<PAGE>
Filed pursuant to Rule 424(b)(5)
PROSPECTUS SUPPLEMENT Registration File No. 333-62595
(TO PROSPECTUS DATED SEPTEMBER 18, 1998)
$350,000,000 (APPROXIMATE)
PROVIDENT BANK HOME EQUITY LOAN TRUST 1998-4
HOME EQUITY LOAN ASSET-BACKED CERTIFICATES, SERIES 1998-4
THE PROVIDENT BANK
AS SELLER AND MASTER SERVICER
THE CERTIFICATES REPRESENT OBLIGATIONS OF THE TRUST ONLY AND DO NOT REPRESENT AN
INTEREST IN OR OBLIGATION OF THE PROVIDENT BANK, THE TRUSTEE OR ANY OF THEIR
AFFILIATES.
This prospectus supplement may be used to offer and sell the
certificates only if accompanied by the prospectus.
THE TRUST WILL ISSUE
o nine classes of senior Class A Certificates, which are
offered hereby
o two classes of senior Class X Certificates, which are not
offered hereby
o two classes of subordinate Residual Certificates, which
are not offered hereby
THE CERTIFICATES
o represent the entire beneficial interest in a trust, whose assets are a pool
of closed-end fixed and adjustable rate mortgage loans consisting of two
loan groups
o currently have no trading market
o are not insured or guaranteed by any governmental agency
o are obligations of the trust only and are not obligations of the seller,
master servicer or its affiliates
CREDIT ENHANCEMENT
o will be provided in the form of a spread account and an irrevocable and
unconditional certificate guaranty insurance policy issued by MBIA Insurance
Corporation
The trust will make two REMIC elections for federal income tax purposes.
REVIEW THE INFORMATION IN "RISK FACTORS" ON PAGE S-9 AND ON PAGE 11 IN THE
PROSPECTUS.
For complete information about the Class A Certificates, read both this
prospectus supplement and the prospectus.
Lehman Brothers, on behalf of the underwriters, will buy the Class A
Certificates from The Provident Bank at a price equal to approximately 99.65% of
their face value. The underwriters will sell the Class A Certificates from time
to time in negotiated transactions.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
---------------------------
LEHMAN BROTHERS PRUDENTIAL SECURITIES INCORPORATED
December 23, 1998
<PAGE>
For ninety-days following the date of this prospectus supplement, all dealers
selling the Class A Certificates will deliver a prospectus supplement and
prospectus. This is in addition to the dealers' obligation to deliver a
prospectus when acting as underwriters of the Class A Certificates and with
respect to their unsold allotments or subscriptions.
You should rely only on the information contained or incorporated by reference
in this prospectus supplement and the accompanying prospectus. We have not
authorized anyone to provide you with different information.
We are not offering the Class A Certificates in any state where the offer is not
permitted.
We do not claim that the information in this prospectus supplement and
prospectus is accurate as of any date other than the dates stated on the
respective covers.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
PROSPECTUS SUPPLEMENT
Summary................................................................................................. S-3
Risk Factors............................................................................................ S-9
The Certificate Insurer................................................................................. S-13
The Provident Bank...................................................................................... S-15
Description of the Mortgage Loans....................................................................... S-18
Prepayment and Yield Considerations..................................................................... S-37
Description of the Certificates......................................................................... S-47
Use of Proceeds......................................................................................... S-73
Federal Income Tax Consequences......................................................................... S-73
State Taxes............................................................................................. S-76
ERISA Considerations.................................................................................... S-76
Legal Investment Considerations......................................................................... S-78
Underwriting............................................................................................ S-78
Experts................................................................................................. S-79
Legal Matters........................................................................................... S-79
Ratings................................................................................................. S-79
Index of Defined Terms.................................................................................. S-80
Annex I................................................................................................. I-1
Annex II................................................................................................ II-1
Annex III............................................................................................... III-1
PROSPECTUS
Prospectus Supplement or Current Report on Form 8-K..................................................... 2
Available Information................................................................................... 2
Incorporation of Certain Documents by Reference......................................................... 3
Reports to Securityholders.............................................................................. 3
Summary of Terms........................................................................................ 4
Risk Factors............................................................................................ 11
The Trust Fund.......................................................................................... 17
Use of Proceeds......................................................................................... 21
The Provident Bank...................................................................................... 21
Loan Program............................................................................................ 21
Description of the Securities........................................................................... 23
Credit Enhancement...................................................................................... 33
Yield and Prepayment Considerations..................................................................... 37
The Agreements.......................................................................................... 39
Certain Legal Aspects of the Loans...................................................................... 50
Federal Income Tax Consequences......................................................................... 56
State Tax Considerations................................................................................ 78
ERISA Considerations.................................................................................... 78
Legal Investment........................................................................................ 82
Method of Distribution.................................................................................. 83
Legal Matters........................................................................................... 84
Financial Information................................................................................... 84
Rating.................................................................................................. 84
Index of Defined Terms.................................................................................. 85
</TABLE>
S-2
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SUMMARY
This summary highlights selected information from this prospectus
supplement and does not contain all of the information that you need to consider
in making your investment decision. Please read this entire prospectus
supplement and the accompanying prospectus carefully for additional information
about the Class A Certificates.
HOME EQUITY LOAN ASSET-BACKED CERTIFICATES, SERIES 1998-4
<TABLE>
<CAPTION>
LAST SCHEDULED
INITIAL CLASS DISTRIBUTION
CLASS CERTIFICATE RATE PRINCIPAL BALANCE(1) DATE(2)
- ------------------ ---------------- -------------------- ------------------
<S> <C> <C> <C>
Class A-1 6.28% $50,373,000 11/25/2013
Class A-2 5.97% $38,233,000 11/25/2013
Class A-3 6.01% $21,973,000 07/25/2017
Class A-4 6.17% $19,997,000 04/25/2022
Class A-5 6.21% $14,525,000 12/25/2024
Class A-6 6.69% $31,299,000 01/25/2030
Class A-7 6.20% $19,600,000 01/25/2030
Class A-8 LIBOR+0.35%(3) $64,000,000 04/25/2021
Class A-9 Variable(4) $90,000,000 01/25/2030
Class X-1(5) Variable(6) 0 N/A
Class X-2(5) Variable(6) 0 N/A
Class R-1(5) N/A 0 N/A
Class R-2(5) N/A 0 N/A
</TABLE>
- --------------------------
(1) This amount is subject to a variance of 5%.
(2) We expect the actual last distribution date for each Class A Certificate to
be significantly earlier than its last scheduled distribution date.
(3) If this rate exceeds the weighted average of the net loan rates for loan
group 2 on any distribution date, you will receive interest at the weighted
average net loan rate for loan group 2. We refer you to "DESCRIPTION OF THE
CERTIFICATES--Certificate Rate" for additional information.
(4) The Certificate Rate for this class for the first Distribution Date will be
5.70% per annum and will be recalculated ten times each year pursuant to the
auction procedures set forth in this prospectus supplement in Annex II and Annex
III.
(5) This class is not being offered pursuant to this prospectus supplement and
prospectus.
(6) We refer you to "DESCRIPTION OF THE CERTIFICATES--Priority of
Distributions" for the calculation of the certificate rate.
THE SELLER AND MASTER SERVICER
o The Provident Bank.
o The Provident Bank maintains its principal office at One East Fourth Street,
Cincinnati, Ohio. Its telephone number is (513) 579-2000.
o The master servicer will receive a monthly fee from the interest payments on
the mortgage loans equal to 0.50% per annum on the principal balance of each
mortgage loan.
We refer you to "THE PROVIDENT BANK" in this prospectus supplement for
additional information.
THE TRUST
o Provident Bank Home Equity Loan Trust 1998-4.
TRUSTEE
o Bankers Trust Company of California, N.A.
AUCTION AGENT
o Bankers Trust Company, a New York banking corporation.
CERTIFICATE INSURER
o MBIA Insurance Corporation, a New York stock insurance company.
We refer you to "THE CERTIFICATE INSURER" in this prospectus supplement for
additional information.
S-3
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CUT-OFF DATE
o For any initial mortgage loan, the cut-off date is December 1, 1998. For any
subsequent mortgage loan, the cut-off date is the date of origination for that
mortgage loan, unless a subsequent mortgage loan was originated prior to
December 1, 1998, then December 29, 1998.
CLOSING DATE
o December 30, 1998.
DISTRIBUTION DATE
o The 25th day of each month, or if such day is not a business day, the next
business day. The first distribution date is January 25, 1999.
DUE PERIOD
o The calendar month immediately preceding a determination date or a
distribution date, as applicable.
DESIGNATIONS
o Offered Certificates--The Class A Certificates.
o Non-Offered Certificates--The Class R Certificates and the Class X
Certificates.
o Regular Certificates--All classes of certificates other than the Class R
Certificates.
o Class X Certificates--The Class X-1 and the Class X-2 Certificates.
o Residual Certificates--The Class R-1 and Class-R-2 Certificates.
o Class A Certificates--The Class A-1, Class A-2, Class A-3, Class A-4,
Class A-5, Class A-6, Class A-7, Class A-8 and Class A-9 Certificates.
o Fixed Rate or Group 1 Certificates--The Class A-1, Class A-2, Class A-3,
Class A-4, Class A-5, Class A-6 and Class A-7 Certificates. These certificates
will receive their payments from loan group 1.
o Group 2 Certificates--The Class A-8 and Class A-9 Certificates. These
certificates will receive their payments from loan group 2.
o Variable Rate Certificates--The Class A-8 Certificates.
o Auction Rate Certificates--The Class A-9 Certificates.
o Loan Group 1--Mortgage loans which bear interest at a fixed rate.
o Loan Group 2--Mortgage loans which bear interest at an adjustable rate.
REGISTRATION OF CLASS A CERTIFICATES
We will issue the Class A Certificates in book-entry form. You will hold your
interests either through a depository in the United States or through one of two
depositories in Europe. While the certificates are book-entry, they will be
registered in the name of the applicable depository, or in the name of the
depository's nominee.
Transfers within any depository system will be made in accordance with the usual
rules and operating procedures of that system. Cross-market transfers between
two different depository systems may be made through a third-party bank and/or
the related depositories. The limited circumstances under which definitive
certificates will replace the book-entry certificates are described in this
prospectus supplement.
We refer you to "RISK FACTORS--Consequences on Liquidity and Payment Delay
Because of Owning Book-Entry Certificates", "DESCRIPTION OF THE
CERTIFICATES--Book-Entry Certificates" and "ANNEX I" in this prospectus
supplement for additional information.
TRUST PROPERTY
The trust property is held by the trustee for the benefit of the
certificateholders. The trust property includes:
o a pool of closed-end fixed and adjustable rate mortgage loans, secured by
first and second deeds of trust or mortgages on primarily one- to-four family
residential properties;
o payments on the mortgage loans received on or after the cut-off date;
o property that secured a mortgage loan which has been acquired by foreclosure
or deed in lieu of foreclosure and the net proceeds from the sale of a
foreclosed property;
o rights under any hazard insurance policies covering the mortgaged properties;
o amounts on deposit in certain accounts described in this prospectus
supplement; and
S-4
<PAGE>
o a certificate guaranty insurance policy for the benefit of the holders of the
Class A Certificates.
THE MORTGAGE LOANS
On the closing date, the trust will acquire an initial pool of fixed and
adjustable rate home equity loans, or "initial mortgage loans," with a current
aggregate principal balance as of the cut-off date of $225,869,705.02.
The initial mortgage loans will have the following characteristics as of the
cut-off date:
o number of mortgage loans: 2,879
o aggregate principal balance: $225,869,705.02
o mortgaged property location: 43 states and the District of Columbia
o loan rates range: 7.850% to 18.000%
o weighted average interest rate: 10.374% (approximate)
o weighted average remaining term to stated maturity: 306 months (approximate)
o term to stated maturity range: 58 months to 360 months
o last maturity date: January 2029
o combined loan-to-value ratio range: 11.26% to 90.00% (approximate)
o weighted average combined loan-to-value ratio: 78.07%
o balloon loans--loans with amortization schedules that don't fully amortize by
their maturity date: 19.58% (approximate)
The initial mortgage loans in loan group 1 will have the following
characteristics as of the cut-off date:
o number of mortgage loans: 1,795
o aggregate principal balance: $126,244,705.29
o mortgaged property location: 41 states and the District of Columbia
o average principal balance: $70,331.31
o maximum principal balance: $500,066.71
o interest rates range: 7.990% to 18.000%
o weighted average interest rate: 10.539% (approximate)
o weighted average remaining term to stated maturity: 263 months (approximate)
o remaining term to stated maturity range: 58 months to 360 months
o combined loan-to-value ratio range: 11.26% to 90.00% (approximate)
o weighted average combined loan-to-value ratio: 77.66%
o balloon loans--loans with amortization schedules that don't fully amortize by
their maturity date: 35.03% (approximate)
The initial mortgage loans in loan group 2 will have the following
characteristics as of the cut-off date:
o number of mortgage loans: 1,084
o aggregate principal balance: $99,624,999.73
o mortgaged property location: 41 states and the District of Columbia
o average principal balance: $91,904.98
o maximum principal balance: $725,577.15
o interest rates range: 7.850% to 16.350%
o weighted average interest rate: 10.165% (approximate)
o weighted average remaining term to stated maturity: 359 months (approximate)
o remaining term to stated maturity range: 352 months to 360 months
o combined loan-to-value ratio range: 11.46% to 90.00% (approximate)
o weighted average combined loan-to-value ratio: 78.58% (approximate)
o weighted average initial periodic cap (first interest rate adjustment): 1.48%
o weighted average periodic cap (subsequent interest rate adjustments): 1.08%
o range of periodic caps: 1.00% to 7.00%.
During the funding period, the trust may purchase additional mortgage loans or
"subsequent mortgage loans." The subsequent mortgage loans will have
characteristics similar to the mortgage loans described above.
We refer you to "DESCRIPTION OF THE MORTGAGE LOANS" in this prospectus
supplement for additional information.
S-5
<PAGE>
MONTHLY ADVANCES
If the master servicer reasonably believes that cash advances can be recovered
from future payments or collections on the mortgage loans, the master servicer
will make cash advances to the trust to cover delinquent mortgage loan payments.
The master servicer will make advances only to maintain a regular flow of
scheduled interest payments on the certificates, not to guarantee or insure
against losses.
We refer you to "DESCRIPTION OF THE CERTIFICATES--Monthly Advances" in this
prospectus supplement for additional information.
THE CERTIFICATES
1. General
o Each month the trustee will calculate the amount you are owed.
o If you hold a certificate on the last day of a calendar month, you will be
entitled to receive payments on the distribution date in the next month.
We refer you to "DESCRIPTION OF THE CERTIFICATES" in this prospectus supplement
for additional information.
2. Interest Distributions
o Interest accrues on the group 1 certificates from the first day of a calendar
month through the last day of that calendar month preceding the month of a
distribution date.
o Interest accrues on the group 2 certificates from the distribution date in the
month prior to that distribution date (or in the case of the first
distribution date, from the closing date) through the day before that
distribution date.
On each distribution date, you will be entitled to the following:
o interest at the related certificate rate that accrued during the related
interest period; and
o any interest that was due on a prior distribution date and not paid. In
addition, interest will have accrued on the amount of interest which was
previously due and not paid.
We refer you to "DESCRIPTION OF THE CERTIFICATES--Interest" in this prospectus
supplement for additional information.
3. Principal Distributions
o Principal distributions are payable on each distribution date.
o Principal payments on the group 1 certificates will be distributed
sequentially, beginning with the Class A-1 Certificates and ending with the
Class A-7 Certificates. For example, no principal will be distributed to the
Class A-2 Certificates until the Class A-1 Certificates are paid in full.
However, beginning with the distribution date in January 2002, principal in an
amount set forth herein will first be distributed to the Class A-7
Certificates prior to any other group 1 certificate receiving a distribution
of principal.
o No distribution of principal will be made to the Class A-9 Certificates until
the Class A-8 Certificates are paid in full.
o Shortfalls in available funds and failure of the certificate insurer to
perform its obligations under the policy will result in a class receiving less
than what is due.
We refer you to "DESCRIPTION OF THE CERTIFICATES--Principal" in this prospectus
supplement for additional information.
CREDIT ENHANCEMENTS
1. The Certificate Insurance Policy: The certificate insurance policy guarantees
the payment of:
o accrued and unpaid interest on the Class A Certificates;
o principal losses on the mortgage loans; and
o any principal amounts owed to the certificateholders on January 25, 2030.
We refer you to "THE CERTIFICATE INSURER" in this prospectus supplement for
additional information.
2. The Spread Account
Amounts on deposit in the spread account will be available to the trustee to pay
interest due on the Class A Certificates and to cover principal losses on the
mortgage loans prior to a draw on the certificate insurance policy.
PRE-FUNDING ACCOUNT
On the closing date, the trustee shall deposit up to a maximum of $69,755,294.71
in the group 1 pre-funding account and up to a maximum of $54,375,000.27 in the
group 2 pre-funding account. It is expected that the seller will have originated
or
S-6
<PAGE>
acquired subsequent mortgage loans from December 1, 1998 to the closing date.
Such loans will be transferred to the trust on the closing date. The maximum
amount to be deposited into the pre-funding accounts on the closing date will be
reduced by the principal balance of the subsequent mortgage loans transferred to
each loan group on the closing date. The trust will use the amounts on deposit
in the pre-funding accounts to acquire subsequent mortgage loans for the related
loan group from the seller. The trustee may only acquire such subsequent
mortgage loans until January 23, 1999.
If any amounts are left in the pre-funding accounts on January 23, 1999, holders
of the group 1 certificates will receive amounts left in the group 1 pre-funding
account and holders of the group 2 certificates will receive amounts left in the
group 2 pre-funding account on the next distribution date as payment of
principal.
We refer you to "RISK FACTORS--Risk of Prepayment Due to Subsequent Mortgage
Loans" and "DESCRIPTION OF THE CERTIFICATES--Pre-Funding Account" in this
prospectus supplement for additional information.
CAPITALIZED INTEREST ACCOUNT
On the closing date, the seller shall deposit with the trustee an amount
available to cover interest shortfalls on the Class A Certificates expected to
occur prior to the trust's purchase of the subsequent mortgage loans. Until the
trust purchases the subsequent mortgage loans or prepays the Class A
Certificates, interest payments on the loans may not cover the amount of
interest due on the certificates.
Any amounts left in the capitalized interest account after January 23, 1999 will
be paid to the seller.
We refer you to "DESCRIPTION OF THE CERTIFICATES--Capitalized Interest Account"
in this prospectus supplement for additional information.
OPTIONAL TERMINATION
If the total pool principal balance declines below 5% of the aggregate principal
balance of the mortgage loans as of the applicable cut-off date, then the seller
may purchase all of the mortgage loans and the related properties in the trust.
If the seller purchases all of the mortgage loans, you will receive a final
distribution and the trust will be terminated.
We refer you to "DESCRIPTION OF THE CERTIFICATES--Termination; Purchase of the
Mortgage Loans" in this prospectus supplement for more detail.
FEDERAL TAX CONSIDERATIONS
For federal income tax purposes:
o An election will be made to treat the trust as two "real estate mortgage
investment conduits", the master REMIC and the subsidiary REMIC.
o The Class A and Class X Certificates will be "regular interests" in the master
REMIC and will be treated as debt instruments of the trust.
o The Class R-1 Certificates will represent the "residual interest" in the
subsidiary REMIC and the Class R-2 Certificates will represent the "residual
interest" in the master REMIC.
We refer you to "CERTAIN FEDERAL INCOME TAX CONSIDERATIONS" in this prospectus
supplement and in the prospectus for additional information.
ERISA CONSIDERATIONS
The fiduciary responsibility provisions of the Employee Retirement Income
Security Act of 1974, or ERISA, can limit investments by certain pension and
other employee benefit plans. For example, the acquisition of certain
certificates may be considered a "prohibited transaction" under ERISA. Certain
exemptions from the prohibited transaction rules could be applicable to the
acquisition of the Class A Certificates, although pension and other employee
benefit plans will not be permitted to purchase the Class A Certificates until
after January 23, 1999, unless the amount deposited in each pre-funding account
on the closing date is 25% or less of the aggregate initial principal
certificate balance of the Class A Certificates of the related certificate
group. If you are a fiduciary of a pension or other employee benefit plan which
is subject to ERISA, you should consult with your counsel regarding the
applicability of the provisions of ERISA and the tax code before purchasing a
Class A Certificate.
We refer you to "ERISA Considerations" in this prospectus supplement and the
prospectus for additional information.
S-7
<PAGE>
LEGAL INVESTMENT CONSIDERATIONS
The Secondary Mortgage Market Enhancement Act of 1984 defines "mortgage related
securities" to include only first mortgages, and not second mortgages. Because
the pool of Mortgage Loans owned by the trust includes second mortgage loans,
the certificates will not be "mortgage related securities" under that
definition. Some institutions may be limited in their legal investment authority
to only first mortgages or "mortgage related securities" and will be unable to
invest in the Class A Certificates.
We refer you to "LEGAL INVESTMENT CONSIDERATIONS" in this prospectus supplement
and "LEGAL INVESTMENT" in the prospectus for additional information.
CERTIFICATE RATING
The trust will not issue the Class A Certificates unless they receive the
following ratings:
AAA by Standard & Poors Ratings Service, a division of The McGraw-Hill
Companies, Inc.
AAA by Fitch IBCA, Inc.
Aaa by Moody's Investors Service, Inc.
A rating is not a recommendation to buy, sell or hold securities and may be
subject to revision or withdrawal by either rating agency.
We refer you to "RATINGS" and "RISK FACTORS--Rating of the Securities" in the
prospectus for additional information.
S-8
<PAGE>
RISK FACTORS
You should carefully consider the following risk factors prior to any
purchase of certificates. You should also carefully consider the information set
forth under "Risk Factors" in the prospectus.
CONSEQUENCES ON LIQUIDITY AND PAYMENT DELAY BECAUSE OF OWNING BOOK-ENTRY
CERTIFICATES
o Limit on Liquidity of Certificates. Issuance of offered certificates in
book-entry form may reduce the liquidity of the offered certificates in the
secondary trading market since investors may be unwilling to purchase
certificates for which they cannot obtain physical certificates.
o Limit on Ability to Transfer or Pledge. Since transactions in the
book-entry certificates can be effected only through DTC, participating
organizations, indirect participants and certain banks, your ability to transfer
or pledge a book-entry certificate to persons or entities that do not
participate in the DTC system or otherwise to take actions in respect of such
certificates, may be limited due to lack of a physical certificate representing
the book-entry certificates.
o Delays in Distributions. You may experience some delay in the receipt of
distributions on the book-entry certificates since the distributions will be
forwarded by the trustee to DTC for DTC to credit the accounts of its
participants which will thereafter credit them to your account either directly
or indirectly through indirect participants, as applicable.
We refer you to "DESCRIPTION OF THE CERTIFICATES--Book-Entry Certificates"
in this prospectus supplement.
BALLOON LOAN RISK
Balloon loans pose a risk because a borrower must pay a large lump sum
payment of principal at the end of the loan term. If the borrower is unable to
pay the lump sum or refinance such amount, you will suffer a loss if the
collateral for the loan is insufficient, the other forms of credit enhancement
are insufficient to cover the loss and the certificate insurer fails to perform
its obligations under the policy. Approximately 19.58% of the initial mortgage
loans (by initial pool balance as of the cut-off date) are balloon loans.
EARLY DEFAULT RISK
All of the initial mortgage loans in the pool as of the cut-off date were
originated within 8 months prior to the cut-off date. As of the cut-off date,
the weighted average remaining term to stated maturity for the initial mortgage
loans was 263 months and 359 months for loan group 1 and loan group 2,
respectively. Generally, borrowers default on mortgage loans with greater
frequency in the early years of the term of the mortgage loan.
DELAY IN RECEIPT OF LIQUIDATION PROCEEDS; LIQUIDATION PROCEEDS MAY BE LESS THAN
MORTGAGE LOAN BALANCE
Substantial delays could be encountered in connection with the liquidation
of delinquent mortgage loans. Further, liquidation expenses such as legal fees,
real estate taxes and maintenance and preservation expenses will reduce the
portion of liquidation proceeds payable to you. If a mortgaged property fails to
provide adequate security for the mortgage loan, you will incur a loss on your
investment if the other credit enhancements are not sufficient to cover the loss
and the certificate insurer fails to perform its obligations under the
certificate insurance policy.
We refer you to "CERTAIN LEGAL ASPECTS OF LOANS--Foreclosure" in the
prospectus.
PREPAYMENTS AFFECT TIMING AND RATE OF RETURN ON YOUR INVESTMENT
The yield to maturity on your certificates will be directly related to the
rate of principal payments on the mortgage loans in the related loan group.
Please consider the following:
o Mortgagors may fully or partially prepay their mortgage loan at any time.
However, some mortgage loans require that the mortgagor pay a fee with any
prepayment. This may result in the rate of prepayments being slower than
otherwise be the case. Approximately 59.95% of the initial mortgage loans (by
initial pool balance as of the cut-off date) have prepayment fees.
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<PAGE>
o All the mortgage loans contain due-on-sale provisions. Due-on-sale
provisions require the mortgagor to fully pay the mortgage loan when the
mortgaged property is sold. Generally, the master servicer will enforce the
due-on-sale provision unless prohibited by applicable law.
o The rate of principal payments on pools of mortgage loans is influenced
by a variety of factors, including general economic conditions, interest rates,
the availability of alternative financing and homeowner mobility.
o We cannot predict the rate at which borrowers will repay their mortgage
loans, nor are we aware of any publicly available studies or statistics on the
rate of prepayment of mortgage loans similar to the mortgage loans in the pool.
We refer you to "PREPAYMENT AND YIELD CONSIDERATIONS" in this prospectus
supplement.
CERTIFICATE RATING BASED PRIMARILY ON FINANCIAL STRENGTH OF THE CERTIFICATE
INSURER
The ratings on the offered certificates depend primarily on the financial
strength of the certificate insurer. Therefore, a reduction of the rating
assigned to the financial strength of the certificate insurer may have a
corresponding reduction on the ratings assigned to the offered certificates. A
reduction in the rating assigned to the offered certificates would reduce the
market value of the certificates and may affect your ability to sell them. In
general, the rating on your certificate addresses credit risk and does not
address the likelihood of prepayments.
We refer you to "RATINGS" in this prospectus supplement.
LIEN PRIORITY COULD RESULT IN PAYMENT DELAY AND LOSS
Some of the mortgage loans in the trust are secured by mortgages which are
junior in priority. Approximately 97.60% of the initial mortgage loans are first
mortgages and approximately 2.40% of the initial mortgage loans are second
mortgages (by initial pool principal balance as of the cut-off date). If a
mortgage loan secured by a second mortgage succeeds to a first lien position
after the cut-off date due to the payoff of a prior first lien, the master
servicer may consent under certain circumstances to a new first priority lien
regardless of the principal amount, which has the effect of making the first
mortgage a junior mortgage. Mortgage loans that are secured by junior mortgages
will receive proceeds from a sale of the related mortgaged property only after
any senior mortgage loans and prior statutory liens have been paid. If the
remaining proceeds are insufficient to satisfy the mortgage loan in the trust,
the other credit enhancements are insufficient to cover the loss and the
certificate insurer fails to perform its obligations under the policy, then:
o there will be a delay in distributions to you while a deficiency judgment
against the borrower is sought; and
o you may incur a loss if a deficiency judgment cannot be obtained.
DISTRIBUTIONS AND RIGHTS OF INVESTORS ADVERSELY AFFECTED BY INSOLVENCY OF SELLER
The sale of the mortgage loans from the seller to the trust will be treated
by the seller and the trust as a sale of the mortgage loans. If the seller were
to become insolvent, a receiver or conservator for, or a creditor of, the
seller, may argue that the transaction between the seller and the trust is a
pledge of mortgage loans as security for a borrowing rather than a sale. Such an
attempt, even if unsuccessful, could result in delays in distributions to you.
In the event of the seller's insolvency, there is a possibility that the
Federal Deposit Insurance Corporation could be appointed as a receiver or
conservator and prevent the trustee from taking any action with respect to the
trust. The Federal Deposit Insurance Corporation may enforce the seller's
contracts and may have the power to cause the seller to continue to perform the
master servicer's duties. This would prevent the appointment of a successor
servicer and prevent the liquidation of the mortgage loans or the early
retirement of the certificates.
The seller will deliver the mortgage notes to the trustee on the closing
date (or the date of transfer of any subsequent mortgage loan) and the
assignments of each mortgage will be delivered within 90 days of the closing
date (or date of transfer as applicable) in recordable form. However, all other
documentation relating
S-10
<PAGE>
to each mortgage loan will be held by the seller and no assignment of any
mortgage is required to be recorded in the name of the trustee, unless the
seller's long-term debt rating is reduced below Baa2 by Moody's or BBB by S&P or
Fitch or upon the occurrence of certain other events. Within 30 days of any such
occurrence, the seller is required to deliver the remaining mortgage documents
to the trustee and to either record the assignments or deliver a legal opinion
to the effect that recordation of such assignments is not necessary in order to
perfect the interest of the trust in the mortgages. Prior to delivery and
recording, the interest of the trustee in the mortgages, the mortgage notes and
any proceeds from the mortgage loans may be subject to the claims of creditors
or to sale to a third party, as well as to a receiver or conservator appointed
in the event of the insolvency of the seller.
In certain states in which the mortgaged properties are located, failure to
record the assignments of the related mortgages to the trustee will have the
result of making the sale of the mortgage loans potentially ineffective against:
o any creditors of the seller who may have been fraudulently or
inadvertently induced to rely on the mortgage loans as assets of the seller, or
o any purchaser of a mortgage loan who had no notice of the prior
conveyance to the trust if such purchaser perfects his interest in the mortgage
loan by taking possession of the related documents or other evidence of
indebtedness.
In such an event, the trust would be an unsecured creditor of the seller.
INTEREST PAYMENTS ON THE MORTGAGE LOANS MAY BE REDUCED
Prepayments of Principal May Reduce Interest Payments. If a mortgagor
prepays a mortgage loan, the mortgagor is charged interest only up to the date
of the prepayment, instead of a full month. The master servicer is obligated to
reduce its servicing fee in the month of such prepayment so that one month's
interest is paid with such prepayment in full. If the servicing fee is
insufficient to pay such interest shortfalls attributed to prepayments, a
shortfall in interest due on the certificates may result. The certificate
insurer is required to cover this shortfall. If the other credit enhancements
are insufficient to cover the loss and the certificate insurer fails to perform
its obligations under the policy, you may incur a loss.
Certain Interest Shortfalls Are Not Covered by the Master Servicer or the
Certificate Insurance Policy. The Soldiers' and Sailors' Civil Relief Act of
1940 permits certain modifications to the payment terms for mortgage loans,
including a reduction in the amount of interest paid by the borrower under
certain circumstances. Neither the master servicer nor the certificate insurer
will pay for any interest shortfalls created by the Soldiers' and Sailors' Civil
Relief Act of 1940.
RISK ASSOCIATED WITH THE SELLER'S UNDERWRITING STANDARDS
The seller's underwriting standards are less stringent than those of FNMA
or FHLMC. Therefore, the mortgage loans may experience higher rates of
delinquencies, defaults and foreclosures than those underwritten according to
more traditional standards.
RISK OF LOSSES AS A RESULT OF GEOGRAPHIC CONCENTRATION
The mortgaged properties relating to the mortgage loans are located in 43
states and the District of Columbia. However, 9.01% of the initial mortgage
loans (by initial pool balance as of the cut-off date) are secured by mortgaged
properties located in Ohio. If Ohio experiences in the future weaker economic
conditions or greater rates of decline in real estate values than the United
States generally then, the mortgage loans may experience higher rates of
delinquencies and foreclosures than would otherwise be the case.
RISK OF PREPAYMENT DUE TO SUBSEQUENT MORTGAGE LOANS
The trust will buy the subsequent mortgage loans from the seller until
January 23, 1999. During this time the seller will sell mortgage loans to the
trust if it has mortgage loans to sell. The ability of the seller to originate
and acquire additional mortgage loans is affected by a variety of factors,
including interest rates, unemployment levels, the rate of inflation and
consumer perception of economic conditions generally. If the full amount
deposited in the pre-funding accounts for the purpose of purchasing the
subsequent mortgage
S-11
<PAGE>
loans cannot be used for that purpose prior to January 23, 1999, any remaining
amounts will be paid on the offered certificates as a prepayment of principal on
the January distribution date.
We refer you to "DESCRIPTION OF THE MORTGAGE LOANS--Conveyance of
Subsequent Mortgage Loans" and "PREPAYMENT AND YIELD CONSIDERATIONS--Mandatory
Prepayment" in this prospectus supplement for more detail.
In addition, the subsequent mortgage loans will have different
characteristics than those described in this prospectus supplement. However, the
seller will not select any subsequent mortgage loans to adversely affect the
interests of the certificateholders or the certificate insurer.
EFFECT OF MORTGAGE LOAN YIELD ON CERTIFICATE RATE
The group 2 certificates accrue interest at certificate rates based on
one-month LIBOR plus a specified margin, but are subject to a cap. The cap on
interest paid on the group 2 certificates is based on the weighted average of
the interest rates on the mortgage loans in loan group 2 net of certain trust
expenses. Substantially all of the mortgage loans in loan group 2 have interest
rates that are based on six month-LIBOR plus a specified margin. Substantially
all of the loan group 2 mortgage loans have periodic and maximum limitations on
adjustments to the mortgage loan rate. Furthermore, the majority of mortgage
loans in loan group 2 are subject to an initial fixed period during which the
loan rates do not change. The initial fixed periods range from 6 months to
5 years from the date of origination. As a result, the group 2 certificates may
accrue less interest than they would accrue if their rates were based solely on
one-month LIBOR plus the specified margin.
A variety of factors could limit the certificate rates on the group 2
certificates. Some of these factors are described below:
o The certificate rates on the group 2 certificates adjust monthly while
the loan rates on the loan group 2 mortgage loans adjust less frequently.
Consequently, the cap on the group 2 certificates may limit increases in the
certificate rates for extended periods in a rising interest rate environment.
o The loan rate on the group 2 mortgage loans may respond to different
economic and market factors than one-month LIBOR. It is possible that interest
rates on certain of the loan group 2 mortgage loans may decline while interest
rates on the group 2 certificates are stable or rising. It is also possible that
interest rates on both the loan group 2 mortgage loans and the group 2
certificates may decline or increase during the same period, but that the
interest rates on the group 2 certificates may decline more slowly or increase
more rapidly.
These factors may adversely affect the yields to maturity on the group 2
certificates.
We refer you to "DESCRIPTION OF THE CERTIFICATES--Net Funds Cap Carryover
Account" and "--The Certificate Rate" in this prospectus supplement for more
detail.
RISKS ASSOCIATED WITH YEAR 2000 COMPLIANCE
As is the case with most companies using computers in their operations, the
master servicer is faced with the task of preparing for year 2000. The year 2000
issue is the result of prior computer programs being written using two digits,
rather than four digits, to define the applicable year. Any of the master
servicer's computer programs that have time-sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000. Major computer
system failure or miscalculations may occur as a result. The master servicer is
presently engaged in various procedures to ensure that its computer systems and
software will be year 2000 compliant.
However, if the master servicer or any of its suppliers, customers, brokers
or agents do not successfully and timely achieve year 2000 compliance, the
performance of obligations of the master servicer could be materially adversely
affected. This could result in delays in processing payments on the mortgage
loans and cause a related delay in distributions to you.
S-12
<PAGE>
THE CERTIFICATE INSURER
The information set forth in this section and in the financial statements
of MBIA Insurance Corporation (the "Certificate Insurer") incorporated by
reference herein as described below have been provided by the Certificate
Insurer. No representation is made by the Underwriters, the Seller, the Trustee,
the Master 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."). 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.
Effective February 17, 1998, MBIA Inc. acquired all the outstanding stock
of Capital Markets Assurance Corporation ("CMAC") through a merger with its
parent CapMAC Holdings Inc. Pursuant to a reinsurance agreement CMAC has ceded
all of its net insured risks (including any amounts due but unpaid from third
party reinsurers), as well as its unearned premiums and contingency reserves, to
the Certificate Insurer. MBIA Inc. is not obligated to pay the debts of or
claims against CMAC.
The consolidated financial statements of the Certificate Insurer, a wholly
owned subsidiary of MBIA Inc., and its subsidiaries as of December 31, 1997 and
December 31, 1996 and for each of the three years in the period ended
December 31, 1997, 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, 1997 and the consolidated financial statements of the
Certificate Insurer and its subsidiaries as of September 30, 1998 and for the
nine month periods ended September 30, 1998 and September 30, 1997 included in
the Quarterly Report on Form 10-Q of MBIA Inc. for the period ending
September 30, 1998 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
purposes of this Prospectus Supplement to the extent that a statement contained
herein or in any other subsequently filed document which also is 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 amended, subsequent to the date
of this Prospectus Supplement and prior to the termination of the offering of
the Offered 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.
S-13
<PAGE>
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, 1997 SEPTEMBER 30, 1998
----------------- ------------------
(AUDITED) (UNAUDITED)
(IN MILLIONS)
<S> <C> <C>
Admitted Assets........................................ $ 5,256 $6,318
Liabilities............................................ 3,496 4,114
Capital and Surplus.................................... 1,760 2,204
</TABLE>
<TABLE>
<CAPTION>
GAAP
---------------------------------------
DECEMBER 31, 1997 SEPTEMBER 30, 1998
----------------- ------------------
(AUDITED) (UNAUDITED)
(IN MILLIONS)
<S> <C> <C>
Assets................................................. $ 5,988 $7,439
Liabilities............................................ 2,624 3,268
Shareholder's Equity................................... 3,364 4,171
</TABLE>
Copies of the financial statements of the Certificate Insurer incorporated
by reference herein and copies of the Certificate Insurer's 1997 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
representation regarding the Certificates or the advisability of investing in
the Certificates.
Moody's Investors Service, Inc. rates the financial strength of the
Certificate Insurer "Aaa".
Standard & Poor's Ratings Services, a division of The McGraw-Hill
Companies, Inc. rates the financial strength of the Certificate Insurer "AAA".
Fitch IBCA, Inc. (formerly known as "Fitch Investors Services, L.P.") rates
the financial strength 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.
YEAR 2000 READINESS DISCLOSURE
An area of potential risk to the Certificate Insurer's financial guarantee
business would be the inability of an issuer or its trustee or paying agent to
make payments on a Certificate Insurer insured transaction because of their
failure to be Year 2000 ready. To mitigate this risk, the Certificate Insurer
has been surveying all trustees, all paying agents and selected high volume
issuers to determine their state of readiness. While the survey is not complete,
the results to-date are that all respondents are either ready or planning to be
ready by late 1999. If the Certificate Insurer is asked to pay in those
situations where the issuer's system fails, it will do so and would expect to
recover any such payment in a fairly short time period. It is not possible at
this time to evaluate the extent of such payments. The Certificate Insurer
believes that it has adequate sources of liquidity to cover these payments.
S-14
<PAGE>
THE PROVIDENT BANK
The Provident Bank ("Provident") will be responsible for servicing the
Mortgage Loans for the Trust in accordance with the terms of the Agreement. See
"--Servicing and Collection Procedures."
Provident is the principal banking subsidiary of Provident Financial Group,
Inc., a Cincinnati based commercial banking and financial services holding
company registered under the Bank Holding Company Act. Provident Financial
Group, Inc. operates throughout Ohio, Northern Kentucky, Southeastern Indiana
and Florida. As of September 30, 1998, Provident Financial Group, Inc. had total
assets of $8.3 billion, net loans and leases of $5.6 billion, deposits of
$5.1 billion and total shareholders' equity of $725.1 million. Provident
Financial Group, Inc.'s tier 1 and total risk-based capital ratios were 9.37%
and 12.18%, respectively. For the fiscal year ended December 31, 1997, Provident
Financial Group, Inc. had net earnings of $115.3 million. For the nine months
ended September 30, 1998, Provident Financial Group, Inc. had net earnings of
$94.9 million. Provident represents approximately 92% of Provident Financial
Group, Inc.'s assets.
CREDIT AND UNDERWRITING GUIDELINES
The following is a description of the underwriting guidelines customarily
employed by Provident with respect to Mortgage Loans which it purchases or
originates. Each Mortgage Loan was underwritten according to these guidelines.
Provident believes its guidelines are consistent with those utilized by home
equity lenders generally. The underwriting process is intended to assess both
the prospective borrower's ability to repay and the adequacy of the real
property security as collateral for the loan granted. In certain cases, loans
may be made outside of those guidelines with the prior approval of an
underwriting manager of Provident.
Provident generally originates or purchases loans which either fully
amortize over a period not to exceed 360 months or provide for amortization over
a 360 month schedule with a "balloon" payment required at the maturity date,
which generally will not be less than fifteen (15) years after origination. The
loan amounts generally range from a minimum of $5,000 to a maximum of $750,000
unless a higher amount is specifically approved by authorized officers of
Provident. Provident primarily originates or purchases non-purchase money first
or second mortgage loans although Provident also originates purchase money first
mortgage loans.
