<PAGE> 1
Filed Pursuant to Rule 424(b)(5)
Registration No. 333-35275
PROSPECTUS SUPPLEMENT
(To Prospectus dated September 26, 1997)
$165,590,000(APPROXIMATE)
PROVIDENT BANK HOME EQUITY LOAN TRUST 1997-A
REVOLVING HOME EQUITY LOAN ASSET-BACKED CERTIFICATES, SERIES 1997-A
-------------------------
THE PROVIDENT BANK,
AS SPONSOR AND SERVICER
-------------------------
Each Revolving Home Equity Loan Asset-Backed Certificate, Series 1997-A
(collectively, the "Certificates") will represent an undivided interest in the
Provident Bank Home Equity Loan Trust 1997-A (the "Trust") to be formed pursuant
to a Pooling and Servicing Agreement among The Provident Bank ("Provident"), as
Sponsor and Servicer, and Bankers Trust Company of California, N.A., as Trustee.
The property of the Trust will include a pool of adjustable rate home equity
revolving credit line loans (sometimes referred to herein as "home equity
loans") made or to be made in the future (the "Mortgage Loans") under certain
home equity revolving credit line loan agreements. The Mortgage Loans are
secured by first, second and third mortgages primarily on one- to four-family
residential properties.
The aggregate undivided interest in the Trust represented by the
Certificates will, as of September 1, 1997 (the "Cut-Off Date"), represent
approximately 98% of the outstanding principal balances of the Mortgage Loans.
The remaining undivided interest in the Trust not represented by the
Certificates (the "Transferor Interest") will initially be equal to
$3,379,396.33, which as of the Cut-Off Date is approximately 2% of the
outstanding principal balances of the Mortgage Loans. The Transferor Interest
will be initially retained by Provident. Only the Certificates are offered
hereby.
Distributions of principal and interest on the Certificates will be made on
the twenty-fifth day of each month or, if such date is not a Business Day, then
on the succeeding Business Day (each, a "Distribution Date"), commencing on
October 27, 1997. On each Distribution Date, holders of the Certificates will be
entitled to receive, from and to the limited extent of funds available in the
Distribution Account (as defined herein), distributions with respect to interest
and principal calculated as set forth herein. The Certificates are not
guaranteed by Provident or any affiliate thereof. However, the Certificates will
be unconditionally and irrevocably guaranteed as to the payment of the
Guaranteed Distributions (as defined herein) on each Distribution Date pursuant
to the terms of a certificate guaranty insurance policy (the "Policy") to be
issued by MBIA Insurance Corporation.
(LOGO)
-------------------------
There is currently no market for the Certificates offered hereby and there
can be no assurance that such a market will develop or if it does develop that
it will continue. See "RISK FACTORS" herein and in the Prospectus.
-------------------------
PROSPECTIVE INVESTORS SHOULD REVIEW THE INFORMATION SET FORTH UNDER "RISK
FACTORS" BEGINNING ON PAGE S-13 HEREIN AND ON PAGE 12 IN THE ACCOMPANYING
PROSPECTUS.
-------------------------
THE CERTIFICATES REPRESENT INTERESTS IN THE TRUST ONLY AND DO NOT REPRESENT
INTERESTS IN OR OBLIGATIONS OF PROVIDENT, THE TRUSTEE OR ANY AFFILIATE THEREOF,
EXCEPT TO THE EXTENT PROVIDED HEREIN. NEITHER THE CERTIFICATES NOR THE MORTGAGE
LOANS ARE INSURED OR GUARANTEED BY ANY GOVERNMENTAL AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
===========================================================================================================
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT (1) PROVIDENT (2)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Certificate........................... 100.00% 0.35% 99.65%
- -----------------------------------------------------------------------------------------------------------
Total..................................... $165,590,000 $579,565 $165,010,435
===========================================================================================================
</TABLE>
(1) Provident has agreed to indemnify the Underwriter against certain
liabilities, including liabilities under the Securities Act of 1933. Certain
expenses of the Underwriter incurred in connection with this offering will
be paid by Provident.
(2) Before deducting expenses, estimated to be $350,000.
-------------------------
The Certificates are offered subject to prior sale and subject to the
Underwriter's right to reject orders in whole or in part. It is expected that
delivery of the Certificates will be made in book-entry form only through the
facilities of The Depository Trust Company, Cedel Bank, societe anonyme and the
Euroclear System on or about September 30, 1997 (the "Closing Date"). The
Certificates will be offered in Europe and the United States of America.
-------------------------
LEHMAN BROTHERS
September 26, 1997
<PAGE> 2
Certain persons participating in this offering may engage in transactions
that stabilize, maintain or otherwise affect the price of the Certificates
offered hereby. Such transactions may include stabilizing and the purchase of
Certificates to cover syndicate short positions. For a description of these
activities, see "UNDERWRITING" herein.
UNTIL NINETY DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT, ALL DEALERS
EFFECTING TRANSACTIONS IN THE CERTIFICATES, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS SUPPLEMENT AND PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS ACTING AS UNDERWRITERS TO
DELIVER A PROSPECTUS SUPPLEMENT AND PROSPECTUS WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
-------------------------
The Certificates offered hereby constitute part of a separate series of
Revolving Home Equity Loan Asset-Backed Certificates being offered by The
Provident Bank from time to time pursuant to its Prospectus dated September 26,
1997. This Prospectus Supplement does not contain complete information about the
offering of the Certificates. Additional information is contained in the
Prospectus and investors are urged to read both this Prospectus Supplement and
the Prospectus in full. Sales of the Certificates may not be consummated unless
the purchaser has received both this Prospectus Supplement and the Prospectus.
S-2
<PAGE> 3
SUMMARY
The following summary of certain pertinent information is qualified in its
entirety by reference to the detailed information appearing elsewhere in this
Prospectus Supplement and the accompanying Prospectus. Certain capitalized terms
used in the Summary are defined elsewhere in the Prospectus Supplement or in the
Prospectus. Reference is made to the Index of Defined Terms herein and the
Glossary of Terms in the Prospectus for the definitions of certain capitalized
terms.
Trust...................... Provident Bank Home Equity Loan Trust 1997-A (the
"Trust") will be formed pursuant to a pooling and
servicing agreement (the "Agreement") to be dated
as of September 1, 1997 (the "Cut-Off Date")
between The Provident Bank ("Provident"), as
sponsor and servicer (together with any successor
in such capacity, the "Sponsor" and the "Servicer",
respectively) and Bankers Trust Company of
California, N.A., as trustee (the "Trustee"). The
property of the Trust will include: a pool of
adjustable rate home equity revolving credit line
loans (the "Mortgage Loans") made or to be made
under certain home equity revolving credit line
loan agreements (the "Credit Line Agreements") and
secured by either first, second or third mortgages
primarily on one-to four-family residential
properties (the "Mortgaged Properties") and the
related Mortgage Files; the collections in respect
of the Mortgage Loans received on or after the
Cut-Off Date; property that secured a Mortgage Loan
which has been acquired by foreclosure or deed in
lieu of foreclosure; an irrevocable and
unconditional certificate guaranty insurance policy
(the "Policy"); rights under certain hazard
insurance policies covering the Mortgaged
Properties; amounts on deposit in the Collection
Account and the Distribution Account; and certain
other property, as described more fully herein.
The Trust property will include the unpaid
principal balance of each Mortgage Loan as of the
Cut-Off Date (the "Cut-Off Date Principal Balance")
plus any additions thereto as a result of new
advances made pursuant to the applicable Credit
Line Agreement (the "Additional Balances") during
the life of the Trust. With respect to any date,
the "Pool Balance" will be equal to the aggregate
of the Principal Balances of all Mortgage Loans as
of such date. The aggregate Cut-Off Date Principal
Balance of the Mortgage Loans is $168,969,816.28
(the "Cut-Off Date Pool Balance"). The "Principal
Balance" of a Mortgage Loan (other than a
Liquidated Mortgage Loan) on any day is equal to
its Cut-Off Date Principal Balance, plus (i) any
Additional Balances in respect of such Mortgage
Loan, minus (ii) all collections credited against
the Principal Balance of such Mortgage Loan in
accordance with the related Credit Line Agreement
prior to such day. The Principal Balance of a
Liquidated Mortgage Loan (as defined herein) after
final recovery of related Liquidation Proceeds (as
defined herein) shall be zero.
Securities Offered......... Each of the Revolving Home Equity Loan Asset-Backed
Certificates, Series 1997-A offered hereby (the
"Certificates") represents an undivided interest in
the Trust. Each Certificate represents the right to
receive payments of interest at the variable rate
described below (the "Certificate Rate"), payable
monthly, and payments of principal at such time and
to the extent provided below. The aggregate
undivided interest in the Trust represented by the
Certificates as of the Closing Date will equal
$165,590,419.95 (the "Original Invested Amount"),
which represents approximately 98% of the Cut-Off
Date Pool Balance. The "Origi-
S-3
<PAGE> 4
nal Certificate Principal Balance" will equal
$165,590,000 (subject to a permitted variance in
the aggregate of plus or minus 5%). Following the
Closing Date, the "Invested Amount" with respect to
any date will be an amount equal to the Original
Invested Amount minus (i) the amount of Investor
Principal Collections (as defined herein)
previously distributed to Certificateholders, and
minus (ii) an amount equal to the product of the
Investor Floating Allocation Percentage and the
Liquidation Loss Amounts (each as defined herein).
The Transferor will own the remaining undivided
interest (the "Transferor Interest") in the
Mortgage Loans, which is equal to the Pool Balance
minus the Invested Amount and will initially equal
approximately 2% of the Cut-Off Date Pool Balance.
The "Transferor" as of any date is the owner of the
Transferor Interest, which will initially be
Provident.
The Certificates will be issued pursuant to the
Agreement. The principal amount of the Certificates
(the "Certificate Principal Balance") on any date
is equal to the Original Certificate Principal
Balance minus the aggregate of amounts actually
distributed as principal to the Certificateholders.
See "DESCRIPTION OF THE CERTIFICATES" herein.
Removal of Certain Mortgage
Loans; Additional
Balances................. Subject to certain conditions, on any Distribution
Date the Transferor may, but shall not be obligated
to, remove from the Trust certain Mortgage Loans
without notice to the Certificateholders. The
Transferor is permitted to randomly designate the
Mortgage Loans to be removed. Mortgage Loans so
designated will only be removed upon satisfaction
of certain conditions specified in the Agreement,
including: (i) the Transferor Interest as of the
Transfer Date (as defined herein) (after giving
effect to such removal) exceeds the Minimum
Transferor Interest (as defined below); (ii) the
Transferor shall have delivered to the Trustee and
the Certificate Insurer a "Mortgage Loan Schedule"
containing a list of all Mortgage Loans remaining
in the Trust after such removal; (iii) the
Transferor shall represent and warrant that no
selection procedures which are adverse to the
interests of the Certificateholders or the
Certificate Insurer were used by the Transferor in
selecting such Mortgage Loans; (iv) in connection
with each retransfer of Mortgage Loans, the Rating
Agencies (as defined herein) shall have been
notified of the proposed transfer and prior to the
Transfer Date the Rating Agencies shall have
notified the Transferor and the Certificate Insurer
in writing that such transfer will not result in a
reduction or withdrawal of the ratings assigned to
the Certificates without regard to the Policy; and
(v) the Transferor shall have delivered to the
Trustee and the Certificate Insurer an officer's
certificate confirming the satisfaction of the
conditions set forth in clauses (i) through (iii)
above. See "DESCRIPTION OF THE CERTIFICATES --
Optional Transfers of Mortgage Loans to the
Transferor."
The "Minimum Transferor Interest" as of any date of
determination is an amount equal to the lesser of
(a) 5% of the Pool Balance on such date and (b) the
Transferor Interest as of the Closing Date.
During the term of the Trust, all Additional
Balances will be transferred to and become property
of the Trust. The Pool Balance at any time will
generally fluctuate from day to day because the
amount of Additional Balances and the amount of
principal payments with respect to the Mortgage
Loans will usually differ from day to day. Because
the
S-4
<PAGE> 5
Transferor Interest is equal to the Pool Balance
minus the Invested Amount, the amount of the
Transferor Interest will fluctuate from day to day
as draws are made with respect to the Mortgage
Loans and as Principal Collections are received.
The Mortgage Loans......... The Cut-Off Date Principal Balance of the Mortgage
Loans is $168,969,816.28. Certain information
concerning the Mortgage Loans is not readily
available and accordingly some of the statistical
information set forth herein is based upon a
"Sample Pool" (as defined herein). See "DESCRIPTION
OF THE MORTGAGE LOANS -- Sample Pool Statistics."
Unless indicated, all statistical information
concerning the Mortgage Loans is based upon all of
the Mortgage Loans included in the Trust. Weighted
averages described below are weighted on the basis
of the Cut-Off Date Principal Balance of all of the
Mortgage Loans or of the Sample Pool Mortgage
Loans, as the context requires. The Mortgage Loans
are secured by first, second or third mortgages on
Mortgaged Properties located in 3 states (based
upon the Sample Pool). Approximately 99.21%, 0.72%
and 0.07% of the Sample Pool Mortgage Loans are
secured by Mortgaged Properties located in the
states of Ohio, Kentucky and New Hampshire,
respectively. The weighted average Combined
Loan-to-Value Ratio of the Sample Pool Mortgage
Loans was 69.34% as of the Cut-Off Date. The
"Combined Loan-to-Value Ratio" or "CLTV" of each
Mortgage Loan is the ratio, expressed as a
percentage, of (a) the sum of (i) the greater of
the Credit Limit and the current balance as of the
Cut-Off Date and (ii) the principal balance of any
senior mortgage loan as of the origination of such
Mortgage Loan, over (b) the value (based on an
appraisal or other acceptable valuation method) for
the related Mortgaged Property determined at the
origination of such Mortgage Loan. Interest accrues
on each Mortgage Loan, payable monthly, on the
daily outstanding Principal Balance thereof for
each billing cycle at a variable rate per annum
(the "Loan Rate") equal at any time to the sum of
the applicable index, as described herein under
"DESCRIPTION OF THE MORTGAGE LOANS -- Mortgage Loan
Terms," as of the first day of each related billing
cycle plus a fixed percentage amount (the "Gross
Margin") specified in the related Credit Line
Agreement, computed on the basis of a 365 day year
times actual days elapsed. The Loan Rate is
adjusted quarterly based upon the level of the
index on the last day of each March, June,
September or December preceding the first day of a
billing cycle (each such date, an "Adjustment
Date"). The Gross Margins for the Mortgage Loans as
of the Cut-Off Date ranged from -1.01% to 3.50%.
Substantially all of the Mortgage Loans are subject
to a maximum Loan Rate of 19.00% per annum (each, a
"Maximum Rate"). The Mortgage Loans have a minimum
Loan Rate equal to the greater of zero and the
Gross Margin. No Mortgage Loan is subject to a
periodic rate cap. As of the Cut-Off Date, the Loan
Rates on the Mortgage Loans ranged from 6.49% per
annum to 12.00% per annum and the weighted average
Loan Rate was 9.23% per annum. The minimum
Principal Balance of any Mortgage Loan as of the
Cut-Off Date was $0.02, the maximum Principal
Balance of any Mortgage Loan as of the Cut-Off Date
was $600,000.00, and the average Principal Balance
of any Mortgage Loan as of the Cut-Off Date was
$24,305.21. As of the Cut-Off Date, the Credit
Limit Utilization Rate ranged from 0.00 % to
103.09%, and the average Credit Limit
S-5
<PAGE> 6
Utilization Rate (as defined herein) was 58.14% per
annum. Approximately 21.08% of the Sample Pool
Mortgage Loans were secured by first mortgages on
the related Mortgaged Property, 68.99% were secured
by second mortgages and 6.47% were secured by third
mortgages. As of the Cut-Off Date, the Mortgage
Loans had loan ages ranging from 0 to 132 months
and the weighted average loan age was 44 months.
See "DESCRIPTION OF THE MORTGAGE LOANS" herein.
Denominations.............. Certificates will be offered for purchase in
minimum denominations of $1,000 and multiples of $1
in excess thereof. The interest in the Trust
evidenced by a Certificate (the "Percentage
Interest") will be equal to the percentage derived
by dividing the denomination of such Certificate by
the Original Certificate Principal Balance.
Registration of
Certificates............... The Certificates will initially be issued in
book-entry form. Persons acquiring beneficial
ownership interests in the Certificates
("Certificate Owners") may elect to hold their
Certificate interests through The Depository Trust
Company ("DTC"), in the United States, or Cedel
Bank, societe anonyme ("Cedel") or the Euroclear
System ("Euroclear"), in Europe. Transfers within
DTC, Cedel or Euroclear, as the case may be, will
be in accordance with the usual rules and operating
procedures of the relevant system. So long as the
Certificates are Book-Entry Certificates (as
defined herein), such Certificates will be
evidenced by one or more Certificates registered in
the name of Cede & Co. ("Cede"), as the nominee of
DTC or one of the relevant depositaries
(collectively, the "European Depositaries").
Cross-market transfers between persons holding
directly or indirectly through DTC, on the one
hand, and counterparties holding directly or
indirectly through Cedel or Euroclear, on the
other, will be effected in DTC through Citibank
N.A. ("Citibank") or The Chase Manhattan Bank
("Chase"), the relevant depositaries of Cedel or
Euroclear, respectively, and each a participating
member of DTC. The Certificates will initially be
registered in the name of Cede. The interests of
the Certificateholders will be represented by book
entries on the records of DTC and participating
members thereof. No Certificate Owner will be
entitled to receive a definitive certificate
representing such person's interest, except in the
event that Definitive Certificates (as defined
herein) are issued under the limited circumstances
described herein. All references in this Prospectus
Supplement to any Certificates reflect the rights
of Certificate Owners only as such rights may be
exercised through DTC and its participating
organizations for so long as such Certificates are
held by DTC. See "RISK FACTORS -- Book-Entry
Certificates," "DESCRIPTION OF THE CERTIFICATES --
Book-Entry Certificates" and "ANNEX I" hereto.
Provident.................. The Provident Bank ("Provident"), an Ohio banking
corporation (the "Transferor" or the "Servicer", as
applicable). The principal executive offices of
Provident are located at One East Fourth Street,
Cincinnati, Ohio 45202 (Telephone: (513) 579-2000).
See "THE PROVIDENT BANK" in the Prospectus.
Trustee.................... Bankers Trust Company of California, N.A., a
national banking association (the "Trustee"), will
act as Trustee on behalf of the Certificateholders.
S-6
<PAGE> 7
Collections................ All collections on the Mortgage Loans will
generally 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 (i) the
amounts collected during the related Collection
Period, including the portion of Net Liquidation
Proceeds (as defined below) allocated to interest
pursuant to the terms of the Credit Line Agreements
less (ii) Servicing Fees for the related Collection
Period.
As to any Distribution Date, "Principal
Collections" will be equal to the sum of (i) the
amounts collected during the related Collection
Period, including the portion of Net Liquidation
Proceeds allocated to principal pursuant to the
terms of the Credit Line Agreements and (ii) any
Transfer Deposit Amounts (as defined herein).
"Net Liquidation Proceeds" with respect to a
Mortgage Loan are the Liquidation Proceeds
(excluding amounts drawn on the Policy) received in
connection with the liquidation of any Mortgage
Loan, whether through trustee's sale, foreclosure
sale or otherwise, reduced by related expenses, but
not including the portion, if any, of such amount
that exceeds the sum of (i) the Principal Balance
of the Mortgage Loan plus (ii) any accrued and
unpaid interest thereon to the end of the
Collection Period during which such Mortgage Loan
became a Liquidated Mortgage Loan.
With respect to any Distribution Date, the portion
of Interest Collections allocable to the
Certificates ("Investor Interest Collections") will
equal the product of (a) Interest Collections for
such Distribution Date and (b) the Investor
Floating Allocation Percentage for such
Distribution Date. With respect to any Distribution
Date, the "Investor Floating Allocation Percentage"
is the percentage equivalent of a fraction
determined by dividing (a) the Invested Amount at
the close of business on the preceding Distribution
Date (or at the Closing Date in the case of the
first Distribution Date) by (b) the Pool Balance at
the beginning of the related Collection Period. The
remaining amount of Interest Collections will be
allocated to the Transferor Interest as more fully
described herein.
On each Distribution Date, the Investor Interest
Collections will be applied in the following order
of priority: (i) as payment to the Trustee for its
fee for services rendered pursuant to the
Agreement; (ii) as payment for the premium for the
Policy; (iii) as payment for the accrued interest
due and any overdue accrued interest (with interest
thereon) on the Certificate Principal Balance of
the Certificates; (iv) as payment for any Investor
Loss Amount (as defined herein) for such
Distribution Date; (v) as payment for any Investor
Loss Amount for a previous Distribution Date that
was not previously (a) funded by Investor Interest
Collections, (b) absorbed by the
Overcollateralization Amount, or (c) funded by
draws on the Policy; (vi) to reimburse the
Certificate Insurer for prior draws made from the
Policy (with interest thereon); (vii) to pay
principal on the Certificates until the Invested
Amount exceeds the Certificate Principal Balance by
the Required Overcollateralization Amount, each as
defined herein (such amount, if any, paid pursuant
to this clause (vii) being referred to herein as
the "Accelerated Principal Distribution Amount");
(viii) as payment to the Certificate
S-7
<PAGE> 8
Insurer for any other amounts owed to the
Certificate Insurer pursuant to the Insurance
Agreement; (ix) to the Servicer for certain amounts
that may be required to be paid pursuant to the
Agreement; and (x) to the Transferor to the extent
permitted as described herein.
Investor Interest Collections available after the
payment of interest on the Certificates may be
insufficient to cover any Investor Loss Amount. If
such insufficiency results in the Certificate
Principal Balance exceeding the Invested Amount, a
draw in an amount equal to such difference will be
made on the Policy in accordance with the terms of
the Policy.
The "Overcollateralization Amount" on any date of
determination is the amount, if any, by which the
Invested Amount exceeds the Certificate Principal
Balance on such day.
Payments to Certificateholders pursuant to clauses
(iv), (v) and (vii) will be principal payments on
the Certificates and will therefore reduce the
Certificate Principal Balance; however, payments
pursuant to clause (vii) will not reduce the
Invested Amount. The Accelerated Principal
Distribution Amount is not guaranteed by the
Policy.
"Liquidation Loss Amount" means with respect to any
Liquidated Mortgage Loan and Distribution Date, the
unrecovered Principal Balance thereof at the end of
the related Collection Period in which such
Mortgage Loan became a Liquidated Mortgage Loan,
after giving effect to the Net Liquidation Proceeds
received in connection therewith. The "Investor
Loss Amount" for any Distribution Date shall be the
product of the Investor Floating Allocation
Percentage and the aggregate of the Liquidation
Loss Amounts for such Distribution Date. See
"DESCRIPTION OF THE CERTIFICATES -- Distributions
on the Certificates."
Principal Collections will be allocated between the
Certificateholders and the Transferor ("Investor
Principal Collections" and "Transferor Principal
Collections," respectively) in accordance with
their percentage interests in the Mortgage Loans of
approximately 98% and 2%, respectively, as of the
Cut-Off Date (each, a "Fixed Allocation
Percentage"), but a lesser amount of Principal
Collections may be distributed to the
Certificateholders during the Managed Amortization
Period, as described below. The "Investor Fixed
Allocation Percentage" shall be 98%.
The Servicer will deposit Interest Collections and
Principal Collections in respect of the Mortgage
Loans in an account established for such purpose
under the Agreement (the "Collection Account"). See
"DESCRIPTION OF THE CERTIFICATES -- Payments on
Mortgage Loans; Deposits to Collection Account and
Distribution Account."
Collection Period.......... As to any Distribution Date the "Collection Period"
is the calendar month preceding the month of such
Distribution Date.
Interest................... Interest on the Certificates will be distributed
monthly on the twenty-fifth day of each month or,
if such day is not a Business Day, then the next
succeeding Business Day (each, a "Distribution
Date"), commencing on October 27, 1997, at the
Certificate Rate for the related Interest Period
(reduced by any Civil Relief Act Interest
Shortfalls for such Distribution Date). The
"Certificate Rate" for the first Interest Period is
5.83625% per annum. The "Certificate Rate" for each
Interest Period will generally equal the sum of (a)
the London Interbank Offered Rate
S-8
<PAGE> 9
for one-month Eurodollar deposits ("LIBOR")
appearing on the Telerate Screen Page 3750, as of
the second LIBOR Business Day (as defined herein)
prior to the first day of such Interest Period (or
as of two LIBOR Business Days prior to the Closing
Date, in the case of the first Interest Period) and
(b) 0.18%. Notwithstanding the foregoing, in no
event will the amount of interest required to be
distributed in respect of the Certificates on a
Distribution Date exceed the amount calculated at a
rate equal to the weighted average of the Loan
Rates (net of the Servicing Fee Rate, the fee
payable to the Trustee (expressed as a rate) and
the rate at which the premium payable to the
Certificate Insurer is calculated) weighted on the
basis of the daily balance of each Mortgage Loan
during the related billing cycle prior to the
Collection Period relating to such Distribution
Date or in the case of the first Distribution Date,
the weighted average loan rate as of the Cut-Off
Date. Interest on the Certificates in respect of
any Distribution Date will accrue from the
preceding Distribution Date (or in the case of the
first Distribution Date, from the date of the
initial issuance of the Certificates (the "Closing
Date")) through the day preceding such Distribution
Date (each such period, an "Interest Period") on
the basis of the actual number of days in the
Interest Period and a 360-day year.
Interest payments on the Certificates will be
funded from Investor Interest Collections, and from
draws on the Policy. See "DESCRIPTION OF THE
CERTIFICATES" herein.
Principal Payments from
Principal Collections.... For the period beginning on the first Distribution
Date and, unless a Rapid Amortization Event (as
defined herein) shall have earlier occurred, ending
immediately following the Distribution Date in
September 2002 (such period, the "Managed
Amortization Period"), the amount of Principal
Collections payable to Certificateholders as of
each Distribution Date during the Managed
Amortization Period will equal, to the extent funds
are available therefor, the Scheduled Principal
Collections Distribution Amount for such
Distribution Date. On any Distribution Date, the
"Scheduled Principal Collections Distribution
Amount" shall equal the lesser of (i) the Maximum
Principal Payment (as defined herein) and (ii) the
Alternative Principal Payment (as defined herein).
With respect to any Distribution Date, the "Maximum
Principal Payment" will equal the product of the
Investor Fixed Allocation Percentage and Principal
Collections for such Distribution Date. With
respect to any Distribution Date, the "Alternative
Principal Payment" will equal the amount, but not
less than zero, of Principal Collections for such
Distribution Date less the aggregate of Additional
Balances created during the related Collection
Period.
Beginning with the first Distribution Date
following the end of the Managed Amortization
Period, the amount of Principal Collections payable
to Certificateholders on each Distribution Date
will be equal to the Maximum Principal Payment. See
"DESCRIPTION OF THE CERTIFICATES -- Distributions
on the Certificates."
In addition, to the extent funds are available
therefor (including funds available under the
Policy), on the Distribution Date in September
2027, Certificateholders will be entitled to
receive as payment of principal an amount equal to
the outstanding Certificate Principal Balance.
S-9
<PAGE> 10
Distributions of Principal Collections based upon
the Investor Fixed Allocation Percentage may result
in distributions of principal to Certificateholders
in amounts that are greater relative to the
declining Pool Balance than would be the case if
the Investor Floating Allocation Percentage were
used to determine the percentage of Principal
Collections distributed in respect of the Invested
Amount. The aggregate distributions of principal to
Certificateholders will not exceed the Original
Certificate Principal Balance.
The Certificate Insurer.... MBIA Insurance Corporation (the "Certificate
Insurer") is a New York stock insurance company.
See "DESCRIPTION OF THE CERTIFICATES -- The Policy"
and "THE CERTIFICATE INSURER" herein. The
Certificate Insurer will issue the Policy pursuant
to the terms of an Insurance Agreement, to be dated
as of September 1, 1997 (the "Insurance Agreement")
among Provident, as Sponsor and Servicer, the
Trustee and the Certificate Insurer.
Policy..................... On or before the Closing Date, the Policy will be
issued by the Certificate Insurer pursuant to the
provisions of the Insurance Agreement.
The Policy will irrevocably and unconditionally
guarantee payment on each Distribution Date to the
Trustee for the benefit of the Certificateholders
the full and complete payment of (i) the Guaranteed
Principal Distribution Amount (as defined herein)
with respect to the Certificates for such
Distribution Date and (ii) accrued and unpaid
interest due on the Certificates (together, the
"Guaranteed Distributions"), with such Guaranteed
Distributions having been calculated in accordance
with the original terms of the Certificates or the
Agreement except for amendments or modifications to
which the Certificate Insurer has given its prior
written consent. The effect of the Policy is to
guarantee the timely payment of interest on, and
the ultimate payment of the principal amount of,
all of the Certificates.
The "Guaranteed Principal Distribution Amount" for
any Distribution Date shall be the amount by which
the Certificate Principal Balance (after giving
effect to all other amounts distributable and
allocable to principal on the Certificates on such
Distribution Date) exceeds the Invested Amount for
such Distribution Date. In addition, the Policy
will guarantee the payment of the outstanding
Certificate Principal Balance on the Distribution
Date in September 2027, (after giving effect to all
other amounts distributable and allocable to
principal on such Distribution Date).
In the absence of payments under the Policy,
Certificateholders will directly bear the credit
risks and other risks associated with their
undivided interest in the Trust. See "DESCRIPTION
OF THE CERTIFICATES -- The Policy."
Overcollateralization
Amount..................... The distribution of Accelerated Principal
Distribution Amounts, if any, to Certificateholders
may result in the Invested Amount being greater
than the Certificate Principal Balance, thereby
creating the "Overcollateralization Amount." The
Overcollateralization Amount, if any, will be
available to absorb any Investor Loss Amount not
covered by Investor Interest Collections. Payments
of Accelerated Principal Distribution Amounts are
not covered by the Policy. Any Investor Loss
Amounts not
S-10
<PAGE> 11
covered by such overcollateralization or Investor
Interest Collections will be covered by draws on
the Policy to the extent provided therein.
Record Date................ The last business day preceding a Distribution Date
or, if the Certificates are no longer Book-Entry
Certificates, the last business day of the month
preceding a Distribution Date.
Servicing.................. The Servicer will be responsible for servicing,
managing and making collections on the Mortgage
Loans. The Servicer will deposit all collections in
respect of the Mortgage Loans into the Collection
Account as described herein. See "DESCRIPTION OF
THE CERTIFICATES -- Payments on Mortgage Loans;
Deposits to Collection Account and Distribution
Account." On the eighteenth day of the month (the
"Determination Date"), the Servicer will deliver
such information reasonably required by the Trustee
in order for the Trustee to calculate the amounts
to be paid, as described herein, to the
Certificateholders on such Distribution Date. See
"DESCRIPTION OF THE CERTIFICATES -- Distributions
on the Certificates." With respect to each
Collection Period, the Servicer will receive from
collections in respect of interest on the Mortgage
Loans, on behalf of itself, a portion of such
collections as a monthly servicing fee (the
"Servicing Fee") in the amount of 0.50% per annum
(the "Servicing Fee Rate") on the aggregate
Principal Balances of the Mortgage Loans as of the
first day of each such Collection Period. See
"DESCRIPTION OF THE CERTIFICATES -- Servicing
Compensation and Payment of Expenses." In certain
limited circumstances, the Servicer may resign or
be removed, in which event either the Trustee or a
third-party servicer will be appointed as a
successor Servicer. See "DESCRIPTION OF THE
CERTIFICATES -- Certain Matters Regarding the
Servicer and the Transferor."
Final Payment of Principal;
Termination.............. The Trust will terminate on the Distribution Date
following the later of (A) payment in full of all
amounts owing to the Certificate Insurer and (B)
the earliest of (i) the Distribution Date on which
the Certificate Principal Balance has been reduced
to zero, (ii) the final payment or other
liquidation of the last Mortgage Loan in the Trust,
(iii) the optional retransfer to the Transferor of
the Certificates, as described below and (iv) the
Distribution Date in September 2027. The
Certificates will be subject to optional retransfer
to the Transferor on any Distribution Date after
the Certificate Principal Balance is reduced to an
amount less than or equal to $8,279,500.00 (5% of
the Original Certificate Principal Balance) and all
amounts due and owing to the Certificate Insurer
and including any unreimbursed draws on the Policy,
together with interest thereon, as provided under
the Insurance Agreement, have been paid. 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. See "DESCRIPTION OF THE
CERTIFICATES -- Termination; Retirement of the
Certificates" herein and "DESCRIPTION OF THE
CERTIFICATES -- Optional Purchase or Termination"
and "THE AGREEMENTS -- Termination" in the
Prospectus.
Mandatory Retransfer of
Certain
Mortgage Loans........... Provident will make certain representations and
warranties in the Agreement with respect to the
Mortgage Loans. If Provident breaches certain
S-11
<PAGE> 12
of its representations and warranties with respect
to any Mortgage Loan and such breach materially and
adversely affects the interests of the
Certificateholders or the Certificate Insurer and
is not cured within the specified period, the
Mortgage Loan will be removed from the Trust upon
the expiration of a specified period from the date
on which Provident becomes aware or receives notice
of such breach and will be reassigned to Provident.
See "DESCRIPTION OF THE CERTIFICATES -- Assignment
of Mortgage Loans" herein.
Federal Tax
Considerations............. Subject to the qualifications set forth in "CERTAIN
FEDERAL INCOME TAX CONSEQUENCES" herein, special
tax counsel to the Trust and counsel to the
Underwriter is of the opinion that, under existing
law, (i) a Certificate will be treated as a debt
instrument for Federal income tax purposes as of
the Closing Date and (ii) the Trust will not be
characterized as an association (or publicly traded
partnership) taxable as a corporation or as a
taxable mortgage pool within the meaning of Section
7701(i) of the Internal Revenue Code of 1986, as
amended (the "Code"). Under the Agreement, the
Sponsor and the Certificateholders will agree to
treat the Certificates as indebtedness for Federal,
state and local income and franchise tax purposes.
See "CERTAIN FEDERAL INCOME TAX CONSIDERATIONS"
herein and in the Prospectus for additional
information concerning the application of Federal
income tax laws.
ERISA Considerations....... The Certificates may be purchased by or on behalf
of an employee benefit plan or other retirement
arrangement that is subject to the Employee
Retirement Income Security Act of 1974, as amended
("ERISA"), or Section 4975 of the Code, as well as
any entity whose source of funds for the purchase
of the Certificates includes plan assets by reason
of a plan or account investing in such entity
(each, a "Plan"), subject to the considerations
described herein. Any Plan fiduciary considering
whether to purchase any Certificate on behalf of a
Plan should consult with its counsel regarding the
applicability of the provisions of ERISA and the
Code. See "ERISA CONSIDERATIONS" herein and in the
Prospectus.
Legal Investment
Considerations........... The Certificates will not constitute "mortgage
related securities" for purposes of the Secondary
Mortgage Market Enhancement Act of 1984 ("SMMEA"),
because not all of the Mortgages securing the
Mortgage Loans are first mortgages. Accordingly,
many institutions with legal authority to invest in
comparably rated securities based solely on first
mortgages may not be legally authorized to invest
in the Certificates. See "LEGAL INVESTMENT
CONSIDERATIONS" herein and "LEGAL INVESTMENT" in
the Prospectus.
Certificate Rating......... It is a condition to the issuance of the
Certificates that they be rated "AAA" by each of
Standard & Poor's Ratings Services, a division of
The McGraw-Hill Companies, Inc. ("Standard &
Poor's") and Fitch Investors Service, L.P.
("Fitch") and "Aaa" by Moody's Investors Service,
Inc. ("Moody's") (each, a "Rating Agency"). In
general, ratings address credit risk and do not
address the likelihood of prepayments. See
"RATINGS" herein and "RISK FACTORS -- Rating of the
Securities" in the Prospectus.
S-12
<PAGE> 13
RISK FACTORS
Consequences on Liquidity and Payment Delay Because of Owning Book-Entry
Certificates. Issuance of the Certificates in book-entry form may reduce the
liquidity of such Certificates in the secondary trading market since investors
may be unwilling to purchase Certificates for which they cannot obtain physical
certificates. See "DESCRIPTION OF THE CERTIFICATES -- Book-Entry Certificates"
herein.
Since transactions in the Certificates can be effected only through DTC,
Cedel, Euroclear, participating organizations, indirect participants and certain
banks, the ability of a Certificate Owner to pledge a Certificate to persons or
entities that do not participate in the DTC, Cedel or Euroclear system or
otherwise to take actions in respect of such Certificates, may be limited due to
lack of a physical certificate representing the Certificates. See "DESCRIPTION
OF THE CERTIFICATES -- Book-Entry Certificates" herein.
Certificate Owners may experience some delay in their receipt of
distributions of interest and principal on the Certificates since such
distributions will be forwarded by the Trustee to DTC and DTC will credit such
distributions to the accounts of its Participants (as defined herein) which will
thereafter credit them to the accounts of Certificate Owners either directly or
indirectly through indirect participants. See "DESCRIPTION OF THE CERTIFICATES
- -- Book-Entry Certificates" herein.
Nature of Security. With respect to the Mortgage Loans, other than the
Hunter Mortgage Loans (as defined herein), required minimum monthly payments, if
any, are not, in most instances, expected to be sufficient to fully amortize
principal of a Mortgage Loan during the Draw Period. After the Draw Period has
ended, substantially all of such Mortgage Loans become payable in equal monthly
installments over a five-year period. With respect to the Hunter Mortgage Loans,
borrowers are not required to make a monthly payments of principal and will be
required to pay the entire principal balance at maturity (collectively, "Balloon
Loans"). With respect to the Balloon Loans, general credit risk may be greater
to Certificateholders than to holders of instruments representing interests in
level payment mortgage loans. The ability of a borrower to make a balloon
payment may be dependent on the borrower's ability to obtain refinancing of the
outstanding principal balance of the Balloon Loan at maturity. An increase in
interest rates may reduce the borrower's ability to obtain refinancing and to
pay the balance of the Mortgage Loan at its maturity.
Since certain mortgages securing Mortgage Loans are junior liens
subordinate to the rights of the mortgagee or beneficiary under any related
senior mortgage or deed of trust, the proceeds from any liquidation, insurance
or condemnation proceeding will be available to satisfy the outstanding balance
of a Mortgage Loan only to the extent that the claims of such senior mortgagee
or beneficiary have been satisfied in full (including any related foreclosure
costs).
Cash Flow Considerations and Risks of Shortfall. Minimum monthly payments
on the Mortgage Loans may be limited to accrued interest. Although borrowers
under certain of the Mortgage Loans may choose to pay down all or a part of
their outstanding principal balance at any time, such borrowers are under no
obligation to do so and, in the event such balances have not been substantially
paid down prior to maturity, some borrowers may be unable to pay the required
final payment.
Even assuming that the Mortgaged Properties provide adequate security for
the Mortgage Loans, substantial delays could be encountered in connection with
the liquidation of Mortgage Loans that are delinquent and resulting shortfalls
in distributions to Certificateholders could occur if the Certificate Insurer
were unable to perform on its obligations under the Policy. Further, liquidation
expenses (such as legal fees, real estate taxes, and maintenance and
preservation expenses) will reduce the proceeds payable to Certificateholders
and thereby reduce the security for the Mortgage Loans. In the event any of the
Mortgaged Properties fail to provide adequate security for the related Mortgage
Loans, Certificateholders could experience a loss if the Certificate Insurer
were unable to perform its obligations under the Policy.
Prepayment Considerations and Effect on Yield to Maturity and Weighted
Average Life of Certificates. Mortgage Loans originated prior to August 1994 may
be prepaid in whole or in part at any time without penalty. Mortgage Loans
originated in August 1994 and thereafter are subject to a $250 termination fee
to the extent the related borrower prepays such loan in full within either a two
or five year period following origination, as indicated in the related Credit
Line Agreement. Provident is not aware of any publicly available
S-13
<PAGE> 14
studies or statistics that accurately predict or forecast the rate of prepayment
of revolving home equity loans. Generally, home equity loans are not viewed by
borrowers as permanent financing. Accordingly, the Mortgage Loans 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, all of the Mortgage Loans 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 related Mortgaged Property to assume the Mortgage Loan. To
the extent permitted by applicable law, such assumption will not release the
original borrower from its obligation under any such Mortgage Loan. See
"DESCRIPTION OF THE CERTIFICATES" herein and "CERTAIN LEGAL ASPECTS OF LOANS --
Due-on-Sale Clauses" in the Prospectus for a description of certain provisions
of the Credit Line Agreements that may affect the prepayment experience on the
Mortgage Loans.
Certificate Rating Based Primarily on Claims-Paying Ability of the
Certificate Insurer. The rating of the Certificates will depend primarily on an
assessment by the Rating Agencies of the Mortgage Loans and upon the
claims-paying ability of the Certificate Insurer. Any reduction in a rating
assigned to the claims-paying ability of the Certificate Insurer below the
rating initially given to the Certificates may result in a reduction in the
rating of the Certificates. The rating by the Rating Agencies of the
Certificates is not a recommendation to purchase, hold or sell the Certificates,
inasmuch as such rating does not comment as to the market price or suitability
for a particular investor. There is no assurance that the ratings will remain in
place for any given period of time or that the ratings will not be lowered or
withdrawn by the Rating Agencies. In general, the ratings address credit risk
and do not address the likelihood of prepayments. The ratings of the
Certificates do not address the possibility of the imposition of United States
withholding tax with respect to non-U.S. persons.
Legal Considerations Resulting from Sale Treatment. The Mortgage Loans are
secured by mortgages (which are first, second or third mortgages) on the
Mortgaged Properties. With respect to Mortgage Loans that are secured by first
mortgages, the Servicer has the power under certain circumstances to consent to
a new mortgage lien on the Mortgaged Property having priority over such Mortgage
Loan. Mortgage Loans secured by junior mortgages are entitled to proceeds that
remain from the liquidation or similar sale of the related Mortgaged Property
after payment of liquidation expenses (such as legal fees, real estate taxes,
and maintenance and preservation expenses) and payments of any related senior
mortgage lien and prior statutory liens. In the event that such proceeds are
insufficient to satisfy such liquidation expenses, senior loans and prior liens
in the aggregate and the Certificate Insurer is unable to perform its
obligations under the Policy, the Certificateholders will bear (i) the risk of
delay in distributions while a deficiency judgment against the borrower is
obtained and (ii) the risk of loss if the deficiency judgment cannot be obtained
or cannot be realized upon. In addition, a junior mortgagee may not foreclose on
the property securing a junior mortgage unless it forecloses subject to all
senior liens. See "CERTAIN LEGAL ASPECTS OF LOANS" in the Prospectus.
Under the terms of the Agreement, so long as Provident's long-term senior
unsecured debt is rated at least "BBB" by Standard & Poor's and Fitch and "Baa2"
by Moody's, the Servicer will be entitled to maintain possession of the
documentation relating to each Mortgage Loan sold by it, including the Credit
Line Agreements and the Related Documents or other evidence of indebtedness
signed by the borrower, and the assignments of the related mortgages to the
Trust will not be required to be recorded. Failure to deliver the Related
Documents to the Trustee will have the result in most, if not all, of the states
in which the Related Documents will be held, and failure to record the
assignments of the related mortgages to the Trustee will have the result in
certain states in which the Mortgaged Properties are located, of making the sale
of the Cut-Off Date Principal Balances, Additional Balances and Related
Documents potentially ineffective against (i) any creditors of Provident, who
may have been fraudulently or inadvertently induced to rely on the Mortgage
Loans as assets of Provident or (ii) any purchaser of a Mortgage Loan who had no
notice of the prior conveyance to the Trust Fund if such purchaser perfects his
interest in the Mortgage Loan by taking possession of the Related Documents or
other evidence of indebtedness or otherwise.
Provident warrants in the Agreement that the transfer by it of all of its
right, title and interest in and to the Mortgage Loans subject to the Agreement
is either a valid transfer and assignment of the Mortgage Loans
S-14
<PAGE> 15
or the grant to the trust of a security interest in the Mortgage Loans. If the
transfer of Mortgage Loans to the Trust is deemed to create a security interest
therein under the Uniform Commercial Code (the "UCC") of an applicable state,
any tax or governmental lien on property of Provident arising before any
Mortgage Loan comes into existence might have priority over the Trust's interest
in such Mortgage Loan. In addition, if the FDIC were appointed receiver of
Provident, the receiver's administrative expenses might also have priority over
the Trust's interest in such Mortgage Loan. If certain events of insolvency or
similar proceedings relating to Provident (an "Insolvency Event") were to occur,
then a Rapid Amortization Event will occur and, pursuant to the terms of the
Agreement, new Additional Balances will not be transferred to the Trust by
Provident.
The Federal Deposit Insurance Act (as amended, "FDIA") sets forth certain
powers that the FDIC could exercise if it were appointed conservator or receiver
of Provident. To the extent (i) Provident grants a security interest in the
Mortgage Loans to the Trust, (ii) such security interest is validly perfected
before the occurrence of an Insolvency Event and (iii) such security interest
was not taken in contemplation of insolvency or with the intent to hinder, delay
or defraud Provident or its creditors, such security interest should not be
subject to avoidance by the FDIC if the FDIC is appointed as a conservator or
receiver of Provident. Subject to clarification by regulations or
interpretations, positions taken by the staff of the FDIC prior to the passage
of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (as
amended "FIRREA") do not suggest that the FDIC, as receiver or conservator for
Provident, would interfere with the timely transfer to the Trust of payments
collected on the Mortgage Loans. If, however, the FDIC were to assert a contrary
position, certain provisions of the FDIA which, at the request of the FDIC, have
been applied in recent lawsuits to avoid security interest in collateral granted
by depository institutions, may permit the FDIC to avoid such security interest,
thereby resulting in possible delays and reduction in payments to the
Certificateholders. Further, if the FDIC were to require the Trustee to comply
with certain administrative claims procedures under the FDIA before the Trust
could collect, sell, dispose of or otherwise liquidate the Mortgage Loans or if
the conservator or receiver were to obtain a stay of proceedings with respect to
Provident as provided in the FDIA, delays in payment and possible reductions in
the amount of those payments could occur. Upon the occurrence of an Insolvency
Event, if no Rapid Amortization Event other than such Insolvency Event exists,
the FDIC may have the power to continue to require the Transferor to transfer
new Additional Balances to the Trust and to prevent the early sale, liquidation
or disposition of the Mortgage Loans and the commencement of the Rapid
Amortization Period. In addition, such receiver may have the power to cause the
early sale of the Mortgage Loans and the early retirement of the Certificates
notwithstanding instructions from the Certificateholders instructing the Trust
not to sell the Mortgage Loans. Upon the occurrence of an Event of Servicing
Termination, if a conservator, receiver or liquidator is appointed for the
Servicer and no Event of Servicing Termination other than such conservatorship,
receivership, liquidation or insolvency of the Servicer exists, the conservator,
receiver or liquidator may have the power to prevent either the Trust or the
Certificateholders from appointing a successor Servicer.
Risk of Losses as a Result of Geographic Concentration. As of the Cut-Off
Date, approximately 99.21%, 0.72 % and 0.07% (by Cut-Off Date Sample Pool
Balance) of the Mortgaged Properties are located in the States of Ohio, Kentucky
and New Hampshire, respectively. An overall decline in the residential real
estate markets in these states could adversely affect the values of the
Mortgaged Properties securing such Mortgage Loans such that the Principal
Balances of the related Mortgage Loans, together with any primary financing on
such Mortgaged Properties, could equal or exceed the value of such Mortgaged
Properties. As the residential real estate market is influenced by many factors,
including the general condition of the economy and interest rates, no assurances
may be given that the residential real estate markets in these states will not
weaken. If these residential real estate markets should experience an overall
decline in property values after the dates of origination of the Mortgage Loans,
the rates of losses on the Mortgage Loans would be expected to increase, and
could increase substantially.
Servicer's Ability to Change the Terms of the Mortgage Loans. The Servicer
may agree to changes in the terms of a Credit Line Agreement, provided that such
changes (i) do not adversely affect the interest of the Certificateholders or
the Certificate Insurer, and (ii) are consistent with prudent business practice.
There can be no assurance that changes in applicable law, 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 Agreement permits the
S-15
<PAGE> 16
Servicer, within certain limitations described therein, to increase the Credit
Limit of the related Mortgage Loan or reduce the Gross Margin for such Mortgage
Loan.
Delinquent Mortgage Loans. The Trust will include Mortgage Loans which are
59 or fewer days delinquent as of the Cut-Off Date. The Cut-Off Date Principal
Balance of Mortgage Loans which are between 30 days and 59 days delinquent as of
the Cut-Off Date was $542,518.77. If there are not sufficient funds from the
Investor Interest Collections to cover the Investor Loss Amounts for any
Distribution Date, the Overcollateralization Amount has been reduced to zero,
and the Certificate Insurer fails to perform its obligations under the Policy,
the aggregate amount of principal returned to the Certificateholders may be less
than the Certificate Principal Balance on the day the Certificates are issued.
Risk of Repayment of Hunter Mortgage Loans. Certain of the Mortgage Loans
(the "Hunter Mortgage Loans") were originated by Hunter Savings Association
("Hunter") prior to Provident's acquisition of Hunter in December 1991. There
are 322 Hunter Mortgage Loans, representing $7,327,877.87 in aggregate Cut-off
Date Principal Balance. The terms of the Hunter Mortgage Loans differ from the
terms of the other Mortgage Loans. See "DESCRIPTION OF MORTGAGE LOANS--Mortgage
Loan Terms." The Hunter Mortgage Loans typically have a ten-year Draw Period
with a balloon payment consisting of the entire principal balance due in full at
the end of such period.
For a discussion of additional risks pertaining to the Certificates, see
"RISK FACTORS" in the Prospectus.
THE CERTIFICATE INSURER
The information set forth in this section and in the financial statements
of the Certificate Insurer incorporated by reference herein as described below
have been provided by the Certificate Insurer. No representation is made by the
Underwriter, the Sponsor, the Servicer or any of their affiliates as to the
accuracy or completeness of any such information.
The Certificate Insurer is the principal operating subsidiary of MBIA Inc.,
a New York Stock Exchange listed company. MBIA Inc. is not obligated to pay the
debts of or claims against the Certificate Insurer. The Certificate Insurer is
domiciled in the State of New York and licensed to do business in and is subject
to regulation under the laws of all 50 states, the District of Columbia, the
Commonwealth of Puerto Rico, the Commonwealth of the Northern Mariana Islands,
the Virgin Islands of the United States and the Territory of Guam. The
Certificate Insurer has two European branches, one in the Republic of France and
the other in the Kingdom of Spain. New York has laws prescribing minimum capital
requirements, limiting classes and concentrations of investments and requiring
the approval of policy rates and forms. State laws also regulate the amount of
both the aggregate and individual risks that may be insured, the payment of
dividends by the Certificate Insurer, changes in control and transactions among
affiliates. Additionally, the Certificate Insurer is required to maintain
contingency reserves on its liabilities in certain amounts and for certain
periods of time.
The consolidated financial statements of the Certificate Insurer, a wholly
owned subsidiary of MBIA Inc., and its subsidiaries as of December 31, 1996 and
December 31, 1995 and for each of the three years ended December 31, 1996,
prepared in accordance with generally accepted accounting principles, included
in the Annual Report on Form 10-K of MBIA Inc. for the year ended December 31,
1996, and the consolidated financial statements of the Certificate Insurer and
its subsidiaries for the six months ended June 30, 1997 and for the periods
ending June 30, 1997 and June 30, 1996 included in the Quarterly Report on Form
10-Q of MBIA Inc. for the period ending June 30, 1997, are hereby incorporated
by reference into this Prospectus Supplement and shall be deemed to be a part
hereof. Any statement contained in a document incorporated by reference herein
shall be modified or superseded for the purposes of this Prospectus Supplement
to the extent that a statement contained herein or in any other subsequently
filed document which is also incorporated by reference herein modifies or
supersedes such statement. Any statement so modified or superseded shall not be
deemed, except as so modified or superseded, to constitute a part of this
Prospectus Supplement.
All financial statements of the Certificate Insurer and its subsidiaries
included in documents filed by MBIA Inc. pursuant to Section 13(a), 13(c), 14 or
15(d) of the Securities Exchange Act of 1934, as
S-16
<PAGE> 17
amended, subsequent to the date of this Prospectus Supplement and prior to the
termination of the offering of the Certificates shall be deemed to be
incorporated by reference into this Prospectus Supplement and to be a part
hereof from the respective dates of filing such documents.
The tables below present selected financial information of the Certificate
Insurer determined in accordance with statutory accounting practices prescribed
or permitted by insurance regulatory authorities ("SAP") and generally accepted
accounting principles ("GAAP"):
<TABLE>
<CAPTION>
SAP
-----------------------------------
DECEMBER 31, 1996 JUNE 30, 1997
------------------ -------------
(AUDITED) (UNAUDITED)
(IN MILLIONS)
<S> <C> <C>
Admitted Assets.................................... $4,476 $ 4,824
Liabilities........................................ 3,009 3,259
Capital and Surplus................................ 1,467 1,565
</TABLE>
<TABLE>
<CAPTION>
GAAP
-----------------------------------
DECEMBER 31, 1996 JUNE 30, 1997
------------------ -------------
(AUDITED) (UNAUDITED)
(IN MILLIONS)
<S> <C> <C>
Assets............................................. $5,066 $ 5,408
Liabilities........................................ 2,262 2,412
Shareholders' Equity............................... 2,804 2,996
</TABLE>
Copies of the financial statements of the Certificate Insurer incorporated
by reference herein and copies of the Certificate Insurer's 1996 year-end
audited financial statements prepared in accordance with statutory accounting
practices are available, without charge, from the Certificate Insurer. The
address of the Certificate Insurer is 113 King Street, Armonk, New York 10504.
The telephone number of the Certificate Insurer is (914) 273-4545.
The Certificate Insurer does not accept any responsibility for the accuracy
or completeness of this Prospectus Supplement or any information or disclosure
contained herein, or omitted herefrom, other than with respect to the accuracy
of the information regarding the Policy and the Certificate Insurer set forth
under the headings "THE CERTIFICATE INSURER" and "DESCRIPTION OF THE
CERTIFICATES--The Policy." Additionally, the Certificate Insurer makes no
representations regarding the Certificates or the advisability of investing in
the Certificates.
Moody's Investors Service, Inc. rates the claims paying ability of the
Certificate Insurer as "Aaa".
Standard & Poor's Ratings Services, a division of The McGraw-Hill
Companies, Inc., rates the claims paying ability of the Certificate Insurer
"AAA".
Fitch Investors Service, L.P. rates the claims paying ability of the
Certificate Insurer "AAA".
Each rating of the Certificate Insurer should be evaluated independently.
The ratings reflect the respective rating agency's current assessment of the
creditworthiness of the Certificate Insurer and its ability to pay claims on its
policies of insurance. Any further explanation as to the significance of the
above ratings may be obtained only from the applicable rating agency.
The above ratings are not recommendations to buy, sell or hold the
Certificates, and such ratings may be subject to revision or withdrawal at any
time by the rating agencies. Any downward revision or withdrawal of any of the
above ratings may have an adverse effect on the market price of the
Certificates. The Certificate Insurer does not guaranty the market price of the
Certificates nor does it guaranty that the ratings on the Certificates will not
be revised or withdrawn.
S-17
<PAGE> 18
THE PROVIDENT BANK
GENERAL
The Servicer will service the Mortgage Loans in accordance with the terms
set forth in the Agreement. As of the Closing Date, the Servicer will service
the Mortgage Loans without subservicing arrangements. The Servicer may perform
any of its obligations under the Agreement through one or more subservicers and
is permitted under the Agreement to transfer servicing to affiliates, provided
such affiliate meets certain standards specified in the Agreement. See
"DESCRIPTION OF THE CERTIFICATES -- Certain Matters Regarding the Servicer and
the Transferor." Notwithstanding any subservicing arrangements, the Servicer
will remain liable for its servicing duties and obligations under the Agreement
as if the Servicer alone were servicing the Mortgage Loans.
Provident is the principal banking subsidiary of Provident Financial Group,
Inc., (formerly known as Provident Bancorp, Inc.) a Cincinnati based bank
holding company registered under the Bank Holding Company Act. Provident
Financial Group, Inc. operates throughout Ohio, Northern Kentucky, Southeastern
Indiana and Florida. As of June 30, 1997, Provident Financial Group, Inc. had
total assets of $7.0 billion, net loans and leases of $5.1 billion, deposits of
$4.7 billion and total shareholders' equity of $569 million. Provident Financial
Group, Inc.'s tier 1 and total capital ratios were 9.46% and 13.21%,
respectively. For the fiscal year ended December 31, 1996, Provident Financial
Group, Inc. had net earnings of $81.2 million. For the period ended June 30,
1997, Provident Financial Group, Inc. had net earnings of $55.5 million.
Provident represents approximately 93% of Provident Financial Group, Inc.'s
assets.
CREDIT AND UNDERWRITING GUIDELINES
Approximately 95.66% of the Mortgage Loans were originated by Provident and
4.34% were originated by Hunter (in each case by Cut-Off Date Pool Balance). The
following is a description of the underwriting guidelines customarily employed
by Provident with respect to its retail originations of mortgage loans for non-
purchase money purposes. The Hunter Mortgage Loans were originated pursuant to
underwriting guidelines comparable to the following underwriting guidelines.
Provident believes its underwriting guidelines are consistent with those
utilized by home equity lenders generally.
Provident performs underwriting procedures intended to assess a prospective
borrower's credit standing and repayment ability, and the value and adequacy of
the mortgaged property as collateral. Exceptions to the underwriting guidelines
are made when compensating factors are present. Such factors include the quality
and location of the property, the length of employment, credit history, current
and pending debt obligations, payment habits and status of past and currently
existing mortgages. Each prospective borrower is required to complete an
application which lists assets, liabilities, income, credit and employment
history and other demographic and personal information. If the information in
the application demonstrates that there is sufficient income and equity in the
real property to justify the making of the mortgage loan, Provident will conduct
a further credit investigation, including obtaining and reviewing an independent
credit bureau report in order to evaluate the applicant's ability to repay.
Provident has historically used a debt-to-income ratio to determine whether
a prospective borrower has sufficient monthly income available to support the
payments of principal and interest on the home equity loan in addition to any
senior mortgage loan payments (including any escrows for property taxes and
hazard insurance premiums) and other monthly credit obligations. The
"debt-to-income ratio" is the ratio of a borrower's total monthly payments to
the borrower's gross monthly income. The monthly debt-to-income ratio, in
general, does not exceed 45% when the Combined Loan-to-Value Ratio does not
exceed 80%. For mortgage loans with CLTVs in excess of 80%, the monthly
debt-to-income ratio generally does not exceed 40%. The foregoing CLTV and
debt-to-income limitations may be exceeded if one or more of the compensating
factors described above are present. In addition, these limitations may be
exceeded if specific approval is obtained from an authorized officer of
Provident.
In addition to the foregoing guidelines, beginning in December, 1996,
Provident instituted a credit scoring procedure as an additional guideline in
evaluating applications for mortgage loans. Generally, applicants must
S-18
<PAGE> 19
meet a minimum score predetermined by Provident. Scores are calculated on the
basis of scoring model developed by Fair-Isaacs, Inc. and utilized by financial
institutions which originate home equity loans.
The maximum amount permitted to be drawn (the "Credit Limit") under the
Credit Line Agreements generally range from a minimum of $5,000 to a maximum of
$250,000. For CLTVs in excess of 80%, the Credit Limit is generally limited to
$50,000 and mortgage loans secured by third mortgages are limited to a CLTV of
80%. These limitations may be exceeded if approval is obtained from a senior
officer of Provident.
