has eliminated the special
rule permitting Section 593 institutions, i.e., 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 continuously
held by a thrift institution since November 1, 1995.
In addition, the Small Business Job Protection Act of 1996 provides three
rules for determining the effect on excess inclusions on the alternative minimum
taxable income of a residual holder. First, alternative 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 taxable income for a tax year cannot be less
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than the 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 Small Business Job Protection Act of 1996, as part of the repeal of
the bad debt reserve method for thrift institutions, repealed the application of
Code Section 593(d) to any taxable year beginning after December 31, 1995.
The excess inclusion portion of a REMIC's income is 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:
- 120% of the long term applicable federal rate on the startup day
multiplied by
- the adjusted issue price of the residual interest security at the
beginning of the quarterly period.
The adjusted issue price of a residual interest 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, 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 some cases, transfers of residual
securities may be disregarded. See " - Restrictions on Ownership and Transfer of
Residual Interest Securities" and " - Tax Treatment of Foreign Investors" below.
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 residual interest security 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 shall have 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.
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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, 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.
Under the REMIC Regulations, if a residual interest security is a
noneconomic residual interest, a transfer of the residual interest security to a
United States person will be disregarded for all federal tax purposes unless no
significant purpose of the transfer was to impede the assessment or collection
of tax. A residual interest security is a noneconomic residual interest unless,
at the time of the transfer:
- the present value of the expected future distributions on the residual
interest security at least equals the product of the present value of the
anticipated excess inclusions and the highest rate of tax for the year in
which the transfer occurs, and
- the transferor reasonably expects that the transferee will receive
distributions from the REMIC at or after the time at which the taxes
accrue on the anticipated excess inclusions in an amount sufficient to
satisfy the accrued taxes.
The transferor of a REMIC residual interest is presumed not to have a
wrongful purpose if it:
- conducts a reasonable investigation of the transferee's financial
condition and concludes that the transferee has historically paid its
debts as they come due and finds no significant evidence indicating that
the transferee will not continue to pay its debts as they come due in the
future, and
- receives a representation from the transferee that the transferee
understands the tax obligations associated with holding a residual
interest and intends to pay those taxes as they come due.
The IRS has issued proposed Treasury regulations that would add to the
conditions necessary to ensure that a transfer of a noneconomic residual
interest would be respected. The proposed additional condition provides that the
transfer of a noneconomic residual interest will not qualify under this safe
harbor unless the present value of the anticipated tax liabilities associated
with holding the residual interest does not exceed the present value of the sum
of
- any consideration given to the transferee to acquire the interest (the
inducement payment),
- future distributions on the interest, and
- any anticipated tax savings associated with holding the interest as the
REMIC generates losses.
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For purposes of this calculation, the present value is calculated using a
discount rate equal to the lesser of the applicable federal rate and the
transferee's cost of borrowing. The proposed effective date for the changes is
February 4, 2000. In Revenue Procedure 2001-12, pending finalization of the
proposed regulations, the IRS has expanded the safe harbor for transfers of
non-economic residual interests to include certain transfers to domestic taxable
corporations with large amounts of gross and net assets where agreement is made
that all future transfers will be to taxable domestic corporations in
transactions that qualify for one of the safe harbor provisions.
If a transfer of a residual interest is disregarded, the transferor would be
liable for any Federal income tax imposed upon taxable income derived by the
transferee from the REMIC. The REMIC Regulations provide no guidance as to how
to determine if a significant purpose of a transfer is to impede the assessment
or collection of tax. A similar type of limitation exists with respect to
transfers of residual interest securities by foreign persons to United States
persons. See " - Tax Treatment of Foreign Investors."
Mark to Market Rules.
Prospective purchasers of a residual interest security should be aware
that the IRS regulations which provide that a residual interest security
acquired after January 3, 1995 cannot be marked-to-market.
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 specified in the prospectus supplement if a REMIC election is not made,
in the opinion of tax counsel, the trust relating to a series of securities will
be classified for federal income tax purposes as a grantor trust under Subpart
E, Part I of Subchapter J of the Code and not as an association taxable as a
corporation. In some series there will be no separation of the principal and
interest payments on the loans. In those circumstances, a holder will be
considered to have purchased a pro rata undivided interest in each of the loans.
In other cases, i.e. stripped securities, sale of the securities will produce a
separation in the ownership of all or a portion of the principal payments from
all or a portion of the interest payments on the loans.
Each holder must report on its federal income tax return its share of the
gross income derived from the loans, not reduced by the amount payable as
trustee fees and the servicing fees, at the same time and in the same manner as
those items would have been reported under the holder's tax accounting method
had it held its interest in the loans directly, received directly its share of
the amounts received with respect to the loans, and paid directly its share of
the servicing fees. In the case of pass-through securities other than stripped
securities, the income
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will consist of a pro rata share of all of the income derived from all of the
loans and, in the case of stripped securities, the income will consist of a pro
rata share of the income derived from each stripped bond or stripped coupon in
which the holder owns an interest. The holder of a security usually will be
entitled to deduct servicing fees under Section 162 or Section 212 of the Code
to the extent that the servicing fees represent reasonable compensation for the
services rendered by the trustee and the master servicer or third parties that
are compensated for the performance of services. In the case of a noncorporate
holder, however, servicing fees, to the extent not otherwise disallowed, e.g.,
because they exceed reasonable compensation, will be deductible in computing the
holder's regular tax liability only to the extent that the fees, when added to
other miscellaneous itemized deductions, exceed 2% of adjusted gross income and
may not be deductible to any extent in computing the holder's 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, which will be adjusted for inflation, will be
reduced by the lesser of:
- 3% of the excess of adjusted gross income over the applicable amount
or
- 80% of the amount of itemized deductions otherwise allowable for the
taxable year.
Discount or Premium on Pass-Through Securities.
The holder's purchase price of a pass-through security is to be allocated
among the loans in proportion to their fair market values, determined as of the
time of purchase of the securities. In the typical case, the trustee, to the
extent necessary to fulfill its reporting obligations, will treat each loan as
having a fair market value proportional to the share of the aggregate principal
balances of all of the loans that it represents, since the securities typically
will have a relatively uniform interest rate and other common characteristics.
To the extent that the portion of the purchase price of a pass-through security
allocated to a loan, other than to a right to receive any accrued interest
thereon and any undistributed principal payments, is less than or greater than
the portion of the principal balance of the loan allocable to the security, the
interest in the loan allocable to the pass-through security will be deemed to
have been acquired at a discount or premium, respectively.
The treatment of any discount will depend on whether the discount
represents OID or market discount. In the case of a loan with OID in excess of a
prescribed de minimis amount or a stripped security, a holder of a security will
be required to report as interest income in each taxable year its share of the
amount of OID that accrues during that year in the manner described above. OID
with respect to a loan could arise, for example, by virtue of the financing of
points by the originator of the loan, or by virtue of the charging of points by
the originator of the loan in an amount greater than a statutory de minimis
exception, in circumstances under which the points are not deductible under the
Code. Any market discount or premium on a loan will be includible in income, in
the manner described in " -- Taxation of Debt Securities; Premium and Market
Discount", except that in the case of pass-through securities, market discount
is calculated on the loans underlying the Certificate, rather than on the
security. A holder that acquires an interest in a loan originated after July 18,
1984 with more than a de minimis amount of market discount, typically, the
excess of the principal amount of the loan over the purchaser's
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allocable purchase price, will be required to include accrued market discount in
income in the manner set forth above. See " - Taxation of Debt Securities;
Market Discount" and " - Premium" above.
In the case of market discount on a pass-through security attributable to
loans originated on or before July 18, 1984, the holder will be required to
allocate the portion of the discount that is allocable to a loan among the
principal payments on the loan and to include the discount allocable to each
principal payment in ordinary income at the time the principal payment is made.
That treatment usually would result in discount being included in income at a
slower rate than discount would be required to be included in income using the
method described in the preceding paragraph.
Stripped Securities.
A stripped security may represent a right to receive only a portion of the
interest payments on the loans, a right to receive only principal payments on
the loans, or a right to receive payments of both interest and principal.
Stripped securities such as ratio strip securities may represent a right to
receive differing percentages of both the interest and principal on each loan.
Under Section 1286 of the Code, the separation of ownership of the right to
receive some or all of the interest payments on an obligation from ownership of
the right to receive some or all of the principal payments results in the
creation of stripped bonds with respect to principal payments and stripped
coupons with respect to interest payments. Section 1286 of the Code applies the
OID rules to stripped bonds and stripped coupons. For purposes of computing OID,
a stripped bond or a stripped coupon is treated as a debt instrument issued on
the date that the stripped interest is purchased with an issue price equal to
its purchase price or, if more than one stripped interest is purchased, the
ratable share of the purchase price allocable to the stripped interest.
Servicing fees in excess of reasonable servicing fees will be treated
under the stripped bond rules. If the excess servicing fees are less than 100
basis points or 1% interest on the loan principal balance or the securities are
initially sold with a de minimis discount, assuming no prepayment assumption is
required, any non-de minimis discount arising from a subsequent transfer of the
securities should be treated as market discount. The IRS appears to require that
reasonable servicing fees be calculated on a loan by loan basis, which could
result in some loans being treated as having more than 100 basis points of
interest stripped off.