The homes used for collateral to secure the loans may be either primary
residential (which includes second and vacation homes) or investor owned one- to
four-family homes, condominiums, townhouses or manufactured housing. Generally,
each home must have a minimum appraised value as described below. Mobile housing
or agricultural land are not accepted as collateral. In some cases, the loan may
be secured by the owner-occupied residence plus additional collateral.
Each property proposed as security for a loan must be appraised within six
months prior to the date of such loan. The Combined Loan-to-Value Ratio of the
first and second mortgages generally may not exceed 90%. If a prior mortgage
exists, Provident first reviews the first mortgage history. If it contains
open-end, advance or negative amortization provisions, the maximum potential
first mortgage balance is used in calculating the Combined Loan-to-Value Ratio
which determines the maximum loan amount.
For Provident's full documentation process, each mortgage applicant must
provide, and Provident must verify, personal financial information. The
applicant's total monthly obligations (which include principal and interest on
each mortgage, tax assessments, other loans, charge accounts and all other
scheduled indebtedness) generally cannot exceed 60% of the applicant's gross
monthly income. Applicants who are salaried employees must provide current
employment information in addition to two recent years of employment history.
Verifications are based on written confirmation from employers or a combination
of the two most recent pay stubs, the two most recent years' W-2 tax forms and
telephone confirmation from the employer. Self-employed applicants must be
self-employed in the same field of work for a minimum of two years and must
provide signed copies of complete federal income tax returns (including
schedules) filed for the most recent two years.
For Provident's stated-income program, proof of one year history of
employment plus proof of current self-employed status is required. The
applicant's debt-to-income ratio is calculated based on income as certified by
the borrower on the application and must be reasonable. For Provident's
non-income verifier program, the loan is underwritten based upon the applicant's
credit report and the appraised value of the mortgaged property. The
S-15
<PAGE>
maximum Combined Loan-to-Value ratio may not exceed 85% for the stated-income
and the non-income verifier program.
For potential borrowers with excellent credit histories, less stringent
underwriting criteria may apply for first mortgage loans.
A credit report by an independent credit reporting agency is required
reflecting the applicant's complete credit history. Credit reports usually
reflect all delinquencies of 30 days or more, repossessions, judgments,
foreclosures, garnishments, bankruptcies, divorce actions and similar adverse
credit events that can be discovered by a search of public records. If a credit
report is obtained more than 60 days prior to the loan closing, Provident will
determine whether the reported information has not changed. Written verification
is obtained of any first mortgage balance if not reported by the credit bureau.
Generally, an applicant should have an acceptable credit history given the
amount of equity available, the strength of the applicant's employment history
and the level of the applicant's income to debt obligations. The rescission
period (generally, a period of three days) must have expired prior to funding a
loan. The rescission period may not be waived by the applicant except as
permitted by law. Either an ALTA title insurance policy or an attorney's opinion
of title is required for all loans.
Applicants are required to obtain 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 home equity loan 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 required.
Provident's credit underwriting guidelines require that any major deferred
maintenance on any property must be cured from the proceeds of the loan.
SERVICING AND COLLECTION PROCEDURES
The following is a description of the servicing policies and procedures
customarily and currently employed by Provident with respect to the portion of
its mortgage loan portfolio which it services. Provident intends to service the
Mortgage Loans in accordance with these policies and procedures and in
accordance with the Agreement. Provident revises its servicing policies and
procedures from time to time, based upon its business judgment, in connection
with changes in economic and market conditions, the mortgage loan portfolio and
applicable laws and regulations. Provident advises new borrowers of its policies
and procedures and of appropriate phone numbers and addresses for Provident's
servicing personnel through an introductory courtesy call.
Servicing of Provident's mortgage loan portfolio is conducted through its
principal office in Cincinnati, Ohio. Centralized controls and standards have
been established by Provident for the servicing and collection of mortgage loans
in its portfolio. Servicing includes, but is not limited to, post-closing loan
processing, payment processing, customer service, collections and liquidations.
Borrowers are billed monthly in advance of the date on which mortgage
payments are due. Provident's collection policy emphasizes working with
borrowers in default in an effort to bring payments current and to avoid
foreclosures. If timely payment is not received, collection procedures are
generally initiated within 5 days after the due date. Initial collection
procedures involve attempting to contact the borrower, on a two-day call
schedule, by telephone to make payment arrangements. Telephone contacts continue
on that schedule until the mortgage loan is brought current, other payment
arrangements are made or Provident determines to take other action. A standard
form letter from Provident's in-house legal counsel is utilized when a mortgage
loan becomes 30 days delinquent. This letter sets forth Provident's collection
options as well as the borrower's options for curing the delinquency.
Regulations and practices regarding the liquidation of properties (e.g.
foreclosure) and the rights of the borrower in default vary greatly from state
to state. Provident will decide that liquidation is the appropriate course of
action only if a delinquency cannot otherwise be cured. Generally, Provident
commences foreclosure
S-16
<PAGE>
proceedings when a loan becomes 60 days delinquent. If Provident determines that
purchasing a property securing a mortgage loan will minimize the loss associated
with it, Provident may bid at the foreclosure sale for such property or accept a
deed in lieu of foreclosure.
Any realization from the sale of foreclosed property is taken as a
recovery. After Provident acquires title to a mortgaged property by foreclosure
or deed in lieu of foreclosure, an approved realtor is selected to list and
advertise the property for sale.
Provident's foreclosure on property securing a junior mortgage loan will be
subject to any senior mortgages. If any senior mortgage loan is in default after
Provident has initiated its foreclosure action, Provident may advance funds to
keep such senior mortgage loan current until such time as Provident satisfies
such senior mortgage loan. Such amounts are added to the balance of the mortgage
loan. In the event that foreclosure proceedings have been instituted on any
senior mortgage prior to the initiation of Provident's foreclosure action,
Provident will either satisfy the senior mortgage loan at the time of the
foreclosure sale or take other action to protect its interest in the related
property.
DELINQUENCY EXPERIENCE
The following table sets forth Provident's delinquency experience on its
servicing portfolio of home equity loans (which includes home equity loans
subserviced by others for Provident) similar to the Mortgage Loans for the
periods indicated. There can be no assurance that the delinquency 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 table is based on all of the closed-end fixed and
adjustable rate mortgage loans in Provident's servicing portfolio.
The information in the tables below has not been adjusted to eliminate the
effect of the significant growth in the size of Provident's mortgage loan
portfolio during the periods shown. Accordingly, delinquency as a percentage of
aggregate principal balance of mortgage loans serviced for each period may 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. However, since most of the mortgage loans in Provident's mortgage loan
portfolio are not fully seasoned, the delinquency information for such an
isolated group would also be distorted to some degree. Through September 30,
1998, Provident's mortgage loan servicing portfolio had experienced cumulative
losses on liquidations of approximately $4,209,016 since home equity loans
similar to the Mortgage Loans were first originated by Provident in September,
1995.
The following table sets forth information relating to the delinquency
experience of mortgage loans similar to and including the Mortgage Loans for the
quarters ended December 31, 1997, March 31, 1998, June 30, 1998 and September
30, 1998. As of September 30, 1998, there were 142 real estate owned properties
in Provident's mortgage loan servicing portfolio, and mortgages representing
$27,304,741 of Provident's mortgage loan servicing portfolio were in bankruptcy,
$18,413,345 of which are delinquent.
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------------------------------------
SEPTEMBER 30, 1998 JUNE 30, 1998 MARCH 31, 1998
------------------------ ------------------------ ------------------------
NUMBER DOLLAR NUMBER DOLLAR NUMBER DOLLAR
OF LOANS AMOUNT OF LOANS AMOUNT OF LOANS AMOUNT
-------- -------------- -------- -------------- -------- --------------
<S> <C> <C> <C> <C> <C> <C>
Portfolio........................... 19,301 $1,450,837,293 16,760 $1,277,681,185 15,156 $1,149,259,791
Delinquency percentage (1)(2)
30-59 days........................ 2.58% 2.40% 2.39% 2.38% 2.50% 2.64%
60-89 days........................ 0.94% 0.96% 0.91% 0.91% 0.90% 0.83%
90 days or more................... 4.41% 4.99% 4.36% 5.23% 4.12% 5.11%
Total............................... 7.93% 8.35% 7.66% 8.52% 7.52% 8.59%
<CAPTION>
QUARTER ENDED
--------------------------
DECEMBER 31, 1997
--------------------------
NUMBER OF DOLLAR
LOANS AMOUNT
-------- --------------
<S> <C> <C>
Portfolio........................... 13,431 $1,021,037,108
Delinquency percentage (1)(2)
30-59 days........................ 2.78% 2.69%
60-89 days........................ 1.22% 1.38%
90 days or more................... 3.42% 4.28%
Total............................... 7.42% 8.36%
</TABLE>
- ------------------
(1) The delinquency percentage represents the number and principal balance of
mortgage loans with payments contractually past due.
(2) Includes properties in foreclosure, delinquent bankruptcies and real estate
owned.
S-17
<PAGE>
DESCRIPTION OF THE MORTGAGE LOANS
GENERAL
The statistical information presented in this Prospectus Supplement is only
with respect to the mortgage loans (the "Initial Mortgage Loans") in the
Mortgage Pool as of December 1, 1998 and describes the Initial Mortgage Loans in
Loan Group 1 and the Initial Mortgage Loans in Loan Group 2 based on the
characteristics of such Loan Groups as of the Cut-Off Date. The "Cut-Off Date"
(a) for any Initial Mortgage Loan is December 1, 1998 or (b) for any Subsequent
Mortgage Loan is the date of origination of such Subsequent Mortgage Loan,
unless such Subsequent Mortgage Loan was originated prior to December 1, 1998,
then December 29, 1998.
The Agreement will provide that additional closed-end, fixed and adjustable
rate mortgage loans (the "Subsequent Mortgage Loans") may be purchased by the
Trust from the Seller during the Funding Period (as defined herein). The Initial
Mortgage Loans and the Subsequent Mortgage Loans will be collectively referred
to herein as the "Mortgage Loans." The Initial Mortgage Loans and the Subsequent
Mortgage Loans, if available, to be purchased by the Trust will be originated or
purchased by Provident, and sold by Provident, as Seller, to the Trust. The
Agreement will also provide that the Mortgage Loans, following the conveyance of
the Subsequent Mortgage Loans, must in the aggregate conform to certain
specified characteristics described below under "--Conveyance of Subsequent
Mortgage Loans". The Mortgaged Properties securing the Mortgage Loans consist
primarily of one- to-four family residential properties. The Mortgaged
Properties may be owner-occupied (which includes second and vacation homes) or
non-owner occupied.
All of the Mortgage Loans bear interest at rates (the "Loan Rates") that
are either fixed or adjustable and are evidenced by promissory notes (the
"Mortgage Notes") secured by deeds of trust or mortgages on the related
mortgaged properties (the "Mortgaged Properties"). The Mortgage Loans are
divided into two loan groups (the "Loan Groups"). "Loan Group 1" consists of
Mortgage Loans with fixed interest rates. "Loan Group 2" consists of Mortgage
Loans with adjustable interest rates. The Initial Mortgage Loans in each Loan
Group are referred to herein as "Loan Group 1 Initial Mortgage Loans" or "Loan
Group 2 Initial Mortgage Loans." The maximum amount of Subsequent Mortgage Loans
to be transferred to the Trust during the Funding Period for Loan Group 1 is
$69,755,294.71 and for Loan Group 2 is $54,375,000.27 (the "Loan Group 1
Pre-Funded Amount" and the "Loan Group 2 Pre-Funded Amount," respectively).
With respect to any date, the "Pool Principal 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
(as defined herein)) on any day is equal to the Cut-Off Date Principal Balance
of such Mortgage Loan minus all collections applied in reduction of its Cut-Off
Date Principal Balance. The "Cut-Off Date Principal Balance" with respect to
each Mortgage Loan is the unpaid principal balance thereof as of the applicable
Cut-Off Date. With respect to any date, the "Loan Group 1 Principal Balance" and
the "Loan Group 2 Principal Balance" will be equal to the aggregate of the
Principal Balances of all Mortgage Loans in Loan Group 1 and Loan Group 2,
respectively, as of such date. The Loan Group 1 Principal Balance and the Loan
Group 2 Principal Balance are each sometimes referred to herein as a "Loan Group
Principal Balance."
As of the Cut-Off Date, the property of the Trust includes, among other
things, a pool of mortgage loans (the "Mortgage Pool") consisting of 2,879
Initial Mortgage Loans with an aggregate Principal Balance as of the Cut-Off
Date of $225,869,705.02 (the "Cut-Off Date Initial Pool Principal Balance"). The
Mortgage Pool consists of closed-end, fixed and adjustable rate home equity
loans with remaining terms to stated maturity of not more than 360 months
(including both fully amortizing and Balloon Loans). Approximately 97.60% of the
Initial Mortgage Loans (by Cut-Off Date Initial Pool Principal Balance) are
secured by first lien mortgages on the Mortgaged Properties and 2.40% (by
Cut-Off Date Initial Pool Principal Balance) are secured by second liens on the
Mortgaged Properties. As of the Cut-Off Date, approximately 0.36% of the Initial
Mortgage Loans (by Cut-Off Date Initial Pool Principal Balance) were 30 to 59
days delinquent. No Initial Mortgage Loan was more than 59 days delinquent as of
the Cut-Off Date (assuming for purposes of the calculation that all months have
30 days.) With respect to the Initial Mortgage Loans, the average Cut-Off Date
Principal Balance was $78,454.22, the minimum Cut-Off Date Principal Balance was
$5,166.80, the maximum Cut-Off Date Principal Balance was $725,577.15, the
minimum Loan Rate and the maximum Loan Rate on the Cut-Off Date were 7.85% and
18.00% per annum, respectively, and the weighted average Loan Rate as of the
Cut-Off Date was 10.37% per annum. The
S-18
<PAGE>
Combined Loan-to-Value Ratio of each Initial Mortgage Loan, computed on the date
such loan was originated, taking into account the amounts of any related senior
mortgage loans (the "Combined Loan-to-Value Ratio") did not exceed 90.00% as of
the Cut-Off Date. The weighted average Combined Loan-to-Value Ratio of the
Initial Mortgage Loans was 78.07% as of the Cut-Off Date. Approximately 19.58%
of the Initial Mortgage Loans (by Cut-Off Date Initial Pool Principal Balance)
are Balloon Loans. Each Initial Mortgage Loan was originated or purchased by the
Seller during or after August 1998. The remaining terms to stated maturity as of
the Cut-Off Date of the Initial Mortgage Loans range from 58 months to
360 months; the weighted average remaining term to stated maturity of the
Initial Mortgage Loans as of the Cut-Off Date is 306 months.
The Mortgage Loans provide that interest is charged to the borrowers
thereunder, and payments are due from such borrowers, as of a scheduled day of
each month which is fixed at the time of origination. Scheduled monthly payments
("Monthly Payments") made by the borrowers on the Mortgage Loans either earlier
or later than the scheduled due dates thereof will not affect the amortization
schedule or the relative application of such payments to principal and interest.
Set forth below is information as of the Cut-Off Date regarding the Loan
Group 1 Initial Mortgage Loans and Loan Group 2 Initial Mortgage Loans. Prior to
the Closing Date, Mortgage Loans may be removed from either Loan Group and other
Mortgage Loans with similar characteristics may be substituted therefor. The
Seller believes that the information set forth herein with respect to the
Initial Mortgage Loans as presently constituted is representative of the Initial
Mortgage Loans as they will be constituted at the Closing Date, although certain
characteristics of such Mortgage Loans may vary but any such variance will not
be material.
LOAN GROUP 1 STATISTICS
The sum of the columns below may not equal the total indicated due to
rounding. In addition, unless otherwise set forth herein, all percentages set
forth herein with respect to the Initial Mortgage Loans in Loan Group 1 are
percentages of the Cut-Off Date Loan Group 1 Initial Principal Balance.
As of the Cut-Off Date, the Initial Mortgage Loans in Loan Group 1
consisted of 1,795 loans, and the related Mortgaged Properties were located in
41 states and the District of Columbia. As of the Cut-Off Date, the Initial
Mortgage Loans in Loan Group 1 had an aggregate Principal Balance of
$126,244,705.29 (the "Cut-Off Date Loan Group 1 Initial Principal Balance"), the
maximum Principal Balance of any of the Initial Mortgage Loans in Loan Group 1
was $500,066.71, the minimum Principal Balance thereof was $5,166.80 and the
Principal Balance of such Initial Mortgage Loans averaged $70,331.31. As of the
Cut-Off Date, the Loan Rates on the Initial Mortgage Loans in Loan Group 1
ranged from 7.99% per annum to 18.00% per annum, and the weighted average Loan
Rate for the Initial Mortgage Loans in Loan Group 1 was 10.54% per annum. As of
the Cut-Off Date, the original term to stated maturity for each Initial Mortgage
Loan in Loan Group 1 ranged from 60 months to 360 months, the weighted average
original term to stated maturity was 264 months, the remaining term to stated
maturity ranged from 58 months to 360 months, the weighted average remaining
term to stated maturity was 263 months and the CLTV (as defined herein) ranged
from 11.26% to 90.00% with a weighted average CLTV of 77.66%. Each Initial
Mortgage Loan in Loan Group 1 was originated or purchased by the Seller in the
period from August 31, 1998 to November 30, 1998. As of the Cut-Off Date,
approximately 96.22% and 3.78% of the Initial Mortgage Loans in Loan Group 1
were secured by first and second liens, respectively. As of the Cut-Off Date,
64.97% of the Initial Mortgage Loans in Loan Group 1 require Monthly Payments
that will fully amortize such Mortgage Loans by their respective maturity dates,
and 35.03% of the Initial Mortgage Loans in Loan Group 1 are Balloon Loans. As
of the Cut-Off Date, the remaining terms to stated maturity of the Balloon Loans
ranged from 59 months to 180 months and the weighted average remaining term to
maturity of the Balloon Loans was 179 months.
S-19
<PAGE>
PRINCIPAL BALANCES
LOAN GROUP 1
INITIAL MORTGAGE LOANS
<TABLE>
<CAPTION>
NUMBER OF CUT-OFF DATE % OF CUT-OFF
LOAN GROUP 1 LOAN GROUP 1 DATE LOAN
RANGE OF CUT-OFF DATE INITIAL INITIAL GROUP 1 INITIAL
PRINCIPAL BALANCES MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------------------------------------------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
$ 0.01-$ 10,000.00.................................... 3 $ 25,163.42 0.02%
$ 10,000.01-$ 20,000.00.................................... 77 1,274,259.81 1.01
$ 20,000.01-$ 30,000.00.................................... 154 3,984,818.36 3.16
$ 30,000.01-$ 40,000.00.................................... 237 8,467,374.18 6.71
$ 40,000.01-$ 50,000.00.................................... 258 11,682,771.30 9.25
$ 50,000.01-$ 60,000.00.................................... 250 13,767,892.43 10.91
$ 60,000.01-$ 70,000.00.................................... 189 12,272,671.47 9.72
$ 70,000.01-$ 80,000.00.................................... 155 11,658,058.27 9.23
$ 80,000.01-$ 90,000.00.................................... 94 8,020,077.83 6.35
$ 90,000.01-$100,000.00.................................... 89 8,480,654.33 6.72
$100,000.01-$110,000.00.................................... 52 5,452,224.99 4.32
$110,000.01-$120,000.00.................................... 47 5,397,894.63 4.28
$120,000.01-$130,000.00.................................... 35 4,393,977.34 3.48
$130,000.01-$140,000.00.................................... 23 3,098,139.16 2.45
$140,000.01-$150,000.00.................................... 21 3,043,655.67 2.41
$150,000.01-$160,000.00.................................... 16 2,455,028.13 1.94
$160,000.01-$170,000.00.................................... 14 2,320,757.07 1.84
$170,000.01-$180,000.00.................................... 16 2,822,617.50 2.24
$180,000.01-$190,000.00.................................... 9 1,657,223.30 1.31
$190,000.01-$200,000.00.................................... 4 777,017.15 0.62
$200,000.01-$210,000.00.................................... 8 1,643,267.80 1.30
$210,000.01-$220,000.00.................................... 2 430,817.77 0.34
$220,000.01-$230,000.00.................................... 4 897,689.32 0.71
$230,000.01-$240,000.00.................................... 5 1,176,639.45 0.93
$240,000.01-$250,000.00.................................... 3 729,600.31 0.58
$250,000.01-$300,000.00.................................... 13 3,550,871.82 2.81
$300,000.01-$400,000.00.................................... 11 3,888,036.41 3.08
$400,000.01-$500,000.00.................................... 5 2,375,439.36 1.88
$500,000.01-$600,000.00.................................... 1 500,066.71 0.40
------ --------------- -------
Total................................................. 1,795 $126,244,705.29 100.00%
------ --------------- -------
------ --------------- -------
</TABLE>
S-20
<PAGE>
GEOGRAPHIC DISTRIBUTION BY STATE(1)
LOAN GROUP 1
INITIAL MORTGAGE LOANS
<TABLE>
<CAPTION>
NUMBER OF CUT-OFF DATE % OF CUT-OFF
LOAN GROUP 1 LOAN GROUP 1 DATE LOAN
INITIAL INITIAL GROUP 1 INITIAL
STATE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------------------------------------------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
Alabama.................................................... 22 $ 1,041,877.51 0.83%
Arkansas................................................... 13 624,801.79 0.49
Arizona.................................................... 5 587,052.68 0.47
California................................................. 50 6,566,420.36 5.20
Colorado................................................... 66 6,418,532.65 5.08
Connecticut................................................ 3 145,794.79 0.12
Delaware................................................... 6 245,234.80 0.19
District of Columbia....................................... 8 626,389.10 0.50
Florida.................................................... 120 7,291,121.97 5.78
Georgia.................................................... 57 3,746,248,13 2.97
Idaho...................................................... 3 199,400.00 0.16
Illinois................................................... 63 5,712,708.32 4.53
Indiana.................................................... 62 3,772,849.78 2.99
Iowa....................................................... 8 351,621.10 0.28
Kansas..................................................... 15 786,614.73 0.62
Kentucky................................................... 19 1,374,565.44 1.09
Louisiana.................................................. 23 895,545.71 0.71
Massachussetts............................................. 3 431,335.57 0.34
Maryland................................................... 54 4,651,206.81 3.68
Michigan................................................... 123 7,447,253.56 5.90
Minnesota.................................................. 17 983,393.58 0.78
Mississippi................................................ 31 1,320,223.85 1.05
Missouri................................................... 44 2,261,730.96 1.79
Nebraska................................................... 8 463,377.05 0.37
Nevada..................................................... 3 438,584.13 0.35
New Jersey................................................. 37 3,481,112.33 2.76
New Mexico................................................. 2 74,836.54 0.06
New York................................................... 53 3,586,630.70 2.84
North Carolina............................................. 185 13,636,586.96 10.80
Ohio....................................................... 161 9,863,010.14 7.81
Oklahoma................................................... 2 127,060.72 0.10
Oregon..................................................... 29 2,549,612.99 2.02
Pennsylvania............................................... 55 2,846,044.58 2.25
South Carolina............................................. 155 10,806,575.14 8.56
Tennessee.................................................. 104 8,434,183.98 6.68
Texas...................................................... 121 6,948,349.03 5.50
Utah....................................................... 11 948,138.26 0.75
Virginia................................................... 11 850,051.25 0.67
Washington................................................. 24 2,492,359.89 1.97
West Virginia.............................................. 2 168,955.09 0.13
Wisconsin.................................................. 14 878,597.94 0.70
Wyoming.................................................... 3 168,715.38 0.13
------ --------------- -------
Total............................................... 1,795 $126,244,705.29 100.00%
------ --------------- -------
------ --------------- -------
</TABLE>
- ------------------
(1) Determined by property address designated as such in the related Mortgage.
S-21
<PAGE>
COMBINED LOAN-TO-VALUE RATIOS(1)
LOAN GROUP 1
INITIAL MORTGAGE LOANS
<TABLE>
<CAPTION>
NUMBER OF CUT-OFF DATE % OF CUT-OFF
LOAN GROUP 1 LOAN GROUP 1 DATE LOAN
INITIAL INITIAL GROUP 1 INITIAL
COMBINED LOAN-TO-VALUE RATIO MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------------------------------------------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
10.001%-15.000%............................................ 4 $ 46,895.36 0.04%
15.001%-20.000%............................................ 6 158,801.68 0.13
20.001%-25.000%............................................ 6 157,629.24 0.12
25.001%-30.000%............................................ 11 333,844.36 0.26
30.001%-35.000%............................................ 8 175,841.80 0.14
35.001%-40.000%............................................ 10 594,392.33 0.47
40.001%-45.000%............................................ 27 852,183.76 0.68
45.001%-50.000%............................................ 30 1,145,706.21 0.91
50.001%-55.000%............................................ 31 1,535,822.28 1.22
55.001%-60.000%............................................ 52 3,420,583.16 2.71
60.001%-65.000%............................................ 64 3,370,747.86 2.67
65.001%-70.000%............................................ 137 8,346,573.11 6.61
70.001%-75.000%............................................ 254 16,519,431.96 13.09
75.001%-80.000%............................................ 652 46,692,851.48 36.99
80.001%-85.000%............................................ 394 34,111,344.38 27.02
85.001%-90.000%............................................ 109 8,782,056.32 6.96
------ --------------- -------
Total...................................................... 1,795 $126,244,705.29 100.00%
------ --------------- -------
------ --------------- -------
</TABLE>
- ------------------
(1) The Combined Loan-to-Value Ratios ("CLTV") shown above are equal, with
respect to each Initial Mortgage Loan, to (i) the sum of (a) the original
principal balance of such Initial Mortgage Loan at the date of origination
plus (b) the remaining balance of the senior lien(s), if any, at the date of
origination of such Initial Mortgage Loan divided by (ii) the lesser of
(a) the value of the related Mortgaged Property, based upon the appraisal
made at the time of origination of such Initial Mortgage Loan or (b) the
purchase price of such Mortgaged Property if the proceeds of such Initial
Mortgage Loan are used to purchase such Mortgaged Property.
LIEN POSITION
LOAN GROUP 1
INITIAL MORTGAGE LOANS
<TABLE>
<CAPTION>
NUMBER OF CUT-OFF DATE % OF CUT-OFF
LOAN GROUP 1 LOAN GROUP 1 DATE LOAN
INITIAL INITIAL GROUP 1 INITIAL
LIEN POSITION MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------------------------------------------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
First...................................................... 1,670 $121,469,637.32 96.22%
Second..................................................... 125 4,775,067.97 3.78
------ --------------- -------
Total............................................ 1,795 $126,244,705.29 100.00%
------ --------------- -------
------ --------------- -------
</TABLE>
S-22
<PAGE>
SECOND MORTGAGE RATIOS(1)
LOAN GROUP 1
INITIAL MORTGAGE LOANS
<TABLE>
<CAPTION>
NUMBER OF CUT-OFF DATE % OF CUT-OFF
LOAN GROUP 1 LOAN GROUP 1 DATE LOAN
INITIAL INITIAL GROUP 1 INITIAL
SECOND MORTGAGE RATIO MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------------------------------------------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
10.001%-20.000%.............................................. 26 $ 690,447.58 14.46%
20.001%-30.000%.............................................. 52 1,893,248.68 39.65
30.001%-40.000%.............................................. 22 822,237.61 17.22
40.001%-50.000%.............................................. 13 711,554.24 14.90
50.001%-60.000%.............................................. 8 457,379.25 9.58
60.001%-70.000%.............................................. 3 120,396.01 2.52
70.001%-80.000%.............................................. 1 79,804.60 1.67
------ ------------- -------
Total........................................................ 125 $4,775,067.97 100.00%
------ ------------- -------
------ ------------- -------
</TABLE>
- ------------------
(1) Applies only to Initial Mortgage Loans in Loan Group 1 in a second lien
position. The Second Mortgage Ratios shown above are equal, with respect to
each such Initial Mortgage Loan in a second lien position, the original
principal balance of such Initial Mortgage Loan at the date of origination
divided by the sum of (a) the original principal balance of such Initial
Mortgage Loan at the date of origination plus (b) the remaining balance of
the senior lien at the date of origination of such Initial Mortgage Loan.
S-23
<PAGE>
LOAN RATES
LOAN GROUP 1
INITIAL MORTGAGE LOANS
<TABLE>
<CAPTION>
NUMBER OF CUT-OFF DATE % OF CUT-OFF
LOAN GROUP 1 LOAN GROUP 1 DATE LOAN
INITIAL INITIAL GROUP 1 INITIAL
LOAN RATES MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------------------------------------------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
7.751%- 8.000%............................................ 7 $ 376,322.20 0.30%
8.001%- 8.250%............................................ 4 235,907.20 0.19
8.251%- 8.500%............................................ 16 1,215,790.03 0.96
8.501%- 8.750%............................................ 34 2,792,335.90 2.21
8.751%- 9.000%............................................ 53 4,415,785.66 3.50
9.001%- 9.250%............................................ 51 3,896,682.49 3.09
9.251%- 9.500%............................................ 92 7,151,979.13 5.67
9.501%- 9.750%............................................ 133 11,261,578.00 8.92
9.751%-10.000%............................................ 195 14,269,216.78 11.30
10.001%-10.250%............................................ 121 8,835,886.96 7.00
10.251%-10.500%............................................ 167 12,077,979.18 9.57
10.501%-10.750%............................................ 160 11,600,966.31 9.19
10.751%-11.000%............................................ 170 13,211,807.38 10.47
11.001%-11.250%............................................ 103 7,763,312.31 6.15
11.251%-11.500%............................................ 125 7,397,268.09 5.86
11.501%-11.750%............................................ 91 5,190,668.02 4.11
11.751%-12.000%............................................ 79 4,831,255.62 3.83
12.001%-12.250%............................................ 55 2,598,452.80 2.06
12.251%-12.500%............................................ 41 2,252,249.98 1.78
12.501%-12.750%............................................ 23 1,664,376.39 1.32
12.751%-13.000%............................................ 36 1,663,933.47 1.32
13.001%-13.250%............................................ 12 465,860.50 0.37
13.251%-13.500%............................................ 11 500,598.64 0.40
13.501%-13.750%............................................ 6 245,693.49 0.19
13.751%-14.000%............................................ 3 142,934.42 0.11
14.001%-14.250%............................................ 3 105,668.34 0.08
14.251%-14.500%............................................ 1 20,758.34 0.02
14.751%-15.000%............................................ 1 24,992.73 0.02
15.001%-15.250%............................................ 1 14,946.32 0.01
17.751%-18.000%............................................ 1 19,498.61 0.02
------ --------------- -------
Total:................................................ 1,795 $126,244,705.29 100.00%
------ --------------- -------
------ --------------- -------
</TABLE>
REMAINING MONTHS TO STATED MATURITY
LOAN GROUP 1
INITIAL MORTGAGE LOANS
<TABLE>
<CAPTION>
NUMBER OF CUT-OFF DATE % OF CUT-OFF
LOAN GROUP 1 LOAN GROUP 1 DATE LOAN
REMAINING TERM TO INITIAL INITIAL GROUP 1 INITIAL
STATED MATURITY MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------------------------------------------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
1- 60.................................................... 6 $ 110,840.18 0.09%
61-120.................................................... 32 967,737.31 0.77
121-180.................................................... 912 59,644,265.46 47.24
181-240.................................................... 140 9,126,461.33 7.23
241-300.................................................... 5 273,071.55 0.22
301-360.................................................... 700 56,122,329.46 44.46
------ --------------- -------
Total................................................. 1,795 $126,244,705.29 100.00%
------ --------------- -------
------ --------------- -------
</TABLE>
S-24
<PAGE>
MONTHS SINCE ORIGINATION OR PURCHASE
LOAN GROUP 1
INITIAL MORTGAGE LOANS
<TABLE>
<CAPTION>
NUMBER OF CUT-OFF DATE % OF CUT-OFF
LOAN GROUP 1 LOAN GROUP 1 DATE LOAN
INITIAL INITIAL GROUP 1 INITIAL
MONTHS SINCE ORIGINATION MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------------------------------------------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
0 months................................................... 640 $ 44,299,316.99 35.09%
1-6 months................................................. 1,154 81,900,608.92 64.87
7-12 months................................................ 1 44,779.38 0.04
------ --------------- -------
Total................................................. 1,795 $126,244,705.29 100.00%
------ --------------- -------
------ --------------- -------
</TABLE>
PROPERTY TYPE
LOAN GROUP 1
INITIAL MORTGAGE LOANS
<TABLE>
<CAPTION>
NUMBER OF CUT-OFF DATE % OF CUT-OFF
LOAN GROUP 1 LOAN GROUP 1 DATE LOAN
INITIAL INITIAL GROUP 1 INITIAL
PROPERTY TYPE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------------------------------------------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
Single-Family.............................................. 1,550 $108,715,668.55 86.12%
Manufactured Housing....................................... 98 5,803,767.25 4.60
Two-to-Four Family......................................... 69 5,115,196.11 4.05
Planned Unit Development (PUD)............................. 35 3,847,878.06 3.05
Condominium................................................ 43 2,762,195.32 2.19
------ --------------- -------
Total................................................. 1,795 $126,244,705.29 100.00%
------ --------------- -------
------ --------------- -------
</TABLE>
OCCUPANCY TYPE
LOAN GROUP 1
INITIAL MORTGAGE LOANS
<TABLE>
<CAPTION>
NUMBER OF CUT-OFF DATE % OF CUT-OFF
LOAN GROUP 1 LOAN GROUP 1 DATE LOAN
INITIAL INITIAL GROUP 1 INITIAL
OCCUPANCY TYPE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------------------------------------------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
Owner Occupied............................................. 1,661 $119,705,064.59 94.82%
Non-Owner Occupied......................................... 134 6,539,640.70 5.18
------ --------------- -------
Total................................................. 1,795 $126,244,705.29 100.00%
------ --------------- -------
------ --------------- -------
</TABLE>
LOAN GROUP 2 STATISTICS
The sum of the columns below may not equal the total indicated due to
rounding. In addition, unless otherwise set forth herein, all percentages set
forth herein with respect to the Loan Group 2 Initial Mortgage Loans are
percentages of the Cut-Off Date Loan Group 2 Initial Principal Balance.
Substantially all of the Mortgage Loans in Loan Group 2 have Loan Rates
which will adjust semi-annually (after an initial fixed rate period (an "Initial
Period") with respect to such Mortgage Loans of either six months, twelve
months, twenty-four months, thirty-six months or sixty months) on the date set
forth in the related Mortgage Note (each, a "Change Date") to equal the sum of
(i) the average of the interbank offered rates for six-month United States
dollar deposits in the London market, as published in The Wall Street Journal as
of the first business day of the month immediately preceding the month of the
applicable Change Date (the "Loan Index") and (ii) the number of basis points
set forth in such Mortgage Note (the "Gross Margin"), subject to rounding and to
the effects of the Periodic Cap, the applicable Lifetime Cap and the applicable
Lifetime Floor. The "Periodic Cap" generally limits changes in the Loan Rate for
each Initial Mortgage Loan on each Change Date
S-25
<PAGE>
to 1.00% (except (a) with respect to the first Change Date for several Mortgage
Loans, the Periodic Cap may be higher and (b) for 152 Loan Group 2 Initial
Mortgage Loans representing 14.45% of the Cut-Off Date Loan Group 2 Initial
Principal Balance which have Periodic Caps ranging from 1.25% to 2.00% and 2
Loan Group 2 Initial Mortgage Loans representing 0.12% of the Cut-Off Date Loan
Group 2 Initial Principal Balance Periodic Caps of 7.00%). The "Lifetime Cap" is
the maximum Loan Rate that may be borne by a Mortgage Loan in Loan Group 2 over
its life. The "Lifetime Floor" is the minimum Loan Rate that may be borne by a
Mortgage Loan in Loan Group 2 over its life. The Mortgage Loans in Loan Group 2
do not negatively amortize. On each Change Date for a Mortgage Loan in Loan
Group 2, the related Monthly Payment will be adjusted to an amount which will
pay interest at the adjusted Loan Rate and fully amortize the then outstanding
principal balance of such Mortgage Loan over its remaining term.
As of the Cut-Off Date, the Loan Group 2 Initial Mortgage Loans consisted
of 1,084 loans, and the related Mortgaged Properties were located in 41 states
and the District of Columbia. As of the Cut-Off Date, the Loan Group 2 Initial
Mortgage Loans had an aggregate Principal Balance of $99,624,999.73 (the
"Cut-Off Date Loan Group 2 Initial Principal Balance"), the maximum Principal
Balance of any of the Loan Group 2 Initial Mortgage Loans was $725,577.15, the
minimum Principal Balance thereof was $10,500.00 and the Principal Balance of
such Mortgage Loans averaged $91,904.98. As of the Cut-Off Date, the Loan Rates
on the Loan Group 2 Initial Mortgage Loans ranged from 7.85% per annum to 16.35%
per annum, and the weighted average Loan Rate for the Loan Group 2 Initial
Mortgage Loans was 10.17% per annum. As of the Cut-Off Date, the original term
to stated maturity of each Loan Group 2 Initial Mortgage Loan was 360 months,
the remaining term to stated maturity ranged from 352 months to 360 months, the
weighted average remaining term to stated maturity was 359 months and the CLTV
(as defined herein) ranged from 11.46% to 90.00% with a weighted average CLTV of
78.58%. Each Loan Group 2 Initial Mortgage Loan was originated or purchased by
the Seller in the period from August 14, 1998 to November 30, 1998. As of the
Cut-Off Date, approximately 99.36% and 0.64% of the Loan Group 2 Initial
Mortgage Loans were secured by first and second liens, respectively. No Mortgage
Loan in Loan Group 2 is a Balloon Loan.
As of the Cut-Off Date, the weighted average Lifetime Cap of the Loan Group
2 Initial Mortgage Loans was approximately 17.06% per annum, with a maximum
Lifetime Cap of 23.35% per annum and a minimum Lifetime Cap of 10.25% per annum;
the weighted average Lifetime Floor of the Loan Group 2 Initial Mortgage Loans
was approximately 9.37% per annum, with a maximum Lifetime Floor of 16.35% per
annum and a minimum Lifetime Floor of 4.25% per annum; and the Loan Group 2
Initial Mortgage Loans had a weighted average Gross Margin of approximately
5.79%, with a maximum Gross Margin of 11.80% and a minimum Gross Margin of
4.14%. As of the Cut-Off Date, 17.88% of the Loan Group 2 Initial Mortgage Loans
adjust after an Initial Period of two years; 78.62% of the Loan Group 2 Initial
Mortgage Loans adjust after an Initial Period of three years and 3.03% adjust
semi-annually as of origination. The weighted average number of months to the
next Change Date of the Loan Group 2 Initial Mortgage Loans is approximately
33 months, with a maximum number of months and a minimum number of months of 52
and 3, respectively.