Provident requires a valuation on all mortgaged property representing
security for a loan. The mortgaged property used as collateral to secure the
mortgage loans may be either primary residential (which includes second and
vacation homes) or investor owned one- to four-family homes, planned unit
developments and condominiums. Mobile housing, commercial or agricultural land
are not accepted as collateral. In some cases, the mortgage loan may be secured
by the owner-occupied residence plus additional collateral.
Provident personnel decide whether property value will be determined by a
full appraisal, a "drive-by" appraisal or an appraisal based on tax assessment
valuation. A "drive-by" appraisal consists of: (i) the appraiser reviewing
appropriate records concerning the tax valuation of the mortgaged property and
the recent sale prices of homes in the same neighborhood; and (ii) an inspection
of the exterior of the mortgaged property. If such exterior inspection indicates
that the mortgaged property is well-maintained, the appraiser determines a
market value based upon the available records; if such exterior inspection
reveals signs of improper maintenance, Provident requires a full appraisal,
which includes an interior inspection of the mortgaged property. A current-owner
title search of the mortgaged property is also obtained by Provident in addition
to an appraisal. In connection with originating a mortgage loan which is in a
junior lien position, Provident typically assumes that the first mortgage lender
has obtained an ALTA title insurance policy although Provident does not
independently verify whether such title insurance policy has been obtained.
Provident generally does not require borrowers to obtain title insurance.
Applicants are required to secure property insurance in an amount
sufficient to cover the new loan and any prior mortgage. If the sum of the
outstanding first mortgage, if any, and the mortgage loan originated by
Provident exceeds replacement value, insurance equal to replacement value may be
accepted. Provident ensures that its name and address is properly added to the
"Mortgage Clause" of the insurance policy. In the event Provident's name is
added to a "Loss Payee Clause" and the policy does not provide for written
notice of policy changes or cancellation, an endorsement adding such provision
is obtained.
As a part of Provident's loan application process, each mortgage applicant
is typically required to provide personal financial information. Applicants who
are salaried employees may be required to provide current employment information
in addition to two recent years of employment history and Provident may verify
this information. Verifications are based on the two most recent pay stubs, the
two most recent years' W-2 tax forms or the two most recent years' complete
federal income tax returns (including schedules). Self-employed applicants
should be self-employed in the same field for a minimum of two years.
Self-employed applicants are typically required to provide signed copies of
complete federal income tax returns (including schedules) filed for the most
recent two years.
Credit reports are obtained from independent credit reporting agencies
reflecting each applicant's credit history. Credit reports should reflect all
delinquencies of 30 days or more, repossessions, judgments, foreclosures,
garnishments, bankruptcies, divorce actions and other adverse credit events that
can be discovered by a search of public records. If the report is obtained more
than 60 days prior to the loan closing, Provident may obtain an updated Credit
report to verify that the reported information has not changed. Verification is
obtained of any first mortgage balance if not reported in the credit report.
Generally, applicants are required to have an acceptable credit history,
satisfactory employment history and the level of income to debt obligations to
support the amount of the mortgage loan applied taking into account the value of
the equity in the mortgaged property. The rescission period must have expired
prior to funding a loan. The rescission period may not be waived by the
applicant except as permitted by law.
S-19
<PAGE> 20
DELINQUENCY AND CHARGE-OFF EXPERIENCE
The following tables set forth Provident's delinquency and charge-off
experience on its servicing portfolio of home equity lines of credit similar to
and including the Mortgage Loans for the periods indicated. Provident has
serviced all of the Mortgage Loans, except for the Hunter Mortgage Loans, since
their origination. The Hunter Mortgage Loans have been serviced by Provident at
all times since Provident's acquisition of Hunter in December 1991. There can be
no assurance that the delinquency and charge-off experience on the Mortgage
Loans will be consistent with the historical information provided below.
Accordingly, this information should not be considered to reflect the credit
quality of the Mortgage Loans included in the Trust, or a basis of assessing the
likelihood, amount or severity of losses on the Mortgage Loans. The statistical
data in the tables set forth below are based on all of the home equity lines of
credit in Provident's servicing portfolio.
Delinquency as a percentage of aggregate principal balance of mortgage
loans serviced for each period would be higher than those shown if a group of
mortgage loans were artificially isolated at a point in time and the information
showed the activity only in that isolated group.
DELINQUENCY EXPERIENCE OF THE SERVICER'S PORTFOLIO OF HOME EQUITY LINES OF
CREDIT
The following table sets forth information relating to the delinquency
experience of mortgage loans similar to and including the Mortgage Loans for the
six months ended June 30, 1997, and the years ended December 31, 1996, December
31, 1995, December 31, 1994 and December 31, 1993.
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
---------------------------------------------------------------------------------------------- ----------------------
DECEMBER 31, 1993 DECEMBER 31, 1994 DECEMBER 31, 1995 DECEMBER 31, 1996 JUNE 30, 1997
---------------------- ---------------------- ---------------------- ---------------------- ----------------------
NUMBER DOLLAR NUMBER DOLLAR NUMBER DOLLAR NUMBER DOLLAR NUMBER DOLLAR
OF LOANS AMOUNT(4) OF LOANS AMOUNT(4) OF LOANS AMOUNT(4) OF LOANS AMOUNT(4) OF LOANS AMOUNT(4)
-------- ------------ -------- ------------ -------- ------------ -------- ------------ -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Portfolio... (3) $115,309,000 (3) $135,794,000 (3) $160,226,000 7,496 $173,670,000 7,647 $182,544,000
Delinquency
percentage(1)
30-59
days... (3) (3) (3) (3) (3) (3) 0.45% 0.40% 0.37% 0.59%
60-89
days... (3) (3) (3) (3) (3) (3) 0.08% 0.11% 0.10% 0.07%
90 days
or
more(2)... (3) (3) (3) (3) (3) (3) 0.21% 0.23% 0.16% 0.13%
TOTAL..... (3) 0.25% (3) 0.32% (3) 0.25% 0.74% 0.74% 0.63% 0.79%
</TABLE>
- -------------------------
(1) The delinquency percentage represents the number and principal balance of
mortgage loans with monthly payments which are contractually past due.
Mortgage loans for which the related borrower has declared bankruptcy are
not included unless or until such loans are delinquent pursuant to their
repayment terms.
(2) Includes the principal balance of loans currently in process of foreclosure
and loans acquired through foreclosure or deed in lieu of foreclosure.
(3) Insufficient information available.
(4) Dollar amounts rounded to the nearest $1,000.
S-20
<PAGE> 21
CHARGE-OFF EXPERIENCE OF THE SERVICER'S PORTFOLIO OF HOME EQUITY LINES OF CREDIT
The following table sets forth information relating to the loan charge-off
experience of mortgage loans similar to and including the Mortgage Loans for the
six months ended June 30, 1997, and the years ended December 31, 1996, December
31, 1995, December 31, 1994 and December 31, 1993.
<TABLE>
<CAPTION>
SIX
MONTHS ENDED
YEAR ENDED ------------
----------------------------------------------------------------------------- JUNE 30,
DECEMBER 31, 1993 DECEMBER 31, 1994 DECEMBER 31, 1995 DECEMBER 31, 1996 1997
----------------- ----------------- ----------------- ----------------- ------------
<S> <C> <C> <C> <C> <C>
Average Portfolio
Balance (1)......... $ 114,629,000 $ 125,552,000 $ 148,011,000 $ 166,948,000 $178,346,000
Charge-Offs (2)....... $82,351 $32,196 $10,488 $162,385 $64,749
Charge-Offs as a % of
Average Portfolio
Balance............. 0.07% 0.03% 0.01% 0.10% 0.07% (3)
</TABLE>
- -------------------------
(1) "Average Portfolio Balance" during the period is the arithmetic average of
the principal balances of the mortgage loans outstanding on the first and
last days of each period. The Average Portfolio Balance has been rounded to
the nearest $1,000.
(2) "Charge-Offs" are amounts which have been determined by Provident to be
uncollectible relating to the mortgage loans for each respective period and
do not include any amount of collections or recoveries received by Provident
subsequent to charge-off dates. Provident's policy regarding charge-offs
provides that mortgaged properties are reappraised when a mortgage loan has
been delinquent for 180 days and based upon such appraisals, a decision is
then made concerning the amounts determined to be uncollectible.
(3) Annualized.
S-21
<PAGE> 22
DESCRIPTION OF THE MORTGAGE LOANS
GENERAL
Certain information concerning the Mortgage Loans is not readily available.
See "-- Sample Pool Statistics." Accordingly some of the statistical information
set forth below is based upon a "Sample Pool" (as defined below). However,
unless otherwise indicated, all statistical information concerning the Mortgage
Loans is based upon all of the Mortgage Loans included in the Trust. All
weighted averages described below are weighted on the basis of the Cut-Off Date
Pool Balance included in the Trust unless otherwise indicated.
All Mortgage Loans were originated between August 1986 and August 1997. The
aggregate Cut-Off Date Principal Balance of the Mortgage Loans was
$168,969,816.28 (by Cut-Off Date Sample Pool Balance), which is equal to the
aggregate Principal Balances of the Mortgage Loans as of the close of business
on September 1, 1997 (the "Cut-Off Date"). Approximately 21.08% of the Sample
Pool Mortgage Loans (by Cut-Off Date Sample Pool Balance) were secured by a
first Mortgage on the related Mortgaged Property, 68.99% of the Sample Pool
Mortgage Loans were secured by second Mortgages and 6.47% of the Sample Pool
Mortgage Loans (by Cut-Off Date Sample Pool Balance) were secured by third
Mortgages. The minimum Principal Balance of the Mortgage Loans as of the Cut-Off
Date was $0.02, the maximum Principal Balance of the Mortgage Loans as of the
Cut-Off Date was $600,000.00, and the average Principal Balance of the Mortgage
Loans as of the Cut-Off Date was $24,305.21. As of the Cut-Off Date, the Loan
Rates on the Mortgage Loans ranged from 6.49% per annum to 12.00% per annum and
the weighted average Loan Rate was 9.23% per annum. The average Credit Limit
Utilization Rate (defined below) of the Mortgage Loans was 58.14% as of the
Cut-Off Date. The weighted average Combined Loan-to-Value Ratio of the Sample
Pool Mortgage Loans was 69.34% as of the Cut-Off Date (by Cut-Off Date Sample
Pool Balance) and the weighted average junior mortgage ratio of the Sample Pool
Mortgage Loans (computed by dividing the greater of the Credit Limit and the
Cut-Off Date Principal Balance for each Mortgage Loan, provided such Mortgage
Loan was in a junior lien position, by the sum of such Credit Limit or Cut-Off
Date Principal Balance as applicable and the outstanding balances at the time
such Mortgage Loan was originated of all senior mortgage loans affecting the
Mortgaged Property) was approximately 45.09% (by Cut-Off Date Sample Pool
Balance). No Sample Pool Mortgage Loan had a Combined Loan-to-Value Ratio
greater than 100%. As of the Cut-Off Date, all of the Sample Pool Mortgage Loans
were secured by Mortgaged Properties that are one- to four-family residences. As
of the Cut-Off Date, 94.64% of the Sample Pool Mortgage Loans (by Cut-Off Date
Sample Pool Balance) were secured by Mortgaged Properties that are
owner-occupied, and 0.09% of the Sample Pool Mortgage Loans (by Cut-Off Date
Sample Pool Balance) were secured by non-owner occupied Mortgaged Properties.
Approximately 99.21%, 0.72% and 0.07% of the Sample Pool Mortgage Loans were
secured by Mortgaged Properties in Ohio, Kentucky and New Hampshire,
respectively (by Cut-Off Date Sample Pool Balance). Approximately 0.32% of the
Mortgage Loans were contractually delinquent 30 days or more. No Mortgage Loan
was delinquent more than 60 days.
The "Combined Loan-to-Value Ratio" or "CLTV" of each Mortgage Loan is the
ratio, expressed as a percentage, of (a) the sum of (i) the greater of the
Credit Limit and the current balance as of the Cut-Off Date and (ii) the
principal balance of any senior mortgage loan as of the origination of such
Mortgage Loan, over (b) the value (based on an appraised value or other
acceptable valuation method) for the related Mortgaged Property determined in
the origination of such Mortgage Loan. The average "Credit Limit Utilization
Rate" for the Mortgage Loans as of the Cut-Off Date is determined by dividing
the sum of the Cut-Off Date Principal Balances of the Mortgage Loans by the sum
of the Credit Limits of the Mortgage Loans.
MORTGAGE LOAN TERMS
The Mortgage Loans were originated pursuant to loan agreements (the "Credit
Line Agreements"). Under the Credit Line Agreements, the borrowers may receive
advances (an "Additional Balance" or a "Draw") at any time during a specified
period (the "Draw Period"). The minimum amount of any Draw that a borrower may
receive is $100. The maximum amount of each Draw with respect to any Mortgage
Loan is equal to the excess, if any, of the Credit Limit over the Principal
Balance outstanding under such Credit Line Agreement at the time of such Draw.
S-22
<PAGE> 23
Approximately 95.66% (by Cut-Off Date Pool Balance) of the Mortgage Loans
have original terms of six years, consisting of a Draw Period of one year and an
"Amortization Period" of five years. However, the Draw Period under each Credit
Line Agreement automatically renews for an unlimited number of successive terms
of one year each unless Provident notifies the borrower of its election to
terminate its obligation to make Draws. After the Draw Period has so ended, the
five-year "Amortization Period" begins during which the borrower is obligated to
make monthly payments equal to the sum of 1/60 of the unpaid balance of the
Mortgage Loan at the end of the Draw Period plus accrued finance charges.
Minimal monthly principal payments may be required to be made by the borrowers
during the Draw Period, but such payments will not be sufficient to fully
amortize the Mortgage Loan during the Draw Period. Notwithstanding the
foregoing, Provident has agreed in the Agreement not to terminate its obligation
to make Draws with respect to any Mortgage Loan during the 48-month period
beginning on the Closing Date, unless the borrower is in default of any material
obligation under the related Credit Line Agreement, the appraised value of the
related Mortgaged Property has declined significantly or Provident reasonably
believes the borrower will be unable to fulfill its payment obligations under
the Credit Line Agreement because of a material change in the borrower's
financial circumstances. With respect to the Hunter Mortgage Loans, the Draw
Period is limited to ten years during which the minimum payment consists of
accrued interest only. Such loans require a balloon payment of the entire
principal balance at maturity. In addition, the interest rate of such mortgage
loans adjusts monthly instead of quarterly.
The borrower's right to make a Draw under a Mortgage Loan may be suspended,
or the Credit Limit may be reduced under a number of circumstances, including,
but not limited to, a material adverse change in the borrower's financial
circumstances, a significant decline in the appraised value of the Mortgaged
Property or a default by the borrower of any material obligation under the
Credit Line Agreement. Generally, such suspension or reduction will not affect
the payment terms for previously drawn balances. In the event of default under a
Mortgage Loan, the right of the borrower to make a Draw may be terminated and
the entire outstanding Principal Balance of such Mortgage Loan may be declared
immediately due and payable. A "default" includes, but is not limited to, the
borrower's failure to make any payment as required, any action or inaction by
the borrower that adversely affects the Mortgaged Property or the rights in the
Mortgaged Property or any fraud or material misrepresentation by a borrower in
connection with the Mortgage Loan. The Credit Limit may also be increased, upon
completion of satisfactory underwriting review, as described below.
Interest (the "Finance Charge") accrues on each Mortgage Loan, payable
monthly, on the related average daily outstanding Principal Balance for each
Billing Cycle at a variable rate per annum (the "Loan Rate") which is adjusted
quarterly (except for the Hunter Mortgage Loans which are adjusted monthly) and
is equal to the Index on the last day of each March, June, September or December
preceding the first day of a Billing Cycle (such date, the "Adjustment Date") as
described below plus a fixed percentage amount (the "Gross Margin") specified in
the related Credit Line Agreement, computed on the basis of a 365 day year times
actual days elapsed. The "Billing Cycle" for each Mortgage Loan is the calendar
month preceding each Due Date. The "Due Date" for payments under each Mortgage
Loan is the twentieth day of each month.
Mortgage Loans originated in March 1997 and thereafter bear interest at a
promotional rate of either 6.49% or 6.99% per annum for the first six months
following the first Draw thereunder. After the expiration of the six-month
promotional period, the interest rate on such Mortgage Loans will be the Loan
Rate described above.
The Finance Charge accrued each month with respect to each Mortgage Loan is
calculated based on the "prime rate" as published in the "Money Rates" table in
The Wall Street Journal (the "Index") on the related Adjustment Date. The Gross
Margins for the Mortgage Loans as of the Cut-Off Date ranged from -1.01% to
3.50%. The weighted average Gross Margins as of the Cut-Off Date for the
Mortgage Loans was 0.89%. Substantially all of the Mortgage Loans are subject to
a maximum Loan Rate of 19% per annum. The Mortgage Loans have a minimum Loan
Rate equal to the greater of zero and the Gross Margin. No Mortgage Loan is
subject to a periodic rate cap.
S-23
<PAGE> 24
Payments made by or on behalf of the borrower for each Mortgage Loan are
generally required to be applied, first, to any unpaid Finance Charges and
second, to the Principal Balance outstanding with respect to such Mortgage Loan.
Mortgage Loans originated in August 1994 and thereafter are subject to a
$250 termination fee to the extent the related borrower prepays such loan within
either a two or five year period following origination, as indicated in the
related Credit Line Agreement.
SAMPLE POOL STATISTICS
Certain information concerning the Mortgage Loans is not readily available,
including information with respect to (i) the Combined Loan-to-Value Ratio, (ii)
property type, (iii) owner occupancy status, (iv) lien priority, (v) senior lien
balance, (vi) appraisal value and (vii) property state. As a result, in order to
compile certain of the data in this section, including the Combined
Loan-to-Value Ratio of the Mortgage Loans, information was manually collected
from loan files constituting a random sample (the "Sample Pool") of 638 Mortgage
Loans (the "Sample Pool Mortgage Loans"), constituting 9.27% of the Mortgage
Loans by Cut-Off Date Principal Balance. ALL AVERAGES AND TOTALS SET FORTH IN
THIS SECTION HAVE BEEN CALCULATED BASED UPON THE SAMPLE POOL MORTGAGE LOANS AS
OF THE CUT-OFF DATE. NO ASSURANCE CAN BE GIVEN THAT THE CHARACTERISTICS OF THE
SAMPLE POOL MORTGAGE LOANS ARE REPRESENTATIVE OF THE MORTGAGE LOANS IN THE
AGGREGATE.
The Sample Pool Mortgage Loans consisted of 638 loans with an aggregate
Cut-Off Date Principal Balance of $15,659,051.84 (the "Cut-Off Date Sample Pool
Balance"). The Cut-Off Date Principal Balances of the Sample Pool Mortgage Loans
ranged from $38.04 to $348,246.85, and the average Cut-Off Date Principal
Balance of the Sample Pool Mortgage Loans was $24,543.97. The sum of certain
percentages set forth in the following tables may not equal exactly 100% due to
differences in the rounding of percentages.
Set forth below is a description of certain characteristics of the Sample
Pool Mortgage Loans:
COMBINED LOAN-TO-VALUE RATIOS(1)
(SAMPLE POOL)
<TABLE>
<CAPTION>
PERCENT OF SAMPLE
COMBINED NUMBER OF CUT-OFF DATE POOL BY CUT-OFF DATE
LOAN-TO-VALUE RATIOS MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ---------------------------------------------- -------------- ----------------- --------------------
<S> <C> <C> <C>
0.000%....................................... 62 $ 1,431,434.87 9.14%
0.001 to 10.000............................. 2 6,987.30 0.04
10.001 to 20.000............................. 10 96,860.62 0.62
20.001 to 30.000............................. 25 479,939.06 3.06
30.001 to 40.000............................. 29 736,241.63 4.70
40.001 to 50.000............................. 48 1,092,118.39 6.97
50.001 to 60.000............................. 44 1,392,554.42 8.89
60.001 to 70.000............................. 66 1,708,105.54 10.91
70.001 to 75.000............................. 41 1,200,441.43 7.67
75.001 to 80.000............................. 124 3,166,760.33 20.22
80.001 to 85.000............................. 118 2,824,770.56 18.04
85.001 to 90.000............................. 28 475,600.36 3.04
90.001 to 95.000............................. 18 559,396.18 3.57
95.001 to 100.000............................. 23 487,841.15 3.12
--- -------------- -------
Total.................................... 638 $15,659,051.84 100.00%
=== ============== =======
</TABLE>
- -------------------------
(1) The "Combined Loan-to-Value Ratio" or "CLTV" of each Mortgage Loan is the
ratio, expressed as a percentage, of (a) the sum of (i) the greater of the
Credit Limit and the current balance as of the Cut-Off Date and (ii) the
principal balance of any senior mortgage loan as of the origination of such
Mortgage Loan, over (b) the value (based on appraised value or other
acceptable valuation method) for the related Mortgaged Property determined
at the origination of such Mortgage Loan.
S-24
<PAGE> 25
LIEN PRIORITY
(SAMPLE POOL)
<TABLE>
<CAPTION>
PERCENT OF SAMPLE
NUMBER OF CUT-OFF DATE POOL BY CUT-OFF DATE
LIEN PRIORITY MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------------------------------------- -------------- ----------------- --------------------
<S> <C> <C> <C>
1................................................ 130 $ 3,300,998.88 21.08%
2................................................ 451 10,803,038.77 68.99
3................................................ 34 1,013,359.24 6.47
Unknown.......................................... 23 541,654.95 3.46
--- -------------- -------
Total..................................... 638 $15,659,051.84 100.00%
=== ============== =======
</TABLE>
PROPERTY TYPE
(SAMPLE POOL)
<TABLE>
<CAPTION>
PERCENT OF SAMPLE
NUMBER OF CUT-OFF DATE POOL BY CUT-OFF DATE
PROPERTY TYPE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------------------------------------- -------------- ----------------- --------------------
<S> <C> <C> <C>
1- to 4-Family................................... 638 $ 15,659,051.84 100.00%
--- ----------------- -------
Total..................................... 638 $ 15,659,051.84 100.00%
=== ============== =======
</TABLE>
OWNER OCCUPANCY STATUS
(SAMPLE POOL)
<TABLE>
<CAPTION>
PERCENT OF SAMPLE
NUMBER OF CUT-OFF DATE POOL BY CUT-OFF DATE
OWNER OCCUPANCY STATUS MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------------------------------------- -------------- ----------------- --------------------
<S> <C> <C> <C>
Owner Occupied................................... 608 $ 14,819,076.51 94.64%
Non-Owner Occupied............................... 1 14,091.89 0.09
Unknown.......................................... 29 825,883.44 5.27
----- ----------------- -------
Total..................................... 638 15,659,051.84 100.00%
=== ============== =======
</TABLE>
GEOGRAPHIC DISTRIBUTION(1)
(SAMPLE POOL)
<TABLE>
<CAPTION>
PERCENT OF SAMPLE
NUMBER OF CUT-OFF DATE POOL BY CUT-OFF DATE
STATE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ---------------------------------------------- -------------- ----------------- --------------------
<S> <C> <C> <C>
Kentucky...................................... 9 $ 113,507.38 0.72%
New Hampshire................................. 1 10,300.00 0.07
Ohio.......................................... 628 15,535,244.46 99.21
--- ----------------- -------
Total.................................... 638 $ 15,659,051.84 100.00%
=== ================ =======
</TABLE>
- -------------------------
(1) Geographic location is determined by the address of the Mortgaged Property
securing each Mortgage Loan.
S-25
<PAGE> 26
MORTGAGE LOAN POOL STATISTICS
Provident has computed the following additional information as of the
Cut-Off Date with respect to the Mortgage Loans to be included in the Trust. The
following tables are based on the Cut-Off Date Principal Balances of all
Mortgage Loans.
PRINCIPAL BALANCES
<TABLE>
<CAPTION>
PERCENT
NUMBER OF CUT-OFF DATE BY CUT-OFF DATE
PRINCIPAL BALANCES MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------------------------------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
$ 0.01- 25,000.00............................ 4,666 $ 56,461,288.15 33.42%
25,000.01- 50,000.00............................ 1,673 60,000,896.85 35.51
50,000.01- 75,000.00............................ 353 21,409,556.36 12.67
75,000.01-100,000.00............................ 164 14,716,175.66 8.71
100,000.01-125,000.00............................ 36 4,054,550.72 2.40
125,000.01-150,000.00............................ 20 2,811,591.17 1.66
150,000.01-175,000.00............................ 11 1,731,467.58 1.02
175,000.01-200,000.00............................ 6 1,126,765.67 0.67
200,000.01-225,000.00............................ 6 1,259,941.92 0.75
225,000.01-250,000.00............................ 5 1,233,043.42 0.73
250,000.01-275,000.00............................ 3 789,330.04 0.47
275,000.01-300,000.00............................ 3 853,547.41 0.51
325,000.01-350,000.00............................ 2 693,169.48 0.41
375,000.01-400,000.00............................ 1 391,977.95 0.23
400,000.01 and greater........................... 3 1,436,513.90 0.85
----- --------------- ------
Total.................................. 6,952 $168,969,816.28 100.00%
===== =============== =======
</TABLE>
CREDIT LIMITS
<TABLE>
<CAPTION>
PERCENT
NUMBER OF CUT-OFF DATE BY CUT-OFF DATE
CREDIT LIMITS MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------------------------------------- -------------- ----------------- ------------------
<S> <C> <C> <C>
$ 0.01- 25,000.00.......................... 2,821 $ 34,054,156.15 20.15%
25,000.01- 50,000.00.......................... 2,594 60,595,333.50 35.86
50,000.01- 75,000.00.......................... 885 30,800,191.80 18.23
75,000.01-100,000.00.......................... 442 21,567,948.54 12.76
100,000.01-125,000.00.......................... 79 4,847,699.23 2.87
125,000.01-150,000.00.......................... 59 5,350,114.09 3.17
150,000.01-175,000.00.......................... 15 1,522,046.93 0.90
175,000.01-200,000.00.......................... 16 2,038,342.88 1.21
200,000.01-225,000.00.......................... 5 1,036,759.27 0.61
225,000.01-250,000.00.......................... 10 1,453,904.56 0.86
250,000.01-275,000.00.......................... 3 789,330.04 0.47
275,000.01-300,000.00.......................... 8 1,593,533.54 0.94
325,000.01-350,000.00.......................... 4 666,617.03 0.39
350,000.01-375,000.00.......................... 1 348,246.85 0.21
375,000.01-400,000.00.......................... 5 650,374.71 0.38
400,000.01 and greater......................... 5 1,655,217.16 0.98
------ --------------- -------
Total..................................... 6,952 $168,969,816.28 100.00%
===== =============== =======
</TABLE>
S-26
<PAGE> 27
CREDIT LIMIT UTILIZATION RATES
<TABLE>
<CAPTION>
NUMBER OF CUT-OFF DATE PERCENT BY CUT-OFF DATE
CREDIT LIMIT UTILIZATION RATES MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- -------------------------------------------- -------------- ----------------- ------------------------
<S> <C> <C> <C>
#10.00%............................... 505 $ 1,346,055.06 0.80%
10.01- 20.00............................... 545 3,868,310.49 2.29
20.01- 30.00............................... 533 6,459,131.04 3.82
30.01- 40.00............................... 483 8,328,796.48 4.93
40.01- 50.00............................... 503 9,660,834.23 5.72
50.01- 60.00............................... 498 11,827,349.71 7.00
60.01- 70.00............................... 477 12,726,534.06 7.53
70.01- 80.00............................... 558 16,142,992.99 9.55
80.01- 85.00............................... 298 8,914,128.96 5.28
85.01- 90.00............................... 437 15,015,125.97 8.89
90.01- 95.00............................... 538 17,042,117.55 10.09
95.01-100.00............................... 1,469 53,808,870.27 31.85
100.01-105.00............................... 108 3,829,569.47 2.27
----- --------------- ------
Total................................ 6,952 $168,969,816.28 100.00%
===== =============== =======
</TABLE>
LOAN AGE
<TABLE>
<CAPTION>
NUMBER OF CUT-OFF DATE PERCENT BY CUT-OFF DATE
LOAN AGE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------------------------------ -------------- ----------------- ------------------------
<S> <C> <C> <C>
0 months................................ 64 $ 1,290,733.77 0.76%
1- 12................................... 1,197 27,778,890.16 16.44
13- 24................................... 1,153 29,478,585.48 17.45
25- 36................................... 1,151 28,885,208.64 17.09
37- 48................................... 930 21,086,857.04 12.48
49- 60................................... 734 17,992,686.21 10.65
61- 72................................... 460 11,769,223.42 6.97
73- 84................................... 272 5,901,747.15 3.49
85- 96................................... 246 6,224,062.90 3.68
97-108................................... 262 6,975,733.85 4.13
109-120................................... 121 3,471,452.63 2.05
121-132................................... 362 8,114,635.03 4.80
----- --------------- ------
Total................................ 6,952 $168,969,816.28 100.00%
===== =============== =======
</TABLE>
S-27
<PAGE> 28
LOAN RATES(1)
<TABLE>
<CAPTION>
NUMBER OF CUT-OFF DATE PERCENT BY CUT-OFF DATE
LOAN RATES MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------------------------------- -------------- ----------------- -----------------------
<S> <C> <C> <C>
6.251 - 6.500%........................... 209 $ 4,863,551.34 2.88%
6.751 - 7.000............................ 263 6,887,326.06 4.08
7.251 - 7,500............................ 2 21,401.87 0.01
7.751 - 8,000............................ 9 248,273.27 0.15
8.001 - 8.250............................ 5 155,855.04 0.09
8.251 - 8.500............................ 896 29,474,262.46 17.44
8.501 - 8.750............................ 2 116,839.72 0.07
8.751 - 9.000............................ 1,134 44,023,966.72 26.05
9.001 - 9.250............................ 204 3,876,631.14 2.29
9.251 - 9.500............................ 1,130 32,473,848.04 19.22
9.751 - 10.000............................ 1,531 29,180,616.50 17.27
10.001 - 10.250............................ 1 252,347.50 0.15
10.251 - 10.500............................ 1,280 12,584,566.39 7.45
10.751 - 11.000............................ 1 18,195.40 0.01
11.251 - 11.500............................ 5 63,935.33 0.04
11.501 - 11.750............................ 1 8,393.43 0.00
11.751 - 12.000............................ 279 4,719,806.07 2.79
----- --------------- ------
Total................................. 6,952 $168,969,816.28 100.00%
===== =============== =======
</TABLE>
- ---------------
(1) As of the Cut-Off Date, approximately 6.95% (by Cut-Off Date Pool Balance)
of the Mortgage Loans are subject to an introductory Loan Rate of either
6.49% or 6.99%. Such rate remains in effect for the first six months
following the first Draw thereunder.
GROSS MARGIN(1)
<TABLE>
<CAPTION>
NUMBER OF CUT-OFF DATE PERCENT BY CUT-OFF DATE
GROSS MARGIN MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------------------------------- -------------- ----------------- -----------------------
<S> <C> <C> <C>
- -1.249 - -1.000%........................... 2 $ 21,401.87 0.01%
- -0.749 - -0.500............................ 9 248,273.27 0.15
- -0.499 - -0.250............................ 5 155,855.04 0.09
- -0.249 - 0.000............................ 899 29,714,088.05 17.59
0.001 - 0.250............................ 3 144,852.76 0.09
0.251 - 0.500............................ 1,331 51,742,099.07 30.62
0.501 - 0.750............................ 204 3,876,631.14 2.29
0.751 - 1.000............................ 1,401 36,258,448.49 21.46
1.251 - 1.500............................ 1,530 29,150,790.91 17.25
1.501 - 1.750............................ 1 252,347.50 0.15
1.751 - 2.000............................ 1,280 12,584,566.39 7.45
2.001 - 2.250............................ 1 10,131.56 0.01
2.251 - 2.500............................ 1 18,195.40 0.01
2.751 - 5.000............................ 5 63,935.33 0.04
3.001 - 3.250............................ 1 8,393.43 0.00
3.251 - 3.500............................ 279 4,719,806.07 2.79
----- --------------- ------
Total................................. 6,952 $168,969,816.28 100.00%
===== =============== =======
</TABLE>
- ---------------
(1) Each Mortgage Loan is subject to a minimum Loan Rate equal to the greater of
zero and the Gross Margin.
S-28
<PAGE> 29
MAXIMUM RATES
<TABLE>
<CAPTION>
NUMBER OF CUT-OFF DATE PERCENT BY CUT-OFF DATE
MAXIMUM RATES MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------------------------------- -------------- ----------------- -----------------------
<S> <C> <C> <C>
18.000%.................................... 4 $ 43,397.38 0.03%
19.000..................................... 6,948 168,926,418.90 99.97
----- --------------- ------
Total................................. 6,952 $168,969,816.28 100.00%
===== =============== ======
</TABLE>
ORIGINATION YEAR
<TABLE>
<CAPTION>
NUMBER OF CUT-OFF DATE PERCENT BY CUT-OFF DATE
ORIGINATION YEAR MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------------------------------- -------------- ----------------- -----------------------
<S> <C> <C> <C>
1986....................................... 15 $ 342,982.55 0.20%
1987....................................... 379 8,719,160.24 5.16
1988....................................... 191 5,070,510.83 3.00
1989....................................... 225 6,322,864.34 3.74
1990....................................... 275 6,698,118.87 3.96
1991....................................... 338 6,795,658.46 4.02
1992....................................... 572 15,405,584.10 9.12
1993....................................... 843 19,387,593.80 11.47
1994....................................... 1,001 23,927,819.64 14.16
1995....................................... 1,288 32,965,365.80 19.51
1996....................................... 1,063 25,797,157.31 15.27
1997....................................... 762 17,537,000.34 10.38
----- --------------- ------
Total................................. 6,952 $168,969,816.28 100.00%
===== =============== ======
</TABLE>
DELINQUENCY STATUS
<TABLE>
<CAPTION>
NUMBER OF CUT-OFF DATE PERCENT BY CUT-OFF DATE
NUMBER OF DAYS DELINQUENT MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- -------------------------------------------- -------------- ----------------- -----------------------
<S> <C> <C> <C>
Current..................................... 6,921 $168,427,297.51 99.68%
30 to 59.................................... 31 542,518.77 0.32
----- --------------- ------
Total.................................. 6,952 $168,969,816.28 100.00%
===== =============== ======
</TABLE>
MATURITY AND PREPAYMENT CONSIDERATIONS
The Agreement, except as otherwise described herein, provides that the
Certificateholders will be entitled to receive on each Distribution Date
distributions of principal, in the amounts described herein, until the
Certificate Principal Balance is reduced to zero. During the Managed
Amortization Period, Certificateholders will receive amounts from Principal
Collections based upon the Investor Fixed Allocation Percentage subject to
reduction as described below. During the Rapid Amortization Period,
Certificateholders will receive amounts from Principal Collections based solely
upon the Investor Fixed Allocation Percentage. Because prior distributions of
Investor Principal Collections to Certificateholders reduce the Investor
Floating Allocation Percentage but do not change the Fixed Allocation
Percentage, allocations of Principal Collections based on the Fixed Allocation
Percentage may result in distributions of principal to the Certificateholders in
amounts that are, in most cases, greater relative to the declining balance of
the Mortgage Loans than would be the case if the Investor Floating Allocation
Percentage were used to determine the percentage of Principal Collections
distributed to Certificateholders. This is especially true during the Rapid
Amortization Period when the Certificateholders are entitled to receive Investor
Principal Collections and not a lesser amount. In addition, Investor Interest
Collections may be distributed as principal to Certificateholders in connection
with the Accelerated Principal Distribution Amount, if any. Moreover, to the
extent of losses allocable to the
S-29
<PAGE> 30
Certificateholders, Certificateholders may also receive as payment of principal
the Floating Allocation Percentage of the amount of such losses either from
Investor Interest Collections or, in some instances, draws under the Policy. The
level of losses may therefore affect the rate of payment of principal on the
Certificates.
To the extent obligors make more draws than principal payments, the
Transferor Interest may grow. Because during the Rapid Amortization Period the
Certificateholders' share of Principal Collections is based upon the Investor
Fixed Allocation Percentage (without reduction), an increase in the Transferor
Interest due to additional draws may also result in Certificateholders receiving
principal at a greater rate than would otherwise occur if the Investor Floating
Allocation Percentage were used to determine the percentage of Principal
Collections distributed to Certificateholders. The Agreement permits the
Transferor, at its option, but subject to the satisfaction of certain conditions
specified in the Agreement, including the conditions described below, to remove
certain Mortgage Loans from the Trust at any time during the life of the Trust,
so long as the Transferor Interest (after giving effect to such removal) is not
less than the Minimum Transferor Interest. Such removals may affect the rate at
which principal is distributed to Certificateholders by reducing the overall
Pool Balance and thus the amount of Principal Collections. See "DESCRIPTION OF
THE CERTIFICATES -- Optional Retransfers of Mortgage Loans to the Transferor."
The prepayment experience with respect to the Mortgage Loans will affect
the weighted average life of the Certificates.
The rate of prepayment on the Mortgage Loans cannot be predicted. Provident
is not aware of any publicly available studies or statistics that accurately
predict or forecast the rate of prepayment of mortgage loans such as the
Mortgage Loans. Generally, home equity revolving credit lines are not viewed by
borrowers as permanent financing. Accordingly, the Mortgage Loans may experience
a higher rate of prepayment than traditional first mortgage loans. On the other
hand, the Hunter Mortgage Loans are Balloon Loans and because the other Mortgage
Loans generally do not amortize during the Draw Period which may automatically
renew for extended periods as described herein, rates of principal payment on
the Mortgage Loans will generally be slower than those of traditional
fully-amortizing first mortgages in the absence of prepayments on such Mortgage
Loans. The prepayment experience of the Trust with respect to the Mortgage Loans
may be affected by a wide variety of factors, including general economic
conditions, prevailing interest rate levels, the availability of alternative
financing, homeowner mobility, the frequency and amount of any future draws on
the Credit Line Agreements and changes affecting the deductibility for Federal
income tax purposes of interest payments on home equity credit lines.
Substantially all of the Mortgage Loans contain "due-on-sale" provisions, and
the Servicer intends to enforce such provisions, unless such enforcement is not
permitted by applicable law. The enforcement of a "due-on-sale" provision will
have the same effect as a prepayment of the related Mortgage Loan. See "CERTAIN
LEGAL ASPECTS OF LOANS -- Due-on-Sale Clauses" in the Prospectus.
The yield to an investor who purchases the Certificates in the secondary
market at a price other than par will vary from the anticipated yield if the
rate of prepayment on the Mortgage Loans is actually different than the rate
anticipated by such investor at the time such Certificates were purchased.
Collections on the Mortgage Loans 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 the fees and charges thereon. It is possible that
borrowers may fail to make scheduled payments. Collections on the Mortgage Loans
may vary due to seasonal purchasing and payment habits of borrowers.
No assurance can be given as to the level of prepayments that will be
experienced by the Trust but it can be expected that a portion of borrowers will
not prepay their Mortgage Loans to any significant degree. See "DESCRIPTION OF
THE SECURITIES -- Weighted Average Life of the Certificates" in the Prospectus.
POOL FACTOR AND TRADING INFORMATION
The "Pool Factor" is a seven-digit decimal which the Servicer will compute
monthly expressing the Certificate Principal Balance of the Certificates as of
each Distribution Date (after giving effect to any
S-30
<PAGE> 31
distribution of principal on such Distribution Date) as a proportion of the
Original Certificate Principal Balance. On the Closing Date, the Pool Factor
will be 1.0000000. See "DESCRIPTION OF THE CERTIFICATES -- Distributions on the
Certificates." Thereafter, the Pool Factor will decline to reflect reductions in
the related Certificate Principal Balance resulting from distributions of
principal to the Certificates.
Pursuant to the Agreement, monthly reports concerning the Invested Amount,
the Pool Factor and various other items of information will be made available to
the Certificateholders. In addition, within 60 days after the end of each
calendar year, beginning with the 1998 calendar year, information for tax
reporting purposes will be made available to each person who has been a
Certificateholder of record at any time during the preceding calendar year. See
"DESCRIPTION OF THE CERTIFICATES -- Book-Entry Certificates" and "-- Reports to
Certificateholders" herein.
DESCRIPTION OF THE CERTIFICATES
The Certificates will be issued pursuant to the Agreement. The form of the
Agreement has been filed as an exhibit to the Registration Statement of which
this Prospectus Supplement and the Prospectus are a part. The following
summaries describe certain provisions of the Agreement. The summaries do not
purport to be complete and are subject to, and are qualified in their entirety
by reference to, all of the provisions of the Agreement. Wherever particular
sections or defined terms of the Agreement are referred to, such sections or
defined terms are hereby incorporated herein by reference.
GENERAL
The Certificates will be issued in minimum denominations of $1,000 and
multiples of $1 in excess thereof and will evidence specified undivided
interests in the Trust. The property of the Trust will consist of, to the extent
provided in the Agreement: (i) each of the Mortgage Loans that from time to time
are subject to the Agreement (including any Additional Balances arising after
the Cut-Off Date); and the Mortgage Files (ii) collections on the Mortgage Loans
received on and after the Cut-Off Date; (iii) Mortgaged Properties relating to
the Mortgage Loans that are acquired by foreclosure or deed in lieu of
foreclosure; (iv) the Collection Account and the Distribution Account (excluding
net earnings thereon); and (v) the Policy. Definitive Certificates (as defined
below), if issued, will be transferable and exchangeable at the corporate trust
office of the Trustee, which will initially act as Certificate Registrar. See
"-- Book-Entry 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 aggregate undivided interest in the Trust represented by the
Certificates as of the Closing Date will equal $165,590,419.95 (the "Original
Invested Amount"), which represents 98% of the Cut-Off Date Pool Balance. The
"Original Certificate Principal Balance" will equal $165,590,000.00 (subject to
a permitted variance in the aggregate of plus or minus 5%). Following the
Closing Date, the "Invested Amount" with respect to any Distribution Date will
be an amount equal to the Original Invested Amount minus (i) the amount of
Investor Principal Collections previously distributed to Certificateholders, and
minus (ii) an amount equal to the product of the Investor Floating Allocation
Percentage and the Liquidation Loss Amounts (each as defined herein). The
principal amount of the outstanding Certificates (the "Certificate Principal
Balance") on any Distribution Date is equal to the Original Certificate
Principal Balance minus the aggregate of amounts actually distributed as
principal to the Certificateholders. See "-- Distributions on the Certificates"
below. Each Certificate represents the right to receive payments of interest at
the Certificate Rate and payments of principal as described below.
The Transferor will own the remaining undivided interest in the Mortgage
Loans (the "Transferor Interest"), which is equal to the Pool Balance less the
Invested Amount. The Transferor Interest will initially equal $3,379,396.33
which represents approximately 2% of the Cut-Off Date Pool Balance. The
Transferor as of any date is the owner of the Transferor Interest, which
initially will be Provident. In general, the Pool Balance will vary each day as
principal is paid on the Mortgage Loans, liquidation losses are incurred,
Additional Balances are drawn down by borrowers and Mortgage Loans are
transferred to the Trust.
S-31
<PAGE> 32
The Transferor has the right to sell or pledge the Transferor Interest at
any time, provided (i) the Rating Agencies (as defined herein) have notified the
Transferor, the Certificate Insurer and the Trustee in writing that such action
will not result in the reduction or withdrawal of the ratings assigned to the
Certificates, (ii) the Certificate Insurer has consented in writing to such
transfer and (iii) certain other conditions specified in the Agreement are
satisfied.
BOOK-ENTRY CERTIFICATES
The Certificates will be book-entry Certificates (the "Book-Entry
Certificates"). Persons acquiring beneficial ownership interests in the
Certificates ("Certificate Owners") may elect to hold their Certificates through
The Depository Trust Company ("DTC") in the United States, or Cedel or Euroclear
(in Europe) if they are participants of such systems, or indirectly through
organizations which are participants in such systems. The Book-Entry
Certificates will be issued in one or more certificates which equal the
aggregate principal balance of the Certificates and will initially be registered
in the name of Cede & Co., the nominee of DTC. Cedel and Euroclear will hold
omnibus positions on behalf of their participants through customers' securities
accounts in Cedel's and Euroclear's names on the books of their respective
depositaries which in turn will hold such positions in customers' securities
accounts in the depositaries' names on the books of DTC. Citibank will act as
depositary for Cedel and Chase will act as depositary for Euroclear (in such
capacities, individually the "Relevant Depositary" and collectively the
"European Depositaries"). Investors may hold such beneficial interests in the
Book-Entry Certificates in minimum denominations representing Certificate
Principal Balances of $1,000 and in multiples of $1 in excess thereof. Except as
described below, no person acquiring a Book-Entry Certificate (each, a
"beneficial owner") will be entitled to receive a physical certificate
representing such Certificate (a "Definitive Certificate"). Unless and until
Definitive Certificates are issued, it is anticipated that the only
"Certificateholder" of the Certificates will be Cede & Co., as nominee of DTC.
Certificate Owners will not be Certificateholders as that term is used in the
Agreement. Certificate Owners are only permitted to exercise their rights
indirectly through Participants and DTC.
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 (each, a "Financial Intermediary") that maintains the
beneficial owner's account for such purpose. In turn, the Financial
Intermediary's ownership of such Book-Entry Certificate will be recorded on the
records of DTC (or of a participating firm that acts as agent for the Financial
Intermediary, whose interest will in turn be recorded on the records of DTC, if
the beneficial owner's Financial Intermediary is not a DTC participant) and on
the records of Cedel or Euroclear, as appropriate.
Certificate Owners will receive all distributions of principal of, and
interest on, the Certificates from the Trustee through DTC and DTC participants.
While the Certificates are outstanding (except under the circumstances described
below), under the rules, regulations and procedures creating and affecting DTC
and its operations (the "Rules"), DTC is required to make book-entry transfers
among Participants on whose behalf it acts with respect to the Certificates and
is required to receive and transmit distributions of principal of, and interest
on, the Certificates. Participants and indirect participants with whom
Certificate Owners have accounts with respect to Certificates are similarly
required to make book-entry transfers and receive and transmit such
distributions on behalf of their respective Certificate Owners. Accordingly,
although Certificate Owners will not possess certificates, the Rules provide a
mechanism by which Certificate Owners will receive distributions and will be
able to transfer their interest.
Certificate Owners will not receive or be entitled to receive certificates
representing their respective interests in the Certificates, except under the
limited circumstances described below. Unless and until Definitive Certificates
are issued, Certificate Owners who are not Participants may transfer ownership
of Certificates only through Participants and indirect participants by
instructing such Participants and indirect participants to transfer
Certificates, by book-entry transfer, through DTC for the account of the
purchasers of such Certificates, which account is maintained with their
respective Participants. Under the Rules and in accordance with DTC's normal
procedures, transfers of ownership of Certificates will be executed through DTC
and the accounts of the respective Participants at DTC will be debited and
credited. Similarly, the
S-32
<PAGE> 33
Participants and indirect participants will make debits or credits, as the case
may be, on their records on behalf of the selling and purchasing Certificate
Owners.
Because of time zone differences, credits of securities received in Cedel
or Euroclear as a result of a transaction with a Participant will be made during
subsequent securities settlement processing and dated the business day following
the DTC settlement date. Such credits or any transactions in such securities
settled during such processing will be reported to the relevant Euroclear or
Cedel Participants on such business day. Cash received in Cedel or Euroclear as
a result of sales of securities by or through a Cedel Participant (as defined
below) or Euroclear Participant (as defined below) to a DTC Participant will be
received with value on the DTC settlement date but will be available in the
relevant Cedel or Euroclear cash account only as of the business day following
settlement in DTC. For information with respect to tax documentation procedures
relating to the Certificates, see "CERTAIN FEDERAL INCOME TAX CONSEQUENCES --
Foreign Investors" and "-- Backup Withholding" herein and "GLOBAL CLEARANCE,
SETTLEMENT AND TAX DOCUMENTATION PROCEDURES -- Certain U.S. Federal Income Tax
Documentation Requirements" in Annex I hereto.
Transfers between Participants will occur in accordance with DTC rules.
Transfers between Cedel Participants and Euroclear Participants will occur in
accordance with their respective rules and operating procedures. Cross-market
transfers between persons holding directly or indirectly through DTC, on the one
hand, and directly or indirectly through Cedel Participants or Euroclear
Participants, on the other, will be effected in DTC in accordance with DTC rules
on behalf of the relevant European international clearing system by the Relevant
Depositary; however, such cross market transactions will require delivery of
instructions to the relevant European international clearing system by the
counterparty in such system in accordance with its rules and procedures and
within its established deadlines (European time). The relevant European
international clearing system will, if the transaction meets its settlement
requirements, deliver instructions to the Relevant Depositary to take action to
effect final settlement on its behalf by delivering or receiving securities in
DTC, and making or receiving payment in accordance with normal procedures for
same day funds settlement applicable to DTC. Cedel Participants and Euroclear
Participants may not deliver instructions directly to the European Depositaries.
DTC which is a New York-chartered limited purpose trust company, performs
services for its participants, some of which (and/or their representatives) own
DTC. In accordance with its normal procedures, DTC is expected to record the
positions held by each DTC participant in the Book-Entry Certificates, whether
held for its own account or as a nominee for another person. In general,
beneficial ownership of Book-Entry Certificates will be subject to the rules,
regulations and procedures governing DTC and DTC participants as in effect from
time to time.
Cedel is incorporated under the laws of Luxembourg as a professional
depository. Cedel holds securities for its participating organizations ("Cedel
Participants") and facilitates the clearance and settlement of securities
transactions between Cedel Participants through electronic book-entry changes in
accounts of Cedel Participants, thereby eliminating the need for physical
movement of certificates. Transactions may be settled in Cedel in any of 28
currencies, including United States dollars. Cedel provides to its Cedel
Participants, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. Cedel interfaces with domestic markets in several
countries. As a professional depository, Cedel is subject to regulation by the
Luxembourg Monetary Institute. Cedel participants are recognized financial
institutions around the world, including underwriters, securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations. Indirect access to Cedel is also available to others, such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a Cedel Participant, either directly or indirectly.
Euroclear was created in 1968 to hold securities for participants of
Euroclear ("Euroclear Participants") and to clear and settle transactions
between Euroclear Participants through simultaneous electronic book-entry
delivery against payment, thereby eliminating the need for physical movement of
certificates and any risk from lack of simultaneous transfers of securities and
cash. Transactions may now be settled in any of 32 currencies, including United
States dollars. Euroclear includes various other services, including securities
S-33
<PAGE> 34
lending and borrowing and interfaces with domestic markets in several countries
generally similar to the arrangements for cross-market transfers with DTC
described above. Euroclear is operated by the Brussels, Belgium office of Morgan
Guaranty Trust Company of New York (the "Euroclear Operator"), under contract
with Euroclear Clearance Systems S.C., a Belgian cooperative corporation (the
"Cooperative"). All operations are conducted by the Euroclear Operator, and all
Euroclear securities clearance accounts and Euroclear cash accounts are accounts
with the Euroclear Operator, not the Cooperative. The Cooperative establishes
policy for Euroclear on behalf of Euroclear Participants. Euroclear Participants
include banks (including central banks), securities brokers and dealers and
other professional financial intermediaries. Indirect access to Euroclear is
also available to other firms that clear through or maintain a custodial
relationship with a Euroclear Participant, either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
Commission.
Securities clearance accounts and cash accounts with the Euroclear Operator
are governed by the Terms and Conditions Governing Use of Euroclear and the
related Operating Procedures of the Euroclear System and applicable Belgian law
(collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within Euroclear, withdrawals of securities and
cash from Euroclear, and receipts of payments with respect to securities in
Euroclear. All securities in Euroclear are held on a fungible basis without
attribution of specific certificates to specific securities clearance accounts.
The Euroclear Operator acts under the Terms and Conditions only on behalf of
Euroclear Participants, and has no record of or relationship with persons
holding through Euroclear Participants.
Distributions on the Book-Entry Certificates will be made on each
Distribution Date by the Trustee to DTC. DTC will be responsible for crediting
the amount of such payments to the accounts of the applicable DTC participants
in accordance with DTC's normal procedures. Each DTC participant will be
responsible for disbursing such payments to the beneficial owners of the
Book-Entry Certificates that it represents and to each Financial Intermediary
for which it acts as agent. Each such Financial Intermediary will be responsible
for disbursing funds to the beneficial owners of the Book-Entry Certificates
that it represents.
Under a book-entry format, beneficial owners of the Book-Entry Certificates
may experience some delay in their receipt of payments, since such payments will
be forwarded by the Trustee to Cede. Distributions with respect to Certificates
held through Cedel or Euroclear will be credited to the cash accounts of Cedel
Participants or Euroclear Participants in accordance with the relevant system's
rules and procedures, to the extent received by the Relevant Depositary. Such
distributions will be subject to tax reporting in accordance with relevant
United States tax laws and regulations. See "CERTAIN FEDERAL INCOME TAX
CONSEQUENCES -- Foreign Investors" and "-- Backup Withholding" herein. Because
DTC can only act on behalf of Financial Intermediaries, the ability of a
beneficial owner to pledge Book-Entry Certificates to persons or entities that
do not participate in the Depository system, or otherwise take actions in
respect of such Book-Entry Certificates, may be limited due to the lack of
physical certificates for such Book-Entry Certificates. In addition, issuance of
the Book-Entry Certificates in book-entry form may reduce the liquidity of such
Certificates in the secondary market since certain potential investors may be
unwilling to purchase Certificates for which they cannot obtain physical
certificates.
Monthly and annual reports on the Trust provided by the Servicer to CEDE,
as nominee of DTC, may be made available 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 such beneficial owners are credited.
DTC has advised the Transferor and 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 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 such actions are taken
on behalf of Financial Intermediaries whose holdings include such Book-Entry
Certificates. Cedel or the Euroclear Operator, as the case may be,
S-34
<PAGE> 35
will take any other action permitted to be taken by a Certificateholder under
the Agreement on behalf of a Cedel Participant or Euroclear Participant only in
accordance with its relevant rules and procedures and subject to the ability of
the Relevant Depositary to effect such actions on its behalf through DTC. DTC
may take actions, at the direction of the related 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 Sponsor 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 Sponsor or the
Trustee is unable to locate a qualified successor, (b) the Transferor, at its
sole option, elects to terminate a book-entry system through DTC or (c) after
the occurrence of an Event of Servicing Termination (as defined herein),
beneficial owners having Percentage Interests aggregating not less than 51% of
the Certificate Principal Balance of the Book-Entry Certificates 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
thereto) 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 such event and the availability through DTC of Definitive
Certificates. Upon surrender by DTC of the global certificate or certificates
representing the Book-Entry Certificates and instructions for re-registration,
the Trustee will issue Definitive Certificates, and thereafter the Trustee will
recognize the holders of such Definitive Certificates as Certificateholders
under the Agreement.
Although DTC, Cedel and Euroclear have agreed to the foregoing procedures
in order to facilitate transfers of Certificates among participants of DTC,
Cedel and Euroclear, they are under no obligation to perform or continue to
perform such procedures and such procedures may be discontinued at any time.
ASSIGNMENT OF MORTGAGE LOANS
At the time of issuance of the Certificates, Provident will transfer to the
Trust all of its right, title and interest in and to each Mortgage Loan
(including any Additional Balances arising in the future), related Credit Line
Agreements, mortgages and other related documents (collectively, the "Related
Documents"), including all collections received on or with respect to each such
Mortgage Loan on or after the Cut-Off Date. The Trustee, concurrently with such
transfer, will deliver the Certificates to Provident and the Transferor
Certificate (as defined in the Agreement) to the Transferor. Each Mortgage Loan
transferred to the Trust will be identified on a schedule (the "Mortgage Loan
Schedule") delivered to the Trustee and the Certificate Insurer pursuant to the
Agreement. Such schedule will include information as to the Cut-Off Date
Principal Balance of each Mortgage Loan, as well as information with respect to
the Loan Rate.
The Agreement will permit Provident to maintain possession of the Related
Documents and certain other documents relating to the Mortgage Loans (the
"Mortgage Files") and assignments of the related mortgages to the Trustee will
not be required to be recorded for so long as the long-term senior unsecured
debt of Provident is rated at least "BBB" by Standard & Poor's and Fitch and
"Baa2" by Moody's. In the event that the Provident long-term senior unsecured
debt is not so rated by any such entity or any such ratings are suspended or
withdrawn (an "Assignment Event"), Provident will have 90 days to record
assignments of the mortgages for each such Mortgage Loan in favor of the Trustee
and will have 60 days to deliver the Mortgage File pertaining to each such
Mortgage Loan to the Trustee (unless opinions of counsel delivered to and
satisfactory to the Rating Agencies and the Certificate Insurer to the effect
that recordation of such assignments or delivery of such documentation is not
required in the relevant jurisdiction to protect the interest of Provident and
the Trustee in the Mortgage Loans). In lieu of delivery of original
documentation and only to the extent such original documentation is unavailable,
Provident may deliver documents which have been imaged optically upon delivery
of an opinion of counsel to the Rating Agencies and the Certificate Insurer,
satisfactory to each, that (i) such documents do not impair the enforceability
of the transfer to the Trust of the Mortgage Loans and (ii) the optical image of
such documents are enforceable in the relevant jurisdictions to the same extent
as the original documents.
S-35
<PAGE> 36
Within 60 days of an Assignment Event, the Trustee will review the Mortgage
Files and if any Related Document is found to be defective in any material
respect and such defect is not cured within 90 days following notification
thereof to Provident by the Trustee or the Certificate Insurer, Provident will
be obligated to accept the transfer of such Mortgage Loan from the Trust. Upon
such transfer, the Principal Balance of such Mortgage Loan will be deducted from
the Pool Balance, thus reducing the amount of the Transferor Interest. If the
deduction would cause the Transferor Interest to become less than the Minimum
Transferor Interest at such time (a "Transfer Deficiency"), Provident will be
obligated to either substitute an Eligible Substitute Mortgage Loan or make a
deposit into the Collection Account in the amount (the "Transfer Deposit
Amount") equal to the Transfer Deficiency. Any such deduction, substitution or
deposit, will be considered for the purposes of the Agreement a payment in full
of such Mortgage Loan. Any Transfer Deposit Amount will be treated as a
Principal Collection. No such transfer shall be considered to have occurred
until the required deposit to the Collection Account is actually made. The
obligation of Provident to accept a transfer of a Defective Mortgage Loan is the
sole remedy regarding any defects in the Mortgage File and Related Documents
available to the Trustee or the Certificateholders.
An "Eligible Substitute Mortgage Loan" is a mortgage loan substituted by
Provident for a Defective Mortgage Loan which must, on the date of such
substitution, (i) have an outstanding Principal Balance (or in the case of a
substitution of more than one Mortgage Loan for a Defective Mortgage Loan, an
aggregate Principal Balance) that is approximately equal to the Transfer
Deficiency relating to such Defective Mortgage Loan; (ii) have a Loan Rate not
less than the Loan Rate of the Defective Mortgage Loan and not more than 1% in
excess of the Loan Rate of such Defective Mortgage Loan; (iii) have a Loan Rate
based on the same Index with adjustments to such Loan Rate made on the same
Adjustment Date as that of the Defective Mortgage Loan; (iv) have a Gross Margin
that is not less than the Gross Margin of the Defective Mortgage Loan and not
more than 100 basis points higher than the Gross Margin for the Defective
Mortgage Loan; (v) have a mortgage of the same or higher level of priority as
the mortgage relating to the Defective Mortgage Loan; (vi) comply with each
representation and warranty as to the Mortgage Loans set forth in the Agreement
(deemed to be made as of the date of substitution); (vii) have an original
Combined Loan-to-Value Ratio not greater than that of the Defective Mortgage
Loan; and (viii) satisfy certain other conditions specified in the Agreement. To
the extent the Principal Balance of an Eligible Substitute Mortgage Loan is less
than the related Transfer Deficiency, Provident will be required to make a
deposit to the Collection Account equal to such difference. Any such amounts
will be treated as Principal Collections.