The Code, OID Regulations and judicial decisions provide no direct
guidance as to how the interest and OID rules are to apply to stripped
securities and other pass-through securities. Under the method described in " --
Taxation of Debt Securities; Interest and Acquisition Discount" for prepayment
securities or the cash flow bond method, a prepayment assumption is used and
periodic recalculations are made which take into account with respect to each
accrual period the effect of prepayments during the period. However, the 1986
Act does not, absent Treasury regulations, appear specifically to cover
instruments like the stripped securities which technically represent ownership
interests in the underlying loans, rather than being debt instruments secured by
those loans. Nevertheless, it is believed that the cash flow bond method is a
reasonable method of reporting income for the securities, and it is expected
that OID will be reported on that basis, as specified in the prospectus
supplement. In applying the calculation to
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pass-through securities, the trustee will treat all payments to be received by a
holder with respect to the underlying loans as payments on a single installment
obligation. The IRS could, however, assert that OID must be calculated
separately for each loan underlying a security.
In some cases, if the loans prepay at a rate faster than the prepayment
assumption, the use of the cash flow bond method may accelerate a holder's
recognition of income. If, however, the loans prepay at a rate slower than the
prepayment assumption, in some circumstances the use of this method may
decelerate a holder's recognition of income.
In the case of a stripped security that is an interest weighted security,
the trustee intends, absent contrary authority, to report income to
securityholders as OID, in the manner described above for interest weighted
securities.
Possible Alternative Characterizations.
The characterizations of the stripped securities described in the
preceding section are not the only possible interpretations of the applicable
Code provisions. Among other possibilities, the IRS could contend that:
- in some series, each non-interest weighted security is composed of an
unstripped undivided ownership interest in loans and an installment
obligation consisting of stripped principal payments;
- the non-interest weighted securities are subject to the contingent payment
provisions of the Contingent Regulations; or
- each interest weighted stripped security is composed of an unstripped
undivided ownership interest in loans and an installment obligation
consisting of stripped interest payments.
Given the variety of alternatives for treatment of the stripped securities
and the different federal income tax consequences that result from each
alternative, we strongly suggest that potential purchasers consult their own tax
advisers regarding the proper treatment of the securities for federal income tax
purposes.
Character as Qualifying Loans.
In the case of stripped securities, there is no specific legal authority
existing regarding whether the character of the securities, for federal income
tax purposes, will be the same as the loans. The IRS could take the position
that the loans' character is not carried over to the securities. Pass-through
securities will be, and, although the matter is not free from doubt, stripped
securities should be considered to represent "real estate assets" within the
meaning of Section 856(c)(5)(B) 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. In
addition, interest income attributable to the securities should be considered to
represent "interest on obligations secured by mortgages on real property or on
interests in real property" within the meaning of Section 856(c)(3)(B) of the
Code. Reserves or funds underlying the securities may cause a proportionate
reduction in the above-described qualifying status categories of securities.
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SALE OR EXCHANGE
Subject to the discussion below with respect to trusts as to which a
partnership election is made, a holder's tax basis in its security is the price
the holder pays for a security, plus amounts of original issue 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 security, measured by the
difference between the amount realized and the security's basis as so adjusted,
typically will be capital gain or loss, assuming that the security is held as a
capital asset. In the case of a 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 regular interest 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 the amount that would
have been includible in the holder's income if the yield on the regular interest
security had equaled 110% of the applicable federal rate as of the beginning of
the holder's holding period, over the amount of ordinary income actually
recognized by the holder on the regular interest security.
MISCELLANEOUS TAX ASPECTS
Backup Withholding.
Subject to the discussion below with respect to trusts as to which a
partnership election is made, a holder, other than a holder of a residual
interest security, may, in some cases, be subject to "backup withholding" at a
rate of 31% with respect to distributions or the proceeds of a sale of
certificates to or through brokers that represent interest or OID on the
securities. This withholding applies if the holder of a security
- fails to furnish the trustee with its taxpayer identification number;
- furnishes the trustee an incorrect taxpayer identification number;
- fails to report properly interest, dividends or other "reportable payments"
as defined in the Code; or
- under some circumstances, fails to provide the trustee or the holder's
securities broker with a certified statement, signed under penalty of
perjury, that the taxpayer identification number provided is its correct
number and that the holder is not subject to backup withholding.
Backup withholding will not apply, however, to some payments made to holders,
including payments to exempt recipients, including exempt organizations, and to
some nonresidents. We suggest that holders consult their tax advisers as to
their qualification for exemption from backup withholding and the procedure for
obtaining the exemption.
In addition, upon the sale of a note to (or through) a broker, the
broker must report the sale and withhold 31% of the entire purchase price,
unless either (i) the broker determines that the seller is a corporation or
other exempt recipient, (ii) the seller certifies that such seller is a
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foreign holder (and certain other conditions are met) or (iii) the seller
provides the broker with a completed IRS Form W-9. Certification of the
registered owner's non-U.S. status would be made normally on an IRS Form W-8BEN
under penalties of perjury, although in certain cases it may be possible to
submit other documentary evidence.
Any amounts withheld under the backup withholding rules from a payment
to a beneficial owner would be allowed as a refund or a credit against such
beneficial owner's United States federal income tax provided the required
information is furnished to the IRS
The trustee will report to the holders and to the master 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 trusts as to which a
partnership election is made, under the Code, 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 nonresident alien individual, foreign partnership or foreign corporation,
which we define as "nonresident", those 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
the recipient is a controlled foreign corporation to which the issuer is a
related person, and will be exempt from federal income tax. Upon receipt of
appropriate ownership statements, the issuer normally will be relieved of
obligations to withhold tax from the interest payments. These provisions
supersede the applicable provisions of United States law that would otherwise
require the issuer to withhold at a 30% rate, unless that 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 nonresidents.
Holders of pass-through securities and stripped securities, including ratio
strip securities, however, may be subject to withholding to the extent that the
loans were originated on or before July 18, 1984.
Interest and OID of holders who are foreign persons are not subject to
withholding if they are effectively connected with a United States business
conducted by the holder. They will, however, be subject to the regular United
States income tax.
Payments to holders of residual interest securities who are foreign
persons typically will be treated as interest for purposes of the 30% or lower
treaty rate United States withholding tax. Holders should assume that the 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 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 that 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
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tax avoidance potential, a transfer of a residual interest security to a
nonresident 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 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 Nonresident transfers a residual interest security to a
United States person, 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. See " - Excess Inclusions."
TAX CHARACTERIZATION OF THE TRUST AS A PARTNERSHIP
Tax counsel will deliver its opinion that a trust will not be treated
as a publicly traded partnership taxable as a corporation for federal income tax
purposes. This opinion will be based on the assumption that the terms of the
related Agreement and related documents will be complied with, and on counsel's
conclusions that the nature of the income of the trust will exempt it from the
rule that some publicly traded partnerships are taxable as corporations or the
issuance of the securities has been structured as a private placement under an
IRS safe harbor, so that the trust will not be characterized as a publicly
traded partnership taxable as a corporation.
If the trust were taxable as a corporation for federal income tax
purposes, the trust would be subject to corporate income tax on its taxable
income. The trust's taxable income would include all its income, possibly
reduced by its interest expense on the notes. Any corporate income tax could
materially reduce cash available to make payments on the notes and distributions
on the certificates, and certificateholders could be liable for any tax that is
unpaid by the trust.
TAX CONSEQUENCES TO HOLDERS OF THE NOTES
Treatment of the Notes as Indebtedness.
The trust will agree, and the noteholders will agree by their purchase
of notes, to treat the notes as debt for federal income tax purposes. Tax
counsel will advise the depositor that the notes will be classified as debt for
federal income tax purposes. The discussion below assumes this characterization
of the notes is correct.
OID, Indexed Securities, etc.
The discussion below assumes that all payments on the notes are
denominated in U.S. dollars, and that the notes are not indexed securities or
strip notes. Moreover, the discussion assumes that the interest formula for the
notes meets the requirements for qualified stated interest under the OID
Regulations, and that any OID on the notes, i.e., any excess of the principal
amount of the notes over their issue price, does not exceed a de minimis amount,
i.e., 0.25% of their principal amount multiplied by the number of full years
included in their term, all within the meaning of the OID Regulations. If these
conditions are not satisfied with respect to any given series of notes,
additional tax considerations with respect to the notes will be disclosed in the
prospectus supplement.
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Interest Income on the Notes.
Based on the above assumptions, except as discussed in the following
paragraph, the notes will not be considered issued with OID. The stated interest
thereon will be taxable to a noteholder as ordinary interest income when
received or accrued in accordance with noteholder's method of tax accounting.
Under the OID Regulations, a holder of a note issued with a de minimis amount of
OID must include the OID in income, on a pro rata basis, as principal payments
are made on the note. It is believed that any prepayment premium paid as a
result of a mandatory redemption will be taxable as contingent interest when it
becomes fixed and unconditionally payable. A purchaser who buys a note for more
or less than its principal amount usually will be subject, respectively, to the
premium amortization or market discount rules of the Code.
A holder of a note that has a fixed maturity date of not more than one
year from the issue date of the note which we refer to as a short-term note may
be subject to special rules. An accrual basis holder of a short-term note and
some cash method holders, including regulated investment companies, as set forth
in Section 1281 of the Code typically would be required to report interest
income as interest accrues on a straight-line basis over the term of each
interest period. Other cash basis holders of a short-term note would be required
to report interest income as interest is paid or, if earlier, upon the taxable
disposition of the short-term note. However, a cash basis holder of a short-term
note reporting interest income as it is paid may be required to defer a portion
of any interest expense otherwise deductible on indebtedness incurred to
purchase or carry the short-term note until the taxable disposition of the
short-term note. A cash basis taxpayer may elect under Section 1281 of the Code
to accrue interest income on all nongovernment debt obligations with a term of
one year or less, in which case the taxpayer would include interest on the
short-term note in income as it accrues, but would not be subject to the
interest expense deferral rule referred to in the preceding sentence. Special
rules apply if a short-term note is purchased for more or less than its
principal amount.