S-26
<PAGE>
PRINCIPAL BALANCES
LOAN GROUP 2
INITIAL MORTGAGE LOANS
<TABLE>
<CAPTION>
NUMBER OF CUT-OFF DATE % OF CUT-OFF
RANGE OF LOAN GROUP 2 LOAN GROUP 2 DATE LOAN
CUT-OFF DATE INITIAL INITIAL GROUP 2 INITIAL
PRINCIPAL BALANCE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------------------------------------------------ -------------- ----------------- -----------------
<S> <C> <C> <C>
$ 10,000.01-$ 20,000.00..................................... 10 $ 171,684.24 0.17%
$ 20,000.01-$ 30,000.00..................................... 47 1,261,258.26 1.27
$ 30,000.01-$ 40,000.00..................................... 85 3,050,875.75 3.06
$ 40,000.01-$ 50,000.00..................................... 102 4,632,882.48 4.65
$ 50,000.01-$ 60,000.00..................................... 144 8,035,021.50 8.07
$ 60,000.01-$ 70,000.00..................................... 109 7,131,277.11 7.16
$ 70,000.01-$ 80,000.00..................................... 109 8,138,867.38 8.17
$ 80,000.01-$ 90,000.00..................................... 70 5,969,740.46 5.99
$ 90,000.01-$100,000.00..................................... 85 8,131,531.99 8.16
$100,000.01-$110,000.00..................................... 54 5,668,705.73 5.69
$110,000.01-$120,000.00..................................... 45 5,195,581.62 5.22
$120,000.01-$130,000.00..................................... 58 7,276,553.99 7.30
$130,000.01-$140,000.00..................................... 34 4,594,405.03 4.61
$140,000.01-$150,000.00..................................... 16 2,332,824.67 2.34
$150,000.01-$160,000.00..................................... 23 3,555,954.00 3.57
$160,000.01-$170,000.00..................................... 11 1,830,772.23 1.84
$170,000.01-$180,000.00..................................... 5 870,788.83 0.87
$180,000.01-$190,000.00..................................... 6 1,111,279.24 1.12
$190,000.01-$200,000.00..................................... 6 1,173,052.78 1.18
$200,000.01-$210,000.00..................................... 6 1,245,052.34 1.25
$210,000.01-$220,000.00..................................... 9 1,944,436.32 1.95
$220,000.01-$230,000.00..................................... 5 1,129,291.90 1.13
$230,000.01-$240,000.00..................................... 5 1,195,129.63 1.20
$240,000.01-$250,000.00..................................... 6 1,469,421.72 1.47
$250,000.01-$300,000.00..................................... 13 3,424,972.92 3.44
$300,000.01-$400,000.00..................................... 9 3,063,129.56 3.07
$400,000.01-$500,000.00..................................... 8 3,494,003.26 3.51
$500,000.01-$600,000.00..................................... 2 1,107,177.64 1.11
$600,000.01-$700,000.00..................................... 1 693,750.00 0.70
$700,000.01-$800,000.00..................................... 1 725,577.15 0.73
------ --------------- -------
Total..................................................... 1,084 $ 99,624,999.73 100.00%
------ --------------- -------
------ --------------- -------
</TABLE>
S-27
<PAGE>
GEOGRAPHIC DISTRIBUTION BY STATE(1)
LOAN GROUP 2
INITIAL MORTGAGE LOANS
<TABLE>
<CAPTION>
NUMBER OF CUT-OFF DATE % OF CUT-OFF
LOAN GROUP 2 LOAN GROUP 2 DATE LOAN
INITIAL INITIAL GROUP 2 INITIAL
STATE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------------------------------------------------ -------------- ----------------- -----------------
<S> <C> <C> <C>
Alabama..................................................... 12 $ 689,350.82 0.69%
Arizona..................................................... 4 426,757.83 0.43
Arkansas.................................................... 8 408,094.23 0.41
California.................................................. 25 4,637,583.79 4.66
Colorado.................................................... 44 5,421,605.05 5.44
Delaware.................................................... 4 327,097.62 0.33
District of Columbia........................................ 8 1,465,725.21 1.47
Florida..................................................... 77 7,416,021.77 7.44
Georgia..................................................... 21 2,105,587.57 2.11
Idaho....................................................... 15 1,393,362.41 1.40
Illinois.................................................... 97 7,960,841.72 7.99
Indiana..................................................... 57 3,979,604.37 3.99
Iowa........................................................ 2 140,634.00 0.14
Kansas...................................................... 14 764,193.77 0.77
Kentucky.................................................... 17 1,350,608.61 1.36
Louisiana................................................... 2 139,768.45 0.14
Maryland.................................................... 52 5,087,029.57 5.11
Massachusetts............................................... 2 159,976.99 0.16
Michigan.................................................... 99 8,911,330.01 8.94
Minnesota................................................... 30 2,934,939.50 2.95
Mississippi................................................. 7 344,471.69 0.35
Missouri.................................................... 50 3,405,748.34 3.42
Montana..................................................... 3 249,167.10 0.25
Nebraska.................................................... 10 997,847.87 1.00
Nevada...................................................... 1 206,040.00 0.21
New Jersey.................................................. 4 496,521.18 0.50
New Mexico.................................................. 2 213,368.69 0.21
New York.................................................... 23 1,744,632.56 1.75
North Carolina.............................................. 17 1,688,451.68 1.69
North Dakota................................................ 1 28,690.82 0.03
Ohio........................................................ 131 10,493,091.87 10.53
Oklahoma.................................................... 3 216,921.37 0.22
Oregon...................................................... 26 3,331,620.05 3.34
Pennsylvania................................................ 40 3,509,357.87 3.52
South Carolina.............................................. 51 5,489,477.65 5.51
Tennessee................................................... 13 893,471.09 0.90
Texas....................................................... 22 2,590,174.59 2.60
Utah........................................................ 13 1,542,022.64 1.55
Virginia.................................................... 13 1,003,627.10 1.01
Washington.................................................. 30 3,214,785.76 3.23
Wisconsin................................................... 32 2,127,047.40 2.14
West Virginia............................................... 2 118,349.12 0.12
------ --------------- -------
Total.................................................. 1,084 $ 99,624,999.73 100.00%
------ --------------- -------
------ --------------- -------
</TABLE>
- ------------------------
(1) Determined by property address designated as such in the related mortgage.
S-28
<PAGE>
COMBINED LOAN-TO-VALUE RATIOS(1)
LOAN GROUP 2
INITIAL MORTGAGE LOANS
<TABLE>
<CAPTION>
NUMBER OF CUT-OFF DATE % OF CUT-OFF
LOAN GROUP 2 LOAN GROUP 2 DATE LOAN
INITIAL INITIAL GROUP 2 INITIAL
COMBINED LOAN-TO-VALUE RATIO MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------------------------------------------------ -------------- ----------------- -----------------
<S> <C> <C> <C>
10.001%-15.000%............................................. 1 $ 39,976.99 0.04%
15.001%-20.000%............................................. 1 74,956.85 0.08
20.001%-25.000%............................................. 1 46,986.93 0.05
25.001%-30.000%............................................. 2 69,350.00 0.07
35.001%-40.000%............................................. 2 104,979.02 0.11
40.001%-45.000%............................................. 10 703,170.75 0.71
45.001%-50.000%............................................. 10 538,860.59 0.54
50.001%-55.000%............................................. 7 402,728.61 0.40
55.001%-60.000%............................................. 26 2,126,514.49 2.13
60.001%-65.000%............................................. 36 2,666,272.26 2.68
65.001%-70.000%............................................. 80 5,813,740.00 5.84
70.001%-75.000%............................................. 180 16,663,887.30 16.73
75.001%-80.000%............................................. 380 34,312,587.54 34.44
80.001%-85.000%............................................. 275 27,806,250.18 27.91
85.001%-90.000%............................................. 73 8,254,738.22 8.29
------ --------------- -------
Total............................................. 1,084 $ 99,624,999.73 100.00%
------ --------------- -------
------ --------------- -------
</TABLE>
- ------------------
(1) CLTV shown above are equal, with respect to each Initial Mortgage Loan, to
(i) the sum of (a) the original principal balance of such Initial Mortgage
Loan at the date of origination plus (b) the remaining balance of the senior
lien(s), if any, at the date of origination of such Initial Mortgage Loan
divided by (ii) the lesser of (a) the value of the related Mortgaged
Property, based upon the appraisal made at the time of origination of such
Initial Mortgage Loan or (b) the purchase price of such Mortgaged Property
if the proceeds of such Initial Mortgage Loan are used to purchase such
Mortgaged Property.
S-29
<PAGE>
LIEN POSITION
LOAN GROUP 2
INITIAL MORTGAGE LOANS
<TABLE>
<CAPTION>
NUMBER OF CUT-OFF DATE % CUT-OFF
LOAN GROUP 2 LOAN GROUP 2 DATE LOAN
INITIAL INITIAL GROUP 2 INITIAL
LIEN POSITION MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------------------------------------------------ -------------- ----------------- -----------------
<S> <C> <C> <C>
First....................................................... 1,071 $ 98,983,717.13 99.36%
Second...................................................... 13 641,282.60 0.64
------ --------------- -------
Total................................................ 1,084 $ 99,624,999.73 100.00%
------ --------------- -------
------ --------------- -------
</TABLE>
SECOND MORTGAGE RATIOS(1)
LOAN GROUP 2
INITIAL MORTGAGE LOANS
<TABLE>
<CAPTION>
NUMBER OF CUT-OFF DATE % OF CUT-OFF
LOAN GROUP 2 LOAN GROUP 2 DATE LOAN
INITIAL INITIAL GROUP 2 INITIAL
SECOND MORTGAGE RATIO MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------------------------------------------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
0.001%-10.000%.............................................. 1 $ 24,548.77 3.83%
10.001%-20.000%.............................................. 1 47,495.00 7.41
20.001%-30.000%.............................................. 4 154,933.23 24.16
30.001%-40.000%.............................................. 3 156,858.39 24.46
40.001%-50.000%.............................................. 4 257,447.21 40.15
-- ----------- -------
Total................................................. 13 $641,282.60 100.00%
-- ----------- -------
-- ----------- -------
</TABLE>
- ------------------
(1) Applies only to Initial Mortgage Loans in a second lien position. The Second
Mortgage Ratios shown above are equal, with respect to each Initial Mortgage
Loan in a second lien position, the original principal balance of such
Initial Mortgage Loan at the date of origination divided by the sum of
(a) the original principal balance of such Initial Mortgage Loan at the date
of origination plus (b) the remaining balance of the senior lien at the date
of origination of such Initial Mortgage Loan.
S-30
<PAGE>
LOAN RATES
LOAN GROUP 2
INITIAL MORTGAGE LOANS
<TABLE>
<CAPTION>
NUMBER OF CUT-OFF DATE % OF CUT-OFF
LOAN GROUP 2 LOAN GROUP 2 DATE LOAN
INITIAL INITIAL GROUP 2 INITIAL
LOAN RATES MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------------------------------------------------ -------------- ----------------- -----------------
<S> <C> <C> <C>
7.751%- 8.000%............................................. 3 $ 310,239.69 0.31%
8.001%- 8.250%............................................. 10 1,985,746.44 1.99
8.251%- 8.500%............................................. 7 623,478.76 0.63
8.501%- 8.750%............................................. 33 3,595,862.35 3.61
8.751%- 9.000%............................................. 35 5,483,646.17 5.50
9.001%- 9.250%............................................. 64 7,102,244.10 7.13
9.251%- 9.500%............................................. 84 7,844,956.40 7.87
9.501%- 9.750%............................................. 98 9,912,093.50 9.95
9.751%-10.000%............................................. 124 11,825,379.62 11.87
10.001%-10.250%............................................. 98 9,124,349.91 9.16
10.251%-10.500%............................................. 104 8,917,546.19 8.95
10.501%-10.750%............................................. 103 9,125,810.69 9.16
10.751%-11.000%............................................. 105 8,464,250.65 8.50
11.001%-11.250%............................................. 45 3,329,551.63 3.34
11.251%-11.500%............................................. 35 2,653,005.10 2.66
11.501%-11.750%............................................. 45 3,177,388.56 3.19
11.751%-12.000%............................................. 36 2,842,318.28 2.85
12.001%-12.250%............................................. 13 727,877.23 0.73
12.251%-12.500%............................................. 14 855,851.74 0.86
12.501%-12.750%............................................. 4 530,963.96 0.53
12.751%-13.000%............................................. 13 806,901.14 0.81
13.001%-13.250%............................................. 5 149,512.36 0.15
13.251%-13.500%............................................. 2 67,796.93 0.07
13.751%-14.000%............................................. 2 84,984.25 0.09
14.001%-14.250%............................................. 1 55,300.00 0.06
16.251%-16.500%............................................. 1 27,944.08 0.03
------ --------------- -------
Total.................................................. 1,084 $ 99,624,999.73 100.00%
------ --------------- -------
------ --------------- -------
</TABLE>
S-31
<PAGE>
REMAINING MONTHS TO STATED MATURITY
LOAN GROUP 2
INITIAL MORTGAGE LOANS
<TABLE>
<CAPTION>
NUMBER OF CUT-OFF DATE % OF CUT-OFF
LOAN GROUP 2 LOAN GROUP 2 DATE LOAN
REMAINING TERM TO INITIAL INITIAL GROUP 2 INITIAL
STATED MATURITY MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------------------------------------------------ -------------- ----------------- -----------------
<S> <C> <C> <C>
301-360 months.............................................. 1,084 $ 99,624,999.73 100.00%
------ --------------- -------
Total.................................................. 1,084 $ 99,624,999.73 100.00%
------ --------------- -------
------ --------------- -------
</TABLE>
MONTHS SINCE ORIGINATION OR PURCHASE
LOAN GROUP 2
INITIAL MORTGAGE LOANS
<TABLE>
<CAPTION>
NUMBER OF CUT-OFF DATE % OF CUT-OFF
LOAN GROUP 2 LOAN GROUP 2 DATE LOAN
INITIAL INITIAL GROUP 2 INITIAL
MONTHS SINCE ORIGINATION MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------------------------------------------------ -------------- ----------------- -----------------
<S> <C> <C> <C>
0 months................................................ 443 $ 38,677,017.27 38.82%
1- 6 months................................................ 641 60,947,982.46 61.18
------ --------------- -------
Total.................................................. 1,084 $ 99,624,999.73 100.00%
------ --------------- -------
------ --------------- -------
</TABLE>
PROPERTY TYPE
LOAN GROUP 2
INITIAL MORTGAGE LOANS
<TABLE>
<CAPTION>
NUMBER OF CUT-OFF DATE % OF CUT-OFF
LOAN GROUP 2 LOAN GROUP 2 DATE LOAN
INITIAL INITIAL GROUP 2 INITIAL
PROPERTY TYPE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------------------------------------------------ -------------- ----------------- -----------------
<S> <C> <C> <C>
Single-Family............................................... 907 $ 83,234,157.45 83.55%
Two-to-Four Family.......................................... 68 5,351,486.23 5.37
Planned Unit Development (PUD).............................. 34 5,307,814.31 5.33
Condominium................................................. 49 4,076,543.59 4.09
Manufactured Housing........................................ 26 1,654,998.15 1.66
------ --------------- -------
Total.................................................. 1,084 $ 99,624,999.73 100.00%
------ --------------- -------
------ --------------- -------
</TABLE>
OCCUPANCY TYPE
LOAN GROUP 2
INITIAL MORTGAGE LOANS
<TABLE>
<CAPTION>
NUMBER OF CUT-OFF DATE % OF CUT-OFF
LOAN GROUP 2 LOAN GROUP 2 DATE LOAN
INITIAL INITIAL GROUP 2 INITIAL
OCCUPANCY TYPE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------------------------------------------------ -------------- ----------------- -----------------
<S> <C> <C> <C>
Owner Occupied.............................................. 952 $ 91,488,050.18 91.83%
Non-Owner Occupied.......................................... 132 8,136,949.55 8.17
------ --------------- -------
Total.................................................. 1,084 $ 99,624,999.73 100.00%
------ --------------- -------
------ --------------- -------
</TABLE>
S-32
<PAGE>
GROSS MARGIN
LOAN GROUP 2
INITIAL MORTGAGE LOANS
<TABLE>
<CAPTION>
NUMBER OF CUT-OFF DATE % OF CUT-OFF
LOAN GROUP 2 LOAN GROUP 2 DATE LOAN
INITIAL INITIAL GROUP 2 INITIAL
MARGIN MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------------------------------------------------ -------------- ----------------- -----------------
<S> <C> <C> <C>
4.01%- 4.25%............................................... 4 $ 460,731.42 0.46%
4.26%- 4.50%............................................... 41 3,737,643.18 3.75
4.51%- 4.75%............................................... 43 4,845,267.33 4.86
4.76%- 5.00%............................................... 214 20,939,588.92 21.02
5.01%- 5.25%............................................... 30 4,037,173.60 4.05
5.26%- 5.50%............................................... 233 22,896,671.56 22.98
5.51%- 5.75%............................................... 44 4,680,291.45 4.70
5.76%- 6.00%............................................... 129 10,386,415.23 10.43
6.01%- 6.25%............................................... 40 3,773,449.26 3.79
6.26%- 6.50%............................................... 62 6,572,525.24 6.60
6.51%- 6.75%............................................... 29 2,144,884.44 2.15
6.76%- 7.00%............................................... 44 3,020,627.49 3.03
7.01%- 7.25%............................................... 28 2,408,705.45 2.42
7.26%- 7.50%............................................... 50 3,889,515.86 3.90
7.51%- 7.75%............................................... 26 1,379,742.94 1.38
7.76%- 8.00%............................................... 17 1,263,401.65 1.27
8.01%- 8.25%............................................... 11 977,925.58 0.98
8.26%- 8.50%............................................... 11 675,473.52 0.68
8.51%- 8.75%............................................... 8 573,652.52 0.58
8.76%- 9.00%............................................... 5 372,544.46 0.37
9.01%- 9.25%............................................... 8 333,497.54 0.33
9.26%- 9.50%............................................... 4 130,042.76 0.13
9.51%- 9.75%............................................... 2 97,284.25 0.10
11.76%-12.00%............................................... 1 27,944.08 0.03
------ --------------- -------
Total....................................................... 1,084 $ 99,624,999.73 100.00%
------ --------------- -------
------ --------------- -------
</TABLE>
INITIAL PERIOD
LOAN GROUP 2
INITIAL MORTGAGE LOANS
<TABLE>
<CAPTION>
NUMBER OF CUT-OFF DATE % OF CUT-OFF
LOAN GROUP 2 LOAN GROUP 2 DATE LOAN
INITIAL INITIAL GROUP 2 INITIAL
INITIAL PERIOD MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------------------------------------------------ -------------- ----------------- -----------------
<S> <C> <C> <C>
6 months................................................... 29 $ 3,022,898.50 3.03%
12 months................................................... 1 154,281.00 0.15
24 months................................................... 203 17,808,661.09 17.88
36 months................................................... 850 78,320,597.69 78.62
60 months................................................... 1 318,561.45 0.32
------ --------------- -------
Total.................................................. 1,084 $ 99,624,999.73 100.00%
------ --------------- -------
------ --------------- -------
</TABLE>
S-33
<PAGE>
NEXT LOAN RATE CHANGE DATE
LOAN GROUP 2
INITIAL MORTGAGE LOANS
<TABLE>
<CAPTION>
NUMBER OF CUT-OFF DATE % OF CUT-OFF
LOAN GROUP 2 LOAN GROUP 2 DATE LOAN
INITIAL INITIAL GROUP 2 INITIAL
NEXT CHANGE DATE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------------------------------------------------ -------------- ----------------- -----------------
<S> <C> <C> <C>
February 1999............................................... 1 $ 97,550.21 0.10%
March 1999.................................................. 1 129,360.19 0.13
April 1999.................................................. 14 1,449,994.41 1.46
May 1999.................................................... 9 1,123,493.69 1.13
June 1999................................................... 5 322,500.00 0.32
November 1999............................................... 1 154,281.00 0.15
May 2000.................................................... 1 134,679.89 0.14
July 2000................................................... 1 40,477.67 0.04
August 2000................................................. 12 1,638,936.09 1.65
September 2000.............................................. 51 4,206,446.16 4.22
October 2000................................................ 106 9,036,527.51 9.07
November 2000............................................... 31 2,692,494.76 2.70
December 2000............................................... 1 49,970.32 0.05
March 2001.................................................. 1 174,146.31 0.17
July 2001................................................... 2 200,330.39 0.20
August 2001................................................. 6 808,317.66 0.81
September 2001.............................................. 33 2,824,880.10 2.84
October 2001................................................ 227 20,517,616.45 20.59
November 2001............................................... 391 36,404,604.27 36.54
December 2001............................................... 188 17,188,278.00 17.25
January 2002................................................ 1 111,553.20 0.11
March 2003.................................................. 1 318,561.45 0.32
------ --------------- -------
Total:...................................................... 1,084 $ 99,624,999.73 100.00%
------ --------------- -------
------ --------------- -------
</TABLE>
S-34
<PAGE>
LIFETIME CAP
LOAN GROUP 2
INITIAL MORTGAGE LOANS
<TABLE>
<CAPTION>
NUMBER OF CUT-OFF DATE % OF CUT-OFF
LOAN GROUP 2 LOAN GROUP 2 DATE LOAN
INITIAL INITIAL GROUP 2 INITIAL
LIFETIME CAP MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------------------------------------------------ -------------- ----------------- -----------------
<S> <C> <C> <C>
10.001%-10.250%............................................. 1 $ 111,553.20 0.11%
12.001%-12.250%............................................. 1 28,800.00 0.03
14.251%-14.500%............................................. 1 127,419.35 0.13
14.501%-14.750%............................................. 4 460,442.78 0.46
14.751%-15.000%............................................. 7 1,070,634.08 1.07
15.001%-15.250%............................................. 13 2,307,686.17 2.32
15.251%-15.500%............................................. 14 1,357,729.86 1.36
15.501%-15.750%............................................. 37 4,004,979.43 4.02
15.751%-16.000%............................................. 53 6,921,608.43 6.95
16.001%-16.250%............................................. 63 7,260,424.94 7.29
16.251%-16.500%............................................. 82 7,475,806.93 7.50
16.501%-16.750%............................................. 100 10,192,882.87 10.23
16.751%-17.000%............................................. 108 9,985,267.86 10.02
17.001%-17.250%............................................. 104 9,194,301.11 9.23
17.251%-17.500%............................................. 103 8,730,908.52 8.76
17.501%-17.750%............................................. 98 8,434,048.91 8.47
17.751%-18.000%............................................. 103 8,249,380.69 8.28
18.001%-18.250%............................................. 40 2,932,965.19 2.94
18.251%-18.500%............................................. 31 2,386,145.39 2.40
18.501%-18.750%............................................. 40 2,784,872.04 2.80
18.751%-19.000%............................................. 29 2,445,388.41 2.45
19.001%-19.250%............................................. 11 620,890.30 0.62
19.251%-19.500%............................................. 14 855,851.74 0.86
19.501%-19.750%............................................. 4 530,963.96 0.53
19.751%-20.000%............................................. 12 768,509.95 0.77
20.001%-20.250%............................................. 5 149,512.36 0.15
20.251%-20.500%............................................. 2 67,796.93 0.07
20.751%-21.000%............................................. 2 84,984.25 0.09
21.001%-21.250%............................................. 1 55,300.00 0.06
22.001% or greater.......................................... 1 27,944.08 0.03
------ --------------- -------
Total.................................................. 1,084 $ 99,624,999.73 100.00%
------ --------------- -------
------ --------------- -------
</TABLE>
S-35
<PAGE>
LIFETIME FLOOR
LOAN GROUP 2
INITIAL MORTGAGE LOANS
<TABLE>
<CAPTION>
NUMBER OF CUT-OFF DATE % OF CUT-OFF
LOAN GROUP 2 LOAN GROUP 2 DATE LOAN
INITIAL INITIAL GROUP 2 INITIAL
LIFETIME FLOOR MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------------------------------------------------ -------------- ----------------- -----------------
<S> <C> <C> <C>
4.001%- 4.250%............................................. 1 $ 126,400.00 0.13%
4.251%- 4.500%............................................. 7 697,060.25 0.70
4.501%- 4.750%............................................. 2 167,495.19 0.17
4.751%- 5.000%............................................. 40 4,130,234.64 4.15
5.001%- 5.250%............................................. 5 485,214.22 0.49
5.251%- 5.500%............................................. 51 4,641,790.62 4.66
5.501%- 5.750%............................................. 6 466,134.56 0.47
5.751%- 6.000%............................................. 21 1,984,665.06 1.99
6.001%- 6.250%............................................. 4 232,798.68 0.23
6.251%- 6.500%............................................. 12 1,568,204.75 1.57
6.501%- 6.750%............................................. 5 340,424.70 0.34
6.751%- 7.000%............................................. 10 878,318.74 0.88
7.001%- 7.250%............................................. 6 456,266.59 0.46
7.251%- 7.500%............................................. 6 597,701.52 0.60
7.501%- 7.750%............................................. 2 109,849.55 0.11
7.751%- 8.000%............................................. 8 737,638.73 0.74
8.001%- 8.250%............................................. 11 1,995,228.68 2.00
8.251%- 8.500%............................................. 7 613,626.60 0.62
8.501%- 8.750%............................................. 30 3,011,951.03 3.02
8.751%- 9.000%............................................. 28 4,193,492.72 4.21
9.001%- 9.250%............................................. 56 6,175,680.85 6.20
9.251%- 9.500%............................................. 70 6,418,206.61 6.44
9.501%- 9.750%............................................. 85 8,750,323.35 8.78
9.751%-10.000%............................................. 98 9,453,183.32 9.49
10.001%-10.250%............................................. 78 7,282,959.91 7.31
10.251%-10.500%............................................. 90 7,640,736.57 7.67
10.501%-10.750%............................................. 86 7,735,018.38 7.76
10.751%-11.000%............................................. 87 6,915,606.70 6.94
11.001%-11.250%............................................. 33 2,382,380.21 2.39
11.251%-11.500%............................................. 29 1,975,365.46 1.98
11.501%-11.750%............................................. 35 2,588,286.22 2.60
11.751%-12.000%............................................. 29 2,378,062.24 2.39
12.001%-12.250%............................................. 8 506,190.89 0.51
12.251%-12.500%............................................. 12 719,305.64 0.72
12.501%-12.750%............................................. 3 113,267.93 0.11
12.751%-13.000%............................................. 11 709,662.71 0.71
13.001%-13.250%............................................. 5 149,512.36 0.15
13.251%-13.500%............................................. 2 67,796.93 0.07
13.751%-14.000%............................................. 3 145,712.54 0.15
14.001%-14.250%............................................. 1 55,300.00 0.06
16.251%-16.500%............................................. 1 27,944.08 0.03
------ --------------- -------
Total.................................................. 1,084 $ 99,624,999.73 100.00%
------ --------------- -------
------ --------------- -------
</TABLE>
S-36
<PAGE>
CONVEYANCE OF SUBSEQUENT MORTGAGE LOANS
The Agreement permits the Trust to acquire during the Funding Period up to
approximately $69,755,294.71 and $54,375,000.27 aggregate principal balance of
Subsequent Mortgage Loans for Loan Group 1 and Loan Group 2, respectively.
Accordingly, the statistical characteristics of the Mortgage Loans in the Trust
will vary upon the acquisition of Subsequent Mortgage Loans.
The obligation of the Trust to purchase Subsequent Mortgage Loans during
the Funding Period is subject to the following requirements, any of which
requirements may be waived or modified in any respect by the Certificate
Insurer: (i) such Subsequent Mortgage Loan may not be 30 or more days
contractually delinquent as of the related Cut-Off Date; (ii) the remaining term
to stated maturity of such Subsequent Mortgage Loan will not exceed 30 years for
fully amortizing loans or 15 years for "Balloon Loans" in Loan Group 1;
(iii) such Subsequent Mortgage Loan will be secured by a Mortgage in a first or
second lien position; (iv) such Subsequent Mortgage Loan will not have a Loan
Rate less than 7.50% per annum for Loan Group 1 and 7.75% per annum for Loan
Group 2; (v) such Subsequent Mortgage Loan will be otherwise acceptable to the
Certificate Insurer; (vi) such Subsequent Mortgage Loan shall be secured by a
mortgage on property which, at the time of the origination of such Subsequent
Mortgage Loan, has an appraised value of not more than $1,500,000;
(vii) following the purchase of such Subsequent Mortgage Loans by the Trust for
Loan Group 1, the Mortgage Loans in Loan Group 1 (including such Subsequent
Mortgage Loans) as of the Closing Date: (a) will have a weighted average Loan
Rate of at least 10.50% per annum; (b) will have a weighted average remaining
term to stated maturity of less than 265 months; (c) will have a weighted
average CLTV of not more than 78.00%; (d) will not have more than 36.25% of
"Balloon Loans" (by aggregate Cut-Off Date Principal Balance for Loan Group 1);
(e) will have no Mortgage Loan with a Cut-Off Date Principal Balance in excess
of $550,000; (f) will not have a state concentration in excess of 11.00% for any
one state (by aggregate Cut-Off Date Principal Balance for Loan Group 1);
(g) will have no more than 5.75% Mortgage Loans relating to non-owner occupied
properties (by aggregate Cut-Off Date Principal Balance for Loan Group 1); and
(h) will not include Mortgage Loans in excess of 3.85% secured by Mortgages in a
second lien position (by aggregate Cut-Off Date Principal Balance for Loan Group
1); and (viii) following the purchase of such Subsequent Mortgage Loans by the
Trust for Loan Group 2, the Mortgage Loans in Loan Group 2 (including such
Subsequent Mortgage Loans) as of the Closing Date; (a) will have a weighted
average Loan Rate of at least 10.10% per annum; (b) will have a weighted average
remaining term to stated maturity of less than 360 months; (c) will have a
weighted average CLTV of not more than 78.70%; (d) will have no Mortgage Loan
with a Cut-Off Date Principal Balance in excess of $1,000,000; (e) will not have
a state concentration in excess of 11.00% for any one state (by aggregate
Cut-Off Date Principal Balance for Loan Group 2); (f) will have no more than
8.25% Mortgage Loans relating to non-owner occupied properties (by aggregate
Cut-Off Date Principal Balance for Loan Group 2) and (g) will not have more than
1.00% of the related Mortgage Loans secured by a Mortgage in a second lien
position (by aggregate Cut-Off Date Principal Balance for Loan Group 2).
PREPAYMENT AND YIELD CONSIDERATIONS
GENERAL
The rate of principal payments on the Class A Certificates (the "Offered
Certificates"), the aggregate amount of distributions on the Offered
Certificates and the yield to maturity of the Offered Certificates will be
related to the rate and timing of payments of principal on the Mortgage Loans in
the related Loan Group. The rate of principal payments on the Mortgage Loans
will in turn be affected by the amortization schedules of the Mortgage Loans and
by the rate of principal prepayments (including for this purpose prepayments
resulting from refinancing, liquidations of the Mortgage Loans due to defaults,
casualties, condemnations and repurchases by the Seller). The Mortgage Loans may
be prepaid by the Mortgagors at any time. However, approximately 59.95% of the
Initial Mortgage Loans (by Cut-Off Date Initial Pool Principal Balance) are
subject to prepayment fees which vary from jurisdiction to jurisdiction.
S-37
<PAGE>
THE CLASS A-8 CERTIFICATES AND CLASS A-9 CERTIFICATES
The yield to investors on the Class A-8 and the Class A-9 Certificates will
be sensitive to, among other things, the level of one-month LIBOR. As described
herein, the Certificate Rate for the Class A-8 and Class A-9 Certificates may in
no event exceed the Group 2 Net Funds Cap, which depends, in large part, on the
Loan Rates in Loan Group 2 in effect on the first day of the month preceding the
month of a Distribution Date. It is possible that an increased level of
one-month LIBOR could occur simultaneously with a lower level of prevailing
interest rates, which may result in faster prepayments of Mortgage Loans with
relatively higher Loan Rates resulting in a lower Group 2 Net Funds Cap.
Although each of the Mortgage Loans in Loan Group 2 bears interest at an
adjustable rate after an Initial Period, such rate is subject to a Periodic Rate
Cap and a Lifetime Cap. If the Loan Index changes substantially between Change
Dates, the adjusted Loan Rate on the related Mortgage Loan may not equal the
Loan Index plus the related Gross Margin due to the constraint of such caps. In
such event, the related Loan Rate will be less than would have been the case in
the absence of such caps. In addition, the Loan Rate applicable to any Change
Date will be based on the Loan Index most recently announced as of the first
business day of the month immediately preceding the month of the applicable
Change Date. Thus, if the value of the Loan Index with respect to a Mortgage
Loan rises, the lag in time before the corresponding Loan Rate increases will,
all other things being equal, slow the upward adjustment of the Group 2 Net
Funds Cap. Furthermore, Mortgage Loans that have not reached their first Change
Date are more likely to be subject to the Periodic Rate Cap on their first
Change Date. See "DESCRIPTION OF THE MORTGAGE LOANS" herein.
Although the Loan Rates on the Mortgage Loans in Loan Group 2 are subject
to adjustment after an Initial Period, the Loan Rates adjust less frequently
than the Certificate Rate for the Class A-8 and Class A-9 Certificates and
adjust by reference to the Loan Index. Changes in the level of one-month LIBOR
or the Certificate Rate on the Class A-9 Certificates may not correlate with
changes in the Loan Index and may not correlate with prevailing interest rates.
It is possible that an increased level of the one-month LIBOR could occur
simultaneously with a lower level of prevailing interest rates, which would be
expected to result in faster prepayments, thereby reducing the weighted average
life of the Class A-8 and Class A-9 Certificates.
PREPAYMENT CONSIDERATIONS
Prepayments, liquidations and purchases of the Mortgage Loans in a Loan
Group (including any optional purchase by the Seller of the remaining Mortgage
Loans in connection with the termination of the Trust and any payment under the
Policy of the Aggregate Class A Principal Balance on the Final Distribution Date
for the related Class) will result in distributions on the related Offered
Certificates of principal amounts which would otherwise be distributed over the
remaining terms of such Mortgage Loans. Since the rate of payment of principal
of the Mortgage Loans will depend on future events and a variety of factors, no
assurance can be given as to such rate or the rate of principal prepayments. The
extent to which the yield to maturity of an Offered Certificate may vary from
the anticipated yield will depend upon the degree to which a Certificate is
purchased at a discount or premium, and the degree to which the timing of
payments thereon is sensitive to prepayments, liquidations and purchases of such
Mortgage Loans.
The rate of prepayment on the Mortgage Loans cannot be predicted. Provident
is not aware of any publicly available studies or statistics on the rate of
prepayment of 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 purchase money first mortgage loans. The
prepayment experience of the Trust with respect to the Mortgage Loans may be
affected by a wide variety of factors, including economic conditions, prevailing
interest rate levels, the availability of alternative financing, homeowner
mobility and changes affecting the deductibility for Federal income tax purposes
of interest payments on home equity loans. All of the Mortgage Loans contain
"due-on-sale" provisions, and, with respect to the Mortgage Loans, the Master
Servicer is required by the Agreement 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
Mortgage Loans" in the Prospectus.
As with fixed rate obligations generally, the rate of prepayment on a pool
of mortgage loans with fixed rates such as the Mortgage Loans in Loan Group 1 is
affected by prevailing market rates for mortgage loans of a
S-38
<PAGE>
comparable term and risk level. When the market interest rate is below the
interest rate on a mortgage loan, mortgagors may have an increased incentive to
refinance their mortgage loans. Depending on prevailing market rates, the future
outlook for market rates and economic conditions generally, some mortgagors may
sell or refinance mortgaged properties in order to realize their equity in the
mortgaged properties, to meet cash flow needs or to make other investments.
All of the Mortgage Loans in Loan Group 2 are adjustable-rate mortgage
loans. As is the case with conventional fixed rate mortgage loans, adjustable
rate mortgage loans may be subject to a greater rate of principal prepayments in
a declining interest rate environment. For example, if prevailing interest rates
fall significantly, adjustable rate mortgage loans could be subject to higher
prepayment rates than if prevailing interest rates remain constant because the
availability of fixed rate mortgage loans at competitive interest rates may
encourage mortgagors to refinance their adjustable rate mortgage loans to "lock
in" a lower fixed interest rate. The existence of the applicable Periodic Cap,
Lifetime Cap and Lifetime Floor also may affect the likelihood of prepayments.
In addition, the delinquency and loss experience of the adjustable rate Mortgage
Loans may differ from that of the fixed rate Mortgage Loans because the amount
of the Monthly Payments on the adjustable rate Mortgage Loans are subject to
adjustment on each Change Date. If such different experience were to occur, the
prepayment experience on the Group 2 Certificates may differ from that on the
Group 1 Certificates. However, no assurance can be given as to the level of
prepayments that the Mortgage Loans will experience.
PAYMENT DELAY FEATURE OF FIXED RATE CERTIFICATES
The effective yield to the Certificateholders of each Class of Fixed Rate
Certificates will be lower than the yield otherwise produced by the Certificate
Rate for each such Class and the purchase price of such Certificates because
distributions will not be payable to the Certificateholders until the 25th day
of the month following the month of accrual (without any additional distribution
of interest or earnings thereon in respect of such delay).
MANDATORY PREPAYMENT
During the Funding Period, it is expected that approximately $69,755,294.71
and $54,375,000.27 of Subsequent Mortgage Loans will be transferred to the Trust
for Loan Group 1 and Loan Group 2, respectively. In the event that less than
such amounts of Subsequent Mortgage Loans are transferred to the Trust for a
Loan Group, the Classes of the related Certificate Group then entitled to
distribution of principal will receive on the Distribution Date immediately
following the end of the Funding Period, an additional distribution allocable to
principal in an amount equal to the excess of (i) $69,755,294.71 in the case of
Loan Group 1 and $54,375,000.27 in the case of Loan Group 2 over (ii) the
aggregate Cut-Off Date Principal Balances of the related Subsequent Mortgage
Loans for such Loan Group. Although no assurances can be given, Provident
intends that the principal amount of Mortgage Loans in each Loan Group in the
Trust at the end of the Funding Period will substantially equal the related
Aggregate Class A Principal Balance. Accordingly, there should be no material
principal prepayment to the Certificateholders due to a lack of Subsequent
Mortgage Loans.
WEIGHTED AVERAGE LIVES
Generally, greater than anticipated prepayments of principal will increase
the yield on Offered Certificates purchased at a price less than par and will
decrease the yield on Offered Certificates purchased at a price greater than
par. The effect on an investor's yield due to principal prepayments on the
Mortgage Loans occurring at a rate that is faster (or slower) than the rate
anticipated by the investor in the period immediately following the issuance of
the Certificates will not be entirely offset by a subsequent like reduction (or
increase) in the rate of principal payments. The weighted average life of the
Offered Certificates will also be affected by the amount and timing of
delinquencies and defaults on the Mortgage Loans and the recoveries, if any, on
defaulted Mortgage Loans and foreclosed properties.
The "weighted average life" of a Certificate refers to the average amount
of time that will elapse from the date of issuance to the date each dollar in
respect of principal of such Certificate is repaid. The weighted average life of
any Class of the Class A Certificates will be influenced by, among other
factors, the rate at which principal payments are made on the Mortgage Loans,
including, with respect to the Group 1 Certificates, final payments made upon
the maturity of Balloon Loans.
S-39
<PAGE>
Prepayments on Mortgage Loans are commonly measured relative to a
prepayment standard or model. The model used in this Prospectus Supplement is
the prepayment assumption, which represents an assumed rate of prepayment each
month relative to the then outstanding principal balance of the pool of mortgage
loans for the life of such mortgage loans. A 100% prepayment assumption (the
"Prepayment Assumption") assumes a conditional prepayment rate ("CPR") of 4% per
annum of the outstanding principal balance of such mortgage loans in the first
month of the life of the mortgage loans and an additional 1.45% (precisely
16/11) (expressed as a percentage per annum) in each month thereafter until the
twelfth month; beginning in the twelfth month and in each month thereafter
during the life of the mortgage loans, a conditional prepayment rate of 20% per
annum each month is assumed. As used in the table below, 0% Prepayment
Assumption assumes a conditional prepayment rate equal to 0% of the Prepayment
Assumption, i.e., no prepayments. Correspondingly, 115% Prepayment Assumption
assumes prepayment rates equal to 115% of the Prepayment Assumption, and so
forth. The Prepayment Assumption does not purport to be a historical description
of prepayment experience or a prediction of the anticipated rate of prepayment
of any pool of mortgage loans, including the Mortgage Loans. Provident believes
that no existing statistics of which it is aware provide a reliable basis for
holders of Offered Certificates to predict the amount or the timing of receipt
of prepayments on the Mortgage Loans.
Since the tables were prepared on the basis of the assumptions in the
following paragraph, there are discrepancies between characteristics of the
actual Mortgage Loans and the characteristics of the Mortgage Loans assumed in
preparing the tables. Any such discrepancy may have an effect upon the
percentages of the Principal Balances outstanding and weighted average lives of
the Offered Certificates set forth in the tables. In addition, since the actual
Mortgage Loans in the Trust have characteristics which differ from those assumed
in preparing the tables set forth below, the distributions of principal on the
Offered Certificates may be made earlier or later than as indicated in the
tables.
For the purpose of the tables below, it is assumed that: (i) the Mortgage
Loans consist of pools of loans with the level-pay and balloon amortization
characteristics set forth below, (ii) the amount of interest accrued on the
Mortgage Loans is reduced by amounts sufficient to pay servicing fees, trustee
fees, auction agent fees and insurance premiums, (iii) the Closing Date for the
Class A Certificates is December 30, 1998, (iv) distributions on the Class A
Certificates are made on the 25th day of each month regardless of the day on
which the Distribution Date actually occurs, commencing in January 1999 and are
made in accordance with the priorities described herein, (v) the scheduled
monthly payments of principal and interest on the Mortgage Loans will be timely
delivered on the last day of each month (with no defaults), commencing in
December 1998, (vi) the related Mortgage Loans' prepayment rates are a multiple
of the Prepayment Assumption, (vii) all prepayments are prepayments in full
received on the last day of each month (commencing December 1998) and include
30 days of interest thereon, (viii) no optional termination is exercised,
(ix) each Class of Class A Certificates has the respective Certificate Rate and
initial Class A Principal Balance as set forth herein, (x) the Loan Index for
each Due Period will be 5.1477%, (xi) the LIBOR Index for each Interest Period
will be 5.6206% and the Certificate Rate for Class A-9 Certificates is 5.70% per
annum for each Distribution Date, (xii) the Loan Rate for each Mortgage Loan in
Loan Group 2 is adjusted on its next Change Date (and on subsequent Change
Dates, if necessary) to equal the sum of (a) the assumed level of the Loan Index
and (b) the respective Gross Margin (such sum being subject to the applicable
caps and floors); (xiii) the Policy covers the remaining Class A Principal
Balance on the Final Distribution Date for the related Class with respect to
each Class of Class A Certificates and (xiv) the maximum amount of Subsequent
Mortgage Loans is purchased by the Trust on the Closing Date.