Provident will make certain representations and warranties as to the
accuracy in all material respects of certain information furnished to the
Trustee with respect to each Mortgage Loan (e.g., Cut-Off Date Principal Balance
and the Loan Rate). In addition, Provident will represent and warrant on the
Closing Date that at the time of transfer to the Trust, Provident has
transferred or assigned all of its rights, title and interest in or granted a
security interest in each Mortgage Loan and the Related Documents, free of any
lien (subject to certain exceptions). Upon discovery of a breach of any such
representation and warranty which materially and adversely affects the interests
of the Certificateholders or the Certificate Insurer in the related Mortgage
Loan and Related Documents, Provident will have a period of 60 days after
discovery or notice of the breach to effect a cure. If the breach cannot be
cured within the 60-day period, Provident will be obligated to accept a transfer
of the Defective Mortgage Loan from the Trust. The same procedure and
limitations that are set forth in the two preceding paragraphs for the transfer
of Defective Mortgage Loans will apply to the transfer of a Mortgage Loan that
is required to be transferred because of such breach of a representation or
warranty in the Agreement that materially and adversely affects the interests of
the Certificateholders.
Mortgage Loans required to be transferred to Provident as described in the
preceding paragraphs are referred to as "Defective Mortgage Loans."
Pursuant to the Agreement, the Servicer will service and administer the
Mortgage Loans as more fully set forth above.
S-36
<PAGE> 37
AMENDMENTS TO CREDIT LINE AGREEMENTS
Subject to applicable law, the Servicer may change the terms of the Credit
Line Agreements at any time provided that such changes (i) do not adversely
affect the interest of the Certificateholders or the Certificate Insurer, and
(ii) are consistent with prudent business practice. In addition, the Agreement
permits the Servicer, within certain limitations described therein, to increase
or reduce the Credit Limit of the related Mortgage Loan and reduce the Margin
for such Mortgage Loan.
OPTIONAL TRANSFERS OF MORTGAGE LOANS TO THE TRANSFEROR
Subject to the conditions specified in the Agreement, on any Distribution
Date the Transferor may, but shall not be obligated to, remove on such
Distribution Date (the "Transfer Date") from the Trust, certain Mortgage Loans
without notice to the Certificateholders. The Transferor is permitted to
randomly designate the Mortgage Loans to be removed. Mortgage Loans so
designated will only be removed upon satisfaction of certain conditions
specified in the Agreement, including: (i) the Transferor Interest as of such
Transfer Date (after giving effect to such removal) exceeds the Minimum
Transferor Interest; (ii) the Transferor shall have delivered to the Trustee and
the Certificate Insurer a "Mortgage Loan Schedule" containing a list of all
Mortgage Loans remaining in the Trust after such removal; (iii) the Transferor
shall represent and warrant that no selection procedures which the Transferor
reasonably believes are adverse to the interests of the Certificateholders or
the Certificate Insurer were used by the Transferor in selecting such Mortgage
Loans; (iv) in connection with each such retransfer of Mortgage Loans, the
Rating Agencies shall have been notified of the proposed transfer and prior to
the Transfer Date the Rating Agencies shall have notified the Transferor, the
Trustee and the Certificate Insurer in writing that such transfer will not
result in a reduction or withdrawal of the ratings assigned to the Certificates
without regard to the Policy; and (v) the Transferor shall have delivered to the
Trustee and the Certificate Insurer an officer's certificate confirming the
satisfaction of the conditions set forth in clauses (i) through (iii) above.
As of any date of determination, the "Minimum Transferor Interest" is an
amount equal to the lesser of (a) 5% of the Pool Balance on such date and (b)
the Transferor Interest as of the Closing Date.
PAYMENTS ON MORTGAGE LOANS; DEPOSITS TO COLLECTION ACCOUNT AND DISTRIBUTION
ACCOUNT
The Servicer shall establish and maintain in the name of the Trustee a
separate trust account (the "Collection Account") for the benefit of the
Certificateholders, the Certificate Insurer and the Transferor, as their
interests may appear. The Collection Account will be an Eligible Account (as
defined herein). Subject to the investment provision described in the following
paragraphs, upon receipt by the Servicer of amounts in respect of the Mortgage
Loans (excluding amounts representing the Servicing Fee,) the Servicer will
deposit such amounts in the Collection Account. Not later than the eighteenth
day of the calendar month of each Distribution Date (the "Determination Date"),
the Servicer will notify the Trustee of the amount of such deposit to be
included in funds available for the related Distribution Date. Amounts so
deposited may be invested in Eligible Investments (as described in the
Agreement) maturing no later than one Business Day prior to the date on which
amounts on deposit therein are required to be deposited in the Distribution
Account.
The Trustee will establish an account (the "Distribution Account") into
which will be deposited amounts withdrawn from the Collection Account for
distribution to Certificateholders on a Distribution Date. The Distribution
Account will be an Eligible Account. Amounts on deposit therein may be invested
in Eligible Investments maturing on or before the Business Day prior to the
related Distribution Date.
An "Eligible Account" is a segregated account that is (i) maintained with a
depository institution whose debt obligations at the time of any deposit therein
have the highest short-term debt rating by the Rating Agencies and whose
accounts are fully insured by either the Savings Association Insurance Fund
("SAIF") or the Bank Insurance Fund ("BIF") of the Federal Deposit Insurance
Corporation with a minimum long-term unsecured debt rating of "A2" by Moody's
and "A" by S&P and Fitch, and which is any of (a) a federal savings and loan
association duly organized, validly existing and in good standing under the
applicable banking laws of any state, (b) an institution or association duly
organized, validly existing and in good standing under
S-37
<PAGE> 38
the applicable banking laws of any state, (c) a national banking association
duly organized, validly existing and in good standing under the federal banking
laws or (d) a principal subsidiary of a bank holding company, and in each case
of (a) - (d), approved in writing by a Certificate Insurer, (ii) a segregated
trust account maintained with the corporate trust department of a federal or
state chartered depository institution or trust company, having capital and
surplus of not less than $50,000,000, acting in its fiduciary capacity or (iii)
otherwise acceptable to each Rating Agency and the Certificate Insurer as
evidenced by a letter from each Rating Agency and the Certificate Insurer to the
Trustee, without reduction or withdrawal of their then current ratings of the
Certificates without regard to the Policy.
Eligible Investments are specified in the Agreement and are limited to
investments which are acceptable to the Certificate Insurer and meet the
criteria of the Rating Agencies from time to time as being consistent with their
then current ratings of the Certificates.
ALLOCATIONS AND COLLECTIONS
All collections on the Mortgage Loans will generally 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 amounts collected
during the related Collection Period, including such portion of Net Liquidation
Proceeds allocated to interest pursuant to the terms of the Credit Line
Agreements, less Servicing Fees for the related Collection Period.
As to any Distribution Date, "Principal Collections" will be equal to the
sum of (i) the amounts collected during the related Collection Period, including
such portion of Net Liquidation Proceeds allocated to principal pursuant to the
terms of the Credit Line Agreements and (ii) any Transfer Deposit Amounts. "Net
Liquidation Proceeds" with respect to a Mortgage Loan are equal to the
Liquidation Proceeds, reduced by related expenses, but not including the
portion, if any, of such amount that exceeds the sum of (i) the Principal
Balance of the Mortgage Loan plus (ii) accrued and unpaid interest thereon to
the end of the Collection Period during which such Mortgage Loan became a
Liquidated Mortgage Loan. "Liquidation Proceeds" are the proceeds (excluding any
amounts drawn on the Policy) received in connection with the liquidation of any
Mortgage Loan, whether through trustee's sale, foreclosure sale or otherwise.
With respect to any Distribution Date, the portion of Interest Collections
allocable to the Certificates ("Investor Interest Collections") will equal the
product of (a) Interest Collections for such Distribution Date and (b) the
Investor Floating Allocation Percentage. With respect to any Distribution Date,
the "Investor Floating Allocation Percentage" is the percentage equivalent of a
fraction determined by dividing (a) the Invested Amount at the close of business
on the preceding Distribution Date (or the Closing Date in the case of the first
Distribution Date) by (b) the Pool Balance at the beginning of the related
Collection Period. The remaining amount of Interest Collections will be
allocated to the Transferor Interest.
Principal Collections will be allocated between the Certificateholders and
the Transferor ("Investor Principal Collections" and "Transferor Principal
Collections", respectively) as described herein.
The Trustee will deposit any amounts drawn under the Policy into the
Collection Account.
With respect to any date, the "Pool Balance" will be equal to the aggregate
of the Principal Balances of all Mortgage Loans as of such date. The Principal
Balance of a Mortgage Loan (other than a Liquidated Mortgage Loan) on any day is
equal to the Cut-Off Date Principal Balance thereof, plus (i) any Additional
Balances in respect of such Mortgage Loan minus (ii) all collections credited
against the Principal Balance of such Mortgage Loan in accordance with the
related Credit Line Agreement prior to such day. The Principal Balance of a
Liquidated Mortgage Loan after final recovery of related Liquidation Proceeds
shall be zero.
DISTRIBUTIONS ON THE CERTIFICATES
Beginning with the first Distribution Date (which will occur on October 27,
1997), distributions on the Certificates will be made by the Trustee or the
Paying Agent based upon aggregate information provided by the Servicer on each
Distribution Date to the persons in whose names such Certificates are registered
at the close of business on the day prior to each Distribution Date or, if the
Certificates are no longer Book-Entry
S-38
<PAGE> 39
Certificates, at the close of business on the last day of the month preceding
such Distribution Date (the "Record Date"). The term "Distribution Date" means
the twenty-fifth day of each month or, if such day is not a Business Day, then
the next succeeding Business Day. Distributions will be made by check or money
order mailed (or upon the request of a Certificateholder owning Certificates
having denominations aggregating at least $1,000,000, by wire transfer or
otherwise) to the address of the person entitled thereto (which, in the case of
Book-Entry Certificates, will be DTC or its nominee) as it appears on the
Certificate Register in amounts calculated as described herein on the
Determination Date. However, the final distribution in respect of the
Certificates will be made only upon presentation and surrender thereof at the
office or the agency of the Trustee specified in the notice to
Certificateholders of such final distribution. For purposes of the Agreement, a
"Business Day" is any day other than (i) a Saturday or Sunday or (ii) a day on
which the Certificate Insurer or banking institutions in the States of Ohio,
California or New York are required or authorized by law to be closed.
Application of Interest Collections. On each Distribution Date, the Trustee
or the Paying Agent will apply the Investor Interest Collections in the
following manner and order of priority:
(i) as payment to the Trustee for its fee for services rendered
pursuant to the Agreement;
(ii) as payment for the premium for the Policy;
(iii) as payment for the accrued interest due and any overdue accrued
interest (with interest thereon to the extent permitted by law) on the
Certificate Principal Balance of the Certificates;
(iv) to pay Certificateholders the Investor Loss Amount for such
Distribution Date;
(v) as payment for any Investor Loss Amount for a previous
Distribution Date that was not previously (a) funded by Investor Interest
Collections, (b) absorbed by the Overcollateralization Amount or (c) funded
by draws on the Policy;
(vi) to reimburse the Certificate Insurer for prior draws made from
the Policy (with interest thereon);
(vii) to pay principal on the Certificates (after giving effect to all
other amounts distributed as principal on the Certificates on such
Distribution Date) until the Invested Amount exceeds the Certificate
Principal Balance by the Required Overcollateralization Amount (such amount
so paid, the "Accelerated Principal Distribution Amount");
(viii) any other amounts owed to the Certificate Insurer pursuant to
the Insurance Agreement;
(ix) certain amounts that may be required to be paid to the Servicer
pursuant to the Agreement; and
(x) to the Transferor to the extent permitted as described herein.
Payments to Certificateholders pursuant to clause (iii) will be interest
payments on the Certificates. Payments to Certificateholders pursuant to clauses
(iv), (v) and (vii) will be principal payments on the Certificates and will
reduce the Certificate Principal Balance; however, payments pursuant to clause
(vii) will not reduce the Invested Amount. The Accelerated Principal
Distribution Amount is not guaranteed by the Policy.
To the extent that Investor Interest Collections are applied to pay the
interest on the Certificates, Investor Interest Collections available therefore
may be insufficient to cover Investor Loss Amounts. If such insufficiency
results in the Certificate Principal Balance exceeding the Invested Amount, a
draw will be made on the Policy in accordance with the terms of the Policy.
The "Required Overcollateralization Amount" shall be an amount set forth in
the Insurance Agreement which amount may increase or decrease over time as
described therein. "Liquidation Loss Amount" means with respect to any
Liquidated Mortgage Loan, the unrecovered Principal Balance thereof during the
Collection Period in which such Mortgage Loan became a Liquidated Mortgage Loan,
after giving effect to the Net Liquidation Proceeds received in connection
therewith. The "Investor Loss Amount" shall be the product of the Investor
Floating Allocation Percentage and the aggregate of the Liquidation Loss Amounts
for such Distribution Date.
S-39
<PAGE> 40
A "Liquidated Mortgage Loan" means, as to any Distribution Date, any
Mortgage Loan in respect of which the Servicer has determined, based on the
servicing procedures specified in the Agreement, as of the end of the preceding
Collection Period that all Liquidation Proceeds which it expects to recover with
respect to the disposition of the related Mortgaged Property have been
recovered.
As to any Distribution Date, the "Collection Period" is the calendar month
preceding each Distribution Date.
Interest will be distributed on each Distribution Date at the Certificate
Rate for the related Interest Period on the Certificate Principal Balance as of
the first day of such Interest Period (reduced by any Civil Relief Act Interest
Shortfalls for such Distribution Date). The "Certificate Rate" for a
Distribution Date will generally equal the sum of (a) LIBOR, determined as
specified herein, as of the second LIBOR Business Day prior to the immediately
preceding Distribution Date (or as of two LIBOR Business Days prior to the
Closing Date, in the case of the first Distribution Date) plus (b) 0.18% per
annum. Notwithstanding the foregoing, in no event will the amount of interest
required to be distributed in respect of the Certificates on any Distribution
Date exceed the amount calculated at a rate equal to the weighted average of the
Loan Rates (net of the Servicing Fee Rate, the fee payable to the Trustee
(expressed as a rate) and the rate at which the premium payable to the
Certificate Insurer is calculated) weighted on the basis of the daily balance of
each Mortgage Loan during the related Billing Cycle prior to the Collection
Period relating to such Distribution Date or in the case of the first
Distribution Date, the weighted average loan rate as of the Cut-Off Date.
The Certificate Rate for the first Interest Period is 5.83625% per annum.
Interest on the Certificates in respect of any Distribution Date will accrue on
the Certificate Principal Balance from the preceding Distribution Date (or in
the case of the first Distribution Date, from the date of the initial issuance
of the Certificates (the "Closing Date")) through the day preceding such
Distribution Date (each such period, an "Interest Period") on the basis of the
actual number of days in the Interest Period and a 360-day year. Interest
payments on the Certificates will be funded from Investor Interest Collections
and, if necessary, from the Policy pursuant to the terms thereof. Interest for
any Distribution Date due but not paid on such Distribution Date will be due on
the next succeeding Distribution Date together with additional interest on such
amount at a rate equal to the applicable Certificate Rate.
Calculation of the LIBOR Rate. On each Distribution Date, LIBOR shall be
established by the Trustee and as to any Interest Period, LIBOR will equal the
rate for United States dollar deposits for one month which appears on the
Telerate Screen Page 3750 as of 11:00 A.M., London time, on the second LIBOR
Business Day prior to the first day of such Interest Period. "Telerate Screen
Page 3750" means the display designated as page 3750 on the Telerate Service (or
such other page as may replace page 3750 on that service for the purpose of
displaying London interbank offered rates of major banks). If such rate does not
appear on such page (or such other page as may replace that page on that
service, or if such service is no longer offered, such other service for
displaying LIBOR or comparable rates as may be selected by the Sponsor after
consultation with the Trustee), the rate will be the Reference Bank Rate. The
"Reference Bank Rate" will be determined on the basis of the rates at which
deposits in U.S. Dollars are offered by the reference banks (which shall be
three major banks that are engaged in transactions in the London interbank
market, selected by the Sponsor after consultation with the Trustee) as of 11:00
A.M., London time, on the day that is two LIBOR Business Days prior to the
immediately preceding Distribution Date to prime banks in the London interbank
market for a period of one month in amounts approximately equal to the principal
amount of the Certificates then outstanding. The Trustee will request the
principal London office of each of the reference banks to provide a quotation of
its rate. If at least two such quotations are provided, the rate will be the
arithmetic mean of the quotations. If on such date fewer than two quotations are
provided as requested, the rate will be the arithmetic mean of the rates quoted
by two or more major banks in New York City, selected by the Sponsor after
consultation with the Trustee, as of 11:00 A.M., New York City time, on such
date for loans in U.S. Dollars to leading European banks for a period of one
month in amounts approximately equal to the principal amount of the Certificates
then outstanding. If no such quotations can be obtained, the rate will be LIBOR
for the prior Distribution Date. "LIBOR Business Day" means any day other than
(i) a Saturday or a Sunday or (ii) a day on which banking institutions in the
State of New York or in the city of London, England are required or authorized
by law to be closed.
S-40
<PAGE> 41
Transferor Collections. Collections allocable to the Transferor Interest
will be distributed to the Transferor only to the extent that such distribution
will not reduce the amount of the Transferor Interest as of the related
Distribution Date below the Minimum Transferor Interest. Amounts not distributed
to the Transferor because of such limitations will be retained in the Collection
Account until the Transferor Interest exceeds the Minimum Transferor Interest,
at which time such excess shall be released to the Transferor.
Overcollateralization. The distribution of the aggregate Accelerated
Principal Distribution Amount, if any, to Certificateholders may result in the
Invested Amount being greater than the Certificate Principal Balance, thereby
creating overcollateralization. The Overcollateralization Amount, if any, will
be available to absorb any Investor Loss Amount that is not covered by Investor
Interest Collections.
Distributions of Principal Collections. For the period beginning on the
first Distribution Date and, unless a Rapid Amortization Event shall have
earlier occurred, ending immediately after the Distribution Date in September
2002 (such period, the "Managed Amortization Period"), the amount of Principal
Collections payable to Certificateholders as of each Distribution Date during
the Managed Amortization Period will equal, to the extent funds are available
therefor, the Scheduled Principal Collections Distribution Amount for such
Distribution Date. On any Distribution Date during the Managed Amortization
Period, the "Scheduled Principal Collections Distribution Amount" shall equal
the lesser of (i) the Maximum Principal Payment (as defined below) and (ii) the
Alternative Principal Payment (as defined herein). With respect to any
Distribution Date, the "Maximum Principal Payment" will equal the product of the
Investor Fixed Allocation Percentage and Principal Collections for such
Distribution Date. With respect to any Distribution Date, the "Alternative
Principal Payment" will equal the amount, but not less than zero, of Principal
Collections for such Distribution Date less the aggregate of Additional Balances
created during the related Collection Period. The "Rapid Amortization Period" is
the period beginning at the earlier of (i) the occurrence of a Rapid
Amortization Event and (ii) immediately following the Distribution Date in
September 2002 and continuing until the later of when (i) the Certificate
Principal Balance has been reduced to zero and all amounts then due and owing to
the Certificate Insurer have been paid and (ii) the Trust is terminated. See "--
Termination; Retirement of the Certificates."
Beginning with the first Distribution Date following the end of the Managed
Amortization Period, the amount of Principal Collections payable to
Certificateholders on each Distribution Date will be equal to the Maximum
Principal Payment.
Distributions of Principal Collections based upon the Investor Fixed
Allocation Percentage may result in distributions of principal to
Certificateholders in amounts that are greater relative to the declining Pool
Balance than would be the case if the Investor Floating Allocation Percentage
were used to determine the percentage of Principal Collections distributed in
respect of the Invested Amount. Principal Collections not allocated to the
Certificateholders will be allocated to the Transferor Interest. The aggregate
distributions of principal to the Certificateholders will not exceed the
Original Certificate Principal Balance.
In addition, to the extent of funds available therefor (including funds
available under the Policy), on the Distribution Date in September 2027,
Certificateholders will be entitled to receive as a payment of principal an
amount equal to the outstanding Certificate Principal Balance.
The Paying Agent. The Paying Agent shall initially be the Trustee, together
with any successor thereto in such capacity (the "Paying Agent"). The Paying
Agent shall have the revocable power to withdraw funds from the Distribution
Account for the purpose of making distributions to the Certificateholders.
RAPID AMORTIZATION EVENTS
As described above, the Managed Amortization Period will continue through
the Distribution Date in September 2002, unless a Rapid Amortization Event
occurs prior to such date in which case the Rapid Amortization Period will
commence prior to such date. The "Rapid Amortization Period" is the period
commencing on the earlier of (x) the end of the Managed Amortization Period and
(y) the day, if any, upon which a Rapid Amortization Event occurs and concluding
upon the later of (i) termination of the Trust and
S-41
<PAGE> 42
(ii) all amounts due and owing to the Certificate Insurer and the
Certificateholders have been paid. "Rapid Amortization Event" refers to any of
the following events:
(a) failure on the part of the Sponsor (i) to make a payment or
deposit required under the Agreement or (ii) to observe or perform in any
material respect any other covenants or agreements of the Sponsor set forth
in the Agreement, which failure continues unremedied for a period of 30
days after written notice;
(b) any representation or warranty made by the Sponsor in the
Agreement proves to have been incorrect in any material respect when made
and continues to be incorrect in any material respect for a period of 30
days after written notice and as a result of which the interests of the
Certificateholders or the Certificate Insurer are materially and adversely
affected; provided, however, that a Rapid Amortization Event shall not be
deemed to occur with respect to a breach of representation and warranty
relating to a Mortgage Loan if the Sponsor has purchased or made a
substitution for the related Mortgage Loan or Mortgage Loans if applicable
during such period (or within an additional 60 days with the consent of the
Trustee and the Certificate Insurer) in accordance with the provisions of
the Agreement;
(c) the occurrence of certain events of bankruptcy, insolvency or
receivership relating to the Transferor or the Sponsor;
(d) the Trust becomes subject to regulation by the Securities and
Exchange Commission as an investment company within the meaning of the
Investment Company Act of 1940, as amended; or
(e) the aggregate of all draws under the Policy exceeds 1% of the
Cut-Off Date Pool Balance.
In the case of any event described in clause (a) or (b), a Rapid
Amortization Event will be deemed to have occurred only if, after the applicable
grace period, if any, described in such clauses, either the Trustee or
Certificateholders holding Certificates evidencing more than 51% of the
Percentage Interests (in either case, with the consent of the Certificate
Insurer) or the Certificate Insurer (so long as there is no default by the
Certificate Insurer in the performance of its obligations under the Policy), by
written notice to the Transferor and the Servicer (and to the Trustee, if given
by the Certificateholders) declare that a Rapid Amortization Event has occurred
as of the date of such notice. In the case of any event described in clause (c),
(d) or (e) a Rapid Amortization Event will be deemed to have occurred without
any notice or other action on the part of the Trustee, the Certificate Insurer
or the Certificateholders immediately upon the occurrence of such event.
In addition to the consequences of a Rapid Amortization Event discussed
above, if the Transferor voluntarily files a bankruptcy petition or goes into
liquidation or any person is appointed a receiver or bankruptcy trustee of the
Transferor, on the day of any such filing or appointment no further Additional
Balances will be transferred to the Trust, the Transferor will immediately cease
to transfer Additional Balances to the Trust and the Transferor will promptly
give notice to the Trustee and the Certificate Insurer of any such filing or
appointment.
Notwithstanding the foregoing, if a conservator, receiver or
trustee-in-bankruptcy is appointed for the Transferor and no Rapid Amortization
Event exists other than such conservatorship, receivership or insolvency of the
Transferor, the conservator, receiver or trustee-in-bankruptcy may have the
power to prevent the commencement of the Rapid Amortization Period or the sale
of Mortgage Loans described above.
THE POLICY
The following information has been supplied by the Certificate Insurer for
inclusion in this Prospectus Supplement. Accordingly, Provident does not make
any representation as to the accuracy and completeness of such information.
The Certificate Insurer, in consideration of the payment of the premium and
subject to the terms of the Policy, thereby unconditionally and irrevocably
guarantees to any Owner that an amount equal to each full and complete Insured
Payment will be received by the Trustee, or its successor, as trustee for the
Owners (the "Trustee"), on behalf of the Owners from the Certificate Insurer,
for distribution by the Trustee to each Owner of each Owner's proportionate
share of the Insured Payment. The Certificate Insurer's obligations
S-42
<PAGE> 43
under the Policy with respect to a particular Insured Payment shall be
discharged to the extent funds equal to the applicable Insured Payment are
received by the Trustee, whether or not such funds are properly applied by the
Trustee. Insured Payments shall be made only at the time set forth in the Policy
and no accelerated Insured Payments shall be made regardless of any acceleration
of the Certificates, unless such acceleration is at the sole option of the
Certificate Insurer.
Notwithstanding the foregoing paragraph, the Policy does not cover
shortfalls, if any, attributable to the liability of the Trust or the Trustee
for withholding taxes, if any (including interest and penalties in respect of
any such liability).
The Certificate Insurer will pay any Insured Payment that is a Preference
Amount on the Business Day following receipt on a Business Day by the Fiscal
Agent (as described below) of (i) a certified copy of the order requiring the
return of a preference payment, (ii) an opinion of counsel satisfactory to the
Certificate Insurer that such order is final and not subject to appeal, (iii) an
assignment in such form as is reasonably required by the Certificate Insurer,
irrevocably assigning to the Certificate Insurer all rights and claims of the
Owner relating to or arising under the Certificates against the debtor that made
such preference payment or otherwise with respect to such preference payment and
(iv) appropriate instruments to effect the appointment of the Certificate
Insurer as agent for such Owner in any legal proceeding, related to such
preference payment, such instruments being in a form satisfactory to the
Certificate Insurer, provided that if such documents are received after 12:00
noon, New York City time, on such Business Day, they will be deemed to be
received on the following Business Day. Such payments shall be disbursed to the
receiver or trustee in bankruptcy named in the final order of the court
exercising jurisdiction on behalf of the Owner and not to any Owner directly
unless such Owner has returned principal or interest paid on the Certificates to
such receiver or trustee in bankruptcy, in which case such payment shall be
disbursed to such Owner.
The Certificate Insurer will pay any other amount payable under the Policy
no later than 12:00 noon, New York City time, on the later of the Distribution
Date on which the related Deficiency Amount is due or the third Business Day
following receipt in New York, New York on a Business Day by State Street Bank
and Trust Company, N.A., as Fiscal Agent for the Certificate Insurer or any
successor fiscal agent appointed by the Certificate Insurer (the "Fiscal Agent")
of a Notice (as described below); provided that if such Notice is received after
12:00 noon, New York City time, on such Business Day, it will be deemed to be
received on the following Business Day. If any such Notice received by the
Fiscal Agent is not in proper form or is otherwise insufficient for the purpose
of making claim under the Policy, it shall be deemed not to have been received
by the Fiscal Agent for purposes of this paragraph, and the Certificate Insurer
or the Fiscal Agent, as the case may be, shall promptly so advise the Trustee
and the Trustee may submit an amended Notice.
Insured Payments due under the Policy unless otherwise stated therein will
be disbursed by the Fiscal Agent to the Trustee on behalf of the Owners by wire
transfer of immediately available funds in the amount of the Insured Payment
less, in respect of Insured Payments related to Preference Amounts, any amount
held by the Trustee for the payment of such Insured Payment and legally
available therefor.
The Fiscal Agent is the agent of the Certificate Insurer only and the
Fiscal Agent shall in no event be liable to the Owners for any acts of the
Fiscal Agent or any failure of the Certificate Insurer to deposit or cause to be
deposited, sufficient funds to make payments due under the Policy.
As used in the Policy, the following terms shall have the following
meanings:
"Agreement" means the Pooling and Servicing Agreement, dated as of
September 1, 1997, between Provident, as Sponsor and Servicer and the Trustee,
as trustee, without regard to any amendment or supplement thereto unless such
amendment or modification has been approved in writing by the Certificate
Insurer.
"Business Day" means any day other than (i) a Saturday or a Sunday or (ii)
a day on which the Certificate Insurer or banking institutions in the States of
New York, Ohio or California are required or authorized by law or executive
order to be closed.
S-43
<PAGE> 44
"Civil Relief Act Interest Shortfalls" means for any Distribution Date any
shortfall in interest collections on the Mortgage Loans during the prior
Collection Period that are attributable to the Soldiers' and Sailors' Civil
Relief Act of 1940, as amended.
"Deficiency Amount" means for any Distribution Date (A) the excess, if any,
of (i) Investor Certificate Interest for such Distribution Date plus any Unpaid
Investor Certificate Interest Shortfall, if any, due on the Certificates over
(ii) Investor Interest Collections on deposit in the Distribution Account
available to be distributed therefor on such Distribution Date and (B) the
Guaranteed Principal Amount.
"Final Distribution Date" means the Distribution Date in September 2027.
"Guaranteed Principal Amount" means (a) for any Distribution Date (other
than the Final Distribution Date) the amount, if any, by which the Certificate
Principal Balance exceeds the Invested Amount as of such Distribution Date
(after giving effect to all distributions of principal on the Certificates on
such Distribution Date pursuant to the Agreement) and (b) on the Final
Distribution Date, the outstanding Certificate Principal Balance (after giving
effect to all other distributions of principal on the Certificates on such
Distribution Date pursuant to the Agreement).
"Insured Payment" means (i) as of any Distribution Date, any Deficiency
Amount and (ii) any Preference Amount.
"Investor Certificate Interest" means, with respect to any Distribution
Date, interest for the related Interest Period at the applicable Certificate
Rate on the Certificate Principal Balance as of the first day of such Interest
Period (after giving effect to the distributions made on the first day of such
Interest Period), net of any Civil Relief Act Interest Shortfalls for such
Distribution Date.
"Notice" means the telephonic or telegraphic notice, promptly confirmed in
writing by telecopy, substantially in the form of Exhibit A attached to the
Policy, the original of which is subsequently delivered by registered or
certified mail, from the Trustee specifying the Insured Payment which shall be
due and owing on the applicable Distribution Date.
"Owner" means each Holder (as defined in the Agreement) who, on the
applicable Distribution Date, is entitled under the terms of the applicable
Certificates to payment thereunder.
"Preference Amount" means any amount previously distributed to an Owner on
the Certificates that is recoverable and sought to be recovered as a voidable
preference by a trustee in bankruptcy pursuant to the United States Bankruptcy
Code (11 U.S.C.), as amended from time to time in accordance with a final
nonappealable order of a court having competent jurisdiction.
"Unpaid Investor Certificate Shortfall" means, with respect to any
Distribution Date, the aggregate amount, if any, of Investor Certificate
Interest that was accrued in respect of prior Distribution Dates and has not
been distributed to Certificateholders.
Capitalized terms used in the Policy and not otherwise defined in the
Policy shall have the respective meanings set forth in the Agreement as of the
date of execution of the Policy, without giving effect to any subsequent
amendment or modification to the Agreement unless such amendment or modification
has been approved in writing by the Certificate Insurer.
Any notice under the Policy or service of process on the Fiscal Agent or
the Certificate Insurer may be made at the address listed below for the Fiscal
Agent or the Certificate Insurer or such other address as the Certificate
Insurer shall specify in writing to the Trustee.
The notice address of the Fiscal Agent is 61 Broadway, 15th Floor, New
York, New York 10006, Attention: Municipal Registrar and Paying Agency, or such
other address as the Fiscal Agent shall specify to the Trustee in writing.
The Policy is being issued under and pursuant to, and shall be construed
under, the laws of the State of New York, without giving effect to the conflict
of laws principles thereof.
S-44
<PAGE> 45
The insurance provided by the Policy is not covered by the
Property/Casualty Insurance Security Fund specified in Article 76 of the New
York Insurance Law.
The Policy is not cancelable for any reason. The premium on the Policy is
not refundable for any reason including payment, or provision being made for
payment, prior to the maturity of the Certificates.
REPORTS TO CERTIFICATEHOLDERS
Concurrently with each distribution to the Certificateholders, the Servicer
will forward to the Trustee for mailing to such Certificateholder and the
Certificate Insurer statement setting forth among other items:
(i) the Investor Floating Allocation Percentage for the preceding
Collection Period;
(ii) the amount being distributed to Certificateholders;
(iii) the amount of interest included in such distribution and the
related Certificate Rate;
(iv) the amount, if any, of overdue accrued interest included in such
distribution (and the amount of interest thereon);
(v) the amount, if any, of the remaining overdue accrued interest
after giving effect to such distribution;
(vi) the amount, if any, of principal included in such distribution;
(vii) the amount, if any, of the reimbursement of previous Liquidation
Loss Amounts included in such distribution;
(viii) the amount, if any, of the aggregate unreimbursed Liquidation
Loss Amounts after giving effect to such distribution;
(ix) the Servicing Fee for such Distribution Date;
(x) the Invested Amount and the Certificate Principal Balance, each
after giving effect to such distribution;
(xi) the Pool Balance as of the end of the preceding Collection
Period;
(xii) the number and aggregate Principal Balances of the Mortgage
Loans 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;
(xiii) the book value of any real estate which is acquired by the
Trust through foreclosure or grant of deed in lieu of foreclosure; and
(xiv) the amount of any draws on the Policy.
In the case of information furnished pursuant to clauses (iii), (iv), (v),
(vi), (vii) and (viii) above, the amounts shall be expressed as a dollar amount
per Certificate with a $1,000 denomination.
Each year commencing in 1998, the Servicer will be required to forward to
the Trustee a statement containing the information set forth in clauses (iii)
and (vi) above aggregated for such calendar year.
COLLECTION AND OTHER SERVICING PROCEDURES ON MORTGAGE LOANS
The Servicer will make reasonable efforts to collect all payments called
for under the Mortgage Loans and will, consistent with the Agreement, follow
such collection procedures as it follows from time to time with respect to the
home equity loans in its servicing portfolio comparable to the Mortgage Loans.
Consistent with the above, the Servicer may in its discretion waive any late
payment charge or any assumption or other fee or charge that may be collected in
the ordinary course of servicing the Mortgage Loans.
With respect to the Mortgage Loans, the Servicer may arrange with a
borrower a schedule for the payment of interest due and unpaid for a period,
provided that any such arrangement is consistent with the
S-45
<PAGE> 46
Servicer's policies with respect to the home equity mortgage loans it owns or
services. In accordance with the terms of the Agreement, the Servicer may
consent under certain circumstances to the placing of a subsequent senior lien
in respect of a Mortgage Loan.
HAZARD INSURANCE
The Servicer will cause to be maintained fire and hazard insurance with
extended coverage customary in the area where the Mortgaged Property is located,
in an amount which is at least equal to the lesser of (i) the outstanding
Principal Balance on the Mortgage Loan and any related senior lien(s), and (ii)
the full insurable value of the premises securing the Mortgage Loan. Generally,
if the Mortgaged Property is in an area identified in the Federal Register by
the Flood Emergency Management Agency as FLOOD ZONE "A", such flood insurance
has been made available and the Servicer determines that such insurance is
necessary in accordance with accepted mortgage servicing practices of prudent
lending institutions, the Servicer will cause to be purchased a flood insurance
policy with a generally acceptable insurance carrier, in an amount representing
coverage not less than the lesser of (a) the outstanding Principal Balance of
the Mortgage Loan and the First Lien, if any, or (b) the maximum amount of
insurance available under the National Flood Insurance Act of 1968, as amended.
Any amounts collected by the Servicer under any such policies (other than
amounts to be applied to the restoration or repair of the Mortgaged Property, or
to be released to the Mortgagor in accordance with customary mortgage servicing
procedures) will be deposited in the Collection Account, subject to retention by
the Servicer to the extent such amounts constitute servicing compensation or to
withdrawal pursuant to the Agreement.
In the event that the Servicer obtains and maintains a blanket policy as
provided in the Agreement insuring against fire and hazards of extended coverage
on all of the Mortgage Loans, then, to the extent such policy names the Servicer
or its designee as loss payee and provides coverage in an amount equal to the
aggregate unpaid principal balance of the Mortgage Loans without coinsurance,
and otherwise complies with the requirements of the first paragraph of this
subsection, the Servicer will be deemed conclusively to have satisfied its
obligations with respect to fire and hazard insurance coverage.
REALIZATION UPON DEFAULTED MORTGAGE LOANS
The Servicer will foreclose upon or otherwise comparably convert to
ownership Mortgaged Properties securing such of the Mortgage Loans as come into
default when, in accordance with applicable servicing procedures under the
Agreement, no satisfactory arrangements can be made for the collection of
delinquent payments. In connection with such foreclosure or other conversion,
the Servicer will follow such practices as it deems necessary or advisable and
as are in keeping with its general subordinate mortgage 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, such
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 Certificateholders or the Transferor.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
With respect to each Collection Period, the Servicer will receive from
interest collections in respect of the Mortgage Loans a portion of such interest
collections as a monthly Servicing Fee in the amount equal to 0.50% per annum
("Servicing Fee Rate") on the aggregate Principal Balances of the Mortgage Loans
as of the first day of the related Collection Period (or at the Cut-Off Date for
the first Collection Period). 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.
The Servicer will pay certain ongoing expenses associated with the Trust
and incurred by it in connection with its responsibilities under the Agreement.
In addition, the Servicer will be entitled to reimbursement for certain expenses
incurred by it in connection with defaulted Mortgage Loans and in connection
with the
S-46
<PAGE> 47
restoration of Mortgaged Properties, such right of reimbursement being prior to
the rights of Certificateholders to receive any related Net Liquidation
Proceeds.
EVIDENCE AS TO COMPLIANCE
The Agreement provides for delivery on or before May 31 in each year,
beginning on May 31, 1998, to the Trustee and the Certificate Insurer of an
annual statement signed by an officer of the Servicer to the effect that the
Servicer has fulfilled its material obligations under the Agreement throughout
the preceding fiscal year, except as specified in such statement.
CERTAIN MATTERS REGARDING THE SERVICER AND THE TRANSFEROR
The Agreement provides that the Servicer may not resign from its
obligations and duties thereunder, except in connection with a permitted
transfer of servicing, unless (i) such duties and obligations are no longer
permissible under applicable law or are in material conflict by reason of
applicable law with any other activities of a type and nature presently carried
on by it or its affiliate or (ii) upon the satisfaction of the following
conditions: (a) the Servicer has proposed a successor servicer to the Trustee
and the Certificate Insurer in writing and such proposed successor servicer is
reasonably acceptable to the Trustee; (b) the Rating Agencies have confirmed to
the Trustee and the Certificate Insurer that the appointment of such proposed
successor servicer as the Servicer will not result in the reduction or
withdrawal of the then current rating of the Certificates; and (c) such proposed
successor servicer is acceptable to the Certificate Insurer. No such resignation
will become effective until the Trustee or a successor servicer has assumed the
Servicer's obligations and duties under the Agreement.
The Servicer may perform any of its duties and obligations under the
Agreement through one or more subservicers or delegates, which may be affiliates
of the Servicer. Notwithstanding any such arrangement, the Servicer will remain
liable and obligated to the Trustee and the Certificateholders and the
Certificate Insurer for the Servicer's duties and obligations under the
Agreement, without any diminution of such duties and obligations and as if the
Servicer itself were performing such duties and obligations.
Any person into which, in accordance with the Agreement, Provident or the
Servicer may be merged or consolidated or any person resulting from any merger
or consolidation to which Provident or the Servicer is a party, or any person
succeeding to the business of Provident or the Servicer, will be the successor
to the Servicer under the Agreement.
The Agreement provides that the Servicer will indemnify the Trust and the
Trustee from and against any loss, liability, expense, damage or injury suffered
or sustained as a result of the Servicer's actions or omissions in connection
with the servicing and administration of the Mortgage Loans which are not in
accordance with the provisions of the Agreement. In the event of an Event of
Servicing Termination (as defined below) resulting in the assumption of
servicing obligations by a successor Servicer, the successor Servicer will
indemnify the Transferor for any losses, claims, damages and liabilities of the
Transferor as described in this paragraph arising from the successor Servicer's
actions or omissions. The Agreement provides that neither the Transferor nor the
Servicer nor their directors, officers, employees or agents will be under any
other liability to the Trust, the Trustee, the Certificateholders or any other
person for any action taken or for refraining from taking any action pursuant to
the Agreement. However, neither the Transferor nor the Servicer will be
protected against any liability which would otherwise be imposed by reason of
willful misconduct, bad faith or gross negligence of the Transferor or the
Servicer in the performance of its duties under the Agreement or by reason of
reckless disregard of its obligations thereunder. In addition, the Agreement
provides that the Servicer will not be under any obligation to appear in,
prosecute or defend any legal action which is not incidental to its servicing
responsibilities under the Agreement and which in its opinion may expose it to
any expense or liability. The Servicer may, in its sole discretion, undertake
any such legal action which it may deem necessary or desirable with respect to
the Agreement and the rights and duties of the parties thereto and the interest
of the Certificateholders and the and the Certificate Insurer thereunder.
S-47
<PAGE> 48
EVENTS OF SERVICING TERMINATION
"Events of Servicing Termination" will consist of: (i) any failure by the
Servicer to deposit in the Collection Account any deposit required to be made
under the Agreement; (ii) any failure by the Servicer duly to observe or perform
in any material respect any other of its covenants or agreements in the
Agreement which, in each case, materially and adversely affects the interests of
the Certificateholders or the Certificate Insurer and continues unremedied for
30 days after the giving of written notice of such failure to the Servicer by
the Trustee, or to the Servicer and the Trustee by the Certificate Insurer or
Certificateholders evidencing an aggregate, undivided interest in the Trust of
at least 25% of the Certificate Principal Balance; (iii) certain events of
insolvency, readjustment of debt, marshalling of assets and liabilities or
similar proceedings relating to the Servicer and certain actions by the Servicer
indicating insolvency, reorganization or inability to pay its obligations; or
(iv) certain loss or delinquency tests set forth in the Agreement are not met.
Under certain other circumstances, the Trustee shall, at the direction of the
Certificate Insurer or may, with the consent of the Certificate Insurer, or the
holders of Certificates evidencing an aggregate, undivided interest in the Trust
of at least 51% of the Certificate Principal Balance may (with the consent of
the Certificate Insurer) deliver written notice to the Servicer terminating all
the rights and obligations of the Servicer under the Agreement.
Notwithstanding the foregoing, a delay in or failure of performance
referred to under clause (ii) above for a period of 30 Business Days, shall not
constitute an Event of Servicing Termination if such delay or failure could not
be prevented by the exercise of reasonable diligence by the Servicer and such
delay or failure was caused by an act of God or other similar occurrence. Upon
the occurrence of any such event the Servicer shall not be relieved from using
its best efforts to perform its obligations in a timely manner in accordance
with the terms of the Agreement and the Servicer shall provide the Trustee, the
Transferor, the Certificate Insurer and the Certificateholders prompt notice of
such failure or delay by it, together with a description of its efforts to so
perform its obligations.
RIGHTS UPON AN EVENT OF SERVICING TERMINATION
So long as an Event of Servicing Termination remains unremedied, either the
Trustee shall at the direction of the Certificate Insurer or may, with the
consent of the Certificate Insurer, or Certificateholders evidencing an
aggregate, undivided interest in the Trust of at least 51% of the Certificate
Principal Balance with the consent of the Certificate Insurer, may terminate all
of the rights and obligations of the Servicer under the Agreement and in and to
the Mortgage Loans, whereupon the Trustee will succeed to all the
responsibilities, duties and liabilities of the Servicer under the Agreement and
will be entitled to similar compensation arrangements. In the event that the
Trustee would be obligated to succeed the Servicer but is unwilling or unable so
to act, it may appoint, or petition a court of competent jurisdiction for the
appointment of, a housing and home finance institution or other mortgage loan or
home equity loan servicer with all licenses and permits required to perform its
obligations under the Agreement and having a net worth of at least $15,000,000
and acceptable to the Certificate Insurer to act as successor to the Servicer
under the Agreement. Pending such appointment, the Trustee will be obligated to
act in such capacity unless prohibited by law. Such successor will be entitled
to receive the same compensation that the Servicer would otherwise have received
(or such lesser compensation as the Trustee and such successor may agree). A
receiver or conservator for the Servicer may be empowered to prevent the
termination and replacement of the Servicer where the only Event of Servicing
Termination that has occurred is an Insolvency Event.
AMENDMENT
The Agreement may be amended from time to time by the Sponsor, the Servicer
and the Trustee and with the consent of the Certificate Insurer, but without the
consent of the Certificateholders, to cure any ambiguity, to correct or
supplement any provisions therein which may be inconsistent with any other
provisions of the Agreement, to add to the duties of the Transferor or the
Servicer or to add or amend any provisions of the Agreement as required by the
Rating Agencies in order to maintain or improve any rating of the Certificates
(it being understood that, after obtaining the ratings in effect on the Closing
Date, neither the Sponsor, the Trustee nor the Servicer is obligated to obtain,
maintain, or improve any such rating) or to add any other provisions with
respect to matters or questions arising under the Agreement which shall not be
S-48
<PAGE> 49
inconsistent with the provisions of the Agreement, provided that such action
will not, as evidenced by an opinion of counsel, materially and adversely affect
the interests of any Certificateholder or the Certificate Insurer; provided,
that any such amendment will not be deemed to materially and adversely affect
the Certificateholders and no such opinion will be required to be delivered if
the person requesting such amendment obtains a letter from the Rating Agencies
stating that such amendment would not result in a downgrading of the then
current rating of the Certificates. The Agreement may also be amended from time
to time by the Sponsor, the Servicer and the Trustee, with the consent of
Certificateholders evidencing an aggregate, undivided interest in the Trust of
at least 51% of the Certificate Principal Balance and the Certificate Insurer
for the purpose of adding any provisions to or changing in any manner or
eliminating any of the provisions of the Agreement or of modifying in any manner
the rights of the Certificateholders, provided that no such amendment will (i)
reduce in any manner the amount of, or delay the timing of, collections of
payments on the Certificates or distributions or payments under the Policy which
are required to be made on any Certificate without the consent of the holder of
such Certificate or (ii) reduce the aforesaid percentage required to consent to
any such amendment, without the consent of the holders of all Certificates then
outstanding.
TERMINATION; RETIREMENT OF THE CERTIFICATES
The Trust will terminate on the Distribution Date following the later of
(A) payment in full of all amounts owing to the Certificate Insurer and (B) the
earliest of (i) the Distribution Date on which the Certificate Principal Balance
has been reduced to zero, (ii) the final payment or other liquidation of the
last Mortgage Loan in the Trust, (iii) the optional transfer to the Transferor
of the Mortgage Loans, as described below and (iv) the Distribution Date in
September 2027.
The Certificates will be subject to optional transfer to the Transferor on
any Distribution Date after the Certificate Principal Balance is reduced to an
amount less than or equal to 5% of the Original Certificate Principal Balance
and all amounts due and owing to the Certificate Insurer, including unreimbursed
draws on the Policy, together with interest thereon, as provided under the
Insurance Agreement, have been paid. The transfer 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. In no event, however, will the Trust created by the Agreement continue for
more than 21 years after the death of certain individuals named in the
Agreement. Written notice of termination of the Agreement will be given to each
Certificateholder, and the final distribution will be made only upon surrender
and cancellation of the Certificates at an office or agency appointed by the
Trustee which will be specified in the notice of termination.
THE TRUSTEE
Bankers Trust Company of California, N.A., a national banking association
with its principal place of business in California, has been named Trustee
pursuant to the Agreement.
The commercial bank or trust company serving as Trustee may own
Certificates and have normal banking relationships with the Servicer, the
Sponsor and the Certificate Insurer and/or their affiliates.
The Trustee may resign at any time, in which event the Sponsor will be
obligated to appoint a successor Trustee, as approved by the Certificate
Insurer. The Sponsor or the Certificate Insurer may also remove the Trustee if
the Trustee ceases to be eligible to continue as such under the Agreement or if
the Trustee becomes insolvent. Upon becoming aware of such circumstances, the
Sponsor will be obligated to appoint a successor Trustee, as approved by the
Certificate Insurer. Any resignation or removal of the Trustee and appointment
of a successor Trustee will not become effective until acceptance of the
appointment by the successor Trustee.
No holder of a Certificate will have any right under the Agreement to
institute any proceeding with respect to the Agreement unless the Certificate
Insurer has consented in writing to the institution of such proceeding and such
holder previously has given to the Trustee written notice of default and unless
Certificateholders evidencing an aggregate, undivided interest in the Trust of
at least 51% of the Certificate Principal Balance have made written requests
upon the Trustee to institute such proceeding in its own name as Trustee
thereunder and have offered to the Trustee reasonable indemnity and the Trustee
for 60 days has
S-49
<PAGE> 50
neglected or refused to institute any such proceeding. The Trustee will be under
no obligation to exercise any of the trusts or powers vested in it by the
Agreement or to make any investigation of matters arising thereunder or to
institute, conduct or defend any litigation thereunder or in relation thereto at
the request, order or direction of any of the Certificateholders, unless such
Certificateholders have offered to the Trustee reasonable security or indemnity
against the cost, expenses and liabilities which may be incurred therein or
thereby.
CERTAIN ACTIVITIES
The Trust will not: (i) borrow money; (ii) make loans; (iii) invest in
securities for the purpose of exercising control; (iv) underwrite securities;
(v) except as provided in the Agreement, engage in the purchase and sale (or
turnover) of investments; (vi) offer securities in exchange for property (except
Certificates for the Mortgage Loans); or (vii) repurchase or otherwise reacquire
its securities. See "-- Evidence as to Compliance" above for information
regarding reports as to the compliance by the Servicer with the terms of the
Agreement.
USE OF PROCEEDS
The net proceeds to be received from the sale of the Certificates will be
applied by Provident for its general corporate purposes.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following discussion, which summarizes certain U.S. federal income tax
aspects of the purchase, ownership and disposition of the Certificates, is based
on the provisions of the Internal Revenue Code of 1986, as amended (the "Code"),
the Treasury Regulations thereunder, and published rulings and court decisions
in effect as of the date hereof, all of which are subject to change, possibly
retroactively. This discussion does not address every aspect of the U.S. federal
income tax laws which may be relevant to Certificate Owners in light of their
personal investment circumstances or to certain types of Certificate Owners
subject to special treatment under the U.S. federal income tax laws (for
example, banks and life insurance companies). Accordingly, investors should
consult their tax advisors regarding U.S. federal, state, local, foreign and any
other tax consequences to them of investing in the Certificates.
CHARACTERIZATION OF THE CERTIFICATES AS INDEBTEDNESS
Based on the application of existing law to the facts as set forth in the
Agreement and other relevant documents and assuming compliance with the terms of
the Agreement as in effect on the date of issuance of the Certificates, Brown &
Wood LLP, special tax counsel to the Trust ("Tax Counsel") and counsel to the
Underwriter, is of the opinion that (i) the Certificates will be treated as debt
instruments for federal income tax purposes as of such date and (ii) the Trust
will not be characterized as an association (or publicly traded partnership)
taxable as a corporation or as a taxable mortgage pool within the meaning of
Section 7701(i). Accordingly, upon issuance, the Certificates will be treated as
"Debt Securities" as described in the Prospectus. See "CERTAIN FEDERAL INCOME
TAX CONSIDERATIONS" in the Prospectus.
The Transferor and the Certificateholders express in the Agreement their
intent that, for applicable tax purposes, the Certificates will be indebtedness
secured by the Mortgage Loans. The Transferor and the Certificateholders, by
accepting the Certificates, and each Certificate Owner by its acquisition of a
beneficial interest in a Certificate, have agreed to treat the Certificates as
indebtedness for U.S. federal income tax purposes. However, because different
criteria are used to determine the non-tax accounting characterization of the
transaction, the Transferor intends to treat this transaction as a sale of an
interest in the Principal Balances of the Mortgage Loans for financial
accounting and certain regulatory purposes.
In general, whether for U.S. federal income tax purposes a transaction
constitutes a sale of property or a loan, the repayment of which is secured by
property, is a question of fact, the resolution of which is based upon
S-50
<PAGE> 51
the economic substance of the transaction rather than its form or the manner in
which it is labeled. While the Internal Revenue Service (the "IRS") and the
courts have set forth several factors to be taken into account in determining
whether the substance of a transaction is a sale of property or a secured loan,
the primary factor in making this determination is whether the transferee has
assumed the risk of loss or other economic burdens relating to the property and
has obtained the benefits of ownership thereof. Tax Counsel has analyzed and
relied on several factors in reaching its opinion that the weight of the
benefits and burdens of ownership of the Mortgage Loans has been retained by the
Transferor and has not been transferred to the Certificate Owners.
In some instances, courts have held that a taxpayer is bound by the
particular form it has chosen for a transaction, even if the substance of the
transaction does not accord with its form. Tax Counsel has advised that the
rationale of those cases will not apply to this transaction, because the form of
the transaction as reflected in the operative provisions of the documents either
accords with the characterization of the Certificates as debt or otherwise makes
the rationale of those cases inapplicable to this situation.
TAXATION OF INTEREST INCOME OF CERTIFICATE OWNERS
Assuming that the Certificate Owners are holders of debt obligations for
U.S. federal income tax purposes, the Certificates generally will be taxable as
Debt Securities. See "CERTAIN FEDERAL INCOME TAX CONSIDERATIONS" in the
Prospectus.
While it is not anticipated that the Certificates will be issued at a
greater than de minimis discount, under Treasury regulations (the "OID
Regulations") it is possible that the Certificates could nevertheless be deemed
to have been issued with original issue discount ("OID") if the interest were
not treated as "unconditionally payable" under the OID Regulations. If such
regulations were to apply, all of the taxable income to be recognized with
respect to the Certificates would be includible in income of Certificate Owners
as OID, but would not be includible again when the interest is actually
received. See "CERTAIN FEDERAL INCOME TAX CONSIDERATIONS -- Taxation of Debt
Securities; Interest and Acquisition Discount" in the Prospectus for a
discussion of the application of the OID rules if the Certificates are in fact
issued at a greater than de minimis discount or are treated as having been
issued with OID under the OID Regulations. For purposes of calculating OID, it
is likely that the Certificates will be treated as Pay-Through Securities.
POSSIBLE CLASSIFICATION OF THE CERTIFICATES AS A PARTNERSHIP OR ASSOCIATION
TAXABLE AS A CORPORATION
The opinion of Tax Counsel is not binding on the courts or the IRS. It is
possible that the IRS could assert that, for purposes of the Code, the
transaction contemplated by this Prospectus with respect to the Certificates
constitutes a sale of the Mortgage Loans (or an interest therein) to the
Certificate Owners and that the proper classification of the legal relationship
between the Transferor and the Certificate Owners resulting from this
transaction is that of a partnership (including a publicly traded partnership),
a publicly traded partnership treated as a corporation, or an association
taxable as a corporation. Since Tax Counsel has advised that the Certificates
will be treated as indebtedness in the hands of the Certificateholders for U.S.
federal income tax purposes, the Transferor will not attempt to comply with U.S.
federal income tax reporting requirements applicable to partnerships or
corporations as such requirements would apply if the Certificates were treated
as indebtedness.
If it were determined that this transaction created an entity classified as
a corporation (including a publicly traded partnership taxable as a
corporation), the Trust would be subject to U.S. federal income tax at corporate
income tax rates on the income it derives from the Mortgage Loans, which would
reduce the amounts available for distribution to the Certificate Owners. Cash
distributions to the Certificate Owners generally would be treated as dividends
for tax purposes to the extent of such corporation's earnings and profits. If
the transaction were treated as creating a partnership between the Certificate
Owners and the Transferor, the partnership itself would not be subject to U.S.
federal income tax (unless it were to be characterized as a publicly traded
partnership taxable as a corporation); rather, the Transferor and each
Certificate Owner would be taxed individually on their respective distributive
shares of the partnership's income, gain, loss, deductions and credits. The
amount and timing of items of income and deductions of the
S-51
<PAGE> 52
Certificate Owner could differ if the Certificates were held to constitute
partnership interests rather than indebtedness.
POSSIBLE CLASSIFICATION AS A TAXABLE MORTGAGE POOL
In relevant part, Section 7701(i) of the Code provides that any entity (or
a portion of an entity) that is a "taxable mortgage pool" will be classified as
a taxable corporation and will not be permitted to file a consolidated U.S.
federal income tax return with another corporation. Subject to a grandfather
provision for existing entities, any entity (or a portion of any entity) will be
a taxable mortgage pool if (i) substantially all of its assets consist of debt
instruments, more than 50% of which are real estate mortgages, (ii) the entity
is the obligor under debt obligations with two or more maturities, and (iii)
under the terms of the entity's debt obligations (or an underlying arrangement),
payments on such debt obligations bear a relationship to the debt instruments
held by the entity.
Assuming that all of the provisions of the Agreement, as in effect on the
date of issuance, are complied with, Tax Counsel is of the opinion that the
arrangement created by the Agreement will not be a taxable mortgage pool under
Section 7701(i) of the Code because only one class of indebtedness secured by
the Mortgage Loans is being issued.
The opinion of Tax Counsel is not binding on the IRS or the courts. If the
IRS were to contend successfully (or future regulations were to provide) that
the arrangement created by the Agreement is a taxable mortgage pool, such
arrangement would be subject to U.S. federal corporate income tax on its taxable
income generated by ownership of the Mortgage Loans. Such a tax might reduce
amounts available for distributions to Certificate Owners. The amount of such a
tax would depend upon whether distributions to Certificate Owners would be
deductible as interest expense in computing the taxable income of such an
arrangement as a taxable mortgage pool.
FOREIGN INVESTORS
In general, subject to certain exceptions, interest (including OID) paid on
a Certificate to a nonresident alien individual, foreign corporation or other
non-United States person is not subject to U.S. federal income tax, provided
that such interest is not effectively connected with a trade or business of the
recipient in the United States and the Certificate Owner provides the required
foreign person information certification. See "CERTAIN FEDERAL INCOME TAX
CONSIDERATIONS -- Tax Treatment of Foreign Investors" in the Prospectus.
If the interests of the Certificate Owners were deemed to be partnership
interests, the partnership, if it were considered to be engaged in a U.S. trade
or business, would be required, on a quarterly basis, to pay withholding tax
equal to the product, for each foreign partner, of such foreign partner's
distributive share of "effectively connected" income of the partnership
multiplied by the highest rate of tax applicable to that foreign partner. In
addition, such foreign partner would be subject to branch profits tax. Each
non-foreign partner would be required to certify to the partnership that it is
not a foreign person. The tax withheld from each foreign partner would be
credited against such foreign partner's U.S. income tax liability.
If the Trust were taxable as a corporation, distributions to foreign
persons, to the extent treated as dividends (or if the Trust were characterized
as a partnership that was not engaged in a trade or business, all interest
distributions), would generally be subject to withholding at the rate of 30%,
unless such rate were reduced by an applicable tax treaty.
If, contrary to the opinion of Tax Counsel, the Certificates are
recharacterized as equity interests in a partnership, or in an association or
publicly traded partnership taxable as a corporation, any taxes required to be
so withheld will be treated for all purposes of the Certificates and the Policy
as having been paid to the related Certificateholder.