Sale or Other Disposition.
If a noteholder sells a note, the holder will recognize gain or loss in
an amount equal to the difference between the amount realized on the sale and
the holder's adjusted tax basis in the note. The adjusted tax basis of a note to
a particular noteholder will equal the holder's cost for the note, increased by
any market discount, acquisition discount, OID and gain previously included by
noteholder in income with respect to the note and decreased by the amount of
bond premium, if any, previously amortized and by the amount of principal
payments previously received by noteholder with respect to the note. Any gain or
loss will be capital gain or loss if the note was held as a capital asset,
except for gain representing accrued interest and accrued market discount not
previously included in income. Capital losses usually may be used only to offset
capital gains.
Foreign Holders.
Interest payments made or accrued to a noteholder who is a nonresident
alien, foreign corporation or other non-United States person will be considered
portfolio interest, and will not be subject to United States federal income tax
and withholding tax, if the interest is not
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effectively connected with the conduct of a trade or business within the United
States by the foreign person, and the foreign person:
- is not actually or constructively a "10 percent shareholder" of the trust
or the seller, including a holder of 10% of the outstanding certificates,
or a "controlled foreign corporation" with respect to which the trust or
the seller is a "related person" within the meaning of the Code and
- provides the trustee or other person who is otherwise required to withhold
U.S. tax with respect to the notes with an appropriate statement on Form
W-8BEN or a similar form, signed under penalties of perjury, certifying
that the beneficial owner of the note is a foreign person and providing the
foreign person's name and address.
A withholding agent is the United States payor (or a non-U.S. payor who
is a qualified intermediary, U.S. branch of a foreign person, or withholding
foreign partnership) in the chain of payment prior to payment to a foreign
holder (which itself is not a withholding agent). Generally, this statement is
made on an IRS Form W-8BEN, which is effective for the remainder of the year of
signature plus three full calendar years unless a change in circumstances makes
any information on the form incorrect. Notwithstanding the preceding sentence, a
W-8BEN with a U.S. taxpayer identification number will remain effective until a
change in circumstances makes any information on the form incorrect, provided
that the withholding agent reports at least annually to the beneficial owner on
Form 1042-S. The beneficial owner must inform the withholding agent within 30
days of such change and furnish a new W-8BEN. A foreign holder who is not an
individual or corporation (or an entity treated as a corporation for federal
income tax purposes) holding the notes on its own behalf may have substantially
increased reporting requirements and should consult their tax advisor.
If a note is held through a securities clearing organization or some
other financial institutions, the organization or institution may provide the
relevant signed statement to the withholding agent; in that case, however, the
signed statement must be accompanied by a Form W-8BEN or substitute form
provided by the foreign person that owns the note. If the interest is not
portfolio interest, then it will be subject to United States federal income and
withholding tax at a rate of 30 percent, unless reduced or eliminated by an
applicable tax treaty.
Any capital gain realized on the sale, redemption, retirement or other
taxable disposition of a note by a foreign person will be exempt from United
States federal income and withholding tax, if:
- the gain is not effectively connected with the conduct of a trade or
business in the United States by the foreign person and
- 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.
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Backup Withholding.
Each holder of a note, other than an exempt holder including a
corporation, tax-exempt organization, qualified pension and profit-sharing
trust, individual retirement account or nonresident alien who provides
certification as to status as a nonresident, will be required to provide, under
penalties of perjury, a certificate containing the holder's name, address,
correct federal taxpayer identification number and a statement that the holder
is not subject to backup withholding. Should a nonexempt noteholder fail to
provide the required certification, the trust will be required to withhold 31
percent of the amount otherwise payable to the holder, and remit the withheld
amount to the IRS as a credit against the holder's federal income tax liability.
Possible Alternative Treatments of the Notes.
If, contrary to the opinion of 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. If so
treated, the trust might be treated as a publicly traded partnership taxable as
a corporation with the adverse consequences described in " -- Tax
Characterization of the Trust as a Partnership" and the taxable corporation
would not be able to reduce its taxable income by deductions for interest
expense on notes recharacterized as equity. Alternatively, and most likely in
the view of tax counsel, the trust might be treated as a publicly traded
partnership that would not be taxable as a corporation because it would meet
qualifying income tests. Nonetheless, treatment of the notes as equity interests
in a publicly traded partnership could have adverse tax consequences to some
holders. For example, income to tax-exempt entities including pension funds
would be unrelated business taxable income, income to foreign holders would be
subject to U.S. tax and U.S. tax return filing and withholding requirements, and
individual holders may be limited in their ability to deduct their share of the
trust's expenses.
TAX CONSEQUENCES TO HOLDERS OF THE CERTIFICATES
Treatment of the Trust as a Partnership.
The trust and the master servicer will agree, and the
certificateholders will agree by their purchase of certificates, to treat the
trust as a partnership for purposes of federal and state income tax, franchise
tax and any other tax measured in whole or in part by income, with the assets of
the partnership being the assets held by the trust, the partners of the
partnership being the certificateholders, and the notes being debt of the
partnership. However, the proper characterization of the arrangement involving
the trust, the certificates, the notes, the trust and the master 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 features characteristic of debt, the certificates
might be considered debt of the trust. Any characterization of that type 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. The following discussion assumes that the certificates represent
equity interests in a partnership.
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Indexed Securities, etc.
The following discussion assumes that all payments on the certificates
are denominated in U.S. dollars, none of the certificates are indexed securities
or strip certificates, 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 the
certificates will be disclosed in the prospectus supplement.
Partnership Taxation.
As a partnership, the trust will not be subject to federal income tax.
Rather, each certificateholder will be required to separately take into account
the holder's allocated share of income, gains, losses, deductions and credits of
the trust. The trust's income will consist primarily of interest and finance
charges earned on the loans including appropriate adjustments for market
discount, OID and bond premium and any gain upon collection or disposition of
loans. The trust's deductions will consist primarily of interest accruing with
respect to the notes, servicing and other fees, and losses or deductions upon
collection or disposition of loans.
The tax items of a partnership are allocable to the partners in
accordance with the Code, Treasury regulations and the related Agreement and
related documents. The Agreement will provide that the certificateholders will
be allocated taxable income of the trust for each month equal to the sum of:
- the interest that accrues on the certificates in accordance with their
terms for the month, including interest accruing at the pass-through rate
for the month and interest on amounts previously due on the certificates
but not yet distributed;
- any trust income attributable to discount on the loans that corresponds to
any excess of the principal amount of the certificates over their initial
issue price;
- prepayment premium payable to the certificateholders for the month; and
- any other amounts of income payable to the certificateholders for the
month.
The allocation will be reduced by any amortization by the trust of
premium on loans that corresponds to any excess of the issue price of
certificates over their principal amount. All remaining taxable income of the
trust will be allocated to the seller. Based on the economic arrangement of the
parties, this approach for allocating trust income should be permissible under
applicable Treasury regulations, although no assurance can be given that the IRS
would not require a greater amount of income to be allocated to
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 in the preceding paragraph even though the trust
might not have sufficient cash to make current cash distributions of the 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 income even if they have not received cash from the trust to pay
taxes. In addition, because tax allocations and tax reporting will be done on a
uniform basis for all certificateholders but certificateholders may be
purchasing
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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.
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 taxable to the holder under the Code.
An individual taxpayer's share of expenses of the trust including
servicing fees but not interest expense would be miscellaneous itemized
deductions. The 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.
The trust intends to make all tax calculations relating to income and
allocations to certificateholders on an aggregate basis. If the IRS were to
require that the calculations be made separately for each loan, the trust 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 loans were not issued with OID, and, therefore,
the trust should not have OID income. However, the purchase price paid by the
trust for the loans may be greater or less than the remaining principal balance
of the loans at the time of purchase. If so, the loan will have been acquired at
a premium or discount, as the case may be. As indicated above, the trust will
make this calculation on an aggregate basis, but might be required to recompute
it on a loan by loan basis.
If the trust acquires the loans at a market discount or premium, the
trust will elect to include any discount in income currently as it accrues over
the life of the loans or to offset any premium against interest income on the
loans. As indicated above, a portion of market discount income or premium
deduction may be allocated to certificateholders.
Section 708 Termination.
Under final regulations issued on May 9, 1997 under Code Section 708, a
sale or exchange of 50% or more of the capital and profits in a partnership
would cause a deemed contribution of assets of the partnership (the "old
partnership") to a new partnership (the "new partnership") in exchange for
interests in the new partnership. Those interests would be deemed distributed to
the partners of the old partnership in liquidation of the partnership, which
would not constitute a sale or exchange. Accordingly under these new
regulations, if the trust fund were characterized as a partnership and a sale of
certificates terminated the partnership under Code Section 708, the purchaser's
basis in its ownership interest would not change.
Disposition of Certificates.
Capital gain or loss usually 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
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certificateholder's tax basis in a certificate typically will equal the holder's
cost increased by the holder's share of trust income includible in income and
decreased by any distributions received with respect to the 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. A holder acquiring certificates at different prices
may be required to maintain a single aggregate adjusted tax basis in the
certificates, and, upon sale or other disposition of some of the certificates,
allocate a portion of the aggregate tax basis to the certificates sold rather
than maintaining a separate tax basis in each certificate for purposes of
computing gain or loss on a sale of that certificate.