LOAN GROUP 1
<TABLE>
<CAPTION>
ORIGINAL ORIGINAL REMAINING
AMORTIZATION TERM TO TERM TO
PRINCIPAL LOAN TERM MATURITY MATURITY AMORTIZATION
BALANCE($) RATE(%) (IN MONTHS) (IN MONTHS) (IN MONTHS) METHODOLOGY
- ------------- ------- ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
71,138,100.33 10.564 360 180 179 Balloon
24,913,632.97 10.352 176 176 175 Level Pay
12,856,301.58 10.296 243 243 242 Level Pay
87,091,965.12 10.594 360 360 359 Level Pay
</TABLE>
S-40
<PAGE>
LOAN GROUP 2
<TABLE>
<CAPTION>
ORIGINAL
CURRENT NEXT INITIAL TERM TO
PRINCIPAL LOAN CHANGE GROSS LIFETIME LIFETIME PERIODIC PERIODIC MATURITY
BALANCE($) RATE(%) DATE MARGIN(%) CAP(%) FLOOR(%) CAP(%) CAP(%) (IN MONTHS)
- ------------- ------- -------- --------- -------- -------- -------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
4,867,983.04 9.918 4/1/99 5.242 16.469 9.389 1.065 1.000 360
5,738,500.47 9.689 9/1/00 5.982 16.466 8.798 2.429 1.160 360
25,426,395.47 9.996 10/1/00 6.308 16.789 9.411 1.996 1.365 360
5,465,278.03 10.362 9/1/01 5.711 17.227 9.574 1.601 1.109 360
28,801,633.38 10.439 10/1/01 5.864 17.362 8.939 1.564 1.052 360
61,465,136.54 10.146 11/1/01 5.588 17.095 9.444 1.367 1.014 360
22,235,073.06 10.065 12/1/01 5.411 17.035 9.776 1.046 1.030 360
<CAPTION>
REMAINING
TERM TO
PRINCIPAL MATURITY
BALANCE($) (IN MONTHS)
- ------------- -----------
<S> <C>
4,867,983.04 359
5,738,500.47 357
25,426,395.47 359
5,465,278.03 358
28,801,633.38 359
61,465,136.54 360
22,235,073.06 360
</TABLE>
Subject to the foregoing discussion and assumptions, the following table
indicates the weighted average life of each Class of Class A Certificates, and
sets forth the percentages of the initial Class A Principal Balance of each such
Class of Class A Certificates that would be outstanding after each of the dates
shown at various percentages of Prepayment Assumption.
S-41
<PAGE>
PERCENT OF INITIAL CLASS A PRINCIPAL BALANCE OUTSTANDING
AT THE FOLLOWING PERCENTAGES OF THE PREPAYMENT ASSUMPTION
<TABLE>
<CAPTION>
CLASS A-1 CLASS A-2
-------------------------------------- --------------------------------------
DISTRIBUTION DATE 50% 100% 115% 150% 200% 250% 50% 100% 115% 150% 200% 250%
- ----------------------------------- --- ---- ---- ---- ---- ---- --- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percent.................... 100 100 100 100 100 100 100 100 100 100 100 100
December 25, 1999.................. 71 45 37 18 0 0 100 100 100 100 88 52
December 25, 2000.................. 31 0 0 0 0 0 100 67 46 0 0 0
December 25, 2001.................. 0 0 0 0 0 0 95 0 0 0 0 0
December 25, 2002.................. 0 0 0 0 0 0 56 0 0 0 0 0
December 25, 2003.................. 0 0 0 0 0 0 21 0 0 0 0 0
December 25, 2004.................. 0 0 0 0 0 0 0 0 0 0 0 0
December 25, 2005.................. 0 0 0 0 0 0 0 0 0 0 0 0
December 25, 2006.................. 0 0 0 0 0 0 0 0 0 0 0 0
December 25, 2007.................. 0 0 0 0 0 0 0 0 0 0 0 0
December 25, 2008.................. 0 0 0 0 0 0 0 0 0 0 0 0
December 25, 2009.................. 0 0 0 0 0 0 0 0 0 0 0 0
December 25, 2010.................. 0 0 0 0 0 0 0 0 0 0 0 0
December 25, 2011.................. 0 0 0 0 0 0 0 0 0 0 0 0
December 25, 2012.................. 0 0 0 0 0 0 0 0 0 0 0 0
December 25, 2013.................. 0 0 0 0 0 0 0 0 0 0 0 0
December 25, 2014.................. 0 0 0 0 0 0 0 0 0 0 0 0
December 25, 2015.................. 0 0 0 0 0 0 0 0 0 0 0 0
December 25, 2016.................. 0 0 0 0 0 0 0 0 0 0 0 0
December 25, 2017.................. 0 0 0 0 0 0 0 0 0 0 0 0
December 25, 2018.................. 0 0 0 0 0 0 0 0 0 0 0 0
December 25, 2019.................. 0 0 0 0 0 0 0 0 0 0 0 0
December 25, 2020.................. 0 0 0 0 0 0 0 0 0 0 0 0
December 25, 2021.................. 0 0 0 0 0 0 0 0 0 0 0 0
December 25, 2022.................. 0 0 0 0 0 0 0 0 0 0 0 0
December 25, 2023.................. 0 0 0 0 0 0 0 0 0 0 0 0
December 25, 2024.................. 0 0 0 0 0 0 0 0 0 0 0 0
December 25, 2025.................. 0 0 0 0 0 0 0 0 0 0 0 0
December 25, 2026.................. 0 0 0 0 0 0 0 0 0 0 0 0
December 25, 2027.................. 0 0 0 0 0 0 0 0 0 0 0 0
December 25, 2028.................. 0 0 0 0 0 0 0 0 0 0 0 0
Weighted Average Life
(years)*......................... 1.6 0.9 0.8 0.7 0.6 0.5 4.2 2.3 2.0 1.6 1.2 1.0
</TABLE>
- ------------------
<TABLE>
<S> <C>
* The weighted average life of a Certificate of any class is determined by (i) multiplying the amount of each
distribution in reduction of the related Class A Principal Balance by the number of years from the date of
issuance of the Certificate to the related Distribution Date, (ii) adding the results, and (iii) dividing the
sum by the original principal balance of the Certificates.
</TABLE>
These tables have been prepared based on the assumptions described above
(including the assumptions regarding the characteristics and performance of the
Mortgage Loans, which differ from the actual characteristics and performance
thereof) and should be read in conjunction therewith.
S-42
<PAGE>
PERCENT OF INITIAL CLASS A PRINCIPAL BALANCE OUTSTANDING
AT THE FOLLOWING PERCENTAGES OF THE PREPAYMENT ASSUMPTION
<TABLE>
<CAPTION>
CLASS A-3 CLASS A-4
-------------------------------------- ---------------------------------------
DISTRIBUTION DATE 50% 100% 115% 150% 200% 250% 50% 100% 115% 150% 200% 250%
- ----------------------------------- --- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percent.................... 100 100 100 100 100 100 100 100 100 100 100 100
December 25, 1999.................. 100 100 100 100 100 100 100 100 100 100 100 100
December 25, 2000.................. 100 100 100 99 0 0 100 100 100 100 92 0
December 25, 2001.................. 100 90 45 0 0 0 100 100 100 44 0 0
December 25, 2002.................. 100 0 0 0 0 0 100 99 46 0 0 0
December 25, 2003.................. 100 0 0 0 0 0 100 20 0 0 0 0
December 25, 2004.................. 84 0 0 0 0 0 100 0 0 0 0 0
December 25, 2005.................. 40 0 0 0 0 0 100 0 0 0 0 0
December 25, 2006.................. 12 0 0 0 0 0 100 0 0 0 0 0
December 25, 2007.................. 0 0 0 0 0 0 82 0 0 0 0 0
December 25, 2008.................. 0 0 0 0 0 0 50 0 0 0 0 0
December 25, 2009.................. 0 0 0 0 0 0 19 0 0 0 0 0
December 25, 2010.................. 0 0 0 0 0 0 0 0 0 0 0 0
December 25, 2011.................. 0 0 0 0 0 0 0 0 0 0 0 0
December 25, 2012.................. 0 0 0 0 0 0 0 0 0 0 0 0
December 25, 2013.................. 0 0 0 0 0 0 0 0 0 0 0 0
December 25, 2014.................. 0 0 0 0 0 0 0 0 0 0 0 0
December 25, 2015.................. 0 0 0 0 0 0 0 0 0 0 0 0
December 25, 2016.................. 0 0 0 0 0 0 0 0 0 0 0 0
December 25, 2017.................. 0 0 0 0 0 0 0 0 0 0 0 0
December 25, 2018.................. 0 0 0 0 0 0 0 0 0 0 0 0
December 25, 2019.................. 0 0 0 0 0 0 0 0 0 0 0 0
December 25, 2020.................. 0 0 0 0 0 0 0 0 0 0 0 0
December 25, 2021.................. 0 0 0 0 0 0 0 0 0 0 0 0
December 25, 2022.................. 0 0 0 0 0 0 0 0 0 0 0 0
December 25, 2023.................. 0 0 0 0 0 0 0 0 0 0 0 0
December 25, 2024.................. 0 0 0 0 0 0 0 0 0 0 0 0
December 25, 2025.................. 0 0 0 0 0 0 0 0 0 0 0 0
December 25, 2026.................. 0 0 0 0 0 0 0 0 0 0 0 0
December 25, 2027.................. 0 0 0 0 0 0 0 0 0 0 0 0
December 25, 2028.................. 0 0 0 0 0 0 0 0 0 0 0 0
Weighted Average Life
(years)*......................... 6.9 3.5 3.0 2.3 1.8 1.4 10.0 4.6 4.0 3.0 2.2 1.8
</TABLE>
- ------------------
<TABLE>
<S> <C>
* The weighted average life of a Certificate of any class is determined by (i) multiplying the amount of each
distribution in reduction of the related Class A Principal Balance by the number of years from the date of
issuance of the Certificate to the related Distribution Date, (ii) adding the results, and (iii) dividing the
sum by the original principal balance of the Certificates.
</TABLE>
These tables have been prepared based on the assumptions described above
(including the assumptions regarding the characteristics and performance of the
Mortgage Loans, which differ from the actual characteristics and performance
thereof) and should be read in conjunction therewith.
S-43
<PAGE>
PERCENT OF INITIAL CLASS A PRINCIPAL BALANCE OUTSTANDING
AT THE FOLLOWING PERCENTAGES OF THE PREPAYMENT ASSUMPTION
<TABLE>
<CAPTION>
CLASS A-5 CLASS A-6
--------------------------------------- ---------------------------------------
DISTRIBUTION DATE 50% 100% 115% 150% 200% 250% 50% 100% 115% 150% 200% 250%
- ------------------------------------ ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percent..................... 100 100 100 100 100 100 100 100 100 100 100 100
December 25, 1999................... 100 100 100 100 100 100 100 100 100 100 100 100
December 25, 2000................... 100 100 100 100 100 84 100 100 100 100 100 100
December 25, 2001................... 100 100 100 100 0 0 100 100 100 100 96 37
December 25, 2002................... 100 100 100 23 0 0 100 100 100 100 45 3
December 25, 2003................... 100 100 57 0 0 0 100 100 100 68 16 0
December 25, 2004................... 100 50 0 0 0 0 100 100 94 44 7 0
December 25, 2005................... 100 0 0 0 0 0 100 97 71 31 4 0
December 25, 2006................... 100 0 0 0 0 0 100 86 63 29 4 0
December 25, 2007................... 100 0 0 0 0 0 100 72 52 23 4 0
December 25, 2008................... 100 0 0 0 0 0 100 58 41 16 3 0
December 25, 2009................... 100 0 0 0 0 0 100 46 31 11 2 0
December 25, 2010................... 86 0 0 0 0 0 100 36 23 8 1 0
December 25, 2011................... 48 0 0 0 0 0 100 28 17 5 1 0
December 25, 2012................... 13 0 0 0 0 0 100 22 13 4 0 0
December 25, 2013................... 0 0 0 0 0 0 53 10 5 1 0 0
December 25, 2014................... 0 0 0 0 0 0 46 7 4 1 0 0
December 25, 2015................... 0 0 0 0 0 0 40 6 3 1 0 0
December 25, 2016................... 0 0 0 0 0 0 34 4 2 0 0 0
December 25, 2017................... 0 0 0 0 0 0 29 3 2 0 0 0
December 25, 2018................... 0 0 0 0 0 0 24 2 1 0 0 0
December 25, 2019................... 0 0 0 0 0 0 20 2 1 0 0 0
December 25, 2020................... 0 0 0 0 0 0 17 1 1 0 0 0
December 25, 2021................... 0 0 0 0 0 0 14 1 0 0 0 0
December 25, 2022................... 0 0 0 0 0 0 11 1 0 0 0 0
December 25, 2023................... 0 0 0 0 0 0 9 0 0 0 0 0
December 25, 2024................... 0 0 0 0 0 0 7 0 0 0 0 0
December 25, 2025................... 0 0 0 0 0 0 5 0 0 0 0 0
December 25, 2026................... 0 0 0 0 0 0 3 0 0 0 0 0
December 25, 2027................... 0 0 0 0 0 0 1 0 0 0 0 0
December 25, 2028................... 0 0 0 0 0 0 0 0 0 0 0 0
Weighted Average Life
(years)*.......................... 13.0 6.1 5.1 3.8 2.7 2.1 17.8 11.4 9.8 7.0 4.4 3.0
</TABLE>
- ------------------
<TABLE>
<S> <C>
* The weighted average life of a Certificate of any class is determined by (i) multiplying the amount of each
distribution in reduction of the related Class A Principal Balance by the number of years from the date of
issuance of the Certificate to the related Distribution Date, (ii) adding the results, and (iii) dividing the
sum by the original principal balance of the Certificates.
</TABLE>
These tables have been prepared based on the assumptions described above
(including the assumptions regarding the characteristics and performance of the
Mortgage Loans, which differ from the actual characteristics and performance
thereof) and should be read in conjunction therewith.
S-44
<PAGE>
PERCENT OF INITIAL CLASS A PRINCIPAL BALANCE OUTSTANDING
AT THE FOLLOWING PERCENTAGES OF THE PREPAYMENT ASSUMPTION
<TABLE>
<CAPTION>
CLASS A-7 CLASS A-8
-------------------------------------- --------------------------------------
DISTRIBUTION DATE 50% 100% 115% 150% 200% 250% 50% 100% 140% 150% 200% 250%
- ----------------------------------- --- ---- ---- ---- ---- ---- --- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percent.................... 100 100 100 100 100 100 100 100 100 100 100 100
December 25, 1999.................. 100 100 100 100 100 100 83 68 55 52 36 20
December 25, 2000.................. 100 100 100 100 100 100 60 25 0 0 0 0
December 25, 2001.................. 100 100 100 100 100 100 39 0 0 0 0 0
December 25, 2002.................. 95 90 88 85 79 73 20 0 0 0 0 0
December 25, 2003.................. 90 81 78 72 63 39 3 0 0 0 0 0
December 25, 2004.................. 82 67 63 53 41 19 0 0 0 0 0 0
December 25, 2005.................. 72 53 47 37 24 9 0 0 0 0 0 0
December 25, 2006.................. 49 25 20 12 12 5 0 0 0 0 0 0
December 25, 2007.................. 33 12 8 4 4 2 0 0 0 0 0 0
December 25, 2008.................. 22 5 3 1 1 1 0 0 0 0 0 0
December 25, 2009.................. 15 3 1 0 0 1 0 0 0 0 0 0
December 25, 2010.................. 10 1 1 0 0 0 0 0 0 0 0 0
December 25, 2011.................. 6 1 0 0 0 0 0 0 0 0 0 0
December 25, 2012.................. 4 0 0 0 0 0 0 0 0 0 0 0
December 25, 2013.................. 0 0 0 0 0 0 0 0 0 0 0 0
December 25, 2014.................. 0 0 0 0 0 0 0 0 0 0 0 0
December 25, 2015.................. 0 0 0 0 0 0 0 0 0 0 0 0
December 25, 2016.................. 0 0 0 0 0 0 0 0 0 0 0 0
December 25, 2017.................. 0 0 0 0 0 0 0 0 0 0 0 0
December 25, 2018.................. 0 0 0 0 0 0 0 0 0 0 0 0
December 25, 2019.................. 0 0 0 0 0 0 0 0 0 0 0 0
December 25, 2020.................. 0 0 0 0 0 0 0 0 0 0 0 0
December 25, 2021.................. 0 0 0 0 0 0 0 0 0 0 0 0
December 25, 2022.................. 0 0 0 0 0 0 0 0 0 0 0 0
December 25, 2023.................. 0 0 0 0 0 0 0 0 0 0 0 0
December 25, 2024.................. 0 0 0 0 0 0 0 0 0 0 0 0
December 25, 2025.................. 0 0 0 0 0 0 0 0 0 0 0 0
December 25, 2026.................. 0 0 0 0 0 0 0 0 0 0 0 0
December 25, 2027.................. 0 0 0 0 0 0 0 0 0 0 0 0
December 25, 2028.................. 0 0 0 0 0 0 0 0 0 0 0 0
Weighted Average Life
(years)*......................... 8.3 6.9 6.6 6.1 5.7 5.0 2.6 1.4 1.1 1.1 0.9 0.7
</TABLE>
- ------------------
<TABLE>
<S> <C>
* The weighted average life of a Certificate of any class is determined by (i) multiplying the amount of each
distribution in reduction of the related Class A Principal Balance by the number of years from the date of
issuance of the Certificate to the related Distribution Date, (ii) adding the results, and (iii) dividing the
sum by the original principal balance of the Certificates.
</TABLE>
These tables have been prepared based on the assumptions described above
(including the assumptions regarding the characteristics and performance of the
Mortgage Loans, which differ from the actual characteristics and performance
thereof) and should be read in conjunction therewith.
S-45
<PAGE>
PERCENT OF INITIAL CLASS A PRINCIPAL BALANCE OUTSTANDING
AT THE FOLLOWING PERCENTAGES OF THE PREPAYMENT ASSUMPTION
<TABLE>
<CAPTION>
CLASS A-9
---------------------------------------
DISTRIBUTION DATE 50% 100% 140% 150% 200% 250%
- --------------------------------------------------------------------------- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Initial Percent............................................................ 100 100 100 100 100 100
December 25, 1999.......................................................... 100 100 100 100 100 100
December 25, 2000.......................................................... 100 100 100 95 75 57
December 25, 2001.......................................................... 100 94 71 66 45 28
December 25, 2002.......................................................... 100 75 51 46 27 14
December 25, 2003.......................................................... 100 59 36 32 16 7
December 25, 2004.......................................................... 91 47 26 22 9 3
December 25, 2005.......................................................... 81 37 19 15 6 2
December 25, 2006.......................................................... 72 29 13 11 3 1
December 25, 2007.......................................................... 64 23 9 7 2 0
December 25, 2008.......................................................... 57 18 7 5 1 0
December 25, 2009.......................................................... 51 14 5 4 1 0
December 25, 2010.......................................................... 45 11 3 2 0 0
December 25, 2011.......................................................... 39 9 2 2 0 0
December 25, 2012.......................................................... 35 7 2 1 0 0
December 25, 2013.......................................................... 31 5 1 1 0 0
December 25, 2014.......................................................... 27 4 1 1 0 0
December 25, 2015.......................................................... 23 3 1 0 0 0
December 25, 2016.......................................................... 20 3 0 0 0 0
December 25, 2017.......................................................... 17 2 0 0 0 0
December 25, 2018.......................................................... 15 1 0 0 0 0
December 25, 2019.......................................................... 13 1 0 0 0 0
December 25, 2020.......................................................... 11 1 0 0 0 0
December 25, 2021.......................................................... 9 1 0 0 0 0
December 25, 2022.......................................................... 7 0 0 0 0 0
December 25, 2023.......................................................... 6 0 0 0 0 0
December 25, 2024.......................................................... 4 0 0 0 0 0
December 25, 2025.......................................................... 3 0 0 0 0 0
December 25, 2026.......................................................... 2 0 0 0 0 0
December 25, 2027.......................................................... 1 0 0 0 0 0
December 25, 2028.......................................................... 0 0 0 0 0 0
Weighted Average Life
(years)*................................................................. 12.7 7.0 5.0 4.6 3.4 2.6
</TABLE>
- ------------------
<TABLE>
<S> <C>
* The weighted average life of a Certificate of any class is determined by (i) multiplying the amount of each
distribution in reduction of the related Class A Principal Balance by the number of years from the date of
issuance of the Certificate to the related Distribution Date, (ii) adding the results, and (iii) dividing the
sum by the original principal balance of the Certificates.
</TABLE>
These tables have been prepared based on the assumptions described above
(including the assumptions regarding the characteristics and performance of the
Mortgage Loans, which differ from the actual characteristics and performance
thereof) and should be read in conjunction therewith.
S-46
<PAGE>
DESCRIPTION OF THE CERTIFICATES
Provident Bank Home Equity Loan Trust 1998-4 (the "Trust") will issue
thirteen Classes (each, a "Class") of certificates: The Class A-1 Certificates,
the Class A-2 Certificates, the Class A-3 Certificates, the Class A-4
Certificates, the Class A-5 Certificates, the Class A-6 Certificates, the
Class A-7 Certificates, the Class A-8 Certificates and the Class A-9
Certificates (collectively, the "Class A Certificates"), the Class X-1
Certificates and the Class X-2 Certificates (collectively, the "Class X
Certificates") and the Class R-1 Certificates and the Class R-2 Certificates
(collectively, the "Class R Certificates," and together with the Class A and
Class X Certificates, the "Certificates"). The Certificates will be issued
pursuant to a pooling and servicing agreement (the "Agreement") dated as of
December 1, 1998 between The Provident Bank, as seller, document custodian and
master servicer (in such capacities, the "Seller", "Document Custodian" and
"Master Servicer") and Bankers Trust Company of California, N.A., as trustee
(the "Trustee"). The form of the Agreement has been filed as an exhibit to the
Registration Statement of which this prospectus supplement (the "Prospectus
Supplement") and the prospectus (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 Class A Certificates will be issued in nine Classes, Class A-1
Certificates (the "Class A-1 Certificates"), Class A-2 Certificates (the "Class
A-2 Certificates"), Class A-3 Certificates (the "Class A-3 Certificates"),
Class A-4 Certificates (the "Class A-4 Certificates"), Class A-5 Certificates
(the "Class A-5 Certificates"), Class A-6 Certificates (the "Class A-6
Certificates"), the Class A-7 Certificates (the "Class A-7 Certificates"), the
Class A-8 Certificates (the "Class A-8 Certificates") and the Class A-9
Certificates (the "Class A-9 Certificates"). Only the Class A Certificates (the
"Offered Certificates") are being offered hereby. Delivery of the Offered
Certificates will be made on or about December 30, 1998 (the "Closing Date").
Each Class of Offered Certificates represents the right to receive payments of
interest at the Certificate Rate for such Class and payments of principal as
described below.
In addition, the Trust will issue four Classes of Certificates which are
not offered hereby: Class X-1 Certificates (the "Class X-1 Certificates"), Class
X-2 Certificates (the "Class X-2 Certificates"), Class R-1 Certificates (the
"Class R-1 Certificates") and Class R-2 Certificates (the "Class R-2
Certificates").
The rights of the holders of the Class X-1 Certificates and the Class X-2
Certificates to receive distributions with respect to the Mortgage Loans will be
pari passu with the rights of the holders of the Group 1 Certificates and
Group 2 Certificates, respectively, to receive distributions of interest. The
rights of the holders of the Class R Certificates to receive distributions with
respect to the Mortgage Loans will be subordinate to the rights of the Class A
Certificates and the Class X Certificates. Distributions to the holders of the
Class R Certificates are expected to be minimal.
The Offered Certificates (except the Class A-9 Certificates, which will be
issued in denominations of $25,000 and integral multiples in excess thereof)
will be issued in 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) the
Mortgage Loans; (ii) payments on the Mortgage Loans received on and after the
applicable Cut-Off Date (exclusive of (i) certain payments in respect of
interest accrued on the Mortgage Loans during November 1998 as described in the
Agreement and (ii) payments in respect of interest on the delinquent Mortgage
Loans due prior to the applicable Cut-Off Date and received thereafter);
(iii) Mortgaged Properties relating to the Mortgage Loans that are acquired by
foreclosure or deed in lieu of foreclosure; (iv) the Collection Account, the
Distribution Account, the Net Funds Cap Carryover Reserve Account, the
Pre-Funding Accounts, the Capitalized Interest Accounts, the Spread Account and
funds on deposit therein (excluding net earnings thereon); and (v) rights under
certain hazard insurance policies covering the Mortgaged Properties. In
addition, Provident has caused the Certificate Insurer to issue an irrevocable
and unconditional certificate guaranty insurance policy (the "Policy") pursuant
to the terms of an Insurance Agreement, dated as of December 1, 1998 (the
"Insurance Agreement") among the Seller, the Master Servicer, the Trustee and
the Certificate Insurer for the benefit of the holders of the Class A
S-47
<PAGE>
Certificates, pursuant to which the Certificate Insurer will guarantee payments
to such Certificateholders as described herein. Definitive Certificates (as
defined below) will be transferable and exchangeable at the corporate trust
office of the Trustee, which will initially act as Certificate Registrar. 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.
Each Mortgage Loan in the Trust will be assigned to one of two mortgage
loan groups ("Loan Group 1" and "Loan Group 2", respectively, and each a "Loan
Group"). The Class A Certificates will be divided into two groups (each, a
"Certificate Group"). The Class A-1, Class A-2, Class A-3, Class A-4,
Class A-5, Class A-6 and Class A-7 Certificates (the "Group 1 Certificates" or
"Fixed Rate Certificates") will represent undivided ownership interests in the
Mortgage Loans assigned to Loan Group 1, all collections thereon (exclusive of
(i) certain payments in respect of interest accrued on such Mortgage Loans
during November 1998 as described in the Agreement and (ii) payments in respect
of interest on the delinquent Mortgage Loans in Loan Group 1 due prior to the
applicable Cut-Off Date and received thereafter) and the proceeds thereof. The
Class A-8 and Class A-9 Certificates (the "Group 2 Certificates") will represent
undivided ownership interests in the Mortgage Loans assigned to Loan Group 2,
all collections thereon (exclusive of payments in respect of (i) certain
payments in respect of interest accrued on such Mortgage Loans during November
1998 as described in the Agreement and (ii) interest on the delinquent Mortgage
Loans in Loan Group 2 due prior to the applicable Cut-Off Date and received
thereafter) and the proceeds thereof. The principal amount of a Class of
Class A Certificates (each, a "Class A Principal Balance") on any date is equal
to the applicable Class A Principal Balance on the Closing Date minus the
aggregate of amounts actually distributed as principal to the holders of such
Class of Class A Certificates. On any date, the "Aggregate Class A Principal
Balance" is, with respect to the Group 1 Certificates, the aggregate of the
Class Principal Balances of the Group 1 Certificates on such date and with
respect to the Group 2 Certificates, the aggregate of the Class Principal
Balances of the Group 2 Certificates on such date.
The Person in whose name a Certificate is registered as such in the
Certificate Register is referred to herein as a "Certificateholder."
The "Percentage Interest" of a Class A Certificate as of any date of
determination will be equal to the percentage obtained by dividing the
denomination of such Certificate by the Class A Principal Balance for the
related Class as of the Closing Date.
The Certificates will not be listed on any securities exchange.
BOOK-ENTRY CERTIFICATES
The Offered Certificates will be book-entry Certificates (the "Book-Entry
Certificates"). Persons acquiring beneficial ownership interests in the Offered
Certificates ("Certificate Owners") will hold their Offered Certificates through
The Depository Trust Company ("DTC") in the United States, or Cedelbank
("Cedelbank") or 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 Certificates will be issued in one
or more certificates which equal the aggregate principal balance of the Offered
Certificates and will initially be registered in the name of Cede & Co.
("Cede"), the nominee of DTC. Cedelbank and Euroclear will hold omnibus
positions on behalf of their participants through customers' securities accounts
in Cedelbank's and Euroclear's names on the books of their respective
depositaries which in turn will hold such positions in customers' securities
accounts in the depositaries' names on the books of DTC. Citibank N.A. will act
as depositary for Cedelbank and The Chase Manhattan Bank 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 Offered Certificates will be Cede, 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.
S-48
<PAGE>
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 (such Financial Intermediary is referred to herein as a
"Participant") (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 (such
Financial Intermediary is referred to herein as an "Indirect Participant"), and
on the records of Cedelbank or Euroclear, as appropriate).
Certificate Owners will receive all distributions of principal of, and
interest on, the Offered Certificates from the Trustee through DTC and DTC
Participants. While the Offered 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 Offered Certificates and is required to receive and transmit
distributions of principal of, and interest on, the Offered Certificates.
Participants and Indirect Participants with whom Certificate Owners have
accounts with respect to Offered 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 Offered 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 Offered Certificates only through Participants and
Indirect Participants by instructing such Participants and Indirect Participants
to transfer Offered Certificates, by book-entry transfer, through DTC for the
account of the purchasers of such Offered Certificates, which account is
maintained with their respective Participants. Under the Rules and in accordance
with DTC's normal procedures, transfers of ownership of Offered Certificates
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 Certificate Owners.
Because of time zone differences, credits of securities received in
Cedelbank or Euroclear as a result of a transaction with a Participant will be
made during subsequent securities settlement processing and dated the business
day following the DTC settlement date. Such credits or any transactions in such
securities settled during such processing will be reported to the relevant
Euroclear or Cedelbank Participants on such business day. Cash received in
Cedelbank or Euroclear as a result of sales of securities by or through a
Cedelbank 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 Cedelbank 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
"FEDERAL INCOME TAX CONSEQUENCES--Federal Income Tax Consequences to 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 Cedelbank Participants and Euroclear Participants will occur
in accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through Cedelbank
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
S-49
<PAGE>
receiving payment in accordance with normal procedures for same day funds
settlement applicable to DTC. Cedelbank 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.
Cedelbank is incorporated under the laws of Luxembourg as a professional
depository. Cedelbank holds securities for its participating organizations
("Cedelbank Participants") and facilitates the clearance and settlement of
securities transactions between Cedelbank Participants through electronic
book-entry changes in accounts of Cedelbank Participants, thereby eliminating
the need for physical movement of certificates. Transactions may be settled in
Cedelbank in any of 28 currencies, including United States dollars. Cedelbank
provides to its Cedelbank Participants, among other things, services for
safekeeping, administration, clearance and settlement of internationally traded
securities and securities lending and borrowing. Cedelbank interfaces with
domestic markets in several countries. As a professional depository, Cedelbank
is subject to regulation by the Luxembourg Monetary Institute. Cedelbank
Participants are recognized financial institutions around the world, including
underwriters, securities brokers and dealers, banks, trust companies, clearing
corporations and certain other organizations. Indirect access to Cedelbank is
also available to others, such as banks, brokers, dealers and trust companies
that clear through or maintain a custodial relationship with a Cedelbank
Participant, either directly or indirectly.
Euroclear was created in 1968 to hold securities for its participants
("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 (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
S-50
<PAGE>
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 Cedelbank or Euroclear will be credited to the cash accounts of
Cedelbank Participants or Euroclear Participants in accordance with the relevant
system's rules and procedures, to the extent received by the Relevant
Depositary. Such distributions will be subject to tax reporting in accordance
with relevant United States tax laws and regulations. See "FEDERAL INCOME TAX
CONSEQUENCES--Federal Income Tax Consequences to 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 will be provided to Cede, as
nominee of DTC, and may be made available by Cede 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 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. Cedelbank or
the Euroclear Operator, as the case may be, will take any other action permitted
to be taken by a Certificateholder under the Agreement on behalf of a Cedelbank
Participant or Euroclear Participant only in accordance with its relevant rules
and procedures and subject to the ability of the Relevant 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 Class A Certificates which
conflict with actions taken with respect to other Class A 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 Provident 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 Provident or the
Trustee is unable to locate a qualified successor, (b) Provident, at its sole
option, with the consent of the Trustee, elects to terminate a book-entry system
through DTC or (c) after the occurrence of an Event of Default (as defined
herein), beneficial owners representing not less than 51% of the Aggregate
Class A 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, Cedelbank and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of Class A Certificates among
participants of DTC, Cedelbank and Euroclear, they are under no obligation to
perform or continue to perform such procedures and such procedures may be
discontinued at any time.
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Neither Provident, the Certificate Insurer nor 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 Certificates held by
Cede, as nominee for DTC, or for maintaining, supervising or reviewing any
records relating to such beneficial ownership interests.
DTC management is aware that some computer applications, systems, and the
like for processing data ("Systems") that are dependent upon calendar dates,
including dates before, on, and after January 1, 2000, may encounter "Year 2000
problems." DTC has informed its Participants and other members of the financial
community (the "Industry") that it has developed and is implementing a program
so that its Systems, as the same relate to the timely payment of distributions
(including principal and income payments) to securityholders, book-entry
deliveries, and settlement of trades within DTC ("DTC Services"), continue to
function appropriately. This program includes a technical assessment and a
remediation plan, each of which is complete. Additionally, DTC's plan includes a
testing phase, which is expected to be completed within appropriate time frames.
However, DTC's ability to perform properly its services is also dependent
upon other parties, including but not limited to issuers and their agents, as
well as third party vendors from whom DTC licenses software and hardware, and
third party vendors on whom DTC relies for information or the provision of
services, including telecommunication and electrical utility service providers,
among others. DTC has informed the Industry that it is contacting (and will
continue to contact) third party vendors from whom DTC acquires services to: (i)
impress upon them the importance of such services being year 2000 compliant; and
(ii) determine the extent of their efforts for Year 2000 remediation (and, as
appropriate, testing) of their services. In addition, DTC is in the process of
developing such contingency plans as it deems appropriate.
According to DTC, the foregoing information with respect to DTC has been
provided to the Industry for informational purposes only and is not intended to
serve as a representation, warranty, or contract modification of any kind.
ASSIGNMENT OF MORTGAGE LOANS
The sale of the Mortgage Loans from the Seller to the Trust will be treated
by the Seller and the Trust as a sale of the Mortgage Loans. The Seller will
warrant that such transfer is a sale of its interest in the Mortgage Loans. In
the event of an insolvency of the Seller, it is possible that a receiver or
conservator for, or a creditor of, the Seller, may argue that the sale of the
Mortgage Loans by the Seller was a pledge of such Mortgage Loans in connection
with a borrowing by the Seller rather than a true sale. Such an attempt, even if
unsuccessful, could result in delays in distributions on the Offered
Certificates.
In the event that the FDIC were appointed receiver or conservator for the
Seller, the FDIC could exercise legal authority to prevent the Trustee from
taking any action based solely upon such appointment or insolvency of the
Seller. For example, the FDIC has the power to enforce contracts of the Seller
and may have the power to cause the Seller to continue to perform the duties of
the Master Servicer and to prevent the appointment of a successor servicer, or
to cause the sale or liquidation of the Mortgage Loans and early retirement of
the Certificates notwithstanding instructions of the Certificateholders or the
Certificate Insurer to the contrary. The FDIC as receiver may void certain
transfers determined to be fraudulent which occur prior to the appointment of a
receiver or conservator and has the power to repudiate or disaffirm any contract
of the Seller. In the event of any repudiation or disaffirmance, damages for the
repudiation or disaffirmance are limited by statute, and the FDIC as receiver
may require the Trustee to comply with certain claims procedures. Consequently,
payments on the Certificates could be delayed or reduced. In addition, the FDIC
as conservator or receiver for the Seller may have the power to transfer to
another party all of the Seller's rights and obligations with respect to the
Trust and the Certificateholders and the related property.
To the extent that the Seller is deemed to have granted a security interest
to the Trust and (i) the agreement by which the Seller grants a security
interest to the Trust in the Mortgage Loans was undertaken in the ordinary
course of business, not in contemplation of the Seller's insolvency and with no
intent to hinder, delay or defraud the Seller or its creditors or any federal
banking regulator, (ii) the secured party is not an insider or affiliate of the
Seller, (iii) the secured obligation represents a bona fide arms' length
transaction, (iv) the grant or creation of the
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security interest was for adequate consideration, (v) the security agreement is
in writing, was approved by Seller's board of directors (or loan committee),
which approval is reflected in the minutes of the board (or committee) and the
agreement has been continuously, since the time of its execution, an official
record of the Seller, and (vi) such security interest is otherwise legally
perfected and enforceable, the Seller believes that the FDIC as receiver or
conservator of the Seller would not seek to void such security interest. This
conclusion assumes that the FDIC abides by its Statement of Policy Regarding
Treatment of Security Interests After Appointment of the FDIC as Conservator or
Receiver dated March 31, 1993. If the FDIC does not void such security interest,
it still could require compliance with the claims procedures and could limit the
amount recoverable from the security property or seek to redeem or prepay the
secured obligation of the Seller (to the extent that it recognized a claim for a
secured obligation without permitting the sale of the property). To the extent
that any claim of the Trustee or the Certificateholders allowed by the FDIC were
not satisfied or were not permitted to be satisfied from the security property,
the claimant would be an unsecured creditor of the Seller, entitled to payment
on the claim, if any, in the same manner as other unsecured creditors of the
Seller, only following payment of other secured claims, administrative expenses
of the receiver and deposit liabilities of the Seller.
On the Closing Date (or, with respect to the Subsequent Mortgage Loans, the
date of transfer to the Trust), Provident will transfer to the Trust all of its
right, title and interest in and to each Mortgage Loan, the related Mortgage
Notes, Mortgages and other related documents (collectively, the "Related
Documents"), including all payments received on or with respect to each such
Mortgage Loan on or after the applicable Cut-Off Date (exclusive of (i) certain
payments in respect of interest accrued on the Mortgage Loans during November
1998 as described in the Agreement and (ii) payments in respect of interest on
the delinquent Mortgage Loans due prior to the applicable Cut-Off Date and
received thereafter). The Trustee, concurrently with such transfer, will deliver
the Certificates to Provident. Each Mortgage Loan transferred to the Trust will
be identified on a schedule (the "Mortgage Loan Schedule") delivered to the
Trustee pursuant to the Agreement. The Mortgage Loan Schedule will include
information as to the Principal Balance of each Mortgage Loan as of its
applicable Cut-Off Date, its Loan Rate as well as other information.
Under the terms of the Agreement, Provident will maintain possession of the
documentation relating to each Mortgage Loan (the "Mortgage File"), other than
the Mortgage Notes, which will be delivered to the Trustee on the Closing Date
(or the date of transfer of any Subsequent Mortgage Loan), and the assignments
of each Mortgage, which will be delivered to the Trustee in recordable form
within 90 days of the Closing Date. Within 30 days of an Assignment Event,
Provident will deliver the remainder of the Mortgage File pertaining to each
Mortgage Loan to the Trustee. In the Agreement, the Trustee will acknowledge the
assignment of the Mortgage Loans to the Trust. Provident will agree to hold the
portion of the Mortgage File being held by it for and on behalf of the Trustee.
An "Assignment Event" will occur on the 30th day following either (i) the
occurrence and continuance of an Event of Default, (ii) the reduction of the
Seller's long-term unsecured debt rating below "Baa2" by Moody's or "BBB" by S&P
or Fitch or (iii) the suspension, termination or withdrawal of the Seller's
long-term unsecured debt rating by Moody's, S&P or Fitch.
The Trustee will review the Mortgage Notes within 60 days of the Closing
Date and the assignments of each Mortgage within 180 days of the Closing Date,
and if any Mortgage Note or assignment is found to be defective in any material
respect and such defect is not cured within 90 days following notification
thereof to the Seller, the Seller will be obligated to either (i) substitute for
such Mortgage Loan an Eligible Substitute Mortgage Loan; however, such
substitution is permitted only within two years of the Closing Date and may not
be made unless an opinion of counsel is provided to the effect that such
substitution will not disqualify the Trust as a REMIC or result in a prohibited
transaction tax under the Code or (ii) purchase such Mortgage Loan at a price
(the "Purchase Price") equal to the outstanding Principal Balance of such
Mortgage Loan as of the date of purchase, plus all accrued and unpaid interest
thereon (such accrued and unpaid interest may constitute all or a portion of a
unreimbursed Monthly Advance), computed at the Loan Rate, plus the amount of any
unreimbursed Servicing Advances made by the Master Servicer. The Purchase Price
will be deposited in the Collection Account on or prior to the next succeeding
Determination Date after such obligation arises. The obligation of the Seller to
repurchase or substitute for a Defective Mortgage Loan is the sole remedy
regarding any defects in the Mortgage
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Loans and Related Documents available to the Trustee or the Certificateholders.
Within 60 days of an Assignment Event, the Trustee will review the Mortgage File
(to the extent not previously reviewed) 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 to the Seller, the Seller will be obligated to
purchase or substitute for such Mortgage Loan in the manner described above.
In connection with the substitution of an Eligible Substitute Mortgage
Loan, the Seller will be required to deposit in the Collection Account on or
prior to the next succeeding Determination Date after such obligation arises an
amount (the "Substitution Adjustment Amount") equal to the excess of the
Principal Balance of the related Defective Mortgage Loan over the Principal
Balance of such Eligible Substitute Mortgage Loan.
An "Eligible Substitute Mortgage Loan" is a Mortgage Loan substituted by
the Seller 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) not in excess of and not more than 5% less than the
Principal Balance of the 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) if such Defective
Mortgage Loan is in Loan Group 2, have a Loan Rate based on the same Loan Index
with the next Change Date no later than the next Change Date of the Defective
Mortgage Loan and have a Gross Margin that is not less than the Gross Margin of
the Defective Mortgage Loan and not more than 1% higher than the Gross Margin
for the Defective Mortgage Loan; (iv) have a Mortgage of the same or higher
level of priority as the Mortgage relating to the Defective Mortgage Loan at the
time such Mortgage was transferred to the Trust; (v) have a remaining term to
maturity not more than six months earlier and not later than the remaining term
to maturity of the Defective Mortgage Loan; (vi) comply with each representation
and warranty 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; (viii) if such Defective Mortgage Loan
is in Loan Group 2, have a Lifetime Cap and a Periodic Cap no lower than the
Lifetime Cap and Periodic Cap, respectively, applicable to such Defective
Mortgage Loan; and (ix) be of the same type of Mortgaged Property as the
Defective Mortgage Loan or a detached single family residence. More than one
Eligible Substitute Mortgage Loan may be substituted for a Defective Mortgage
Loan if such Eligible Substitute Mortgage Loans meet the foregoing attributes in
the aggregate and such substitution is approved in writing in advance by the
Certificate Insurer.