S-52
<PAGE> 53
BACKUP WITHHOLDING
Certain Certificate Owners may be subject to backup withholding at the rate
of 31% with respect to interest paid on the Certificates if the Certificate
Owners, upon issuance, fail to supply the Trustee or his broker with his
taxpayer identification number, furnish an incorrect taxpayer identification
number, fail to report interest, dividends, or other "reportable payments" (as
defined in the Code) properly, or, under certain circumstances, fail to provide
the Trustee or his broker with a certified statement, under penalty of perjury,
that he is not subject to backup withholding.
The Trustee will be required to report annually to the IRS, and to each
Certificateholder of record, the amount of interest paid (and OID accrued, if
any) on the Certificates (and the amount of interest withheld for U.S. federal
income taxes, if any) for each calendar year, except as to exempt holders
(generally, holders that are corporations, certain tax-exempt organizations or
nonresident aliens who provide certification as to their status as
nonresidents). As long as the only "Certificateholder" of record is Cede, as
nominee for DTC, Certificate Owners and the IRS will receive tax and other
information including the amount of interest paid on the Certificates from
Participants and Indirect Participants rather than from the Trustee. (The
Trustee, however, will respond to requests for necessary information to enable
Participants, Indirect Participants and certain other persons to complete their
reports.) Each non-exempt Certificate Owner will be required to provide, under
penalty of perjury, a certificate on IRS Form W-9 containing his or her name,
address, correct federal taxpayer identification number and a statement that he
or she is not subject to backup withholding. Should a nonexempt Certificate
Owner fail to provide the required certification, the Participants or Indirect
Participants (or the Paying Agent) will be required to withhold 31% of the
interest (and principal) otherwise payable to the holder, and remit the withheld
amount to the IRS as a credit against the holder's Federal income tax liability.
TAX-EXEMPT ENTITIES
A tax-exempt Certificate Owner would be subject to less favorite tax
treatment because an interest in a partnership would generate "unrelated
business taxable income" and thereby subject the Certificate Owner to the
"unrelated business taxable income" provisions of the Code.
STATE TAXES
Provident makes no representations regarding the tax consequences of
purchase, ownership or disposition of the Certificates under the tax laws of any
state. Investors considering an investment in the Certificates should consult
their own tax advisors regarding such tax consequences.
All investors should consult their own tax advisors regarding the Federal,
state, local, foreign or any other income tax consequences of the purchase,
ownership and disposition of the Certificates.
ERISA CONSIDERATIONS
Any Plan fiduciary which proposes to cause a Plan to acquire any of the
Certificates should consult with its counsel with respect to the potential
consequences under the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), and the Code, of the Plan's acquisition and ownership of such
Certificates. See "ERISA Considerations" in the Prospectus.
The Department of Labor has issued an individual exemption, Prohibited
Transaction Exemption ("PTE") 91-14, Exemption Application No. D-7956, 56 Fed.
Reg. 7413 (1991), to Lehman Brothers Inc. (the "Exemption") relating to (1) the
acquisition, sale and holding by Plans of certain certificates representing an
undivided interest in certain asset-backed pass-through trusts, with respect to
which Lehman Brothers Inc. or any of its affiliates is the sole underwriter or
the manager or co-manager of the underwriting syndicate; and (2) the servicing,
operation and management of such asset-backed pass-through trusts, provided that
the general conditions and certain other conditions set forth in the Exemption
are satisfied. The
S-53
<PAGE> 54
Exemption will apply to the acquisition, holding and resale of the Certificates
by a Plan provided that certain conditions (certain of which are described
below) are met.
Among the conditions which must be satisfied for the Exemption to apply are
the following:
(1) The acquisition of the Certificates by a Plan is on terms
(including the price for such Certificates) that are at least as
favorable to the investing Plan as they would be in an arm's-
length transaction with an unrelated party;
(2) The rights and interests evidenced by the Certificates acquired by
the Plan are not subordinated to the rights and interests
evidenced by other certificates of the Trust;
(3) The Certificates acquired by the Plan have received a rating at
the time of such acquisition that is in one of the three highest
generic rating categories from Standard & Poor's, Moody's, or Duff
& Phelps Credit Rating Co.;
(4) The sum of all payments made to and retained by the Underwriter in
connection with the distribution of the Certificates represents
not more than reasonable compensation for underwriting such
Certificates; the sum of all payments made to and retained by the
Sponsor pursuant to the sale of the Mortgage Loans to the Trust
represents not more than the fair market value of such Mortgage
Loans; the sum of all payments made to and retained by the
Servicer represent not more than reasonable compensation for the
Servicer's services under the Agreement and reimbursement of the
Servicer's reasonable expenses in connection therewith;
(5) The Trustee is not an affiliate of the Underwriter, the Sponsor,
the Servicer, the Certificate Insurer, any borrower whose
obligations under one or more Mortgage Loans constitute more than
5% of the aggregate unamortized principal balance of the assets in
the Trust, or any of their respective affiliates (the "Restricted
Group"); and
(6) The Plan investing in the Certificates is an "accredited investor"
as defined in Rule 501(a)(1) of Regulation D of the Securities and
Exchange Commission under the Securities Act of 1933, as amended.
The Underwriters believe that the Exemption will apply to the acquisition
and holding of the Certificates by Plans and that all conditions of the
Exemption other than those within the control of the investors will be met.
Any Plan fiduciary considering whether to purchase any Certificates on
behalf of a Plan should consult with its counsel regarding the applicability of
the fiduciary responsibility and prohibited transaction provisions of ERISA and
the Code to such investment. Among other things, before purchasing any
Certificates, a fiduciary of a Plan subject to the fiduciary responsibility
provisions of ERISA or an employee benefit plan subject to the prohibited
transaction provisions of the Code should make its own determination as to the
availability of the exemptive relief provided in the Exemption, and also
consider the availability of any other prohibited transaction exemptions.
LEGAL INVESTMENT CONSIDERATIONS
Although, as a condition to their issuance, the Certificates will be rated
in the highest rating category of the Rating Agencies, the Certificates will not
constitute "mortgage related securities" for purposes of the Secondary Mortgage
Market Enhancement Act of 1984 ("SMMEA"), because not all of the Mortgages
securing the Mortgage Loans are first mortgages. Accordingly, many institutions
with legal authority to invest in comparably rated securities based on first
mortgage loans may not be legally authorized to invest in the Certificates,
which because they evidence interests in a pool that includes junior mortgage
loans are not "mortgage related securities" under SMMEA. See "LEGAL INVESTMENT"
in the Prospectus.
S-54
<PAGE> 55
UNDERWRITING
Subject to the terms and conditions set forth in the underwriting
agreement, dated September 26, 1997 (the "Underwriting Agreement"), between
Provident and Lehman Brothers Inc. (the "Underwriter"), Provident has agreed to
sell to the Underwriter, and the Underwriter has agreed to purchase from
Provident all the Certificates.
In the Underwriting Agreement, the Underwriter has agreed, subject to the
terms and conditions set forth therein, to purchase all the Certificates offered
hereby if any of the Certificates are purchased.
Provident has been advised by the Underwriter that it proposes initially to
offer the Certificates to the public in Europe and the United States at the
offering price set forth herein and to certain dealers at such price less a
discount not in excess of 0.225% of the Certificate denominations. The
Underwriter may allow and such dealers may reallow a discount not in excess of
0.125% of the Certificate denominations to certain other dealers. After the
initial public offering, the public offering price, such concessions and such
discounts may be changed.
Provident has been advised by the Underwriter that it presently intends to
make a market in the Certificates offered hereby; however, the Underwriter 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.
Until the distribution of the Certificates is completed, rules of the
Commission may limit the ability of the Underwriter and certain selling group
members to bid for and purchase the Certificates. As an exception to these
rules, the Underwriter are permitted to engage in certain transactions that
stabilize the price of the Certificates. Such transactions consist of bids or
purchases for the purpose of pegging, fixing or maintaining the price of the
Certificates.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases.
Neither Provident nor any of the Underwriter makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the prices of the Certificates. In addition, neither
Provident nor any of the Underwriter makes any representation that the
Underwriter will engage in such transactions or that such transactions, once
commenced, will not be discontinued without notice.
The Underwriting Agreement provides that Provident will indemnify the
Underwriter against certain civil liabilities, including liabilities under the
Securities Act of 1933, as amended.
Certain expenses of the Underwriter incurred in connection with this
offering will be paid by Provident.
LEGAL MATTERS
Certain legal matters with respect to the Certificates will be passed upon
for Provident by Keating, Muething & Klekamp, P.L.L., Cincinnati, Ohio and for
the Underwriter by Brown & Wood LLP, New York, New York. Certain legal matters
will be passed upon for the Certificate Insurer by Kutak Rock, Omaha, Nebraska.
EXPERTS
The consolidated balance sheets of MBIA Insurance Corporation and its
subsidiaries as of December 31, 1996 and 1995 and the related consolidated
statements of income, changes in shareholder's equity, and cash flows for each
of the three years in the period ended December 31, 1996, incorporated by
reference in this Prospectus Supplement, have been incorporated herein in
reliance on the report of Coopers & Lybrand L.L.P., independent accountants,
given on the authority of that firm as experts in accounting and auditing.
S-55
<PAGE> 56
RATINGS
It is a condition to issuance that the Certificates be rated "AAA" by
Standard & Poor's and Fitch and "Aaa" by Moody's.
A securities rating addresses the likelihood of the receipt by
Certificateholders of distributions on the Mortgage Loans. The rating takes into
consideration the characteristics of the Mortgage Loans and the structural,
legal and tax aspects associated with the Certificates. The ratings on the
Certificates do not, however, constitute statements regarding the likelihood or
frequency of prepayments on the Mortgage Loans or the possibility that
Certificateholders might realize a lower than anticipated yield.
The ratings assigned to the Certificates will depend primarily upon the
creditworthiness of the Certificate Insurer. Any reduction in a rating assigned
to the claims-paying ability of the Certificate Insurer below the ratings
initially assigned to the Certificates may result in a reduction of one or more
of the ratings assigned to the Certificates.
A securities rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning rating
organization. Each securities rating should be evaluated independently of
similar ratings on different securities.
S-56
<PAGE> 57
INDEX OF DEFINED TERMS
<TABLE>
<CAPTION>
PAGE
---------------------
<S> <C>
Accelerated Principal Distribution Amount.............................. S-7, S-39
Additional Balance..................................................... S-22
Additional Balances.................................................... S-3
Adjustment Date........................................................ S-5, S-23
Agreement.............................................................. S-3, S-43
Alternative Principal Payment.......................................... S-9, S-41
Amortization Period.................................................... S-23
Assignment Event....................................................... S-35
Average Portfolio Balance.............................................. S-21
Balloon Loans.......................................................... S-13
Beneficial owner....................................................... S-32
BIF.................................................................... S-37
Billing Cycle.......................................................... S-23
Book-Entry Certificates................................................ S-32
Business Day........................................................... S-43, S-39
Cede................................................................... S-6
Cedel.................................................................. S-6
Cedel Participants..................................................... S-33
Certificate Insurer.................................................... S-10
Certificate Owners..................................................... S-6, S-32
Certificate Principal Balance.......................................... S-4, S-31
Certificate Rate....................................................... S-3, S-8, S-40
Certificateholder...................................................... S-3, S-53
Certificates........................................................... 1, S-3
Charge-Offs............................................................ S-21
Chase.................................................................. S-6
Citibank............................................................... S-6
Civil Belief Act Interest Shortfalls................................... S-44
Closing Date........................................................... 1, S-9, S-40
CLTV................................................................... S-5, S-21, S-22, S-24
Code................................................................... S-12, S-50
Collection Account..................................................... S-8, S-37
Collection Period...................................................... S-8, S-40
Combined Loan-to-Value Ratio........................................... S-5, S-21, S-24
Cooperative............................................................ S-34
Credit Limit........................................................... S-19
Credit Limit Utilization Rate.......................................... S-22
Credit Line Agreements................................................. S-3, S-22
Cut-Off Date........................................................... 1, S-3, S-22
Cut-Off Date Pool Balance.............................................. S-3
Cut-Off Date Principal Balance......................................... S-3
Cut-Off Date Sample Pool Balance....................................... S-24
Defective Mortgage Loans............................................... S-36
Deficiency Amount...................................................... S-44
Definitive Certificate................................................. S-32
Determination Date..................................................... S-11, S-37
Distribution Account................................................... S-37
Distribution Date...................................................... 1, S-8, S-39
Draw................................................................... S-22
</TABLE>
S-57
<PAGE> 58
<TABLE>
<CAPTION>
PAGE
---------------------
<S> <C>
Draw Period............................................................ S-22
DTC.................................................................... S-6, S-32
Due Date............................................................... S-23
Eligible Account....................................................... S-37
Eligible Substitute Mortgage Loan...................................... S-36
ERISA.................................................................. S-12, S-53
Euroclear.............................................................. S-6
Euroclear Operator..................................................... S-34
Euroclear Participants................................................. S-33
European Depositaries.................................................. S-6, S-32
Events of Servicing Termination........................................ S-48
FDIA................................................................... S-15
Final Distribution Date................................................ S-44
Finance Charge......................................................... S-23
Financial Intermediary................................................. S-31
FIRREA................................................................. S-15
Fiscal Agent........................................................... S-43
Fitch.................................................................. S-12
Fixed Allocation Percentage............................................ S-8
GAAP................................................................... S-17
Gross Margin........................................................... S-5, S-23
Guaranteed Distributions............................................... S-10
Guaranteed Principal Amount............................................ S-44
Guaranteed Principal Distribution Amount............................... S-10
home equity loans...................................................... 1
Hunter Mortgage Loans.................................................. S-16
Hunter................................................................. S-16
Index.................................................................. S-23
Insolvency Event....................................................... S-15
Insurance Agreement.................................................... S-10
Insured Payment........................................................ S-44
Interest Collections................................................... S-7, S-38
Interest Period........................................................ S-9, S-40
Invested Amount........................................................ S-4, S-31
Investor Certificate Interest.......................................... S-44
Investor Fixed Allocation Percentage................................... S-8
Investor Floating Allocation Percentage................................ S-7, S-38
Investor Interest Collections.......................................... S-7, S-38
Investor Loss Amount................................................... S-8, S-39
Investor Principal Collections......................................... S-8, S-38
IRS.................................................................... S-51
LIBOR.................................................................. S-9
LIBOR Business Day..................................................... S-40
Liquidated Mortgage Loan............................................... S-39, S-40
Liquidation Loss Amount................................................ S-8, S-39
Liquidation Proceeds................................................... S-38
Loan Rate.............................................................. S-5, S-23
Loss Payee Clause...................................................... S-19
Managed Amortization Period............................................ S-9
Maximum Principal Payment.............................................. S-9, S-41
Maximum Rate........................................................... S-5
</TABLE>
S-58
<PAGE> 59
<TABLE>
<CAPTION>
PAGE
---------------------
<S> <C>
Minimum Transferor Interest............................................ S-4, S-37
Moody's................................................................ S-12
Mortgage Clause........................................................ S-19
Mortgage Files......................................................... S-35
Mortgage Loan Schedule................................................. S-4, S-34, S-36
Mortgage Loans......................................................... 1, S-3
Mortgaged Properties................................................... S-3
Net Liquidation Proceeds............................................... S-7, S-38
Notice................................................................. S-44
OID.................................................................... S-51
OID Regulations........................................................ S-51
Original Certificate Principal Balance................................. S-4, S-32
Original Invested Amount............................................... S-3, S-31
Overcollateralization Amount........................................... S-8, S-10
Owner.................................................................. S-44
Paying Agent........................................................... S-41
Percentage Interest.................................................... S-6
Plan................................................................... S-12
Policy................................................................. 1, S-3
Pool Balance........................................................... S-3, S-38
Pool Factor............................................................ S-30
Preference Amount...................................................... S-44
Principal Balance...................................................... S-3
Principal Collections.................................................. S-7, S-38
Provident.............................................................. 1, S-3, S-6
PTE.................................................................... S-53
Rapid Amortization Event............................................... S-41, S-42
Rapid Amortization Period.............................................. S-11, S-41
Rating Agency.......................................................... S-12
Record Date............................................................ S-39
The Reference Bank Rate................................................ S-40
Related Documents...................................................... S-35
Relevant Depositary.................................................... S-32
Required Overcollateralization Amount.................................. S-39
Restricted Group....................................................... S-54
Rules.................................................................. S-32
SAIF................................................................... S-37
Sample Pool............................................................ S-22, S-24
Sample Pool Mortgage Loans............................................. S-22, S-24
SAP.................................................................... S-17
Scheduled Principal Collections Distribution Amount.................... S-9, S-41
Servicer............................................................... S-3, S-6
Servicing Fee.......................................................... S-11
Servicing Fee Rate..................................................... S-11, S-46
SMMEA.................................................................. S-12, S-54
Sponsor................................................................ S-3
Standard & Poor's...................................................... S-12
Tax Counsel............................................................ S-50
Telerate Screen Page 3750.............................................. S-40
Terms and Conditions................................................... S-34
Transfer Date.......................................................... S-37
</TABLE>
S-59
<PAGE> 60
<TABLE>
<CAPTION>
PAGE
---------------------
<S> <C>
Transfer Deficiency.................................................... S-36
Transfer Deposit Amount................................................ S-36
Transferor............................................................. S-4, S-6
Transferor Interest.................................................... 1, S-4, S-31
Trust.................................................................. 1, S-3
Trustee................................................................ S-3, S-6, S-42
UCC.................................................................... S-15
Underwriters........................................................... S-55
Underwriting Agreement................................................. S-55
Unpaid Investor Certificate Shortfall.................................. S-44
</TABLE>
S-60
<PAGE> 61
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered Revolving
Home Equity Loan Asset-Backed Certificates, Series 1997-A (the "Global
Securities") will be available only in book-entry form. Investors in the Global
Securities may hold such Global Securities through any of The Depository Trust
Company ("DTC"), Cedel or Euroclear. The Global Securities will be tradeable as
home market instruments in both the European and U.S. domestic markets. Initial
settlement and all secondary trades will settle in same-day funds.
Secondary market trading between investors holding Global Securities
through Cedel and Euroclear will be conducted in the ordinary way in accordance
with their normal rules and operating procedures and in accordance with
conventional eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors holding Global Securities
through DTC will be conducted according to the rules and procedures applicable
to U.S. corporate debt obligations and prior Home Equity Loan Asset-Backed
Certificates issues.
Secondary cross-market trading between Cedel or Euroclear and DTC
Participants holding Certificates will be effected on a delivery-against-payment
basis through the respective Depositaries of Cedel and Euroclear (in such
capacity) and as DTC Participants.
Non-U.S. holders (as described below) of Global Securities will be subject
to U.S. withholding taxes unless such holders meet certain requirements and
deliver appropriate U.S. tax documents to the securities clearing organizations
or their participants.
INITIAL SETTLEMENT
All Global Securities will be held in book-entry form by DTC in the name of
Cede & Co. as nominee of DTC. Investors' interests in the Global Securities will
be represented through financial institutions acting on their behalf as direct
and indirect Participants in DTC. As a result, Cedel and Euroclear will hold
positions on behalf of their participants through their respective Depositaries,
which in turn will hold such positions in accounts as DTC Participants.
Investors electing to hold their Global Securities through DTC will follow
the settlement practices applicable to prior Home Equity Loan Asset-Backed
Certificates issues. Investor securities custody accounts will be credited with
their holdings against payment in same-day funds on the settlement date.
Investors electing to hold their Global Securities through Cedel or
Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global security
and no "lock-up" or restricted period. Global Securities will be credited to the
securities custody accounts on the settlement date against payment in same-day
funds.
SECONDARY MARKET TRADING
Since the purchaser determines the place of delivery, it is important to
establish at the time of the trade where both the purchaser's and 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 Home
Equity Loan Asset-Backed Certificates issues in same-day funds.
Trading between Cedel and/or Euroclear Participants. Secondary market
trading between Cedel Participants or Euroclear Participants will be settled
using the procedures applicable to conventional eurobonds in same-day funds.
S-61
<PAGE> 62
Trading between DTC Seller and Cedel or Euroclear Purchaser. When Global
Securities are to be transferred from the account of a DTC Participant to the
account of a Cedel Participant or a Euroclear Participant, the purchaser will
send instructions to Cedel or Euroclear through a Cedel Participant or Euroclear
Participant at least one business day prior to settlement. Cedel or Euroclear
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 the actual number of days in such
accrual period and a year assumed to consist of 360 days. For transactions
settling on the 31st of the month, payment will include interest accrued to and
excluding the first day of the following month. Payment will then be made by the
respective Depositary of the DTC Participant's account against delivery of the
Global Securities. After settlement has been completed, the Global Securities
will be credited to the respective clearing system and by the clearing system,
in accordance with its usual procedures, to the Cedel Participant's or Euroclear
Participant's account. The securities credit will appear the next day (European
time) and the cash debt will be back-valued to, and the interest on the Global
Securities will accrue from, the value date (which would be the preceding day
when settlement occurred in New York). If settlement is not completed on the
intended value date (i.e., the trade fails), the Cedel or Euroclear cash debt
will be valued instead as of the actual settlement date.
Cedel Participants and Euroclear Participants will need to make available
to the respective clearing systems the funds necessary to process same-day funds
settlement. The most direct means of doing so is to preposition funds for
settlement, either from cash on hand or existing lines of credit, as they would
for any settlement occurring within Cedel or Euroclear. Under this approach,
they may take on credit exposure to Cedel or Euroclear until the Global
Securities are credited to their accounts one day later.
As an alternative, if Cedel or Euroclear has extended a line of credit to
them, Cedel Participants or Euroclear Participants can elect not to preposition
funds and allow that credit line to be drawn upon the finance settlement. Under
this procedure, Cedel Participants or Euroclear Participants purchasing Global
Securities would incur overdraft charges for one day, assuming they cleared the
overdraft when the Global Securities were credited to their accounts. However,
interest on the Global Securities would accrue from the value date. Therefore,
in many cases the investment income on the Global Securities earned during that
one-day period may substantially reduce or offset the amount of such overdraft
charges, although this result will depend on each Cedel Participant's or
Euroclear Participant's particular cost of funds.
Since the settlement is taking place during New York business hours, DTC
Participants can employ their usual procedures for sending Global Securities to
the respective European Depositary for the benefit of Cedel Participants or
Euroclear Participants. The sale proceeds will be available to the 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 Cedel or Euroclear Seller and DTC Purchaser. Due to time
zone differences in their favor, Cedel Participants and Euroclear Participants
may employ their customary procedures for transactions in which Global
Securities are to be transferred by the respective clearing system, through the
respective Depositary, to a DTC Participant. The seller will send instructions
to Cedel or Euroclear through a Cedel Participant or Euroclear Participant at
least one business day prior to settlement. In these cases Cedel or Euroclear
will instruct the respective Depositary, as appropriate, to deliver the Global
Securities to the 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 the actual
number of days in such accrual period and a year assumed to consist of 360 days.
For transactions settling on the 31st of the month, payment will include
interest accrued to and excluding the first day of the following month. The
payment will then be reflected in the account of the Cedel Participant or
Euroclear Participant the following day, and receipt of the cash proceeds in the
Cedel Participant's or Euroclear Participant's account would be back-valued to
the value date (which would be the preceding day, when settlement occurred in
New York). Should the Cedel Participant or Euroclear Participant have a line of
credit with its respective clearing system and elect to be in debt in
anticipation of receipt of the sale proceeds in its account, the back-valuation
will extinguish any overdraft incurred over that one-day period. If settlement
is not completed on the intended
S-62
<PAGE> 63
value date (i.e., the trade fails), receipt of the cash proceeds in the Cedel
Participant's or Euroclear Participant's account would instead be valued as of
the actual settlement date.
Finally, day traders that use Cedel or Euroclear and that purchase Global
Securities from DTC Participants for delivery to Cedel Participants or Euroclear
Participants should note that these trades would automatically fail on the sale
side unless affirmative action were taken. At least three techniques should be
readily available to eliminate this potential problem:
(a) borrowing through Cedel or Euroclear for one day (until the purchase
side of the day trade is reflected in their Cedel or Euroclear accounts) in
accordance with the clearing system's customary procedures;
(b) borrowing the Global Securities in the U.S. from a DTC Participant no
later than one day prior to settlement, which would give the Global Securities
sufficient time to be reflected in their Cedel or Euroclear account in order to
settle the sale side of the trade; or
(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 Cedel Participant or Euroclear
Participant.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of Global Securities holding securities through Cedel or
Euroclear (or through DTC if the holder has an address outside the U.S.) will be
subject to the 30% U.S. withholding tax that generally applies to payments of
interest (including original issue discount) on registered debt issued by U.S.
Persons, unless (i) each clearing system, bank or other financial institution
that holds customers' securities in the ordinary course of its trade or business
in the chain of intermediaries between such beneficial owner and the U.S. entity
required to withhold tax complies with applicable certification requirements and
(ii) such beneficial owner takes one of the following steps to obtain an
exemption or reduced tax rate:
Exemption for Non-U.S. Persons (Form W-8). Beneficial owners of Global
Securities that are non-U.S. Persons can obtain a complete exemption from the
withholding tax by filing a signed Form W-8 (Certificate of Foreign Status). If
the information shown on Form W-8 changes, a new Form W-8 must be filed within
30 days of such change.
Exemption for Non-U.S. Persons With Effectively Connected Income (Form
4224). A non-U.S. Person, including a non-U.S. corporation or bank with a U.S.
branch, for which the interest income is effectively connected with its conduct
of a trade or business in the United States, can obtain an exemption from the
withholding tax by filing Form 4224 (Exemption from Withholding of Tax on Income
Effectively Connected with the Conduct of a Trade or Business in the United
States).
Exemption or Reduced Rate for Non-U.S. Persons Resident in Treaty Countries
(Form 1001). Non-U.S. Persons that are Certificate Owners residing in a country
that has a tax treaty with the United States can obtain an exemption or reduced
tax rate (depending on the treaty terms) by filing Form 1001 (Ownership,
Exemption or Reduced Rate Certificate). If the treaty provides only for a
reduced rate, withholding tax will be imposed at that rate unless the filer
alternatively files Form W-8. Form 1001 may be filed by the Certificate Owners
or their agents.
Exemption for U.S. Persons (Form W-9). U.S. Persons can obtain a complete
exemption from the withholding tax by filing Form W-9 (Payer's Request for
Taxpayer Identification Number and Certification).
U.S. Federal Income Tax Reporting Procedure. The Certificate Owner of a
Global Security or, in the case of a Form 1001 or a Form 4224 filer, his agent,
files by submitting the appropriate form to the person through whom it holds
(the clearing agency, in the case of persons holding directly on the books of
the clearing agency). Form W-8 and Form 1001 are effective for three calendar
years and Form 4224 is effective for one calendar year.
S-63
<PAGE> 64
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 or any political subdivision thereof or (iii) an estate or trust
the income of which is includible in gross income for United States tax
purposes, regardless of its source. 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. Investors are advised to consult their own tax
advisors for specific tax advice concerning their holding and disposing of the
Global Securities.
S-64
<PAGE> 65
PROSPECTUS
ASSET BACKED SECURITIES
(ISSUABLE IN SERIES)
------------------------
This Prospectus relates to the issuance of Asset Backed Certificates (the
"Certificates") and Asset Backed Notes (the "Notes" and, together with the
Certificates, the "Securities"), which may be issued from time to time in one or
more series (each, a "Series") by a Trust Fund created by The Provident Bank
("Provident") on terms determined at the time of sale and described in this
Prospectus and the related Prospectus Supplement. The Securities of a Series
will consist of Certificates which evidence beneficial ownership of a trust
established by Provident (each, a "Trust Fund"), and Notes secured by the assets
of a Trust Fund. As specified in the related Prospectus Supplement, the Trust
Fund for a Series of Securities will include certain assets (the "Trust Fund
Assets") which will consist of the following types of single family mortgage
loans (the "Loans"): (i) mortgage loans secured by first and/or subordinate
liens on one- to four-family residential properties (the "Mortgage Loans") and
(ii) closed-end loans (the "Closed-End Loans") and/or revolving home equity
loans or certain balances thereof (the "Revolving Credit Line Loans", together
with the Closed-End Loans, the "Home Equity Loans") secured by first or
subordinate liens on one- to four-family residential properties. The Trust Fund
Assets will be originated or be acquired by Provident and conveyed by Provident
to the related Trust Fund. A Trust Fund also may include insurance policies,
surety bonds, cash accounts, reinvestment income, guaranties or letters of
credit to the extent described in the related Prospectus Supplement. See "Index
of Defined Terms" on Page 85 of this Prospectus for the location of the
definitions of certain capitalized terms.
Each Series of Securities will be issued in one or more classes. Each class
of Certificates of a Series will evidence beneficial ownership of a specified
percentage (which may be 0%) or portion of future interest payments and a
specified percentage (which may be 0%) or portion of future principal payments
on the related Trust Fund Assets. Each class of Notes of a Series will be
secured by the related Trust Fund Assets or, if so specified in the related
Prospectus Supplement, a portion thereof. A Series of Securities may include one
or more classes that are senior in right of payment to one or more other classes
of Securities of such Series. One or more classes of Securities of a Series may
be entitled to receive distributions of principal, interest or any combination
thereof prior to one or more other classes of Securities of such Series on or
after the occurrence of specified events, in each case as specified in the
related Prospectus Supplement.
Distributions to Securityholders will be made monthly, quarterly,
semi-annually or at such other intervals and on the dates specified in the
related Prospectus Supplement. Distributions on the Securities of a Series will
be made from the related Trust Fund Assets or proceeds thereof pledged for the
benefit of the Securityholders as specified in the related Prospectus
Supplement.
The related Prospectus Supplement will describe any insurance or guarantee
provided with respect to the related Series of Securities including, without
limitation, any insurance or guarantee provided by the Department of Housing and
Urban Development, the United States Department of Veterans' Affairs or any
private insurer or guarantor. The only obligations of Provident with respect to
a Series of Securities will be to make certain representations and warranties to
the Trustee for the related Series of Securities. The principal obligations of
the Master Servicer named in the related Prospectus Supplement with respect to
the related Series of Securities will be limited to obligations pursuant to
certain representations and warranties and to its contractual servicing
obligations, including any obligation it may have to advance delinquent payments
on the related Trust Fund Assets.
The yield on each class of Securities of a Series will be affected by, among
other things, the rate of payments of principal (including prepayments) on the
related Trust Fund Assets and the timing of receipt of such payments as
described under "Risk Factors -- Prepayment and Yield Considerations" and "Yield
and Prepayment Considerations" herein and in the related Prospectus Supplement.
A Trust Fund may be subject to early termination under the circumstances
described under "The Agreements -- Termination; Optional Termination" herein and
in the related Prospectus Supplement.
If specified in the related Prospectus Supplement, one or more elections may
be made to treat a Trust Fund or specified portions thereof as a "real estate
mortgage investment conduit" ("REMIC") for federal income tax purposes. See
"Federal Income Tax Consequences."
------------------------
FOR A DISCUSSION OF CERTAIN RISKS ASSOCIATED WITH AN INVESTMENT IN THE
SECURITIES, SEE THE INFORMATION UNDER "RISK FACTORS" ON PAGE 12.
THE CERTIFICATES OF A GIVEN SERIES WILL REPRESENT BENEFICIAL INTERESTS IN, AND
THE NOTES OF A GIVEN SERIES WILL REPRESENT OBLIGATIONS OF, THE RELATED TRUST
FUND ONLY AND WILL NOT REPRESENT INTERESTS IN OR OBLIGATIONS OF PROVIDENT, THE
MASTER SERVICER, OR ANY AFFILIATES THEREOF, EXCEPT TO THE EXTENT DESCRIBED IN
THE RELATED PROSPECTUS SUPPLEMENT. THE SECURITIES AND THE LOANS WILL NOT BE
INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY
GOVERNMENTAL AGENCY OR INSTRUMENTALITY OR BY PROVIDENT OR ANY OTHER PERSON OR
ENTITY, EXCEPT IN EACH CASE TO THE EXTENT DESCRIBED IN THE RELATED PROSPECTUS
SUPPLEMENT.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS OR THE RELATED PROSPECTUS SUPPLEMENT.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
Prior to issuance there will have been no market for the Securities of any
Series and there can be no assurance that a secondary market for any Securities
will develop, or if it does develop, that it will continue or provide
Securityholders with a sufficient level of liquidity of investment. This
Prospectus may not be used to consummate sales of Securities of any Series
unless accompanied by a Prospectus Supplement. Offers of the Securities may be
made through one or more different methods, including offerings through
underwriters, as more fully described under "Method of Distribution" herein and
in the related Prospectus Supplement.
September 10, 1997
<PAGE> 66
UNTIL 90 DAYS AFTER THE DATE OF EACH PROSPECTUS SUPPLEMENT, ALL DEALERS
EFFECTING TRANSACTIONS IN THE SECURITIES COVERED BY SUCH PROSPECTUS SUPPLEMENT,
WHETHER OR NOT PARTICIPATING IN THE DISTRIBUTION THEREOF, MAY BE REQUIRED TO
DELIVER SUCH PROSPECTUS SUPPLEMENT AND THIS PROSPECTUS. THIS IS IN ADDITION TO
THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS AND PROSPECTUS SUPPLEMENT WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
PROSPECTUS SUPPLEMENT OR CURRENT REPORT ON FORM 8-K
The Prospectus Supplement or Current Report on Form 8-K relating to the
Securities of each Series to be offered hereunder will, among other things, set
forth with respect to such Securities, as appropriate: (i) the aggregate
principal amount, interest rate and authorized denominations of each class of
such Series of Securities; (ii) information as to the assets comprising the
Trust Fund, including the general characteristics of the related Trust Fund
Assets included therein and, if applicable, the insurance policies, surety
bonds, guaranties, letters of credit or other instruments or agreements included
in the Trust Fund or otherwise, and the amount and source of any reserve account
or other cash account; (iii) the circumstances, if any, under which the Trust
Fund may be subject to early termination; (iv) the circumstances, if any, under
which the Notes of such Series are subject to redemption; (v) the method used to
calculate the amount of principal to be distributed or paid with respect to each
class of Securities; (vi) the order of application of distributions or payments
to each of the classes within such Series, whether sequential, pro rata, or
otherwise; (vii) the Distribution Dates with respect to such Series; (viii)
additional information with respect to the method of distribution of such
Securities; (ix) whether one or more REMIC elections will be made with respect
to the Trust Fund and, if so, the designation of the regular interests and the
residual interests; (x) the aggregate original percentage ownership interest in
the Trust Fund to be evidenced by each class of Certificates; (xi) the stated
maturity of each class of Notes of such Series; (xii) information as to the
nature and extent of subordination with respect to any class of Securities that
is subordinate in right of payment to any other class; and (xiii) information as
to the Master Servicer and the Trustee.
AVAILABLE INFORMATION
Provident has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement under the Securities Act of 1933, as
amended, with respect to the Securities. This Prospectus, which forms a part of
the Registration Statement, and the Prospectus Supplement relating to each
Series of Securities contain descriptions of the material terms of the documents
referred to herein and therein, but do not contain all of the information set
forth in the Registration Statement pursuant to the Rules and Regulations of the
Commission. For further information, reference is made to such Registration
Statement and the exhibits thereto. Such Registration Statement and exhibits can
be inspected and copied at prescribed rates at the public reference facilities
maintained by the Commission at its Public Reference Section, 450 Fifth Street,
N.W., Washington, D.C. 20549, and at its Regional Offices located as follows:
Midwest Regional Office, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661; and Northeast Regional Office, Seven World Trade Center, Suite 1300, New
York, New York 10048. The Commission also maintains a Web site at
http://www.sec.gov from which such Registration Statement and exhibits may be
obtained.
No person has been authorized to give any information or to make any
representation other than those contained in this Prospectus and any Prospectus
Supplement with respect hereto and, if given or made, such information or
representations must not be relied upon. This Prospectus and any Prospectus
Supplement with respect hereto do not constitute an offer to sell or a
solicitation of an offer to buy any securities other than the Securities offered
hereby and thereby nor an offer of the Securities to any person in any state or
other jurisdiction in which such offer would be unlawful. The delivery of this
Prospectus at any time does not imply that information herein is correct as of
any time subsequent to its date.
2
<PAGE> 67
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents subsequently filed by or on behalf of the Trust Fund referred
to in the accompanying Prospectus Supplement with the Commission pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), after the date of this Prospectus and prior to the
termination of any offering of the Securities issued by such Trust Fund 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 such documents. Any statement
contained in a document incorporated or deemed to be incorporated by reference
herein shall be deemed to be modified or superseded for all purposes of this
Prospectus to the extent that a statement contained herein (or in the
accompanying Prospectus Supplement) or in any other subsequently filed document
which also is or is deemed to be incorporated by reference modifies or replaces
such statement. Any such statement so modified or superseded shall not be
deemed, except as so modified or superseded, to constitute a part of this
Prospectus. Neither Provident nor the Master Servicer for any Series intends to
file with the Commission periodic reports with respect to the related Trust Fund
following completion of the reporting period required by Rule 15d-1 or
Regulation 15D under the Exchange Act.
The Trustee or such other entity specified in the related Prospectus
Supplement on behalf of any Trust Fund will provide without charge to each
person to whom this Prospectus is delivered, on the written or oral request of
such person, a copy of any or all of the documents referred to above that have
been or may be incorporated by reference in this Prospectus (not including
exhibits to the information that is incorporated by reference unless such
exhibits are specifically incorporated by reference into the information that
this Prospectus incorporates). Such requests should be directed to the Corporate
Trust Office of the Trustee or the address of such other entity specified in the
accompanying Prospectus Supplement. Included in the accompanying Prospectus
Supplement is the name, address, telephone number, and, if available, facsimile
number of the office or contact person at the Corporate Trust Office of the
Trustee or such other entity.
REPORTS TO SECURITYHOLDERS
Periodic and annual reports concerning the related Trust Fund for a Series
of Securities will be forwarded to Securityholders. However, such reports will
neither be examined nor reported on by an independent public accountant. See
"Description of the Securities -- Reports to Securityholders".
3
<PAGE> 68
SUMMARY OF TERMS
This summary is qualified in its entirety by reference to the detailed
information appearing elsewhere in this Prospectus and in the related Prospectus
Supplement with respect to the Series of Securities offered thereby and to the
related Agreement (as such term is defined below) which will be prepared in
connection with each Series of Securities. Unless otherwise specified,
capitalized terms used and not defined in this Summary of Terms have the
meanings given to them in this Prospectus and in the related Prospectus
Supplement. See "Index of Defined Terms" on Page 85 of this Prospectus for the
location of the definitions of certain capitalized terms.
Title of Securities........ Asset Backed Certificates (the "Certificates") and
Asset Backed Notes (the "Notes" and, together with
the Certificates, the "Securities"), which are
issuable in Series.
Provident.................. The Provident Bank ("Provident"), an Ohio banking
corporation in its capacity as transferor of the
Loans to the Trust Fund.
Trustee.................... The trustee(s) (the "Trustee") for each Series of
Securities will be specified in the related
Prospectus Supplement. See "The Agreements" herein
for a description of the Trustee's rights and
obligations.
Master Servicer............ The entity or entities named as Master Servicer
(the "Master Servicer") in the related Prospectus
Supplement, which may be Provident or an affiliate
thereof. See "The Agreements -- Certain Matters
Regarding the Master Servicer and Provident".
Trust Fund Assets.......... Assets of the Trust Fund for a Series of Securities
will include certain assets (the "Trust Fund
Assets") which will consist of the Loans, together
with payments in respect of such Trust Fund Assets,
as specified in the related Prospectus Supplement.
At the time of issuance of the Securities of the
Series, Provident will assign the Loans comprising
the related Trust Fund to the Trustee, without
recourse. The Loans will be collected in a pool
(each, a "Pool") as of the first day of the month
of the issuance of the related Series of Securities
or such other date specified in the related
Prospectus Supplement (the "Cut-Off Date"). Trust
Fund Assets also may include insurance policies,
surety bonds, cash accounts, reinvestment income,
guaranties or letters of credit to the extent
described in the related Prospectus Supplement. See
"Credit Enhancement". In addition, if the related
Prospectus Supplement so provides, the related
Trust Fund Assets will include the funds on deposit
in an account (a "Pre-Funding Account") which will
be used to purchase additional Loans during the
period specified in such Prospectus Supplement. See
"The Agreements -- Pre-Funding Account".
Loans...................... The Loans will consist of (i) mortgage loans
secured by first and/or subordinate liens on one-
to four-family residential properties (each, a
"Mortgage Loan") and (ii) closed-end loans (the
"Closed-End Loans") and/or revolving home equity
loans or certain balances thereof (the "Revolving
Credit Line Loans", together with the Closed-End
Loans, the "Home Equity Loans"). All Loans will
have been originated or purchased by Provident,
either directly or through an affiliate.
As specified in the related Prospectus Supplement,
the Home Equity Loans will be secured by mortgages
or deeds of trust or other similar security
instruments creating a lien on a Mortgaged
Property, which may be subordinated to one or more
senior liens on the Mortgaged Property, as
described in the related Prospectus Supplement.
4
<PAGE> 69
Description of the
Securities................. Each Security will represent a beneficial ownership
interest in, or be secured by the assets of, a
Trust Fund created by Provident pursuant to an
Agreement among Provident, the Master Servicer and
the Trustee for the related Series. The Securities
of any Series may be issued in one or more classes
as specified in the related Prospectus Supplement.
A Series of Securities may include one or more
classes of senior Securities (collectively, the
"Senior Securities") and one or more classes of
subordinate Securities (collectively, the
"Subordinated Securities"). Certain Series or
classes of Securities may be covered by insurance
policies or other forms of credit enhancement, in
each case as described under "Credit Enhancement"
herein and in the related Prospectus Supplement.
One or more classes of Securities of each Series
(i) may be entitled to receive distributions
allocable only to principal, only to interest or to
any combination thereof; (ii) may be entitled to
receive distributions only of prepayments of
principal throughout the lives of the Securities or
during specified periods; (iii) may be subordinated
in the right to receive distributions of scheduled
payments of principal, prepayments of principal,
interest or any combination thereof to one or more
other classes of Securities of such Series
throughout the lives of the Securities or during
specified periods; (iv) may be entitled to receive
such distributions only after the occurrence of
events specified in the related Prospectus
Supplement; (v) may be entitled to receive
distributions in accordance with a schedule or
formula or on the basis of collections from
designated portions of the related Trust Fund
Assets; (vi) as to Securities entitled to
distributions allocable to interest, may be
entitled to receive interest at a fixed rate or a
rate that is subject to change from time to time;
and (vii) as to Securities entitled to
distributions allocable to interest, may be
entitled to distributions allocable to interest
only after the occurrence of events specified in
the related Prospectus Supplement and may accrue
interest until such events occur, in each case as
specified in the related Prospectus Supplement. The
timing and amounts of such distributions may vary
among classes or over time, as specified in the
related Prospectus Supplement.
Distributions on the
Securities................. Distributions on the Securities entitled thereto
will be made monthly, quarterly, semi-annually or
at such other intervals and on the dates specified
in the related Prospectus Supplement (each, a
"Distribution Date") out of the payments received
in respect of the assets of the related Trust Fund
or other assets pledged for the benefit of the
Securities as described under "Credit Enhancement"
herein to the extent specified in the related
Prospectus Supplement. The amount allocable to
payments of principal and interest on any
Distribution Date will be determined as specified
in the related Prospectus Supplement. The
Prospectus Supplement for a Series of Securities
will describe the method for allocating
distributions among Securities of different classes
as well as the method for allocating distributions
among Securities for any particular class.
The aggregate original principal balance of the
Securities will not exceed the aggregate
distributions allocable to principal that such
Securities will be entitled to receive. If
specified in the related Prospectus Supplement, the
Securities will have an aggregate original
principal balance equal to
5
<PAGE> 70
the aggregate unpaid principal balance of the Trust
Fund Assets as of the related Cut-Off Date and will
bear interest in the aggregate at a rate equal to
the interest rate borne by the underlying Loans
(the "Loan Rate") net of the aggregate servicing
fees and any other amounts specified in the related
Prospectus Supplement or at such other interest
rate as may be specified in such Prospectus
Supplement.
The rate at which interest will be passed through
or paid to Securityholders (each, a "Pass-Through
Rate") entitled thereto may be a fixed rate or a
rate that is subject to change from time to time
from the time and for the periods, in each case, as
specified in the related Prospectus Supplement. Any
such rate may be calculated on a loan-by-loan
basis, weighted average basis, a notional amount or
other basis, in each case as described in the
related Prospectus Supplement.
Credit Enhancement......... The Trust Fund Assets or the Securities of one or
more classes in the related Series may have the
benefit of one or more types of credit enhancement
as described in the related Prospectus Supplement.
The protection against losses afforded by any such
credit support may be limited. The type,
characteristics and amount of credit enhancement
will be determined based on the characteristics of
the Loans comprising the Trust Fund Assets and
other factors and will be established on the basis
of requirements of each Rating Agency rating the
Securities of such Series. See "Credit
Enhancement."
If specified in the related Prospectus Supplement,
the coverage provided by one or more of the forms
of credit enhancement described in this Prospectus
may apply concurrently to two or more separate
Trust Funds. If applicable, the related Prospectus
Supplement will identify the Trust Funds to which
such credit enhancement relates and the manner of
determining the amount of coverage provided to such
Trust Funds thereby and of the application of such
coverage to the identified Trust Funds.
A. Subordination........... A Series of Securities may consist of one or more
classes of Senior Securities and one or more
classes of Subordinated Securities. The rights of
the holders of the Subordinated Securities of a
Series to receive distributions with respect to the
related Trust Fund Assets will be subordinated to
such rights of the holders of the Senior Securities
of the same Series to the extent described in the
related Prospectus Supplement. This subordination
is intended to enhance the likelihood of regular
receipt by holders of Senior Securities of such
Series of the full amount of monthly payments of
principal and interest due them. The protection
afforded to the holders of Senior Securities of a
Series by means of the subordination feature will
be accomplished by (i) the preferential right of
such holders to receive, prior to any distribution
being made in respect of the related Subordinated
Securities, the amounts of interest and/or
principal due them on each Distribution Date out of
the funds available for distribution on such date
in the related Security Account and, to the extent
described in the related Prospectus Supplement, by
the right of such holders to receive future
distributions on the related Trust Fund Assets that
would otherwise have been payable to the holders of
Subordinated Securities; (ii) reducing the
ownership interest (if applicable) of the related
Subordinated Securities; or (iii) a combination of
clauses (i) and (ii) above. If so specified in the
related Prospectus
6
<PAGE> 71
Supplement, subordination may apply only in the
event of certain types of losses not covered by
other forms of credit support, such as hazard
losses not covered by standard hazard insurance
policies or losses due to the bankruptcy or fraud
of the borrower. The related Prospectus Supplement
will set forth information concerning, among other
things, the amount of subordination of a class or
classes of Subordinated Securities in a Series, the
circumstances in which such subordination will be
applicable, and the manner, if any, in which the
amount of subordination will decrease over time.
B. Reserve Account......... One or more reserve accounts or other cash accounts
(each, a "Reserve Account") may be established and
maintained for each Series of Securities. The
related Prospectus Supplement will specify whether
or not such Reserve Accounts will be included in
the corpus of the Trust Fund for such Series and
will also specify the manner of funding such
Reserve Accounts and the conditions under which the
amounts in any such Reserve Accounts will be used
to make distributions to holders of Securities of a
particular class or released from such Reserve
Accounts.
C. Letter of Credit........ If so specified in the related Prospectus
Supplement, credit support for a Series may be
provided by one or more letters of credit. A letter
of credit may provide limited protection against
certain losses in addition to or in lieu of other
credit support, such as losses resulting from
delinquent payments on the Loans in the related
Trust Fund, losses from risks not covered by
standard hazard insurance policies, losses due to
bankruptcy of a borrower and application of certain
provisions of the federal Bankruptcy Code, and
losses due to denial of insurance coverage due to
misrepresentations made in connection with the
origination or sale of a Loan. The issuer of the
letter of credit (the "L/C Bank") will be obligated
to honor demands with respect to such letter of
credit, to the extent of the amount available
thereunder to provide funds under the circumstances
and subject to such conditions as are specified in
the related Prospectus Supplement. The liability of
the L/C Bank under its letter of credit will be
reduced by the amount of unreimbursed payments
thereunder.
The maximum liability of a L/C Bank under its
letter of credit will be an amount equal to a
percentage specified in the related Prospectus
Supplement of the initial aggregate outstanding
principal balance of the Loans in the related Trust
Fund or one or more Classes of Securities of the
related Series. The maximum amount available at any
time to be paid under a letter of credit will be
determined in the manner specified therein and in
the related Prospectus Supplement.
D. Insurance Policies;
Surety Bonds and
Guarantees.............. If so specified in the related Prospectus
Supplement, credit support for a Series may be
provided by an insurance policy and/or a surety
bond issued by one or more insurance companies or
sureties. Such certificate guarantee insurance or
surety bond will guarantee timely distributions of
interest and/or full distributions of principal on
the basis of a schedule of principal distributions
set forth in or determined in the manner specified
in the related Prospectus Supplement. If specified
in the related Prospectus Supplement, one or more
bankruptcy bonds, special hazard insurance
policies, other insurance or third-party guarantees
may be used to
7
<PAGE> 72
provide coverage for the risks of default or types
of losses set forth in such Prospectus Supplement.
E. Over-Collateralization.. If so provided in the Prospectus Supplement for a
Series of Securities, a portion of the interest
payment on each Loan may be applied as an
additional distribution in respect of principal to
reduce the principal balance of a certain class or
classes of such Series of Securities and, thus,
accelerate the rate of payment of principal on such
class or classes of such Series of Securities.
F. Mortgage Pool
Insurance Policy........ A mortgage pool insurance policy or policies may be
obtained and maintained for Loans relating to any
Series of Securities, which shall be limited in
scope and shall cover defaults on the related Loans
in an initial amount equal to a specified
percentage of the aggregate principal balance of
all Loans included in the Pool as of the related
Cut-Off Date.
G. Cross-Collateralization. If specified in the related Prospectus Supplement,
separate classes of a Series of Securities may
evidence the beneficial ownership of, or be secured
by, separate groups of assets included in a Trust
Fund. In such case, credit support may be provided
by a cross-collateralization feature which requires
that distributions be made to Securities evidencing
a beneficial ownership interest in, or secured by,
one or more asset groups prior to distributions to
Subordinated Securities evidencing a beneficial
ownership interest in, or secured by, other asset
groups within the same Trust Fund. See "Credit
Enhancement--Cross-Collateralization."
Advances................... The Master Servicer and, if applicable, each
mortgage servicing institution that services a Loan
in a Pool on behalf of the Master Servicer (each, a
"Sub-Servicer") may be obligated to advance amounts
(each, an "Advance") corresponding to delinquent
interest and/or principal payments on such Loan
until the date, as specified in the related
Prospectus Supplement, on which the related
Property is sold at a foreclosure sale or the
related Loan is otherwise liquidated. Any
obligation to make Advances may be subject to
limitations as specified in the related Prospectus
Supplement. If so specified in the related
Prospectus Supplement, Advances may be drawn from a
cash account available for such purpose as
described in such Prospectus Supplement. Advances
will be reimbursable to the extent described under
"Description of the Securities -- Advances" herein
and in the related Prospectus Supplement.
In the event the Master Servicer or Sub-Servicer
fails to make a required Advance, the Trustee may
be obligated to advance such amounts otherwise
required to be advanced by the Master Servicer or
Sub-Servicer. See "Description of the
Securities -- Advances."
Optional Termination....... The Master Servicer or the party specified in the
related Prospectus Supplement, including the holder
of the residual interest in a REMIC, may have the
option to effect early retirement of a Series of
Securities through the purchase of the Trust Fund
Assets. The Master Servicer will deposit the
proceeds of any such purchase in the Security
Account for each Trust Fund as described under "The
Agreements -- Payments on Loans; Deposit to
Security Account." Any such purchase of Trust Fund
Assets and property acquired in respect of Trust
Fund Assets evidenced by a Series of Securities
will be made at the option of the Master
8
<PAGE> 73
Servicer, such other person or, if applicable, such
holder of the REMIC residual interest, at a price
specified in the related Prospectus Supplement. The
exercise of such right will effect early retirement
of the Securities of that Series, but the right of
the Master Servicer, such other person or, if
applicable, such holder of the REMIC residual
interest, to so purchase is subject to the
principal balance of the related Trust Fund Assets
being less than the percentage specified in the
related Prospectus Supplement of the aggregate
principal balance of the Trust Fund Assets at the
Cut-Off Date for the Series. The foregoing is
subject to the provision that if a REMIC election
is made with respect to a Trust Fund, any such
purchase will be made only in connection with a
"qualified liquidation" of the REMIC within the
meaning of Section 860F(g)(4) of the Internal
Revenue Code of 1986, as amended (the "Code").
Legal Investment........... The Prospectus Supplement for each Series of
Securities will specify which, if any, of the
classes of Securities offered thereby constitute
"mortgage related securities" for purposes of the
Secondary Mortgage Market Enhancement Act of 1984
("SMMEA"). Classes of Securities that qualify as
"mortgage related securities" will be legal
investments for certain types of institutional
investors to the extent provided in SMMEA, subject,
in any case, to any other regulations which may
govern investments by such institutional investors.
Institutions whose investment activities are
subject to review by federal or state authorities
should consult with their counsel or the applicable
authorities to determine whether an investment in a
particular class of Securities (whether or not such
class constitutes a "mortgage related security")
complies with applicable guidelines, policy
statements or restrictions. See "Legal Investment."
Federal Income Tax
Consequences............. The federal income tax consequences to
Securityholders will vary depending on whether one
or more elections are made to treat the Trust Fund
or specified portions thereof as a REMIC under the
provisions of the Code. The Prospectus Supplement
for each Series of Securities will specify whether
such an election will be made.
If a REMIC election is made, Securities
representing regular interests in a REMIC will
generally be taxable to holders in the same manner
as evidences of indebtedness issued by the REMIC.
Stated interest on such regular interests will be
taxable as ordinary income and taken into account
using the accrual method of accounting, regardless
of the holder's normal accounting method. If no
REMIC election is made, interest (other than
original issue discount ("OID")) on Securities that
are characterized as indebtedness for federal
income tax purposes will be includible in income by
holders thereof in accordance with their usual
method of accounting.
Certain classes of Securities may be issued with
OID. A Securityholder should be aware that the Code
and the Treasury regulations promulgated thereunder
do not adequately address certain issues relevant
to prepayable securities, such as the Securities.
Securityholders that will be required to report
income with respect to the related Securities under
the accrual method of accounting will do so without
giving effect to delays and reductions in
distributions attributable
9
<PAGE> 74
to a default or delinquency on the Loans, except
possibly to the extent that it can be established
that such amounts are uncollectible. As a result,
the amount of income (including OID) reported by a
Securityholder in any period could significantly
exceed the amount of cash distributed to such
Securityholder in that period.
In the opinion of Brown & Wood LLP, if a REMIC
election is made with respect to a Series of
Securities, then the arrangement by which such
Securities 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. A REMIC will not
be subject to entity-level tax. Rather, the taxable
income or net loss of a REMIC will be taken into
account by the holders of residual interests. Such
holders will report their proportionate share of
the taxable income of the REMIC whether or not they
receive cash distributions from the REMIC
attributable to such income. The portion of the
REMIC taxable income consisting of "excess
inclusions" may not be offset against other
deductions or losses of the holder, including the
net operating losses.
In the opinion of Brown & Wood LLP, if a REMIC or a
partnership election is not made with respect to a
Series of Securities, then the arrangement by which
such Securities are issued will be classified as a
grantor trust under Subpart E, Part I of Subchapter
J of the Code and not as an association taxable as
a corporation. If so provided in the Prospectus
Supplement for a Series, there will be no
separation of the principal and interest payments
on the Loans. In such circumstances, the
Securityholder will be considered to have purchased
a pro rata undivided interest in each of the Loans.
In other cases, 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.
In the opinion of Brown & Wood LLP, if a
partnership election is made, the Trust Fund will
not be treated as an association or a publicly
traded partnership taxable as a corporation as long
as all of the provisions of the applicable
Agreement are complied with and the statutory and
regulatory requirements are satisfied. If Notes are
issued by such Trust Fund, such Notes will be
treated as indebtedness for federal income tax
purposes. The holders of the Certificates issued by
such Trust Fund, if any, will agree to treat the
Certificates as equity interests in a partnership.
The Securities will be treated as assets described
in Section 7701(a)(19)(C) of the Code and as real
estate assets described in Section 856(c) of the
Code.
Generally, gain or loss will be recognized on a
sale of Securities in the amount equal to the
difference between the amount realized and the
seller's tax basis in the Securities sold.
The material federal income tax consequences for
investors associated with the purchase, ownership
and disposition of the Securities are set forth
herein under "Federal Income Tax Consequences". The
material federal income tax consequences for
investors associated with the purchase, ownership
and disposition of Securities of any particular
Series will be set forth under the heading "Federal
Income Tax Consequences"
10
<PAGE> 75
in the related Prospectus Supplement. See "Federal
Income Tax Consequences".
ERISA Considerations....... A fiduciary of any employee benefit plan or other
retirement plan or arrangement subject to the
Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), or the Code should carefully
review with its legal advisors whether the purchase
or holding of Securities could give rise to a
transaction prohibited or not otherwise permissible
under ERISA or the Code. See "ERISA
Considerations". Certain classes of Securities may
not be transferred unless the Trustee is furnished
with a letter of representation or an opinion of
counsel to the effect that such transfer will not
result in a violation of the prohibited transaction
provisions of ERISA and the Code and will not
subject the Trustee, Provident or the Master
Servicer to additional obligations. See
"Description of the Securities -- General" and
"ERISA Considerations".
Risk Factors............... For a discussion of certain risks associated with
an investment in the Securities, see "Risk Factors"
on Page 12 herein and in the related Prospectus
Supplement.
11
<PAGE> 76
RISK FACTORS
Investors should consider the following factors in connection with the
purchase of the Securities.
LIMITED LIQUIDITY
There will be no market for the Securities of any Series prior to the
issuance thereof, and there can be no assurance that a secondary market will
develop or, if it does develop, that it will provide Securityholders with
liquidity of investment or will continue for the life of the Securities of such
Series.
LIMITED SOURCE OF PAYMENTS--NO RECOURSE TO PROVIDENT OR MASTER SERVICER
As further described in the related Prospectus Supplement, the Securities
of a Series will be payable solely from the Trust Fund for such Series and will
not have any claim against or security interest in any trust fund for any other
Series. There will be no recourse to Provident or any other person for any
failure to receive distributions on the Securities. Further, at the times set
forth in the related Prospectus Supplement, certain Trust Fund Assets and/or any
balance remaining in the Security Account immediately after making all payments
due on the Securities of such Series, after making adequate provision for future
payments on certain classes of Securities and after making any other payments
specified in the related Prospectus Supplement, may be promptly released or
remitted to Provident, the Master Servicer, any credit enhancement provider or
any other person entitled thereto and will no longer be available for making
payments to Securityholders. Consequently, holders of Securities of each Series
must rely solely upon payments with respect to the Trust Fund Assets and the
other assets constituting the Trust Fund for a Series of Securities, including,
if applicable, any amounts available pursuant to any credit enhancement for such
Series, for the payment of principal of and interest on the Securities of such
Series.
The Securities will not represent an interest in or obligation of
Provident, the Master Servicer or any of their respective affiliates. The only
obligation, if any, of Provident with respect to the Trust Fund Assets or the
Securities of any Series will be pursuant to certain representations and
warranties and certain document delivery requirements.
Provident may be required to repurchase or substitute for any Loan with
respect to which such representations and warranties or document delivery
requirements are breached. There is no assurance, however, that Provident will
have the financial ability to effect such repurchase or substitution.