Any gain on the sale of a certificate attributable to the holder's
share of unrecognized accrued market discount on the loans typically would be
treated as ordinary income to the holder and would give rise to special tax
reporting requirements. The trust does not expect to have any other assets that
would give rise to these special reporting requirements. Thus, to avoid those
special reporting requirements, the trust 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 in " -- Tax Consequences to Holders of Certificates; Partnership
Taxation" over the life of the certificates that exceeds the aggregate cash
distributions, the excess usually will give rise to a capital loss upon the
retirement of the certificates.
Allocations Between Transferors and Transferees.
The trust's taxable income and losses will be determined monthly and
the tax items for a particular calendar month will be apportioned among the
certificateholders in proportion to the principal amount of certificates owned
by them as of the close of the last day of that 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 might be reallocated among the certificateholders. The trust'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 or loss, the purchasing certificateholder will have a higher lower basis
in the certificates than the selling certificateholder had. The tax basis of the
trust's assets will not be adjusted to reflect that higher or lower basis unless
the trust were to file an election under Section 754 of the Code. In order to
avoid the administrative complexities that would be involved in keeping accurate
accounting records, as well as potentially onerous information reporting
requirements, the trust will not make an election. As a result,
certificateholders might be allocated a greater or lesser amount of trust income
than would be appropriate based on their own purchase price for certificates.
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Administrative Matters.
The trustee is required to keep or have kept complete and accurate
books of the trust. The books will be maintained for financial reporting and tax
purposes on an accrual basis and the fiscal year of the trust will be the
calendar year. The trustee will file a partnership information return on IRS
Form 1065 with the IRS for each taxable year of the trust and will report each
certificateholder's allocable share of items of trust income and expense to
holders and the IRS on Schedule K-1. The trust will provide the Schedule K-l
information to nominees that fail to provide the trust with the information
statement described in the following paragraph and nominees will be required to
forward information to the beneficial owners of the certificates. Holders must
file tax returns that are consistent with the information return filed by the
trust or be subject to penalties unless the holder notifies the IRS of all
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 with
a statement containing information on the nominee, the beneficial owners and the
certificates so held. The information includes:
- the name, address and taxpayer identification number of the nominee and
- as to each beneficial owner
- the name, address and identification number of the person,
- whether the person is a United States person, a tax-exempt entity or a
foreign government, an international organization, or any wholly owned
agency or instrumentality of either of the foregoing, and
- some information on certificates that were held, bought or sold on behalf
of the person throughout the year.
In addition, brokers and financial institutions that hold certificates through a
nominee are required to furnish directly to the trust 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. The information referred to above for any calendar year
must be furnished to the trust on or before the following January 31. Nominees,
brokers and financial institutions that fail to provide the trust with the
information described above may be subject to penalties.
The seller will be designated as the tax matters partner in the
Agreement and 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. The
statute of limitations for partnership items typically does not expire before
three years after the date on which the partnership information return is filed.
Any adverse determination following an audit of the return of the trust by the
appropriate taxing authorities could result in an adjustment of the returns of
the certificateholders. In some circumstances, a certificateholder may be
precluded from separately litigating a proposed adjustment to the items
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of the trust. 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.
Tax Consequences to Foreign Certificateholders.
It is not clear whether the trust would be considered to be engaged in
a trade or business in the United States for purposes of federal withholding
taxes with respect to non-U.S. persons because there is no clear authority
dealing with that issue under facts substantially similar to those describing
the trust. Although it is not expected that the trust would be engaged in a
trade or business in the United States for those purposes, the trust will
withhold as if it were so engaged in order to protect the trust from possible
adverse consequences of a failure to withhold. The trust expects to withhold on
the portion of its taxable income that is allocable to foreign
certificateholders under Section 1446 of the Code, as if that 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 to change its withholding
procedures. In determining a holder's withholding status, the trust may rely on
IRS Form W-8BEN, IRS Form W-9 or the holder's certification of nonforeign status
signed under penalties of perjury.
The term "U.S. Person" means a citizen or resident of the United
States, a corporation, partnership or other entity created or organized in or
under the laws of the United States, any state of the United States or the
District of Columbia, other than a partnership that is not treated as a United
States person under any applicable Treasury regulation , or an estate whose
income is subject to U.S. federal income tax regardless of its source of income,
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.
Each foreign holder might be required to file a U.S. individual or
corporate income tax return including, in the case of a corporation, the branch
profits tax on its share of the trust's income. Each foreign holder must obtain
a taxpayer identification number from the IRS and submit that number to the
trust on Form W-8BEN in order to assure appropriate crediting of the taxes
withheld. A foreign holder usually would be entitled to file with the IRS a
claim for refund with respect to taxes withheld by the trust taking the position
that no taxes were due because the trust was not engaged in a U.S. trade or
business. However, interest payments made or accrued to a certificateholder who
is a foreign person usually will be considered guaranteed payments to the extent
the payments are determined without regard to the income of the trust. If these
interest payments are properly characterized as guaranteed payments, then the
interest will not be considered portfolio interest. As a result,
certificateholders will be subject to United States federal income tax and
withholding tax at a rate of 30 percent, unless reduced or eliminated by an
applicable treaty. In that case, a foreign holder would only be entitled to
claim a refund for that portion of the taxes in excess of the taxes that should
be withheld with respect to the guaranteed payments.
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 the certificateholder fails
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to comply with identification procedures, unless the holder is an exempt
recipient under applicable provisions of the Code.
FASIT SECURITIES
General
The FASIT provisions of the Code were enacted by the Small Business Job
Protection Act of 1996 and create a new elective statutory vehicle for the
issuance of mortgage-backed and asset-backed securities. The FASIT provisions of
the Code became effective on September 1, 1997. On February 4, 2000, the IRS and
Treasury issued proposed Treasury regulations on FASITs. The regulations would
not be effective until final regulations are filed with the federal register.
However, it appears that some anti-abuse rules would apply as of February 4,
2000. Accordingly, definitive guidance cannot be provided with respect to many
aspects of the tax treatment of FASIT securityholders. In the opinion of tax
counsel, if a FASIT election is made with respect to a series of securities,
then the arrangement by which the securities of that series are issued will be
treated as a FASIT assuming compliance with all of the provisions of the
applicable Agreement, including the making of a timely FASIT election, and
representations made by the seller as to factual matters. In addition, the
trust's qualification as a FASIT depends on its ability to satisfy the
requirements of the FASIT provisions on an ongoing basis, including, without
limitation, requirements of proposed, temporary or final Treasury regulations
that may be promulgated in the future under the FASIT provisions and that may
apply to the trust or as a result of any change in the applicable law. Investors
also should note that the FASIT discussion in this prospectus constitutes only a
summary of the federal income tax consequences to holders of FASIT securities.
With respect to each series of FASIT securities, the prospectus supplement will
provide a detailed discussion regarding the federal income tax consequences
associated with the particular transaction.
FASIT securities will be classified as either FASIT regular securities,
which will be treated as debt for federal income tax purposes, or FASIT
ownership securities, which are not treated as debt for federal income tax
purposes, but rather as representing rights and responsibilities with respect to
the taxable income or loss of the related series FASIT. The prospectus
supplement for each series of securities will indicate whether one or more FASIT
elections will be made for that series and which securities of that series will
be designated as regular interests, and which will be designated as ownership
interests.
Qualification as a FASIT
The trust underlying a series, or one or more designated pools of
assets held in the trust, will qualify under the Code as a FASIT in which the
FASIT regular securities and the FASIT ownership securities will constitute the
"regular interests" and the "ownership interests," respectively, if
- a FASIT election is in effect,
- tests concerning the composition of the FASIT's assets and the nature of
the securityholders' interests in the FASIT are met on a continuing basis,
and
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- the trust is not a regulated investment company as defined in Section
851(a) of the Code.
Asset Composition
In order for a trust, or one or more designated pools of assets held by
a trust, to be eligible for FASIT status, substantially all of the assets of the
trust or the designated pool must consist of "permitted assets" as of the close
of the third month beginning after the closing date and at all times after that
date (the "FASIT Qualification Test"). Permitted assets include:
- cash or cash equivalents,
- debt instruments with fixed terms that would qualify as REMIC regular
interests if issued by a REMIC, i.e., instruments that provide for interest
at a fixed rate, a qualifying variable rate, or a qualifying interest-only
type rate,
- foreclosure property,
- some hedging instruments, including interest and currency rate swaps and
enhancement contracts, that are reasonably required to guarantee or hedge
against the FASIT's risks associated with being the obligor on FASIT
interests,
- contract rights to acquire qualifying debt instruments or qualifying
hedging instruments,
- FASIT regular interests, and
- REMIC regular interests.
Permitted assets do not include any debt instruments issued by the
holder of the FASIT's ownership interest or by any person related to the holder.
Interests in a FASIT
In addition to the foregoing asset qualification requirements, the
interests in a FASIT also must meet requirements. All of the interests in a
FASIT must belong to either of the following:
- one or more classes of regular interests or
- a single class of ownership interest that is held by a fully taxable
domestic C corporation.
In the case of series that include FASIT ownership securities, the
ownership interest will be represented by the FASIT ownership securities.
A FASIT interest qualifies as a regular interest if:
- it is designated as a regular interest,
- it has a stated maturity no greater than thirty years,
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- it entitles its holder to a specified principal amount,
- the issue price of the interest does not exceed 125% of its stated
principal amount,
- the yield to maturity of the interest is less than the applicable Treasury
rate published by the IRS plus 5%, and
- if it pays interest, the interest is payable at either (a) a fixed rate
with respect to the principal amount of the regular interest or (b) a
permissible variable rate with respect to the principal amount. Permissible
variable rates for FASIT regular interests are the same as those for REMIC
regular interests, i.e., qualified floating rates and weighted average
rates. See " -- Taxation of Debt Securities -- Variable Rate Debt
Securities."