The Seller will make certain representations and warranties as to the
accuracy in all material respects of certain information furnished to the
Trustee and the Certificate Insurer with respect to each Mortgage Loan (e.g.,
Cut-Off Date Principal Balance and the Loan Rate). In addition, the Seller will
represent and warrant, on the Closing Date, that, among other things: (i) the
Seller has transferred and assigned all of its right, title and interest in each
Mortgage Loan and the Related Documents, free of any lien; and (ii) each
Mortgage Loan complied, at the time of origination, in all material respects
with applicable state and federal laws. Upon discovery of a breach of any such
representation and warranty which materially and adversely affects the interests
of the Trust, the Certificateholders or the Certificate Insurer in the related
Mortgage Loan and Related Documents, the Seller 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, the Seller will be obligated to
(i) substitute for such Defective Mortgage Loan an Eligible Substitute Mortgage
Loan or (ii) purchase such Defective Mortgage Loan from the Trust. The same
procedure and limitations that are set forth above for the substitution or
purchase of Defective Mortgage Loans as a result of deficient documentation
relating thereto will apply to the substitution or purchase of a Defective
Mortgage Loan as a result of a breach of a representation or warranty in the
Agreement that materially and adversely affects the interests of the Trust, the
Certificateholders or the Certificate Insurer.
Mortgage Loans required to be transferred to the Seller as described in the
preceding paragraphs are referred to as "Defective Mortgage Loans."
Pursuant to the Agreement, the Master Servicer will service and administer
the Mortgage Loans as more fully set forth herein.
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PAYMENTS ON MORTGAGE LOANS; DEPOSITS TO COLLECTION ACCOUNT AND DISTRIBUTION
ACCOUNT
The Master Servicer shall establish and maintain in the name of the Trustee
a separate trust account (the "Collection Account") for the benefit of the
holders of the Certificates. 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 Master Servicer of amounts in respect
of the Mortgage Loans (excluding amounts representing the Master Servicing Fee),
the Master Servicer will deposit such amounts in the Collection Account. Amounts
so deposited may be invested in Eligible Investments (as described in the
Agreement) maturing no later than one Business Day prior to the next succeeding
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 short-term debt rating of "A-1" by S&P, "P-1" by Moody's or "F-1" by
Fitch and whose accounts are fully insured to the maximum extent provided 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 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,
and in each case of (a)-(d), approved in writing by the 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.
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Eligible Investments are specified in the Agreement and are limited to
investments which meet the criteria of the Certificate Insurer and the Rating
Agencies from time to time as being consistent with the then current ratings of
the Certificates. All net investment earnings on funds deposited to the
Collection Account and the Distribution Account will be for the benefit of the
Master Servicer as additional servicing compensation. The Master Servicer will
be obligated to deposit the amount of any net loss incurred in respect of an
Eligible Investment held therein.
MONTHLY ADVANCES
Not later than three Business Days prior to each Distribution Date, the
Master Servicer will remit to the Trustee for deposit in the Distribution
Account an amount, to be distributed on the related Distribution Date, equal to
interest due but not received on each Mortgage Loan during the related Due
Period (net of the Master Servicing Fee) (the "Monthly Advance"). With respect
to any Balloon Loan that is delinquent on its maturity date, the Master Servicer
will continue to make Monthly Advances with respect to such Balloon Loan in an
amount equal to one month's interest on the unpaid principal balance at the Loan
Rate (net of the Master Servicing Fee). Such obligation of the Master Servicer
continues with respect to each Mortgage Loan until such Mortgage Loan becomes a
Liquidated Mortgage Loan; provided, however, the Master Servicer is not required
to make any Monthly Advances, including, without limitation, Monthly Advances
with respect to Balloon Loans, which it determines would be a Nonrecoverable
Advance.
In the course of performing its servicing obligations, the Master Servicer
will pay all reasonable and customary "out-of-pocket" costs and expenses
incurred in the performance of its servicing obligations, including, but not
limited to, the cost of (i) the preservation, restoration and protection of the
Mortgaged Properties, (ii) any enforcement or judicial proceedings, including
foreclosures, and (iii) the management and liquidation of Mortgaged Properties
acquired in satisfaction of the related Mortgage. Each such expenditure will
constitute a "Servicing Advance".
The Master Servicer's right to reimbursement for Servicing Advances is
limited to late collections on the related Mortgage Loan, including Liquidation
Proceeds, Insurance Proceeds and such other amounts as may be collected by the
Master Servicer from the related Mortgagor or otherwise relating to the Mortgage
Loan in respect of which such unreimbursed amounts are owed. The Master
Servicer's right to reimbursement for Monthly Advances shall be limited to late
collections of interest on any Mortgage Loan and to Liquidation Proceeds and
Insurance Proceeds on the related Mortgage Loan. The Master Servicer's right to
such reimbursements is prior to the rights of Certificateholders.
Notwithstanding the foregoing, the Master Servicer is not required to make
any Monthly Advance or Servicing Advance if in the good faith judgment and sole
discretion of the Master Servicer, the Master Servicer determines that such
advance will not be ultimately recoverable from collections received from the
Mortgagor in respect of the related Mortgage Loan or other recoveries in respect
of such Mortgage Loan (a "Nonrecoverable Advance"). However, if any Servicing
Advance or Monthly Advance is determined by the Master Servicer to be
nonrecoverable from such sources, the amount of such Nonrecoverable Advance may
be reimbursed to the Master Servicer from other amounts on deposit in the
Collection Account. The Master Servicer's right to such reimbursements is prior
to the rights of the Certificateholders.
DISTRIBUTION DATES
On the eighteenth day of each month (each, a "Determination Date"), the
Master 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 the next Distribution Date.
On the 25th day of each month, or if such a day is not a Business Day, then
the next succeeding Business Day, commencing in January 1999 (each such day, a
"Distribution Date"), the holders of Offered Certificates of record as of the
applicable Record Date will be entitled to receive, from amounts then on deposit
in the Distribution Account, to the extent of funds available therefor in
accordance with the priorities and in the amounts described below under
"--Priority of Distributions," an aggregate amount equal to the sum of (a) the
Class Interest Distribution for each Class of Offered Certificates and (b) the
Class A Principal Distribution for each Certificate Group. Distributions will be
made (i) in immediately available funds to holders of Offered Certificates
holding Certificates, the aggregate principal balance of which is at least
$1,000,000, by wire transfer
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or otherwise, to the account of such Certificateholder at a domestic bank or
other entity having appropriate facilities therefor, if such Certificateholder
has so notified the Trustee in accordance with the Agreement, or (ii) by check
mailed to the address of the person entitled thereto as it appears as of the
last Record Date on the register (the "Certificate Register") maintained by the
Trustee as registrar (the "Certificate Registrar").
The "Record Date" is, with respect to the Group 1 Certificates, the last
day of the month immediately preceding the month in which the related
Distribution Date occurs and with respect to the Group 2 Certificates, the day
immediately preceding such Distribution Date; provided, however, that if any
Group 2 Certificate becomes a Definitive Certificate, the Record Date for such
Group 2 Certificate will be the last day of the month immediately preceding the
month in which the related Distribution Date occurs.
DEPOSITS TO THE DISTRIBUTION ACCOUNT
No later than the date specified in the Agreement prior to each
Distribution Date, the following amounts in respect of a Loan Group and the
previous Due Period shall be deposited into the Distribution Account and shall
constitute the "Available Funds" for the related Certificate Group for such
Distribution Date: (i) (a) payments of principal and interest on the Mortgage
Loans in such Loan Group (net of amounts representing the Master Servicing Fee
with respect to each Mortgage Loan in the related Loan Group and reimbursement
for related Monthly Advances and Servicing Advances, including Nonrecoverable
Advances, and the interest portion of Payaheads received during such Due Period
intended for application in subsequent Due Periods); and (b) the interest
portion of Payaheads on the Mortgage Loans in such Loan Group received in prior
Due Periods intended for application in such Due Period; (ii) Net Liquidation
Proceeds and Insurance Proceeds with respect to the Mortgage Loans in such Loan
Group (net of amounts applied to the restoration or repair of a Mortgaged
Property); (iii) the Purchase Price for repurchased Defective Mortgage Loans
with respect to the Mortgage Loans in such Loan Group and any related
Substitution Adjustment Amounts; (iv) payments from the Master Servicer in
connection with (a) Monthly Advances, (b) Prepayment Interest Shortfalls and
(c) the termination of the Trust with respect to the Mortgage Loans in such Loan
Group as provided in the Agreement; (v) any amounts withdrawn from the Spread
Account or paid under the Policy in respect of the related Certificate Group
and; (vi) amounts withdrawn from the related Pre-Funding Account or Capitalized
Interest Account for the purpose of making a distribution on the related
Class A Certificates on the Distribution Date in January 1999.
A "Payahead" is a scheduled monthly payment received by the Master Servicer
with the scheduled monthly payment for the current Due Date, intended by the
related Mortgagor to be applied on a subsequent Due Date (for example, because
the Mortgagor intends to be on vacation the following month). The interest
portion of Payaheads will be held in the Collection Account until deposited to
the Distribution Account as part of the Available Funds for the Due Period in
which the Due Date that the Mortgagor intends the application of such scheduled
monthly payment occurs. The principal portion of each Payahead will be part of
the Available Funds for the Due Period in which such Payahead was received.
THE SPREAD ACCOUNT
The Agreement requires the Trustee to establish on the Closing Date and to
maintain a reserve account (the "Spread Account") for the benefit of the
Certificate Insurer and the Certificateholders. On the Closing Date, the Trustee
will make two deposits to the Spread Account, as specified in the Agreement, one
in respect of the Group 1 Certificates and the other in respect of the Group 2
Certificates. No additional deposits will be required to be made to the Spread
Account in respect of either Certificate Group.
On any Distribution Date, amounts, if any, on deposit in the Spread Account
in respect of a Certificate Group will be available to fund any shortfall
between (i) the sum of (a) the Class Interest Distribution for each Class of
Offered Certificates and (b) the Class A Principal Distribution for such
Certificate Group on such date and (ii) funds on deposit in the Distribution
Account available to be distributed therefor on such Distribution Date, prior to
giving effect to any draw on the Policy on such Distribution Date. On any
Distribution Date if the amount on deposit in the Spread Account in respect of a
Certificate Group is insufficient to fund any such shortfall, the amount on
deposit in the Spread Account in respect of the other Certificate Group after
giving effect to any withdrawal therefrom required to be made in respect of such
Certificate Group on such Distribution Date, may be applied to fund such
shortfall. The Agreement permits reductions to the amount on deposit in the
Spread Account in respect of a Certificate Group as specified in the Agreement.
Any such reduction will be dependent on the delinquency and loss performance of
the Mortgage Loans in the related Loan Group. The maximum
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amount required to be on deposit at any time in the Spread Account in respect of
each Certificate Group is referred to herein as the "Group Spread Account
Requirement".
The amounts in the Spread Account in respect of a Certificate Group in
excess of the related Group Spread Account Requirement will be distributed to
the Seller. The Seller will not be required to refund any amounts previously and
properly distributed to it, regardless of whether there are sufficient funds on
a subsequent Distribution Date to make a full distribution to holders of the
Class A Certificates on such Distribution Date. Funds credited to the Spread
Account may be invested in Eligible Investments or certain other investments
specified in the Agreement that are scheduled to mature on or prior to the next
Distribution Date as specified in the Agreement. The Spread Account shall be an
Eligible Account.
The Spread Account and any income earned thereon will not be assets of
either REMIC.
The Spread Account may be terminated or other assets, including mortgage
loans such as the Mortgage Loans or a guarantee of Provident or a letter of
credit issued on behalf of Provident, may be substituted for some or all of the
assets held therein, if any, provided that the Certificate Insurer and the
Rating Agencies consent to such action and the then current ratings of the
Class A Certificates assigned by the Rating Agencies are not lowered as a result
thereof.
NET FUNDS CAP CARRYOVER RESERVE ACCOUNT
The Agreement requires the Trustee to establish on the Closing Date and
maintain thereafter a reserve account (the "Net Funds Cap Carryover Reserve
Account"). On each Distribution Date the amount called for by
clause B(ii)(b) will be deposited to the Net Funds Cap Carryover Reserve Account
as described below under "--Priority of Distributions".
On each Distribution Date, the Trustee shall withdraw from the Net Funds
Cap Carryover Reserve Account, to the extent funds are available therefor, the
Net Funds Cap Carryover Amount for the Group 2 Certificates and pay such amount
to the related Certificateholders on such Distribution Date. Amounts deposited
to the Net Funds Cap Carryover Reserve Account pursuant to (B)(ii)(b) will only
be available to pay the Net Funds Cap Carryover Amount in respect of the
Group 2 Certificates. The Net Funds Cap Carryover Reserve Account will be funded
on the Closing Date with a "Reserve Account Initial Deposit" of $5,000.
Thereafter, if the Group 2 Net Funds Cap does not exceed the Certificate Rate on
either the Class A-8 Certificates or Class A-9 Certificates by 0.20% on any
Distribution Date, the amount to be held in the Net Funds Cap Carryover Reserve
Account for such Distribution Date thereafter will equal the greater of
(i) 0.50% of the outstanding Certificate Principal Balance of such Class or
Classes and (ii) $15,000, and will be funded from amounts otherwise paid to the
Class X-2 Certificates. Thereafter, if the Group 2 Net Funds Cap for any
Distribution Date exceeds the Certificate Rate on either the Class A-8
Certificates or Class A-9 Certificates by 0.20% or more, the Required Reserve
Amount for such Distribution Date will be $5,000 and will be funded from amounts
otherwise paid to the Class X-2 Certificates. Any distribution by the Trustee
from amounts in the Net Funds Cap Carryover Reserve Account shall be made on the
applicable Distribution Date. The amount required to be on deposit in the Net
Funds Cap Carryover Reserve Account at any time is referred to herein as the
"Required Reserve Amount."
Amounts on deposit in the Net Funds Cap Carryover Reserve Account in excess
of the Required Reserve Amount will be released therefrom and distributed to the
holders of the Class X-2 Certificates on any Distribution Date.
The Net Funds Cap Carryover Reserve Account and the income earned thereon
will not be assets of either REMIC. The Policy does not cover any Net Funds Cap
Carryover Amount.
PRE-FUNDING ACCOUNTS
On the Closing Date, up to $69,755,294.71 (the "Loan Group 1 Pre-Funded
Amount") will be deposited into a segregated account, (the "Group 1 Pre-Funding
Account") and up to $54,375,000.27 (the "Loan Group 2 Pre-Funded Amount") will
be deposited into a segregated account, (the "Group 2 Pre-Funding Account" and
together with the Group 1 Pre-Funding Account, "Pre-Funding Accounts"). The
Pre-Funding Accounts shall be Eligible Accounts. It is expected that the Seller
will have originated or acquired Subsequent Mortgage Loans from December 1, 1998
to the Closing Date. Such mortgage loans will be transferred to the Trust on the
Closing Date. The maximum amount to be deposited into the Pre-Funding Accounts
on the Closing Date will be reduced by the Principal Balances of the Subsequent
Mortgage Loans transferred to each Loan Group on the Closing
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Date. Amounts on deposit in a Pre-Funding Account may be used only (i) to
acquire Subsequent Mortgage Loans and (ii) to make accelerated payments on the
Class A Certificates on the January 1999 Distribution Date. During the period
(the "Funding Period") beginning on the Closing Date and ending on January 23,
1999, amounts will, from time to time, be withdrawn from the Pre-Funding
Accounts to purchase Subsequent Mortgage Loans for the related Loan Group in
accordance with the Agreement. Any Pre-Funded Amounts in a Pre-Funding Account
remaining at the end of the Funding Period will be distributed as a principal
prepayment on the January 1999 Distribution Date to the Class A Certificates of
the related Certificate Group then entitled to distributions of principal. The
Pre-Funding Accounts will not be an asset of any REMIC and they shall be owned
by, and any reinvestment earnings on the Pre-Funding Accounts shall be taxable
to the Seller. See "RISK FACTORS--Risk of Prepayment Due to Subsequent Mortgage
Loans," and "DESCRIPTION OF THE CERTIFICATES--Priority of Distributions."
Amounts on deposit in the Pre-Funding Accounts will be invested in Eligible
Investments or certain other investments specified in the Agreement that are
scheduled to mature on or prior to the January 1999 Distribution Date, as
specified in the Agreement. The Pre-Funding Accounts will not be an asset of any
REMIC. Any interest earned on the Pre-Funding Accounts will be taxable to the
Seller.
CAPITALIZED INTEREST ACCOUNTS
On the Closing Date, the amounts, if any, specified in the Agreement will
be deposited into two separate accounts (the "Capitalized Interest Accounts") in
the name of the Trustee on behalf of the Trust. The amounts on deposit in the
Capitalized Interest Accounts, including reinvestment income thereon, will be
used by the Trustee to fund on the January 1999 Distribution Date the excess of
(x) the amount of interest accruing at the weighted average Certificate Rate on
the amount by which the Aggregate Class A Principal Balance of a Certificate
Group as of such Distribution Date exceeds the related Loan Group Principal
Balance as of the beginning of the related Due Period over (y) the amount of any
investment earnings on funds in the Group 1 Pre-Funding Account or Group 2
Pre-Funding Account that are available to pay interest on the respective
Class A Certificates on such Distribution Date. Any amounts remaining in the
Capitalized Interest Accounts following the Funding Period and not needed for
such purpose will be paid to the Seller and will not thereafter be available for
distribution to the Class A Certificateholders. The Capitalized Interest
Accounts will terminate on the first Distribution Date following the Funding
Period.
Amounts on deposit in the Capitalized Interest Accounts will be invested in
Eligible Investments or certain other investments specified in the Agreement
that are scheduled to mature on or prior to the next Distribution Date, as
specified in the Agreement. The Capitalized Interest Accounts will not be an
asset of any REMIC. Any reinvestment earned on the Capitalized Interest Accounts
will be taxable to the Seller.
PRIORITY OF DISTRIBUTIONS
On each Distribution Date the Trustee shall withdraw from the Distribution
Account the sum of (a) the Available Funds with respect to the Group 1
Certificates and (b) the Available Funds with respect to the Group 2
Certificates (such sum, the "Amount Available"), and make the following
disbursements and transfers as described below and to the extent of the Amount
Available (except that withdrawals from the Spread Account and amounts paid
under the Policy shall only be available for distribution to Class A
Certificateholders):
A. With respect to the Group 1 Certificates, the Available Funds with
respect to such Certificate Group will be distributed in the following order of
priority:
(i) to the Trustee, the Trustee fee for Loan Group 1 for such
Distribution Date and to the Certificate Insurer, the amount owing to the
Certificate Insurer under the Insurance Agreement for the premium payable
in respect of the Group 1 Certificates;
(ii) concurrently, as follows:
(a) to the holders of the Class A-1, Class A-2, Class A-3, Class
A-4, Class A-5, Class A-6 and Class A-7 Certificates, an amount equal to
the Class Interest Distribution for the Class A-1, Class A-2, Class A-3,
Class A-4, Class A-5, Class A-6 and Class A-7 Certificates,
respectively, for such Distribution Date; and
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(b) to the holders of the Class X-1 Certificates, the amount to
which they are entitled in accordance with the terms of the Agreement,
which will generally be equal to interest on a notional balance equal to
the Aggregate Class A Principal Balance of the Group 1 Certificates at a
rate equal to the excess, if any, of the Group 1 Net Funds Cap over the
weighted average of the Certificate Rates of the Group 1 Certificates,
in each case for such Distribution Date, plus any interest shortfall
from previous Distribution Dates with interest thereon;
provided, however, if Available Funds with respect to the Group 1 Certificates
(prior to giving effect to withdrawals from the Spread Account or draws on the
Policy) on such Distribution Date are insufficient to make the distributions
required to be made pursuant to this clause A.(ii), such Available Funds will be
allocated between subclauses (a) and (b), above, pro rata, based on the amount
required to be paid pursuant to each such subclause without giving effect to any
shortfall in such Available Funds; and
(iii) to the holders of the Group 1 Certificates, an amount equal to
the Class A Principal Distribution for the Group 1 Certificates for such
Distribution Date in the following order of priority:
(a) to the Class A-7 Certificateholders, the Class A-7 Principal
Distribution Amount; and
(b) the balance of the Class A Principal Distribution Amount for
such Distribution Date, sequentially, to the holders of the Class A-1
Certificates, Class A-2 Certificates, Class A-3 Certificates, Class A-4
Certificates, Class A-5 Certificates, Class A-6 Certificates and
Class A-7 Certificates, in that order, until the Class A Principal
Balance of each such Class of Class A Certificates has been reduced to
zero;
provided, however, if an Insurer Default has occurred and is continuing, the
Class A Principal Distribution for the Group 1 Certificates for such
Distribution Date will be distributed to such Class A Certificateholders on a
pro rata basis, based on the Class A Principal Balance of each such Class.
B. With respect to the Group 2 Certificates, the Available Funds with
respect to such Certificate Group will be distributed in the following order of
priority:
(i) to the Trustee, the Trustee fee for Loan Group 2, to the Auction
Agent, the Auction Agent Fee for the Class A-9 Certificates and to the
Certificate Insurer, the amount owing to the Certificate Insurer under the
Insurance Agreement for the premium payable in respect of the Group 2
Certificates, in each case for such Distribution Date;
(ii) concurrently, as follows:
(a) to the holders of the Class A-8 and A-9 Certificates, an amount
equal to the Class Interest Distribution for such Distribution Date; and
(b) to the holders of the Class X-2 Certificates, the amount to
which they are entitled in accordance with the terms of the Agreement,
which will generally be equal to interest on a notional balance equal to
the Aggregate Class A Principal Balance of the Group 2 Certificates at a
rate equal to the excess, if any, of the Group 2 Net Funds Cap over the
weighted average Certificate Rates for the Group 2 Certificates for such
Distribution Date, plus any interest shortfall from previous
Distribution Dates with interest thereon, such amounts first to be
deposited to the Net Funds Cap Carryover Reserve Account, first to cover
any Net Funds Cap Carryover Amount (to the extent not covered by amounts
already on deposit in the Net Funds Cap Carryover Reserve Account) and
then to cover any Required Reserve Amount and any remainder to the
holders of the Class X-2 Certificates;
provided, however, if Available Funds with respect to the Group 2 Certificates
(prior to giving effect to withdrawals from the Spread Account or draws on the
Policy) on such Distribution Date are insufficient to make the distributions
required to be made pursuant to this clause B.(ii), such Available Funds will be
allocated between subclauses (a) and (b), above, pro rata, based on the amount
required to be paid pursuant to each such subclause without giving effect to any
shortfall in such Available Funds; and
(iii) to the holders of the Group 2 Certificates an amount equal to
the Class A Principal Distribution for the Group 2 Certificates for such
Distribution Date, sequentially, to the Class A-8 and Class A-9
Certificates, in that order, until the Class A Principal Balance of the
Class A-8 and Class A-9 Certificates is reduced to zero; provided, however,
if an Insurer Default has occurred and is continuing, the Class A
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Principal Distribution for the Group 2 Certificates for such Distribution
Date will be distributed to such Class A Certificateholders on a pro rata
basis, based on the Class A Principal Balance of each such Class.
C. After making the distributions referred to in subclauses A. and B.
above, the Trustee shall make distributions in the following order of priority,
to the extent of the balance of the Amount Available;
(i) to the Master Servicer, the amount of any accrued and unpaid
Master Servicing Fee;
(ii) to the Master Servicer, the amount of Nonrecoverable Advances to
the extent not previously reimbursed;
(iii) to the Certificate Insurer, any other amounts owing to the
Certificate Insurer under the Insurance Agreement;
(iv) to the Auction Agent, certain amounts that may be required to be
paid pursuant to the Agreement;
(v) to the Class R-2 Certificateholders, the balance.
"Net Funds Cap Carryover Amount" means, on any Distribution Date and with
respect to Class A-8 and Class A-9 Certificates, the sum of (A) if on such
Distribution Date the Certificate Rate for such Class is based upon the Group 2
Net Funds Cap the excess of (i) the amount of interest such Certificate would
otherwise be entitled to receive on such Distribution Date had such rate been
calculated at the related Formula Rate for such Distribution Date over (ii) the
amount of interest payable in respect of such Certificate at the Group 2 Net
Funds Cap for such Distribution Date, (B) the Net Funds Cap Carryover Amount for
such Certificate for all previous Distribution Dates not previously paid, and
(C) one month's interest on the amount calculated in (B) at the related Formula
Rate for such Distribution Date. No such amounts will be payable with respect to
the Group 1 Certificates. The Policy does not cover the payment, nor do the
ratings assigned to the Class A-8 and Class A-9 Certificates address the
likelihood of the payment, of any Net Funds Cap Carryover Amounts.
THE CERTIFICATE RATE
The "Certificate Rate" on any Distribution Date with respect to the
Class A-1 Certificates, Class A-2 Certificates, Class A-3 Certificates,
Class A-4 Certificates, Class A-5 Certificates, Class A-6 Certificates and
Class A-7 Certificates will be 6.28% per annum, 5.97% per annum, 6.01% per
annum, 6.17% per annum, 6.21% per annum, 6.69% per annum and 6.20% per annum,
respectively. Interest in respect of any Distribution Date will accrue on the
Fixed Rate Certificates during the related Interest Period on the basis of a
360-day year consisting of twelve 30-day months.
The "Certificate Rate" on any Distribution Date with respect to the
Class A-8 and the Class A-9 Certificates will be a per annum rate equal to the
lesser of (A) the related Formula Rate and (B) the Group 2 Net Funds Cap for
such Distribution Date. With respect to the Group 2 Certificates, interest in
respect of any Distribution Date will accrue during the related Interest Period
on the basis of a 360-day year and the actual number of days elapsed.
The "Formula Rate" for the Class A-8 Certificates for any Distribution Date
is the sum of (a) the interbank offered rate for one-month United States dollar
deposits in the London market (the "LIBOR Index") as of the related LIBOR
Determination Date (as defined herein) and (b) 0.35%. The "Formula Rate" for the
Class A-9 Certificates for the first Distribution Date is 5.70% per annum and
for each Distribution Date thereafter, the Auction Rate established for the
Class A-9 Certificates for such Distribution Date based upon the Auction
Procedures described in Annex II hereto.
The "Interest Period" means, with respect to each Distribution Date and the
Fixed Rate Certificates, the period from the first day of the calendar month
preceding the month of such Distribution Date through the last day of such
calendar month. The "Interest Period" means, with respect to each Distribution
Date and the Class A-8 and Class A-9 Certificates, the period from the
Distribution Date in the month preceding the month of such Distribution Date (or
in the case of the first Distribution Date, from the Closing Date) through the
day before such Distribution Date.
The "Group 1 Net Funds Cap" for any Distribution Date shall equal the
difference between (A) the average of the Loan Rates of the Mortgage Loans in
the Loan Group 1 as of the first day of the month preceding the month of such
Distribution Date (or, in the case of the first Distribution Date, the Closing
Date), weighted on the basis of the related Principal Balances as of such date
and (B) the sum of the Master Servicing Fee Rate and the
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rates at which the Trustee fee and the premium payable to the Certificate
Insurer with respect to the Group 1 Certificates are calculated. The "Group 2
Net Funds Cap" for any Distribution Date shall equal the difference between
(A) the average of the Loan Rates of the Mortgage Loans in Loan Group 2 as of
the first day of the month preceding the month of such Distribution Date (or, in
the case of the first Distribution Date, the Closing Date), weighted on the
basis of the related Principal Balances as of such date and (B) the sum of the
Master Servicing Fee Rate, the Auction Agent Fee Rate and the rates at which the
Trustee fee and the premium payable to the Certificate Insurer with respect to
the Group 2 Certificates are calculated (computed on the basis of a 360-day year
and the actual number of days elapsed during the related Interest Period).
With respect to each Distribution Date and the Class A-8 Certificates, the
LIBOR Index shall be established by the Trustee and will equal the rate for one
month United States dollar deposits quoted on Telerate Page 3750 as of
11:00 A.M., London time, on the second LIBOR Business Day prior to the first day
of the related Interest Period (or the second LIBOR Business Day prior to the
Closing Date, in the case of the first Distribution Date) (each, a "LIBOR
Determination Date"). "Telerate 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 Trustee after consultation with the Master Servicer), 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 Trustee after
consultation with the Master Servicer) 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 aggregate Class A Principal Balances of the
Class A-8 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 one or
more major banks in New York City, selected by the Trustee after consultation
with the Master Servicer, 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 aggregate Class A Principal Balance of the
Class A-8 Certificates then outstanding. If no such quotations can be obtained,
the rate will be the LIBOR Index 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.
For a description of the one-month LIBOR rate applicable to the Class A-9
Certificates on any Distribution Date, see Annex II hereto.
INTEREST
On each Distribution Date, to the extent of funds available therefor in
accordance with the priorities described above under "--Priority of
Distribution," interest will be distributed with respect to each Class of Class
A Certificates in an amount (each, a "Class Interest Distribution") equal to the
sum of (a) interest accrued during the related Interest Period at the related
Certificate Rate on the related Class A Principal Balance immediately prior to
such Distribution Date (the "Class Monthly Interest Distributable Amount") and
(b) any Class Interest Carryover Shortfall for such Class of Offered
Certificates for such Distribution Date. As to any Distribution Date and Class
of Offered Certificates, the "Class Interest Carryover Shortfall" is the sum of
(i) the excess of the related Class Monthly Interest Distributable Amount for
the preceding Distribution Date and any outstanding Class Interest Carryover
Shortfall with respect to such Class on such preceding Distribution Date, over
the amount in respect of interest that is actually distributed in respect of
such Class on such preceding Distribution Date plus (ii) one month's interest on
such excess, to the extent permitted by law, at the related Certificate Rate.
The interest entitlement described in (a) above will be reduced by such Class'
pro rata share of Civil Relief Act Interest Shortfalls, if any, for the related
Loan Group for such Distribution Date. Civil Relief Act Interest Shortfalls will
not be covered by payments under the Policy.
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PRINCIPAL
On each Distribution Date, to the extent of funds available therefor, in
accordance with the priorities described above under "--Priorities of
Distributions," principal will be distributed to the holders of Class A
Certificates of each Certificate Group in an amount equal to the lesser of
(A) the related Aggregate Class A Principal Balance and (B) the related Class A
Principal Distribution for such Distribution Date. The "Class A Principal
Distribution" means, with respect to any Distribution Date and Certificate
Group, other than the Final Distribution Date with respect to such Certificate
Group, the sum of the related Class A Monthly Principal Distributable Amount for
such Distribution Date and any Class A Principal Shortfall Amount for such
Distribution Date and on the Final Distribution Date, the related Aggregate
Class A Principal Balance.
"Class A Monthly Principal Distributable Amount" means, with respect to any
Distribution Date and Certificate Group, the amount equal to the sum of the
following amounts (without duplication) with respect to the immediately
preceding Due Period (as defined below): (i) each payment of principal on a
Mortgage Loan in the related Loan Group received by the Master Servicer during
such Due Period, including all full and partial principal prepayments, (ii) the
Principal Balance as of the end of the immediately preceding Due Period of each
Mortgage Loan in the related Loan Group that became a Liquidated Mortgage Loan
during such Due Period, (iii) the portion of the Purchase Price allocable to
principal of all repurchased Defective Mortgage Loans in the related Loan Group
and the principal portion of the amount received in connection with the
termination of the Trust allocable to the related Loan Group as described herein
under "--Termination; Purchase of Mortgage Loans", in each case with respect to
such Due Period, (iv) any Substitution Adjustment Amounts received on or prior
to the previous Determination Date and not yet distributed with respect to the
related Loan Group, and (v) with respect to the first Distribution Date, the
amount, if any, transferred from the related Pre-Funding Account into the
Distribution Account in respect of such Certificate Group.
"Class A Principal Shortfall Amount" means, with respect to any
Distribution Date and Certificate Group, the excess of the sum of the related
Class A Monthly Principal Distributable Amount for the preceding Distribution
Date and any outstanding Class A Principal Shortfall Amount with respect to such
Certificate Group on such preceding Distribution Date over the amount in respect
of principal that is actually distributed to the Class A Certificateholders of
such Certificate Group on such preceding Distribution Date.
The "Class A-7 Principal Distribution Amount" for any Distribution Date
will be the product of (i) the applicable Class A-7 Principal Payment Percentage
for such Distribution Date and (ii) the Class A-7 Pro Rata Principal
Distribution Amount for such Distribution Date. In no event shall the Class A-7
Principal Distribution Amount exceed the Class Principal Balance of the
Class A-7 Certificates.
The "Class A-7 Principal Payment Percentage" for each Distribution Date
shall be as follows:
<TABLE>
<CAPTION>
DISTRIBUTION DATE CLASS A-7 PRINCIPAL PAYMENT PERCENTAGE
- ------------------------------------ --------------------------------------
<S> <C>
January 1999 - December 2001........ 0%
January 2002 - December 2003........ 45%
January 2004 - December 2004........ 80%
January 2005 - December 2005........ 100%
January 2006 and thereafter 300%
</TABLE>
The "Class A-7 Pro Rata Principal Distribution Amount" for any Distribution
Date will be an amount equal to the product of (x) a fraction, the numerator of
which is the Class Principal Balance of the Class A-7 Certificates immediately
prior to such Distribution Date and the denominator of which is the Aggregate
Class A Principal Balance of the Group 1 Certificates immediately prior to such
Distribution Date and (y) the Class A Principal Distribution for the Group 1
Certificates for such Distribution Date.
"Due Period" means, with respect to any Determination Date or Distribution
Date, the calendar month immediately preceding such Determination Date or
Distribution Date, as the case may be.
A "Liquidated Mortgage Loan", as to any Distribution Date, is a Mortgage
Loan with respect to which the Master Servicer has determined, in accordance
with the servicing procedures specified in the Agreement, as of the end of the
preceding Due Period, that all Liquidation Proceeds which it expects to recover
with respect to such Mortgage Loan (including disposition of the related REO
Property) have been recovered.
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An "Insurer Default" will occur in the event the Certificate Insurer fails
to make a payment required under the Policy or if certain events of bankruptcy
or insolvency occur with respect to the Certificate Insurer.
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 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
Class A 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, the Master REMIC
and Subsidiary REMIC 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 Class A Certificates against the
debtor which 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 Class A 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 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.
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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
December 1, 1998, between Provident, as Seller and Master 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 close.
"Deficiency Amount" means for any Distribution Date (A) the excess, if
any, of (i) Class Monthly Interest Distributable Amount for each Class of
Class A Certificates (net of any Civil Relief Act Interest Shortfalls with
respect to the related Loan Group) plus any Class Interest Carryover
Shortfall for each Class of Class A Certificates over (ii) funds 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 January 2030.
"Guaranteed Principal Amount" means (a) for any Distribution Date
(other than the Final Distribution Date for a Certificate Group) the
amount, if any, by which the Aggregate Class A Principal Balance of each
Certificate Group exceeds the related Loan Group Principal Balance at the
end of the previous month (after giving effect to all distributions of
principal on the related Class A Certificates on such Distribution Date)
and (b) on the Distribution Date in January 2030, with respect to the
Group 1 Certificates and January 2030, with respect to the Group 2
Certificates (after giving effect to all other distributions of principal
on the Group 1 Certificates and the Group 2 Certificates on such
Distribution Date, as applicable), an amount equal to the applicable
Aggregate Class A Principal Balance.
"Insured Payment" means as of any Distribution Date, (i) any
Deficiency Amount and (ii) any Preference Amount.
"Notice" means the telephonic or telegraphic notice, promptly
confirmed in writing by telecopy, substantially in the form of Exhibit A
attached to the 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
Class A Certificates to payment thereunder.
"Preference Amount" means any amount previously distributed to an
Owner on the Class A Certificates that is recoverable and sought to be
recovered as a voidable preference by a trustee in bankruptcy pursuant to
the United States Bankruptcy Code (11 U.S.C.), as amended from time to time
in accordance with a final nonappealable order of a court having competent
jurisdiction.
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 may
be made at the address listed below for the Fiscal Agent or such other address
as the Certificate Insurer shall specify in writing to the Trustee.
The notice address of the Fiscal Agent is 15th Floor, 61 Broadway, 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.
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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.
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 Class A Certificates.
REPORTS TO CERTIFICATEHOLDERS
Concurrently with each distribution to the Certificateholders, the Trustee
will forward to each Certificateholder and the Certificate Insurer a statement
(based solely on information received from the Master Servicer) setting forth
among other items with respect to each Distribution Date:
(i) the aggregate amount of the distribution to each Class of
Certificateholders on such Distribution Date;
(ii) the amount of distribution set forth in paragraph (i) above in
respect of interest and the amount thereof in respect of any Class Interest
Carryover Shortfall, and the amount of any Class Interest Carryover
Shortfall remaining;
(iii) the amount of distribution set forth in paragraph (i) above in
respect of principal and the amount thereof in respect of the Class A
Principal Shortfall Amount, and any remaining Class A Principal Shortfall
Amount;
(iv) the amount, if any, by which the Aggregate Class A Principal
Balance of a Certificate Group exceeds the related Loan Group Principal
Balance at the end of the previous month (after giving effect to all
distributions of principal on the related Class A Certificates on such
Distribution Date);
(v) the amount paid under the Policy for such Distribution Date in
respect of the Class Interest Distribution to each Class of Certificates;
(vi) the Master Servicing Fee and the Auction Agent Fee;
(vii) the Pool Principal Balance, the Loan Group 1 Principal Balance
and the Loan Group 2 Principal Balance, in each case as of the close of
business on the last day of the preceding Due Period;
(viii) the Aggregate Class A Principal Balance of each Certificate
Group and Class Principal Balance of each Class of Class A Certificates in
such Certificate Group, after giving effect to payments allocated to
principal above;
(ix) the amount on deposit in the Spread Account in respect of each
Certificate Group on the Distribution Date, after giving effect to any
withdrawals therefrom on such Distribution Date;
(x) the number and aggregate Principal Balances of the Mortgage Loans
of each Loan Group 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 Due Period;
(xi) the book value of any real estate which is acquired by the Trust
through foreclosure or grant of deed in lieu of foreclosure;
(xii) the aggregate amount of prepayments received on the Mortgage
Loans during the previous Due Period and specifying such amount for each
Loan Group;
(xiii) the weighted average Loan Rate on the Mortgage Loans and
specifying such weighted average Loan Rate for each Loan Group as of the
first day of the month prior to the Distribution Date;
(xiv) the amount of any Civil Relief Act Interest Shortfalls,
specifying such amount for each Loan Group;
(xv) the amount of the Net Funds Cap Carryover Amount, if any;
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(xvi) the amount of any Monthly Advances and Servicing Advances; and
(xvii) the Certificate Rate applicable to each Class of Offered
Certificates on such Distribution Date.
In the case of information furnished pursuant to clauses (ii) and (iii)
above, the amounts shall be expressed as a dollar amount per Certificate with a
$1,000 denomination.
The Trustee may also make such statements to Certificateholders available
on the Trustee's website at http:\\online.bankerstrust.com\invr.
Within 60 days after the end of each calendar year, the Trustee will
forward to each Person, if requested in writing by such Person who was a
Certificateholder during the prior calendar year, a statement containing the
information set forth in clauses (ii) and (iii) above aggregated for such
calendar year.
LAST SCHEDULED DISTRIBUTION DATE
The last scheduled Distribution Date for each Class of Offered Certificates
is as follows: Class A-1 Certificates, November 25, 2013, Class A-2
Certificates, November 25, 2013, Class A-3 Certificates, July 25, 2017,
Class A-4 Certificates, April 25, 2022, Class A-5 Certificates, December 25,
2024, Class A-6 Certificates, January 25, 2030, Class A-7 Certificates,
January 25, 2030, Class A-8 Certificates, April 25, 2021 and Class A-9
Certificates, January 25, 2030. It is expected that the actual last Distribution
Date for each Class of Offered Certificates will occur significantly earlier
than such scheduled Distribution Dates. See "PREPAYMENT AND YIELD
CONSIDERATIONS".
Such last scheduled Distribution Dates for the Class A-1 Certificates,
Class A-2 Certificates, Class A-3 Certificates, Class A-4 Certificates,
Class A-5 Certificates and the Class A-8 Certificates are based on the
assumptions set forth under "--Weighted Average Lives" above and on a 0%
Prepayment Assumption. The last scheduled Distribution Dates for the Class A-6
Certificates, Class A-7 Certificates and the Class A-9 Certificates have been
calculated assuming that the Certificate Insurer makes the payment of the
outstanding Class A Principal Balance on the Distribution Date in January 2030.
COLLECTION AND OTHER SERVICING PROCEDURES ON MORTGAGE LOANS
The Master 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 which generally conform to the mortgage
servicing practices of prudent mortgage lending institutions which perform
servicing functions for their own account for mortgage loans of the same type as
the Mortgage Loans in the jurisdictions in which the related Mortgage Properties
are located. Consistent with the above, the Master 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 Master 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 Master Servicer's
policies with respect to mortgage loans it owns or services which are similar to
the Mortgage Loans.