CREDIT ENHANCEMENT AND POSSIBLE LIMITATIONS ON EFFECTIVENESS
Although credit enhancement is intended to reduce the risk of delinquent
payments or losses to holders of Securities entitled to the benefit thereof, the
amount of such credit enhancement will be limited, as set forth in the related
Prospectus Supplement, and may be subject to periodic reduction in accordance
with a schedule or formula or otherwise decline, and could be depleted under
certain circumstances prior to the payment in full of the related Series of
Securities, and as a result Securityholders of the related Series may suffer
losses. Moreover, such credit enhancement may not cover all potential losses or
risks. For example, credit enhancement may or may not cover fraud or negligence
by a loan originator or other parties. In addition, the Trustee will generally
be permitted to reduce, terminate or substitute all or a portion of the credit
enhancement for any Series of Securities, provided the applicable Rating Agency
indicates that the then-current rating of the Securities of such Series will not
be adversely affected. See "Credit Enhancement".
PREPAYMENT AND YIELD CONSIDERATIONS
The timing of principal payments of the Securities of a Series will be
affected by a number of factors, including the following: (i) the extent of
prepayments (including for this purpose prepayments resulting from refinancing
or liquidations of the Loans due to defaults, casualties, condemnations and
repurchases by Provident or the Master Servicer) of the Loans comprising the
Trust Fund, which prepayments may be influenced by a variety of factors
including general economic conditions, prevailing interest rate levels, the
availability of alternative financing and homeowner mobility, (ii) the manner of
allocating principal and/or
12
<PAGE> 77
payments among the classes of Securities of a Series as specified in the related
Prospectus Supplement, (iii) the exercise by the party entitled thereto of any
right of optional termination and (iv) the rate and timing of payment defaults
and losses incurred with respect to the Trust Fund Assets. The repurchase of
Loans by Provident or the Seller may result from repurchases of Trust Fund
Assets due to material breaches of Provident's or the Seller's representations
and warranties, as applicable. The yields to maturity and weighted average lives
of the Securities will be affected primarily by the rate and timing of
prepayment of the Loans comprising the Trust Fund Assets. In addition, the
yields to maturity and weighted average lives of the Securities will be affected
by the distribution of amounts remaining in any Pre-Funding Account following
the end of the related Funding Period. Any reinvestment risks resulting from a
faster or slower incidence of prepayment of Loans held by a Trust Fund will be
borne entirely by the holders of one or more classes of the related Series of
Securities. See "Yield and Prepayment Considerations" and "The Agreements--Pre-
Funding Account."
Interest payable on the Securities of a Series on a Distribution Date will
include all interest accrued during the period specified in the related
Prospectus Supplement. In the event interest accrues over a period ending two or
more days prior to a Distribution Date, the effective yield to Securityholders
will be reduced from the yield that would otherwise be obtainable if interest
payable on the Securities were to accrue through the day immediately preceding
each Distribution Date, and the effective yield (at par) to Securityholders will
be less than the indicated coupon rate. See "Description of the
Securities--Distributions on Securities--Distributions of Interest".
BALLOON PAYMENTS AND INCREASED RISK OF DEFAULT
Certain of the Loans as of the related Cut-Off Date may not be fully
amortizing over their terms to maturity and, thus, will require substantial
principal payments (i.e., balloon payments) at their stated maturity. Loans with
balloon payments involve a greater degree of risk because the ability of a
borrower to make a balloon payment typically will depend upon its ability either
to timely refinance the loan or to timely sell the related Property. The ability
of a borrower to accomplish either of these goals will be affected by a number
of factors, including the level of available mortgage rates at the time of sale
or refinancing, the borrower's equity in the related Property, the financial
condition of the borrower and tax laws. Losses on such Loans that are not
otherwise covered by the credit enhancement described in the applicable
Prospectus Supplement will be borne by the holders of one or more classes of
Securities of the related Series.
NATURE OF MORTGAGES
Change in Property Values and Possible Increase in Losses. There are
several factors that could adversely affect the value of Properties such that
the outstanding balance of the related Loans, together with any senior financing
on the Properties, if applicable, 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 that are not necessarily covered by
insurance, such as earthquakes and floods. In the case of Home Equity Loans,
such decline could extinguish the value of the interest of a junior mortgagee in
the Property before having any effect on the interest of the related senior
mortgagee. If such a decline occurs, the actual rates of delinquencies,
foreclosures and losses on all Loans could be higher than those currently
experienced in the mortgage lending industry in general. Losses on such Loans
that are not otherwise covered by the credit enhancement described in the
applicable Prospectus Supplement will be borne by the holder of one or more
classes of Securities of the related Series.
Delays Due to Liquidation. Even assuming that the Properties provide
adequate security for the Loans, substantial delays could be encountered in
connection with the liquidation of defaulted Loans and corresponding delays in
the receipt of related proceeds by Securityholders could occur. An action to
foreclose on a Property securing a Loan is regulated by state statutes and rules
and is subject to many of the delays and expenses of other lawsuits if defenses
or counterclaims are interposed, sometimes requiring several years to complete.
An uncontested foreclosure in Ohio will take approximately six months to
complete, depending
13
<PAGE> 78
upon how quickly all interested parties are properly served with legal process
to commence the action, and whether reappraisal of the property is necessary
because the bid received at the sheriff's foreclosure sale is less than
two-thirds of the appraised value. In Ohio, foreclosure is usually contested
unless the owner of the property is contemplating bankruptcy. Furthermore, in
some states an action to obtain a deficiency judgment is not permitted following
a nonjudicial sale of a Property. This would apply in Ohio only as to the
execution sale of any personal property in which a security interest is granted
by the mortgage to be foreclosed, but not the real property. Ohio law generally
imposes a two-year limitations period following confirmation of a judicial sale
to collect a deficiency judgment. Such limitation also applies to the collection
of a deficiency judgment by a junior mortgagee after foreclosure and sale of a
senior mortgage. In the event of a default by a borrower, these restrictions,
among other things, may impede the ability of the Master Servicer to foreclose
on or sell the Property or to obtain liquidation proceeds sufficient to repay
all amounts due on the related Loan. In addition, the Master Servicer will be
entitled to deduct from related liquidation proceeds all expenses reasonably
incurred in attempting to recover amounts due on defaulted Loans and not yet
repaid, including payments to senior lienholders, legal fees and costs of legal
action, real estate taxes and maintenance and preservation expenses.
Disproportionate Effect of Liquidation Expenses. Liquidation expenses with
respect to defaulted Loans do not vary directly with the outstanding principal
balance of the Loan at the time of default. Therefore, assuming that a servicer
took the same steps in realizing upon a defaulted Loan having a small remaining
principal balance as it would in the case of a defaulted Loan having a large
remaining principal balance, the amount realized after expenses of liquidation
would be smaller as a percentage of the outstanding principal balance of the
small Loan than would be the case with the defaulted Loan having a large
remaining principal balance.
Home Equity Loans; Junior Liens and Effect on Recoveries. Since the
mortgages and deeds of trust securing the Home Equity Loans will be primarily
junior liens subordinate to the rights of the mortgagee under the related senior
mortgage(s) or deed(s) of trust, the proceeds from any liquidation, insurance or
condemnation proceeds will be available to satisfy the outstanding balance of
such junior lien only to the extent that the claims of such senior mortgagees
have been satisfied in full, including any related foreclosure costs. In
addition, a junior mortgagee may not foreclose on the property securing a junior
mortgage unless it forecloses subject to any senior mortgage, in which case it
must either pay the entire amount due on any senior mortgage to the related
senior mortgagee at or prior to the foreclosure sale or undertake the obligation
to make payments on any such senior mortgage in the event the mortgagor is in
default thereunder. The Trust Fund will not have any source of funds to satisfy
any senior mortgages or make payments due to any senior mortgagees and may
therefore be prevented from foreclosing on the related property. As discussed
above, in Ohio a junior mortgagee may be subject to a two-year limitations
period for the collection of a deficiency judgment if the judgment was entered
in favor of the junior mortgagee in the foreclosure action of a senior
mortgagee.
Consumer Protection Laws. Applicable state laws generally regulate
interest rates and other charges, require certain disclosures, and require
licensing of certain originators and servicers of Loans. In addition, most
states have other laws, public policy and general principles of equity relating
to the protection of consumers, unfair and deceptive practices and practices
which may apply to the origination, servicing and collection of the Loans.
Depending on the provisions of the applicable law and the specific facts and
circumstances involved, violations of these laws, policies and principles may
limit the ability of the Master Servicer to collect all or part of the principal
of or interest on the Loans, may entitle the borrower to a refund of amounts
previously paid and, in addition, could subject the Master Servicer to damages
and administrative sanctions. See "Certain Legal Aspects of the Loans".
ENVIRONMENTAL RISKS TO TRUST FUND
Real property pledged as security to a lender may be subject to certain
environmental risks. Under the laws of certain states, contamination of a
property may give rise to a lien on the property to assure the costs of cleanup.
In several states, such a lien has priority over the lien of an existing
mortgage against such property. In addition, under the laws of some states and
under the federal Comprehensive Environmental Response,
14
<PAGE> 79
Compensation and Liability Act of 1980 ("CERCLA"), a lender may be liable, as an
"owner" or "operator", for costs of addressing releases or threatened releases
of hazardous substances that require remedy at a property, if agents or
employees of the lender have become sufficiently involved in the operations of
the borrower, regardless of whether the environmental damage or threat was
caused by a prior owner. Such costs could result in a loss to the holders of one
or more classes of Securities of the related Series. A lender also risks such
liability on foreclosure of the related property. See "Certain Legal Aspects of
the Loans--Environmental Risks".
CERTAIN OTHER LEGAL ASPECTS OF THE LOANS
Consumer Protection Laws. The Loans may also be subject to federal laws,
including:
(i) the Federal Truth in Lending Act and Regulation Z promulgated
thereunder, which require certain disclosures to the borrowers regarding
the terms of the Loans;
(ii) the Equal Credit Opportunity Act and Regulation B promulgated
thereunder, which prohibit discrimination on the basis of age, race, color,
sex, religion, marital status, national origin, receipt of public
assistance or the exercise of any right under the Consumer Credit
Protection Act, in the extension of credit;
(iii) the Fair Credit Reporting Act, which regulates the use and
reporting of information related to the borrower's credit experience; and
(iv) for Loans that were originated or closed after November 7, 1989,
the Home Equity Loan Consumer Protection Act of 1988, which requires
additional application disclosures, limits changes that may be made to the
Loan documents without the borrower's consent and restricts a lender's
ability to declare a default or to suspend or reduce a borrower's credit
limit to certain enumerated events.
The Riegle Act. Certain Mortgage Loans may be subject to the Riegle
Community Development and Regulatory Improvement Act of 1994 (the "Riegle Act")
which incorporates the Home Ownership and Equity Protection Act of 1994. These
provisions impose additional disclosure and other requirements on creditors with
respect to non-purchase money mortgage loans with high interest rates or high
up-front fees and charges. The provisions of the Riegle Act apply on a mandatory
basis to all Mortgage Loans originated on or after October 1, 1995. These
provisions can impose specific statutory liabilities upon creditors who fail to
comply with their provisions and may affect the enforceability of the related
Loans. In addition, any assignee of the creditor would generally be subject to
all claims and defenses that the consumer could assert against the creditor,
including, without limitation, the right to rescind the Mortgage Loan.
RATING OF THE SECURITIES
It will be a condition to the issuance of a class of Securities offered
hereby that they be rated in one of the four highest rating categories by the
Rating Agency identified in the related Prospectus Supplement. Any such rating
would be based on, among other things, the adequacy of the value of the related
Trust Fund Assets and any credit enhancement with respect to such class and will
represent such Rating Agency's assessment solely of the likelihood that holders
of such class of Securities will receive payments to which such Securityholders
are entitled under the related Agreement. Such rating will not constitute an
assessment of the likelihood that principal prepayments on the related Loans
will be made, the degree to which the rate of such prepayments might differ from
that originally anticipated or the likelihood of early optional termination of
the Series of Securities. Such rating shall not be deemed a recommendation to
purchase, hold or sell Securities, inasmuch as it does not address market price
or suitability for a particular investor. Such rating will not address the
possibility that prepayment at higher or lower rates than anticipated by an
investor may cause such investor to experience a lower than anticipated yield or
that an investor purchasing a Security at a significant premium might fail to
recoup its initial investment under certain prepayment scenarios.
There is also no assurance that any such rating will remain in effect for
any given period of time or that it may not be lowered or withdrawn entirely by
the Rating Agency in the future if in its judgment circumstances in the future
so warrant. In addition to being lowered or withdrawn due to any erosion in the
adequacy of the
15
<PAGE> 80
value of the Trust Fund Assets or any credit enhancement with respect to a
Series of Securities, such rating might also be lowered or withdrawn because of,
among other reasons, an adverse change in the financial or other condition of a
credit enhancement provider or a change in the rating of such credit enhancement
provider's long term debt.
The amount, type and nature of credit enhancement, if any, established with
respect to a class of Securities will be determined on the basis of criteria
established by each Rating Agency rating classes of such Series. Such criteria
are sometimes based upon an actuarial analysis of the behavior of similar loans
in a larger group. Such analysis is often the basis upon which each Rating
Agency determines the amount of credit enhancement required with respect to each
such class. There can be no assurance that the historical data supporting any
such actuarial analysis will accurately reflect future experience nor any
assurance that the data derived from a large pool of similar loans accurately
predicts the delinquency, foreclosure or loss experience of any particular pool
of Loans. No assurance can be given that the values of any Properties have
remained or will remain at their levels on the respective dates of origination
of the related Loans. If the residential real estate markets should experience
an overall decline in property values such that the outstanding principal
balances of the Loans in a particular Trust Fund and any other financing on the
related Properties become equal to or greater than the value of the Properties,
the rates of delinquencies, foreclosures and losses could be higher than those
now generally experienced in the mortgage lending industry. In addition, adverse
economic conditions (which may or may not affect real property values) may
affect the timely payment by mortgagors of scheduled payments of principal and
interest on the Loans and, accordingly, the rates of delinquencies, foreclosures
and losses with respect to any Trust Fund. To the extent that such losses are
not covered by credit enhancement, such losses will be borne, at least in part,
by the holders of one or more classes of Securities of the related Series. See
"Rating".
BOOK-ENTRY REGISTRATION AND REDUCTION OF LIQUIDITY OF SECURITIES
If issued in book-entry form, such registration 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 certificates. Since
transactions in Book-Entry Securities can be effected only through the
Depository Trust Company ("DTC"), participating organizations, Financial
Intermediaries and certain banks, the ability of a Securityholder to pledge a
Book-Entry Security to persons or entities that do not participate in the DTC
system may be limited due to lack of a physical certificate representing such
Securities. Security Owners will not be recognized as Securityholders as such
term is used in the related Agreement, and Security Owners will be permitted to
exercise the rights of Securityholders only indirectly through DTC and its
Participants.
In addition, Securityholders may experience some delay in their receipt of
distributions of interest and principal on Book-Entry Securities since
distributions are required to be forwarded by the Trustee to DTC and DTC will
then be required to credit such distributions to the accounts of Depository
participants which thereafter will be required to credit them to the accounts of
Securityholders either directly or indirectly through Financial Intermediaries.
See "Description of the Securities--Book-Entry Registration of Securities".
PRE-FUNDING ACCOUNTS AND POSSIBLE PREPAYMENT RISK
If so provided in the related Prospectus Supplement, on the related Closing
Date Provident will deposit cash in an amount (the "Pre-Funded Amount")
specified in such Prospectus Supplement into an account (the "Pre-Funding
Account"). In no event shall the Pre-Funded Amount exceed 50% of the initial
aggregate principal amount of the Certificates and/or Notes of the related
Series of Securities. The Pre-Funded Amount will be used to purchase Loans
("Subsequent Loans") in a period from the related Closing Date to a date not
more than one year after such Closing Date (such period, the "Funding Period")
from Provident. The Pre-Funding Account will be maintained with the Trustee for
the related Series of Securities and is designed solely to hold funds to be
applied by such Trustee during the Funding Period to pay to Provident the
purchase price for Subsequent Loans. Monies on deposit in the Pre-Funding
Account will not be available to cover losses on or in respect of the related
Loans. To the extent that the entire Pre-Funded Amount has not been applied to
the purchase of Subsequent Loans by the end of the related Funding Period, any
amounts remaining in the Pre-Funding Account will be distributed as a prepayment
of principal to the holders of the related Securities
16
<PAGE> 81
on the Distribution Date immediately following the end of the Funding Period, in
the amounts and pursuant to the priorities set forth in the related Prospectus
Supplement. Any reinvestment risk resulting from such prepayment will be borne
entirely by the holders of one or more classes of the related Series of
Securities.
BANKRUPTCY AND INSOLVENCY RISKS
Provident and the Trust Fund will treat the transfer of Loans from
Provident to the Trust Fund as a sale for accounting purposes. However, in the
event of the insolvency of Provident, it is possible that a receiver or
conservator (or similar official) for Provident, may attempt to recharacterize
the sale of the Loans as a borrowing by Provident, secured by a pledge of the
Loans. Certain provisions of the Federal Deposit Insurance Act may permit the
FDIC to avoid such security interest. This position, if argued before and/or
accepted by a court, could prevent timely payments of amounts due on the
Securities and result in a reduction of payments due on the Securities.
Provident will, however, mark its records to indicate that the Trust Fund Assets
relating to each Series have been sold to a Trust Fund.
In the event of a bankruptcy or insolvency of the Master Servicer, the
bankruptcy trustee or receiver may have the power to prevent the Trustee or the
Securityholders from appointing a successor Master Servicer. The time period
during which cash collections may be commingled with the Master Servicer's own
funds prior to each Distribution Date will be specified in the related
Prospectus Supplement. In the event of the insolvency of the Master Servicer and
if such cash collections are commingled with the Master Servicer's own funds for
at least ten days, the Trust Fund will likely not have a perfected interest in
such collections since such collections would not have been deposited in a
segregated account within ten days after the collection thereof, and the
inclusion thereof in the bankruptcy estate of the Master Servicer may result in
delays in payment and failure to pay amounts due on the Securities of the
related Series.
In addition, 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 realize upon its
security. For example, in a proceeding under the federal Bankruptcy Code, a
lender may not foreclose on a mortgaged property without the permission of the
bankruptcy court. The rehabilitation plan proposed by the debtor may provide, if
the mortgaged property is not the debtor's principal residence and the court
determines that the value of the mortgaged property is less than the principal
balance of the mortgage loan, for the reduction of the secured indebtedness to
the value of the mortgaged property as of the date of the commencement of the
bankruptcy, rendering the lender a general unsecured creditor for the
difference, and also may reduce the monthly payments due under such mortgage
loan, change the rate of interest and alter the mortgage loan repayment
schedule. The effect of any such proceedings under the federal Bankruptcy Code,
including but not limited to any automatic stay, could result in delays in
receiving payments on the Loans underlying a Series of Securities and possible
reductions in the aggregate amount of such payments.
VALUE OF TRUST FUND ASSETS
There is no assurance that the market value of the Trust Fund Assets or any
other assets relating to a Series of Securities described under "Credit
Enhancement" herein will at any time be equal to or greater than the principal
amount of the Securities of such Series then outstanding, plus accrued interest
thereon. Moreover, upon an event of default under the Agreement for a Series of
Securities and a sale of the related Trust Fund Assets or upon a sale of the
assets of a Trust Fund for a Series of Securities, the Trustee, the Master
Servicer, the credit enhancer, if any, and any other service provider specified
in the related Prospectus Supplement generally will be entitled to receive the
proceeds of any such sale to the extent of unpaid fees and other amounts owing
to such persons under the related Agreement prior to distributions to
Securityholders. Upon any such sale, the proceeds thereof may be insufficient to
pay in full the principal of and interest on the Securities of such Series.
17
<PAGE> 82
THE TRUST FUND
GENERAL
The Securities of each Series will represent interests in the assets of the
related Trust Fund, and the Notes of each Series will be secured by the pledge
of the assets of the related Trust Fund. The Trust Fund for each Series will be
held by the Trustee for the benefit of the related Securityholders. Each Trust
Fund will consist of certain assets (the "Trust Fund Assets") consisting of a
pool (each, a "Pool") comprised of Loans as specified in the related Prospectus
Supplement, together with payments in respect of such Loans, as specified in the
related Prospectus Supplement.* The Pool will be created on the first day of the
month of the issuance of the related Series of Securities or such other date
specified in the related Prospectus Supplement (the "Cut-Off Date"). The
Securities will be entitled to payment from the assets of the related Trust Fund
or other assets pledged for the benefit of the Securityholders as specified in
the related Prospectus Supplement and will not be entitled to payments in
respect of the assets of any other trust fund established by Provident.
Each Loan will have been originated or acquired by Provident in accordance
with the underwriting criteria specified below under "Loan
Program -- Underwriting Standards" or as otherwise described in the related
Prospectus Supplement. See "Loan Program -- Underwriting Standards". The Trust
Fund Assets will be conveyed without recourse by Provident to the related Trust
Fund.
Provident will assign the Trust Fund Assets to the Trustee named in the
related Prospectus Supplement for the benefit of the holders of the Securities
of the related Series. The Master Servicer named in the related Prospectus
Supplement will service the Trust Fund Assets, either directly or through
Sub-Servicers, pursuant to a Pooling and Servicing Agreement among Provident,
the Master Servicer and the Trustee with respect to a Series consisting of
Certificates, or a master servicing agreement (each, a "Master Servicing
Agreement") between the Trustee and the Master Servicer with respect to a Series
consisting of Certificates and Notes, and will receive a fee for such services.
See "Loan Program" and "The Agreements". With respect to Loans serviced by the
Master Servicer through a Sub-Servicer, the Master Servicer will remain liable
for its servicing obligations under the related Agreement as if the Master
Servicer alone were servicing such Loans.
As used herein, "Agreement" means, with respect to a Series consisting of
Certificates, the Pooling and Servicing Agreement, and with respect to a Series
consisting of Certificates and Notes, the Trust Agreement, the Indenture and the
Master Servicing Agreement, as the context requires.
If so specified in the related Prospectus Supplement, a Trust Fund relating
to a Series of Securities may be a business trust formed under the laws of the
state specified in the related Prospectus Supplement pursuant to a trust
agreement (each, a "Trust Agreement") between Provident and the trustee of such
Trust Fund.
With respect to each Trust Fund, prior to the initial offering of the
related Series of Securities, the Trust Fund will have no assets or liabilities.
No Trust Fund is expected to engage in any activities other than acquiring,
managing and holding the related Trust Fund Assets and other assets contemplated
herein specified and in the related Prospectus Supplement and the proceeds
thereof, issuing Securities and making payments and distributions thereon and
certain related activities. No Trust Fund is expected to have any source of
capital other than its assets and any related credit enhancement.
The only obligations of Provident with respect to a Series of Securities
will be to make certain representations and warranties to the Trustee for such
Series of Securities. With respect to any breach of a representation or warranty
which materially and adversely affects the interests of a Securityholder,
Provident
- ---------------
* Whenever the terms "Pool", "Certificates", "Notes" and "Securities" are
used in this Prospectus, such terms will be deemed to apply, unless the context
indicates otherwise, to one specific Pool and the Securities of one Series
including the Certificates representing certain undivided interests in, and/or
Notes secured by the assets of, a single Trust Fund consisting primarily of the
Loans in such Pool. Similarly, the term "Pass- Through Rate" will refer to the
Pass-Through Rate borne by the Certificates and the term "interest rate" will
refer to the interest rate borne by the Notes of one specific Series, as
applicable, and the term "Trust Fund" will refer to one specific Trust Fund.
18
<PAGE> 83
will be obligated to cure such breach or repurchase or substitute for the
affected Loan or Loans. See "The Agreements -- Assignment of the Trust Fund
Assets". The obligations of the Master Servicer with respect to the Loans will
consist principally of its contractual servicing obligations under the related
Agreement (including its obligation to enforce the obligations of the
Sub-Servicers or Provident, or both, as more fully described herein under "Loan
Program -- Representations by Provident; Repurchases" and "The
Agreements -- Sub-Servicing" and "-- Assignment of the Trust Fund Assets") and
its obligation, if any, to make certain cash advances in the event of
delinquencies in payments on or with respect to the Loans in the amounts
described herein under "Description of the Securities -- Advances". The
obligations of the Master Servicer to make advances may be subject to
limitations to the extent provided herein and in the related Prospectus
Supplement.
The following is a brief description of the assets expected to be included
in the Trust Funds. If specific information respecting Trust Fund Assets is not
known at the time the related Series of Securities initially is offered, more
general information of the nature described below will be provided in the
related Prospectus Supplement, and specific information will be set forth in a
report on Form 8-K to be filed with the Securities and Exchange Commission
within fifteen days after the initial issuance of such Securities (the "Detailed
Description"). In no event, however, will more than 5% (by principal balance at
the Cut-Off Date) of the Mortgage Pool deviate from the characteristics of the
Loans set forth in the related Prospectus Supplement. A copy of the Agreement
with respect to each Series of Securities will be available for inspection at
the corporate trust office of the Trustee specified in the related Prospectus
Supplement. A schedule of the Loans relating to such Series will be attached to
the Agreement delivered to the Trustee upon delivery of the Securities.
THE LOANS
General. Loans will consist of Mortgage Loans and Home Equity Loans. As
more fully described in the related Prospectus Supplement, the Loans will be
"conventional" loans.
The Loans in a Pool will have monthly payments due on the first day of each
month or on such other day of the month specified in the related Prospectus
Supplement. The payment terms of the Loans to be included in a Trust Fund will
be described in the related Prospectus Supplement and may include any of the
following features (or combination thereof), all as described below or in the
related Prospectus Supplement:
(a) Interest may be payable at a fixed rate, a rate adjustable from
time to time in relation to an index (which will be specified in the
related Prospectus Supplement), a rate that is fixed for a period of time
or under certain circumstances and is followed by an adjustable rate, a
rate that otherwise varies from time to time, or a rate that is convertible
from an adjustable rate to a fixed rate. Changes to an adjustable rate may
be subject to periodic limitations, maximum rates, minimum rates or a
combination of such limitations. Accrued interest may be deferred and added
to the principal of a Loan for such periods and under such circumstances as
may be specified in the related Prospectus Supplement. Loans may provide
for the payment of interest at a rate lower than the specified interest
rate borne by such Loan (the "Loan Rate") for a period of time or for the
life of the Loan, and the amount of any difference may be contributed from
funds supplied by the seller of the Property or another source.
(b) Principal may be payable on a level debt service basis to fully
amortize the Loan over its term, may be calculated on the basis of an
assumed amortization schedule that is significantly longer than the
original term to maturity or on an interest rate that is different from the
Loan Rate or may not be amortized during all or a portion of the original
term. Payment of all or a substantial portion of the principal may be due
on maturity ("balloon payment"). Principal may include interest that has
been deferred and added to the principal balance of the Loan.
(c) Monthly payments of principal and interest may be fixed for the
life of the Loan, may increase over a specified period of time or may
change from period to period. Loans may include limits on periodic
increases or decreases in the amount of monthly payments and may include
maximum or minimum amounts of monthly payments.
19
<PAGE> 84
(d) Prepayments of principal may be subject to a prepayment fee, which
may be fixed for the life of the Loan or may decline over time, and may be
prohibited for the life of the Loan or for certain periods ("Lockout
Periods"). Certain Loans may permit prepayments after expiration of the
applicable Lockout Period and may require the payment of a prepayment fee
in connection with any such subsequent prepayment. Other Loans may permit
prepayments without payment of a fee unless the prepayment occurs during
specified time periods. The Loans may include "due-on-sale" clauses which
permit the mortgagee to demand payment of the entire Loan in connection
with the sale or certain transfers of the related Property. Other Loans may
be assumable by persons meeting the then applicable standards set forth in
the Agreement.
A Trust Fund may contain certain Loans ("Buydown Loans") that include
provisions whereby a third party partially subsidizes the monthly payments of
the borrowers on such Loans during the early years of such Loans, the difference
to be made up from a fund (a "Buydown Fund") contributed by such third party at
the time of origination of the Loan. A Buydown Fund will be in an amount equal
either to the discounted value or full aggregate amount of future payment
subsidies. The underlying assumption of buydown plans is that the income of the
borrower will increase during the buydown period as a result of normal increases
in compensation and inflation, so that the borrower will be able to meet the
full loan payments at the end of the buydown period. To the extent that this
assumption as to increased income is not fulfilled, the possibility of defaults
on Buydown Loans is increased. The related Prospectus Supplement will contain
information with respect to any Buydown Loan concerning limitations on the
interest rate paid by the borrower initially, on annual increases in the
interest rate and on the length of the buydown period.
The real property which secures repayment of the Loans is referred to as
the "Mortgaged Properties". The Loans will be secured by mortgages or deeds of
trust or other similar security instruments creating a lien on a Mortgaged
Property. In the case of Home Equity Loans, such liens generally will be
subordinated to one or more senior liens on the related Mortgaged Properties as
described in the related Prospectus Supplement. The Mortgaged Properties are
referred to herein as the "Properties". The Properties relating to Loans will
consist of detached or semi-detached one- to four-family dwelling units,
townhouses, rowhouses, individual condominium units, individual units in planned
unit developments, manufactured homes and certain other dwelling units ("Single
Family Properties"). Such Properties may include vacation and second homes,
investment properties, and dwellings situated on leasehold estates. In the case
of leasehold interests, the term of the leasehold will exceed the scheduled
maturity of the Loan by at least five years, unless otherwise specified in the
related Prospectus Supplement. The Properties may be located in any one of the
fifty states, the District of Columbia, Guam, Puerto Rico or any other territory
of the United States.
Loans with certain Loan-to-Value Ratios and/or certain principal balances
may be covered wholly or partially by primary mortgage guaranty insurance
policies (each, a "Primary Mortgage Insurance Policy"). The existence, extent
and duration of any such coverage will be described in the applicable Prospectus
Supplement.
The aggregate principal balance of Loans secured by Properties that are
owner-occupied may be disclosed in the related Prospectus Supplement. The basis
for a representation that a given percentage of the Loans is secured by Single
Family Properties that are owner-occupied will be either (i) the making of a
representation by the borrower at origination of the Loan either that the
underlying Property will be used by the borrower for a period of at least six
months every year or that the borrower intends to use the Property as a primary
residence or (ii) a finding that the address of the underlying Property is the
borrower's mailing address.
Home Equity Loans. As more fully described in the related Prospectus
Supplement, interest on each Revolving Credit Line Loan, excluding introduction
rates offered from time to time during promotional periods, is computed and
payable monthly on the average daily outstanding principal balance of such Loan.
Principal amounts on a Revolving Credit Line Loan may be drawn down (up to a
maximum amount as set forth in the related Prospectus Supplement) or repaid
under each Revolving Credit Line Loan from time to time, but may be subject to a
minimum periodic payment. As specified in the related Prospectus Supplement, the
Trust Fund may include any amounts borrowed under a Revolving Credit Line Loan
after the Cut-Off
20
<PAGE> 85
Date. The full amount of a Closed-End Loan is advanced at the inception of the
Loan and generally is repayable in equal (or substantially equal) installments
of an amount to fully amortize such Loan at its stated maturity or is a Balloon
Loan. As more fully described in the related Prospectus Supplement, interest on
each Closed-End Loan is calculated on the basis of the outstanding principal
balance of such Loan multiplied by the Loan Rate thereon and further multiplied
by either a fraction, the numerator of which is the number of days in the period
elapsed since the preceding payment of interest was made and the denominator of
which is the number of days in the annual period for which interest accrues on
such Loan, or a fraction which is 30 over 360. Except to the extent provided in
the related Prospectus Supplement, the original terms to stated maturity of
Closed-End Loans generally will not exceed 360 months. Under certain
circumstances, under either a Revolving Credit Line Loan or a Closed-End Loan, a
borrower may choose an interest only payment option and is obligated to pay only
the amount of interest which accrues on the Loan during the billing cycle. An
interest only payment option may be available for a specified period before the
borrower must begin paying at least the minimum monthly payment of a specified
percentage of the average outstanding balance of the Loan.
Additional Information. Each Prospectus Supplement will contain
information, as of the date of such Prospectus Supplement and to the extent then
specifically known to Provident, with respect to the Loans contained in the
related Pool, including (i) the aggregate outstanding principal balance and the
average outstanding principal balance of the Loans as of the applicable Cut-Off
Date, (ii) the type of property securing the Loan (e.g., single family
residences, individual units in condominium apartment buildings, two-to
four-family dwelling units or other real property), (iii) the original terms to
maturity of the Loans, (iv) the largest principal balance and the smallest
principal balance of any of the Loans, (v) the earliest origination date and
latest maturity date of any of the Loans, (vi) the Loan-to-Value Ratios or
Combined Loan-to-Value Ratios, as applicable, of the Loans, (vii) the Loan Rates
or annual percentage rates ("APR") or range of Loan Rates or APR's borne by the
Loans, (viii) the maximum and minimum per annum Loan Rates, and (ix) the
geographical location of the Loans. If specific information respecting the Loans
is not known to Provident at the time the related Securities are initially
offered, more general information of the nature described above will be provided
in the related Prospectus Supplement, and specific information will be set forth
in the Detailed Description.
Generally, the "Loan-to-Value Ratio" of a Loan at any given time is the
fraction, expressed as a percentage, the numerator of which is the original
principal balance of the related Loan and the denominator of which is the
Collateral Value of the related Property. Generally, the "Combined Loan-to-Value
Ratio" of a Loan at any given time is the ratio, expressed as a percentage, of
(i) the sum of (a) the original principal balance of the Loan (or, in the case
of a Revolving Credit Line Loan, the maximum amount thereof available) and (b)
the outstanding principal balance at the date of origination of the Loan of any
senior mortgage loan(s) or, in the case of any open-ended senior mortgage loan,
the maximum available line of credit with respect to such mortgage loan,
regardless of any lesser amount actually outstanding at the date of origination
of the Loan, to (ii) the Collateral Value of the related Property. The
"Collateral Value" of the Property, other than with respect to certain Loans the
proceeds of which were used to refinance an existing mortgage loan (each, a
"Refinance Loan"), is the lesser of (a) the appraised value determined in an
appraisal obtained at origination of such Loan and (b) the sales price for such
Property. In the case of Refinance Loans, the "Collateral Value" of the related
Property is the appraised value thereof determined in an appraisal obtained at
the time of refinancing.
No assurance can be given that values of the Properties have remained or
will remain at their levels on the dates of origination of the related Loans. If
the residential real estate market should experience an overall decline in
property values such that the sum of the outstanding principal balances of the
Loans and any primary or secondary financing on the Properties, as applicable,
in a particular Pool become equal to or greater than the value of the
Properties, the actual rates of delinquencies, foreclosures and losses could be
higher than those now generally experienced in the mortgage lending industry. In
addition, adverse economic conditions and other factors (which may or may not
affect real property values) may affect the timely payment by borrowers of
scheduled payments of principal and interest on the Loans and, accordingly, the
actual rates of delinquencies, foreclosures and losses with respect to any Pool.
To the extent that such losses are not covered
21
<PAGE> 86
by subordination provisions or alternative arrangements, such losses will be
borne, at least in part, by the holders of the Securities of the related Series.
SUBSTITUTION OF TRUST FUND ASSETS
Substitution of Trust Fund Assets will be permitted in the event of
breaches of representations and warranties with respect to any original Trust
Fund Asset or in the event the documentation with respect to any Trust Fund
Asset is determined by the Trustee to be incomplete. The period during which
such substitution will be permitted generally will be indicated in the related
Prospectus Supplement.
USE OF PROCEEDS
The net proceeds to be received by Provident from the sale of the Trust
Fund Assets by Provident to Trust Funds will be applied by Provident to the
purchase of additional trust fund assets or will be used by Provident for
general corporate purposes. Provident expects to sell Securities in Series
issued by the related Trust Fund from time to time, but the timing and amount of
offerings of Securities will depend on a number of factors, including the volume
of Trust Fund Assets originated or acquired by Provident and sold to the Trust
Fund, prevailing interest rates, availability of funds and general market
conditions.
THE PROVIDENT BANK
Provident, an Ohio banking corporation, is the principal banking subsidiary
of Provident Financial Group, Inc., a Cincinnati-based bank holding company
registered under the Bank Holding Company Act. Provident Financial Group, Inc.
operates throughout Ohio, Northern Kentucky, Southeastern Indiana and Florida.
The principal executive offices of Provident are located at One East Fourth
Street, Cincinnati, Ohio 45202 (Telephone: (513) 579-2000).
Neither Provident nor any of Provident's affiliates will insure or
guarantee distributions on the Securities of any Series.
LOAN PROGRAM
The Loans will have been originated or purchased by Provident, either
directly or through affiliates. The Loans so originated or acquired by Provident
will have been originated in accordance with the underwriting criteria specified
below under "Underwriting Standards" and as further described in the related
Prospectus Supplement.
UNDERWRITING STANDARDS
Underwriting standards are applied by or on behalf of a lender to evaluate
the borrower's credit standing and repayment ability, and the value and adequacy
of the related Property as collateral. In general, a prospective borrower
applying for a Loan is required to fill out a detailed application designed to
provide to the underwriting officer pertinent credit information, including the
principal balance and payment history with respect to any senior mortgage, if
any, which will be verified by Provident. As part of the description of the
borrower's financial condition, the borrower generally is required to provide a
current list of assets and liabilities and a statement of income and expenses,
as well as an authorization to apply for a credit report which summarizes the
borrower's credit history with local merchants and lenders and any record of
bankruptcy. In most cases, an employment verification is obtained from an
independent source (typically the borrower's employer) which verification
reports, among other things, the length of employment with that organization and
the borrower's current salary. If a prospective borrower is self-employed, the
borrower may be required to submit copies of signed tax returns. The borrower
may also be required to authorize verification of deposits at financial
institutions where the borrower has demand or savings accounts.
In determining the adequacy of the property to be used as collateral, an
appraisal will generally be made of each property considered for financing. The
appraiser is generally required to inspect the property, issue a
22
<PAGE> 87
report on its condition and, if applicable, verify construction has been
completed. The appraisal is based on the market value of comparable homes, the
estimated rental income (if considered applicable by the appraiser) and the cost
of replacing the property. The value of the property being financed, as
indicated by the appraisal, must be such that it currently supports, and is
anticipated to support in the future, the outstanding loan balance.
The maximum loan amount will vary depending upon a borrower's credit grade
and loan program but will not generally exceed $750,000. Variations in maximum
loan amount limits will be permitted based on compensating factors. Compensating
factors may generally include, to the extent specified in the related Prospectus
Supplement, low loan-to-value ratio, low debt-to-income ratio, stable
employment, favorable credit history and the nature of the underlying first
mortgage loan, if applicable.
Provident's underwriting standards generally permit loans with
loan-to-value ratios at origination of up to 100% depending on the loan program,
type and use of the property, creditworthiness of the borrower and debt-
to-income ratio.
After obtaining all applicable employment, credit and property information,
Provident will use a debt-to-income ratio to assist in determining whether the
prospective borrower has sufficient monthly income available to support the
payments of principal and interest on the Mortgage Loan in addition to other
monthly credit obligations. The "debt-to-income ratio" is the ratio of the
borrower's total monthly obligations (which includes principal and interest on
each mortgage, tax assessments, other loans, charge accounts and all other
scheduled indebtedness) to the borrower's gross monthly income. The maximum
monthly debt-to-income ratio will vary depending upon a borrower's credit grade
and loan program but will not generally exceed 60%. Variations in the monthly
debt-to-income ratio limit will be permitted based on compensating factors to
the extent specified in the related Prospectus Supplement.
If specified in the related Prospectus Supplement, a portion of the Loans
in a Trust Fund may have been originated under a limited documentation program.
Under a limited documentation program, more emphasis is placed on the value and
adequacy of the property as collateral and other assets of the borrower than on
credit underwriting. Under a limited documentation program, certain credit
underwriting documentation concerning income or income verification and/or
employment verification is waived.
In the case of a Loan secured by a leasehold interest in real property, the
title to which is held by a third party lessor, Provident will represent and
warrant, among other things, that the remaining term of the lease and any
sublease is at least five years longer than the remaining term on the Loan.
Certain of the types of Loans that may be included in a Trust Fund are
recently developed and may involve additional uncertainties not present in
traditional types of loans. For example, certain of such Loans may provide for
escalating or variable payments by the borrower. These types of Loans are
underwritten on the basis of a judgment that the borrowers have the ability to
make the monthly payments required initially. In some instances, a borrower's
income may not be sufficient to permit continued Loan payments as such payments
increase. These types of Loans may also be underwritten primarily upon the basis
of Loan-to-Value Ratios or other favorable credit factors.
QUALIFICATIONS OF PROVIDENT
Provident will be required to satisfy the following qualifications.
Provident is, and each entity from which it acquires Loans must be, an
institution experienced in originating and servicing loans of the type contained
in the related Pool in accordance with accepted practices and prudent
guidelines, and must maintain satisfactory facilities to originate and service
those loans. Provident is a seller/servicer approved by the Federal National
Mortgage Association ("FNMA") and the Federal Home Loan Mortgage Corporation
("FHLMC"). Provident is a mortgagee approved by the Federal Housing Authority
and is an institution the deposit accounts in which are insured by the Federal
Deposit Insurance Corporation ("FDIC").
23
<PAGE> 88
REPRESENTATIONS BY PROVIDENT; REPURCHASES
Provident will have made representations and warranties in respect of the
Loans sold by Provident to the Trust Fund and evidenced by all, or a part, of a
Series of Securities. Such representations and warranties may include, among
other things: (i) that title insurance (or in the case of Properties located in
areas where such policies are generally not available, an attorney's certificate
of title) and any required hazard insurance policy were effective at origination
of each Loan and that each policy (or certificate of title as applicable)
remained in effect on the date of purchase of the Loan from Provident; (ii) that
Provident had good title to each such Loan and such Loan was subject to no
offsets, defenses, counterclaims or rights of rescission except to the extent
that any buydown agreement may forgive certain indebtedness of a borrower; (iii)
that each Loan constituted a valid lien on, or a perfected security interest
with respect to, the Property (subject only to permissible liens disclosed, if
applicable, title insurance exceptions, if applicable, and certain other
exceptions described in the Agreement), (iv) the Property is undamaged by waste,
fire, earthquake, earth movement, windstorm, flood, tornado or other casualty,
so as to affect adversely the value of the Property; (v) that there were no
delinquent tax or assessment liens against the Property; (vi) that no required
payment on a Loan was delinquent more than the number of days specified in the
related Prospectus Supplement; and (vii) that each Loan was made in compliance
with, and is enforceable under, all applicable state and federal laws and
regulations in all material respects.
The Master Servicer or the Trustee will promptly notify Provident of any
breach of any representation or warranty made by it in respect of a Loan which
materially and adversely affects the interests of the Securityholders in such
Loan. If Provident cannot cure such breach within the number of days specified
in the related Prospectus Supplement following notice from the Master Servicer
or the Trustee, as the case may be, then Provident will be obligated either (i)
to repurchase such Loan from the Trust Fund at a price (the "Purchase Price")
equal to 100% of the unpaid principal balance thereof as of the date of the
repurchase plus unpaid accrued interest thereon to the first day of the month
following the month of repurchase at the Loan Rate (less any Advances or amount
payable as related servicing compensation if Provident is the Master Servicer)
or (ii) substitute for such Loan a replacement loan that satisfies the criteria
specified in the related Prospectus Supplement. If a REMIC election is to be
made with respect to a Trust Fund, the Master Servicer or a holder of the
related residual certificate generally will be obligated to pay any prohibited
transaction tax which may arise in connection with any such repurchase or
substitution and the Trustee must have received a satisfactory opinion of
counsel that such repurchase or substitution will not cause the Trust Fund to
lose its status as a REMIC or otherwise subject the Trust Fund to a prohibited
transaction tax. This repurchase or substitution obligation will constitute the
sole remedy available to holders of Securities or the Trustee for a breach of
representation by Provident.
Neither the Trustee nor the Master Servicer (unless the Master Servicer is
Provident) will be obligated to purchase or substitute a Loan if Provident
defaults on its obligation to do so, and no assurance can be given that
Provident will carry out its respective repurchase or substitution obligations
with respect to Loans.
DESCRIPTION OF THE SECURITIES
Each Series of Certificates will be issued pursuant to separate agreements
(each, a "Pooling and Servicing Agreement" or a "Trust Agreement") among
Provident, the Master Servicer and the Trustee. A form of Pooling and Servicing
Agreement and Trust Agreement has been filed as an exhibit to the Registration
Statement of which this Prospectus forms a part. Each Series of Notes will be
issued pursuant to an indenture (the "Indenture") between the related Trust Fund
and the entity named in the related Prospectus Supplement as trustee (the
"Trustee") with respect to such Series, and the related Loans will be serviced
by the Master Servicer pursuant to a Master Servicing Agreement. A form of
Indenture and Master Servicing Agreement has been filed as an exhibit to the
Registration Statement of which this Prospectus forms a part.
A Series of Securities may consist of both Notes and Certificates. Each
Agreement, dated as of the related Cut-Off Date, will be among Provident, the
Master Servicer and the Trustee for the benefit of the holders of the Securities
of such Series. The provisions of each Agreement will vary depending upon the
24
<PAGE> 89
nature of the Securities to be issued thereunder and the nature of the related
Trust Fund. The following are descriptions of the material provisions which may
appear in each Agreement. The descriptions are subject to, and are qualified in
their entirety by reference to, all of the provisions of the Agreement for each
Series of Securities and the applicable Prospectus Supplement. Provident will
provide a copy of the Agreement (without exhibits) relating to any Series of
Securities without charge upon written request of a holder of record of a
Security of such Series addressed to The Provident Bank, One East Fourth Street,
Cincinnati, Ohio 45202, Attention: Secretary.
GENERAL
As described in the related Prospectus Supplement, the Securities of each
Series will be issued in book-entry or fully registered form, in the authorized
denominations specified in the related Prospectus Supplement, will, in the case
of Certificates, evidence specified beneficial ownership interests in, and in
the case of Notes, be secured by, the assets of the related Trust Fund created
pursuant to each Agreement and will not be entitled to payments in respect of
the assets included in any other Trust Fund established by Provident. Unless
otherwise specified in the related Prospectus Supplement, the Securities will
not represent obligations of Provident or any affiliate of Provident. Certain of
the Loans may be guaranteed or insured as set forth in the related Prospectus
Supplement. Each Trust Fund will consist of, to the extent provided in the
related Agreement, (i) the Trust Fund Assets, as from time to time are subject
to the related Agreement (exclusive of any amounts specified in the related
Prospectus Supplement ("Retained Interest")), including all payments of interest
and principal received with respect to the Loans after the Cut-Off Date (to the
extent not applied in computing the principal balance of such Loans as of the
Cut-Off Date (the "Cut-Off Date Principal Balance")); (ii) such assets as from
time to time are required to be deposited in the related Security Account, as
described below under "The Agreements -- Payments on Loans; Deposits to Security
Account"; (iii) property which secured a Loan and which is acquired on behalf of
the Securityholders by foreclosure or deed in lieu of foreclosure and (iv) any
insurance policies or other forms of credit enhancement required to be
maintained pursuant to the related Agreement. If so specified in the related
Prospectus Supplement, a Trust Fund may also include one or more of the
following: reinvestment income on payments received on the Trust Fund Assets, a
Reserve Account, a mortgage pool insurance policy, a special hazard insurance
policy, a bankruptcy bond, one or more letters of credit, a surety bond,
guaranties or similar instruments.
Each Series of Securities will be issued in one or more classes. Each class
of Certificates of a Series will evidence beneficial ownership of a specified
percentage (which may be 0%) or portion of future interest payments and a
specified percentage (which may be 0%) or portion of future principal payments
on, and each class of Notes of a Series will be secured by, the related Trust
Fund Assets. A Series of Securities may include one or more classes that are
senior in right to payment to one or more other classes of Securities of such
Series. Certain Series or classes of Securities may be covered by insurance
policies, surety bonds or other forms of credit enhancement, in each case as
described under "Credit Enhancement" herein and in the related Prospectus
Supplement. One or more classes of Securities of a Series may be entitled to
receive distributions of principal, interest or any combination thereof.
Distributions on one or more classes of a Series of Securities may be made prior
to one or more other classes, after the occurrence of specified events, in
accordance with a schedule or formula or on the basis of collections from
designated portions of the related Trust Fund Assets, in each case as specified
in the related Prospectus Supplement. The timing and amounts of such
distributions may vary among classes or over time as specified in the related
Prospectus Supplement.
Distributions of principal and interest (or, where applicable, of principal
only or interest only) on the related Securities will be made by the Trustee on
each Distribution Date (i.e., monthly, quarterly, semi-annually or at such other
intervals and on the dates as are specified in the related Prospectus
Supplement) in proportion to the percentages specified in the related Prospectus
Supplement. Distributions will be made to the persons in whose names the
Securities are registered at the close of business on the dates specified in the
related Prospectus Supplement (each, a "Record Date"). Distributions will be
made in the manner specified in the related Prospectus Supplement to the persons
entitled thereto at the address appearing in the register maintained for
Securityholders (the "Security Register"); provided, however, that the final
distribution in
25
<PAGE> 90
retirement of the Securities will be made only upon presentation and surrender
of the Securities at the office or agency of the Trustee or other person
specified in the notice to Securityholders of such final distribution.
The Securities will be freely transferable and exchangeable at the
Corporate Trust Office of the Trustee as set forth in the related Prospectus
Supplement. No service charge will be made for any registration of exchange or
transfer of Securities of any Series, but the Trustee may require payment of a
sum sufficient to cover any related tax or other governmental charge.
As to each Series, an election may be made to treat the related Trust Fund
or designated portions thereof as a "real estate mortgage investment conduit" or
"REMIC" as defined in the Code. The related Prospectus Supplement will specify
whether a REMIC election is to be made. Alternatively, the Agreement for a
Series of Securities may provide that a REMIC election may be made at the
discretion of Provident or the Master Servicer and may only be made if certain
conditions are satisfied. As to any such Series, the terms and provisions
applicable to the making of a REMIC election will be set forth in the related
Prospectus Supplement. If such an election is made with respect to a Series of
Securities, one of the classes will be designated as evidencing the sole class
of "residual interests" in the related REMIC, as defined in the Code. All other
classes of Securities in such a Series will constitute "regular interests" in
the related REMIC, as defined in the Code. As to each Series of Securities with
respect to which a REMIC election is to be made, the Master Servicer, the
Trustee or a holder of the related residual certificate will be obligated to
take all actions required in order to comply with applicable laws and
regulations.
DISTRIBUTIONS ON SECURITIES
General. In general, the method of determining the amount of distributions
on a particular Series of Securities will depend on the type of credit support,
if any, that is used with respect to such Series. See "Credit Enhancement". Set
forth below are descriptions of various methods that may be used to determine
the amount of distributions on the Securities of a particular Series. The
Prospectus Supplement for each Series of Securities will describe the method to
be used in determining the amount of distributions on the Securities of such
Series.
Distributions allocable to principal and interest on the Securities will be
made by the Trustee out of, and only to the extent of, funds in the related
Security Account, including any funds transferred from any Reserve Account. As
between Securities of different classes and as between distributions of
principal (and, if applicable, between distributions of Principal Prepayments,
as defined below, and scheduled payments of principal) and interest,
distributions made on any Distribution Date will be applied as specified in the
related Prospectus Supplement. The Prospectus Supplement will also describe the
method for allocating distributions among Securities of a particular class.
Available Funds. All distributions on the Securities of each Series on
each Distribution Date will be made from the Available Funds described below, in
accordance with the terms described in the related Prospectus Supplement and
specified in the Agreement. "Available Funds" for each Distribution Date will
generally equal the amount on deposit in the related Security Account on such
Distribution Date (net of related fees and expenses payable by the related Trust
Fund) other than amounts to be held therein for distribution on future
Distribution Dates.
Distributions of Interest. Interest will accrue on the aggregate principal
balance of the Securities (or, in the case of Securities entitled only to
distributions allocable to interest, the aggregate notional amount) of each
class of Securities (the "Class Security Balance") entitled to interest from the
date, at the Pass-Through Rate or interest rate, as applicable (which in either
case may be a fixed rate or rate adjustable as specified in such Prospectus
Supplement), and for the periods specified in such Prospectus Supplement. To the
extent funds are available therefor, interest accrued during each such specified
period on each class of Securities entitled to interest (other than a class of
Securities that provides for interest that accrues, but is not currently
payable, referred to hereafter as "Accrual Securities") will be distributable on
the Distribution Dates specified in the related Prospectus Supplement until the
aggregate Class Security Balance of the Securities of such class has been
distributed in full or, in the case of Securities entitled only to distributions
allocable to interest, until the aggregate notional amount of such Securities is
reduced to zero or for the period of time designated in the
26
<PAGE> 91
related Prospectus Supplement. The original Class Security Balance of each
Security will equal the aggregate distributions allocable to principal to which
such Security is entitled. Distributions allocable to interest on each Security
that is not entitled to distributions allocable to principal will be calculated
based on the notional amount of such Security. The notional amount of a Security
will not evidence an interest in or entitlement to distributions allocable to
principal but will be used solely for convenience in expressing the calculation
of interest and for certain other purposes.
Interest payable on the Securities of a Series on a Distribution Date will
include all interest accrued during the period specified in the related
Prospectus Supplement. In the event interest accrues over a period ending two or
more days prior to a Distribution Date, the effective yield to Securityholders
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
such Distribution Date, and the effective yield (at par) to Securityholders will
be less than the indicated coupon rate.
With respect to any class of Accrual Securities, if specified in the
related Prospectus Supplement, any interest that has accrued but is not paid on
a given Distribution Date will be added to the aggregate Class Security Balance
of such class of Securities on that Distribution Date. Distributions of interest
on any class of Accrual Securities will commence only after the occurrence of
the events specified in such Prospectus Supplement. Prior to such time, the
beneficial ownership interest in the Trust Fund or the principal balance, as
applicable, of such class of Accrued Securities, as reflected in the aggregate
Class Security Balance of such class of Accrual Securities, will increase on
each Distribution Date by the amount of interest that accrued on such class of
Accrual Securities during the preceding interest accrual period but that was not
required to be distributed to such class on such Distribution Date. Any such
class of Accrual Securities will thereafter accrue interest on its outstanding
Class Security Balance as so adjusted.
Distributions of Principal. The related Prospectus Supplement will specify
the method by which the amount of principal to be distributed on the Securities
on each Distribution Date will be calculated and the manner in which such amount
will be allocated among the classes of Securities entitled to distributions of
principal. The aggregate Class Security Balance of any class of Securities
entitled to distributions of principal generally will be the aggregate original
Class Security Balance of such class of Securities specified in such Prospectus
Supplement, reduced by all distributions reported to the holders of such
Securities as allocable to principal and, (i) in the case of Accrual Securities,
as described in the related Prospectus Supplement, increased by interest accrued
but not then distributable on such Accrual Securities and (ii) in the case of
adjustable rate Securities, subject to the effect of negative amortization, if
applicable.
If so provided in the related Prospectus Supplement, one or more classes of
Securities will be entitled to receive all or a disproportionate percentage of
the payments of principal which are received from borrowers in advance of their
scheduled due dates and are not accompanied by amounts representing scheduled
interest due after the month of such payments ("Principal Prepayments") in the
percentages and under the circumstances or for the periods specified in such
Prospectus Supplement. Any such allocation of Principal Prepayments to such
class or classes of Securities will have the effect of accelerating the
amortization of such Securities while increasing the interests evidenced by one
or more other classes of Securities in the Trust Fund. Increasing the interests
of the other classes of Securities relative to that of certain Securities is
intended to preserve the availability of the subordination provided by such
other Securities. See "Credit Enhancement -- Subordination".
Unscheduled Distributions. If specified in the related Prospectus
Supplement, the Securities will be subject to receipt of distributions before
the next scheduled Distribution Date under the circumstances and in the manner
described below and in such Prospectus Supplement. If applicable, the Trustee
will be required to make such unscheduled distributions on the day and in the
amount specified in the related Prospectus Supplement if, due to substantial
payments of principal (including Principal Prepayments) on the Trust Fund
Assets, the Trustee or the Master Servicer determines that the funds available
or anticipated to be available from the Security Account and, if applicable, any
Reserve Account, may be insufficient to make required distributions on the
Securities on such Distribution Date. Unless otherwise specified in the related
Prospectus Supplement, the amount of any such unscheduled distribution that is
allocable to principal will not exceed the
27
<PAGE> 92
amount that would otherwise have been required to be distributed as principal on
the Securities on the next Distribution Date. Unless otherwise specified in the
related Prospectus Supplement, the unscheduled distributions will include
interest at the applicable Pass-Through Rate (if any) or interest rate (if any)
on the amount of the unscheduled distribution allocable to principal for the
period and to the date specified in such Prospectus Supplement.
ADVANCES
To the extent provided in the related Prospectus Supplement, the Master
Servicer will be required to advance on or before each Distribution Date (from
its own funds, funds advanced by Sub-Servicers or funds held in the Security
Account for future distributions to the holders of Securities of the related
Series) an amount equal to the aggregate of payments of interest and/or
principal that were delinquent on the related Determination Date (as such term
is defined in the related Prospectus Supplement) and were not advanced by any
Sub-Servicer, subject to the Master Servicer's determination that such advances
may be recoverable out of late payments by borrowers, Liquidation Proceeds,
Insurance Proceeds or otherwise.
In making Advances, the Master Servicer will endeavor to maintain a regular
flow of scheduled interest and principal payments to Securityholders, rather
than to guarantee or insure against losses. If Advances are made by the Master
Servicer from cash being held for future distribution to Securityholders, the
Master Servicer will replace such funds on or before any future Distribution
Date to the extent that funds in the applicable Security Account on such
Distribution Date would be less than the amount required to be available for
distributions to Securityholders on such date. Any Master Servicer funds
advanced will be reimbursable to the Master Servicer out of recoveries on the
specific Loans with respect to which such Advances were made (e.g., late
payments made by the related borrower, any related Insurance Proceeds,
Liquidation Proceeds or proceeds of any Loan purchased by Provident or a
Sub-Servicer pursuant to the related Agreement). Advances by the Master Servicer
(and any advances by a Sub-Servicer) also will be reimbursable to the Master
Servicer (or Sub-Servicer) from cash otherwise distributable to Securityholders
(including the holders of Senior Securities) to the extent that the Master
Servicer determines that any such Advances previously made are not ultimately
recoverable as described above. To the extent provided in the related Prospectus
Supplement, the Master Servicer also will be obligated to make Advances, to the
extent recoverable out of Insurance Proceeds, Liquidation Proceeds or otherwise,
in respect of certain taxes and insurance premiums not paid by borrowers on a
timely basis. Funds so advanced are reimbursable to the Master Servicer to the
extent permitted by the related Agreement. The obligations of the Master
Servicer to make advances may be supported by a cash advance reserve fund, a
surety bond or other arrangement of the type described herein under "Credit
Enhancement", in each case as described in the related Prospectus Supplement.
In the event the Master Servicer or a Sub-Servicer fails to make a required
Advance, the Trustee will be obligated to make such Advance in its capacity as
successor servicer if it is acting in such capacity. If the Trustee makes such
an Advance, it will be entitled to be reimbursed for such Advance to the same
extent and degree as the Master Servicer or a Sub-Servicer is entitled to be
reimbursed for Advances. See "Description of the Securities -- Distributions on
Securities".