If a FASIT security fails to pay a specified principal amount, has an
issue price that exceeds 125% of its stated principal amount, or has yield to
maturity in excess of the AFR, but otherwise meets the above requirements, it
may still qualify as a type of regular interest known as a high-yield interest.
In addition, if a FASIT security fails to pay a fixed rate or a permissible
variable rate, but the interest payable on the security consists of a specified
portion of the interest payments on permitted assets and that portion does not
vary over the life of the security, the security also will qualify as a
high-yield interest. A high-yield interest may be held only by domestic C
corporations that are fully subject to corporate income tax ("Eligible
Corporations"), other FASITs, and dealers in securities who acquire high yield
interests as inventory, rather than for investment. In addition, holders of
high-yield interests may be limited in offsetting income derived from that
interest. See " -- Tax Treatment of FASIT Regular Securities -- Treatment of
High-Yield Interests."
Anti-Abuse Rule. Under proposed Treasury regulations, the Commissioner
of Internal Revenue may make appropriate adjustments with regard to the FASIT
and any arrangement or transaction involving the FASIT if a principal purpose of
forming or using the FASIT is to achieve results inconsistent with the intent of
the FASIT provisions and the FASIT regulations. This determination would be
based on all of the facts and circumstances, including a comparison of the
purported business purpose for a transaction and the claimed tax benefits
resulting from the transaction.
Consequences of the Failure of the FASIT Trust to Qualify as a FASIT.
If a FASIT Trust fails to comply with one or more of the Code's ongoing
requirements for FASIT status during any taxable year, proposed Treasury
regulations provide that its FASIT status would be lost for that year and the
FASIT Trust will be unable to elect FASIT status without the Commissioner's
approval. If FASIT status is lost, under proposed Treasury regulations the
entity classification of the former FASIT (the "New Arrangement") is determined
under general federal income tax principles. The holder of the FASIT Ownership
Security is treated as exchanging the New Arrangement's assets for an amount
equal to their value and gain recognized is treated as gain from a prohibited
transaction that is subject to the 100 percent tax, without exception. Loss, if
any, is disallowed. In addition, the holder of the FASIT Ownership Security must
recognize cancellation of indebtedness income, on a regular interest by regular
interest basis, in an amount equal to the adjusted issue price of each FASIT
Regular Security outstanding immediately before the cessation over its fair
market value. If the holder of the FASIT Ownership Security has a
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continuing economic interest in the New Arrangement, the characterization of
this interest is determined under general federal income tax principles. Holder
of FASIT Regular Securities are treated as exchanging their Notes for interests
in the New Arrangement, the classification of which is determined under general
federal income tax principles. Gain is recognized to the extent the new interest
either does not qualify as debt or differs either in kind or extent. The basis
of the interest in the New Arrangement equals the basis in the FASIT Regular
Security increased by any gain recognized on the exchange.
TAX TREATMENT OF FASIT REGULAR SECURITIES
General.
Payments received by holders of FASIT regular securities should be
accorded the same tax treatment under the Code as payments received on other
taxable corporate debt instruments and on REMIC regular interests. As in the
case of holders of REMIC Regular interests, holders of FASIT regular interests
must report income from those interests under an accrual method of accounting,
even if they otherwise would have used the cash receipts and disbursements
method. Except in the case of FASIT regular interests issued with original issue
discount or acquired with market discount or premium, interest paid or accrued
on a FASIT regular interest will be treated as ordinary income to the
securityholder and a principal payment on the security will be treated as a
return of capital to the extent that the securityholder's basis is allocable to
that payment. FASIT regular interests issued with original issue discount or
acquired with market discount or premium will treat interest and principal
payments on the securities in the same manner described for REMIC regular
interests. See " -- Taxation of Debt Securities," " -- Market Discount," and
" -- Premium" above. High-yield securities may be held only by fully taxable
domestic C corporations, other FASITs, and some securities dealers.
Securityholders of high-yield securities may be limited in their ability to use
current losses or net operating loss carryforwards or carrybacks to offset any
income derived from those securities.
If a FASIT regular interest is sold or exchanged, the securityholder
usually will recognize gain or loss upon the sale in the manner described in
" -- Taxation of Debt Securities; Sale or Exchange". In addition, if a FASIT
regular interest becomes wholly or partially worthless as a result of default
and delinquencies on the underlying assets, the holder of the security should be
allowed to deduct the loss sustained or alternatively be able to report a lesser
amount of income. However, the timing and character of those losses in income
are uncertain. See " -- Taxation of Debt Securities -- Effects of Default and
Delinquencies."
FASIT regular securities held by a REIT will qualify as "real estate
assets" within the meaning of section 856(c)(4) of the Code, and interest on
those securities will be considered Qualifying REIT Interest to the same extent
that REMIC securities would be so considered. FASIT regular securities held by a
thrift institution taxed as a "domestic building and loan association" will
represent qualifying assets for purposes of the qualification requirements set
forth in Code Section 7701(a)(19) to the same extent that REMIC securities would
be so considered. See " -- Taxation of Debt Securities." In addition, FASIT
regular securities held by a financial institution to which Section 585 of the
Code applies will be treated as evidences of indebtedness for purposes of
Section 582(c)(1) of the Code. FASIT securities will not qualify as "government
securities" for either REIT or RIC qualification purposes.
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Treatment of High-Yield Interests
High-yield interests are subject to special rules regarding the
eligibility of holders of those interests, and the ability of the holders to
offset income derived from their FASIT security with losses. High-yield
interests may be held only by Eligible Corporations, other FASITs, and dealers
in securities who acquire the interests as inventory. If a securities dealer,
other than an Eligible Corporation, initially acquires a high-yield interest as
inventory, but later begins to hold it for investment, the dealer will be
subject to an excise tax equal to the income from the high-yield interest
multiplied by the highest corporate income tax rate. In addition, transfers of
high-yield interests to disqualified holders will be disregarded for federal
income tax purposes, and the transferor still will be treated as the holder of
the high-yield interest.
The holder of a high-yield interest may not use non-FASIT current
losses or net operating loss carryforwards or carrybacks to offset any income
derived from the high-yield interest, for either regular federal income tax
purposes or for alternative minimum tax purposes. In addition, the FASIT
provisions contain an anti-abuse rule that imposes corporate income tax on
income derived from a FASIT regular interest that is held by a pass-through
entity, other than another FASIT, that issues debt or equity securities backed
by the FASIT regular interest and that have the same features as high-yield
interests.
TAX TREATMENT OF FASIT OWNERSHIP SECURITIES
A FASIT ownership security represents the residual equity interest in a
FASIT. The holder of a FASIT ownership security determines its taxable income by
taking into account all assets, liabilities, and items of income, gain,
deduction, loss, and credit of a FASIT. The character of the income to the
holder of a FASIT ownership interest will be the same as the character of the
income to the FASIT, except that any tax-exempt interest income taken into
account by the holder of a FASIT ownership interest is treated as ordinary
income. In determining that taxable income, the holder of a FASIT ownership
security must determine the amount of interest, original issue discount, market
discount, and premium recognized with respect to the FASIT's assets and the
FASIT regular securities issued by the FASIT according to a constant yield
methodology and under an accrual method of accounting. In addition, holders of
FASIT ownership securities are subject to the same limitations on their ability
to use losses to offset income from their FASIT security as are the holders of
high-yield interests. See " -- Tax Treatment of FASIT Regular Securities --
Treatment of High-Yield Interests."
Rules similar to the wash sale rules applicable to REMIC residual
securities also will apply to FASIT ownership securities. Accordingly, losses on
dispositions of a FASIT ownership security usually will be disallowed where,
within six months before or after the disposition, the seller of the security
acquires any other FASIT ownership security or, in the case of a FASIT holding
mortgage assets, any interest in a taxable mortgage pool, that is economically
comparable to a FASIT ownership security. In addition, if any security that is
sold or contributed to a FASIT by the holder of the related FASIT ownership
security was required to be marked-to-market under Code section 475 by the
holder, then section 475 will continue to apply to the securities, except that
the amount realized under the mark-to-market rules will be the greater of the
securities value under present law or the securities value after applying
special valuation rules contained in the FASIT provisions. Those special
valuation rules require that the value of
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debt instruments that are not traded on an established securities market be
determined by calculating the present value of the reasonably expected payments
under the instrument using a discount rate of 120% of the applicable federal
rate, compounded semiannually. The proposed FASIT regulations issued on February
4, 2000 significantly altered the mark-to-market rules with respect to
securities sold or contributed to a FASIT by the holder of the related FASIT
ownership security. Prospective investors should consult with their tax advisors
regarding the impact of the proposed FASIT regulations on the mark-to-market
rules.
The holder of a FASIT ownership security will be subject to a tax equal
to 100% of the net income derived by the FASIT from any prohibited transactions.
Prohibited transactions include:
- the receipt of income derived from assets that are not permitted
assets,
- some dispositions of permitted assets,
- the receipt of any income derived from any loan originated by a
FASIT, and
- in some cases, the receipt of income representing a servicing fee
or other compensation.
Any series for which a FASIT election is made will be structured in
order to avoid application of the prohibited transaction tax.
Backup Withholding, Reporting and Tax Administration
Securityholders of FASIT securities will be subject to backup
withholding to the same extent holders of REMIC securities would be subject. See
" -- Miscellaneous Tax Aspects -- Backup Withholding." For purposes of reporting
and tax administration, holders of record of FASIT securities will be treated in
the same manner as holders of REMIC securities.
FOREIGN SECURITYHOLDERS
Foreign holders of FASIT securities will be subject to withholding to
the same extent foreign holders of notes would be subject. See " - Tax
Consequences to Holders of the Notes - Foreign Holders."