HAZARD INSURANCE
The Master 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 maximum
insurable value of the improvements securing such Mortgage Loan from time to
time and (ii) the combined principal balance owing on such Mortgage Loan and any
mortgage loan senior to such 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 Master Servicer determines that such insurance is necessary in
accordance with accepted mortgage servicing practices of prudent lending
institutions, the Master 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 combined principal balance owing on
such Mortgage Loan and any mortgage loan senior to such mortgage loan, or
(b) the maximum amount of insurance available under the National Flood Insurance
Act of
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1968, as amended. The Master Servicer will also maintain on REO Property, to the
extent such insurance is available, fire and hazard insurance in the applicable
amounts described above, liability insurance and, to the extent required and
available under the National Flood Insurance Act of 1968, as amended, and the
Master Servicer determines that such insurance is necessary in accordance with
accepted mortgage servicing practices of prudent lending institutions, flood
insurance in an amount equal to that required above. Any amounts collected by
the Master 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 Master Servicer
to the extent such amounts constitute servicing compensation or to withdrawal
pursuant to the Agreement.
In the event that the Master 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 Master 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 Master Servicer will be deemed conclusively to
have satisfied its obligations with respect to fire and hazard insurance
coverage.
REALIZATION UPON DEFAULTED MORTGAGE LOANS
The Master Servicer will foreclose upon or otherwise comparably convert to
ownership Mortgaged Properties securing such of the Mortgage Loans as come into
and continue in 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 Master Servicer will follow such practices as it deems necessary or
advisable and as are in keeping with its general mortgage servicing activities,
provided that the Master 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 Master 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.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
With respect to each Due Period, the Master Servicer will receive from
interest payments in respect of the Mortgage Loans a portion of such interest
payments as a monthly master servicing fee (the "Master Servicing Fee") in the
amount equal to 0.50% per annum (the "Master Servicing Fee Rate") on the
Principal Balance of each Mortgage Loan as of the first day of each such Due
Period. All assumption fees, late payment charges, prepayment penalties and
other fees and charges, to the extent collected from borrowers, will be retained
by the Master Servicer as additional servicing compensation.
The Master Servicer's right to reimbursement for unreimbursed Servicing
Advances is limited to late collections on the related Mortgage Loan, including
Liquidation Proceeds, Insurance Proceeds and such other amounts as may be
collected by the Master Servicer from the related Mortgagor or otherwise
relating to the Mortgage Loan in respect of which such unreimbursed amounts are
owed. The Master Servicer's right to reimbursement for unreimbursed Monthly
Advances shall be limited to late collections of interest on any Mortgage Loan
and to liquidation proceeds and insurance proceeds on the related Mortgage Loan.
However, if any Servicing Advance or Monthly Advance is determined by the Master
Servicer to be nonrecoverable from such sources, the amount of such
nonrecoverable advances may be reimbursed to the Master Servicer from other
amounts on deposit in the Collection Account. The Master Servicer's right to
such reimbursements is prior to the rights of Certificateholders.
Not later than the Determination Date, the Master Servicer is required to
remit to the Trustee, without any right of reimbursement, an amount equal to,
with respect to each Mortgage Loan as to which a principal prepayment in full
was received during the related Due Period, the lesser of (a) the excess, if
any, of 30 days' interest on the Principal Balance of such Mortgage Loan at the
Loan Rate (or at such lower rate as may be in effect for such Mortgage Loan
because of application of the Soldiers' and Sailors' Civil Relief Act of 1940,
as amended (the "Civil Relief Act")), minus the Master Servicing Fee for such
Mortgage Loan, over the amount of interest actually paid by the related
Mortgagor in connection with such principal prepayment in full minus the
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Master Servicing Fee for such Mortgage Loan (with respect to all such Mortgage
Loans, the "Prepayment Interest Shortfall") and (b) the sum of the aggregate
Master Servicer Fee received by the Master Servicer in the most recently ended
Due Period. The aggregate amount remitted by the Master Servicer each month is
referred to herein as "Compensating Interest".
Civil Relief Act Interest Shortfalls will not be covered by the Policy,
although Prepayment Interest Shortfalls, after application of the Master
Servicing Fee for the related Due Period, will be so covered. The Master
Servicer is not obligated to offset any of the Master Servicing Fee against, or
to provide any other funds to cover, any shortfalls in interest collections on
the Mortgage Loans that are attributable to the application of the Civil Relief
Act (any such shortfall, a "Civil Relief Act Interest Shortfall"). See "RISK
FACTORS--Payments on the Mortgage Loans" in this Prospectus Supplement.
EVIDENCE AS TO COMPLIANCE
The Agreement provides for delivery on or before the last day of the fifth
month following the end of the Master Servicer's fiscal year, beginning in 1999,
to the Trustee, the Certificate Insurer and the Rating Agencies of an annual
statement signed by an officer of the Master Servicer to the effect that the
Master Servicer has fulfilled its material obligations under the Agreement
throughout the preceding fiscal year, except as specified in such statement.
On or before the last day of the fifth month following the end of the
Master Servicer's fiscal year, beginning in 1999, the Master Servicer will
furnish a report prepared by a firm of nationally recognized independent public
accountants (who may also render other services to Provident) to the Trustee,
the Certificate Insurer and the Rating Agencies to the effect that such firm has
examined certain documents and the records relating to servicing of the Mortgage
Loans under the Uniform Single Attestation Program for Mortgage Bankers and such
firm's conclusion with respect thereto.
The Master Servicer's fiscal year is the calendar year.
CERTAIN MATTERS REGARDING THE MASTER SERVICER
The Agreement provides that the Master 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 as evidenced by an opinion of counsel delivered
to the Certificate Insurer or (ii) upon the satisfaction of the following
conditions: (a) the Master Servicer has proposed a successor master servicer to
the Trustee in writing and such proposed successor master servicer is reasonably
acceptable to the Trustee; (b) the Rating Agencies have confirmed to the Trustee
that the appointment of such proposed successor master servicer as the Master
Servicer will not result in the reduction or withdrawal of the then current
rating of the Certificates; and (c) such proposed successor master servicer is
reasonably acceptable to the Certificate Insurer. No such resignation will
become effective until the Trustee or a successor master servicer has assumed
the Master Servicer's obligations and duties under the Agreement.
The Master 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 Master Servicer. Notwithstanding any such arrangement, the Master
Servicer will remain liable and obligated to the Trustee and the
Certificateholders for the Master Servicer's duties and obligations under the
Agreement, without any diminution of such duties and obligations and as if the
Master Servicer itself were performing such duties and obligations.
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The Master Servicer may permit the placement of a subsequent senior
mortgage on any Mortgaged Property, provided that (a) the related Mortgage
succeeded to a first lien position after the Closing Date for such Mortgage Loan
and, immediately following the placement of such senior lien, such Mortgage is
in a second lien position and the outstanding principal amount of the mortgage
loan secured by such senior lien is no greater than the outstanding principal
amount of the first mortgage loan existing as of the Closing Date and the
recalculated combined loan-to-value ratio of the Mortgage Loan is not greater
than the Combined Loan-to-Value Ratio of such Mortgage Loan as of the Closing
Date; or (b) the Mortgage relating to the Mortgage Loan was in a second lien
position as of the Closing Date, the new senior lien secures a mortgage loan
that refinances an existing first mortgage loan and the outstanding principal
amount of such refinanced mortgage loan is no greater than the outstanding
principal amount of the first mortgage loan existing as of the Closing Date and
the recalculated combined loan-to-value ratio of such Mortgage Loan is not
greater than the Combined Loan-to-Value Ratio of such Mortgage Loan as of the
Closing Date.
In addition, the Master Servicer may agree to changes in the terms of a
Mortgage Loan, provided, however, that such changes (i) will not cause the
Master and Subsidiary REMIC to fail to qualify as a REMIC (as evidenced by an
opinion of counsel, if required by the Agreement) and do not adversely affect
the interests of the Certificateholders or the Certificate Insurer and (ii) do
not change the Loan Rate of such Mortgage Loan or extend the maturity date of
such Mortgage Loan, unless the related Mortgagor is in default, or such default
is, in the judgment of the Master Servicer, imminent. Any changes to the terms
of a Mortgage Loan that would cause the Master and Subsidiary REMIC to fail to
qualify as a REMIC, however, may be agreed to by the Master Servicer, provided
that the Master Servicer has determined such changes are necessary to avoid a
prepayment of such Mortgage Loan, such changes are in accordance with prudent
business practices and the Master Servicer purchases such Mortgage Loan in
accordance with the terms of the Agreement.
The Agreement provides that the Master 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 Master 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. The Agreement
provides that neither Provident nor the Master 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 Provident nor the Master Servicer will be protected against any
liability which would otherwise be imposed by reason of willful misconduct, bad
faith or gross negligence of Provident or the Master Servicer, as the case may
be, in the performance of their respective duties under the Agreement or by
reason of reckless disregard of their respective obligations thereunder. In
addition, the Agreement provides that the Master 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. The Master
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
thereunder.
Any corporation into which the Master Servicer may be merged or
consolidated, or any corporation resulting from any merger, conversion or
consolidation to which the Master Servicer shall be a party, or any corporation
succeeding to the business of the Master Servicer shall be the successor of the
Master Servicer under the Agreement, without the execution or filing of any
paper or any further act on the part of any of the parties to the Agreement,
anything in the Agreement to the contrary notwithstanding.
EVENTS OF DEFAULT
An "Event of Default" will consist of: (i) (A) any failure of the Master
Servicer to make any required Monthly Advance or (B) any other failure of the
Master Servicer to deposit in the Collection Account or Distribution Account any
deposit required to be made under the Agreement, which failure continues
unremedied for two Business 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 the Certificate Insurer or any Certificateholder; (ii) any failure by
the Master 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 Master Servicer by the Trustee, or to the Master Servicer
and the Trustee by the Certificate Insurer or any
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Certificateholder; (iii) any failure by the Master Servicer to make any required
Servicing Advance, which failure continues unremedied for a period of 30 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 the Certificate Insurer or
any Certificateholder; (iv) certain events of insolvency, readjustment of debt,
marshalling of assets and liabilities or similar proceedings relating to the
Master Servicer and certain actions by the Master Servicer indicating
insolvency, reorganization or inability to pay its obligations (an "Insolvency
Event"); (v) any failure by the Master Servicer to pay when due any amount
payable by it under the Agreement or the Insurance Agreement; (vi) the loss and
delinquency performance of the Mortgage Loans exceeding certain levels specified
in the Agreement or (vii) certain events relating to the financial condition of
the Master Servicer as specified in the Agreement.
Upon the occurrence and continuation of the event described in clause
(i) (A) above, if any Monthly Advance is not made by 4:00 P.M., New York City
time, on the Business Day following written notice to the Master Servicer of
such event, the Trustee will immediately terminate the rights and obligations of
the Master Servicer under the Agreement and the Trustee will make such Monthly
Advance as the successor Master Servicer.
Notwithstanding the foregoing, a delay in or failure of performance
referred to under clause (i) above for a period of ten (10) Business Days or
referred to under clause (ii) above for a period of thirty (30) Business Days,
shall not constitute an Event of Default if such delay or failure could not be
prevented by the exercise of reasonable diligence by the Master 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 Master 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 Master Servicer shall provide
the Trustee, Provident, 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 DEFAULT
So long as an Event of Default remains unremedied, other than an event
described in clause (vi) above, either the Trustee, Certificateholders holding
Certificates evidencing at least 51% of the Voting Rights in the Trust, with the
consent of the Certificate Insurer, or the Certificate Insurer may terminate all
of the rights and obligations of the Master 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 Master Servicer under the
Agreement and will be entitled to similar compensation arrangements. Upon the
occurrence of the event described in clause (vi) above, the Certificate Insurer
may require that an audit of the Master Servicer's servicing practices be
performed. Upon review of such audit, the Certificate Insurer may terminate all
of the rights and obligations of the Master Servicer under the Agreement if it
reasonably concludes that the Master Servicer's servicing practices have not
been in accordance with the Agreement and the condition giving rise to such
default is continuing, whereupon the Trustee will succeed to all such
responsibilities, duties and liabilities of the Master Servicer as described
above. In the event that the Trustee would be obligated to succeed to all the
responsibilities, duties and liabilities of the Master 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 $50,000,000 and acceptable to the Certificate Insurer to act as
successor to the Master 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 Master
Servicer would otherwise have received (or such lesser compensation as the
Trustee and such successor may agree). A receiver or conservator for the Master
Servicer may be empowered to prevent the termination and replacement of the
Master Servicer if the only Event of Default that has occurred is an Insolvency
Event.
AMENDMENT
The Agreement may be amended from time to time by the Seller, the Master
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 Master Servicer to
comply with any requirements imposed by the Internal Revenue Code or any
regulation thereunder, or to add or amend any provisions of the Agreement as
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required by the Rating Agencies in order to maintain or improve any rating of
the Offered Certificates (it being understood that, after obtaining the ratings
in effect on the Closing Date, neither the Seller, the Trustee, the Certificate
Insurer nor the Master 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 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, further, 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 Offered Certificates. The Agreement may also be amended
from time to time by the Seller, the Master Servicer and the Trustee, with the
consent of Certificateholders evidencing at least 51% of the Percentage
Interests of each Class affected thereby 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 Certificateholder or (ii)
reduce the aforesaid percentage required to consent to any such amendment,
without the consent of the holders of all Offered Certificates then outstanding.
TERMINATION; PURCHASE OF MORTGAGE LOANS
The Trust will terminate on the Distribution Date following the later of
(A) payment in full of all amounts owing to the Certificate Insurer unless the
Certificate Insurer shall otherwise consent and (B) the earliest of (i) the
Distribution Date on which the Aggregate Class A Principal Balance of both
Certificate Groups have been reduced to zero, (ii) the final payment or other
liquidation of the last Mortgage Loan in the Trust, (iii) the optional purchase
by the Seller of the Mortgage Loans, as described below and (iv) the
Distribution Date in January 2030.
Subject to provisions in the Agreement concerning adopting a plan of
complete liquidation, the Seller may, at its option, terminate the Agreement on
any Distribution Date following the Due Period at the end of which the Pool
Principal Balance is less than 5% of the sum of the Principal Balance of the
Initial Mortgage Loans and Subsequent Mortgage Loans as of the applicable
Cut-Off Date by purchasing, on the next succeeding Distribution Date, all of the
outstanding Mortgage Loans at a price equal to the sum of the outstanding Pool
Principal Balance (subject to reduction as provided in the Agreement if the
purchase price is based in part on the appraised value of any REO Property
included in the Trust and such appraised value is less than the Principal
Balance of the related Mortgage Loan) and accrued and unpaid interest thereon at
the weighted average of the Loan Rates through the end of the Due Period
preceding the final Distribution Date together with all amounts due and owing to
the Certificate Insurer.
Any such purchase shall be accomplished by deposit into the Distribution
Account of the purchase price specified above.
VOTING RIGHTS
Under the Agreement, the Voting Rights will be allocated to the Class A
Certificates among such Classes in proportion to their respective Class
Principal Balances. Voting Rights allocated to a Class of Certificates will be
further allocated among the Certificates of such Class on the basis of their
respective Percentage Interests. So long as no Insurer Default is continuing,
the Certificate Insurer will be entitled to exercise the Voting Rights of the
Class A Certificates.
THE AUCTION AGENT
Bankers Trust Company, a New York banking corporation, will act as auction
agent (the "Auction Agent") with respect to the Class A-9 Certificates pursuant
to an agreement (the "Auction Agent Agreement") between the Trustee and the
Auction Agent.
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THE TRUSTEE
Bankers Trust Company of California, N.A., a national banking association,
has been named Trustee pursuant to the Agreement.
The Trustee may have normal banking relationships with Provident and the
Master Servicer.
The Trustee may resign at any time, in which event Provident will be
obligated to appoint a successor Trustee, as approved by the Certificate
Insurer. Provident 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, Provident 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 such holder
previously has given to the Trustee written notice of default and unless
Certificateholders holding Certificates evidencing at least 51% of the Voting
Rights in the Trust 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 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.
USE OF PROCEEDS
The net proceeds to be received from the sale of the Certificates will be
applied by Provident towards the origination or purchase of the Mortgage Loans
and for general corporate purposes.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
In the opinion of Brown & Wood LLP, special counsel to the Trust and the
Underwriters, assuming compliance with the Agreement, the Trust created by the
Agreement, exclusive of the Pre-Funding Accounts, the Capitalized Interest
Accounts, the Spread Account and the Net Funds Cap Carryover Reserve Account,
will be treated as two separate real estate mortgage investment conduits (the
"Master REMIC" and the "Subsidiary REMIC", and each a "REMIC"). The Offered
Certificates (exclusive of the rights of the Group 2 Certificates to receive
amounts in respect of any Group 2 Net Funds Cap Carryover Amount from the Net
Funds Cap Carryover Reserve Account) and the Class X Certificates will represent
"regular interests" in the Master REMIC and the Class R-1 and Class R-2
Certificates will represent the sole class of "residual interest" in the
Subsidiary REMIC and the Master REMIC, respectively. See "CERTAIN FEDERAL INCOME
TAX CONSEQUENCES" in the Prospectus.
The Offered Certificates generally will be treated as debt instruments
issued by the Master REMIC for federal income tax purposes. Income on such
Certificates must be reported under an accrual method of accounting.
The Offered Certificates may, depending on their issue price, be issued
with original issue discount ("OID") for federal income tax purposes. Holders of
such Certificates issued with OID will be required to include OID in income as
it accrues under a constant yield method, in advance of the receipt of cash
attributable to such income. The OID Regulations do not contain provisions
specifically interpreting Code Section 1272(a)(6) which applies to prepayable
securities such as the Offered Certificates. Until the Treasury issues guidance
to the contrary, the Trustee intends to base its OID computation on Code
Section 1272(a)(6) and the OID Regulations as described in the 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.
A reasonable application of the principles of the OID Regulations to the
Class A-8 and Class A-9 Certificates generally would be to report all income
with respect to such Certificates as OID for each period, computing such OID
(i) by assuming that the value of the applicable Certificate Index will remain
constant for
S-73
<PAGE>
purposes of determining the original yield to maturity of each such Class of
Certificates and projecting future distributions on such Certificates, thereby
treating such Certificates as fixed rate instruments to which the OID
computation rules described in the Prospectus can be applied, and (ii) by
accounting for any positive or negative variation in the actual value of the
applicable index in any period from its assumed value as a current adjustment to
OID with respect to such period.
The Class A-9 Certificates will constitute variable rate debt instruments
("VRDIs") and the interest payments received thereon will be considered
"qualified stated interest" payable at a qualified floating rate under section
1.1275-5 of the Treasury Regulations. Although it is not entirely clear, under
the special rules with respect to reset bonds, the OID Regulations would
generally calculate the accrual of OID on the Class A-9 Certificates by treating
such Certificates as (i) maturing on the date immediately preceding each Auction
Date for an amount equal to the reset value, and (ii) being reissued on each
Auction Date for an amount equal to the reset value. Prospective purchasers of
the Class A-9 Certificates are urged to consult their tax advisors as to the
potential application of, and the consequences of applying, the regulations
governing reset bonds issued with OID. See "FEDERAL INCOME TAX
CONSEQUENCES--Taxation of Debt Securities--Interest and Acquisition Discount" in
the Prospectus.
Each Class A-8 and Class A-9 Certificateholder is deemed to own an
undivided beneficial ownership interest in two assets, a REMIC regular interest
and the Net Funds Cap Carryover Amount. The Net Funds Cap Carryover Reserve
Account is not an asset of either REMIC. The treatment of amounts received by a
Class A-8 and Class A-9 Certificateholder under such Certificateholder's right
to receive the Net Funds Cap Carryover Amount will depend on the portion, if
any, of the Class A-8 and Class A-9 Certificateholder's purchase price allocable
thereto. Under the REMIC Regulations, each Class A-8 and Class A-9
Certificateholder must allocate its purchase price for the Class A-8 or
Class A-9 Certificates, as applicable, between its undivided interest in the
regular interest and its undivided interest in its right to receive any Net
Funds Cap Carryover Amount in accordance with the relative fair market values of
each property right. Payments made to the Class A-8 and Class A-9
Certificateholders with respect to the Net Funds Cap Carryover Amount will be
included in income based on the regulations relating to notional principal
contracts (the "Notional Principal Contract Regulations"). The OID Regulations
provide that an issuer's allocations of the issue price are binding on all
holders unless the holder explicitly discloses on its tax return that its
allocation is different from the issuer's allocation. For tax reporting
purposes, a de minimis value will be assigned to the Net Funds Cap Carryover
Amount. Under the REMIC Regulations, the Master Servicer is required to account
for the regular interest and the Net Funds Carryover Amount as discrete property
rights. Class A-8 and Class A-9 Certificateholders are advised to consult their
own tax advisors regarding the allocation of issue price, timing, character, and
source of income and deductions resulting from the ownership of the
Certificates. Treasury regulations have been promulgated under Section 1275 of
the Code generally providing for the integration of a "qualifying debt
instrument" with a hedge if the combined cash flows of the components are
substantially equivalent to the cash flows on a variable rate debt instrument.
However, such regulations specifically disallow integration of debt instruments
subject to Section 1272(a)(6) of the Code. Therefore, holders of the Class A-8
and Class A-9 Certificates will be unable to use the integration method provided
for under such regulations with respect to such Certificates. Ownership of the
right to the Net Funds Cap Carryover Amount will nevertheless entitle the owner
to amortize the separate price paid for the right to the Net Funds Cap Carryover
Amount under the Notional Principal Contract Regulations.
The yield used to calculate accruals of OID with respect to the Offered
Certificates with OID will be the original yield to maturity of such
Certificates, determined by assuming that the Mortgage Loans in Group 1 will
prepay in accordance with 115% of the Prepayment Assumption and that the
Mortgage Loans in Group 2 will prepay in accordance with 140% of the Prepayment
Assumption. No representation is made as to the actual rate at which the
Mortgage Loans will prepay.
Prepayments on mortgage loans are commonly measured relative to a
prepayment standard or model. The Prepayment Assumption model used in this
Prospectus represents an assumed rate of prepayment each month relative to the
then outstanding principal balance of the pool of mortgage loans for the life of
such mortgage loans. See "PREPAYMENT AND YIELD CONSIDERATIONS--Weighted Average
Lives". The Prepayment Assumption does not purport to be either an historical
description of the prepayment experience of any pool of mortgage loans or a
prediction of the anticipated rate of prepayment of any pool of mortgage loans,
including the Mortgage Loans, and there is no assurance that the Mortgage Loans
will prepay at the indicated percentage of the
S-74
<PAGE>
Prepayment Assumption. Provident does not make any representation about the
appropriateness of the Prepayment Assumption model.
The Offered Certificates (exclusive of the portion of such Certificates
allocable to the right to receive payments from the applicable Net Funds Cap
Carryover Reserve Account) will be treated as regular interests in a REMIC under
section 860G of the Code. Accordingly, the Offered Certificates will be treated
as (i) assets described in section 7701(a)(19)(C) of the Code and (ii) "real
estate assets" within the meaning of section 856(c)(4)(A) of the Code, in each
case to the extent described in the Prospectus. Interest on the Offered
Certificates will be treated as interest on obligations secured by mortgages on
real property within the meaning of section 856(c)(3)(B) of the Code to the same
extent that the Offered Certificates are treated as real estate assets. See
"FEDERAL INCOME TAX CONSEQUENCES" in the Prospectus.
The holders of the Offered Certificates will be required to include in
income interest on such Certificates in accordance with the accrual method of
accounting. As noted above, each holder of a Class A-8 or Class A-9 Certificate
will be required to allocate a portion of the purchase price paid for the
Class A-8 and Class A-9 Certificates to the right to receive payments from the
Net Funds Cap Carryover Reserve Account in respect of any Net Funds Cap
Carryover Amount. The value of the right to receive any such Net Funds Cap
Carryover Amount is a question of fact which could be subject to differing
interpretations. Because the Net Funds Cap Carryover Amount is treated as a
separate right of the Class A-8 and Class A-9 Certificates not payable by the
REMICs, such right will not be treated as a qualifying asset for any
Certificateholder that is a mutual savings bank, domestic building and loan
association, real estate invesgtment trust, or real estate mortgage investment
conduit and any amounts received from the Net Funds Cap Carryover Reserve
Account will not be qualifying real estate income for real estate investment
trusts.
BACKUP WITHHOLDING
Certain Certificate Owners may be subject to backup withholding at the rate
of 31% with respect to interest paid on the Offered Certificates if the
Certificate Owners, upon issuance, fail to supply the Trustee or their broker
with their 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 their broker with a certified statement, under
penalty of perjury, that they are not subject to backup withholding.
The Trustee will be required to report annually to the IRS, and to each
Offered Certificateholder of record, the amount of interest paid (and OID
accrued, if any) on the Offered Certificates (and the amount of interest
withheld for 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 "Class A 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 such Certificates
owned 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.
Final regulations dealing with withholding tax on income paid to Foreign
Investors (as defined below), backup withholding, and related matters (the "New
Withholding Regulations") were issued by the Treasury Department on October 6,
1997. The New Withholding Regulations will generally be effective for payments
made after December 31, 1999, subject to certain transition rules. Prospective
Certificate Owners are strongly urged to consult their own tax advisors with
respect to the New Withholding Regulations.
Such amounts will be deemed distributed to the affected Certificate owner
for all purposes of the Certificates, the Agreement and the Policy.
S-75
<PAGE>
FEDERAL INCOME TAX CONSEQUENCES TO FOREIGN INVESTORS
The following information describes the United States federal income tax
treatment of holders that are not United States persons ("Foreign Investors").
The term "Foreign Investor" means any person other than (i) a citizen or
resident of the United States, (ii) a corporation or partnership (or any entity
treated as a corporation or partnership for federal income tax purposes) created
or organized in or under the laws of the United States or any state thereof or
the District of Columbia (other than a partnership that is not treated as a
United States person under any applicable Treasury regulations), (iii) an estate
the income of which is includible in gross income for United States federal
income tax purposes, regardless of its source, (iv) a trust if a court within
the United States is able to exercise primary supervision of the administration
of the trust and one or more United States persons have the authority to control
all substantial decisions of the trust, or (v) certain trusts treated as United
States persons before August 20, 1996 that elect to continue to be so treated to
the extent provided in regulations.
The Code and Treasury regulations generally subject interest paid to a
Foreign Investor to a withholding tax at a rate of 30% (unless such rate were
changed by an applicable treaty). The withholding tax, however, is eliminated
with respect to certain "portfolio debt investments" issued to Foreign
Investors. Portfolio debt investments include debt instruments issued in
registered form for which the United States payor receives a statement that the
beneficial owner of the instrument is a Foreign Investor. The Offered
Certificates will be issued in registered form, therefore if the information
required by the Code is furnished (as described below) and no other exceptions
to the withholding tax exemption are applicable, no withholding tax will apply
to the Offered Certificates.
For the Offered Certificates to constitute portfolio debt investments
exempt from the United States withholding tax, the withholding agent must
receive from the Certificate Owner an executed IRS Form W-8 or a similar form
signed under penalty of perjury by the Certificate Owner stating that the
Certificate Owner is a Foreign Investor and providing such Certificate Owner's
name and address. The statement must be received by the withholding agent in the
calendar year in which the interest payment is made, or in either of the two
preceding calendar years.
A Certificate Owner that is a nonresident alien or foreign corporation will
not be subject to United States federal income tax on gain realized on the sale,
exchange, or redemption of such Offered Certificate, provided that (i) such gain
is not effectively connected with a trade or business carried on by the
Certificate Owner in the United States, (ii) in the case of a Certificate Owner
that is an individual, such Certificate Owner is not present in the United
States for 183 days or more during the taxable year in which such sale, exchange
or redemption occurs and (iii) in the case of gain representing accrued
interest, the conditions described in the immediately preceding paragraph are
satisfied.
In addition, prospective Foreign Investors are strongly urged to consult
their own tax advisors with respect to the New Withholding Regulations.
STATE TAXES
Provident makes no representations regarding the tax consequences of
purchase, ownership or disposition of the Offered 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 or foreign income tax consequences of the purchase, ownership and
disposition of the Certificates.
ERISA CONSIDERATIONS
Any fiduciary of a pension or other employee benefit plan (a "Plan") which
proposes to cause a Plan to acquire any of the Offered 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 U.S. Department of Labor has granted to Lehman Brothers Inc. ("Lehman
Brothers") Prohibited Transaction Exemption 91-14 (the "Exemption") which
exempts from the application of the prohibited transaction rules transactions
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
S-76
<PAGE>
Brothers 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 Exemption will apply to the acquisition, holding and resale of
the Class A 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 Class A 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 Class A Certificates
acquired by the Plan are not subordinated to the rights and interests
evidenced by other certificates of the Trust;
(3) The Class A 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 either S&P, Moody's, Fitch or Duff & Phelps
Credit Rating Co.;
(4) The sum of all payments made to and retained by an Underwriter in
connection with the distribution of the Class A Certificates represents not
more than reasonable compensation for underwriting such Certificates; the
sum of all payments made to and retained by the Seller 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 Master Servicer represents not more than reasonable compensation for
the Master Servicer's services under the Agreement and reimbursement of the
Master Servicer's reasonable expenses in connection therewith;
(5) The Trustee is not an affiliate of any Underwriter, the Seller,
the Master 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 Class A 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.
Although the maximum amount permitted to be deposited in the Pre-Funding
Accounts on the Closing Date (the "Pre-Funded Amount") may cause either the Loan
Group 1 or the Loan Group 2 Pre-Funded Amount to exceed 25% of the aggregate
initial Class A Principal Balance of the related Certificate Group (see "ERISA
Considerations" in the Prospectus), it is anticipated that a sufficient amount
of Mortgage Loans will be acquired by the Trust on the Closing Date such that
the amount actually deposited to each Pre-Funding Account will be 25% or less of
such initial aggregate balance. Provided this is the case, the Underwriters
believe that the Exemption will apply to the acquisition and holding of the
Class A 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 Class A 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 Class A 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.
However, if either the Loan Group 1 or the Loan Group 2 Pre-Funded Amount
exceeds 25% of the aggregate initial Class A Principal Balance of the related
Certificate Group, then the Exemption will not apply to the acquisition and
holding of the Class A Certificates of either Certificate Group until the
Funding Period has ended. In such event, no Plan will be permitted to purchase a
Class A Certificate until the Funding Period has ended.
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<PAGE>
LEGAL INVESTMENT CONSIDERATIONS
Although, as a condition to their issuance, the Offered Certificates will
be rated in the highest rating category of the Rating Agencies, the Offered
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
Offered 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.
UNDERWRITING
Subject to the terms and conditions set forth in the underwriting agreement
(the "Underwriting Agreement") between Provident and the Underwriters named
below (the "Underwriters"), Provident has agreed to sell to the Underwriters and
each of the Underwriters has severally agreed to purchase from Provident the
principal amount of Class A Certificates set forth below opposite their
respective names.
<TABLE>
<CAPTION>
CLASS A-1 CLASS A-2 CLASS A-3 CLASS A-4 CLASS A-5 CLASS A-6
UNDERWRITER CERTIFICATES CERTIFICATES CERTIFICATES CERTIFICATES CERTIFICATES CERTIFICATES
- --------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Lehman Brothers Inc.............. $30,224,000 $22,940,000 $13,184,000 $11,999,000 $ 8,715,000 $18,780,000
Prudential Securities
Incorporated.................... 20,149,000 15,293,000 8,789,000 7,998,000 5,810,000 12,519,000
------------ ------------ ------------ ------------ ------------ ------------
Total......................... $50,373,000 $38,233,000 $21,973,000 $19,997,000 $14,525,000 $31,299,000
------------ ------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------ ------------
<CAPTION>
CLASS A-7 CLASS A-8 CLASS A-9
UNDERWRITER CERTIFICATES CERTIFICATES CERTIFICATES
- --------------------------------- ------------ ------------ ------------
<S> <C> <C> <C>
Lehman Brothers Inc.............. $11,760,000 $38,400,000 $ 90,000,000
Prudential Securities
Incorporated.................... 7,840,000 25,600,000 --
------------ ------------ ------------
Total......................... $19,600,000 $64,000,000 $ 90,000,000
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
Provident has been advised that the Underwriters propose initially to offer
the Class A Certificates to certain dealers at such price less a selling
concession not to exceed the percentage of the Certificate denomination set
forth below, and that the Underwriters may allow and such dealers may reallow a
reallowance discount not to exceed the percentage of the Certificate
denomination set forth below:
<TABLE>
<CAPTION>
CLASS OF CERTIFICATE SELLING CONCESSION REALLOWANCE DISCOUNT
- --------------------------------------------------------------- ------------------ --------------------
<S> <C> <C>
Class A-1...................................................... 0.0900% 0.0450%
Class A-2...................................................... 0.1200% 0.0600%
Class A-3...................................................... 0.1800% 0.0900%
Class A-4...................................................... 0.2400% 0.1200%
Class A-5...................................................... 0.3000% 0.1500%
Class A-6...................................................... 0.3900% 0.1950%
Class A-7...................................................... 0.3450% 0.1725%
Class A-8...................................................... 0.2100% 0.1050%
Class A-9...................................................... 0.2100% 0.1050%
</TABLE>
After the initial public offering, the public offering price, such
concessions and such discounts may be changed.
Provident has been advised by the Underwriters that they presently intend
to make a market in the Class A Certificates offered hereby; however, no
Underwriter is 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
Class A Certificates will develop.
Until the distribution of the Class A Certificates is completed, rules of
the Commission may limit the ability of the Underwriters and certain selling
group members to bid for and purchase the Class A Certificates. As an exception
to these rules, the Underwriters are permitted to engage in certain transactions
that stabilize the price of the Class A Certificates. Such transactions consist
of bids or purchases for the purpose of pegging, fixing or maintaining the price
of the Class A 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 Underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the prices of the Class A Certificates. In addition,
neither Provident nor any of the Underwriters makes any representation that the
Underwriters will engage in such transactions or that such transactions, once
commenced, will not be discontinued without notice.
S-78
<PAGE>
The Underwriting Agreement provides that Provident will indemnify the
Underwriters against certain civil liabilities, including liabilities under the
Securities Act of 1933, as amended.
Certain expenses of the Underwriters incurred in connection with this
offering will be paid by Provident.
EXPERTS
The consolidated balance sheets of MBIA Insurance Corporation and
Subsidiaries as of December 31, 1997 and December 31, 1996 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, 1997,
incorporated by reference in this Prospectus Supplement, have been incorporated
herein in reliance on the report of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of that firm as experts in accounting and
auditing.
LEGAL MATTERS
Certain legal matters with respect to the Class A Certificates will be
passed upon for Provident by Keating, Muething & Klekamp, P.L.L., Cincinnati,
Ohio. Certain federal income tax consequences with respect to the Certificates
will be passed upon for the Trust by Brown & Wood LLP, New York, New York. Brown
& Wood LLP, New York, New York will act as counsel for the Underwriters. Certain
legal matters relating to the Certificate Insurer will be passed upon by Kutak
Rock, Omaha, Nebraska.
RATINGS
It is a condition to the issuance of the Class A Certificates that they
receive ratings of "AAA" by Standard & Poors Ratings Services, a division of The
Mc-Graw Hill Companies, Inc. ("S&P") and Fitch IBCA, Inc. ("Fitch") and "Aaa" by
Moody's Investors Service, Inc. ("Moodys," and together with S&P and Fitch, the
"Rating Agencies").
A securities rating addresses the likelihood of the receipt by Class A
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 Class A Certificates. The ratings on
the Class A Certificates do not, however, constitute statements regarding the
likelihood or frequency of prepayments on the Mortgage Loans, the payment of the
Net Funds Cap Carryover Amount or the possibility that Class A
Certificateholders might realize a lower than anticipated yield.
The ratings assigned to the Class A Certificates will depend primarily upon
the creditworthiness of the Certificate Insurer. Any reduction in a rating
assigned to the financial strength of the Certificate Insurer below the ratings
initially assigned to the Class A Certificates may result in a reduction of one
or more of the ratings assigned to the Class A Certificates.
A securities rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning rating
organization. Each securities rating should be evaluated independently of
similar ratings on different securities.