REPORTS TO SECURITYHOLDERS
Prior to or concurrently with each distribution on a Distribution Date, the
Master Servicer or the Trustee will furnish to each Securityholder of record of
the related Series a statement setting forth, to the extent applicable to such
Series of Securities, among other things:
(i) the amount of such distribution allocable to principal, separately
identifying the aggregate amount of any Principal Prepayments and, if so
specified in the related Prospectus Supplement, any applicable prepayment
penalties included therein;
(ii) the amount of such distribution allocable to interest;
(iii) the amount of any Advance;
28
<PAGE> 93
(iv) the aggregate amount (a) otherwise allocable to the Subordinated
Securityholders on such Distribution Date, and (b) withdrawn from the
Reserve Account, if any, that is included in the amounts distributed to the
Senior Securityholders;
(v) the outstanding principal balance or notional amount of each class
of the related Series of Securities after giving effect to the distribution
of principal on such Distribution Date;
(vi) the percentage of principal payments on the Loans (excluding
prepayments), if any, which each such class will be entitled to receive on
the following Distribution Date;
(vii) the percentage of Principal Prepayments on the Loans, if any,
which each such class will be entitled to receive on the following
Distribution Date;
(viii) the related amount of the servicing compensation retained or
withdrawn from the Security Account by the Master Servicer, and the amount
of additional servicing compensation received by the Master Servicer
attributable to penalties, fees, excess Liquidation Proceeds and other
similar charges and items;
(ix) the number and aggregate principal balances of Loans as to which
the minimum monthly payment is delinquent 30-59 days, 60-89 days and 90 or
more days, respectively, as of the close of business on the last day of the
calendar month preceding such Distribution Date;
(x) the book value of any real estate acquired through foreclosure or
grant of a deed in lieu of foreclosure;
(xi) the Pass-Through Rate or interest rate, as applicable, if
adjusted from the date of the last statement, of any such class expected to
be applicable to the next distribution to such class;
(xii) if applicable, the amount remaining in any Reserve Account at
the close of business on the Distribution Date;
(xiii) the Pass-Through Rate or interest rate, as applicable, as of
the day prior to the immediately preceding Distribution Date; and
(xiv) any amounts remaining under letters of credit, Pool policies or
other forms of credit enhancement.
Where applicable, any amount set forth above may be expressed as a dollar
amount per single Security of the relevant class having the Percentage Interest
specified in the related Prospectus Supplement. The report to Securityholders
for any Series of Securities may include additional or other information of a
similar nature to that specified above.
In addition, within a reasonable period of time after the end of each
calendar year, the Master Servicer or the Trustee will mail to each
Securityholder of record at any time during such calendar year a report (a) as
to the aggregate of amounts reported pursuant to (i) and (ii) above for such
calendar year or, in the event such person was a Securityholder of record only
during a portion of such calendar year, for the applicable portion of such year
and (b) such other customary information as may be deemed necessary or desirable
for Securityholders to prepare their tax returns.
CATEGORIES OF CLASSES OF SECURITIES
The Securities of any Series may be comprised of one or more classes. Such
classes, in general, fall into different categories. The following chart
identifies and generally defines certain of the more typical categories.
29
<PAGE> 94
The Prospectus Supplement for a Series of Securities may identify the classes
which comprise such Series by reference to the following categories:
<TABLE>
<CAPTION>
CATEGORIES OF CLASSES DEFINITION
- ---------------------------------------- ---------------------------------------------------
<S> <C>
PRINCIPAL TYPES
Accretion Directed...................... A class that receives principal payments from the
accreted interest from specified classes of Accrual
Securities. An Accretion Directed class also may
receive principal payments from principal paid on
the underlying Trust Fund Assets for the related
Series.
Component Securities.................... A class consisting of "Components." The Components
of a class of Component Securities may have
different principal and/or interest payment
characteristics but together constitute a single
class. Each Component of a class of Component
Securities may be identified as falling into one or
more of the categories in this chart.
Notional Amount Securities.............. A class having no principal balance and bearing
interest on the related notional amount. The
notional amount is used for purposes of the
determination of interest distributions.
Planned Principal Class
(also sometimes referred to as
"PACs")............................... A class that is designed to receive principal
payments using a predetermined principal balance
schedule derived by assuming two constant
prepayment rates for the underlying Trust Fund
Assets. These two rates are the endpoints for the
"structuring range" for the Planned Principal
Class. The Planned Principal Classes in any Series
of Securities may be subdivided into different
categories (e.g., Primary Planned Principal
Classes, Secondary Planned Principal Classes and so
forth) having different effective structuring
ranges and different principal payment priorities.
The structuring range for the Secondary Planned
Principal Class of a Series of Securities will be
narrower than that for the Primary Planned
Principal Class of such Series.
Scheduled Principal Class............... A class that is designed to receive principal
payments using a predetermined principal balance
schedule but is not designated as a Planned
Principal Class or Targeted Principal Class. In
many cases, the schedule is derived by assuming two
constant prepayment rates for the underlying Trust
Fund Assets. These two rates are the endpoints for
the "structuring range" for the Scheduled Principal
Class.
Sequential Pay.......................... Classes that receive principal payments in a
prescribed sequence, that do not have predetermined
principal balance schedules and that under all
circumstances receive payments of principal
continuously from the first Distribution Date on
which they receive principal until they are
retired. A single class that receives principal
payments before or after all other classes in the
same Series of Securities may be identified as a
Sequential Pay class.
Strip................................... A class that receives a constant proportion, or
"strip," of the principal payments on the
underlying Trust Fund Assets.
</TABLE>
30
<PAGE> 95
<TABLE>
<CAPTION>
CATEGORIES OF CLASSES DEFINITION
- ---------------------------------------- ---------------------------------------------------
<S> <C>
Support Class (also sometimes referred
to as "Companion Classes")............ A class that receives principal payments on any
Distribution Date only if scheduled payments have
been made on specified Planned Principal Classes,
Targeted Principal Classes and/or Scheduled
Principal Classes.
Targeted Principal Class (also sometimes
referred to as "TACs")................ A class that is designed to receive principal
payments using a predetermined principal balance
schedule derived by assuming a single constant
prepayment rate for the underlying Trust Fund
Assets.
INTEREST TYPES
Fixed Rate.............................. A class with an interest rate that is fixed
throughout the life of the class.
Floating Rate........................... A class with an interest rate that resets
periodically based upon a designated index and that
varies directly with changes in such index.
Inverse Floating Rate................... A class with an interest rate that resets
periodically based upon a designated index and that
varies inversely with changes in such index.
Variable Rate........................... A class with an interest rate that resets
periodically and is calculated by reference to the
rate or rates of interest applicable to specified
assets or instruments (e.g., the Loan Rates borne
by the underlying Loans).
Interest Only........................... A class that receives some or all of the interest
payments made on the underlying Trust Fund Assets
and little or no principal. Interest Only Classes
have either a nominal principal balance or a
notional amount. A nominal principal balance
represents actual principal that will be paid on
the class. It is referred to as nominal since it is
extremely small compared to other classes. A
notional amount is the amount used as a reference
to calculate the amount of interest due on an
Interest Only Class that is not entitled to any
distributions in respect of principal.
Principal Only.......................... A class that does not bear interest and is entitled
to receive only distributions in respect of
principal.
Partial Accrual......................... A class that accretes a portion of the amount of
accrued interest thereon, which amount will be
added to the principal balance of such class on
each applicable Distribution Date, with the
remainder of such accrued interest to be
distributed currently as interest on such class.
Such accretion may continue until a specified event
has occurred or until such Partial Accrual Class is
retired.
Accrual................................. A class that accretes the amount of accrued
interest otherwise distributable on such class,
which amount will be added as principal to the
principal balance of such class on each applicable
Distribution Date. Such accretion may continue
until some specified event has occurred or until
such Accrual Class is retired.
</TABLE>
31
<PAGE> 96
BOOK-ENTRY REGISTRATION OF SECURITIES
As described in the related Prospectus Supplement, if not issued in fully
registered form, each class of Securities will be registered as book-entry
certificates (the "Book-Entry Securities"). Persons acquiring beneficial
ownership interests in the Securities ("Security Owners") will hold their
Securities through DTC in the United States, or Cedel Bank, societe anonyme
("CEDEL"), or the Euroclear System ("Euroclear") in Europe, if they are
participants of such systems, or indirectly through organizations which are
participants in such systems. The Book-Entry Securities will be issued in one or
more certificates which equal the aggregate principal balance of the Securities
and will initially be registered in the name of Cede & Co., the nominee of DTC.
CEDEL and Euroclear will hold omnibus positions on behalf of their participants
through customers' securities accounts in CEDEL's and Euroclear's names on the
books of their respective depositaries which in turn will hold such positions in
customers' securities accounts in the depositaries' names on the books of DTC.
Citibank, N.A., will act as depositary for CEDEL and The Chase Manhattan Bank
will act as depositary for Euroclear (in such capacities, individually the
"Relevant Depositary" and collectively the "European Depositaries"). Except as
described below, no person acquiring a Book-Entry Security (each, a "beneficial
owner") will be entitled to receive a physical certificate representing such
Security (a "Definitive Security"). Unless and until Definitive Securities are
issued, it is anticipated that the only "Securityholder" of the Securities will
be Cede & Co., as nominee of DTC. Security Owners are only permitted to exercise
their rights indirectly through Participants and DTC.
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 (each, a "Financial Intermediary") that maintains the
beneficial owner's account for such purpose. In turn, the Financial
Intermediary's ownership of such Book-Entry Security will be recorded on the
records of DTC (or of a participating firm that acts as agent for the Financial
Intermediary, whose interest will in turn be recorded on the records of DTC, if
the beneficial owner's Financial Intermediary is not a DTC participant, and on
the records of CEDEL or Euroclear, as appropriate).
Security Owners will receive all distributions of principal of, and
interest on, the Securities from the Trustee through DTC and DTC participants.
While the Securities are outstanding (except under the circumstances described
below), under the rules, regulations and procedures creating and affecting DTC
and its operations (the "Rules"), DTC is required to make book-entry transfers
among Participants on whose behalf it acts with respect to the Securities and is
required to receive and transmit distributions of principal of, and interest on,
the Securities. Participants and indirect participants with whom Security Owners
have accounts with respect to Securities are similarly required to make
book-entry transfers and receive and transmit such distributions on behalf of
their respective Security Owners. Accordingly, although Security Owners will not
possess certificates, the Rules provide a mechanism by which Security Owners
will receive distributions and will be able to transfer their interest.
Security Owners will not receive or be entitled to receive certificates
representing their respective interests in the Securities, except under the
limited circumstances described below. Unless and until Definitive Securities
are issued, Security Owners who are not Participants may transfer ownership of
Securities only through Participants and indirect participants by instructing
such Participants and indirect participants to transfer Securities, by
book-entry transfer, through DTC for the account of the purchasers of such
Securities, which account is maintained with their respective Participants.
Under the Rules and in accordance with DTC's normal procedures, transfers of
ownership of Securities will be executed through DTC and the accounts of the
respective Participants at DTC will be debited and credited. Similarly, the
Participants and indirect participants will make debits or credits, as the case
may be, on their records on behalf of the selling and purchasing Security
Owners.
Because of time zone differences, credits of securities received in CEDEL
or Euroclear as a result of a transaction with a Participant will be made during
subsequent securities settlement processing and dated the business day following
the DTC settlement date. Such credits or any transactions in such securities
settled during such processing will be reported to the relevant Euroclear or
CEDEL Participants on such business day. Cash received in CEDEL or Euroclear as
a result of sales of securities by or through a CEDEL
32
<PAGE> 97
Participant (as defined herein) or Euroclear Participant (as defined herein) to
a DTC Participant will be received with value on the DTC settlement date but
will be available in the relevant CEDEL or Euroclear cash account only as of the
business day following settlement with DTC.
Transfers between Participants will occur in accordance with DTC rules.
Transfers between CEDEL Participants and Euroclear Participants will occur in
accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through CEDEL
Participants or Euroclear Participants, on the other, will be effected in DTC in
accordance with DTC rules on behalf of the relevant European international
clearing system by the Relevant Depositary; however, such cross-market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in such system in accordance
with its rules and procedures and within its established deadlines (European
time). The relevant European international clearing system will, if the
transaction meets its settlement requirements, deliver instructions to the
Relevant Depositary to take action to effect final settlement on its behalf by
delivering or receiving securities in DTC, and making or receiving payment in
accordance with normal procedures for same day funds settlement applicable to
DTC. CEDEL Participants and Euroclear Participants may not deliver instructions
directly to the European Depositaries.
CEDEL is incorporated under the laws of Luxembourg as a professional
depository. CEDEL holds securities for its participating organizations ("CEDEL
Participants") and facilitates the clearance and settlement of securities
transactions between CEDEL Participants through electronic book-entry changes in
accounts of CEDEL Participants, thereby eliminating the need for physical
movement of certificates. Transactions may be settled in CEDEL in any of 28
currencies, including United States dollars. CEDEL provides to its CEDEL
Participants, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. CEDEL interfaces with domestic markets in several
countries. As a professional depository, CEDEL is subject to regulation by the
Luxembourg Monetary Institute. CEDEL Participants are recognized financial
institutions around the world, including underwriters, securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations. Indirect access to CEDEL is also available to others, such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a CEDEL Participant, either directly or indirectly.
Euroclear was created in 1968 to hold securities for its participants
("Euroclear Participants") and to clear and settle transactions between
Euroclear Participants through simultaneous electronic book-entry delivery
against payment, thereby eliminating the need for physical movement of
certificates and any risk from lack of simultaneous transfers of securities and
cash. Transactions may be settled in any of 32 currencies, including United
States dollars. Euroclear includes various other services, including securities
lending and borrowing and interfaces with domestic markets in several countries
generally similar to the arrangements for cross-market transfers with DTC
described above. Euroclear is operated by the Brussels, Belgium office of Morgan
Guaranty Trust Company of New York ("Morgan" and in such capacity, the
"Euroclear Operator"), under contract with Euroclear Clearance Systems S.C., a
Belgian cooperative corporation (the "Belgian Cooperative"). All operations are
conducted by Morgan, and all Euroclear securities clearance accounts and
Euroclear cash accounts are accounts with the Euroclear Operator, not the
Belgian Cooperative. The Belgian Cooperative establishes policy for Euroclear on
behalf of Euroclear Participants. Euroclear Participants include banks
(including central banks), securities brokers and dealers and other professional
financial intermediaries. Indirect access to Euroclear is also available to
other firms that clear through or maintain a custodial relationship with a
Euroclear Participant, either directly or indirectly.
Morgan is the Belgian branch of a New York banking corporation which is a
member bank of the Federal Reserve System. As such, it is regulated and examined
by the Board of Governors of the Federal Reserve System and the New York State
Banking Department, as well as the Belgian Banking Commission.
Securities clearance accounts and cash accounts with Morgan are governed by
the Terms and Conditions Governing Use of Euroclear and the related Operating
Procedures of the Euroclear System and applicable
33
<PAGE> 98
Belgian law (collectively, the "Terms and Conditions"). The Terms and Conditions
govern transfers of securities and cash within Euroclear, withdrawals of
securities and cash from Euroclear, and receipts of payments with respect to
securities in Euroclear. All securities in Euroclear are held on a fungible
basis without attribution of specific certificates to specific securities
clearance accounts. The Euroclear Operator acts under the Terms and Conditions
only on behalf of Euroclear Participants, and has no record of or relationship
with persons holding through Euroclear Participants.
Under a book-entry format, beneficial owners of the Book-Entry Securities
may experience some delay in their receipt of payments, since such payments will
be forwarded by the Trustee to Cede & Co., as nominee of DTC. Distributions with
respect to Securities held through CEDEL or Euroclear will be credited to the
cash accounts of CEDEL Participants or Euroclear Participants in accordance with
the relevant system's rules and procedures, to the extent received by the
Relevant Depositary. Such distributions will be subject to tax reporting in
accordance with relevant United States tax laws and regulations. See "Federal
Income Tax Consequences -- Tax Treatment of Foreign Investors" and "-- Tax
Consequences to Holders of the Notes -- Backup Withholding" herein. Because DTC
can only act on behalf of Financial Intermediaries, the ability of a beneficial
owner to pledge Book-Entry Securities to persons or entities that do not
participate in the Depository system may be limited due to the lack of physical
certificates for such Book-Entry Securities. In addition, issuance of the
Book-Entry Securities in book-entry form may reduce the liquidity of such
Securities in the secondary market since certain potential investors may be
unwilling to purchase Securities for which they cannot obtain physical
certificates.
Monthly and annual reports on the Trust 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 such beneficial owners are credited.
DTC has advised the Trustee that, unless and until Definitive Securities
are issued, DTC will take any action permitted to be taken by the holders of the
Book-Entry Securities under the applicable 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 such actions are taken on behalf of
Financial Intermediaries whose holdings include such Book-Entry Securities.
CEDEL or the Euroclear Operator, as the case may be, will take any other action
permitted to be taken by a Securityholder under the Agreement on behalf of a
CEDEL Participant or Euroclear Participant only in accordance with its relevant
rules and procedures and subject to the ability of the Relevant Depositary to
effect such actions on its behalf through DTC. DTC may take actions, at the
direction of the related Participants, with respect to some Securities which
conflict with actions taken with respect to other Securities.
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 such event and the availability through DTC of
Definitive Securities. Upon surrender by DTC of the global certificate or
certificates representing the Book-Entry Securities and instructions for
re-registration, the Trustee will issue Definitive Securities, and thereafter
the Trustee will recognize the holders of such Definitive Securities as
Securityholders under the applicable Agreement.
Although DTC, CEDEL and Euroclear have agreed to the foregoing procedures
in order to facilitate transfers of Securities among participants of DTC, CEDEL
and Euroclear, they are under no obligation to perform or continue to perform
such procedures and such procedures may be discontinued at any time.
None of the Master Servicer, Provident or the Trustee will have any
responsibility for any aspect of the records relating to or payments made on
account of beneficial ownership interests of the Book-Entry Securities held by
Cede & Co., as nominee of DTC, or for maintaining, supervising or reviewing any
records relating to such beneficial ownership interests.
34
<PAGE> 99
CREDIT ENHANCEMENT
GENERAL
Credit enhancement may be provided with respect to one or more classes of a
Series of Securities or with respect to the related Trust Fund Assets. Credit
enhancement may be in the form of a limited financial guaranty policy issued by
an entity named in the related Prospectus Supplement, the subordination of one
or more classes of the Securities of such Series, the establishment of one or
more Reserve Accounts, the use of a cross-collateralization feature, use of a
mortgage pool insurance policy, bankruptcy bond, special hazard insurance
policy, surety bond, letter of credit, guaranteed investment contract,
overcollateralization, or another method of credit enhancement contemplated
herein and described in the related Prospectus Supplement, or any combination of
the foregoing. Unless otherwise specified in the related Prospectus Supplement,
credit enhancement will not provide protection against all risks of loss and
will not guarantee repayment of the entire principal balance of the Securities
and interest thereon. If losses occur which exceed the amount covered by credit
enhancement or which are not covered by the credit enhancement, Securityholders
will bear their allocable share of any deficiencies.
If specified in the related Prospectus Supplement, the coverage provided by
one or more of the forms of credit enhancement described in this Prospectus may
apply concurrently to two or more separate Trust Funds. If applicable, the
related Prospectus Supplement will identify the Trust Funds to which such credit
enhancement relates and the manner of determining the amount of coverage
provided to such Trust Funds thereby and of the application of such coverage to
the identified Trust Funds.
SUBORDINATION
If so specified in the related Prospectus Supplement, protection afforded
to holders of one or more classes of Securities of a Series by means of the
subordination feature may be accomplished by the preferential right of holders
of one or more other classes of such Series (the "Senior Securities") to
distributions in respect of scheduled principal, Principal Prepayments, interest
or any combination thereof that otherwise would have been payable to holders of
Subordinated Securities under the circumstances and to the extent specified in
the related Prospectus Supplement. Protection may also be afforded to the
holders of Senior Securities of a Series by: (i) reducing the ownership interest
(if applicable) of the related Subordinated Securities; (ii) a combination of
the immediately preceding sentence and clause (i) above; or (iii) as otherwise
described in the related Prospectus Supplement. If so specified in the related
Prospectus Supplement, delays in receipt of scheduled payments on the Loans and
losses on defaulted Loans may be borne first by the various classes of
Subordinated Securities and thereafter by the various classes of Senior
Securities, in each case under the circumstances and subject to the limitations
specified in such Prospectus Supplement. The aggregate distributions in respect
of delinquent payments on the Loans over the lives of the Securities or at any
time, the aggregate losses in respect of defaulted Loans which must be borne by
the Subordinated Securities by virtue of subordination and the amount of the
distributions otherwise distributable to the Subordinated Securityholders that
will be distributable to Senior Securityholders on any Distribution Date may be
limited as specified in the related Prospectus Supplement. If aggregate
distributions in respect of delinquent payments on the Loans or aggregate losses
in respect of such Loans were to exceed an amount specified in the related
Prospectus Supplement, Senior Securityholders would experience losses on their
Securities.
In addition to or in lieu of the foregoing, if so specified in the related
Prospectus Supplement, all or any portion of distributions otherwise payable to
Subordinated Securityholders on any Distribution Date may instead be deposited
into one or more Reserve Accounts established with the Trustee or distributed to
Senior Securityholders. Such deposits may be made on each Distribution Date, for
specified periods or until the balance in the Reserve Account has reached a
specified amount and, following payments from the Reserve Account to Senior
Securityholders or otherwise, thereafter to the extent necessary to restore the
balance in the Reserve Account to required levels, in each case as specified in
the related Prospectus Supplement. Amounts on deposit in the Reserve Account may
be released to the holders of certain classes of Securities at the times and
under the circumstances specified in such Prospectus Supplement.
35
<PAGE> 100
If specified in the related Prospectus Supplement, various classes of
Senior Securities and Subordinated Securities may themselves be subordinate in
their right to receive certain distributions to other classes of Senior and
Subordinated Securities, respectively, through a cross-collateralization
mechanism or otherwise. As between classes of Senior Securities and as between
classes of Subordinated Securities, distributions may be allocated among such
classes (i) in the order of their scheduled final Distribution Dates, (ii) in
accordance with a schedule or formula, (iii) in relation to the occurrence of
events, or (iv) otherwise, in each case as specified in the related Prospectus
Supplement. As between classes of Subordinated Securities, payments to holders
of Senior Securities on account of delinquencies or losses and payments to any
Reserve Account will be allocated as specified in the related Prospectus
Supplement.
LETTER OF CREDIT
The letter of credit, if any, with respect to a Series of Securities will
be issued by the bank or financial institution specified in the related
Prospectus Supplement (the "L/C Bank"). Under the letter of credit, the L/C Bank
will be obligated to honor drawings thereunder in an aggregate fixed dollar
amount, net of unreimbursed payments thereunder, equal to the percentage
specified in the related Prospectus Supplement (i) of the aggregate principal
balance of the Loans on the related Cut-Off Date or (ii) of one or more Classes
of Securities. If so specified in the related Prospectus Supplement, the letter
of credit may permit drawings in the event of losses not covered by insurance
policies or other credit support, such as losses arising from damage not covered
by standard hazard insurance policies, losses resulting from the bankruptcy of a
borrower and the application of certain provisions of the federal Bankruptcy
Code, or losses resulting from denial of insurance coverage due to
misrepresentations in connection with the origination of a Loan. The amount
available under the letter of credit will, in all cases, be reduced to the
extent of the unreimbursed payments thereunder. The obligations of the L/C Bank
under the letter of credit for each Series of Securities will expire at the
earlier of the date specified in the related Prospectus Supplement or the
termination of the Trust Fund. See "The Agreements -- Termination: Optional
Termination." A copy of the letter of credit for a Series, if any, will be filed
with the Commission as an exhibit to a Current Report on Form 8-K to be filed
within 15 days of issuance of the Securities of the related Series.
INSURANCE POLICIES, SURETY BONDS AND GUARANTIES
If so provided in the Prospectus Supplement for a Series of Securities,
deficiencies in amounts otherwise payable on such Securities or certain classes
thereof will be covered by insurance policies and/or surety bonds provided by
one or more insurance companies or sureties. Such instruments may cover, with
respect to one or more classes of Securities of the related Series, timely
distributions of interest and/or full distributions of principal on the basis of
a schedule of principal distributions set forth in or determined in the manner
specified in the related Prospectus Supplement. In addition, if specified in the
related Prospectus Supplement, a Trust Fund may also include bankruptcy bonds,
special hazard insurance policies, other insurance or guaranties for the purpose
of (i) maintaining timely payments or providing additional protection against
losses on the assets included in such Trust Fund, (ii) paying administrative
expenses or (iii) establishing a minimum reinvestment rate on the payments made
in respect of such assets or principal payment rate on such assets. Such
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 such Prospectus Supplement. A copy of any such instrument for a
Series will be filed with the Commission as an exhibit to a Current Report on
Form 8-K to be filed with the Commission within 15 days of issuance of the
Securities of the related Series.
OVER-COLLATERALIZATION
If so provided in the Prospectus Supplement for a Series of Securities, a
portion of the interest payment on each Loan may be applied as an additional
distribution in respect of principal to reduce the principal balance of a
certain class or classes of Securities and, thus, accelerate the rate of payment
of principal on such class or classes of Securities relative to the principal
balance of the Loans in the related Trust Fund.
36
<PAGE> 101
RESERVE ACCOUNTS
If specified in the related Prospectus Supplement, credit support with
respect to a Series of Securities will be provided by the establishment and
maintenance with the Trustee for such Series of Securities, in trust, of one or
more Reserve Accounts for such Series. The related Prospectus Supplement will
specify whether or not any such Reserve Accounts will be included in the Trust
Fund for such Series.
The Reserve Account for a Series will be funded (i) by the deposit therein
of cash, United States Treasury securities, instruments evidencing ownership of
principal or interest payments thereon, letters of credit, demand notes,
certificates of deposit or a combination thereof in the aggregate amount
specified in the related Prospectus Supplement, (ii) by the deposit therein from
time to time of certain amounts, as specified in the related Prospectus
Supplement to which the Subordinated Securityholders, if any, would otherwise be
entitled or (iii) in such other manner as may be specified in the related
Prospectus Supplement.
Any amounts on deposit in the Reserve Account and the proceeds of any other
instrument upon maturity will be held in cash or will be invested in "Permitted
Investments" which may include (i) direct obligations of, or obligations fully
guaranteed as to timely payment of principal and interest by, the United States
or any agency or instrumentality thereof, provided that such obligations are
backed by the full faith and credit of the United States; (ii) repurchase
agreements on obligations specified in clause (i) maturing not more than three
months from the date of acquisition thereof, provided that the short-term
unsecured debt obligations of the party agreeing to repurchase such obligations
are at the time rated by each Rating Agency in its highest short-term rating
category; (iii) certificates of deposit, time deposits and bankers' acceptances
(which, if Moody's is a Rating Agency, shall each have an original maturity of
not more than 90 days and, in the case of bankers' acceptances, shall in no
event have an original maturity of more than 365 days) of any U.S. depository
institution or trust company incorporated under the laws of the United States or
any state thereof and subject to supervision and examination by federal and/or
state banking authorities, provided that the unsecured short-term debt
obligations of such depository institution or trust company at the date of
acquisition thereof have been rated by each Rating Agency in its highest
unsecured short-term debt rating category; (iv) commercial paper (having
original maturities of not more than 90 days) of any corporation incorporated
under the laws of the United States or any state thereof which on the date of
acquisition has been rated by the Rating Agencies in their highest short-term
rating categories; (v) short-term investment funds ("STIFS") sponsored by any
trust company or bank incorporated under the laws of the United States or any
state thereof which on the date of acquisition has been rated by the Rating
Agencies in their respective highest rating category of long-term unsecured
debt; (vi) interests in any money market fund which at the date of acquisition
of the interests in such fund and throughout the time as the interest is held in
such fund has the rating specified in the related Prospectus Supplement by each
Rating Agency; and (vii) other obligations or securities that are acceptable to
each Rating Agency as a Permitted Investment hereunder and will not result in a
reduction in the then current rating of the Securities, as evidenced by a letter
to such effect from such Rating Agency and with respect to which the Master
Servicer has received confirmation that, for tax purposes, the investment
complies with the last clause of this definition; provided that no instrument
described hereunder shall evidence either the right to receive (a) only interest
with respect to the obligations underlying such instrument or (b) both principal
and interest payments derived from obligations underlying such instrument and
the interest and principal payments with respect to such instrument provided a
yield to maturity at par greater than 120% of the yield to maturity at par of
the underlying obligations; and provided, further, that no instrument described
hereunder may be purchased at a price greater than par if such instrument may be
prepaid or called at a price less than its purchase price prior to its stated
maturity. Unless otherwise specified in the related Prospectus Supplement, any
instrument deposited therein will name the Trustee, in its capacity as trustee
for the holders of the Securities, as beneficiary and will be issued by an
entity acceptable to each Rating Agency that rates the Securities of the related
Series. Additional information with respect to such instruments deposited in the
Reserve Accounts will be set forth in the related Prospectus Supplement.
Any amounts so deposited and payments on instruments so deposited will be
available for withdrawal from the Reserve Account for distribution to the
holders of Securities of the related Series for the purposes, in the manner and
at the times specified in the related Prospectus Supplement.
37
<PAGE> 102
POOL INSURANCE POLICIES
If specified in the related Prospectus Supplement, a separate pool
insurance policy ("Pool Insurance Policy") will be obtained for the Pool and
issued by the insurer (the "Pool Insurer") named in such Prospectus Supplement.
Each Pool Insurance Policy will, subject to the limitations described below,
cover loss by reason of default in payment on Loans in the Pool in an amount
equal to a percentage specified in such Prospectus Supplement of the aggregate
principal balance of such Loans on the Cut-Off Date which are not covered as to
their entire outstanding principal balances by Primary Mortgage Insurance
Policies. As more fully described below, the Master Servicer will present claims
thereunder to the Pool Insurer on behalf of itself, the Trustee and the holders
of the Securities of the related Series. The Pool Insurance Policies, however,
are not blanket policies against loss, since claims thereunder may only be made
respecting particular defaulted Loans and only upon satisfaction of certain
conditions precedent described below. The Pool Insurance Policies generally will
not cover losses due to a failure to pay or denial of a claim under a Primary
Mortgage Insurance Policy.
The Pool Insurance Policies generally will provide that no claims may be
validly presented unless (i) any required Primary Mortgage Insurance Policy is
in effect for the defaulted Loan and a claim thereunder has been submitted and
settled; (ii) hazard insurance on the related Property has been kept in force
and real estate taxes and other protection and preservation expenses have been
paid; (iii) if there has been physical loss or damage to the Property, it has
been restored to its physical condition (reasonable wear and tear excepted) at
the time of issuance of the policy; and (iv) the insured has acquired good and
merchantable title to the Property free and clear of liens except certain
permitted encumbrances. Upon satisfaction of these conditions, the Pool Insurer
will have the option either (a) to purchase the property securing the defaulted
Loan at a price equal to the principal balance thereof plus accrued and unpaid
interest at the Loan Rate to the date of such purchase and certain expenses
incurred by the Master Servicer on behalf of the Trustee and Securityholders, or
(b) to pay the amount by which the sum of the principal balance of the defaulted
Loan plus accrued and unpaid interest at the Loan Rate to the date of payment of
the claim and the aforementioned expenses exceeds the proceeds received from an
approved sale of the Property, in either case net of certain amounts paid or
assumed to have been paid under the related Primary Mortgage Insurance Policy.
If any Property securing a defaulted Loan is damaged and proceeds, if any, from
the related hazard insurance policy or the applicable special hazard insurance
policy are insufficient to restore the damaged Property to a condition
sufficient to permit recovery under the Pool Insurance Policy, the Master
Servicer will not be required to expend its own funds to restore the damaged
Property unless it determines that (i) such restoration will increase the
proceeds to Securityholders on liquidation of the Loan after reimbursement of
the Master Servicer for its expenses and (ii) such expenses will be recoverable
by it through proceeds of the sale of the Property or proceeds of the related
Pool Insurance Policy or any related Primary Mortgage Insurance Policy.
The Pool Insurance Policies generally will not insure (and many Primary
Mortgage Insurance Policies do not insure) against loss sustained by reason of a
default arising from, among other things, (i) fraud or negligence in the
origination or servicing of a Loan, including misrepresentation by the borrower,
the originator or persons involved in the origination thereof, or (ii) failure
to construct a Property in accordance with plans and specifications. A failure
of coverage attributable to one of the foregoing events might result in a breach
of Provident's representations described above, and, in such events might give
rise to an obligation on the part of Provident to repurchase the defaulted Loan
if the breach cannot be cured by Provident. No Pool Insurance Policy will cover
(and many Primary Mortgage Insurance Policies do not cover) a claim in respect
of a defaulted Loan occurring when the servicer of such Loan, at the time of
default or thereafter, was not approved by the applicable insurer.
The original amount of coverage under each Pool Insurance Policy generally
will be reduced over the life of the related Securities by the aggregate dollar
amount of claims paid less the aggregate of the net amounts realized by the Pool
Insurer upon disposition of all foreclosed properties. The amount of claims paid
will include certain expenses incurred by the Master Servicer as well as accrued
interest on delinquent Loans to the date of payment of the claim or such other
date set forth in the related Prospectus Supplement. Accordingly, if aggregate
net claims paid under any Pool Insurance Policy reach the original policy limit,
38
<PAGE> 103
coverage under that Pool Insurance Policy will be exhausted and any further
losses will be borne by the related Securityholders.
CROSS-COLLATERALIZATION
If specified in the related Prospectus Supplement, the beneficial ownership
of separate groups of assets included in a Trust Fund may be evidenced by
separate classes of the related Series of Securities. In such case, credit
support may be provided by a cross-collateralization feature which requires that
distributions be made to Securities evidencing a beneficial ownership interest
in, or secured by, one or more asset groups within the same Trust Fund prior to
distributions to Subordinated Securities evidencing a beneficial ownership
interest in, or secured by, one or more other asset groups within such Trust
Fund. Cross-collateralization may be provided by (i) the allocation of certain
excess amounts generated by one or more asset groups to one or more other asset
groups within the same Trust Fund or (ii) the allocation of losses with respect
to one or more asset groups to one or more other asset groups within the same
Trust Fund. The Prospectus Supplement for a Series of Securities which includes
a cross-collateralization feature will describe the manner and conditions for
applying such cross-collateralization feature.
YIELD AND PREPAYMENT CONSIDERATIONS
The yields to maturity and weighted average lives of the Securities will be
affected primarily by the amount and timing of principal payments received on or
in respect of the Trust Fund Assets included in the related Trust Fund. The
original terms to maturity of the Loans in a given Pool will vary depending upon
the type of Loans included therein. Each Prospectus Supplement will contain
information with respect to the type and maturities of the Loans in the related
Pool. The related Prospectus Supplement will specify the circumstances, if any,
under which the related Loans will be subject to prepayment penalties. The
prepayment experience on the Loans in a Pool will affect the weighted average
life of the related Series of Securities.
The rate of prepayment on the Loans cannot be predicted. Home equity loans
and home improvement contracts have been originated in significant volume only
during the past few years and Provident is not aware of any publicly available
studies or statistics on the rate of prepayment of such loans. Generally, home
equity loans and home improvement contracts are not viewed by borrowers as
permanent financing. Accordingly, such Loans may experience a higher rate of
prepayment than traditional first mortgage loans. On the other hand, because
home equity loans such as the Revolving Credit Line Loans generally are not
fully amortizing, the absence of voluntary borrower prepayments could cause
rates of principal payments lower than, or similar to, those of traditional
fully-amortizing first mortgage loans. The prepayment experience of the related
Trust Fund may be affected by a wide variety of factors, including general
economic conditions, prevailing interest rate levels, the availability of
alternative financing, homeowner mobility and the frequency and amount of any
future draws on any Revolving Credit Line Loans. Other factors that might be
expected to affect the prepayment rate of a pool of home equity mortgage loans
or home improvement contracts include the amounts of, and interest rates on, the
underlying senior mortgage loans, and the use of first mortgage loans as
long-term financing for home purchase and subordinate mortgage loans as
shorter-term financing for a variety of purposes, including home improvement,
education expenses and purchases of consumer durables such as automobiles.
Accordingly, such Loans may experience a higher rate of prepayment than
traditional fixed-rate mortgage loans. In addition, any future limitations on
the right of borrowers to deduct interest payments on home equity loans for
federal income tax purposes may further increase the rate of prepayments of the
Loans. The enforcement of a "due-on-sale" provision (as described below) will
have the same effect as a prepayment of the related Loan. See "Certain Legal
Aspects of the Loans -- Due-on-Sale Clauses".
The yield to an investor who purchases Securities in the secondary market
at a price other than par will vary from the anticipated yield if the rate of
prepayment on the Loans is actually different than the rate anticipated by such
investor at the time such Securities were purchased.
Collections on Home Equity Loans may vary because, among other things,
borrowers may (i) make payments during any month as low as the minimum monthly
payment for such month or, during the interest-only period for certain Revolving
Credit Line Loans and, in more limited circumstances, Closed-End Loans,
39
<PAGE> 104
with respect to which an interest-only payment option has been selected, the
interest and the fees and charges for such month or (ii) make payments as high
as the entire outstanding principal balance plus accrued interest and the fees
and charges thereon. In addition, collections on the Loans may vary due to
seasonal purchasing and the payment habits of borrowers.
As specified in the related Prospectus Supplement, certain of the
conventional Loans will contain "due-on-sale" provisions permitting the
mortgagee to accelerate the maturity of the Loan upon sale or certain transfers
by the borrower of the related Property. Thus, the rate of prepayments on such
Loans may be lower than that of conventional Loans bearing comparable interest
rates. The Master Servicer generally will enforce any due-on-sale or
due-on-encumbrance clause to the extent it has knowledge of the conveyance or
further encumbrance or the proposed conveyance or proposed further encumbrance
of the Property and reasonably believes that it is entitled to do so under
applicable law. See "The Agreements -- Collection Procedures" and "Certain Legal
Aspects of the Loans" for a description of certain provisions of each Agreement
and certain legal developments that may affect the prepayment experience on the
Loans.
The rate of prepayments with respect to conventional mortgage loans has
fluctuated significantly in recent years. In general, if prevailing rates fall
significantly below the Loan Rates borne by the Loans, such Loans are more
likely to be subject to higher prepayment rates than if prevailing interest
rates remain at or above such Loan Rates. Conversely, if prevailing interest
rates rise appreciably above the Loan Rates borne by the Loans, such Loans are
more likely to experience a lower prepayment rate than if prevailing rates
remain at or below such Loan Rates. However, there can be no assurance that such
will be the case.
When a full prepayment is made on a Loan, the borrower is charged interest
on the principal amount of the Loan so prepaid only for the number of days in
the month actually elapsed up to the date of the prepayment, rather than for a
full month. The effect of prepayments in full will be to reduce the amount of
interest passed through or paid in the following month to holders of Securities
because interest on the principal amount of any Loan so prepaid will generally
be paid only to the date of prepayment. Partial prepayments in a given month may
be applied to the outstanding principal balances of the Loans so prepaid on the
first day of the month of receipt or the month following receipt. In the latter
case, partial prepayments will not reduce the amount of interest passed through
or paid in such month. Generally, neither full nor partial prepayments will be
passed through or paid until the month following receipt.
Even assuming that the Properties provide adequate security for the Loans,
substantial delays could be encountered in connection with the liquidation of
defaulted Loans and corresponding delays in the receipt of related proceeds by
Securityholders could occur. An action to foreclose on a Property securing a
Loan is regulated by state statutes and rules and is subject to many of the
delays and expenses of other lawsuits if defenses or counterclaims are
interposed, sometimes requiring several years to complete. Furthermore, in some
states an action to obtain a deficiency judgment is not permitted following a
nonjudicial sale of a property. In the event of a default by a borrower, these
restrictions, among other things, may impede the ability of the Master Servicer
to foreclose on or sell the Property or to obtain liquidation proceeds
sufficient to repay all amounts due on the related Loan. In addition, the Master
Servicer will be entitled to deduct from related liquidation proceeds all
expenses reasonably incurred in attempting to recover amounts due on defaulted
Loans and not yet repaid, including payments to senior lienholders, legal fees
and costs of legal action, real estate taxes and maintenance and preservation
expenses.
Liquidation expenses with respect to defaulted mortgage loans do not vary
directly with the outstanding principal balance of the loan at the time of
default. Therefore, assuming that a servicer took the same steps in realizing
upon a defaulted mortgage loan having a small remaining principal balance as it
would in the case of a defaulted mortgage loan having a large remaining
principal balance, the amount realized after expenses of liquidation would be
smaller as a percentage of the remaining principal balance of the small mortgage
loan than would be the case with the defaulted mortgage loan having a large
remaining principal balance.
Applicable state laws generally regulate interest rates and other charges,
require certain disclosures, and require licensing of certain originators and
servicers of Loans. In addition, most have other laws, public policy and general
principles of equity relating to the protection of consumers, unfair and
deceptive practices and practices which may apply to originating, servicing and
collecting Loans. Depending on the provisions of the
40
<PAGE> 105
applicable law and the specific facts and circumstances involved, violations of
these laws, policies and principles may limit the ability of the Master Servicer
to collect all or part of the principal of or interest on the Loans, may entitle
the borrower to a refund of amounts previously paid and, in addition, could
subject the Master Servicer to damages and administrative sanctions.
If the rate at which interest is passed through or paid to the holders of
Securities of a Series is calculated on a Loan-by-Loan basis, disproportionate
principal prepayments among Loans with different Loan Rates will affect the
yield on such Securities. In most cases, the effective yield to Securityholders
will be lower than the yield otherwise produced by the applicable Pass-Through
Rate or interest rate and purchase price, because while interest will accrue on
each Loan from the first day of the month (unless otherwise specified in the
related Prospectus Supplement), the distribution of such interest will not be
made earlier than the month following the month of accrual.
Under certain circumstances, the Master Servicer, the holders of the
residual interests in a REMIC or any person specified in the related Prospectus
Supplement may have the option to purchase the assets of a Trust Fund and
thereby affect earlier retirement of the related Series of Securities. See "The
Agreements -- Termination; Optional Termination".
The relative contribution of the various factors affecting prepayment may
vary from time to time. There can be no assurance as to the rate of payment of
principal of the Trust Fund Assets at any time or over the lives of the
Securities.
The Prospectus Supplement relating to a Series of Securities will discuss
in greater detail the effect of the rate and timing of principal payments
(including prepayments), delinquencies and losses on the yield, weighted average
lives and maturities of such Securities.
THE AGREEMENTS
Set forth below is a description of the material provisions of each
Agreement which are not described elsewhere in this Prospectus. The description
is subject to, and qualified in its entirety by reference to, the provisions of
each Agreement. Where particular provisions or terms used in the Agreements are
referred to, such provisions or terms are as specified in the Agreements.
ASSIGNMENT OF THE TRUST FUND ASSETS
Assignment of the Loans. At the time of issuance of the Securities of a
Series, Provident will assign the Loans comprising the related Trust Fund to the
Trustee, without recourse, together with all principal and interest received by
or on behalf of Provident on or with respect to such Loans after the Cut-Off
Date, other than principal and interest due on or before the Cut-Off Date and
other than any Retained Interest specified in the related Prospectus Supplement.
The Trustee will, concurrently with such assignment, deliver such Securities to
Provident in exchange for the Loans. Each Loan will be identified in a schedule
appearing as an exhibit to the related Agreement. Such schedule will include
information as to the outstanding principal balance of each Loan after
application of payments due on or before the Cut-Off Date, as well as
information regarding the Loan Rate or APR, the maturity of the Loan, the
Loan-to-Value Ratios or Combined Loan-to-Value Ratios, as applicable, at
origination and certain other information.
Unless otherwise specified in the related Prospectus Supplement, the
Agreement will require that, within the time period specified therein, Provident
will also deliver or cause to be delivered to the Trustee (or to the custodian
hereinafter referred to) as to each Mortgage Loan or Home Equity Loan, among
other things, (i) the mortgage note or contract endorsed without recourse in
blank or to the order of the Trustee, (ii) the mortgage, deed of trust or
similar instrument (a "Mortgage") with evidence of recording indicated thereon
(except for any Mortgage not returned from the public recording office, in which
case Provident will deliver or cause to be delivered a copy of such Mortgage
together with a certificate that the original of such Mortgage was delivered to
such recording office), (iii) an assignment of the Mortgage to the Trustee,
which assignment will be in recordable form in the case of a Mortgage
assignment, and (iv) such other security documents, including those relating to
any senior interests in the Property, as may be specified in the related
Prospectus
41
<PAGE> 106
Supplement or the related Agreement. Unless otherwise specified in the related
Prospectus Supplement, Provident will not promptly cause the assignments of the
Mortgages to be recorded in the appropriate public office for real property
records. If specified in the related Prospectus Supplement, some or all of the
Loan documents may not be delivered to the Trustee until after the occurrence of
certain events specified in the related Prospectus Supplement.
The Trustee (or the custodian hereinafter referred to) will review such
Loan documents within the time period specified in the related Prospectus
Supplement after receipt thereof, and the Trustee will hold such documents in
trust for the benefit of the related Securityholders. Unless otherwise specified
in the related Prospectus Supplement, if any such document is found to be
missing or defective in any material respect, the Trustee (or such custodian)
will notify the Master Servicer and Provident. If Provident cannot cure the
omission or defect within the time period specified in the related Prospectus
Supplement after receipt of such notice, Provident will be obligated to either
(i) purchase the related Loan from the Trust Fund at the Purchase Price or (ii)
if so specified in the related Prospectus Supplement, remove such Loan from the
Trust Fund and substitute in its place one or more other Loans that meets
certain requirements set forth therein. There can be no assurance that Provident
will fulfill this purchase or substitution obligation. Unless otherwise
specified in the related Prospectus Supplement, this obligation to cure,
purchase or substitute constitutes the sole remedy available to the
Securityholders or the Trustee for omission of, or a material defect in, a
constituent document.
The Trustee will be authorized to appoint a custodian pursuant to a
custodial agreement to maintain possession of and, if applicable, to review the
documents relating to the Loans as agent of the Trustee.
Notwithstanding the foregoing provisions, with respect to a Trust Fund for
which a REMIC election is to be made, no purchase or substitution of a Loan will
be made if such purchase or substitution would result in a prohibited
transaction tax under the Code.
No Recourse to Provident or Master Servicer. As described above under
"-- Assignment of the Loans," Provident will assign the Loans comprising the
related Trust Fund to the Trustee, without recourse. However, Provident will be
obligated to repurchase or substitute for any Loan as to which certain
representations and warranties are breached or for failure to deliver certain
documents relating to the Loans as described herein under "Assignment of the
Loans" and "Loan Program -- Representations by Provident; Repurchases." These
obligations to purchase or substitute constitute the sole remedy available to
the Securityholders or the Trustee for a breach of any such representation or
warranty or failure to deliver a constituent document.
PAYMENTS ON LOANS; DEPOSITS TO SECURITY ACCOUNT
The Master Servicer will establish and maintain or cause to be established
and maintained with respect to the related Trust Fund a separate account or
accounts for the collection of payments on the related Trust Fund Assets in the
Trust Fund (the "Security Account") which, unless otherwise specified in the
related Prospectus Supplement, must be either (i) maintained with a depository
institution whose short-term debt obligations and long-term debt obligations at
the time of any deposit therein and throughout the time the interest is
maintained are rated as specified in the related Prospectus Supplement by the
Rating Agencies, and the deposits in such account or accounts are fully insured
by either the Bank Insurance Fund (the "BIF") or the Savings Association
Insurance Fund ("SAIF") (as successor to the Federal Savings and Loan Insurance
Corporation) and which is any of (a) a federal savings and loan association duly
organized, validly existing and in good standing under the applicable banking
laws of any state, (b) an institution duly organized, validly existing and in
good standing under the applicable banking laws of any state, (c) a national
banking association duly organized, validly existing and in good standing under
the federal banking laws or (d) a principal subsidiary of a bank holding
company, (ii) a segregated trust account maintained with the corporate trust
department of a federal or state chartered depository or trust company, having
capital and surplus of not less than $50,000,000, acting in its fiduciary
capacity, or (iii) an account otherwise acceptable to each Rating Agency as
evidenced by a letter from each Rating Agency to the Trustee, without reduction
or withdrawal of the then current ratings of the Securities. The collateral
eligible to secure amounts in the Security Account is limited to Permitted
Investments. A Security Account may be maintained as an interest bearing account
or
42
<PAGE> 107
the funds held therein may be invested pending each succeeding Distribution Date
in Permitted Investments. Unless otherwise specified in the related Prospectus
Supplement, the Master Servicer or its designee will be entitled to receive any
such interest or other income earned on funds in the Security Account as
additional compensation and will be obligated to deposit in the Security Account
the amount of any loss immediately as realized. The Security Account may be
maintained with the Master Servicer or with a depository institution that is an
affiliate of the Master Servicer, provided it meets the standards set forth
above.
The Master Servicer will deposit or cause to be deposited in the Security
Account for each Trust Fund, to the extent applicable and unless otherwise
specified in the related Prospectus Supplement, the following payments and
collections received or advances made by or on behalf of it subsequent to the
Cut-Off Date (other than certain payments due on or before the Cut-Off Date and
exclusive of any amounts representing Retained Interest):
(i) all payments on account of principal, including Principal
Prepayments and, if specified in the related Prospectus Supplement, any
applicable prepayment penalties, on the Loans;
(ii) all payments on account of interest on the Loans, net of
applicable servicing compensation;
(iii) all proceeds (net of unreimbursed payments of property taxes,
insurance premiums and similar items ("Insured Expenses") incurred, and
unreimbursed Advances made, by the Master Servicer, if any) of the hazard
insurance policies and any Primary Mortgage Insurance Policies, to the
extent such proceeds are not applied to the restoration of the property or
released to the Mortgagor in accordance with the Master Servicer's normal
servicing procedures (collectively, "Insurance Proceeds") and all other
cash amounts (net of unreimbursed expenses incurred in connection with
liquidation or foreclosure ("Liquidation Expenses") and unreimbursed
Advances made, by the Master Servicer, if any) received and retained in
connection with the liquidation of defaulted Loans, by foreclosure or
otherwise ("Liquidation Proceeds"), together with any net proceeds received
on a monthly basis with respect to any properties acquired on behalf of the
Securityholders by foreclosure or deed in lieu of foreclosure;
(iv) all proceeds of any Loan or property in respect thereof purchased
by Provident as described under "Loan Program -- Representations by
Provident; Repurchases" or "-- Assignment of Trust Fund Assets" above and
all proceeds of any Loan repurchased as described under "-- Termination;
Optional Termination" below;
(v) all payments required to be deposited in the Security Account with
respect to any deductible clause in any blanket insurance policy described
under "-- Hazard Insurance" below;
(vi) any amount required to be deposited by the Master Servicer in
connection with losses realized on investments for the benefit of the
Master Servicer of funds held in the Security Account and, to the extent
specified in the related Prospectus Supplement, any payments required to be
made by the Master Servicer in connection with prepayment interest
shortfalls; and
(vii) all other amounts required to be deposited in the Security
Account pursuant to the Agreement.
The Master Servicer may from time to time direct the institution that
maintains the Security Account to withdraw funds from the Security Account for
the following purposes:
(i) to pay to the Master Servicer the servicing fees described in the
related Prospectus Supplement, the master servicing fees (subject to
reduction) and, as additional servicing compensation, earnings on or
investment income with respect to funds in the Security Account credited
thereto;
(ii) to reimburse the Master Servicer for Advances, such right of
reimbursement with respect to any Loan being limited to amounts received
that represent late recoveries of payments of principal and/or interest on
such Loan (or Insurance Proceeds or Liquidation Proceeds with respect
thereto) with respect to which such Advance was made;
(iii) to reimburse the Master Servicer for any Advances previously
made which the Master Servicer has determined to be nonrecoverable;
43
<PAGE> 108
(iv) to reimburse the Master Servicer from Insurance Proceeds for
expenses incurred by the Master Servicer and covered by the related
insurance policies;
(v) to reimburse the Master Servicer for unpaid master servicing fees
and unreimbursed out-of-pocket costs and expenses incurred by the Master
Servicer in the performance of its servicing obligations, such right of
reimbursement being limited to amounts received representing late
recoveries of the payments for which such advances were made;
(vi) to pay to the Master Servicer, with respect to each Loan or
property acquired in respect thereof that has been purchased by the Master
Servicer pursuant to the Agreement, all amounts received thereon and not
taken into account in determining the principal balance of such repurchased
Loan;
(vii) to reimburse the Master Servicer or Provident for expenses
incurred and reimbursable pursuant to the Agreement;
(viii) to withdraw any amount deposited in the Security Account and
not required to be deposited therein; and
(ix) to clear and terminate the Security Account upon termination of
the Agreement.
In addition, unless otherwise specified in the related Prospectus
Supplement, on or prior to the business day immediately preceding each
Distribution Date, the Master Servicer shall withdraw from the Security Account
the amount of Available Funds, to the extent on deposit, for deposit in an
account maintained by the Trustee for the related Series of Securities.
The applicable Agreement may require the Master Servicer to establish and
maintain one or more escrow accounts into which Mortgagors deposit amounts
sufficient to pay taxes, assessments, hazard insurance premiums or comparable
items. Withdrawals from the escrow accounts maintained for Mortgagors may be
made to effect timely payment of taxes, assessments and hazard insurance
premiums or comparable items, to reimburse the Master Servicer out of related
assessments for maintaining hazard insurance, to refund to Mortgagors amounts
determined to be overages, to remit to Mortgagors, if required, interest earned,
if any, on balances in any of the escrow accounts, to repair or otherwise
protect the Property and to clear and terminate any of the escrow accounts. The
Master Servicer will be solely responsible for administration of the escrow
accounts and will be expected to make advances to such account when a deficiency
exists therein.
PRE-FUNDING ACCOUNT
If so provided in the related Prospectus Supplement, the Master Servicer
will establish and maintain a Pre-Funding Account, in the name of the related
Trustee on behalf of the related Securityholders, into which Provident will
deposit cash in an amount equal to the Pre-Funded Amount on the related Closing
Date. The Pre-Funding Account will be maintained with the Trustee for the
related Series of Securities and is designed solely to hold funds to be applied
by such Trustee during the Funding Period to pay to Provident the purchase price
for Subsequent Loans. Monies on deposit in the Pre-Funding Account will not be
available to cover losses on or in respect of the related Loans. The Pre-Funded
Amount will not exceed 50% of the initial aggregate principal amount of the
Securities of the related Series. The Pre-Funded Amount will be used by the
related Trustee to purchase Subsequent Loans from Provident from time to time
during the Funding Period. The Funding Period, if any, for a Trust Fund will
begin on the related Closing Date and will end on the date specified in the
related Prospectus Supplement, which in no event will be later than the date
that is one year after the related Closing Date. Monies on deposit in the
Pre-Funding Account may be invested in Permitted Investments under the
circumstances and in the manner described in the related Agreement. Earnings on
investment of funds in the Pre-Funding Account will be deposited into the
related Security Account or such other trust account as is specified in the
related 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 the related
Securityholders in the manner and priority specified in the related Prospectus
Supplement, as a prepayment of principal of the related Securities.
44
<PAGE> 109
In addition, if so provided in the related Prospectus Supplement, on the
related Closing Date Provident will deposit in an account (the "Capitalized
Interest Account") cash in such amount as is necessary to cover shortfalls in
interest on the related Series of Securities that may arise as a result of
utilization of the Pre-Funding Account as described above. The Capitalized
Interest Account shall be maintained with the Trustee for the related Series of
Securities and is designed solely to cover the above-mentioned interest
shortfalls. Monies on deposit in the Capitalized Interest Account will not be
available to cover losses on or in respect of the related Loans. To the extent
that the entire amount on deposit in the Capitalized Interest Account has not
been applied to cover shortfalls in interest on the related Series of Securities
by the end of the Funding Period, any amounts remaining in the Capitalized
Interest Account will be paid to Provident.
SUB-SERVICING
The Master Servicer may enter into an agreement (a "Sub-Servicing
Agreement") with any servicing entity which will act as the Sub-Servicer for the
related Loans, which Sub-Servicing Agreement will not contain any terms
inconsistent with the related Agreement. Notwithstanding any such subservicing
arrangement, unless otherwise provided in the related Prospectus Supplement, the
Master Servicer will remain liable for its servicing duties and obligations
under the Master Servicing Agreement as if the Master Servicer alone were
servicing the Loans.
COLLECTION PROCEDURES
The Master Servicer, directly or through one or more Sub-Servicers, will
make reasonable efforts to collect all payments called for under the Loans and
will, consistent with each Agreement and any Pool Insurance Policy, Primary
Mortgage Insurance Policy, bankruptcy bond or alternative arrangements, follow
such collection procedures as are customary with respect to loans that are
comparable to the Loans. Consistent with the above, the Master Servicer may, in
its discretion, (i) waive any assumption fee, late payment or other charge in
connection with a Loan and (ii) to the extent not inconsistent with the coverage
of such Loan by a Pool Insurance Policy, Primary Mortgage Insurance Policy,
bankruptcy bond or alternative arrangements, if applicable, arrange with a
borrower a schedule for the liquidation of delinquencies consistent with the
Master Servicer's policies with respect to the mortgage loans it owns and
services for others. To the extent the Master Servicer is obligated to make or
cause to be made Advances, such obligation will remain during any period of such
an arrangement.
In any case in which property securing a Loan has been, or is about to be,
conveyed by the mortgagor or obligor, the Master Servicer will, to the extent it
has knowledge of such conveyance or proposed conveyance, exercise or cause to be
exercised its rights to accelerate the maturity of such Loan under any
due-on-sale clause applicable thereto, but only if the exercise of such rights
is permitted by applicable law. If these conditions are not met or if the Master
Servicer reasonably believes it is unable under applicable law to enforce such
due-on-sale clause, the Master Servicer will enter into or cause to be entered
into an assumption and modification agreement with the person to whom such
property has been or is about to be conveyed, pursuant to which such person
becomes liable for repayment of the Loan and, to the extent permitted by
applicable law, the mortgagor remains liable thereon. Any fee collected by or on
behalf of the Master Servicer for entering into an assumption agreement will be
retained by or on behalf of the Master Servicer as additional servicing
compensation. See "Certain Legal Aspects of the Loans -- Due-on-Sale Clauses".
In connection with any such assumption, the terms of the related Loan may not be
changed.
HAZARD INSURANCE
Except as otherwise specified in the related Prospectus Supplement, the
Master Servicer will require the mortgagor or obligor on each Loan to maintain a
hazard insurance policy providing for no less than the coverage of the standard
form of fire insurance policy with extended coverage customary for the type of
Property in the state in which such Property is located. Such coverage will be
in an amount that is at least equal to the lesser of (i) the maximum insurable
value of the improvements securing such Loan from time to time, (ii) the
combined principal balance owing on such Loan and any mortgage loan senior to
such Loan and (iii) the minimum amount required to compensate for damage or loss
on a replacement cost basis. All
45
<PAGE> 110
amounts collected by the Master Servicer under any hazard policy (except for
amounts to be applied to the restoration or repair of the Property or released
to the mortgagor or obligor in accordance with the Master Servicer's normal
servicing procedures) will be deposited in the related Security Account. In the
event that the Master Servicer maintains a blanket policy insuring against
hazard losses on all the Loans comprising part of a Trust Fund, it will
conclusively be deemed to have satisfied its obligation relating to the
maintenance of hazard insurance. Such blanket policy may contain a deductible
clause, in which case the Master Servicer will be required to deposit from its
own funds into the related Security Account the amounts which would have been
deposited therein but for such clause.