Under proposed Treasury regulations, if a non-U.S. Person holds, either
directly or through a vehicle which itself is not subject to U.S. federal income
tax like a partnership or a trust, a FASIT Regular Security and a "conduit
debtor" pays or accrues interest on a debt instrument held by the FASIT, any
interest received or accrued by the non-U.S. Person FASIT Regular Security
holder is treated as received or accrued from the conduit debtor. The proposed
Treasury regulations state that a debtor is a conduit debtor if the debtor is a
U.S. Person or the United States branch of a non-U.S. Person and the non-U.S.
Person regular interest holder is (1) a "10 percent shareholder" of the debtor,
(2) a "controlled foreign corporation" and the debtor is a related person with
respect to the controlled foreign corporation or (3) related to the debtor. As
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set forth above, the proposed Treasury regulations would not be effective until
final regulations are filed with the federal register.
DUE TO THE COMPLEXITY OF THE FEDERAL INCOME TAX RULES APPLICABLE TO
SECURITYHOLDERS AND THE CONSIDERABLE UNCERTAINTY THAT EXISTS WITH RESPECT TO
MANY ASPECTS OF THOSE RULES, WE SUGGEST THAT POTENTIAL INVESTORS CONSULT THEIR
OWN TAX ADVISORS REGARDING THE TAX TREATMENT OF THE ACQUISITION, OWNERSHIP, AND
DISPOSITION OF THE SECURITIES.
STATE TAX CONSIDERATIONS
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, we
suggest that potential investors consult their own tax advisors with respect to
the various state and local tax consequences of an investment in the securities.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974 and Section 4975 of
the Code impose restrictions on employee benefit plans subject to ERISA and on
plans and other arrangements subject to Section 4975 of the Code ("Plans"), and
on persons who are parties in interest or disqualified persons ("parties in
interest") with respect to those Plans. Some employee benefit plans, including
governmental plans and church plans for which no election has been made under
Section 410(d) of the Code, are not subject to the restrictions of ERISA, and
assets of those plans may be invested in the securities without regard to the
ERISA considerations described in this section, subject to other applicable
federal and state law. However, any governmental or church plan which is
qualified under Section 401(a) of the Code and exempt from taxation under
Section 501(a) of the Code is subject to the prohibited transaction rules set
forth in Section 503 of the Code.
Investments by Plans are subject to ERISA's fiduciary requirements,
including the requirement of investment prudence and diversification and the
requirement that a Plan's investments be made in accordance with the documents
governing the Plan.
Section 406 of ERISA prohibits parties in interest with respect to a
Plan from engaging in prohibited transactions involving the Plan and its assets
unless a statutory, regulatory or administrative exemption applies to the
transaction. Section 4975 of the Code imposes excise taxes or, in some cases, a
civil penalty may be assessed under Section 502(i) of ERISA, on parties in
interest which engage in non-exempt prohibited transactions.
Depending on the relevant facts and circumstances, a prohibited
transaction exemption may apply to the purchase or holding of the securities -
for example:
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- Prohibited Transaction Class Exemption ("PTCE") 96-23 exempts
some transactions effected on behalf of a Plan by an in-house
asset manager;
- PTCE 95-60 exempts some transactions between insurance company
general accounts and parties in interest;
- PTCE 91-38 exempts some transactions between bank collective
investment funds and parties in interest;
- PTCE 90-1 exempts some transactions between insurance company
pooled separate accounts and parties in interest; and
- PTCE 84-14 exempts some transactions effected on behalf of a Plan
by a qualified professional asset manager.
There can be no assurance that any of these exemptions will apply with respect
to any Plan's investment in the securities, or that an exemption, if it did
apply, would apply to all prohibited transactions that may occur in connection
with any investment. Furthermore, these exemptions might not apply to
transactions involved in operation of the trust if, as discussed below, the
assets of the trust were considered to include Plan Assets.
The DOL has issued a final regulation, 29 C.F.R. Section 2510.3-101,
(the "Plan Assets Regulation"), containing rules for determining what
constitutes the assets of a Plan. The Plan Assets Regulation provides that, when
a Plan invests in an equity interest in a corporation, partnership, trust or
other entity, the underlying assets and properties of the entity will be deemed
for purposes of ERISA to be assets of the Plan unless an exception applies.
Under the terms of the Plan Assets Regulation, the trust (or other
issuer) may be deemed to hold Plan Assets by reason of a Plan's investment in a
security; the Plan Assets would include an undivided interest in the trust
assets and any other assets held by the trust. In that event, persons providing
services with respect to the assets of the trust may be parties in interest,
subject to the fiduciary responsibility provisions of Title I of ERISA,
including the prohibited transaction provisions of Section 406 of ERISA and of
Section 4975 of the Code, with respect to transactions involving the assets
unless the transactions are subject to a statutory, regulatory or administrative
exemption. In addition, the obligations and responsibilities of Plan sponsors
and Plan administrators may be expanded by application of Part 1 of Subtitle B
of Title I of ERISA to the entity's assets and operations. There may also be an
improper delegation of the responsibility to manage Plan Assets if Plans that
purchase securities are deemed to own an interest in the underlying assets of
the Trust.
The look-through rule of the Plan Assets Regulation does not apply if
the interest acquired by the Plan is treated as indebtedness under applicable
local law and has no substantial equity features. A profits interest in a
partnership, an undivided ownership interest in property and a beneficial
ownership interest in a trust usually are deemed to be equity interests under
the final regulation. If notes of a particular series were deemed to be
indebtedness under applicable local law without any substantial equity features,
the assets of an investing Plan would include the notes, but not, by reason of
the purchase, the underlying assets of the trust. The prospectus
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supplement related to a series will indicate the expected treatment of the
securities in that series under the Plan Assets Regulation.
If the interest is an equity interest, the Plan Assets Regulation
creates an exception if the class of equity interests in question is:
- widely held, i.e., held by 100 or more investors who are
independent of the depositor and each other at the conclusion of
the initial public offering;
- freely transferable; and
- sold as part of an offering under
- an effective registration statement under the
Securities Act, and then subsequently registered under
the Exchange Act or
- an effective registration statement under Section 12(b)
or 12(g) of the Exchange Act.
In addition, the regulation provides that if at all times more than 75% of the
value of each class of equity interests in the entity is held by investors other
than benefit plan investors - which includes Plans, employee benefit plans as
defined under ERISA, whether or not they are subject to ERISA, and any entity
whose underlying assets include plan assets by reason of a plan's investment in
the entity - the assets of an investing Plan will not include any of the
underlying assets of the trust.
The DOL has granted to some underwriters substantially identical
individual administrative exemptions (the "Underwriter Exemptions") from some of
the prohibited transaction rules of ERISA and the related excise tax provisions
of Section 4975 of the Code with respect to the initial purchase, the holding
and the subsequent resale by Plans of securities, including notes and
certificates, issued by entities holding investment pools consisting only of
certain secured receivables, loans and other obligations ("issuers") and the
servicing, operations and management of such entities, provided the conditions
and requirements of the Underwriter Exemptions are met. These securities may
include the certificates or the notes issued under this prospectus. The
obligations covered by the Underwriter Exemptions include obligations like the
trust assets, other than home improvement contracts that are unsecured. The
Underwriter Exemptions may apply to the acquisition, holding and resale of the
securities by a Plan, provided that a number of conditions are met, including
those listed in the next paragraph.
While each Underwriter Exemption is an individual exemption separately
granted to a specific underwriter, the terms and conditions are similar and
include:
- the acquisition of the securities by a Plan is on terms,
including the price, that are at least as favorable to the Plan
as they would be in an arm's-length transaction with an unrelated
party;
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- the rights and interests evidenced by the securities acquired by
the Plan are not subordinated to the rights and interests
evidenced by other securities of the issuer, unless the issuer
holds only certain types of assets, such as mortgage loans
secured by real property (a "Designated Transaction");
- the securities 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 (four, in a Designated Transaction)
from any of S&P, Moody's or Fitch;
- The sum of all payments made to the underwriter in connection
with the distribution of the securities represents not more than
reasonable compensation for underwriting the securities. The sum
of all payments made to and retained by the seller for the sale
of those obligations to the issuer represents not more than the
fair market value of the obligations. The sum of all payments
made to and retained by any servicer represents not more than
reasonable compensation for the servicer's services under the
related servicing agreement and reimbursement of the servicer's
reasonable expenses in connection therewith;
- The trustee must not be an affiliate of any other member of the
Restricted Group;
- The Plan investing in the securities is an accredited investor as
defined in Rule 501(a)(1) of Regulation D under the Securities
Act; and
- For certain types of issuers, the documents establishing the
issuer and governing the transaction must contain certain
provisions intended to protect the assets of the issuer from
creditors of the sponsor.
The issuer also must meet the following requirements:
- the investment pool must consist solely of assets of the type
which have been included in other investment pools;
- securities in the other investment pools must have been rated in
one of the three highest rating categories (four, in a Designated
Transaction) of a rating agency for at least one year prior to
the Plan's acquisition of securities; and
- securities evidencing interests in the other investment pools
must have been purchased by investors other than Plans for at
least one year prior to any Plan's acquisition of securities.
The Underwriter Exemptions provide exemptive relief to some
mortgage-backed and asset-backed securities transactions that use
pre-funding accounts and that otherwise meet the requirements of the
Underwriter Exemptions. Mortgage loans or other secured receivables
(the "obligations") supporting payments to securityholders, and having
a value equal to no more than twenty-five percent (25%) of the total
principal amount of the securities being offered by the issuer, may be
transferred to the issuer within a 90-day or three-month pre-funding
period following the closing date, instead of being required to
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be either identified or transferred on or before the closing date. The
relief is available when the following conditions are met:
(1) The ratio of the amount allocated to the
pre-funding account to the total principal amount of the
securities being offered must not exceed twenty-five percent
(25%).