S-79
<PAGE>
INDEX OF DEFINED TERMS
<TABLE>
<CAPTION>
TERMS PAGE
- -------------------------------------------------------------------------------------- -----
<S> <C>
accredited investor................................................................... S-77
Aggregate Class A Principal Balance................................................... S-48
Agreement............................................................................. S-47, S-65
All Hold Rate......................................................................... II-1
Amount Available...................................................................... S-59
Assignment Event...................................................................... S-53
Auction............................................................................... II-1
Auction Agent......................................................................... S-72, II-1
Auction Agent Agreement............................................................... S-72, II-1
Auction Agent Fee..................................................................... II-1
Auction Agent Fee Rate................................................................ II-1
Auction Date.......................................................................... II-1
Auction Period........................................................................ II-1
Auction Procedures.................................................................... II-2
Auction Rate.......................................................................... II-2
Available Certificates................................................................ II-8
Available Funds....................................................................... S-57
Authorized Denominations.............................................................. II-2
Balloon Loans......................................................................... S-37
beneficial owner...................................................................... S-48
Bid................................................................................... II-6
Bid Auction Rate...................................................................... II-8
Bidder................................................................................ II-6
BIF................................................................................... S-55
Book-Entry Certificates............................................................... S-48
Broker-Dealer......................................................................... II-2
Broker-Dealer Agreement............................................................... II-2
Broker-Dealer Fee..................................................................... II-2
Broker-Dealer Fee Rate................................................................ II-2
Business Day.......................................................................... S-65, II-2
Buyer's Broker-Dealer................................................................. III-1
Capitalized Interest Accounts......................................................... S-59
Cede.................................................................................. S-48
Cedelbank............................................................................. S-48
Cedelbank Participants................................................................ S-50
Certificate Group..................................................................... S-48
Certificate Initial Rate.............................................................. II-2
Certificate Initial Rate Adjustment Date.............................................. II-2
Certificate Insurer................................................................... S-13
Certificate Owners.................................................................... S-48
Certificate Rate...................................................................... S-61, II-2
Certificate Register.................................................................. S-57
Certificate Registrar................................................................. S-57
Certificateholder..................................................................... S-48
Certificates.......................................................................... S-47
Change Date........................................................................... S-25
Civil Relief Act...................................................................... S-68
Civil Relief Act Interest Shortfall................................................... S-69
Class................................................................................. S-47
Class A Certificates.................................................................. S-47
Class A Monthly Principal Distributable Amount........................................ S-63
</TABLE>
S-80
<PAGE>
<TABLE>
<CAPTION>
TERMS PAGE
- -------------------------------------------------------------------------------------- -----
<S> <C>
Class A Principal Balance............................................................. S-48
Class A Principal Distribution........................................................ S-63
Class A Principal Shortfall Amount.................................................... S-63
Class A-1 Certificates................................................................ S-47
Class A-2 Certificates................................................................ S-47
Class A-3 Certificates................................................................ S-47
Class A-4 Certificates................................................................ S-47
Class A-5 Certificates................................................................ S-47
Class A-6 Certificates................................................................ S-47
Class A-7 Certificates................................................................ S-47
Class A-7 Principal Distribution Amount............................................... S-63
Class A-7 Principal Payment Percentage................................................ S-63
Class A-7 Pro Rata Principal Distribution Amount...................................... S-63
Class A-8 Certificates................................................................ S-47
Class A-9 Certificates................................................................ S-47
Class Interest Carryover Shortfall.................................................... S-62
Class Interest Distribution........................................................... S-62
Class Monthly Interest Distributable Amount........................................... S-62
Class R Certificates.................................................................. S-47
Class R-1 Certificates................................................................ S-47
Class R-2 Certificates................................................................ S-47
Class X Certificates.................................................................. S-47
Class X-1 Certificates................................................................ S-47
Class X-2 Certificates................................................................ S-47
Closing Date.......................................................................... S-47
CLTV.................................................................................. S-22
CMAC.................................................................................. S-13
Collection Account.................................................................... S-55
Combined Loan-to-Value Ratio.......................................................... S-19
Compensating Interest................................................................. S-69
Cooperative........................................................................... S-50
CPR................................................................................... S-40
Cut-Off Date.......................................................................... S-18
Cut-Off Date Initial Pool Principal Balance........................................... S-18
Cut-Off Date Loan Group 1 Initial Principal Balance................................... S-19
Cut-Off Date Loan Group 2 Initial Principal Balance................................... S-26
Cut-Off Date Principal Balance........................................................ S-18
Defective Mortgage Loans.............................................................. S-54
Deficiency Amount..................................................................... S-65
Definitive Certificate................................................................ S-48
Determination Date.................................................................... S-56
Distribution Account.................................................................. S-55
Distribution Date..................................................................... S-56
Document Custodian.................................................................... S-47
DTC................................................................................... S-48
DTC Services.......................................................................... S-52
Due Period............................................................................ S-63
Eligible Account...................................................................... S-55
Eligible Substitute Mortgage Loan..................................................... S-54
ERISA................................................................................. S-76
Euroclear............................................................................. S-48
Euroclear Operator.................................................................... S-50
Euroclear Participants................................................................ S-50
</TABLE>
S-81
<PAGE>
<TABLE>
<CAPTION>
TERMS PAGE
- -------------------------------------------------------------------------------------- -----
<S> <C>
European Depositaries................................................................. S-48
Event of Default...................................................................... S-70
Exemption............................................................................. S-76
Existing Certificateholder............................................................ II-2
Existing Certificateholder Registry................................................... II-2
Final Distribution Date............................................................... S-65
Financial Intermediary................................................................ S-49
Fiscal Agent.......................................................................... S-64
Fitch................................................................................. S-79
Fixed Rate Certificates............................................................... S-48
Foreign Investors..................................................................... S-76
Formula Rate.......................................................................... S-61
Funding Period........................................................................ S-59
GAAP.................................................................................. S-14
Global Securities..................................................................... I-1
Gross Margin.......................................................................... S-25
Group Spread Account Requirement...................................................... S-58
Group 1 Certificates.................................................................. S-48
Group 1 Net Funds Cap................................................................. S-61
Group 1 Pre-Funding Account........................................................... S-58
Group 2 Certificates.................................................................. S-48
Group 2 Net Funds Cap................................................................. S-62
Group 2 Pre-Funding Account........................................................... S-58
Guaranteed Principal Amount........................................................... S-65
Hold Order............................................................................ II-6
Indirect Participant.................................................................. S-49
Industry.............................................................................. S-52
Initial Mortgage Loans................................................................ S-18
Initial Period........................................................................ S-25, II-2
Insolvency Event...................................................................... S-71
Insurance Agreement................................................................... S-47
Insured Payment....................................................................... S-65
Insurer Default....................................................................... S-64
Interest Period....................................................................... S-61, II-2
Lehman Brothers....................................................................... S-76
LIBOR Business Day.................................................................... S-62
LIBOR Determination Date.............................................................. S-62, II-2
LIBOR Index........................................................................... S-61
Lifetime Cap.......................................................................... S-26
Lifetime Floor........................................................................ S-26
Liquidated Mortgage Loan.............................................................. S-63
Loan Group(s)......................................................................... S-18, S-48
Loan Group 1.......................................................................... S-18, S-48
Loan Group 1 Initial Mortgage Loans................................................... S-18
Loan Group 1 Pre-Funded Amount........................................................ S-18, S-58
Loan Group 1 Principal Balance........................................................ S-18
Loan Group 2.......................................................................... S-18, S-48
Loan Group 2 Initial Mortgage Loans................................................... S-18
Loan Group 2 Principal Balance........................................................ S-18
Loan Group 2 Pre-Funded Amount........................................................ S-18, S-58
Loan Group Principal Balance.......................................................... S-18
Loan Index............................................................................ S-25
Loan Rates............................................................................ S-18
</TABLE>
S-82
<PAGE>
<TABLE>
<CAPTION>
TERMS PAGE
- -------------------------------------------------------------------------------------- -----
<S> <C>
London Banking Day.................................................................... II-3
Market Agent.......................................................................... II-3
Master REMIC.......................................................................... S-73
Master Servicer....................................................................... S-47
Master Servicing Fee.................................................................. S-68
Master Servicing Fee Rate............................................................. S-68
Maximum Auction Rate.................................................................. II-3
MBIA Inc.............................................................................. S-13
Monthly Advance....................................................................... S-56
Monthly Payments...................................................................... S-19
Moody's............................................................................... S-79
Mortgage File......................................................................... S-53
Mortgage Loan Schedule................................................................ S-53
Mortgage Loans........................................................................ S-18
Mortgage Notes........................................................................ S-18
Mortgage Pool......................................................................... S-18
Mortgaged Properties.................................................................. S-18
Net Funds Cap Carryover Amount........................................................ S-61
Net Funds Cap Carryover Reserve Account............................................... S-58
New Withholding Regulations........................................................... S-75
Nonrecoverable Advance................................................................ S-56
Notice................................................................................ S-65
Notional Principal Contract Regulations............................................... S-74
Offered Certificates.................................................................. S-37, S-47
OID................................................................................... S-73
One-Month Index Maturity.............................................................. II-3
One-Month LIBOR....................................................................... II-3
Order................................................................................. II-6
Owner................................................................................. S-65
Participant........................................................................... S-49
Payahead.............................................................................. S-57
Percentage Interest................................................................... S-48
Periodic Cap.......................................................................... S-25
Person................................................................................ II-3
Plan.................................................................................. S-76
Policy................................................................................ S-47
Pool Principal Balance................................................................ S-18
Potential Certificateholder........................................................... II-3
Preference Amount..................................................................... S-65
Pre-Funded Amount..................................................................... S-77
Pre-Funding Accounts.................................................................. S-58
Prepayment Assumption................................................................. S-40
Prepayment Interest Shortfall......................................................... S-69
Principal Balance..................................................................... S-18
Prospectus............................................................................ S-47
Prospectus Supplement................................................................. S-47
Provident............................................................................. S-15
Purchase Price........................................................................ S-53
Qualified stated interest............................................................. S-74
Rate Adjustment Date.................................................................. II-3
Rate Determination Date............................................................... II-3
Rating Agencies....................................................................... S-79
Record Date........................................................................... S-57
Reference Bank Rate................................................................... S-62
</TABLE>
S-83
<PAGE>
<TABLE>
<CAPTION>
TERMS PAGE
- -------------------------------------------------------------------------------------- -----
<S> <C>
Reference Banks....................................................................... II-3
regular interests..................................................................... S-73
Related Documents..................................................................... S-53
Relevant Depositary................................................................... S-48
REMIC................................................................................. S-73
Required Reserve Amount............................................................... S-58
Reserve Account Initial Deposit....................................................... S-58
residual interest..................................................................... S-73
Restricted Group...................................................................... S-77
Rules................................................................................. S-49
S&P................................................................................... S-79
SAIF.................................................................................. S-55
SAP................................................................................... S-14
Sell Order............................................................................ II-6
Seller................................................................................ S-47
Seller's Broker-Dealer................................................................ III-1
Servicing Advance..................................................................... S-56
SMMEA................................................................................. S-78
Spread Account........................................................................ S-57
Submitted Bid......................................................................... II-8
Submitted Hold Order.................................................................. II-8
Submitted Orders...................................................................... II-8
Submitted Sell Order.................................................................. II-8
Subsequent Mortgage Loans............................................................. S-18
Subsidiary REMIC...................................................................... S-73
Substitution Adjustment Amount........................................................ S-54
Sufficient Bids....................................................................... II-8
Systems............................................................................... S-52
Telerate Page 3750.................................................................... S-62
Terms and Conditions.................................................................. S-50
Trust................................................................................. S-47
Trustee............................................................................... S-47, S-64
Underwriters.......................................................................... S-78
Underwriting Agreement................................................................ S-78
U.S. Person........................................................................... I-3
VRDIs................................................................................. S-74
weighted average life................................................................. S-39
Year 2000 problems.................................................................... S-52
</TABLE>
S-84
<PAGE>
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered Home Equity
Loan Asset-Backed Certificates, Series 1998-4 (the "Global Securities") will be
available only in book-entry form. Investors in the Global Securities may hold
such Global Securities through any of DTC, Cedelbank 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 Cedelbank and Euroclear will be conducted in the ordinary way in
accordance with their normal rules and operating procedures and in accordance
with conventional eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors holding Global Securities
through DTC will be conducted according to the rules and procedures applicable
to US corporate debt obligations and prior Home Equity Loan Asset-Backed
Certificates issues.
Secondary cross-market trading between Cedelbank or Euroclear and DTC
Participants holding Certificates will be effected on a delivery-against-payment
basis through the respective Depositaries of Cedelbank and Euroclear (in such
capacity) and as DTC Participants.
Non-US 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
Participants and Indirect Participants in DTC. As a result, Cedelbank 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 Cedelbank or
Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global security
and no "lock-up" or restricted period. Global 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 Cedelbank and/or Euroclear Participants. Secondary market
trading between Cedelbank Participants or Euroclear Participants will be settled
using the procedures applicable to conventional eurobonds in same-day funds.
Trading between DTC seller and Cedelbank or Euroclear purchaser. When
Global Securities are to be transferred from the account of a DTC Participant to
the account of a Cedelbank Participant or a Euroclear Participant, the purchaser
will send instructions to Cedelbank or Euroclear through a Cedelbank Participant
or Euroclear Participant at least one business day prior to settlement.
Cedelbank or Euroclear will instruct the respective Depositary, as the case may
be, to receive the Global Securities against payment. Payment will include
interest accrued on the Global Securities from and including the last coupon
payment date to and excluding the settlement date, on the basis of either the
actual number of days in such accrual period and a year assumed to
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<PAGE>
consist of 360 days or a 360-day year of 12 30-day months as applicable to the
related class of Global Securities. For transactions settling on the 31st of the
month, payment will include interest accrued to and excluding the first day of
the following month. Payment will then be made by the respective Depositary of
the DTC Participant's account against delivery of the Global Securities. After
settlement has been completed, the Global Securities will be credited to the
respective clearing system and by the clearing system, in accordance with its
usual procedures, to the Cedelbank Participant's or Euroclear Participant's
account. The securities credit will appear the next day (European time) and the
cash debt will be back-valued to, and the interest on the Global 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 Cedelbank or Euroclear cash debt will be valued
instead as of the actual settlement date.
Cedelbank Participants and Euroclear Participants will need to make
available to the respective clearing systems the funds necessary to process
same-day funds settlement. The most direct means of doing so is to preposition
funds for settlement, either from cash on hand or existing lines of credit, as
they would for any settlement occurring within Cedelbank or Euroclear. Under
this approach, they may take on credit exposure to Cedelbank or Euroclear until
the Global Securities are credited to their accounts one day later.
As an alternative, if Cedelbank or Euroclear has extended a line of credit
to them, Cedelbank Participants or Euroclear Participants can elect not to
preposition funds and allow that credit line to be drawn upon to finance
settlement. Under this procedure, Cedelbank 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 Cedelbank 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 Cedelbank 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 Cedelbank or Euroclear through a Cedelbank Participant or Euroclear
Participant at least one business day prior to settlement. In these cases
Cedelbank or Euroclear will instruct the respective Depositary, as appropriate,
to deliver the Global Securities to the DTC Participant's account against
payment. Payment will include interest accrued on the Global Securities from and
including the last coupon payment to and excluding the settlement date on the
basis of either the actual number of days in such accrual period and a year
assumed to consist of 360 days or a 360-day year of 12 30-day months as
applicable to the related class of Global Securities. For transactions settling
on the 31st of the month, payment will include interest accrued to and excluding
the first day of the following month. The payment will then be reflected in the
account of the Cedelbank Participant or Euroclear Participant the following day,
and receipt of the cash proceeds in the Cedelbank Participant's or Euroclear
Participant's account would be back-valued to the value date (which would be the
preceding day, when settlement occurred in New York). Should the Cedelbank
Participant or Euroclear Participant have a line of credit with its respective
clearing system and elect to be in debt in anticipation of receipt of the sale
proceeds in its account, the back-valuation will extinguish any overdraft
incurred over that one-day period. If settlement is not completed on the
intended value date (i.e., the trade fails), receipt of the cash proceeds in the
Cedelbank Participant's or Euroclear Participant's account would instead be
valued as of the actual settlement date.
Finally, day traders that use Cedelbank or Euroclear and that purchase
Global Securities from DTC Participants for delivery to Cedelbank Participants
or Euroclear Participants should note that these trades would
I-2
<PAGE>
automatically fail on the sale side unless affirmative action were taken. At
least three techniques should be readily available to eliminate this potential
problem:
(a) borrowing through Cedelbank or Euroclear for one day (until the
purchase side of the day trade is reflected in their Cedelbank or Euroclear
accounts) in accordance with the clearing system's customary procedures;
(b) borrowing the Global 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 Cedelbank or Euroclear
account in order to settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of the trade
so that the value date for the purchase from the DTC Participant is at
least one day prior to the value date for the sale to the Cedelbank
Participant or Euroclear Participant.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of Global 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 his agent.
Exemption for U.S. Persons (Form W-9). U.S. Persons can obtain a complete
exemption from the withholding tax by filing Form W-9 (Payer's Request for
Taxpayer Identification Number and Certification).
U.S. Federal Income Tax Reporting Procedure. The Certificate Owner of a
Global Security or, in the case of a Form 1001 or a Form 4224 filer, his agent,
files by submitting the appropriate form to the person through whom it holds
(the clearing agency, in the case of persons holding directly on the books of
the clearing agency). Form W-8 and Form 1001 are effective for three calendar
years and Form 4224 is effective for one calendar year.
The term "U.S. Person" means 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 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 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 shall be considered
U.S. persons as well. 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.
I-3
<PAGE>
ANNEX II
AUCTION PROCEDURES
The following description of the Auction Procedures applies to the
Class A-9 Certificates. The term "Certificate," as used in this Annex, refers to
the Class A-9 Certificates, and the term "Certificateholder" refers to
Certificateholders holding the Class A-9 Certificates.
DEFINITIONS
Capitalized terms used herein and not otherwise defined have the meanings
ascribed in the accompanying Prospectus Supplement. Additionally, the following
terms have the meanings ascribed to them:
"All Hold Rate" means for any Interest Period ninety percent (90%) of
One-Month LIBOR for such period.
"Auction" means the implementation of the Auction Procedures on an Auction
Date.
"Auction Agent" means Bankers Trust Company, a New York banking corporation
or any successor appointed under the Auction Agent Agreement.
"Auction Agent Agreement" means the Auction Agent Agreement, dated December
30, 1998 between Bankers Trust Company of California, N.A., as Trustee under the
Agreement and Bankers Trust Company, as Auction Agent.
"Auction Agent Fee" means for each Interest Period, commencing on the
Closing Date, the amount equal to the product of (i) the Auction Agent Fee Rate
times (ii) a fraction, the numerator which is the number of days in such
Interest Period and the denominator of which is 360, times (iii) the aggregate
principal amount of Class A-9 Certificates outstanding at the close of business
on the last day of the month immediately preceding the applicable Distribution
Date.
"Auction Agent Fee Rate" means the per annum rate equal to the sum of (i)
the Broker-Dealer Fee Rate and (ii) 0.01%.
"Auction Date" means the Business Day immediately preceding the first day
of each Auction Period, commencing January 22, 1999, other than:
(A) each Auction Period commencing after the ownership of the
Certificates is no longer maintained in Book-Entry Form by the Depository;
(B) each Auction Period commencing after and during the continuance of
a Insurer Default; or
(C) each Auction Period commencing less than two Business Days after
the cure or waiver of a Insurer Default.
Notwithstanding the foregoing, the Auction Date for one or more Auction Periods
may be changed pursuant to the Auction Agent Agreement, as described herein.
"Auction Period" means after the Initial Period, the period during which
any Certificate Rate established for the Class A-9 Certificates applies, which
shall be the period commencing on each Distribution Date, other than the
Distribution Date in October, November or December of any year, and shall
continue through the day immediately preceding the next Distribution Date. The
Auction Period relating to the Auction Date in October of
II-1
<PAGE>
any year, shall commence on the Distribution Date in October of such year and
shall continue through the day immediately preceding the Distribution Date in
January of the following year.
"Auction Procedures" means the procedures set forth in the Agreement, and
described herein by which the Auction Rate is determined.
"Auction Rate" means the rate of interest per annum that results from the
implementation of the Auction Procedures.
"Authorized Denominations" means $25,000 and any integral multiple in
excess thereof.
"Broker-Dealer" means Lehman Brothers Inc. or any other broker or dealer
(each as defined in the Securities Exchange Act of 1934, as amended), commercial
bank or other entity permitted by law to perform the functions required of a
Broker-Dealer set forth in the Auction Procedures that (a) is a Participant (or
an affiliate of a Participant), (b) has been appointed as such by the Seller,
with the consent of the Market Agent and (c) has entered into a Broker-Dealer
Agreement that is in effect on the date of reference.
"Broker-Dealer Agreement" means the Broker-Dealer Agreement, dated
December 30, 1998 between the Auction Agent and the Broker-Dealer.
"Broker-Dealer Fee" means the portion of the Auction Agent Fee paid to the
Broker-Dealer pursuant to the Broker-Dealer Agreement.
"Broker-Dealer Fee Rate" means 25 basis points.
"Business Day" means any day other than (i) a Saturday or Sunday or (ii) a
day on which banking institutions in the States of New York, Ohio or California
are authorized or obligated by law or executive order to be closed.
"Certificate Initial Rate" means 5.70% per annum.
"Certificate Rate" means initially the Certificate Initial Rate until the
first Auction Date at which time the Certificate Rate will be reset pursuant to
the Auction Procedures, subject to the Group 2 Net Funds Cap.
"Existing Certificateholder" means (i) with respect to and for the purpose
of dealing with the Auction Agent in connection with an Auction, a Person who is
a Broker-Dealer listed in the Existing Certificateholder Registry at the close
of business on the Business Day immediately preceding such Auction and
(ii) with respect to and for the purpose of dealing with the Broker-Dealer in
connection with an Auction, a Person who is a beneficial owner of any
Certificate.
"Existing Certificateholder Registry" means the registry of Persons who are
owners of the Class A-9 Certificates maintained by the Auction Agent as provided
in the Auction Agent Agreement.
"Initial Period" means the period commencing on the Closing Date and
continuing through January 24, 1999.
"Interest Period" means with respect to any Distribution Date, the period
from the Distribution Date in the month preceding the month of such Distribution
Date through the day before such Distribution Date.
"LIBOR Determination Date" means for any Auction Period the first date
which is both a Business Day and a London Banking Day immediately prior to the
commencement of such Auction Period.
II-2
<PAGE>
"London Banking Day" means any Business Day on which dealings in deposits
in United States dollars are transacted in the London interbank market.
"Market Agent" means Lehman Brothers Inc.
"Maximum Auction Rate" means (A) One-Month LIBOR plus 1.00% (if the ratings
assigned by the Rating Agencies to the Class A-9 Certificates are "AAA", "AAA"
and "Aaa" or better), (B) One-Month LIBOR plus 1.25% (if the ratings assigned by
the Rating Agencies to the Class A-9 Certificates are "AA", "AA" or "Aa" or
better (C) One-Month LIBOR plus 2.00% (if the ratings assigned by the Rating
Agencies to the Class A-9 Certificates are "A", "A" or "A" or better) or
(D) One-Month LIBOR plus 3.50% (if any one of the ratings assigned by the Rating
Agencies to the Class A-9 Certificates is less than "A", "A" or "A"). For
purposes of the Auction Agent and the Auction Procedures, the ratings referred
to in this definition shall be the last rating of which the Auction Agent has
been given notice pursuant to the Auction Agent Agreement.
"One-Month LIBOR" means the London interbank offered rate for deposits in
U.S. dollars having a maturity of one month commencing on the related LIBOR
Determination Date (the "One-Month Index Maturity") which appears on Telerate
Page 3750 as of 11:00 a.m., London time, on such LIBOR Determination Date. If
such rate does not appear on Telerate Page 3750, the rate for that day will be
determined on the basis of the rates at which deposits in U.S. dollars, having
the One-Month Index Maturity and in a principal amount of not less than
U.S. $1,000,000, are offered at approximately 11:00 a.m., London time, on such
LIBOR Determination Date to prime banks in the London interbank market by the
Reference Banks. The Auction Agent will request the principal London office of
each of such Reference Banks to provide a quotation of its rate. If at least two
such quotations are provided, the rate for that day will be the arithmetic mean
of the quotations. If fewer than two quotations are provided, the rate for that
day will be the arithmetic mean of the rates quoted by major banks in New York
City, selected by the Auction Agent, at approximately 11:00 a.m., New York City
time, on such LIBOR Determination Date for loans in U.S. dollars to leading
European banks having the One-Month Index Maturity and in a principal amount
equal to an amount of not less than U.S. $1,000,000; provided that if the banks
selected as aforesaid are not quoting as mentioned in this sentence, One-Month
LIBOR in effect for the applicable Auction Period will be One-Month LIBOR in
effect for the previous Auction Period.
"Person" means any individual, corporation, estate, partnership, limited
liability company, joint venture, association, joint stock company, trust
(including any beneficiary thereof), unincorporated organization or government
or any such agency or political subdivision thereof.
"Potential Certificateholder" means any Person (including an Existing
Certificateholder that is (i) a Broker-Dealer when dealing with the Auction
Agent and (ii) a potential beneficial owner when dealing with a Broker-Dealer)
who may be interested in acquiring Class A-9 Certificates (or, in the case of an
Existing Certificateholder thereof, an additional principal amount of Class A-9
Certificates).
"Rate Adjustment Date" means the date on which Certificate Rate is
effective and means, with respect to each such Certificate, the date of
commencement of each Auction Period.
"Rate Determination Date" means the Auction Date, or if no Auction Date is
applicable, the Business Day immediately preceeding the date of commencement of
an Auction Period.
"Reference Banks" means leading banks selected by the Auction Agent and
engaged in transactions in Eurodollar deposits in the international Eurocurrency
market.
EXISTING CERTIFICATEHOLDERS AND POTENTIAL CERTIFICATEHOLDERS
Participants in each Auction will include: (i) Existing Certificateholders
as of the close of business on the Business Day preceding each Auction Date
according to the records of the Auction Agent; and (ii) Potential
Certificateholders. See"--Broker-Dealer."
II-3
<PAGE>
By purchasing a Class A-9 Certificate, whether in an Auction or otherwise,
each prospective purchaser of the Class A-9 Certificates or its Broker-Dealer
must agree and will be deemed to have agreed: (i) to participate in Auctions on
the terms described herein; (ii) so long as the beneficial ownership of the
Class A-9 Certificates is maintained in Book-Entry Form to sell, transfer or
otherwise dispose of the Class A-9 Certificates only pursuant to a Bid (as
defined below) or a Sell Order (as defined below) in an Auction, or to or
through a Broker-Dealer, provided that in the case of all transfers other than
those pursuant to an Auction, the Existing Certificateholder of the Class A-9
Certificates so transferred, its Participant or Broker-Dealer advises the
Auction Agent of such transfer; (iii) to have its beneficial ownership of the
Class A-9 Certificates maintained at all times in Book-Entry Form for the
account of its Participant, which in turn will maintain records of such
beneficial ownership, and to authorize such Participant to disclose to the
Auction Agent such information with respect to such beneficial ownership as the
Auction Agent may request; (iv) that a Sell Order placed by an Existing
Certificateholder will constitute an irrevocable offer to sell the principal
amount of the Class A-9 Certificate specified in such Sell Order; (v) that a Bid
placed by an Existing Certificateholder will constitute an irrevocable offer to
sell the principal amount of the Class A-9 Certificates specified in such Bid if
the rate specified in such Bid is greater than, or in some cases equal to, the
Certificate Rate determined as described herein; and (vi) that a Bid placed by a
Potential Certificateholder will constitute an irrevocable offer to purchase the
amount, or a lesser principal amount, of the Class A-9 Certificate specified in
such Bid if the rate specified in such Bid is, respectively, less than or equal
to the Certificate Rate, determined as described herein.
The principal amount of the Class A-9 Certificates purchased or sold may be
subject to proration procedures on the Auction Date. Each purchase or sale of
the Class A-9 Certificates on the Auction Date will be made for settlement on
the first day of the Auction Period immediately following such Auction Date at a
price equal to 100% of the principal amount thereof, plus accrued but unpaid
interest thereon. The Auction Agent is entitled to rely upon the terms of any
Order submitted to it by a Broker-Dealer.
Auction Agent
Bankers Trust Company, a New York banking corporation will be appointed as
Auction Agent to serve as agent for the Trust in connection with Auctions. The
Trustee will enter into the Auction Agent Agreement with Bankers Trust Company
as the Auction Agent. Any Substitute Auction Agent will be (i) a bank, national
banking association or trust company duly organized under the laws of the United
States of America or any state or territory thereof having its principal place
of business in the Borough of Manhattan, New York, or such other location as
approved by the Trustee and the Market Agent in writing and having a combined
capital stock or surplus of at least $50,000,000, or (ii) a member of the
National Association of Securities Dealers, Inc. having a capitalization of at
least $50,000,000, and, in either case, authorized by law to perform all the
duties imposed upon it under the Auction Agent Agreement and approved by the
Certificate Insurer in writing. The Auction Agent may at any time resign by
giving at least 90 days notice to the Trustee, the Certificate Insurer and the
Market Agent. The Auction Agent may be removed at any time by the Trustee upon
the written direction of the Certificate Insurer, or, with the consent of the
Certificate Insurer, the Certificateholders holding 66 2/3% of the aggregate
principal amount of the Class A-9 Certificates then outstanding, by an
instrument signed by the the Certificate Insurer or such Certificateholders or
their attorneys and filed with the Auction Agent, the Trustee and the Market
Agent upon at least 90 days' notice. Neither resignation nor removal of the
Auction Agent pursuant to the preceding two sentences will be effective until
and unless a Substitute Auction Agent has been appointed, has been approved in
writing by the Certificate Insurer and has accepted such appointment. If
required by the Certificate Insurer, Certificateholders holding 66 2/3% of the
aggregate principal amount of the Class A-9 Certificates then outstanding or by
the Market Agent, a Substitute Auction Agent Agreement shall be entered into
with a Substitute Auction Agent. Notwithstanding the foregoing, the Auction
Agent may terminate the Auction Agent Agreement if, within 25 days after
notifying the Trustee, the Certificate Insurer and the Market Agent in writing
that it has not received payment of any Auction Agent Fee due it in accordance
with the Auction Agent Agreement, the Auction Agent does not receive such
payment.
If the Auction Agent should resign or be removed or be dissolved, or if the
property or affairs of the Auction Agent shall be taken under the control of any
state or federal court or administrative body because of bankruptcy
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or insolvency, or for any other reason, the Trustee, at the direction of the
Seller and the Certificate Insurer (after receipt of a certificate from the
Market Agent confirming that any proposed Substitute Auction Agent meets the
requirements described in the immediately preceding paragraph above), shall use
its best efforts to appoint a Substitute Auction Agent.
The Auction Agent is acting as agent for the Trust in connection with
Auctions. In the absence of bad faith, negligent failure to act or negligence on
its part, the Auction Agent will not be liable for any action taken, suffered or
omitted or any error of judgment made by it in the performance of its duties
under the Auction Agent Agreement and will not be liable for any error of
judgment made in good faith unless the Auction Agent will have been negligent in
ascertaining (or failing to ascertain) the pertinent facts.
The Trustee will pay the Auction Agent the Auction Agent Fee on each
Distribution Date and will reimburse the Auction Agent upon its request for all
reasonable expenses, disbursements and advances incurred or made by the Auction
Agent in accordance with any provision of the Auction Agent Agreement or the
Broker-Dealer Agreement (including the reasonable compensation and the expenses
and disbursements of its agents and counsel). The Trust will indemnify and hold
harmless the Auction Agent for and against any loss, liability or expense
incurred without negligence or bad faith on the Auction Agent's part, arising
out of or in connection with the acceptance or administration of its agency
under the Auction Agent Agreement and the Broker-Dealer Agreement, including the
reasonable costs and expenses (including the reasonable fees and expenses of its
counsel) of defending itself against any such claim or liability in connection
with its exercise or performance of any of its respective duties thereunder and
of enforcing this indemnification provision; provided that the Trust will not
indemnify the Auction Agent as described in this paragraph for any fees and
expenses incurred by the Auction Agent in the normal course of performing its
duties under the Auction Agent Agreement and under the Broker-Dealer Agreement,
such fees and expenses being payable as described above.
Broker-Dealer
Existing Certificateholders and Potential Certificateholders may
participate in Auctions only by submitting orders (in the manner described
below) through a Broker-Dealer.
The Broker-Dealer is entitled to a Broker-Dealer Fee on each Distribution
Date, which is payable by the Auction Agent from monies received from the
Trustee.
AUCTION PROCEDURES
General
Pursuant to the Auction Agent Agreement, Auctions to establish the Auction
Rate for the Class A-9 Certificates issued by the Trust will be held on each
applicable Auction Date, except as described below, by application of the
Auction Procedures described herein.
The Auction Agent will calculate the Maximum Auction Rate, the All Hold
Rate and One-Month LIBOR on each Auction Date. The Trustee will calculate and,
no later than the Business Day preceding each Auction Date, will report to the
Auction Agent in writing, the Group 2 Net Funds Cap. If the Class A-9
Certificates are no longer maintained in Book-Entry Form, the Trustee will
calculate the Maximum Auction Rate and the Group 2 Net Funds Cap on the Business
Day immediately preceding the first day of each Auction Period. If an Insurer
Default has occurred, the Trustee will calculate the Maximum Auction Rate on the
Rate Determination Date for (i) each Auction Period commencing after the
occurrence and during the continuance of such Insurer Default and (ii) any
Auction Period commencing less than two Business Days after the cure of any
Insurer Default. The Auction Agent will determine One-Month LIBOR for each
Auction Period other than the Initial Period for the Class A-9 Certificates;
provided, that if the ownership of the Certificates is no longer maintained in
Book-Entry Form, or if an Insurer Default has occurred, then the Trustee will
determine One-Month LIBOR for each such
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Auction Period. The determination by the Trustee or the Auction Agent, as the
case may be, of One-Month LIBOR will (in the absence of manifest error) be final
and binding upon the Certificateholders and all other parties. If calculated or
determined by the Auction Agent, the Auction Agent will promptly advise the
Trustee of One-Month LIBOR.
Submission of Orders
So long as the ownership of the Class A-9 Certificates is maintained in
Book-Entry Form, an Existing Certificateholder may sell, transfer or otherwise
dispose of Class A-9 Certificates pursuant to a Bid or Sell Order (as
hereinafter defined) placed in an Auction only through a Broker-Dealer, provided
that, in the case of all transfers other than pursuant to Auctions, such
Existing Certificateholder, its Broker-Dealer or its Participant advises the
Auction Agent of such transfer. Auctions for the Class A-9 Certificates will be
conducted on each applicable Auction Date, if there is an Auction Agent on such
Auction Date, in the following manner.
Prior to the Submission Deadline (defined as 1:00 p.m., eastern time, on
any Auction Date or such other time on any Auction Date by which Broker-Dealers
are required to submit Orders to the Auction Agent as specified by the Auction
Agent from time to time) on each Auction Date relating to a Certificate:
(a) each Existing Certificateholder may submit to a Broker-Dealer by
telephone or otherwise information as to: (i) the principal amount of
Class A-9 Certificates held by such Existing Certificateholder which such
Existing Certificateholder desires to continue to hold without regard to
the Certificate Rate for the next succeeding Auction Period (a "Hold
Order"); (ii) the principal amount of Class A-9 Certificates which such
Existing Certificateholder offers to sell if the Certificate Rate for the
next succeeding Auction Period will be less than the rate per annum
specified by such Existing Certificateholder (a "Bid"); and/or (iii) the
principal amount of Class A-9 Certificates held by such Existing
Certificateholder which such Existing Certificateholder offers to sell
without regard to the Certificate Rate for the next succeeding Auction
Period (a "Sell Order"); and
(b) the Broker-Dealer may contact Potential Certificateholders to
determine the principal amount of Class A-9 Certificates which each such
Potential Certificateholder offers to purchase, if the Certificate Rate for
the next succeeding Auction Period will not be less than (and in some cases
equal to) the rate per annum specified by such Potential Certificateholder
(also a "Bid").
Each Hold Order, Bid and Sell Order will be an "Order." Each Existing
Certificateholder and each Potential Certificateholder placing an Order is
referred to as a "Bidder."
Subject to the provisions described below under "Validity of Orders," a Bid
by an Existing Certificateholder will constitute an irrevocable offer to sell:
(i) the principal amount of Class A-9 Certificates specified in such Bid if the
Certificate Rate will be less than the rate specified in such Bid, (ii) such
principal amount or a lesser principal amount of Class A-9 Certificates to be
determined as described below in "Acceptance and Rejection of Orders," if the
Certificate Rate will be equal to the rate specified in such Bid or (iii) such
principal amount or a lesser principal amount of the Class A-9 Certificates to
be determined as described below under "Acceptance and Rejection of Orders," if
the Certificate Rate is less than the rate specified in such Bid and Sufficient
Bids (as defined below) have not been made.
Subject to the provisions described below under "Validity of Orders," a
Sell Order by an Existing Certificateholder will constitute an irrevocable offer
to sell: (i) the principal amount of the Class A-9 Certificate specified in such
Sell Order or (ii) such principal amount or a lesser principal amount of
Class A-9 Certificate as described below under "Acceptance and Rejection of
Orders," if Sufficient Bids have not been made.
Subject to the provisions described below under "Validity of Orders," a Bid
by a Potential Certificateholder will constitute an irrevocable offer to
purchase (i) the principal amount of the Class A-9 Certificate specified in such
Bid if the Certificate Rate will be higher than the rate specified in such Bid
or (ii) such principal amount or a
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lesser principal amount as described below in "Acceptance and Rejection of
Orders," if the Certificate Rate is equal to the rate specified in such Bid.
The Broker-Dealer will submit in writing to the Auction Agent prior to the
Submission Deadline on each Auction Date all Orders obtained by such
Broker-Dealer and will specify with respect to each such Order: (i) the name of
the Bidder placing such Order; (ii) the aggregate principal amount that is the
subject of such order; (iii) to the extent that such Bidder is an Existing
Certificateholder: (a) the principal amount of the Class A-9 Certificates
subject to any Hold Order placed by such Existing Certificateholder; (b) the
principal amount subject to any Bid placed by such Existing Certificateholder
and the rate specified in such Bid; and (c) the principal amount subject to any
Sell Order placed by such Existing Certificateholder, and (iv) to the extent
such Bidder is a Potential Certificateholder, the rate specified in such
Potential Certificateholder's Bid.
If any rate specified in any Bid contains more than three figures to the
right of the decimal point, the Auction Agent will round such rate up to the
next highest one-thousandth (.001) of one percent.
If an Order or Orders covering the Class A-9 Certificates held by any
Existing Certificateholder are not submitted to the Auction Agent prior to the
Submission Deadline, the Auction Agent will deem a Hold Order to have been
submitted on behalf of such Existing Certificateholder covering the principal
amount of Class A-9 Certificates held by such Existing Certificateholder and not
subject to an Order submitted to the Auction Agent.
Neither the Seller, the Trustee nor the Auction Agent will be responsible
for any failure of the Broker-Dealer to submit an Order to the Auction Agent on
behalf of any Existing Certificateholder or Potential Certificateholder.
An Existing Certificateholder may submit multiple Orders, of different
types and specifying different rates, in an Auction with respect to Class A-9
Certificates then held by such Existing Certificateholder. An Existing
Certificateholder that offers to purchase additional Class A-9 Certificates is,
for purposes of such offer, treated as a Potential Certificateholder.
Any Bid specifying a rate higher than the Maximum Auction Rate will (i) be
treated as a Sell Order if submitted by a Existing Certificateholder and (ii)
not be accepted if submitted by a Potential Certificateholder.
Validity of Orders
If any Existing Certificateholder submits through a Broker-Dealer to
the Auction Agent one or more Orders covering in the aggregate more than the
principal amount of the Class A-9 Certificates held by such Existing
Certificateholder, such Orders will be considered valid as follows and in the
order of priority described below.
Hold Orders. All Hold Orders will be considered valid, but only up to the
aggregate principal amount of the Class A-9 Certificates held by such Existing
Certificateholder.
Bids. Any Bid will be considered valid up to an amount equal to the excess
of the principal amount of the Class A-9 Certificates held by such Existing
Certificateholder over the aggregate principal amount of the Class A-9
Certificates subject to any Hold Orders referred to above. Subject to the
preceding sentence, if multiple Bids with the same rate are submitted on behalf
of such Existing Certificateholder and the aggregate principal amount of
Class A-9 Certificates subject to such Bids is greater than such excess, such
Bids will be considered valid up to an amount equal to such excess. Subject to
the two preceding sentences, if more than one Bid with different rates are
submitted on behalf of such Existing Certificateholder, such Bids will be
considered valid first in the ascending order of their respective rates until
the highest rate is reached at which such excess exists and then at such rate up
to the amount of such excess. In any event, the aggregate principal amount of
Class A-9 Certificates, if any, subject to Bids not valid under the provisions
described above will be treated as the subject of a Bid by a Potential
Certificateholder at the rate therein specified.
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<PAGE>
Sell Orders. All Sell Orders will be considered valid up to an amount equal
to the excess of the principal amount of Class A-9 Certificates held by such
Existing Certificateholder over the aggregate principal amount of Certificates
subject to valid Hold Orders and valid Bids as referred to above.
If more than one Bid for a Class A-9 Certificate is submitted on behalf of
any Potential Certificateholder, each Bid submitted will be a separate Bid with
the rate and principal amount therein specified. Any Bid or Sell Order submitted
by an Existing Certificateholder covering an aggregate principal amount of
Class A-9 Certificates not equal to an Authorized Denomination or an integral
multiple thereof will be rejected and will be deemed a Hold Order. Any Bid
submitted by a Potential Certificateholder covering an aggregate principal
amount of Class A-9 Certificates not equal to an Authorized Denomination or an
integral multiple thereof will be rejected. Any Order submitted in an Auction by
the Broker-Dealer to the Auction Agent prior to the Submission Deadline on any
Auction Date will be irrevocable.
A Hold Order, a Bid or a Sell Order that has been determined valid pursuant
to the procedures described above is referred to as a "Submitted Hold Order," a
"Submitted Bid" and a "Submitted Sell Order," respectively (collectively,
"Submitted Orders").
Determination of Sufficient Bid and Bid Auction Rate
Not earlier than the Submission Deadline on each Auction Date, the Auction
Agent will assemble all valid Submitted Orders and will determine:
(a) the excess of the total principal amount of Class A-9 Certificates over
the sum of the aggregate principal amount of such Certificates subject to
Submitted Hold Orders (such excess being hereinafter referred to as the
"Available Certificates"); and
(b) from such Submitted Orders whether the aggregate principal amount of
Class A-9 Certificates subject to Submitted Bids by Potential Certificateholders
specifying one or more rates equal to or lower than the Maximum Auction Rate
exceeds or is equal to the sum of (i) the aggregate principal amount of
Class A-9 Certificates subject to Submitted Bids by Existing Certificateholders
specifying one or more rates higher than the Maximum Auction Rate and (ii) the
aggregate principal amount of Class A-9 Certificates subject to Submitted Sell
Orders (in the event such excess or such equality exists other than because all
of the Class A-9 Certificates are subject to Submitted Hold Orders, such
Submitted Bids by Potential Certificateholders above will be hereinafter
referred to collectively as "Sufficient Bids"); and
(c) if Sufficient Bids exist, the "Bid Auction Rate," which will be the
lowest rate specified in such Submitted Bids such that if:
(i) each such Submitted Bid from Existing Certificateholders of such
Certificate specifying such lowest rate and all other Submitted Bids from
Existing Certificateholders of such Certificate specifying lower rates were
rejected (thus entitling such Existing Certificateholders to continue to
hold the principal amount of Certificates subject to such Submitted Bids);
and
(ii) each such Submitted Bid from Potential Certificateholders of such
Certificate specifying such lowest rate and all other Submitted Bids from
Potential Certificateholder specifying lower rates, were accepted,
the result would be that such Existing Certificateholders described in
subparagraph (c)(i) above would continue to hold an aggregate principal amount
of Certificates which, when added to the aggregate principal amount of
Certificates to be purchased by such Potential Certificateholders described in
this subparagraph (c)(ii) would equal not less than the Available Certificates.
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<PAGE>
Determination of Auction Rate and Certificate Rate, Notice
Promptly after the Auction Agent has made the determinations described
above, the Auction Agent is to advise the Trustee of the Group 2 Net Funds Cap,
the Maximum Auction Rate, the All Hold Rate and the components thereof on the
Auction Date, and based on such determinations, the Auction Rate for the next
succeeding Auction Period as follows:
(a) if Sufficient Bids exist, that the Auction Rate for the next succeeding
Auction Period will be equal to the Bid Auction Rate so determined;
(b) if Sufficient Bids do not exist (other than because all of the
Certificates are subject to Submitted Hold Orders), that the Auction Rate for
the next succeeding Auction Period will be equal to the Maximum Auction Rate; or
(c) if all the Class A-9 Certificates are subject to Submitted Hold Orders,
that the Auction Rate for the next succeeding Auction Period will be equal to
the All Hold Rate.
Promptly after the Auction Agent has determined the Auction Rate, the
Auction Agent will determine and advise the Trustee of the Certificate Rate,
which rate will be the lesser of (a) the Auction Rate and (b) the Group 2 Net
Funds Cap.
Acceptance and Rejection of Orders
Existing Certificateholders will continue to hold the principal amount of
Class A-9 Certificates that are subject to Submitted Hold Orders. If the
Group 2 Net Funds Cap is equal to or greater than the Bid Auction Rate and if
Sufficient Bids, as described above under "Determination of Sufficient Bids and
Bid Auction Rate," have been received by the Auction Agent, the Bid Auction Rate
will be the Certificate Rate, and Submitted Bids and Submitted Sell Orders will
be accepted or rejected and the Auction Agent will take such other action as
provided in the Auction Agent Agreement and described below under "Sufficient
Bids."