In general, the standard form of fire and extended coverage policy covers
physical damage to or destruction of the improvements securing a Loan by fire,
lightning, explosion, smoke, windstorm and hail, riot, strike and civil
commotion, subject to the conditions and exclusions particularized in each
policy. Although the policies relating to the Loans may have been underwritten
by different insurers under different state laws in accordance with different
applicable forms and therefore may not contain identical terms and conditions,
the basic terms thereof are dictated by respective state laws, and most such
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 mud flows),
nuclear reactions, wet or dry rot, vermin, rodents, insects or domestic animals,
theft and, in certain cases, vandalism. The foregoing list is merely indicative
of certain kinds of uninsured risks and is not intended to be all inclusive. If
the Property securing a Loan is located in a federally designated special flood
area at the time of origination, the Master Servicer will require the mortgagor
or obligor to obtain and maintain flood insurance.
The hazard insurance policies covering properties securing the Loans
typically contain a clause which in effect requires the insured at all time to
carry insurance of a specified percentage (generally 80% to 90%) of the full
replacement value of the insured property in order to recover the full amount of
any partial loss. If the insured's coverage falls below this specified
percentage, then the insurer's liability in the event of partial loss will not
exceed the larger of (i) the actual cash value (generally defined as replacement
cost at the time and place of loss, less physical depreciation) of the
improvements damaged or destroyed or (ii) such proportion of the loss as the
amount of insurance carried bears to the specified percentage of the full
replacement cost of such improvements. Since the amount of hazard insurance the
Master Servicer may cause to be maintained on the improvements securing the
Loans declines as the principal balances owing thereon decrease, and since
improved real estate generally has appreciated in value over time in the past,
the effect of this requirement in the event of partial loss may be that hazard
insurance proceeds will be insufficient to restore fully the damaged property.
If specified in the related Prospectus Supplement, a special hazard insurance
policy will be obtained to insure against certain of the uninsured risks
described above. See "Credit Enhancement."
If the Property securing a defaulted Loan is damaged and proceeds, if any,
from the related hazard insurance policy are insufficient to restore the damaged
Property, the Master Servicer is not required to expend its own funds to restore
the damaged Property unless it determines (i) that such restoration will
increase the proceeds to Securityholders on liquidation of the Loan after
reimbursement of the Master Servicer for its expenses and (ii) that such
expenses will be recoverable by it from related Insurance Proceeds or
Liquidation Proceeds.
If recovery on a defaulted Loan under any related Insurance Policy is not
available, or if the defaulted Loan is not covered by an Insurance Policy, the
Master Servicer will be obligated to follow or cause to be followed such normal
practices and procedures as it deems necessary or advisable to realize upon the
defaulted Loan. If the proceeds of any liquidation of the Property securing the
defaulted Loan are less than the principal balance of such Loan plus interest
accrued thereon that is payable to Securityholders, the Trust Fund will realize
a loss in the amount of such difference plus the aggregate of expenses incurred
by the Master Servicer in connection with such proceedings which are
reimbursable under the Agreement. In the unlikely event that any such
proceedings result in a total recovery which is, after reimbursement to the
Master Servicer of its expenses, in excess of the principal balance of such Loan
plus interest accrued thereon that is payable to Securityholders, the Master
Servicer will be entitled to withdraw or retain from the Security Account
amounts representing its normal servicing compensation with respect to such Loan
and, unless otherwise specified in
46
<PAGE> 111
the related Prospectus Supplement, amounts representing the balance of such
excess, exclusive of any amount required by law to be forwarded to the related
borrower, as additional servicing compensation.
If the Master Servicer or its designee recovers Insurance Proceeds which,
when added to any related Liquidation Proceeds and after deduction of certain
expenses reimbursable to the Master Servicer, exceed the principal balance of
such Loan plus interest accrued thereon that is payable to Securityholders, the
Master Servicer will be entitled to withdraw or retain from the Security Account
amounts representing its normal servicing compensation with respect to such
Loan. In the event that the Master Servicer has expended its own funds to
restore the damaged Property and such funds have not been reimbursed under the
related hazard insurance policy, it will be entitled to withdraw from the
Security Account out of related Liquidation Proceeds or Insurance Proceeds an
amount equal to such expenses incurred by it, in which event the Trust Fund may
realize a loss up to the amount so charged. Since Insurance Proceeds cannot
exceed deficiency claims and certain expenses incurred by the Master Servicer,
no such payment or recovery will result in a recovery to the Trust Fund which
exceeds the principal balance of the defaulted Loan together with accrued
interest thereon. See "Credit Enhancement".
The proceeds from any liquidation of a Loan will be applied in the
following order of priority: first, to reimburse the Master Servicer for any
unreimbursed expenses incurred by it to restore the related Property and any
unreimbursed servicing compensation payable to the Master Servicer with respect
to such Loan; second, to reimburse the Master Servicer for any unreimbursed
Advances with respect to such Loan; third, to accrued and unpaid interest (to
the extent no Advance has been made for such amount) on such Loan; and fourth,
as a recovery of principal of such Loan.
REALIZATION UPON DEFAULTED LOANS
Primary Mortgage Insurance Policies. If so specified in the related
Prospectus Supplement, the Master Servicer will maintain or cause to be
maintained, as the case may be, in full force and effect, a Primary Mortgage
Insurance Policy with regard to each Loan for which such coverage is required.
Primary Mortgage Insurance Policies reimburse certain losses sustained by reason
of defaults in payments by borrowers. The Master Servicer will not cancel or
refuse to renew any such Primary Mortgage Insurance Policy in effect at the time
of the initial issuance of a Series of Securities that is required to be kept in
force under the applicable Agreement unless the replacement Primary Mortgage
Insurance Policy for such cancelled or nonrenewed policy is maintained with an
insurer whose claims-paying ability is sufficient to maintain the current rating
of the classes of Securities of such Series that have been rated.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
The principal servicing compensation to be paid to the Master Servicer in
respect of its master servicing activities for each Series of Securities will be
equal to the percentage per annum described in the related Prospectus Supplement
(which may vary under certain circumstances) of the outstanding principal
balance of each Loan, and such compensation will be retained by it from
collections of interest on such Loan in the related Trust Fund (the "Master
Servicing Fee"). As compensation for its servicing duties, a Sub-Servicer, if
any, will be entitled to a monthly servicing fee as described in the related
Prospectus Supplement. In addition, the Master Servicer or Sub-Servicer will
retain all prepayment charges, assumption fees and late payment charges, to the
extent collected from borrowers, and any benefit that may accrue as a result of
the investment of funds in the applicable Security Account (unless otherwise
specified in the related Prospectus Supplement).
The Master Servicer will pay or cause to be paid certain ongoing expenses
associated with each Trust Fund and incurred by it in connection with its
responsibilities under the related Agreement, including, without limitation, and
if so specified in the related Prospectus Supplement, payment of any fee or
other amount payable in respect of any credit enhancement arrangements, payment
of the fees and disbursements of the Trustee, any custodian appointed by the
Trustee, the certificate registrar and any paying agent, and payment of expenses
incurred in enforcing the obligations of Sub-Servicers. The Master Servicer will
be entitled to
47
<PAGE> 112
reimbursement of expenses incurred in enforcing the obligations of Sub-Servicers
under certain limited circumstances.
EVIDENCE AS TO COMPLIANCE
Each Agreement will provide that on or before a specified date in each
year, a firm of independent public accountants will furnish a statement to the
Trustee to the effect that, on the basis of the examination by such firm
conducted substantially in compliance with the Uniform Single Attestation
Program for Mortgage Bankers or the Audit Program for Mortgages serviced for
FHLMC, the servicing by or on behalf of the Master Servicer of the Trust Fund
Assets pursuant to the Agreement was conducted in compliance therewith except
for any significant exceptions or errors in records that, in the opinion of the
firm, the Audit Program for Mortgages serviced for FHLMC, or the Uniform Single
Attestation Program for Mortgage Bankers, it is required to report. In rendering
its statement such firm may rely, as to matters relating to the direct servicing
of Loans by Sub-Servicers, upon comparable statements for examinations conducted
substantially in compliance with the Uniform Single Attestation Program for
Mortgage Bankers or the Audit Program for Mortgages serviced for FHLMC (rendered
within one year of such statement) of firms of independent public accountants
with respect to the related Sub-Servicer.
Each Agreement will also provide for delivery to the Trustee, on or before
a specified date in each year, of an annual statement signed by two officers of
the Master Servicer to the effect that the Master Servicer has fulfilled its
obligations under the Agreement throughout the preceding year.
Copies of the annual accountants' statement and the statement of officers
of the Master Servicer may be obtained by Securityholders of the related Series
without charge upon written request to the Master Servicer at the address set
forth in the related Prospectus Supplement.
CERTAIN MATTERS REGARDING THE MASTER SERVICER AND PROVIDENT
The Master Servicer under each Pooling and Servicing Agreement or Master
Servicing Agreement, as applicable, will be named in the related Prospectus
Supplement. Any of Provident, an affiliate of Provident or another entity may
serve as Master Servicer.
Each Agreement will provide that the Master Servicer may not resign from
its obligations and duties under the Agreement except upon (a) appointment of a
successor servicer and receipt by the Trustee of a letter from the Rating Agency
that such resignation and appointment will not result in a downgrade of the
Securities and (b) a determination that its duties thereunder are no longer
permissible under applicable law. The Master Servicer may, however, be removed
from its obligations and duties as set forth in the Agreement. No such
resignation will become effective until the Trustee or a successor servicer has
assumed the Master Servicer's obligations and duties under the Agreement.
Each Agreement will further provide that neither the Master Servicer,
Provident nor any director, officer, employee, or agent of the Master Servicer
or Provident will be under any liability to the related Trust Fund or
Securityholders for any action taken or for refraining from the taking of any
action in good faith pursuant to the Agreement, or for errors in judgment;
provided, however, that neither the Master Servicer, Provident nor any such
person will be protected against any liability which would otherwise be imposed
by reason of wilful misfeasance, bad faith or gross negligence in the
performance of duties thereunder or by reason of reckless disregard of
obligations and duties thereunder. Each Agreement will further provide that the
Master Servicer, Provident and any director, officer, employee or agent of the
Master Servicer or Provident will be entitled to indemnification by the related
Trust Fund 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 related to any specific
Loan or Loans (except any such loss, liability or expense otherwise reimbursable
pursuant to the Agreement) and any loss, liability or expense incurred by reason
of willful misfeasance, bad faith or gross negligence in the performance of
duties thereunder or by reason of reckless disregard of obligations and duties
thereunder. In addition, each Agreement will provide that neither the Master
Servicer nor Provident will be under any obligation to appear in, prosecute or
defend any legal action which is not incidental to its respective
responsibilities under the Agreement and which in its opinion may
48
<PAGE> 113
involve it in any expense or liability. The Master Servicer or Provident may,
however, in its discretion undertake any such action which it may deem necessary
or desirable with respect to the Agreement and the rights and duties of the
parties thereto and the interests of the Securityholders thereunder. In such
event, the legal expenses and costs of such action and any liability resulting
therefrom will be expenses, costs and liabilities of the Trust Fund, and the
Master Servicer or Provident, as the case may be, will be entitled to be
reimbursed therefor out of funds otherwise distributable to Securityholders.
Except as otherwise specified in the related Prospectus Supplement, any
person into which the Master Servicer may be merged or consolidated, or any
person resulting from any merger or consolidation to which the Master Servicer
is a party, or any person succeeding to the business of the Master Servicer,
will be the successor of the Master Servicer under each Agreement, provided that
such person is qualified to sell mortgage loans to, and service mortgage loans
on behalf of, FNMA or FHLMC and further provided that such merger, consolidation
or succession does not adversely affect the then current rating or ratings of
the class or classes of Securities of such Series that have been rated.
EVENTS OF DEFAULT; RIGHTS UPON EVENT OF DEFAULT
Pooling and Servicing Agreement; Master Servicing Agreement. Except as
otherwise specified in the related Prospectus Supplement, Events of Default
under each Agreement will consist of (i) any failure by the Master Servicer to
make any required deposit pursuant to the related Agreement (other than an
Advance) which continues unremedied for five days after the giving of written
notice of such failure to the Master Servicer by the Trustee, or to the Master
Servicer and the Trustee by a holder of the Securities of the related Series;
(ii) any failure by the Master Servicer to make an Advance as required under the
Agreement; (iii) any failure by the Master Servicer duly to observe or perform
in any material respect any of its other covenants or agreements in the
Agreement which continues unremedied for thirty days after the giving of written
notice of such failure to the Master Servicer by the Trustee, or to the Master
Servicer and the Trustee by a holder of the Securities of the related Series;
and (iv) certain events of insolvency, readjustments of debt, marshalling of
assets and liabilities or similar proceedings and certain actions by or on
behalf of the Master Servicer indicating its insolvency, reorganization or
inability to pay its obligations.
If specified in the related Prospectus Supplement, the Agreement will
permit the Trustee to sell the Trust Fund Assets in the event that payments in
respect thereto are insufficient to make payments required in the Agreement. The
Trust Fund Assets will be sold only under the circumstances and in the manner
specified in the related Prospectus Supplement.
Unless otherwise provided in the related Prospectus Supplement, so long as
an Event of Default under an Agreement remains unremedied, the Trustee may (and
at the direction of holders of Securities evidencing not less than 51% of the
aggregate Percentage Interests and under such other circumstances as may be
specified in such Agreement, the Trustee shall) terminate all of the rights and
obligations of the Master Servicer under the Agreement relating to such Trust
Fund and in and to the related Trust Fund Assets, whereupon the Trustee will
succeed to all of the responsibilities, duties and liabilities of the Master
Servicer under the Agreement, including, if specified in the related Prospectus
Supplement, the obligation to make Advances, and will be entitled to similar
compensation arrangements; provided, however, that if the Event of Default
results from the Master Servicer's failure to make an Advance, the Trustee shall
terminate the Master Servicer. In the event that the Trustee is unwilling or
unable so to act, it may appoint, or petition a court of competent jurisdiction
for the appointment of, a mortgage loan servicing institution with a net worth
of a least $50,000,000 to act as successor to the Master Servicer under the
Agreement. Pending such appointment, the Trustee is obligated to act in such
capacity. The Trustee and any such successor may agree upon the servicing
compensation to be paid, which in no event may be greater than the compensation
payable to the Master Servicer under the Agreement.
Unless otherwise provided in the related Prospectus Supplement, no
Securityholder, solely by virtue of such holder's status as a Securityholder,
will have any right under any Agreement to institute any proceeding with respect
to such Agreement, unless such holder previously has given to the Trustee
written notice of default and unless the holders of Securities of any class of
such Series evidencing not less than 25% of the
49
<PAGE> 114
aggregate Percentage Interests constituting such class have made written request
upon the Trustee to institute such proceeding in its own name as Trustee
thereunder and have offered to the Trustee reasonable indemnity, and the Trustee
for 60 days has neglected or refused to institute any such proceeding.
Indenture. Except as otherwise specified in the related Prospectus
Supplement, Events of Default under the Indenture for each Series of Notes
include: (i) a default in the payment of any principal of or interest on any
Note of such Series which continues unremedied for five days after written
notice of such default is given as specified in the related Prospectus
Supplement; (ii) failure to perform in any material respect any other covenant
of Provident or the Trust Fund in the Indenture which continues for a period of
thirty days after notice thereof is given in accordance with the procedures
described in the related Prospectus Supplement; (iii) certain events of
bankruptcy, insolvency, receivership or liquidation of Provident or the Trust
Fund; or (iv) any other Event of Default provided with respect to Notes of that
Series including but not limited to certain defaults on the part of the issuer,
if any, of a credit enhancement instrument supporting such Notes.
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 of such Series
may declare the principal amount (or, if the Notes of that Series have an
interest rate of 0%, such portion of the principal amount as may be specified in
the terms of that Series, as provided in the related Prospectus Supplement) of
all the Notes of such Series to be due and payable immediately. Such declaration
may, under certain circumstances, be rescinded and annulled by the holders of
more than 50% of the Percentage Interests of the Notes of such Series.
If, following an Event of Default with respect to any Series of Notes, the
Notes of such Series have been declared to be due and payable, the Trustee may,
in its discretion, notwithstanding such acceleration, elect to maintain
possession of the collateral securing the Notes of such Series and to continue
to apply distributions on such collateral as if there had been no declaration of
acceleration if such collateral continues to provide sufficient funds for the
payment of principal of and interest on the Notes of such Series as they would
have become due if there had not been such a declaration. In addition, the
Trustee may not sell or otherwise liquidate the collateral securing the Notes of
a Series following an Event of Default, other than a default in the payment of
any principal or interest on any Note of such Series which continues unremedied
for five days after written notice of such default is given as specified in the
related Prospectus Supplement, unless (a) the holders of 100% of the Percentage
Interests of the Notes of such Series consent to such sale, (b) the proceeds of
such sale or liquidation are sufficient to pay in full the principal of and
accrued interest, due and unpaid, on the outstanding Notes of such Series at the
date of such sale or (c) the Trustee determines that such collateral would not
be sufficient on an ongoing basis to make all payments on such Notes as such
payments would have become due if such Notes had not been declared due and
payable, and the Trustee obtains the consent of the holders of 66 2/3% of the
Percentage Interests of the Notes of such Series.
In the event that the Trustee liquidates the collateral in connection with
an Event of Default involving a default in the payment of principal of or
interest on the Notes of a Series which continues unremedied for five days after
written notice of such default is given as specified in the related Prospectus
Supplement, the Indenture provides that the Trustee will have a prior lien on
the proceeds of any such liquidation for unpaid fees and expenses. As a result,
upon the occurrence of such an Event of 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 Noteholders after the occurrence of such an
Event of Default.
Except as otherwise specified in the related Prospectus Supplement, in the
event the principal of the Notes of a Series is declared due and payable as
described above, the holders of any such Notes issued at a discount from par may
be entitled to receive no more than an amount equal to the unpaid principal
amount thereof less the amount of such discount which is unamortized.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, in case an Event of Default shall occur and be continuing 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
50
<PAGE> 115
holders of Notes of such Series unless such holders 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 such request or
direction. Subject to such provisions for indemnification and certain
limitations contained in the Indenture, the holders of a majority of the then
aggregate outstanding amount of the Notes of such Series 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 of such Series, and the holders of a majority
of the then aggregate outstanding amount of the Notes of such Series may, in
certain cases, waive any default with respect thereto, 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 of such Series affected thereby.
AMENDMENT
Except as otherwise specified in the related Prospectus Supplement, each
Agreement may be amended by Provident, the Master Servicer and the Trustee,
without the consent of any of the Securityholders, (i) to cure any ambiguity;
(ii) to correct or supplement any provision therein which may be defective or
inconsistent with any other provision therein; or (iii) to make any other
revisions with respect to matters or questions arising under the Agreement which
are not inconsistent with the provisions thereof, provided that such action will
not adversely affect in any material respect the interests of any
Securityholder. An amendment will be deemed not to adversely affect in any
material respect the interests of the Securityholders if the person requesting
such amendment obtains a letter from each Rating Agency requested to rate the
class or classes of Securities of such Series stating that such amendment will
not result in the downgrading or withdrawal of the respective ratings then
assigned to such Securities. In addition, to the extent provided in the related
Agreement, an Agreement may be amended without the consent of any of the
Securityholders to change the manner in which the Security Account is
maintained, provided that any such change does not adversely affect the then
current rating on the class or classes of Securities of such Series that have
been rated. In addition, if a REMIC election is made with respect to a Trust
Fund, the related Agreement may be amended to modify, eliminate or add to any of
its provisions to such extent as may be necessary to maintain the qualification
of the related Trust Fund as a REMIC, provided that the Trustee has received an
opinion of counsel to the effect that such action is necessary or helpful to
maintain such qualification. Each Agreement may also be amended by Provident,
the Master Servicer and the Trustee with consent of holders of Securities of
such Series evidencing not less than 51% of the aggregate Percentage Interests
of each class affected thereby for the purpose of adding any provisions to or
changing in any manner or eliminating any of the provisions of the Agreement or
of modifying in any manner the rights of the holders of the related Securities;
provided, however, that no such amendment may (i) reduce in any manner the
amount of or delay the timing of, payments received on Loans which are required
to be distributed on any Security without the consent of the holder of such
Security, or (ii) reduce the aforesaid percentage of Securities of any class the
holders of which are required to consent to any such amendment without the
consent of the holders of all Securities of such class covered by such Agreement
then outstanding. If a REMIC election is made with respect to a Trust Fund, the
Trustee will not be entitled to consent to an amendment to the related Agreement
without having first received an opinion of counsel to the effect that such
amendment will not cause such Trust Fund to fail to qualify as a REMIC.
TERMINATION; OPTIONAL TERMINATION
Pooling and Servicing Agreement; Trust Agreement. Unless otherwise
specified in the related Agreement, the obligations created by each Pooling and
Servicing Agreement and Trust Agreement for each Series of Securities will
terminate upon the payment to the related Securityholders of all amounts held in
the Security Account by the Master Servicer and required to be paid to them
pursuant to such Agreement following the later of (i) the final payment of or
other liquidation of the last of the Trust Fund Assets subject thereto or the
disposition of all property acquired upon foreclosure of any such Trust Fund
Assets remaining in the Trust Fund and (ii) the purchase by the Master Servicer
or, if REMIC treatment has been elected and if specified in the related
Prospectus Supplement, by the holder of the residual interest in the REMIC or
any other party specified to have such right (see "Federal Income Tax
Consequences" below), from the related
51
<PAGE> 116
Trust Fund of all of the remaining Trust Fund Assets and all property acquired
in respect of such Trust Fund Assets.
Unless otherwise specified by the related Prospectus Supplement, any such
purchase of Trust Fund Assets and property acquired in respect of Trust Fund
Assets evidenced by a Series of Securities will be made at the option of the
Master Servicer, such other person or, if applicable, such holder of the REMIC
residual interest, at a price specified in the related Prospectus Supplement.
The exercise of such right will affect early retirement of the Securities of
that Series, but the right of the Master Servicer, such other person or, if
applicable, such holder of the REMIC residual interest, to so purchase is
subject to the principal balance of the related Trust Fund Assets being less
than the percentage specified in the related Prospectus Supplement of the
aggregate principal balance of the Trust Fund Assets at the Cut-Off Date for the
Series. The foregoing is subject to the provision that if a REMIC election is
made with respect to a Trust Fund, any repurchase pursuant to clause (ii) above
will be made only in connection with a "qualified liquidation" of the REMIC
within the meaning of Section 860F(g)(4) of the Code.
Indenture. The Indenture will be discharged with respect to a Series of
Notes (except with respect to certain continuing rights specified in the
Indenture) upon the delivery to the Trustee for cancellation of all the Notes of
such Series or, with certain limitations, upon deposit with the Trustee of funds
sufficient for the payment in full of all of the Notes of such Series.
In addition to such discharge with certain limitations, the Indenture will
provide that, if so specified with respect to the Notes of any Series, the
related Trust Fund will be discharged from any and all obligations in respect of
the Notes of such Series (except for certain obligations relating to temporary
Notes and exchange of Notes, to register the transfer of or exchange Notes of
such Series, to replace stolen, lost or mutilated Notes of such Series, to
maintain paying agencies and to hold monies for payment in trust) upon the
deposit with the Trustee, in trust, of money and/or direct obligations of or
obligations guaranteed by the United States of America which through the payment
of interest and principal in respect thereof 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 of such Series on the last scheduled
Distribution Date for such Notes and any installment of interest on such Notes
in accordance with the terms of the Indenture and the Notes of such Series. In
the event of any such defeasance and discharge of Notes of such Series, holders
of Notes of such Series would be able to look only to such money and/or direct
obligations for payment of principal and interest, if any, on their Notes until
maturity.
THE TRUSTEE
The Trustee under each Agreement will be named in the applicable Prospectus
Supplement. The commercial bank or trust company serving as Trustee may have
normal banking relationships with Provident, the Master Servicer and any of
their respective affiliates.
CERTAIN LEGAL ASPECTS OF THE LOANS
The following discussion contains summaries, which are general in nature,
of certain legal matters relating to the Loans. Because such legal aspects are
governed primarily by applicable state law (which laws may differ
substantially), the descriptions do not, except as expressly provided below,
reflect the laws of any particular state, nor do they encompass the laws of all
states in which the security for the Loans is situated. The descriptions are
qualified in their entirety by reference to the applicable federal laws and the
appropriate laws of the states in which Loans may be originated.
GENERAL
The Loans for a Series may be secured by deeds of trust, mortgages,
security deeds or deeds to secure debt, depending upon the prevailing practice
in the state in which the property subject to the loan is located. Deeds of
trust are used almost exclusively in California instead of mortgages. A mortgage
creates a lien upon the real property encumbered by the mortgage, which lien is
generally not prior to the lien for real estate taxes
52
<PAGE> 117
and assessments. Priority between mortgages depends on their terms and generally
on the order of recording with a state or county office. There are two parties
to a mortgage, the mortgagor, who is the borrower and owner of the mortgaged
property, and the mortgagee, who is the lender. Under the mortgage instrument,
the mortgagor delivers to the mortgagee a note or bond and the mortgage.
Although a deed of trust is similar to a mortgage, a deed of trust formally has
three parties, the borrower-property owner called the trustor (similar to a
mortgagor), a lender (similar to a mortgagee) called the beneficiary, and a
third-party grantee called the trustee. Under a deed of trust, the borrower
grants the property, irrevocably until the debt is paid, in trust, generally
with a power of sale, to the trustee to secure payment of the obligation. A
security deed and a deed to secure debt are special types of deeds which
indicate on their face that they are granted to secure an underlying debt. By
executing a security deed or deed to secure debt, the grantor conveys title to,
as opposed to merely creating a lien upon, the subject property to the grantee
until such time as the underlying debt is repaid. The trustee's authority under
a deed of trust, the mortgagee's authority under a mortgage and the grantee's
authority under a security deed or deed to secure debt are governed by law and,
with respect to some deeds of trust, the directions of the beneficiary.
FORECLOSURE/REPOSSESSION
Deed of Trust. Foreclosure of a deed of trust is generally accomplished by
a non-judicial sale under a specific provision in the deed of trust which
authorizes the trustee to sell the property at public auction upon any default
by the borrower under the terms of the note or deed of trust. In certain states,
such foreclosure also may be accomplished by judicial action in the manner
provided for foreclosure of mortgages. In addition to any notice requirements
contained in a deed of trust, in some states (such as California), the trustee
must record a notice of default and send a copy to the borrower-trustor, to any
person who has recorded a request for a copy of any notice of default and notice
of sale, to any successor in interest to the borrower-trustor, to the
beneficiary of any junior deed of trust and to certain other persons. In some
states (including California), the borrower-trustor has the right to reinstate
the loan at any time following default until shortly before the trustee's sale.
In general, the borrower, or any other person having a junior encumbrance on the
real estate, may, during a statutorily prescribed reinstatement period, cure a
monetary default by paying the entire amount in arrears plus other designated
costs and expenses incurred in enforcing the obligation. Generally, state law
controls the amount of foreclosure expenses and costs, including attorney's
fees, which may be recovered by a lender. After the reinstatement period has
expired without the default having been cured, the borrower or junior lienholder
no longer has the right to reinstate the loan and must pay the loan in full to
prevent the scheduled foreclosure sale. If the deed of trust is not reinstated
within any applicable cure period, a notice of sale must be posted in a public
place and, in most states (including California), published for a specific
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 and sent to all
parties having an interest of record in the real property. In California, the
entire process from recording a notice of default to a non-judicial sale usually
takes four to five months.
Mortgages. Foreclosure of a mortgage is generally accomplished by judicial
action. In Ohio, judicial foreclosure is mandatory for residential property. The
action is initiated by the service of legal pleadings upon all parties having an
interest in the real property. Delays in completion of the foreclosure may
occasionally result from difficulties in locating necessary parties. Judicial
foreclosure proceedings are often not contested by any of the parties. When the
mortgagee's right to foreclosure is contested, the legal proceedings necessary
to resolve the issue can be time consuming. After the completion of a judicial
foreclosure proceeding, the court generally issues a judgment of foreclosure and
appoints a referee or other court officer to conduct the sale of the property.
In some states, mortgages may also be foreclosed by advertisement, pursuant to a
power of sale provided in the mortgage. Ohio requires judicial foreclosure,
which includes the issuance of a decree in foreclosure, a statutory required
appraisal process, public advertising for at least one month in a newspaper of
general circulation providing adequate notice of a public auction to be
conducted by the sheriff generally on one or more pre-established days each
month, depending on the county in which the foreclosure occurs. In Ohio, the
procedure, if uncontested, will take approximately six months assuming
successful service or process (one month), motion for summary judgment (two
months), decree in foreclosure and appraisal (one month), advertising (one
month) and sheriff's sale and confirmation (one month). A contested case will
take longer.
53
<PAGE> 118
Although foreclosure sales are typically public sales, frequently no third
party purchaser bids in excess of the lender's lien because of the difficulty of
determining the exact status of title to the property, the possible
deterioration of the property during the foreclosure proceedings and a
requirement that the purchaser pay for the property in cash or by cashier's
check. Thus the foreclosing lender often purchases the property from the trustee
or referee for an amount equal to the principal amount outstanding under the
loan, 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 such judgment is available. Thereafter,
subject to the right of the borrower in some states to remain in possession
during the redemption period, the lender will assume the burden of ownership,
including obtaining hazard insurance and making such 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. Any loss may be reduced by the receipt of
any mortgage guaranty insurance proceeds.
Courts have imposed general equitable principles upon foreclosure, which
are generally designed to mitigate the legal consequences to the borrower of the
borrower's defaults under the loan documents. Some courts have been faced with
the issue of whether federal or state constitutional provisions reflecting due
process concerns for fair notice require that borrowers under deeds of trust
receive notice longer than that prescribed by statute. For the most part, these
cases have upheld the notice provisions as being reasonable or have found that
the sale by a trustee under a deed of trust does not involve sufficient state
action to afford constitutional protection to the borrower. Ohio law places a
two-year limitations period, following the sheriff's sale and confirmation
order, in which a deficiency judgment may be obtained and enforced.
When the beneficiary under a junior mortgage or deed of trust cures the
default and reinstates or redeems by paying the full amount of the senior
mortgage or deed of trust, the amount paid by the beneficiary so to cure or
redeem becomes a part of the indebtedness secured by the junior mortgage or deed
of trust. See "Junior Mortgages; Rights of Senior Mortgagees" below.
ENVIRONMENTAL RISKS
Real property pledged as security to a lender may be subject to unforeseen
environmental risks. Under the laws of certain 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 such a lien has priority over the lien of
an existing mortgage against such property. In addition, under CERCLA, the
United States Environmental Protection Agency ("EPA") may impose a lien on
property where 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
property, even though the environmental damage or threat was caused by a prior
or current owner or operator. CERCLA imposes liability for such costs on any and
all "responsible parties," including owners or operators. However, CERCLA
excludes from the definition of "owner or operator" a secured creditor who holds
indicia of ownership primarily to protect its security interest but without
"participating in the management" of the Property (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 investment (including leasing
the facility or property to third party) or fails to market the property in a
timely fashion.
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 exemption 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
54
<PAGE> 119
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 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. 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. It is conceivable that such costs
arising from the circumstances set forth above would result in a loss to
Securityholders.
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 such 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 the holders of security interests in
underground storage tanks. Liability for cleanup of petroleum contamination may,
however, be governed by state law, which may not provide for any specific
protection for secured creditors.
Except as otherwise specified in the related Prospectus Supplement, at the
time the Loans were originated, no environmental assessments or very limited
environmental assessments of the Properties were conducted.
RIGHTS OF REDEMPTION
In some states, after sale pursuant to a deed of trust or foreclosure of a
mortgage, the borrower and foreclosed junior lienors are given a statutory
period in which to redeem the property from the foreclosure sale. In certain
other states (including California), this right of redemption applies only to
sales following judicial foreclosure and not to sales pursuant to a non-judicial
power of sale. In most states where the right of redemption is available,
statutory redemption may occur upon payment of the foreclosure purchase price,
accrued interest and taxes. In other states, redemption may be authorized if the
former borrower pays only a portion of the sums due. The effect of a statutory
right of redemption is to diminish the ability of the lender to sell the
foreclosed property. The exercise of a right of redemption would defeat the
title of any purchaser from the lender subsequent to foreclosure or sale under a
deed of trust. Consequently, the practical effect of the redemption right 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. In Ohio, the right of
redemption is dual in nature, arising both from equity and from statute. By
customary practice in the Court of Common Pleas, the judgment of foreclosure
allows a three-day grace period for the defendant to pay amounts owed before
foreclosure of the equity of redemption. By statute, the debtor's common law
equity of redemption actually continues until the time of confirmation of sale.
The judgment debtor may redeem the property by depositing the amount of the
judgment plus costs with the Clerk of Court of Common Pleas where the execution
was made.
55
<PAGE> 120
ANTI-DEFICIENCY LEGISLATION; BANKRUPTCY LAWS; TAX LIENS
Certain states have imposed statutory and judicial restrictions that limit
the remedies of a beneficiary under a deed of trust or a mortgagee under a
mortgage. In some states, including California, statutes and case law limit the
right of the beneficiary or mortgagee to obtain a deficiency judgment against
borrowers financing the purchase of their residence or following sale under a
deed of trust or certain other foreclosure proceedings. A deficiency judgment is
a personal judgment against the borrower equal in most cases to the difference
between the amount due to the lender and the fair market value of the real
property at the time of the foreclosure sale. As a result of these prohibitions,
it is anticipated that in most instances the Master Servicer will utilize the
non-judicial foreclosure remedy and will not seek deficiency judgments against
defaulting borrowers.
Some state statutes require the beneficiary or mortgagee to exhaust the
security afforded under a deed of trust or mortgage by foreclosure in an attempt
to satisfy the full debt before bringing a personal action against the borrower.
In certain other states, the lender has the option of bringing a personal action
against the borrower on the debt without first exhausting such security;
however, in some of these states, the lender, following judgment on such
personal action, may be deemed to have elected a remedy and may be precluded
from exercising remedies with respect to the security. Consequently, the
practical effect of the election requirement, when applicable, is that lenders
will usually proceed first against the security rather than bringing a personal
action against the borrower. In some states, exceptions to the anti-deficiency
statutes are provided for in certain instances where the value of the lender's
security has been impaired by acts or omissions of the borrower, for example, in
the event of waste of the property. Ohio law does not limit the amount of the
deficiency judgment, but does impose a two-year limitations period on the
enforcement of such judgment. Finally, other statutory provisions limit any
deficiency judgment against the former borrower following a foreclosure sale to
the excess of the outstanding debt over the fair market value of the property at
the time of the public sale. The purpose of these statutes is generally to
prevent a beneficiary or a mortgagee from obtaining a large deficiency judgment
against the former borrower as a result of low or no bids at the foreclosure
sale.
In addition to anti-deficiency and related legislation, 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 realize upon its security. For
example, in a proceeding under the federal Bankruptcy Code, a lender may not
foreclose on a mortgaged property without the permission of the bankruptcy
court. The rehabilitation plan proposed by the debtor may provide, if the
mortgaged property is not the debtor's principal residence and the court
determines that the value of the mortgaged property is less than the principal
balance of the mortgage loan, for the reduction of the secured indebtedness to
the value of the mortgaged property as of the date of the commencement of the
bankruptcy, rendering the lender a general unsecured creditor for the
difference, and also may reduce the monthly payments due under such mortgage
loan, change the rate of interest and alter the mortgage loan repayment
schedule. The effect of any such proceedings under the federal Bankruptcy Code,
including but not limited to any automatic stay, could result in delays in
receiving payments on the Loans underlying a Series of Securities and possible
reductions in the aggregate amount of such payments.
The federal tax laws provide priority to certain tax liens over the lien of
a mortgage or secured party.
DUE-ON-SALE CLAUSES
Each conventional Loan generally will contain a due-on-sale clause which
will generally provide that if the mortgagor or obligor sells, transfers or
conveys the Property, the Loan or contract may be accelerated by the mortgagee
or secured party. Court decisions and legislative actions have placed
substantial restrictions on the right of lenders to enforce such clauses in many
states. For instance, the California Supreme Court in August 1978 held that
due-on-sale clauses were generally unenforceable. However, the Garn-St Germain
Depository Institutions Act of 1982 (the "Garn-St Germain Act"), subject to
certain exceptions, preempts state constitutional, statutory and case law
prohibiting the enforcement of due-on-sale clauses. As a result, due-on-sale
clauses are generally enforceable except in those states whose legislatures
exercised their authority
56
<PAGE> 121
to regulate the enforceability of such clauses with respect to mortgage loans
that were (i) 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 (ii)
originated by lenders other than national banks, federal savings institutions
and federal credit unions. FHLMC has taken the position in its published
mortgage servicing standards that, out of a total of eleven "window period
states," five states (Arizona, Michigan, Minnesota, New Mexico and Utah) have
enacted statutes extending, on various terms and for varying periods, the
prohibition on enforcement of due-on-sale clauses with respect to certain
categories of "window period loans". Also, the Garn-St Germain Act does
"encourage" lenders to permit assumption of loans at the original rate of
interest or at some other rate less than the average of the original rate and
the market rate.
As to loans secured by an owner-occupied residence, the Garn-St Germain Act
sets forth nine specific instances in which a mortgagee covered by the Act may
not exercise its rights under a due-on-sale clause, notwithstanding the fact
that a transfer of the property may have occurred. The inability to enforce a
due-on-sale clause may result in transfer of the related Property to an
uncreditworthy person, which could increase the likelihood of default or may
result in a mortgage bearing an interest rate below the current market rate
being assumed by a new home buyer, which may affect the average life of the
Loans and the number of Loans which may extend to maturity.
In addition, under federal bankruptcy law, due-on-sale clauses may not be
enforceable in bankruptcy proceedings and may, under certain circumstances, be
eliminated in any modified mortgage resulting from such bankruptcy proceeding.
ENFORCEABILITY OF PREPAYMENT AND LATE PAYMENT FEES
Forms of notes, mortgages and deeds of trust used by lenders may contain
provisions obligating the borrower to pay a late charge if payments are not
timely made, and in some circumstances may provide for prepayment fees or
penalties if the obligation is paid prior to maturity. In certain states, there
are or may be specific limitations upon the late charges which a lender may
collect from a borrower for delinquent payments. Certain states also limit the
amounts that a lender may collect from a borrower as an additional charge if the
loan is prepaid. Under certain state laws, prepayment charges may not be imposed
after a certain period of time following the origination of mortgage loans with
respect to prepayments on loans secured by liens encumbering owner-occupied
residential properties. Since many of the Properties will be owner-occupied, it
is anticipated that prepayment charges may not be imposed with respect to many
of the Loans. The absence of such a restraint on prepayment, particularly with
respect to fixed rate Loans having higher Loan Rates, may increase the
likelihood of refinancing or other early retirement of such Loans or contracts.
Late charges and prepayment fees are typically retained by servicers as
additional servicing compensation.
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
certain types of residential first mortgage loans originated by certain lenders
after March 31, 1980. The Office of Thrift Supervision, as successor to the
Federal Home Loan Bank Board, is authorized to issue rules and regulations and
to publish interpretations governing implementation of Title V. Title V
authorized the states to reimpose interest rate limits by adopting, before April
1, 1983, a law or constitutional provision which expressly rejects application
of the federal law. Fifteen states adopted such a 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 mortgage loans covered by Title V. Certain states have taken action
to reimpose interest rate limits and/or to limit discount points or other
charges.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT
Generally, under the terms of the Soldiers' and Sailors' Civil Relief Act
of 1940, as amended (the "Relief Act"), a borrower who enters military service
after the origination of such borrower's Loan (including a borrower who is a
member of the National Guard or is in reserve status at the time of the
origination of the
57
<PAGE> 122
Loan and is later called to active duty) may not be charged interest above an
annual rate of 6% during the period of such borrower's active duty status,
unless a court orders otherwise upon application of the lender. It is possible
that such interest rate limitation could have an effect, for an indeterminate
period of time, on the ability of the Master Servicer to collect full amounts of
interest on certain of the Loans. Unless otherwise provided in the related
Prospectus Supplement, any shortfall in interest collections resulting from the
application of the Relief Act could result in losses to Securityholders. The
Relief Act also imposes limitations which would impair the ability of the Master
Servicer to foreclose on an affected Loan during the borrower's period of active
duty status. Moreover, the Relief Act permits the extension of a Loan's maturity
and the re-adjustment of its payment schedule beyond the completion of military
service. Thus, in the event that such a Loan goes into default, there may be
delays and losses occasioned by the inability to realize upon the Property in a
timely fashion.
JUNIOR MORTGAGES; RIGHTS OF SENIOR MORTGAGEES
To the extent that the Loans comprising the Trust Fund for a Series are
secured by mortgages which are junior to other mortgages held by other lenders
or institutional investors, the rights of the Trust Fund (and therefore the
Securityholders) as mortgagee under any such junior mortgage are subordinate to
those of any mortgagee under any senior mortgage. The senior mortgagee has the
right to receive hazard insurance and condemnation proceeds and to cause the
property securing the Loan to be sold upon default of the mortgagor, thereby
extinguishing the junior mortgagee's lien unless the junior mortgagee asserts
its subordinate interest in the property in foreclosure litigation and,
possibly, satisfies the defaulted senior mortgage. A junior mortgagee may
satisfy a defaulted senior loan in full and, in some states, may cure a 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.
The standard form of the mortgage 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 such proceeds and awards to any indebtedness secured
by the mortgage, in such 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 a senior mortgage 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 mortgage. Proceeds in excess of the amount of
senior mortgage indebtedness, in most cases, may be applied to the indebtedness
of a junior mortgage.
Another provision sometimes found in the form of the mortgage 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 thereof, 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 is
given the right under certain mortgages to perform the obligation itself, at its
election, with the mortgagor reimbursing the mortgagee for any sums expended by
the mortgagee on behalf of the mortgagor. All sums so expended by the mortgagee
become part of the indebtedness secured by the mortgage.
The form of credit line trust deed or mortgage generally used by most
institutional lenders which make Revolving Credit Line 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. Any amounts so advanced after the
Cut-Off Date with respect to any Mortgage will not be included in the Trust
Fund. The priority of the lien securing any advance made under the clause may
depend 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 trust deed or mortgage,
notwithstanding the
58
<PAGE> 123
fact that there may be junior trust deeds or mortgages and other liens which
intervene between the date of recording of the trust deed or mortgage and the
date of the future advance, and notwithstanding that the beneficiary or lender
had actual knowledge of such intervening junior trust deeds or mortgages and
other liens at the time of the advance. In most states, including Ohio, the
trust deed or mortgage lien securing mortgage loans of the type which includes
home equity credit lines applies retroactively to the date of the original
recording of the trust deed 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 trust deed or mortgage and except as to
advances made after receipt by the lender of a written notice of lien from a
judgment lien creditor of the trustor.
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 Single Family Properties. These laws include the
federal Truth-in-Lending Act and Regulation Z promulgated thereunder, Real
Estate Settlement Procedures Act and Regulation B promulgated thereunder, Equal
Credit Opportunity Act, Fair Credit Billing Act, Fair Credit Reporting Act and
related statutes and regulations. In particular, Regulation Z requires certain
disclosures to borrowers regarding terms of the Loans; the Equal Credit
Opportunity Act and Regulation B promulgated thereunder prohibit discrimination
in the extension of credit on the basis of age, race, color, sex, religion,
marital status, national origin, receipt of public assistance or the exercise of
any right under the Consumer Credit Protection Act; and the Fair Credit
Reporting Act regulates the use and reporting of information related to the
borrower's credit experience. Certain provisions of these laws impose specific
statutory liabilities upon lenders who fail to comply therewith. In addition,
violations of such laws may limit the ability of Provident to collect all or
part of the principal of or interest on the Loans and could subject Provident
and in some cases its assignees to damages and administrative enforcement.
FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following is a summary of the anticipated material federal income tax
consequences of the purchase, ownership, and disposition of the Securities and
is based on advice of Brown & Wood LLP, special counsel to the Trust Fund. The
summary is based upon the provisions of the Code, the regulations promulgated
thereunder, including, where applicable, proposed regulations, and the judicial
and administrative rulings and decisions now in effect, all of which are subject
to change or possible differing interpretations. The statutory provisions,
regulations, and interpretations on which this interpretation is based are
subject to change, and such a change 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, nor with certain types of investors subject to special treatment
under the federal income tax laws. This summary focuses primarily upon investors
who will hold Securities as "capital assets" (generally, property held for
investment) within the meaning of Section 1221 of the Code, but much of the
discussion is applicable to other investors as well. Prospective investors are
advised to consult their own tax advisers concerning the federal, state, local
and any other tax consequences to them of the purchase, ownership and
disposition of the Securities.
The federal income tax consequences to Holders will vary depending on
whether (i) the Securities of a Series are classified as indebtedness; (ii) an
election is made to treat the Trust Fund relating to a particular Series of
Securities as a REMIC under the Code; (iii) the Securities represent an
ownership interest in some or all of the assets included in the Trust Fund for a
Series; or (iv) an election is made to treat the Trust Fund relating to a
particular Series of Certificates as a partnership. The Prospectus Supplement
for each Series of Securities will specify how the Securities will be treated
for federal income tax purposes and will discuss whether a REMIC election, if
any, will be made with respect to such Series. Prior to issuance of each Series
of Securities, the Trust Fund shall file with the Commission a Form 8-K on
behalf of the related Trust Fund
59
<PAGE> 124
containing an opinion of Brown & Wood LLP with respect to the validity of the
information set forth under "Federal Income Tax Consequences" herein and in the
related Prospectus Supplement.
TAXATION OF DEBT SECURITIES
Interest and Acquisition Discount. Securities representing regular
interests in a REMIC ("Regular Interest Securities") are generally taxable to
Holders in the same manner as evidences of indebtedness issued by the REMIC.
Stated interest on the Regular Interest Securities will be taxable as ordinary
income and taken into account using the accrual method of accounting, regardless
of the Holder's normal accounting method. Interest (other than original issue
discount) on Securities (other than Regular Interest Securities) that are
characterized as indebtedness for federal income tax purposes will be includible
in income by Holders thereof 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 hereinafter collectively as
"Debt Securities."
Debt Securities that are Compound Interest Securities will, and certain of
the other Debt Securities may, be issued with "original issue discount" ("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
thereunder on February 2, 1994, as amended on June 11, 1996 (the "OID
Regulations"). A Holder should be aware, however, that the OID Regulations do
not adequately address certain issues relevant to prepayable securities, such as
the Debt Securities.
In general, OID, if any, will equal the difference between the stated
redemption price at maturity of a Debt Security and its issue price. A Holder of
a Debt Security must include such OID in gross income as ordinary interest
income as it accrues under a method taking into account an economic accrual of
the discount. In general, OID must be included in income in advance of the
receipt of the cash representing that income. The amount of OID on a Debt
Security will be considered to be zero if it is less than a de minimis amount
determined under the Code.
The issue price of a Debt Security is the first price at which a
substantial amount of Debt Securities of that class are sold to the public
(excluding bond houses, brokers, underwriters or wholesalers). If less than a
substantial amount of a particular class of Debt Securities is sold for cash on
or prior to the related Closing Date, the issue price for such class will be
treated as the fair market value of such class on such 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
generally will not include distributions of interest if such distributions
constitute "qualified stated interest."
Under the OID Regulations, qualified stated interest generally means
interest payable at a single fixed rate or qualified variable rate (as described
below) provided that such 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. Certain Debt Securities may provide for default
remedies in the event of late payment or nonpayment of interest. The interest on
such 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 with respect to which deferred
interest will accrue, will not constitute qualified stated interest payments, in
which case the stated redemption price at maturity of such Debt Securities
includes all distributions of interest as well as principal thereon. 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 below. In the case of a Debt Security with a
60
<PAGE> 125
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 generally have OID. Holders of Debt Securities should 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 such 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 (i.e., rounding down partial years) from the issue date until each
distribution in reduction of stated redemption price at maturity is scheduled to
be made by a fraction, the numerator of which is the amount of each distribution
included in the stated redemption price at maturity of the Debt Security and the
denominator of which is the stated redemption price at maturity of the Debt
Security. Holders generally must report de minimis OID pro rata as principal
payments are received, and such 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 treated as payable at a qualified
variable rate and not as contingent interest if, generally, (i) such interest is
unconditionally payable at least annually, (ii) the issue price of the debt
instrument does not exceed the total noncontingent principal payments and (iii)
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 such Debt Security. In
the case of Compound Interest Securities, certain Interest Weighted Securities
(as defined herein under "-- Interest Weighted Securities"), and certain of the
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 Internal Revenue Service (the "IRS") recently issued final regulations
(the "Contingent Regulations") governing the calculation of OID on instruments
having contingent interest payments. The Contingent 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 such 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 such Debt Security, the
sum of the "daily portions" of such 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 (generally the period over which interest accrues on the debt
instrument) will equal the product of the yield to maturity of the Debt Security
and the adjusted issue price of the Debt Security, reduced by any payments of
qualified stated interest. The adjusted issue price is the sum of its issue
price plus prior accruals or OID, reduced by the total payments made with
respect to such Debt Security in all prior periods, other than qualified stated
interest payments.
The amount of OID to be included in income by a Holder of a debt
instrument, such as certain Classes of the Debt Securities, that is subject to
acceleration due to prepayments on other debt obligations securing such
instruments (a "Pay-Through Security"), is computed by taking into account the
anticipated rate of prepayments assumed in pricing the debt instrument (the
"Prepayment Assumption"). The amount of OID that will accrue during an accrual
period on a Pay-Through Security is the excess (if any) of the sum of (a) the
present value of all payments remaining to be made on the Pay-Through Security
as of the close of the
61
<PAGE> 126
accrual period and (b) the payments during the accrual period of amounts
included in the stated redemption price of the Pay-Through Security, over the
adjusted issue price of the Pay-Through Security at the beginning of the accrual
period. The present value of the remaining payments is to be determined on the
basis of three factors: (i) the original yield to maturity of the Pay-Through
Security (determined on the basis of compounding at the end of each accrual
period and properly adjusted for the length of the accrual period), (ii) events
which have occurred before the end of the accrual period and (iii) the
assumption that the remaining payments will be made in accordance with the
original 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 a Pay-Through
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 Pay-Through 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.
Provident 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 such adjustments. If the IRS were to require
that OID be accrued without such adjustments, the rate of accrual of OID for a
Class of Regular Interest Securities could increase.
Certain classes of Regular Interest Securities may represent more than one
class of REMIC regular interests. Unless otherwise provided in the related
Prospectus Supplement, the Trustee intends, based on the OID Regulations, to
calculate OID on such 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 such a Holder who purchases such 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 such
OID by comparable economic accruals of portions of such excess.
Effects of Defaults and Delinquencies. Holders will be required to report
income with respect to the related 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 such amounts are uncollectible. As a result, the amount of
income (including OID) reported by a Holder of such a Security in any period
could significantly exceed the amount of cash distributed to such 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 such losses or reductions in income are
uncertain and, accordingly, Holders of Securities should consult their own tax
advisors on this point.
Interest Weighted Securities. It is not clear how income should be accrued
with respect to Regular Interest Securities or Stripped Securities (as defined
under "-- Tax Status as a Grantor Trust; General" herein) 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 ("Interest Weighted Securities"). The Issuer 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 such 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 such Holder for such Security over its
stated principal amount, if any. Under this approach, a Holder would be entitled
to amortize such premium only if it has in effect an election under Section 171
of the Code with respect to all taxable debt instruments held by such Holder, as
described below. Alternatively, the IRS could assert that an Interest Weighted
Security should be taxable under the rules governing bonds issued with
contingent
62
<PAGE> 127
payments. Such treatment may be more likely in the case of Interest Weighted
Securities that are Stripped Securities as described below. 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 (i) the yield to maturity of such Debt
Securities and (ii) in the case of Pay-Through Securities, the present value of
all payments remaining to be made on such Debt Securities, should be calculated
as if the interest index remained at its value as of the issue date of such
Securities. Because the proper method of adjusting accruals of OID on a variable
rate Debt Security is uncertain, Holders of variable rate Debt Securities should
consult their own tax advisers regarding the appropriate treatment of such
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"
(generally, the excess of the principal amount of the Debt Security over the
purchaser's purchase price) will be required to include accrued market discount
in income as ordinary income in each month, but limited to an amount not
exceeding the principal payments on the Debt Security received in that month
and, if the Securities are sold, the gain realized. Such market discount would
accrue in a manner to be provided in Treasury regulations but, until such
regulations are issued, such market discount would in general accrue either (i)
on the basis of a constant yield (in the case of a Pay-Through Security, taking
into account a prepayment assumption) or (ii) in the ratio of (a) in the case of
Securities (or in the case of a Pass-Through Security (as defined herein under
"-- Tax Status as a Grantor Trust"), as set forth below, the Loans underlying
such Security) not originally issued with OID, stated interest payable in the
relevant period to total stated interest remaining to be paid at the beginning
of the period or (b) in the case of Securities (or, in the case of a
Pass-Through Security, as described below, the Loans underlying such Security)
originally issued at a discount, OID in the relevant period to total OID
remaining to be paid.
Section 1277 of the Code provides that, regardless of the origination date
of the Debt Security (or, in the case of a Pass-Through Security, the Loans),
the excess of interest paid or accrued to purchase or carry a Security (or, in
the case of a Pass-Through Security, as described below, the underlying Loans)
with market discount over interest received on such Security is allowed as a
current deduction only to the extent such excess is greater than the market
discount that accrued during the taxable year in which such interest expense was
incurred. In general, the deferred portion of any interest expense will be
deductible when such market discount is included in income, including upon the
sale, disposition, or repayment of the Security (or in the case of a
Pass-Through Security, an underlying Loan). A Holder may elect to include market
discount in income currently as it accrues, on all market discount obligations
acquired by such Holder during the taxable year such election is made and
thereafter, in which case the interest deferral rule will not apply.
Premium. A Holder who purchases a Debt Security (other than an Interest
Weighted Security to the extent described above) at a cost greater than its
stated redemption price at maturity, generally will be considered to have
purchased the Security at a premium, which it may elect to amortize as an offset
to interest income on such 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 such Class. If a Holder makes an election
to amortize premium on a Debt Security, such election will apply to all taxable
debt instruments (including all REMIC regular interests and all pass-through
certificates representing ownership interests in a trust holding debt
obligations) held by the Holder at the beginning of the taxable year in which
the election is made, and to all taxable debt instruments acquired thereafter by
such Holder, and will be irrevocable without the consent of the IRS. Purchasers
who pay a premium for the Securities should consult their tax advisers regarding
the election to amortize premium and the method to be employed.
On June 27, 1996, the IRS issued proposed regulations (the "Amortizable
Bond Premium Regulations") dealing with amortizable bond premium. These
regulations specifically do not apply to prepayable debt
63
<PAGE> 128
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. Prospective purchasers of the
Securities should consult their tax advisors regarding the possible application
of the Amortizable Bond Premium Regulations.
Election to Treat All Interest as Original Issue Discount. The OID
Regulations permit a Holder of a Debt Security to elect to accrue all interest,
discount (including de minimis market or original issue discount) and premium
income as interest, based on a constant yield method for Debt Securities
acquired on or after April 4, 1994. If such 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
such Holder of the Debt Security acquires during the year of the election or
thereafter. Similarly, a Holder of a Debt Security that makes this election for
a Debt Security that is acquired at a premium will be deemed to have made an
election to amortize bond premium with respect to all debt instruments having
amortizable bond premium that such Holder owns or acquires. The election to
accrue interest, discount and premium on a constant yield method with respect to
a Debt Security is irrevocable.
TAXATION OF THE REMIC AND ITS HOLDERS
General. In the opinion of Brown & Wood LLP, special counsel to the Trust
Fund, 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 related Prospectus Supplement.
Except to the extent specified otherwise in a Prospectus Supplement, if a
REMIC election is made with respect to a Series of Securities, (i) Securities
held by a domestic building and loan association 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 (ii)
Securities held by a real estate investment trust will constitute "real estate
assets" within the meaning of Code Section 856(c)(6)(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 assets described in (i) or (ii) above, then a Security will
qualify for the tax treatment described in (i), (ii) or (iii) in the proportion
that such REMIC assets are qualifying assets.
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.
REMIC EXPENSES; SINGLE CLASS REMICS
As a general rule, all of the expenses of a REMIC will be taken into
account by Holders of the Residual Interest Securities. In the case of a "single
class REMIC," however, the expenses will be allocated, under Treasury
regulations, among the Holders of the Regular Interest Securities and the
Holders of the Residual Interest Securities (as defined herein) on a daily basis
in proportion to the relative amounts of income accruing to each Holder on that
day. In the case of a Holder of a Regular Interest Security who is an individual
or a "pass-through interest holder" (including certain pass-through entities,
but not including real estate investment trusts), such expenses will be
deductible only to the extent that such expenses, plus other "miscellaneous
itemized deductions" of the Holder, exceed 2% of such 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
64
<PAGE> 129
lesser of (i) 3% of the excess of adjusted gross income over the applicable
amount or (ii) 80% of the amount of itemized deductions otherwise allowable for
such taxable year. The reduction or disallowance of this deduction may have a
significant impact on the yield of the Regular Interest Security to such a
Holder. In general terms, a single class REMIC is one that either (i) 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 (ii) is similar to such a
trust and which is structured with the principal purpose of avoiding the single
class REMIC rules. Unless otherwise specified in the related Prospectus
Supplement, the expenses of the REMIC will be allocated to Holders of the
related Residual Interest Securities.
TAXATION OF THE REMIC
General. Although a REMIC is a separate entity for federal income tax
purposes, a REMIC is not generally subject to entity-level tax. Rather, the
taxable income or net loss of a REMIC is taken into account by the Holders of
Residual Interests. As described above, the Regular Interests are generally
taxable as debt of the REMIC.
Calculation of REMIC Income. The taxable income or net loss of a REMIC is
determined under an accrual method of accounting and in the same manner as in
the case of an individual, with certain adjustments. In general, the taxable
income or net loss will be the difference between (i) the gross income produced
by the REMIC's assets, including stated interest and any OID or market discount
on Loans and other assets, and (ii) 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. A Holder
of a Residual Interest Security that is an individual or a "pass-through
interest holder" (including certain pass-through entities, but not including
real estate investment trusts) will be unable to deduct servicing fees payable
on the Loans or other administrative expenses of the REMIC for a given taxable
year, to the extent that such expenses, when aggregated with such Holder's other
miscellaneous itemized deductions for that year, do not exceed two percent of
such 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 Startup
Day (generally, the day that the interests are issued). That 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 such 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 such discount in income, but without regard to the de minimis
rules. See "Taxation of Debt Securities" above. However, a REMIC that acquires
Loans at a market discount must include such 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 such date, it is possible that
such premium may be recovered in proportion to payments of Loan principal.
Prohibited Transactions and Contributions Tax. The REMIC will be subject
to a 100% tax on any net income derived from a "prohibited transaction." For
this purpose, net income will be calculated without taking into account any
losses from prohibited transactions or any deductions attributable to any
prohibited transaction that resulted in a loss. In general, prohibited
transactions include: (i) subject to limited exceptions, the sale or other
disposition of any qualified mortgage transferred to the REMIC; (ii) subject to
limited
65
<PAGE> 130
exceptions, the sale or other disposition of a cash flow investment; (iii) the
receipt of any income from assets not permitted to be held by the REMIC pursuant
to the Code; or (iv) the receipt of any fees or other compensation for services
rendered by the REMIC. It is anticipated that a REMIC will not engage in any
prohibited transactions in which it would recognize a material amount of net
income. In addition, subject to a number of exceptions, a tax is imposed at the
rate of 100% on amounts contributed to a REMIC after the close of the
three-month period beginning on the Startup Day. The Holders of Residual
Interest Securities will generally be responsible for the payment of any such
taxes imposed on the REMIC. To the extent not paid by such Holders or otherwise,
however, such taxes will be paid out of the Trust Fund and will be allocated pro
rata to all outstanding classes of Securities of such REMIC.