(2) All obligations transferred after the closing
date (the "additional obligations") must meet the same terms
and conditions for eligibility as the original obligations
used to create the issuer, which terms and conditions have
been approved by a rating agency.
(3) The transfer of additional obligations to the
issuer during the pre-funding period must not result in the
securities to be covered by the Underwriter Exemption
receiving a lower credit rating from a rating agency upon
termination of the pre-funding period than the rating that was
obtained at the time of the initial issuance of the securities
by the issuer.
(4) Solely as a result of the use of pre-funding, the
weighted average annual percentage interest rate for all of
the obligations in the investment pool at the end of the
pre-funding period must not be more than 100 basis points
lower than the average interest rate for the obligations
transferred to the investment pool on the closing date.
(5) In order to insure that the characteristics of
the additional obligations are substantially similar to those
of the original obligations which were transferred to the
issuer:
- the characteristics of the additional
obligations must be monitored by an
insurer or other credit support provider
that is independent of the depositor; or
- an independent accountant retained by
the depositor must provide the depositor
with a letter, with copies provided to
each rating agency rating the
securities, the related underwriter and
the related trustee, stating whether or
not the characteristics of the
additional obligations conform to the
characteristics described in the related
prospectus, prospectus supplement, or
pooling and servicing agreement. In
preparing the letter, the independent
accountant must use the same type of
procedures as were applicable to the
obligations transferred to the issuer as
of the closing date.
(6) The pre-funding period must end no later than
three months or 90 days after the closing date or earlier in
some cases if the pre-funding account falls below the minimum
level specified in the pooling and servicing agreement or an
Event of Default occurs.
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(7) Amounts transferred to any pre-funding account
and capitalized interest account used in connection with the
pre-funding may be invested only in permitted investments.
(8) The related prospectus or prospectus supplement
must describe:
- any pre-funding account and capitalized
interest account used in connection with
a pre-funding account;
- the duration of the pre-funding period;
- the percentage or dollar value of the
amount allocated to the pre-funding
account for the issuer; and
- that the amounts remaining in the
pre-funding account at the end of the
pre-funding period will be remitted to
securityholders as repayments of
principal.
(9) The related pooling and servicing agreement or
trust agreement must describe the permitted investments for
the pre-funding account and capitalized interest account and,
if not disclosed in the related prospectus or prospectus
supplement, the terms and conditions for eligibility of
additional obligations.
Moreover, the Underwriter Exemptions provide relief from
self-dealing/conflict of interest prohibited transactions that may occur when
the Plan fiduciary causes a Plan to acquire securities of an issuer holding
receivables as to which the fiduciary or its affiliates is an obligor provided
that, among other requirements:
- in the case of an acquisition in connection with the initial
issuance of securities, at least fifty (50) percent of each class
of securities in which Plans have invested is acquired by persons
independent of the Restricted Group and at least fifty (50)
percent of the aggregate interest in the trust is acquired by
persons independent of the Restricted Group;
- the fiduciary or affiliate is not an obligor with respect to more
than five (5) percent of the fair market value of the obligations
contained in the investment pool;
- a Plan's investment in securities does not exceed twenty-five
(25) percent of all of the securities outstanding after the
acquisition; and
- immediately after the acquisition, no more than twenty-five (25)
percent of the assets of any Plan for which the person is a
fiduciary are invested in securities representing an interest in
one or more issuers containing assets sold or serviced by the
same entity.
This relief from self dealing/conflict of interest prohibited transactions is
not available for Plans sponsored by the seller, the underwriters of the
securities, any trustee, any servicer, any insurer
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of the issuer, any obligor with respect to obligations included in an investment
pool constituting more than five (5) percent of the aggregate unamortized
principal balance of the assets in the investment pool, or any affiliate of
these parties (the "Restricted Group").
The rating of a security may change. If the rating of a security
declines below the lowest permitted rating, the security will no longer be
eligible for relief under the Underwriter Exemptions, and consequently may not
be purchased by or sold to a Plan (although a Plan that had purchased the
security when it had a permitted rating would not be required by the Underwriter
Exemptions to dispose of it).
We suggest that prospective Plan investors consult with their legal
advisors concerning the impact of ERISA and the Code, the potential application
of the Underwriter Exemptions to the purchase and holding of the securities and
the potential consequences in their specific circumstances, and the effect of
the Plan Asset Regulations prior to making an investment in the securities.
Moreover, each Plan fiduciary should read carefully the prospectus supplement
relating to the securities it is considering acquiring, and should determine
whether under the general fiduciary standards of investment procedure and
diversification an investment in the securities is appropriate for the Plan,
taking into account the overall investment policy of the Plan and the
composition of the Plan's investment portfolio.
LEGAL INVESTMENT
If the prospectus supplement specifies that the securities will not
constitute mortgage-related securities under the Secondary Mortgage Market
Enhancement Act of 1984, we suggest that investors whose investment authority is
subject to legal restrictions consult their own legal advisors to determine
whether and to what extent the securities constitute legal investments for them.
RATINGS
It will be a requirement for issuance of any series that the securities
offered by this prospectus and the prospectus supplement be rated by at least
one rating agency in one of its four highest applicable rating categories. The
rating or ratings applicable to offered securities of each series will be as set
forth in the prospectus supplement. A securities rating should be evaluated
independently of similar ratings on different types of securities. A securities
rating does not address the effect that the rate of prepayments on loans or
underlying loans, as applicable, for a series may have on the yield to investors
in the securities of the series.
PLAN OF DISTRIBUTION
The depositor may offer each series of securities through one or more
underwriters that may be designated at the time of each offering of the
securities. The prospectus supplement will set forth the specific terms of the
offering of the series of securities and of each class within the series, the
names of the underwriters, the purchase price of the securities, the proceeds to
the
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depositor from the sale, any securities exchange on which the securities may be
listed, and, if applicable, the initial public offering prices, the discounts
and commissions to the underwriters and any discounts and concessions allowed or
reallowed to some dealers. The place and time of delivery of each series of
securities will also be set forth in the prospectus supplement relating to the
series.
The underwriters involved in the offering of a series of securities may
include Fleet Securities, Inc., an affiliate of the depositor and the Bank, and
may include other affiliates of the depositor and of the Bank.
This prospectus, together with the accompanying prospectus supplement,
may be used by Fleet Securities, Inc. or another affiliate of the Bank in
connection with offers and sales of an indeterminate amount of the securities in
market-making transactions. In these transactions, Fleet Securities, Inc. or
another affiliate may act as a principal or an agent and the sales will be at
negotiated prices related to prevailing market prices at the time of the sale.
LEGAL MATTERS
As specified in the prospectus supplement, legal matters in connection
with the securities will be passed upon for the depositor by Brown & Wood LLP,
New York, New York.
AVAILABLE INFORMATION
The depositor is subject to the informational requirements of the
Exchange Act and accordingly files reports and other information with the SEC.
The reports and other information can be inspected and copied at the public
reference facilities maintained by the SEC at 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at its Regional Offices located as follows:
- Midwest Regional Office, Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661; and
- Northeast Regional Office, 7 World Trade Center, Suite 1300, New
York, New York 10048.
Copies of the material can also be obtained from the Public Reference
Section of the SEC, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates. In addition, the SEC maintains a Web site at
http://www.sec.gov containing reports, proxy and information statements and
other information regarding registrants, including the depositor, that file
electronically with the SEC.
Copies of the registration statement of which this prospectus forms a
part and the exhibits are on file at the offices of the SEC in Washington, D.C.
Copies may be obtained at rates prescribed by the SEC upon request to the SEC,
and may be inspected, without charge, at the offices of the SEC, 450 Fifth
Street, N.W., Washington, D.C.
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INCORPORATION OF DOCUMENTS BY REFERENCE
All documents subsequently filed by or on behalf of the trust referred
to in the accompanying prospectus supplement with the SEC under 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
shall 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 shall 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 prospectus supplement or in any other subsequently filed
document which also is or is deemed to be incorporated by reference modifies or
replaces that statement. Any statement so modified or superseded shall not be
deemed, except as so modified or superseded, to constitute a part of this
prospectus.
The depositor on behalf of any trust will provide without charge to
each person to whom this prospectus is delivered, on the written or oral request
of the person, a copy of any or all of the documents referred to in the previous
paragraph that have been or may be incorporated by reference in this prospectus
but not including exhibits to the information that is incorporated by reference
unless the exhibits are specifically incorporated by reference into the
information that this prospectus incorporates. Requests should be directed to
Fleet Home Equity Loan Corporation, 100 Federal Street, Boston, Massachusetts
02110, telephone number (617) 434-2200.
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GLOSSARY OF DEFINED TERMS
ADDITIONAL OBLIGATIONS: means all Obligations transferred after the closing
date.
ACT: means the Home Ownership and Equity Protection Act of 1994.
AGREEMENT: means, with respect to a series of certificates, the pooling and
servicing agreement or trust agreement, and with respect to a series of notes,
the indenture and the servicing agreement, as the context requires.
BANK: means Fleet National Bank.
CERCLA: means the Comprehensive Environmental Response, Compensation and
Liability Act of 1980.
CLG: means the Consumer Lending Group, a branch of the Bank.
CLTV: means combined loan-to-value ratio.
CODE: means the Internal Revenue Code of 1986.
DESIGNATED TRANSACTION: as defined in the Underwriter Exemptions, means a
securitization transaction in which the assets of the issuer consists of certain
fully secured obligations such as mortgage loans secured by residential real
property.
ELIGIBLE CORPORATION: means a domestic C corporation that is fully subject to
corporate income tax.
ELIGIBLE INVESTMENTS: means, as is acceptable to the rating agency, among other
investments:
- obligations of the United States and government agencies,
- federal funds,
- certificates of deposit,
- commercial paper,
- demand and time deposits and banker's acceptances,
- repurchase agreements of United States government securities, and
- guaranteed investment contracts.
FASIT QUALIFICATION TEST: means a test to determine eligibility of a trust, or
one or more designated pools of assets held by a trust, for FASIT status, under
which substantially all of the assets of the trust or the designated pool must
consist of "permitted assets" as of the close of the third month beginning after
the closing date and at all times after that date.
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<PAGE> 198
FICO SCORE: means the score derived from proprietary scoring models developed by
Fair, Isaac and Co., Inc.
GARN-ST. GERMAIN ACT: means the Garn-St. Germain Depository Institutions Act of
1982.
HELOC: means a home equity line of credit.
HOUSING ACT: means the National Housing Act of 1934.
LOANS: means mortgage loans, which may be closed-end home equity loans, HELOCs,
mortgage loans the proceeds of which have been applied to the purchase of
mortgaged property, and home improvement contracts.
MORTGAGED PROPERTIES: means property which secures repayment of the loans.
NEW ARRANGEMENT: means, if FASIT status is lost, the entity classification of
the former FASIT.
OBLIGATIONS: means mortgage loans or other secured receivables.
PARTIES IN INTEREST: means persons who are parties in interest or disqualified
persons with respect to Plans.
PLAN ASSETS REGULATION: means the final regulation issued by the DOL, 29 C.F.R.
Section 2510.3-101, containing rules for determining what constitutes the assets
of a Plan.
PLANS: means employee benefit plans subject to ERISA and plans and other
arrangements subject to Section 4975 of the Code.
POOLED SECURITIES: means the mortgage or asset backed securities included as
part of the trust assets.
PTCE: means a Prohibited Transaction Class Exemption.
RCRA: means the Resource Conservation and Recovery Act.
RDG: means the Retail Distribution Group, a branch of the Bank.
RESTRICTED GROUP: means Plans sponsored by the seller, the underwriters of the
securities, any trustee, any servicer, any insurer or any obligor with respect
to obligations included in a trust constituting more than five (5) percent of
the aggregate unamortized principal balance of the assets in a trust, or any
affiliate of the parties, to which the Underwriter Exemption does not apply.
SECURED CREDITOR EXCLUSION: means, with respect to CERCLA, the exclusion from
the definition of "owner or operator" of a secured creditor who holds indicia of
ownership primarily to protect its security interest.
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TITLE V: means Title V of the Depository Institutions Deregulation and Monetary
Control Act of 1980.
UNDERWRITER EXEMPTIONS: means the individual administrative exemptions, granted
by the DOL to some underwriters, from some of the prohibited transaction rules
of ERISA and the related excise tax provisions of Section 4975 of the Code with
respect to the initial purchase, the holding and the subsequent resale by Plans
of certificates in pass-through trusts that consist of receivables, loans and
other obligations that meet the conditions and requirements of the Underwriter
Exemptions.
U.S. PERSON: means a citizen or resident of the United States, a corporation,
partnership or other entity created or organized in or under the laws of the
United States, any state of the United States or the District of Columbia, other
than a partnership that is not treated as a United States person under any
applicable Treasury regulation , or an estate whose income is subject to U.S.
federal income tax regardless of its source of income, 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.
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<PAGE> 200
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated expenses in connection
with the issuance and distribution of the Certificates being registered under
this Registration Statement, other than underwriting discounts and commissions:
SEC Registration Fee ............................................ $ [ ]
Printing and Engraving .......................................... $ [ ]
Legal Fees and Expenses ......................................... $ [ ]
Trustee Fees and Expenses ....................................... $ [ ]
Accounting Fees & Expenses ...................................... $ [ ]
Blue Sky Fees & Expenses ........................................ $ [ ]
Rating Agency Fees .............................................. $ [ ]
Miscellaneous ................................................... $ [ ]
============
Total ........................................................... $ [ ]
============
--------------------
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Registrant's Articles of Incorporation and By-Laws provide for
indemnification of directors and officers of the Registrant to the fullest
extent permitted by Delaware law.
ITEM 16. EXHIBITS.
1.1 Form of Underwriting Agreement.*
3.1 Articles of Incorporation of the Registrant.
3.2 Bylaws of the Registrant.
4.1 Form of Pooling and Servicing Agreement.*
4.2 Form of Servicing Agreement.*
4.3 Form of Trust Agreement.*
4.4 Form of Indenture.*
5.1(a) Opinion of Brown & Wood LLP as to legality of the Securities
(including consent of such firm).*
5.1(b) Opinion of Richards, Layton & Finger, PA as to legality of the
Securities according to Delaware state law (including consent
of such firm).*
8.1 Opinion of Brown & Wood LLP as to certain tax matters
(including consent of such firm).*
10.1 Form of Mortgage Loan Purchase Agreement.*
23.1(a) Consent of Brown & Wood LLP (included in exhibits 5.1(a) and
8.1 hereof).*
23.1(b) Consent of Richards, Layton & Finger, PA (included in exhibit
5.1(b) hereof).*
24.1 Powers of Attorney (included on signature page).
-------------
* To be filed by amendment.
ITEM 17. UNDERTAKINGS.
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<PAGE> 201
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section
10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the registration statement
(or the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental
change in the information set forth in the registration
statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar
value of securities offered would not exceed that which was
registered) and any deviation from the low or high and of the
estimated maximum offering range may be reflected in the form
of prospectus filed with the Commission pursuant to Rule
424(b) if, in the aggregate, the changes in volume and price
represent no more than 20 percent change in the maximum
aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration
statement; and
(iii) To include any material information with
respect to the plan of distribution not previously disclosed
in the registration statement or any material change of such
information in the registration statement.
(2) That, for the purpose of determining any liability under
the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at
the termination of the offering.
(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(f) The undersigned registrant hereby undertakes to provide to the
underwriter at the closing specified in the underwriting agreements,
certificates in such denominations and registered in such names as required by
the underwriter to permit prompt delivery to each purchaser.
(h) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question of whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
(j) The undersigned Registrant hereby undertakes to file an application
for the purpose of determining the eligibility of the trustee to act under
subsection (a) of Section 310 of the Trust Indenture Act in accordance with the
rules and regulations prescribed by the Commission under Section 305(b)(2) of
the Act.
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<PAGE> 202
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that: (i) it
meets all of the requirements for filing on Form S-3 and (ii) the security
rating requirement of Transaction Exemption B.5 will be met at the time of sale
of the securities. The Registrant has duly caused this Registration Statement to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Boston, State of Massachusetts, on the 12th day of January, 2001.
FLEET HOME EQUITY LOAN CORPORATION
By: /s/ John Rodehorst
--------------------------------
Name: John Rodehorst
Title: Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned Directors
and Officers of Fleet Home Equity Loan Corporation, a Delaware corporation,
hereby constitute and appoint Jeffrey A. Lipson, with full power of substitution
and resubstitution, their true and lawful attorney and agent to sign the names
of the undersigned Directors and Officers in the capacities indicated below to
the registration statement to which this Power of Attorney is attached as an
exhibit, and all amendments (including post-effective amendments) and
supplements thereto, and all instruments or documents filed as a part thereof or
in connection therewith, and to file the same, with all exhibits thereto, and
all other instruments or documents in connection therewith, with the Securities
and Exchange Commission; and each of the undersigned hereby ratifies and
confirms all that said attorney, agent or any of them shall do or cause to be
done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1933,
this Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ John Rodehorst Chairman President, Chief Executive January 12, 2001
------------------ Officer and Director
John Rodehorst
/s/ Jeffrey A. Lipson Principal Financial Officer, Vice January 12, 2001
--------------------- President and Director
Jeffrey A. Lipson
/s/ Nancy O'Connor Treasurer, Principal Accounting January 12, 2001
------------------ Officer and Director
Nancy O'Connor
/s/ Sherri Jonas Director January 12, 2001
----------------
Sherri Jonas
/s/ Dwight Jenkins Director January 12, 2001
------------------
Dwight Jenkins
</TABLE>
II-3
<PAGE> 203
EXHIBIT INDEX
=============
Exhibit
No. Description of Exhibit
------- ----------------------
1.1 Form of Underwriting Agreement.*
3.1 Articles of Incorporation of the Registrant.
3.2 Bylaws of the Registrant.
4.1 Form of Pooling and Servicing Agreement.*
4.2 Form of Servicing Agreement.*
4.3 Form of Trust Agreement.*
4.4 Form of Indenture.*
5.1(a) Opinion of Brown & Wood LLP as to legality of the Securities
(including consent of such firm).*
5.1(b) Opinion of Richards, Layton & Finger, PA as to legality of the
Securities according to Delaware state law (including consent
of such firm).*
8.1 Opinion of Brown & Wood LLP as to certain tax matters (including
consent of such firm).*
10.1 Form of Mortgage Loan Purchase Agreement.*
23.1(a) Consent of Brown & Wood LLP (included in exhibits 5.1(a) and
8.1 hereof).*
23.1(b) Consent of Richards, Layton & Finger, PA (included in exhibit
5.1(b) hereof).*
24.1 Powers of Attorney (included on signature page).
-------------
* To be filed by amendment.