TAXATION OF HOLDERS OF RESIDUAL INTEREST SECURITIES
The Holder of a Security representing a Residual Interest (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 in which
such 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 such quarter, and by allocating that
amount among the Holders (on such day) of the Residual Interest Securities in
proportion to their respective holdings on such 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 such income or loss. The reporting
of taxable income without corresponding distributions could occur, for example,
in certain 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 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 certain REMIC issues as a result of the fact
that interest expense deductions, as a percentage of outstanding principal on
Regular Interest Securities, will typically increase over time as lower yielding
Securities are paid, whereas interest income with respect to Loans will
generally remain constant over time as a percentage of Loan principal.
In any event, because the Holder of a Residual Interest is taxed on the net
income of the REMIC, the taxable income derived from a Residual Interest
Security in a given taxable year will not be equal to the taxable income
associated with investment in a corporate bond or stripped instrument having
similar cash flow characteristics and pretax yield. Therefore, the after-tax
yield on the Residual Interest Security may be less than that of such 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 such loss arises. A Holder's basis in a
Residual Interest Security will initially equal such Holder's purchase price,
and will subsequently be increased by the amount of the REMIC's taxable income
allocated to the Holder, and decreased (but not below zero) by the amount of
distributions made and the amount of the REMIC's net loss allocated to the
Holder. Any disallowed loss may be carried forward indefinitely, but may be used
only to offset income of the REMIC generated by the same REMIC. The ability of
Holders of Residual Interest Securities to deduct net losses may be subject to
additional limitations under the Code, as to which such Holders should consult
their tax advisers.
Distributions. Distributions on a Residual Interest Security (whether at
their scheduled times or as a result of prepayments) will generally not result
in any additional taxable income or loss to a Holder of a Residual Interest
Security. If the amount of such 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 such
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 such Holder's adjusted
basis in the Residual Interest Security at the time of such sale or exchange.
Except to the
66
<PAGE> 131
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 such 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 such
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, such holder's excess inclusion income will
be treated as unrelated business taxable income of such Holder. In addition,
under Treasury regulations yet to be issued, if a real estate investment trust,
a regulated investment company, a common trust fund, or certain cooperatives
were to own a Residual Interest Security, a portion of dividends (or other
distributions) paid by the real estate investment trust (or other entity) would
be treated as excess inclusion income. If a Residual Security is owned by a
foreign person, excess inclusion income is subject to tax at a rate of 30% which
may not be reduced by treaty, is not eligible for treatment as "portfolio
interest" and is subject to certain additional limitations. See "Tax Treatment
of Foreign Investors." The Small Business Job Protection Act of 1996 has
eliminated the special rule permitting Section 593 institutions ("thrift
institutions") to use net operating losses and other allowable deductions to
offset their excess inclusion income from REMIC residual certificates that have
"significant value" within the meaning of the REMIC Regulations, effective for
taxable years beginning after December 31, 1995, except with respect to residual
certificates 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 of excess inclusions on the alternative minimum
taxable income of a residual Holder. First, alternative minimum taxable income
for such 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 than
excess inclusions for the year. Third, the amount of any alternative minimum tax
net operating loss deductions must be computed without regard to any excess
inclusions. These rules are effective for tax years beginning after December 31,
1986, unless a residual Holder elects to have such rules apply only to tax years
beginning after August 20, 1996.
The excess inclusion portion of a REMIC's income is generally equal to the
excess, if any, of REMIC taxable income for the quarterly period allocable to a
Residual Interest Security, over the daily accruals for such quarterly period of
(i) 120% of the long-term applicable federal rate on the Startup Day multiplied
by (ii) the adjusted issue price of such Residual Interest Security at the
beginning of such 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 certain circumstances, 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 by any "Disqualified Organization."
Disqualified Organizations include the United States, any State or political
subdivision thereof, 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 such
entity is not subject to tax on its unrelated business income. Accordingly, the
applicable Pooling and Servicing 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
67
<PAGE> 132
an affidavit representing and warranting that it is neither a Disqualified
Organization nor an agent or nominee acting on behalf of a Disqualified
Organization.
If a Residual Interest Security is transferred to a Disqualified
Organization (in violation of the restrictions set forth above), a substantial
tax will be imposed on the transferor of such 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," as described below, a transfer of a 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 (i) 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 (ii) 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. 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 certain transfers of
Residual Interests 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 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 related Prospectus Supplement if a REMIC or
partnership election is not made, in the opinion of Brown & Wood LLP, special
counsel to Provident, the Trust Fund 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 (the Securities of such Series, "Pass-Through Securities"). In some
Series there will be no separation of the principal and interest payments on the
Loans. In such circumstances, a Holder will be considered to have purchased a
pro rata undivided interest in each of the Loans. In other cases ("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 fees
to the Trustee and the Servicer and similar fees (collectively, the "Servicing
Fees")), at the same time and in the same manner as such 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, such income 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, such income will consist of a pro rata
share of the income derived from each stripped bond or stripped coupon in
68
<PAGE> 133
which the Holder owns an interest. The holder of a Security will generally be
entitled to deduct such Servicing Fees under Section 162 or Section 212 of the
Code to the extent that such Servicing Fees represent "reasonable" compensation
for the services rendered by the Trustee and the 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
such Holder's regular tax liability only to the extent that such fees, when
added to other miscellaneous itemized deductions, exceed 2% of adjusted gross
income and may not be deductible to any extent in computing such 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 amount will be
adjusted for inflation) will be reduced by the lesser of (i) 3% of the excess of
adjusted gross income over the applicable amount or (ii) 80% of the amount of
itemized deductions otherwise allowable for such 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, unless otherwise specified
in the related Prospectus Supplement, 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 currently deductible
pursuant to applicable Code provisions. Any market discount or premium on a Loan
will be includible in income, generally in the manner described above, except
that in the case of Pass-Through Securities, market discount is calculated with
respect to the Loans underlying the Certificate, rather than with respect to 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 (generally, the
excess of the principal amount of the Loan over the purchaser's 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 generally will be
required to allocate the portion of such 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 such principal payment
is made. Such treatment would generally 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 certain payments of both
interest and principal. Certain Stripped Securities ("Ratio Strip Securities")
may represent a right to receive differing percentages of both the interest and
principal on each Loan. Pursuant to 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
69
<PAGE> 134
computing OID, a stripped bond or a stripped coupon is treated as a debt
instrument issued on the date that such 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 such stripped
interest.
Servicing Fees in excess of reasonable Servicing Fees ("Excess Servicing
Fees") will be treated under the stripped bond rules. If the Excess Servicing
Fees are less than 100 basis points (i.e., 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 above for Pay-Through
Securities (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 such period. However, the 1986
Act does not, absent Treasury regulations, appear specifically to cover
instruments such as the Stripped Securities which technically represent
ownership interests in the underlying Loans, rather than being debt instruments
"secured by" those Loans. For tax years beginning after August 5, 1997, the
Taxpayer Relief Act of 1997 may allow use of the Cash Flow Bond Method with
respect to the Strip Securities and other Pass-Through Securities because it
provides that such method applies to any pool of debt instruments the yield on
which may be affected by prepayments. Nevertheless, it is believed that the Cash
Flow Bond Method is a reasonable method of reporting income for such Securities,
and it is expected that OID will be reported on that basis unless otherwise
specified in the related Prospectus Supplement. In applying the calculation to
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.
Under certain circumstances, 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 above are not the only possible interpretations of
the applicable Code provisions. Among other possibilities, the IRS could contend
that (i) in certain 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; (ii) the non-Interest
Weighted Securities are subject to the contingent payment provisions of the
Contingent Regulations; or (iii) 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, potential purchasers are urged to 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 in such circumstances. 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)(6)(B) of the
Code and "loans secured by an interest in real property" within the meaning of
70
<PAGE> 135
Section 7701(a)(19)(C)(v) of the Code; and 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.
SALE OR EXCHANGE
Subject to the discussion below with respect to Trust Funds as to which a
partnership election is made, a Holder's tax basis in its Security is the price
such 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,
will generally 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 (i) the amount that
would have been includible in the Holder's income if the yield on such Regular
Interest Security had equaled 110% of the applicable federal rate as of the
beginning of such Holder's holding period, over the amount of ordinary income
actually recognized by the Holder with respect to such Regular Interest
Security. The maximum tax rate on ordinary income for individual taxpayers is
39.6% and the maximum tax rate on long-term capital gains for such taxpayers is
28%. The maximum tax rate on both ordinary income and long-term capital gains of
corporate taxpayers is 35%. The Taxpayer Relief Act of 1997 reduces the maximum
rates on long-term capital gains recognized on capital assets held by individual
taxpayers for more than eighteen months as of the date of disposition (and would
further reduce the maximum rates on such gains in the year 2001 and thereafter
for certain individual taxpayers who meet specified conditions). Prospective
investors should consult their own tax advisors concerning these tax law
changes.
MISCELLANEOUS TAX ASPECTS
Backup Withholding. Subject to the discussion below with respect to Trust
Funds as to which a partnership election is made, a Holder, other than a Holder
of a Residual Interest Security, may, under certain circumstances, be subject to
"backup withholding" at a rate of 31% with respect to distributions or the
proceeds of a sale of certificates to or through brokers that represent interest
or OID on the Securities. This withholding generally applies if the Holder of a
Security (i) fails to furnish the Trustee with its taxpayer identification
number ("TIN"); (ii) furnishes the Trustee an incorrect TIN; (iii) fails to
report properly interest, dividends or other "reportable payments" as defined in
the Code; or (iv) under certain circumstances, fails to provide the Trustee or
such Holder's securities broker with a certified statement, signed under penalty
of perjury, that the TIN provided is its correct number and that the Holder is
not subject to backup withholding. Backup withholding will not apply, however,
with respect to certain payments made to Holders, including payments to certain
exempt recipients (such as exempt organizations) and to certain Nonresidents (as
defined below). Holders should consult their tax advisers as to their
qualification for exemption from backup withholding and the procedure for
obtaining the exemption.
The Trustee will report to the Holders and to the Servicer for each
calendar year the amount of any "reportable payments" during such year and the
amount of tax withheld, if any, with respect to payments on the Securities.
TAX TREATMENT OF FOREIGN INVESTORS
Subject to the discussion below with respect to Trust Funds 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
("Nonresidents"), such interest will
71
<PAGE> 136
normally qualify as portfolio interest (except where (i) the recipient is a
holder, directly or by attribution, of 10% or more of the capital or profits
interest in the issuer, or (ii) 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 such interest
payments. These provisions supersede the generally applicable provisions of
United States law that would otherwise require the issuer to withhold at a 30%
rate (unless such 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, generally be subject to the regular
United States income tax.
Payments to Holders of Residual Interest Securities who are foreign persons
will generally be treated as interest for purposes of the 30% (or lower treaty
rate) United States withholding tax. Holders should assume that such income does
not qualify for exemption from United States withholding tax as "portfolio
interest." It is clear that, to the extent that a payment represents a portion
of REMIC taxable income that constitutes excess inclusion income, a Holder of a
Residual Interest Security will not be entitled to an exemption from or
reduction of the 30% (or lower treaty rate) withholding tax rule. If the
payments are subject to United States withholding tax, they generally will be
taken into account for withholding tax purposes only when paid or distributed
(or when the Residual Interest Security is disposed of). The Treasury has
statutory authority, however, to promulgate regulations which would require such
amounts to be taken into account at an earlier time in order to prevent the
avoidance of tax. Such regulations could, for example, require withholding prior
to the distribution of cash in the case of Residual Interest Securities that do
not have significant value. Under the REMIC Regulations, if a Residual Interest
Security has tax avoidance potential, a transfer of a Residual Interest Security
to a 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 such 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 FUND AS A PARTNERSHIP
Brown & Wood LLP, special counsel to Provident, will deliver its opinion
that a Trust Fund for which a partnership election is made will not be an
association (or publicly traded partnership) taxable as a corporation for
federal income tax purposes. This opinion will be based on the assumption that
the terms of the Trust Agreement and related documents will be complied with,
and on counsel's conclusions that the nature of the income of the Trust Fund
will exempt it from the rule that certain publicly traded partnerships are
taxable as corporations or the issuance of the Securities has been structured as
a private placement under an IRS safe harbor, so that the Trust Fund will not be
characterized as a publicly traded partnership taxable as a corporation.
If the Trust Fund were taxable as a corporation for federal income tax
purposes, the Trust Fund would be subject to corporate income tax on its taxable
income. The Trust Fund's taxable income would include all its income, possibly
reduced by its interest expense on the Notes. Any such 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 such tax that is unpaid by the Trust Fund.
72
<PAGE> 137
TAX CONSEQUENCES TO HOLDERS OF THE NOTES
Treatment of the Notes as Indebtedness. The Trust Fund will agree, and the
Noteholders will agree by their purchase of Notes, to treat the Notes as debt
for federal income tax purposes. Brown & Wood LLP, special counsel to Provident,
will, except as otherwise provided in the related Prospectus Supplement, advise
Provident 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 such Notes will
be disclosed in the applicable Prospectus Supplement.
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 such
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 such 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
will generally 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 such Note (a "Short-Term Note") may be subject to special
rules. An accrual basis Holder of a Short-Term Note (and certain cash method
Holders, including regulated investment companies, as set forth in Section 1281
of the Code) generally 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, in general, 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. Certain
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 such 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 such Noteholder
with respect to such Note. Any such 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 generally 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 (a
"foreign person") generally will be considered "portfolio interest", and
generally will not be subject to United States federal income tax and
withholding tax if the interest is not effectively connected with the conduct of
a trade or business within the United States by
73
<PAGE> 138
the foreign person and the foreign person (i) is not actually or constructively
a "10 percent shareholder" of the Trust Fund or Provident (including a Holder of
10% of the outstanding Certificates) or a "controlled foreign corporation" with
respect to which the Trust Fund or Provident is a "related person" within the
meaning of the Code and (ii) provides the Owner 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-8 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. If a Note is held through a
securities clearing organization or certain other financial institutions, the
organization or institution may provide the relevant signed statement to the
withholding agent; in that case, however, the signed statement must be
accompanied by a Form W-8 or substitute form provided by the foreign person that
owns the Note. If such 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 pursuant to 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, provided that (i) such gain is not
effectively connected with the conduct of a trade or business in the United
States by the foreign person and (ii) 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.
Backup Withholding. Each Holder of a Note (other than an exempt Holder
such as a corporation, tax-exempt organization, qualified pension and
profit-sharing trust, individual retirement account or nonresident alien who
provides certification as to status as a nonresident) will be required to
provide, under penalties of perjury, a certificate 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 Fund 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 Brown & Wood LLP, special counsel to the Trust Fund, the IRS successfully
asserted that one or more of the Notes did not represent debt for federal income
tax purposes, the Trust Fund might be treated as a publicly traded partnership
that would not be taxable as a corporation because it would meet certain
qualifying income tests. Nonetheless, treatment of the Notes as equity interests
in such a publicly traded partnership could have adverse tax consequences to
certain Holders. For example, income to certain tax-exempt entities (including
pension funds) would be "unrelated business taxable income", income to foreign
Holders generally would be subject to U.S. tax and U.S. tax return filing and
withholding requirements, and individual Holders might be subject to certain
limitations on their ability to deduct their share of the Trust Fund's expenses.
TAX CONSEQUENCES TO HOLDERS OF THE CERTIFICATES
Treatment of the Trust Fund as a Partnership. The Trust Fund and the
Master Servicer will agree, and the Certificateholders will agree by their
purchase of Certificates, to treat the Trust Fund as a partnership for purposes
of federal and state income tax, franchise tax and any other tax measured in
whole or in part by income, with the assets of the partnership being the assets
held by the Trust Fund, the partners of the partnership being the
Certificateholders, and the Notes being debt of the partnership. However, the
proper characterization of the arrangement involving the Trust Fund, the
Certificates, the Notes, the Trust Fund and the Servicer is not clear because
there is no authority on transactions closely comparable to that contemplated
herein.
A variety of alternative characterizations are possible. For example,
because the Certificates have certain features characteristic of debt, the
Certificates might be considered debt of the Trust Fund. Any such
characterization would not result in materially adverse tax consequences to
Certificateholders as compared to the consequences from treatment of the
Certificates as equity in a partnership, described below. The following
discussion assumes that the Certificates represent equity interests in a
partnership.
74
<PAGE> 139
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 such Certificates will be disclosed in the
applicable Prospectus Supplement.
Partnership Taxation. As a partnership, the Trust Fund will not be subject
to federal income tax. Rather, each Certificateholder will be required to
separately take into account such Holder's allocated share of income, gains,
losses, deductions and credits of the Trust Fund. The Trust Fund's income will
consist primarily of interest and finance charges earned on the Loans (including
appropriate adjustments for market discount, OID and bond premium) and any gain
upon collection or disposition of Loans. The Trust Fund'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 partnership agreement (here, the
Trust Agreement and related documents). The Trust Agreement will provide, in
general, that the Certificateholders will be allocated taxable income of the
Trust Fund for each month equal to the sum of (i) the interest that accrues on
the Certificates in accordance with their terms for such month, including
interest accruing at the Pass-Through Rate for such month and interest on
amounts previously due on the Certificates but not yet distributed; (ii) any
Trust Fund income attributable to discount on the Loans that corresponds to any
excess of the principal amount of the Certificates over their initial issue
price (iii) prepayment premium payable to the Certificateholders for such month;
and (iv) any other amounts of income payable to the Certificateholders for such
month. Such allocation will be reduced by any amortization by the Trust Fund 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 Fund will be allocated to Provident. Based on the economic arrangement of
the parties, this approach for allocating Trust Fund income should be
permissible under applicable Treasury regulations, although no assurance can be
given that the IRS would not require a greater amount of income to be allocated
to Certificateholders. Moreover, even under the foregoing method of allocation,
Certificateholders may be allocated income equal to the entire Pass-Through Rate
plus the other items described above even though the Trust Fund might not have
sufficient cash to make current cash distributions of such amount. Thus, cash
basis Holders will in effect be required to report income from the Certificates
on the accrual basis and Certificateholders may become liable for taxes on Trust
Fund income even if they have not received cash from the Trust Fund to pay such
taxes. In addition, because tax allocations and tax reporting will be done on a
uniform basis for all Certificateholders but Certificateholders may be
purchasing Certificates at different times and at different prices,
Certificateholders may be required to report on their tax returns taxable income
that is greater or less than the amount reported to them by the Trust Fund.
All of the taxable income allocated to a Certificateholder that is a
pension, profit sharing or employee benefit plan or other tax-exempt entity
(including an individual retirement account) will constitute "unrelated business
taxable income" generally taxable to a Holder under the Code.
An individual taxpayer's share of expenses of the Trust Fund (including
fees to the Servicer but not interest expense) would be miscellaneous itemized
deductions. Such deductions might be disallowed to the individual in whole or in
part and might result in such Holder being taxed on an amount of income that
exceeds the amount of cash actually distributed to such Holder over the life of
the Trust Fund.
The Trust Fund intends to make all tax calculations relating to income and
allocations to Certificateholders on an aggregate basis. If the IRS were to
require that such calculations be made separately for each Loan, the Trust Fund
might be required to incur additional expense but it is believed that there
would not be a material adverse effect on Certificateholders.
Discount and Premium. It is believed that the Loans were not issued with
OID, and, therefore, the Trust Fund should not have OID income. However, the
purchase price paid by the Trust Fund 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
75
<PAGE> 140
Fund will make this calculation on an aggregate basis, but might be required to
recompute it on a Loan by Loan basis.)
If the Trust Fund acquires the Loans at a market discount or premium, the
Trust Fund will elect to include any such discount in income currently as it
accrues over the life of the Loans or to offset any such premium against
interest income on the Loans. As indicated above, a portion of such market
discount income or premium deduction may be allocated to Certificateholders.
Section 708 Termination. Pursuant to final Treasury regulations issued May
9, 1997 under section 708 of the Code a sale or exchange of 50 percent or more
of the capital and profits in the Trust Fund within a 12-month period would
cause a deemed contribution of assets of the Trust Fund (the "old partnership")
to a new partnership (the "new partnership") in exchange for interests in the
new partnership. Such interests would be deemed distributed to the partners of
the old partnership in liquidation thereof, which would not constitute a sale or
exchange.
Disposition of Certificates. Generally, capital gain or loss will be
recognized on a sale of Certificates in an amount equal to the difference
between the amount realized and the seller's tax basis in the Certificates sold.
A Certificateholder's tax basis in a Certificate will generally equal the
Holder's cost increased by the Holder's share of Trust Fund income (includible
in income) and decreased by any distributions received with respect to such
Certificate. In addition, both the tax basis in the Certificates and the amount
realized on a sale of a Certificate would include the Holder's share of the
Notes and other liabilities of the Trust Fund. A Holder acquiring Certificates
at different prices may be required to maintain a single aggregate adjusted tax
basis in such Certificates, and, upon sale or other disposition of some of the
Certificates, allocate a portion of such 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 would generally be treated as
ordinary income to the Holder and would give rise to special tax reporting
requirements. The Trust Fund does not expect to have any other assets that would
give rise to such special reporting requirements. Thus, to avoid those special
reporting requirements, the Trust Fund will elect to include market discount in
income as it accrues.
If a Certificateholder is required to recognize an aggregate amount of
income (not including income attributable to disallowed itemized deductions
described above) over the life of the Certificates that exceeds the aggregate
cash distributions with respect thereto, such excess will generally give rise to
a capital loss upon the retirement of the Certificates.
Allocations Between Transferors and Transferees. In general, the Trust
Fund's taxable income and losses will be determined monthly and the tax items
for a particular calendar month will be apportioned among the Certificateholders
in proportion to the principal amount of Certificates owned by them as of the
close of the last day of such 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 such a monthly convention may not be permitted by existing
regulations. If a monthly convention is not allowed (or only applies to
transfers of less than all of the partner's interest), taxable income or losses
of the Trust Fund might be reallocated among the Certificateholders. The Trust
Fund's method of allocation between transferors and transferees may be revised
to conform to a method permitted by future regulations.
Section 754 Election. In the event that a Certificateholder sells its
Certificates at a profit (loss), the purchasing Certificateholder will have a
higher (lower) basis in the Certificates than the selling Certificateholder had.
The tax basis of the Trust Fund's assets will not be adjusted to reflect that
higher (or lower) basis unless the Trust Fund were to file an election under
Section 754 of the Code. In order to avoid the administrative complexities that
would be involved in keeping accurate accounting records, as well as potentially
onerous information reporting requirements, the Trust Fund will not make such
election. As a result, Certificateholders might be allocated a greater or lesser
amount of Trust Fund income than would be appropriate based on their own
purchase price for Certificates.
76
<PAGE> 141
Administrative Matters. The Owner Trustee is required to keep or have kept
complete and accurate books of the Trust Fund. Such books will be maintained for
financial reporting and tax purposes on an accrual basis and the fiscal year of
the Trust Fund will be the calendar year. The Trustee will file a partnership
information return (IRS Form 1065) with the IRS for each taxable year of the
Trust Fund and will report each Certificateholder's allocable share of items of
Trust Fund income and expense to Holders and the IRS on Schedule K-1. The Trust
Fund will provide the Schedule K-1 information to nominees that fail to provide
the Trust Fund with the information statement described below and such nominees
will be required to forward such information to the beneficial owners of the
Certificates. Generally, Holders must file tax returns that are consistent with
the information return filed by the Trust Fund or be subject to penalties unless
the Holder notifies the IRS of all such inconsistencies.
Under Section 6031 of the Code, any person that holds Certificates as a
nominee at any time during a calendar year is required to furnish the Trust Fund
with a statement containing certain information on the nominee, the beneficial
owners and the Certificates so held. Such information includes (i) the name,
address and taxpayer identification number of the nominee and (ii) as to each
beneficial owner (x) the name, address and identification number of such person,
(y) whether such person is a United States person, a tax-exempt entity or a
foreign government, an international organization, or any wholly owned agency or
instrumentality of either of the foregoing, and (z) certain information on
Certificates that were held, bought or sold on behalf of such person throughout
the year. In addition, brokers and financial institutions that hold Certificates
through a nominee are required to furnish directly to the Trust Fund information
as to themselves and their ownership of Certificates. A clearing agency
registered under Section 17A of the Exchange Act is not required to furnish any
such information statement to the Trust Fund. The information referred to above
for any calendar year must be furnished to the Trust Fund on or before the
following January 31. Nominees, brokers and financial institutions that fail to
provide the Trust Fund with the information described above may be subject to
penalties.
Provident or the Trustee will be designated as the tax matters partner in
the related Trust Agreement and, as such, will be responsible for representing
the Certificateholders in any dispute with the IRS. The Code provides for
administrative examination of a partnership as if the partnership were a
separate and distinct taxpayer. Generally, the statute of limitations for
partnership items does not expire before three years after the date on which the
partnership information return is filed. Any adverse determination following an
audit of the return of the Trust Fund by the appropriate taxing authorities
could result in an adjustment of the returns of the Certificateholders, and,
under certain circumstances, a Certificateholder may be precluded from
separately litigating a proposed adjustment to the items of the Trust Fund. An
adjustment could also result in an audit of a Certificateholder's returns and
adjustments of items not related to the income and losses of the Trust Fund.
Tax Consequences to Foreign Certificateholders. It is not clear whether
the Trust Fund would be considered to be engaged in a trade or business in the
United States for purposes of federal withholding taxes with respect to non-U.S.
persons because there is no clear authority dealing with that issue under facts
substantially similar to those described herein. Although it is not expected
that the Trust Fund would be engaged in a trade or business in the United States
for such purposes, the Trust Fund will withhold as if it were so engaged in
order to protect the Trust Fund from possible adverse consequences of a failure
to withhold. The Trust Fund expects to withhold on the portion of its taxable
income that is allocable to foreign Certificateholders pursuant to Section 1446
of the Code, as if such income were effectively connected to a U.S. trade or
business, at a rate of 35% for foreign holders that are taxable as corporations
and 39.6% for all other foreign holders. Subsequent adoption of Treasury
regulations or the issuance of other administrative pronouncements may require
the Trust Fund to change its withholding procedures. In determining a Holder's
withholding status, the Trust Fund may rely on IRS Form W-8, 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 or any political subdivision thereof, other than a
partnership that is not treated as a United States person under any applicable
Treasury regulations, 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
77
<PAGE> 142
trust and one or more United States persons have the authority to control all
substantial decisions of the trust. Notwithstanding the preceding sentence, to
the extent provided in Treasury regulations, certain trusts in existence on
August 20, 1996, and treated as United States persons prior to such date, that
elect to continue to be treated as United States persons also will be a U.S.
Holder.
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 Fund's income. Each foreign Holder must
obtain a taxpayer identification number from the IRS and submit that number to
the Trust Fund on Form W-8 in order to assure appropriate crediting of the taxes
withheld. A foreign Holder generally would be entitled to file with the IRS a
claim for refund with respect to taxes withheld by the Trust Fund taking the
position that no taxes were due because the Trust Fund was not engaged in a U.S.
trade or business. However, interest payments made (or accrued) to a
Certificateholder who is a foreign person generally will be considered
guaranteed payments to the extent such payments are determined without regard to
the income of the Trust Fund. If these interest payments are properly
characterized as guaranteed payments, then the interest 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 pursuant to an applicable treaty. In such case, a foreign
Holder would only be entitled to claim a refund for that portion of the taxes in
excess of the taxes that should be withheld with respect to the guaranteed
payments.
Backup Withholding. Distributions made on the Certificates and proceeds
from the sale of the Certificates will be subject to a "backup" withholding tax
of 31% if, in general, the Certificateholder fails to comply with certain
identification procedures, unless the Holder is an exempt recipient under
applicable provisions of the Code.
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, potential
investors should consult their own tax advisors with respect to the various
state and local tax consequences of an investment in the Securities.
ERISA CONSIDERATIONS
The following describes certain considerations under ERISA and the Code,
which apply only to Securities of a Series that are not divided into subclasses.
If Securities are divided into subclasses, the related Prospectus Supplement
will contain information concerning considerations relating to ERISA and the
Code that are applicable to such Securities.
ERISA imposes requirements on employee benefit plans (and on certain other
retirement plans and arrangements, including individual retirement accounts and
annuities, Keogh plans and collective investment funds and separate accounts in
which such plans, accounts or arrangements are invested) (collectively "Plans")
subject to ERISA and on persons who are fiduciaries with respect to such Plans.
Generally, ERISA applies to investments made by Plans. Among other things, ERISA
requires that the assets of Plans be held in trust and that the trustee, or
other duly authorized fiduciary, have exclusive authority and discretion to
manage and control the assets of such Plans. ERISA also imposes certain duties
on persons who are fiduciaries of Plans. Under ERISA, any person who exercises
any authority or control respecting the management or disposition of the assets
of a Plan is considered to be a fiduciary of such Plan (subject to certain
exceptions not here relevant). Certain employee benefit plans, such as
governmental plans (as defined in ERISA Section 3(32)) and, if no election has
been made under Section 410(d) of the Code, church plans (as defined in ERISA
Section 3(33)), are not subject to ERISA requirements. Accordingly, assets of
such plans may be invested in Securities without regard to the ERISA
considerations described above and below, subject to the provisions of
applicable state law. Any such plan which is qualified and exempt from taxation
under Code
78
<PAGE> 143
Sections 401(a) and 501(a), however, is subject to the prohibited transaction
rules set forth in Code Section 503.
On November 13, 1986, the United States Department of Labor (the "DOL")
issued final regulations concerning the definition of what constitutes the
assets of a Plan. (Labor Reg. Section 2510.3-101). Under this regulation, the
underlying assets and properties of corporations, partnerships and certain other
entities in which a Plan makes an "equity" investment could be deemed for
purposes of ERISA to be assets of the investing Plan in certain circumstances.
However, the regulation provides that, generally, the assets of a corporation or
partnership in which a Plan invests will not be deemed for purposes of ERISA to
be assets of such Plan if the equity interest acquired by the investing Plan is
a publicly-offered security. A publicly-offered security, as defined in the
Labor Reg. Section 2510.3-101, is a security that is widely held, freely
transferable and registered under the Securities Exchange Act of 1934, as
amended.
In addition to the imposition of general fiduciary standards of investment
prudence and diversification, ERISA prohibits a broad range of transactions
involving Plan assets and persons ("Parties in Interest") having certain
specified relationships to a Plan and imposes additional prohibitions where
Parties in Interest are fiduciaries with respect to such Plan. Because the Loans
may be deemed Plan assets of each Plan that purchases Securities, an investment
in the Securities by a Plan might be a prohibited transaction under ERISA
Sections 406 and 407 and subject to an excise tax under Code Section 4975 unless
a statutory or administrative exemption applies.
In Prohibited Transaction Exemption 83-1 ("PTE 83-1"), which amended
Prohibited Transaction Exemption 81-7, the DOL exempted from ERISA's prohibited
transaction rules certain transactions relating to the operation of residential
mortgage pool investment trusts and the purchase, sale and holding of "mortgage
pool pass-through certificates" in the initial issuance of such certificates.
PTE 83-1 permits, subject to certain conditions, transactions which might
otherwise be prohibited between Plans and Parties in Interest with respect to
those Plans related to the origination, maintenance and termination of mortgage
pools consisting of mortgage loans secured by first or second mortgages or deeds
of trust on single-family residential property, and the acquisition and holding
of certain mortgage pool pass-through certificates representing an interest in
such mortgage pools by Plans. If the general conditions (discussed below) of PTE
83-1 are satisfied, investments by a Plan in Securities that represent interests
in a Pool consisting of Loans ("Single Family Securities") will be exempt from
the prohibitions of ERISA Sections 406(a) and 407 (relating generally to
transactions with Parties in Interest who are not fiduciaries) if the Plan
purchases the Single Family Securities at no more than fair market value and
will be exempt from the prohibitions of ERISA Sections 406(b)(1) and (2)
(relating generally to transactions with fiduciaries) if, in addition, the
purchase is approved by an independent fiduciary, no sales commission is paid to
the pool sponsor, the Plan does not purchase more than 25% of all Single Family
Securities, and at least 50% of all Single Family Securities are purchased by
persons independent of the pool sponsor or pool trustee. PTE 83-1 does not
provide an exemption for transactions involving Subordinate Securities.
Accordingly, no transfer of a Subordinate Security or a Security which is not a
Single Family Security may be made to a Plan unless specified in the related
Prospectus Supplement.
The discussion in this and the next succeeding paragraph applies only to
Single Family Securities. Provident believes that, for purposes of PTE 83-1, the
term "mortgage pass-through certificate" would include: (i) Securities issued in
a Series consisting of only a single class of Securities; and (ii) Securities
issued in a Series in which there is only one class of such Securities; provided
that the Securities in the case of clause (i), or the Securities in the case of
clause (ii), evidence the beneficial ownership of both a specified percentage of
future interest payments (greater than 0%) and a specified percentage (greater
than 0%) of future principal payments on the Loans. It is not clear whether a
class of Securities that evidences the beneficial ownership in a Trust Fund
divided into Loan groups, beneficial ownership of a specified percentage of
interest payments only or principal payments only, or a notional amount of
either principal or interest payments, or a class of Securities entitled to
receive payments of interest and principal on the Loans only after payments to
other classes or after the occurrence of certain specified events would be a
"mortgage pass-through certificate" for purposes of PTE 83-1.
79
<PAGE> 144
PTE 83-1 sets forth three general conditions which must be satisfied for
any transaction to be eligible for exemption: (i) the maintenance of a system of
insurance or other protection for the pooled mortgage loans and property
securing such loans, and for indemnifying Securityholders against reductions in
pass-through payments due to property damage or defaults in loan payments in an
amount not less than the greater of one percent of the aggregate principal
balance of all covered pooled mortgage loans or the principal balance of the
largest covered pooled mortgage loan; (ii) the existence of a pool trustee who
is not an affiliate of the pool sponsor; and (iii) a limitation on the amount of
the payment retained by the pool sponsor, together with other funds inuring to
its benefit, to not more than adequate consideration for selling the mortgage
loans plus reasonable compensation for services provided by the pool sponsor to
the pool. Provident believes that the first general condition referred to above
will be satisfied with respect to the Securities in a Series issued without a
subordination feature, or the Securities only in a Series issued with a
subordination feature, provided that the subordination and Reserve Account,
subordination by shifting of interests, the pool insurance or other form of
credit enhancement described under "Credit Enhancement" herein (such
subordination, pool insurance or other form of credit enhancement being the
system of insurance or other protection referred to above) with respect to a
Series of Securities is maintained in an amount not less than the greater of one
percent of the aggregate principal balance of the Loans or the principal balance
of the largest Loan. See "Description of the Securities" herein. In the absence
of a ruling that the system of insurance or other protection with respect to a
Series of Securities satisfies the first general condition referred to above,
there can be no assurance that these features will be so viewed by the DOL. The
Trustee will not be affiliated with Provident.
Each Plan fiduciary who is responsible for making the investment decisions
whether to purchase or commit to purchase and to hold Single Family Securities
must make its own determination as to whether the first and third general
conditions, and the specific conditions described briefly in the preceding
paragraphs, of PTE 83-1 have been satisfied, or as to the availability of any
other prohibited transaction exemptions. Each Plan fiduciary should also
determine whether, under the general fiduciary standards of investment prudence
and diversification, an investment in the Securities is appropriate for the
Plan, taking into account the overall investment policy of the Plan and the
composition of the Plan's investment portfolio.
The DOL has granted to certain underwriters individual administrative
exemptions (the "Underwriter Exemptions") from certain 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 certain
receivables, loans and other obligations that meet the conditions and
requirements of the Underwriter Exemptions.
While each Underwriter Exemption is an individual exemption separately
granted to a specific underwriter, the terms and conditions which generally
apply to the Underwriter Exemptions are substantially the following:
(1) the acquisition of the certificates by a Plan is on terms
(including the price for the certificates) that are at least as favorable
to the Plan as they would be in an arm's-length transaction with an
unrelated party;
(2) the rights and interests evidenced by the certificates acquired by
the Plan are not subordinated to the rights and interests evidenced by
other certificates of the trust fund;
(3) the certificates required by the Plan have received a rating at
the time of such acquisition that is one of the three highest generic
rating categories from Standard & Poor's Ratings Group, a Division of The
McGraw-Hill Companies ("S&P"), Moody's Investors Service, Inc. ("Moody's"),
Duff & Phelps Credit Rating Co. ("DCR") or Fitch Investors Service, Inc.
("Fitch");
(4) the trustee must not be an affiliate of any other member of the
Restricted Group as defined below;
(5) the sum of all payments made to and retained by the underwriters
in connection with the distribution of the certificates represents not more
than reasonable compensation for underwriting the certificates; the sum of
all payments made to and retained by the seller pursuant to the assignment
of the loans to the trust fund represents not more than the fair market
value of such loans; the sum of all
80
<PAGE> 145
payments made to and retained by the servicer and any other servicer
represents not more than reasonable compensation for such person's services
under the agreement pursuant to which the loans are pooled and
reimbursements of such person's reasonable expenses in connection
therewith; and
(6) the Plan investing in the certificates is an "accredited investor"
as defined in Rule 501(a)(1) of Regulation D of the Securities and Exchange
Commission under the Securities Act of 1933, as amended.
The trust fund must also meet the following requirements:
(i) the corpus of the trust fund must consist solely of assets of the
type that have been included in other investment pools;
(ii) certificates in such other investment pools must have been rated
in one of the three highest rating categories of S&P, Moody's, Fitch or DCR
for at least one year prior to the Plan's acquisition of certificates; and
(iii) certificates evidencing interests in such other investment pools
must have been purchased by investors other than Plans for at least one
year prior to any Plan's acquisition of certificates.
Moreover, the Underwriter Exemptions generally provide relief from certain
self-dealing/conflict of interest prohibited transactions that may occur when
the Plan fiduciary causes a Plan to acquire certificates in a trust as to which
the fiduciary (or its affiliate) is an obligor on the receivables held in the
trust, provided that, among other requirements: (i) in the case of an
acquisition in connection with the initial issuance of certificates, at least
fifty percent (50%) of each class of certificates in which Plans have invested
is acquired by persons independent of the Restricted Group (as defined below),
(ii) such fiduciary (or its affiliate) is an obligor with respect to five
percent (5%) or less of the fair market value of the obligations contained in
the trust; (iii) the Plan's investment in certificates of any class does not
exceed twenty-five percent (25%) of all of the certificates of that class
outstanding at the time of the acquisition; and (iv) immediately after the
acquisition, no more than twenty-five percent (25%) of the assets of the Plan
with respect to which such person is a fiduciary is invested in certificates
representing an interest in one or more trusts containing assets sold or
serviced by the same entity. The Underwriter Exemptions do not apply to Plans
sponsored by Provident, the related Underwriter, the Trustee, the Master
Servicer, any insurer with respect to the Loans, any obligor with respect to
Loans included in the Trust Fund constituting more than five percent (5%) of the
aggregate unamortized principal balance of the assets in the Trust Fund, or any
affiliate of such parties (the "Restricted Group").
The Prospectus Supplement for each Series of Securities will indicate the
classes of Securities, if any, offered thereby as to which it is expected that
an Underwriter Exemption will apply.
The Underwriter Exemption contains several requirements, some of which
differ from those in PTE 83-l. The Underwriter Exemption contains an expanded
definition of "certificate" which includes an interest which entitles the holder
to pass-through payments of principal, interest and/or other payments. The
Underwriter Exemption contains an expanded definition of "trust" which permits
the trust corpus to consist of secured consumer receivables. The definition of
"trust", however, does not include any investment pool unless, inter alia, (i)
the investment pool consists only of assets of the type which have been included
in other investment pools, (ii) certificates evidencing interests in such other
investment pools have been purchased by investors other than Plans for at least
one year prior to the Plan's acquisition of certificates pursuant to the
Underwriter Exemption, and (iii) certificates in such other investment pools
have been rated in one of the three highest generic rating categories of the
four credit rating agencies noted below. Generally, the Underwriter Exemption
holds that the acquisition of the certificates by a Plan must be on terms
(including the price for the certificates) that are at least as favorable to the
Plan as they would be in an arm's length transaction with an unrelated party.
The Underwriter Exemption requires that the rights and interests evidenced by
the certificates not be "subordinated" to the rights and interests evidenced by
other certificates of the same trust. The Underwriter Exemption requires that
certificates acquired by a Plan have received a rating at the time of their
acquisition that is in one of the three highest generic rating categories of
S&P, Moody's, Fitch or DCR. The Underwriter Exemption specifies that the pool
trustee must not be an affiliate of the pool sponsor, nor an affiliate of the
Underwriter, the pool servicer, any obligor with respect to mortgage loans
included in the trust
81
<PAGE> 146
constituting more than five percent (5%) of the aggregate unamortized principal
balance of the assets in the trust, or any affiliate of such entities. Finally,
the Underwriter Exemption stipulates that any Plan investing in the certificates
must be an "accredited investor" as defined in Rule 501(a)(1) of Regulation D of
the Securities and Exchange Commission under the Securities Act of 1933, as
amended.
Any Plan fiduciary which proposes to cause a Plan to purchase Securities
should consult with their counsel concerning the impact of ERISA and the Code,
the applicability of PTE 83-1 and the Underwriter Exemption, and the potential
consequences in their specific circumstances, prior to making such investment.
Moreover, each Plan fiduciary should determine whether under the general
fiduciary standards of investment prudence and diversification an investment in
the Securities is appropriate for the Plan, taking into account the overall
investment policy of the Plan and the composition of the Plan's investment
portfolio.
LEGAL INVESTMENT
The Prospectus Supplement for each Series of Securities will specify which,
if any, of the classes of Securities offered thereby constitute "mortgage
related securities" for purposes of the Secondary Mortgage Market Enhancement
Act of 1984 ("SMMEA"). Classes of Securities that qualify as "mortgage related
securities" will be legal investments for persons, trusts, corporations,
partnerships, associations, business trusts, and business entities (including
depository institutions, life insurance companies and pension funds) created
pursuant to or existing under the laws of the United States or of any state
(including the District of Columbia and Puerto Rico) whose authorized
investments are subject to state regulations to the same extent as, under
applicable law, obligations issued by or guaranteed as to principal and interest
by the United States or any such entities. Under SMMEA, if a state enacted
legislation prior to October 4, 1991 specifically limiting the legal investment
authority of any such entities with respect to "mortgage related securities",
Securities will constitute legal investments for entities subject to such
legislation only to the extent provided therein. Approximately twenty-one states
adopted such legislation prior to the October 4, 1991 deadline.
SMMEA also amended the legal investment authority of federally-chartered
depository institutions as follows: federal savings and loan associations and
federal savings banks may invest in, sell or otherwise deal in Securities
without limitations as to the percentage of their assets represented thereby,
federal credit unions may invest "in mortgage related securities", and national
banks may purchase securities for their own account without regard to the
limitations generally applicable to investment securities set forth in 12 U.S.C.
24 (Seventh), subject in each case to such regulations as the applicable federal
authority may prescribe. In this connection, federal credit unions should review
the National Credit Union Administration ("NCUA") Letter to Credit Unions No.
96, as modified by Letter to Credit Unions No. 108, which includes guidelines to
assist federal credit unions in making investment decisions for "mortgage
related securities" and the NCUA's regulation "Investment and Deposit
Activities" (12 C.F.R. Part 703), which sets forth certain restrictions on
investments by federal credit unions in "mortgage related securities" (in each
case whether or not the class of Securities under consideration for purchase
constituted a "mortgage related security").
All depository institutions considering an investment in the Securities
(whether or not the class of Securities under consideration for purchase
constitutes a "mortgage related security") should review the Federal Financial
Institutions Examination Council's Supervisory Policy Statement on the
Securities Activities (to the extent adopted by their respective regulators)
(the "Policy Statement") setting forth, in relevant part, certain securities
trading and sales practices deemed unsuitable for an institution's investment
portfolio, and guidelines for (and restrictions on) investing in mortgage
derivative products, including "mortgage related securities", which are
"high-risk mortgage securities" as defined in the Policy Statement. According to
the Policy Statement, such "high-risk mortgage securities" include securities
such as Securities not entitled to distributions allocated to principal or
interest, or Subordinated Securities. Under the Policy Statement, it is the
responsibility of each depository institution to determine, prior to purchase
(and at stated intervals thereafter), whether a particular mortgage derivative
product is a "high-risk mortgage security", and whether the purchase (or
retention) of such a product would be consistent with the Policy Statement.
The foregoing does not take into consideration the applicability of
statutes, rules, regulations, orders, guidelines or agreements generally
governing investments made by a particular investor, including, but not
82
<PAGE> 147
limited to "prudent investor" provisions which may restrict or prohibit
investment in securities which are not "interest bearing" or "income paying".
There may be other restrictions on the ability of certain investors,
including depository institutions, either to purchase Securities or to purchase
Securities representing more than a specified percentage of the investor's
assets. Investors should consult their own legal advisors in determining whether
and to what extent the Securities constitute legal investments for such
investors.
METHOD OF DISTRIBUTION
Securities are being offered hereby in Series from time to time (each
Series evidencing or relating to a separate Trust Fund) through any of the
following methods:
1. By negotiated firm commitment underwriting and public reoffering by
underwriters;
2. By agency placements through one or more placement agents primarily
with institutional investors and dealers; and
3. By placement directly by Provident with institutional investors.
A Prospectus Supplement will be prepared for each Series which will
describe the method of offering being used for that Series and will set forth
the identity of any underwriters thereof and either the price at which such
Series is being offered, the nature and amount of any underwriting discounts or
additional compensation to such underwriters and the proceeds of the offering to
Provident, or the method by which the price at which the underwriters will sell
the Securities will be determined. Each Prospectus Supplement for an
underwritten offering will also contain information regarding the nature of the
underwriters' obligations, any material relationship between Provident and any
underwriter and, where appropriate, information regarding any discounts or
concessions to be allowed or reallowed to dealers or others and any arrangements
to stabilize the market for the Securities so offered. In firm commitment
underwritten offerings, the underwriters will be obligated to purchase all of
the Securities of such Series if any such Securities are purchased. Securities
may be acquired by the underwriters for their own accounts and may be resold
from time to time in one or more transactions, including negotiated
transactions, at a fixed public offering price or at varying prices determined
at the time of sale.
Underwriters and agents may be entitled under agreements entered into with
Provident to indemnification by Provident against certain civil liabilities,
including liabilities under the Securities Act of 1933, as amended, or to
contribution with respect to payments which such underwriters or agents may be
required to make in respect thereof.
If a Series is offered other than through underwriters, the Prospectus
Supplement relating thereto will contain information regarding the nature of
such offering and any agreements to be entered into between Provident and
purchasers of Securities of such Series.
LEGAL MATTERS
Certain legal matters relating to the Securities of each Series will be
passed upon for Provident by Keating, Muething & Klekamp, P.L.L., Cincinnati,
Ohio. Certain legal matters relating to certain federal income tax consequences
with respect to the Securities will be passed upon for the Trust Fund by Brown &
Wood LLP, New York, New York. Brown & Wood LLP, New York, New York, will act as
counsel for the underwriter or underwriters specified in the Prospectus
Supplement.
FINANCIAL INFORMATION
A new Trust Fund will be formed with respect to each Series of Securities
and no Trust Fund will engage in any business activities or have any assets or
obligations prior to the issuance of the related Series of
83
<PAGE> 148
Securities. Accordingly, no financial statements with respect to any Trust Fund
will be included in this Prospectus or in the related Prospectus Supplement.
RATING
It is a condition to the issuance of the Securities of each Series offered
hereby and by the Prospectus Supplement that they shall have been rated in one
of the four highest rating categories by the nationally recognized statistical
rating agency or agencies (each, a "Rating Agency") specified in the related
Prospectus Supplement.
Any such rating would be based on, among other things, the adequacy of the
value of the Trust Fund Assets and any credit enhancement with respect to such
class and will reflect such Rating Agency's assessment solely of the likelihood
that Holders of a class of Securities will receive payments to which such
Securityholders are entitled under the related Agreement. Such rating will not
constitute an assessment of the likelihood that principal prepayments on the
related Loans will be made, the degree to which the rate of such prepayments
might differ from that originally anticipated or the likelihood of early
optional termination of the Series of Securities. Such rating should not be
deemed a recommendation to purchase, hold or sell Securities, inasmuch as it
does not address market price or suitability for a particular investor. Each
security rating should be evaluated independently of any other security rating.
Such rating will not address the possibility that prepayment at higher or lower
rates than anticipated by an investor may cause such investor to experience a
lower than anticipated yield or that an investor purchasing a Security at a
significant premium might fail to recoup its initial investment under certain
prepayment scenarios.
There is also no assurance that any such rating will remain in effect for
any given period of time or that it may not be lowered or withdrawn entirely by
the Rating Agency in the future if in its judgment circumstances in the future
so warrant. In addition to being lowered or withdrawn due to any erosion in the
adequacy of the value of the Trust Fund Assets or any credit enhancement with
respect to a Series, such rating might also be lowered or withdrawn for other
reasons, including, but not limited to, an adverse change in the financial or
other condition of a credit enhancement provider or a change in the rating of
such credit enhancement provider's long-term debt.
The amount, type and nature of credit enhancement, if any, established with
respect to a Series of Securities will be determined on the basis of criteria
established by each Rating Agency rating classes of such Series. Such criteria
are sometimes based upon an actuarial analysis of the behavior of mortgage loans
in a larger group. Such analysis is often the basis upon which each Rating
Agency determines the amount of credit enhancement required with respect to each
such class. There can be no assurance that the historical data supporting any
such actuarial analysis will accurately reflect future experience nor any
assurance that the data derived from a large pool of mortgage loans accurately
predicts the delinquency, foreclosure or loss experience of any particular pool
of Loans. No assurance can be given that values of any Properties have remained
or will remain at their levels on the respective dates of origination of the
related Loans. If the residential real estate markets should experience an
overall decline in property values such that the outstanding principal balances
of the Loans in a particular Trust Fund and any secondary financing on the
related Properties become equal to or greater than the value of the Properties,
the rates of delinquencies, foreclosures and losses could be higher than those
now generally experienced in the mortgage lending industry. In additional,
adverse economic conditions (which may or may not affect real property values)
may affect the timely payment by mortgagors of scheduled payments of principal
and interest on the Loans and, accordingly, the rates of delinquencies,
foreclosures and losses with respect to any Trust Fund. To the extent that such
losses are not covered by credit enhancement, such losses will be borne, at
least in part, by the Holders of one or more classes of the Securities of the
related Series.
84
<PAGE> 149
INDEX OF DEFINED TERMS
<TABLE>
<CAPTION>
TERM PAGE
- ----------------------------------------------------------------------------------- ---------
<S> <C>
Accrual Securities................................................................. 26
Advance............................................................................ 8
Agreement.......................................................................... 18
Amortizable Bond Premium Regulations............................................... 63
APR................................................................................ 21
Available Funds.................................................................... 26
Balloon payment.................................................................... 19
Belgian Cooperative................................................................ 33
Beneficial owner................................................................... 32
BIF................................................................................ 42
Book-Entry Securities.............................................................. 32
Buydown Fund....................................................................... 20
Buydown Loans...................................................................... 20
Capitalized Interest Account....................................................... 45
Cash Flow Bond Method.............................................................. 70
CEDEL.............................................................................. 32
CEDEL Participants................................................................. 33
CERCLA............................................................................. 15
Certificates....................................................................... 1, 4
Class Security Balance............................................................. 26
Closed-End Loans................................................................... 1, 4
Code............................................................................... 9
Collateral Value................................................................... 21
Combined Loan-to-Value Ratio....................................................... 21
Commission......................................................................... 2
Companion Classes.................................................................. 31
Components......................................................................... 30
Contingent Regulations............................................................. 61
Cut-Off Date....................................................................... 4, 18
Cut-Off Date Principal Balance..................................................... 25
DCR................................................................................ 80
Debt Securities.................................................................... 60
Debt-to-income ratio............................................................... 23
Definitive Security................................................................ 32
Detailed Description............................................................... 19
Disqualified Organization.......................................................... 67
Distribution Date.................................................................. 5
DOL................................................................................ 79
DTC................................................................................ 16
EPA................................................................................ 54
ERISA.............................................................................. 11
Euroclear.......................................................................... 32
Euroclear Operator................................................................. 33
Euroclear Participants............................................................. 33
European Depositaries.............................................................. 32
Excess Servicing Fees.............................................................. 70
</TABLE>
85
<PAGE> 150
<TABLE>
<CAPTION>
TERM PAGE
- ----------------------------------------------------------------------------------- ---------
<S> <C>
Exchange Act....................................................................... 3
FDIC............................................................................... 23
FHLMC.............................................................................. 23
Financial Intermediary............................................................. 32
Fitch.............................................................................. 80
FNMA............................................................................... 23
Foreign person..................................................................... 73
Funding Period..................................................................... 16
Garn-St Germain Act................................................................ 56
Home Equity Loans.................................................................. 1, 4
Indenture.......................................................................... 24
Insurance Proceeds................................................................. 43
Insured Expenses................................................................... 43
Interest Weighted Securities....................................................... 62
IRS................................................................................ 61
L/C Bank........................................................................... 7, 36
Liquidation Expenses............................................................... 43
Liquidation Proceeds............................................................... 43
Loan Rate.......................................................................... 6, 19
Loan-to-Value Ratio................................................................ 21
Loans.............................................................................. 1
Lockout Periods.................................................................... 20
Master Servicer.................................................................... 4
Master Servicing Agreement......................................................... 18
Master Servicing Fee............................................................... 47
Moody's............................................................................ 80
Morgan............................................................................. 33
Mortgage........................................................................... 41
Mortgage Loan...................................................................... 4
Mortgage Loans..................................................................... 1
Mortgaged Properties............................................................... 20
NCUA............................................................................... 82
New Partnership.................................................................... 76
Nonresidents....................................................................... 71
Notes.............................................................................. 1, 4
OID................................................................................ 9, 60
OID Regulations.................................................................... 60
Old Partnership.................................................................... 76
PACs............................................................................... 30
Parties in Interest................................................................ 79
Pass-Through Rate.................................................................. 6
Pass-Through Securities............................................................ 68
Pay-Through Security............................................................... 61
Permitted Investments.............................................................. 37
Plans.............................................................................. 78
Policy Statement................................................................... 82
Pool............................................................................... 4, 18
Pool Insurance Policy.............................................................. 38
</TABLE>
86
<PAGE> 151
<TABLE>
<CAPTION>
TERM PAGE
- ----------------------------------------------------------------------------------- ---------
<S> <C>
Pool Insurer....................................................................... 38
Pooling and Servicing Agreement.................................................... 24
Pre-Funded Amount.................................................................. 16
Pre-Funding Account................................................................ 4, 16
Prepayment Assumption.............................................................. 61
Primary Mortgage Insurance Policy.................................................. 20
Principal Prepayments.............................................................. 27
Properties......................................................................... 20
Provident.......................................................................... 1, 4
PTE 83-1........................................................................... 79
Purchase Price..................................................................... 24
Rating Agency...................................................................... 84
Ratio Strip Securities............................................................. 69
RCRA............................................................................... 55
Record Date........................................................................ 25
Refinance Loan..................................................................... 21
Regular Interest Securities........................................................ 60
Relevant Depositary................................................................ 32
Relief Act......................................................................... 57
REMIC.............................................................................. 1
Reserve Account.................................................................... 7
Residual Interest Security......................................................... 66
Restricted Group................................................................... 81
Retained Interest.................................................................. 25
Revolving Credit Line Loans........................................................ 1, 4
Riegle Act......................................................................... 15
Rules.............................................................................. 32
S&P................................................................................ 80
SAIF............................................................................... 42
Secured Creditor Exclusion......................................................... 54
Securities......................................................................... 1, 4
Security Account................................................................... 42
Security Owners.................................................................... 32
Security Register.................................................................. 25
Senior Securities.................................................................. 5, 35
Series............................................................................. 1
Servicing Fees..................................................................... 68
Short-Term Note.................................................................... 73
Single Family Properties........................................................... 20
Single Family Securities........................................................... 79
SMMEA.............................................................................. 9, 82
STIFS.............................................................................. 37
Stripped Securities................................................................ 68
Sub-Servicer....................................................................... 8
Sub-Servicing Agreement............................................................ 45
Subordinated Securities............................................................ 5
Subsequent Loans................................................................... 16
TACs............................................................................... 31
</TABLE>
87
<PAGE> 152
<TABLE>
<CAPTION>
TERM PAGE
- ----------------------------------------------------------------------------------- ---------
<S> <C>
Terms and Conditions............................................................... 34
Thrift institutions................................................................ 67
TIN................................................................................ 71
Title V............................................................................ 57
Trust Agreement.................................................................... 18, 24
Trust Fund......................................................................... 1
Trust Fund Assets.................................................................. 1, 4, 18
Trustee............................................................................ 4, 24
U.S. Person........................................................................ 77
Underwriter Exemptions............................................................. 80
</TABLE>
88
<PAGE> 153
=======================================================
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS
SUPPLEMENT OR THE PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY PROVIDENT OR
THE UNDERWRITER. THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS DO NOT CONSTITUTE
AN OFFER OF ANY SECURITIES OTHER THAN THOSE TO WHICH THEY RELATE OR AN OFFER TO
SELL, OR A SOLICITATION OF AN OFFER TO BUY, TO ANY PERSON IN ANY JURISDICTION
WHERE SUCH AN OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF
THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL,
UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THEIR RESPECTIVE DATES.
-------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
PROSPECTUS SUPPLEMENT
Summary.................................... S-3
Risk Factors............................... S-13
The Certificate Insurer.................... S-16
The Provident Bank......................... S-18
Description of the Mortgage Loans.......... S-22
Maturity and Prepayment Considerations..... S-29
Pool Factor and Trading Information........ S-30
Description of the Certificates............ S-31
Use of Proceeds............................ S-50
Certain Federal Income Tax Consequences.... S-50
State Taxes................................ S-53
ERISA Considerations....................... S-53
Legal Investment Considerations............ S-54
Underwriting............................... S-55
Legal Matters.............................. S-55
Experts.................................... S-55
Ratings.................................... S-56
Index of Defined Terms..................... S-57
Annex I.................................... S-61
PROSPECTUS
Prospectus Supplement...................... 2
Available Information...................... 2
Incorporation of Certain Documents by
Reference................................ 3
Reports to Securityholders................. 3
Summary of Terms........................... 4
Risk Factors............................... 12
The Trust Fund............................. 18
Use of Proceeds............................ 22
The Provident Bank......................... 22
Loan Program............................... 22
Description of the Securities.............. 24
Credit Enhancement......................... 35
Yield and Prepayment Considerations........ 39
The Agreements............................. 41
Certain Legal Aspects of Loans............. 52
Federal Income Tax Consequences............ 59
State Tax Considerations................... 78
ERISA Considerations....................... 78
Legal Investment........................... 82
Method of Distribution..................... 83
Legal Matters.............................. 83
Financial Information...................... 83
Rating..................................... 84
Index of Defined Terms..................... 85
</TABLE>
=======================================================
=======================================================
PROVIDENT BANK
HOME EQUITY
LOAN TRUST 1997-A
$165,590,000
(APPROXIMATE)
REVOLVING HOME EQUITY LOAN
ASSET-BACKED CERTIFICATES
SERIES 1997-A
THE PROVIDENT BANK
AS SPONSOR AND SERVICER
---------------------------
PROSPECTUS SUPPLEMENT
September 26, 1997
---------------------------
LEHMAN BROTHERS
=======================================================