If the Group 2 Net Funds Cap is less than the Auction Rate, the Certificate
Rate will be the Group 2 Net Funds Cap. If the Auction Agent has not received
Sufficient Bids as described above under "Determination of Sufficient Bids and
Bid Auction Rate" (other than because all of the Certificates are subject to
Submitted Holds Orders), the Certificate Rate will be the lesser of the Maximum
Auction Rate or the Group 2 Net Funds Cap. In any of the cases described above
in this paragraph, Submitted Orders will be accepted or rejected and the Auction
Agent will take such other action as described below under "Insufficient Bids."
Sufficient Bids. If Sufficient Bids have been made with respect to the
Class A-9 Certificates and the Group 2 Net Funds Cap is equal to or greater than
the Bid Auction Rate (in which case the Certificate Rate shall be the Bid
Auction Rate), all Submitted Sell Orders will be accepted and, subject to the
denomination requirements described below, Submitted Bids will be accepted or
rejected as follows in the following order of priority and all other Submitted
Bids will be rejected:
(a) Existing Certificateholders' Submitted Bids specifying any rate
that is higher than the Certificate Rate will be accepted, thus requiring
each such Existing Certificateholder to sell the aggregate principal amount
of Class A-9 Certificates subject to such Submitted Bids;
(b) Existing Certificateholders' Submitted Bids specifying any rate
that is lower than the Certificate Rate will be rejected, thus entitling
each such Existing Certificateholder to continue to hold the aggregate
principal amount of Certificates subject to such Submitted Bids;
(c) Potential Certificateholders' Submitted Bids specifying any rate
that is lower than (or in some cases, equal to) the Certificate Rate will
be accepted;
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(d) Each Existing Certificateholder's Submitted Bid specifying a rate
that is equal to the Certificate Rate will be rejected, thus entitling such
Existing Certificateholder to continue to hold the aggregate principal
amount of Class A-9 Certificates subject to such Submitted Bid, unless the
aggregate principal amount of Class A-9 Certificates subject to such
Submitted Bids will be greater than the principal amount of Class A-9
Certificates (the "remaining principal amount") equal to the excess of the
Available Certificates over the aggregate principal amount of Class A-9
Certificates subject to Submitted Bids described in subparagraphs (b) and
(c) above, in which event such Submitted Bid of such Existing
Certificateholder will be rejected in part and such Existing
Certificateholder will be entitled to continue to hold the principal amount
of Class A-9 Certificates subject to such Submitted Bid, but only in an
amount equal to the aggregate principal amount of Class A-9 Certificates
obtained by multiplying the remaining principal amount by a fraction, the
numerator of which will be the principal amount of Certificates held by
such Existing Certificateholder subject to such Submitted Bid and the
denominator of which will be the sum of the principal amount of Class A-9
Certificates subject to such Submitted Bids made by all such Existing
Certificateholders that specified a rate equal to the Certificate Rate; and
(e) Each Potential Certificateholder's Submitted Bid specifying a rate
that is equal to the Certificate Rate will be accepted, but only in an
amount equal to the principal amount of Class A-9 Certificates obtained by
multiplying the excess of the aggregate principal amount of Available
Certificates over the aggregate principal amount of Class A-9 Certificates
subject to Submitted Bids described in subparagraphs (b), (c) and
(d) above by a fraction, the numerator of which will be the aggregate
principal amount of Class A-9 Certificates subject to such Submitted Bid
and the denominator of which will be the sum of the principal amount of
Class A-9 Certificates subject to Submitted Bids made by all such Potential
Certificateholders that specified a rate equal to the Certificate Rate.
Insufficient Bids. If Sufficient Bids have not been made with respect to
the Class A-9 Certificates (other than because all of the Certificates are
subject to Submitted Hold Orders) or if the Group 2 Net Funds Cap is less than
the Bid Auction Rate (in which case the Certificate Rate shall be the Group 2
Net Funds Cap), subject to the denomination requirements described below,
Submitted Orders will be accepted or rejected as follows in the following order
of priority and all other Submitted Bids will be rejected:
(a) Existing Certificateholders' Submitted Bids specifying any rate
that is equal to or lower than the Certificate Rate will be rejected, thus
entitling such Existing Certificateholders to continue to hold the
aggregate principal amount of Class A-9 Certificates subject to such
Submitted Bids;
(b) Potential Certificateholders' Submitted Bids specifying any rate
that is equal to or lower than the Certificate Rate will be accepted, and
specifying any rate that is higher than the Certificate Rate will be
rejected; and
(c) each Existing Certificateholder's Submitted Bid specifying any
rate that is higher than the Certificate Rate and the Submitted Sell Order
of each Existing Certificateholder will be accepted, thus entitling each
Existing Certificateholder that submitted any such Submitted Bid or
Submitted Sell Order to sell such Class A-9 Certificates subject to such
Submitted Bid or Submitted Sell Order, but in both cases only in an amount
equal to the aggregate principal amount of Class A-9 Certificates obtained
by multiplying the aggregate principal amount of Class A-9 Certificates
subject to Submitted Bids described in subparagraph (b) above by a
fraction, the numerator of which will be the aggregate principal amount of
Class A-9 Certificates held by such Existing Certificateholder subject to
such Submitted Bid or Submitted Sell Order and the denominator of which
will be the aggregate principal amount of Class A-9 Certificates subject to
all such Submitted Bids and Submitted Sell Orders.
All Hold Orders. If all Class A-9 Certificates are subject to Submitted
Hold Orders, all Submitted Bids will be rejected.
Authorized Denominations Requirement. If, as a result of the procedures
described above regarding Sufficient Bids and Insufficient Bids, any Existing
Certificateholder would be entitled or required to sell, or any
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Potential Certificateholder would be entitled or required to purchase, a
principal amount of Class A-9 Certificates that is not equal to an Authorized
Denomination or an integral multiple thereof, the Auction Agent will, in such
manner as in its sole discretion it will determine, round up or down the
principal amount of Class A-9 Certificates to be purchased or sold by any
Existing Certificateholder or Potential Certificateholder so that the principal
amount of Class A-9 Certificates purchased or sold by each Existing
Certificateholder or Potential Certificateholder will be equal to an Authorized
Denomination or an integral multiple in excess thereof. If, as a result of the
procedures described above regarding Insufficient Bids, any Potential
Certificateholder would be entitled or required to purchase less than a
principal amount of Class A-9 Certificates equal to an Authorized Denomination
or any integral multiple thereof, the Auction Agent will, in such manner as in
its sole discretion it will determine, allocate Class A-9 Certificates for
purchase among Potential Certificateholders so that only Class A-9 Certificates
in an Authorized Denomination or any integral multiples in excess thereof are
purchased by any Potential Certificateholder, even if such allocation results in
one or more of such Potential Certificateholders not purchasing any Class A-9
Certificates.
Based on the results of each Auction, the Auction Agent is to determine the
aggregate principal amount of Class A-9 Certificates to be purchased and the
aggregate principal amount of Class A-9 Certificates to be sold by Potential
Certificateholders and Existing Certificateholders on whose behalf the
Broker-Dealer submitted Bids or Sell Orders and to the extent that such
aggregate principal amount of the Class A-9 Certificates to be sold differs from
such aggregate principal amount of Class A-9 Certificates to be purchased,
determine to which other Broker-Dealer or Broker-Dealers acting for one or more
purchasers such Broker-Dealer will deliver, or from which Broker-Dealers acting
for one or more sellers such Broker-Dealer will receive, as the case may be,
Class A-9 Certificates.
Any calculation by the Auction Agent (or the Trustee, if applicable) of the
Certificate Rate, One-Month LIBOR, the Maximum Auction Rate, the All Hold Rate,
the Group 2 Net Funds Cap and the Maximum Auction Rate will, in the absence of
manifest error, be binding on all other parties.
At any time when a scheduled Auction is not being held, interest will
accrue on the Class A-9 Certificates at the Maximum Auction Rate for the
applicable period.
Settlement Procedures
The Auction Agent is required to advise the Broker-Dealer of the
Certificate Rate for the Class A-9 Certificates for the next Auction Period and,
whether the Bids or Sell Orders were accepted or rejected, in whole or in part
by telephone not later than 3:00 pm., eastern time, on the Auction Date. The
Broker-Dealer is required to then advise such Bidder of the applicable
Certificate Rate for the next Interest Period and, if such Order was a Bid or a
Sell Order, whether such Bid or Sell Order was accepted or rejected, in whole or
in part, confirm purchases and sales with each Existing Certificateholder or
Potential Certificateholder, as the case may be, purchasing or selling
Class A-9 Certificates as a result of the Auction and advise each Existing
Certificateholder or Potential Certificateholder, as the case may be, purchasing
or selling Class A-9 Certificates as a result of the Auction to give
instructions to its Participant to pay the purchase price against delivery of
such Class A-9 Certificates or to deliver such Class A-9 Certificates against
payment therefor, as appropriate. Pursuant to the Auction Agent Agreement, the
Auction Agent is to record each transfer of Class A-9 Certificates on the
Existing Certificateholders Registry to be maintained by the Auction Agent.
In accordance with DTC's normal procedures, on the Business Day after the
Auction Date, the transactions described above will be executed through DTC, so
long as DTC is the Depository, and the accounts of the respective Participants
at DTC will be debited and credited and the Class A-9 Certificates delivered as
necessary to effect the purchases and sales of the Class A-9 Certificates as
determined in the Auction. Purchasers are required to make payment through their
Participants in same-day funds to DTC against delivery through their
Participants. DTC will make payment in accordance with its normal procedures,
which now provide for payment against delivery by its Participants in
immediately available funds.
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If any Existing Certificateholder selling Class A-9 Certificates in an
Auction fails to deliver such Certificates, the Broker-Dealer may deliver to any
person that was to have purchased Class A-9 Certificates in such Auction a
principal amount of Class A-9 Certificates that is less than the principal
amount of Class A-9 Certificates that otherwise was to be purchased by such
person but in any event equal to an Authorized Denomination or any integral
multiple thereof. In such event, the principal amount of Class A-9 Certificates
to be delivered will be determined by the Broker-Dealer. Delivery of such lesser
principal amount of Class A-9 Certificates will constitute good delivery.
Neither the Trustee nor the Auction Agent will have any responsibility or
liability with respect to the failure of a Potential Certificateholder, Existing
Certificateholder or the Broker-Dealer or Participant to deliver the principal
amount of Class A-9 Certificates or to pay for the Class A-9 Certificates
purchased or sold pursuant to an Auction or otherwise. For a further description
of the settlement procedures, see "SETTLEMENT PROCEDURES" attached hereto as
Annex III.
TRUSTEE NOT RESPONSIBLE FOR AUCTION AGENT, MARKET AGENT AND BROKER-DEALERS
The Trustee shall not be liable or responsible for the actions of or
failure to act by the Auction Agent, Market Agent or the Broker-Dealer under the
Agreement, the Auction Agent Agreement, or any Broker-Dealer Agreement. The
Trustee may conclusively rely upon any information required to be furnished by
the Auction Agent, the Market Agent or any Broker-Dealer without undertaking any
independent review or investigation of the truth or accuracy of such
information.
CHANGES IN THE AUCTION DATE
The Market Agent, with the consent of the Seller and the Certificate
Insurer, may specify an earlier Auction Date (but in no event more than five
Business Days earlier) than the Auction Date that would otherwise be determined
in accordance with the definition of "Auction Date" with respect to one or more
specified Auction Periods in order to conform with then current market practice
with respect to similar securities or to accommodate economic and financial
factors that may affect or be relevant to the day of the week constituting an
Auction Date and the interest rate borne on the Class A-9 Certificates. The
Seller will not consent to such change in the Auction Date unless the Seller
will have received from the Market Agent not less than three days no more than
20 days prior to the effective date of such change a written request for consent
together with a certificate demonstrating the need for change in reliance on
such factors. The Market Agent will provide notice of its determination to
specify an earlier Auction Date for one or more Auction Periods by means of a
written notice delivered at least 10 days prior to the proposed changed Auction
Date to the Trustee, the Auction Agent, the Seller, the Certificate Insurer, the
Rating Agencies and the Depository.
The changes in Auction terms described above may be made with respect to
any Authorized Denomination of Class A-9 Certificates. In connection with any
change in Auction terms described above, the Auction Agent is to provide such
further notice to such parties as is specified in the Auction Agent Agreement.
II-12
<PAGE>
ANNEX III
The following description of Settlement Procedures applies to the
Class A-9 Certificates. Capitalized terms used herein and not otherwise defined
have the meanings ascribed in Annex II and the accompanying Prospectus
Supplement.
SETTLEMENT PROCEDURES
(a) Not later than 3:00 p.m. if the Certificate Rate for the Class A-9
Certificates is the Auction Rate or (2) 4:00 p.m. if the Certificate Rate for
the Class A-9 Certificates is the Group 2 Net Funds Cap, the Auction Agent is to
notify by telephone each Broker-Dealer that participated in the Auction held on
such Auction Date and submitted an Order on behalf of an Existing
Certificateholder or Potential Certificateholder of:
(i) the Certificate Rate fixed for the Class A-9 Certificate for the
next Auction Period;
(ii) whether there were Sufficient Bids in such Auction;
(iii) if such Broker-Dealer (a "Seller's Broker-Dealer") submitted
Bids or Sell Orders on behalf of an Existing Certificateholder, whether
such Bid or Sell Order was accepted or rejected, in whole or in part, and
the principal amount of Class A-9 Certificates, if any, to be sold by such
Existing Certificateholder;
(iv) if such Broker-Dealer (a "Buyer's Broker-Dealer") submitted a
Bid on behalf of a Potential Certificateholder, whether such Bid was
accepted or rejected, in whole or in part, and the principal amount of
Class A-9 Certificates, if any, to be purchased by such Potential
Certificateholder;
(v) if the aggregate amount of Class A-9 Certificates to be sold by
all Existing Certificateholders on whose behalf such Seller's Broker-Dealer
submitted Bids or Sell Orders exceeds the aggregate principal amount of
Class A-9 Certificates to be purchased by all Potential Certificateholders
on whose behalf such Buyer's Broker-Dealer submitted a Bid, the name or
names of one or more Buyer's Broker-Dealers and the name of the
Participant, if any, of each such Buyer's Broker-Dealer acting for one or
more purchasers of such excess principal amount of Class A-9 Certificates
and the principal amount of Class A-9 Certificates to be purchased from one
or more Existing Certificateholders on whose behalf such Seller's
Broker-Dealer acted by one or more Potential Certificateholders on whose
behalf each of such Buyer's Broker-Dealers acted;
(vi) if the principal amount of Class A-9 Certificates to be
purchased by all Potential Certificateholders on whose behalf such Buyer's
Broker-Dealer submitted a Bid exceeds the amount of Class A-9 Certificates
to be sold by all Existing Certificateholders on whose behalf such Seller's
Broker-Dealer submitted a Bid or a Sell Order, the name or names of one or
more Seller's Broker-Dealers (and the name of the Participant, if any, of
each such Seller's Broker-Dealer) acting for one or more sellers of such
excess principal amount of Class A-9 Certificates and the principal amount
of Class A-9 Certificates to be sold to one or more Potential
Certificateholders on whose behalf such Buyer's Broker-Dealer acted by one
or more Existing Certificateholder on whose behalf each of such Seller's
Broker-Dealers acted; and
(vii) the Auction Date for the next succeeding Auction.
(b) On each Auction Date, each Broker-Dealer that submitted an Order on
behalf of any Existing Certificateholder or Potential Certificateholder is to:
(i) advise each Existing Certificateholder and Potential
Certificateholder on whose behalf such Broker-Dealer submitted a Bid or
Sell Order in the Auction on such Auction Date whether such Bid or Sell
Order was accepted or rejected, in whole or in part;
(ii) in the case of a Broker-Dealer that is a Buyer's Broker-Dealer,
advise each Potential Certificateholder on whose behalf such Buyer's
Broker-Dealer submitted a Bid that was accepted, in whole or in part, to
instruct such Potential Certificateholder's Participant to pay to such
Buyer's Broker-Dealer (or its Participant) through the Depository the
amount necessary to purchase the principal amount of the Class A-9
Certificates to be purchased pursuant to such Bid against receipt of such
Class A-9 Certificates together with accrued interest;
(iii) in the case of a Broker-Dealer that is a Seller's
Broker-Dealer, instruct each Existing Certificateholder on whose behalf
such Seller's Broker-Dealer submitted a Sell Order that was accepted, in
whole or in part, or a Bid that was accepted, in whole or in part, to
instruct such Existing Certificateholder's
III-1
<PAGE>
Participant to deliver to such Seller's Broker-Dealer (or its Participant)
through the Depository the principal amount of the Class A-9 Certificates
to be sold pursuant to such Order against payment therefor;
(iv) advise each Existing Certificateholder on whose behalf such
Broker-Dealer submitted an Order and each Potential Certificateholder on
whose behalf such Broker-Dealer submitted a Bid of the Certificate Rate for
the next Auction Period;
(v) advise each Existing Certificateholder on whose behalf such
Broker-Dealer submitted an Order of the next Auction Date; and
(vi) advise each Potential Certificateholder on whose behalf such
Broker-Dealer submitted a Bid that was accepted, in whole or in part, of
the next Auction Date.
(c) On the basis of the information provided to it pursuant to paragraph
(a) above, each Broker-Dealer that submitted a Bid or Sell Order in an Auction
is required to allocate any funds received by it in connection with such Auction
pursuant to paragraph (b)(ii) above, and any Class A-9 Certificates received by
it in connection with such Auction pursuant to paragraph (b)(iii) above, among
the Potential Certificateholders, if any, on whose behalf such Broker-Dealer
submitted Bids, the Existing Certificateholder, if any, on whose behalf such
Broker-Dealer submitted Bids or Sell Orders in such Auction, and any
Broker-Dealers identified to it by the Auction Agent following such Auction
pursuant to paragraph (a)(v) or (a)(vi) above.
(d) On each Auction Date:
(i) each Potential Certificateholder and Existing Certificateholder
with an Order in the Auction on such Auction Date will instruct its
Participant as provided in (b)(ii) or (b)(iii) above, as the case may be:
(ii) each Seller's Broker-Dealer that is not a Participant of the
Depository will instruct its Participant to deliver such Class A-9
Certificates through the Depository to a Buyer's Broker-Dealer (or its
Participant) identified to such Seller's Broker-Dealer pursuant to
(a)(v) above against payment therefor; and
(iii) each Buyer's Broker-Dealer that is not a Participant in the
Depository will instruct its Participant to pay through the Depository to
Seller's Broker-Dealer (or its Participant) identified following such
Auction pursuant to (a)(vi) above the amount necessary to purchase the
Class A-9 Certificates to be purchased pursuant to (b)(ii) above against
receipt of such Certificates.
(e) On the Business Day following each Auction Date;
(i) each Participant for a Bidder in the Auction on such Auction Date
referred to in (d)(i) above will instruct the Depository to execute the
transactions described under (b)(ii) or (b)(iii) above for such Auction,
and the Depository will execute such transactions;
(ii) each Seller's Broker-Dealer or its Participant will instruct the
Depository to execute the transactions described in (d)(ii) above for such
Auction, and the Depository will execute such transactions; and
(iii) each Buyer's Broker-Dealer or its Participant will instruct the
Depository to execute the transactions described in (d)(iii) above for such
Auction, and the Depository will execute such transactions.
(f) If an Existing Certificateholder selling Class A-9 Certificates in an
Auction fails to deliver such Certificates (by authorized book-entry), a
Broker-Dealer may deliver to the Potential Certificateholder on behalf of which
it submitted a Bid that was accepted a principal amount of Class A-9
Certificates that is less than the principal amount of Class A-9 Certificates
that otherwise was to be purchased by such Potential Certificateholder. In such
event, the principal amount of Class A-9 Certificates to be so delivered will be
determined solely by such Broker-Dealer (but only in Authorized Denominations).
Delivery of such lesser principal amount of Class A-9 Certificates will
constitute good delivery. Notwithstanding the foregoing terms of this paragraph
(f), any delivery or nondelivery of Class A-9 Certificates which will represent
any departure from the results of an Auction, as determined by the Auction
Agent, will be of no effect unless and until the Auction Agent will have been
notified of such delivery or nondelivery in accordance with the provisions of
the Auction Agent Agreement and the Broker-Dealer Agreements. Neither the
Trustee nor the Auction Agent will have any responsibility or liability with
respect to the failure of a Potential Certificateholder, Existing
Certificateholder or their respective Broker-Dealer or Participant to take
delivery of or deliver, as the case may be, the principal amount of the
Certificates purchased or sold pursuant to an Auction or otherwise.
III-2
<PAGE>
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 86 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 11.
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 18, 1998
<PAGE>
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>
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>
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.
<TABLE>
<S> <C>
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.
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
</TABLE>
4
<PAGE>
<TABLE>
<S> <C>
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 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
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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 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
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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 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
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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 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
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"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 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 in
the REMIC. 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 net operating losses.
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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" 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 Section 4975 of 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 11 herein and in the related
Prospectus Supplement.
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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 payments among the classes of Securities of a Series
as specified in the related Prospectus Supplement, (iii) the exercise by the
party
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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 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
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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. Except from the sale of the mortgaged property, 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, 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 actually participated in the management or operations of such
property, 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".
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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 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
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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 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
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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.
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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 will be obligated to cure such breach or repurchase or substitute for
the affected Loan or Loans. See "The
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* 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.
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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.
(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
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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 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.
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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 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.
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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 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.
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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").
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
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<PAGE>
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
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
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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 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.
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<PAGE>
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 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
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<PAGE>
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 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
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(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;
(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;
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(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. 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.
</TABLE>
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<TABLE>
<CAPTION>
CATEGORIES OF CLASSES DEFINITION
- ------------------------------------------------ ---------------------------------------------------------------
<S> <C>
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.
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.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
CATEGORIES OF CLASSES DEFINITION
- ------------------------------------------------ ---------------------------------------------------------------
<S> <C>
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>
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, socete 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.
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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 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
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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 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.
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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.
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
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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.
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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.
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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,
coverage under that Pool Insurance Policy will be exhausted and any further
losses will be borne by the related Securityholders.
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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, 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.
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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 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.
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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 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.
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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 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.
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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;
(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;
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(vi) to reimburse the Master Servicer or Provident for expenses
incurred and reimbursable pursuant to the Agreement;
(vii) to withdraw any amount deposited in the Security Account and not
required to be deposited therein; and
(viii) 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.
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.
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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 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
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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 may 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 times 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 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".
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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 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.
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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 may 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 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 service mortgage loans and meets the net worth
requirement specified in the Agreement 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.
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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 51% of the 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
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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 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
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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 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
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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 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
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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.
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.
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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
"actually 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 actual 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 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.
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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.
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
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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 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.
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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 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
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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 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
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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 Securityholders 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 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
Securityholders 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 Securityholder'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 Securityholders 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 Securityholder 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 holder of a
Debt Security 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
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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
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. Securityholders 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
Securityholders 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.
Treasury 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 Securityholder 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
Securityholder 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.
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The amount of OID to be included in income by a Securityholder 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 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
Securityholder 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
Securityholder 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 Securityholders of Pay-Through Securities based
on the Prepayment Assumption, no representation is made to Securityholders 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 Internal Revenue
Service ("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 Securityholder who purchases such Debt Security for
an amount that exceeds its adjusted issue price will be entitled (as will an
initial Securityholder 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. Securityholders 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 Securityholder of such a Security in any
period could significantly exceed the amount of cash distributed to such
Securityholder in that period. The Securityholder 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, Securityholders 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
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were a security purchased at a premium equal to the excess of the price paid by
such Securityholder for such Security over its stated principal amount, if any.
Under this approach, a Securityholder 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 Securityholder, as described below.
Alternatively, the IRS could assert that an Interest Weighted Security should be
taxable under the rules governing bonds issued with contingent 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 Securityholder 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 Securityholder may elect to
include market discount in income currently as it accrues, on all market
discount obligations acquired by such Securityholder during the taxable year
such election is made and thereafter, in which case the interest deferral rule
will not apply.
Premium. A Securityholder 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 Securityholder 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 Securityholder at the beginning of the taxable
year in which the election is made, and to all taxable debt instruments acquired
thereafter by such Securityholder, and will be irrevocable without the
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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 December 30, 1997, the IRS issued final regulations (the "Amortizable
Bond Premium Regulations") dealing with amortizable bond premium. These
regulations specifically do not apply to prepayable debt instruments subject to
Code Section 1272(a)(6) such as the Securities. Absent further guidance from the
IRS, the Trustee intends to account for amortizable bond premium in the manner
described above. 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) (4)(A), 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 Securityholder, exceed 2% of such Securityholder's
adjusted gross income. In addition, for taxable years beginning after
December 31, 1990, the amount of itemized deductions otherwise allowable for the
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taxable year for an individual whose adjusted gross income exceeds the
applicable amount (which amount will be adjusted for inflation for taxable years
beginning after 1990) will be reduced by the lesser of (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 Securityholder. 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
Securityholder's other miscellaneous itemized deductions for that year, do not
exceed two percent of such Securityholder'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 exceptions, the sale or other disposition of a cash flow investment;
(iii) the receipt of any income from assets not permitted to be held
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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
Securityholders 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
Securityholder may take into account currently is limited to the
Securityholder's adjusted basis at the end of the calendar quarter in which such
loss arises. A Securityholder's basis in a Residual Interest Security will
initially equal such Securityholder's purchase price, and will subsequently be
increased by the amount of the REMIC's taxable income allocated to the
Securityholder, and decreased (but not below zero) by the amount of
distributions made and the amount of the REMIC's net loss allocated to the
Securityholder. 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 Securityholders of Residual Interest Securities to deduct net losses
may be subject to additional limitations under the Code, as to which such
Securityholders 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 Securityholder of a Residual
Interest Security. If the amount of such payment exceeds a Securityholder's
adjusted basis in the Residual Interest Security, however, the Securityholder
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 Securityholder's
adjusted basis in the Residual Interest Security at the time of such sale or
exchange. Except to the extent provided in regulations, which have not yet been
issued, any loss upon disposition of a Residual Interest Security will be
disallowed if the selling Securityholder acquires any residual interest in a
REMIC or similar mortgage pool within six months before or after such
disposition.
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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
Securityholder'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 Securityholder'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 the holder of a Residual Interest Security. First, alternative
minimum taxable income for such holder of a Residual Interest Security is
determined without regard to the special rule that taxable income cannot be less
than excess inclusions. Second, a Residual Interest Securityholder'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 of a Residual Interest Security 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 Securityholder 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 an affidavit representing and warranting
that it is neither a Disqualified Organization nor an agent or nominee acting on
behalf of a Disqualified Organization.
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If a Residual Interest Security is transferred to a Disqualified
Organization (in violation of the restrictions set forth above), a substantial
tax will be imposed on the transferor of 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.
The Taxpayer Relief Act of 1997 adds provisions to the Code that will apply
to an "electing large partnership." If an electing large partnership holds a
Residual Interest Security, all interests in the electing large partnership are
treated as held by disqualified organizations for purposes of the tax imposed
upon a pass-through entity by section 860E(e) of the Code. An exception to this
tax, otherwise available to a pass-through entity that is furnished certain
affidavits by record holders of interests in the entity and that does not know
such affidavits are false, is not available to an electing large partnership.
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 Securityholder 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 Securityholder 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 Securityholder'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
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consist of a pro rata share of the income derived from each stripped bond or
stripped coupon in which the Securityholder owns an interest. The Securityholder
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 Securityholder, however, Servicing Fees
(to the extent not otherwise disallowed, e.g., because they exceed reasonable
compensation) will be deductible in computing such Securityholder'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 Securityholder'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 Securityholder'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 Securityholder 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 Securityholder 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 Securityholder 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 computing OID, a stripped bond or a stripped coupon is treated as a
debt instrument issued on the date that such
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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
Securityholder 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
Securityholder'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 Securityholder'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
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
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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 Securityholder's tax basis in its Security is
the price such Securityholder 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 Securityholder's income if the yield on such
Regular Interest Security had equaled 110% of the applicable federal rate as of
the beginning of such Securityholder'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 20%. The maximum tax rate on both ordinary income and long-term
capital gains of corporate taxpayers is 35%.
MISCELLANEOUS TAX ASPECTS
Backup Withholding. Subject to the discussion below with respect to Trust
Funds as to which a partnership election is made, a Securityholder, 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
Securityholder (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 Securityholder's securities broker with a certified statement, signed under
penalty of perjury, that the TIN provided is its correct number and that the
Securityholder is not subject to backup withholding. Backup withholding will not
apply, however, with respect to certain payments made to Securityholders,
including payments to certain exempt recipients (such as exempt organizations)
and to certain Nonresidents (as defined below). Securityholders 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 Securityholders 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 "Foreign Holder" (as hereinafter defined), such interest will 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 Foreign Holders. Foreign Holders of Pass-Through Securities
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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 Securityholders who are Foreign Holders are not subject
to withholding if they are effectively connected with a United States business
conducted by the Securityholder. They will, however, generally be subject to the
regular United States income tax.
Payments to Foreign 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. Securityholders 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
Foreign 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."
For purposes of this section, a "Foreign Holder" is defined for United
States federal income tax purposes as any Securityholder other than (i) any
individual who is a citizen or resident of the United States, (ii) a corporation
or partnership (including any entity treated as a corporation or partnership for
United States federal income tax purposes) created or organized in or under the
laws of the United States, any state thereof or the District of Columbia unless,
in the case of a partnership, Treasury regulations provide otherwise, (iii) an
estate the income of which is subject to United States federal income tax
regardless of its source, (iv) a trust if a court within the United States is
able to exercise primary supervision over the administration of the trust and
one or more United States persons have authority to control all substantial
decisions of the trust, or (v) certain trusts in existence on August 20, 1996,
and treated as United States persons (as defined in Code Section 7701(a)(30))
prior to such date that elect to continue to be so treated.
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.
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TAX CONSEQUENCES TO HOLDERS OF THE NOTES
Treatment of the Notes as Indebtedness. The Trust Fund will agree, and the
Securityholders will agree by their purchase of Notes (the "Noteholders"), 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 Noteholder of a Short-Term Note (and certain cash method
Noteholders, 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 Noteholders 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 Noteholder 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 Noteholder
will recognize gain or loss in an amount equal to the difference between the
amount realized on the sale and the Noteholder's adjusted tax basis in the Note.
The adjusted tax basis of a Note to a particular Noteholder will equal the
Noteholder'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 Foreign Holder 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 the Foreign Holder and the
Foreign Holder (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
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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 Holder 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 Holder and (ii) in the case of an individual Foreign
Holder, the Foreign Holder is not present in the United States for 183 days or
more in the taxable year.
Backup Withholding. Each Noteholder (other than an exempt Noteholder 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 Noteholder's name, address,
correct federal taxpayer identification number and a statement that the
Noteholder 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 Noteholder, and remit
the withheld amount to the IRS as a credit against the Noteholder's federal
income tax liability.
New Withholding Regulations. Final regulations dealing with withholding
tax on income paid to foreign persons, backup withholding and related matters
(the "New Withholding Regulations") were issued by the Treasury Department on
October 6, 1997. The New Withholding Regulations will generally be effective for
payments made after December 31, 1999, subject to certain transition rules.
Prospective investors are strongly urged to consult their own tax advisors with
respect to the New Withholding Regulations.
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 Noteholders. 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 Securityholders will agree by their purchase
of Certificates (the "Certificateholders"), 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.
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Indexed Securities, etc. The following discussion assumes that all
payments on the Certificates are denominated in U.S. dollars, none of the
Certificates are Indexed Securities or Strip Certificates, and that a Series of
Securities includes a single class of Certificates. If these conditions are not
satisfied with respect to any given Series of Certificates, additional tax
considerations with respect to 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 Certificateholders 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 Certificateholder 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 Certificateholder being taxed on an amount of
income that exceeds the amount of cash actually distributed to such
Certificateholder 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 Fund will make this calculation on an aggregate
basis, but might be required to recompute it on a Loan by Loan basis.)
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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
Certificateholder's cost increased by the Certificateholder'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 Certificateholder's share of the Notes and other liabilities of the Trust
Fund. A Certificateholder 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
Certificateholder's share of unrecognized accrued market discount on the Loans
would generally be treated as ordinary income to the Certificateholder 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 Securityholder 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.
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 Certificateholders and the IRS on Schedule K-1.
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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, Certificateholders must file tax returns
that are consistent with the information return filed by the Trust Fund or be
subject to penalties unless the Certificateholders notify 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 Foreign
Holders 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
Certificateholder's withholding status, the Trust Fund may rely on IRS Form W-8
or similar form, IRS Form W-9 or the Certificateholder's certification of
nonforeign status signed under penalties of perjury.
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 or similar form in order to assure appropriate
crediting of the taxes withheld. A Foreign Holder generally would be entitled to
file with the IRS a claim for refund with respect to taxes withheld by the Trust
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, Foreign Holders 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
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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 Certificateholder is an exempt recipient
under applicable provisions of the Code.
New Withholding Regulations. As discussed above, the New Withholding
Regulations deal with withholding tax on income paid to foreign persons, backup
withholding and related matters. The New Withholding Regulations were issued by
the Treasury Department on October 6, 1997 and will generally be effective for
payments made after December 31, 1999, subject to certain transition rules.
Prospective investors are strongly urged to consult their own tax advisors with
respect to the New Withholding Regulations.
TAXATION OF TRUST AS FASIT
In the opinion of Brown & Wood LLP, special tax counsel to the Trust Fund,
if a FASIT election is made with respect to a Series of Securities, the Trust
Fund will be formed to qualify as a FASIT. The Small Business and Job Protection
Act of 1996 added Sections 860H through 860L to the Code (the "FASIT
Provisions"), which provide for a new type of entity for federal income tax
purposes known as a "financial asset securitization investment trust" (a
"FASIT"). Although the FASIT provisions of the Code became effective on
September 1, 1997, no Treasury regulations or other administrative guidance have
been issued with respect for those provisions. Accordingly, definitive guidance
cannot be provided with respect to many aspects of the tax treatment of FASIT
Regular Securityholders. Investors should also note that the FASIT discussion
contained herein constitutes only a summary of the U.S. federal income tax
consequences to the holders of FASIT Securities. With respect to each Series of
FASIT Regular Securities, the related Prospectus Supplement will provide a
detailed discussion regarding the federal income tax consequences associated
with the particular transaction.
FASIT Securities will be classified as either FASIT Regular Securities,
which generally will be treated as debt for U.S. federal income tax purposes, or
FASIT Ownership Securities, which generally are not treated as debt for such
purposes, but rather as representing rights and responsibilities with respect to
the taxable income or loss of the related Series FASIT. The Prospectus
Supplement for each Series of Securities will indicate which Securities of such
Series will be designated as FASIT Regular Securities, and which, if any, will
be designated as FASIT Ownership Securities.
Qualification as a FASIT. The Trust Fund will qualify under the Code as a
FASIT in which FASIT Regular Securities (the "FASIT Regular Securities") and the
Ownership Interest Security (the "FASIT Ownership Security") will constitute the
"regular interests" and the "ownership interest," respectively, if (i) a FASIT
election is in effect, (ii) certain tests concerning (A) the composition of the
FASIT's assets and (B) the nature of the Securityholders' interests in the FASIT
are met on a continuing basis, and (iii) the Trust Fund is not a regulated
investment company as defined in section 851(a) of the Code.
Asset Composition. In order for the Trust Fund to be eligible for FASIT
status, substantially all of the assets of the Trust Fund must consist of
"permitted assets" as of the close of the third month beginning after the
closing date and at all times thereafter (the "FASIT Qualification Test").
Permitted assets include (i) cash or cash equivalents, (ii) debt instruments
with fixed terms that would qualify as regular interests if issued by a REMIC as
defined in section 860D of the Code ("REMIC") (generally, instruments that
provide for interest at a fixed rate, a qualifying variable rate, or a
qualifying interest-only ("10") type rate), (iii) foreclosure property,
(iv) certain hedging instruments (generally, interest and currency rate swaps
and credit enhancement contracts) that are reasonably required to guarantee or
hedge against the FASIT's risks associated with being the obligor on FASIT
interests, (v) contract rights to acquire qualifying debt instruments or
qualifying hedging instruments, (vi) FASIT regular interests, and (vii) REMIC
regular interests. Permitted assets do not include any debt instruments issued
by the holder of the FASIT's ownership interest or by any person related to such
holder.
Interests in a FASIT. In addition to the foregoing asset qualification
requirements, the interests in a FASIT also must meet certain requirements. All
of the interests in a FASIT must belong to either of the following: (i) one or
more classes of regular interests or (ii) a single class of ownership interest
that is held by a fully taxable domestic C Corporation.
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A FASIT interest generally qualifies as a regular interest if (i) it is
designated as a regular interest, (ii) it has a stated maturity no greater than
thirty years, (iii) it entitles its holder to a specified principal amount,
(iv) the issue price of the interest does not exceed 125% of its stated
principal amount, (v) the yield to maturity of the interest is less than the
applicable Treasury rate published by the IRS plus 5%, and (vi) if it pays
interest, such interest is payable at either (a) a fixed rate with respect to
the principal amount of the regular interest or (b) a permissible variable rate
with respect to such principal amount. Permissible variable rates for FASIT
regular interests are the same as those for REMIC regular interests (i.e.,
certain qualified floating rates and weighted average rates). Interest will be
considered to be based on a permissible variable rate 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,"
a combination of a single fixed rate and one or more "qualified floating rates,"
one "qualified inverse floating rate," or a combination of "qualified floating
rates" that do not operate in a manner that significantly accelerates or defers
interest payments on such FASIT regular interest.
If an interest in a FASIT fails to meet one or more of the requirements set
out in clauses (iii), (iv), or (v) in the immediately preceding paragraph, but
otherwise meets all requirements to be treated as a FASIT, it may still qualify
as a type of regular interest known as a "High-Yield Interest." In addition, if
an interest in a FASIT fails to meet the requirement of clause (vi), but the
interest payable on the interest consists of a specified portion of the interest
payments on permitted assets and that portion does not vary over the life of the
security, the interest will also qualify as a High-Yield Interest. A High-Yield
Interest may be held only by domestic C corporations that are fully subject to
corporate income tax ("Eligible Corporations"), other FASITs, and dealers in
securities who acquire such interests as inventory, rather than for investment.
In addition, holders of High-Yield Interests are subject to limitations on
offset of income derived from such interest. See "Certain Federal Income Tax
Consequences--Taxation of Trust as a FASIT--Treatment of High-Yield Interests."
Consequences of Disqualification. If the Trust Fund fails to comply with
one or more of the Code's ongoing requirements for FASIT status during any
taxable year, the Code provides that its FASIT status may be lost for that year
and thereafter. If FASIT status is lost, the treatment of the former FASIT and
interests therein for U.S. federal income tax purposes is uncertain. Although
the Code authorizes the Treasury to issue regulations that address situations
where a failure to meet the requirements for FASIT status occurs inadvertently
and in good faith, such regulations have not yet been issued. It is possible
that disqualification relief might be accompanied by sanctions, such as the
imposition of a corporate tax on all or a portion of the FASIT's income for the
period of time in which the requirements for FASIT status are not satisfied.
Nevertheless, in the opinion of Tax Counsel, if the Trust Fund fails to qualify
as a FASIT it will qualify as a partnership. See "Taxation of the Trust Fund as
Partnership."
TREATMENT OF FASIT REGULAR SECURITIES
Payments received by holders of FASIT Regular Securities generally will be
accorded the same tax treatment under the Code as payments received on other
taxable debt instruments. Holders of FASIT Regular Securities must report income
from such Securities under an accural method of accounting, even if they
otherwise would have used the cash receipts and disbursements method. Except in
the case of FASIT Regular Securities issued with original issue discount,
interest paid or accrued on a FASIT Regular Security generally will be treated
as ordinary income to the Holder and a principal payment on such Security will
be treated as a return of capital to the extent that the Securityholder's basis
is allocable to that payment. FASIT Regular Securities issued with original
issue discount or acquired with market discount or premium generally will treat
interest and principal payments on such Securities in the same manner described
for Senior Securities. See "Taxation of Trust as Partnership--Treatment of
Senior Securities--OID, Indexed Securities" below. High-Yield Securities may be
held only by Eligible Corporations, other FASITs, and certain securities
dealers. Holders of High-Yield Securities are subject to limitations on their
ability to use current losses or net operating loss carryforwards or carrybacks
to offset any income derived from those Securities.
If the FASIT Regular Security is sold, the Securityholder generally will
recognize gain or loss upon the sale in the manner described below for Offered
Senior Securities. See "Taxation of Trust as Partnership--Treatment of Senior
Securities--Sale or other Disposition." In addition, if a FASIT regular interest
becomes wholly or
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partially worthless as a result of losses on the Underlying Assets, certain
holders of such Security may be allowed to deduct the loss sustained.
TREATMENT OF HIGH-YIELD INTERESTS
High-Yield Interests are subject to special rules regarding the eligibility
of holders of such interest, and the ability of such holders to offset income
derived from their FASIT Security with losses. High-Yield Interests only may be
held by Eligible Corporations, other FASITs, and dealers in securities who
acquire such interests as inventory. If a securities dealer (other than an
Eligible Corporation) initially acquires a High-Yield Interest as inventory, but
later begins to hold it for investment, the dealer will be subject to an excise
tax equal to the income from the High-Yield Interest multiplied by the highest
corporate income tax rate. In addition, transfers of High-Yield Interests to
disqualified holders will be disregarded for federal income tax purposes, and
the transferor will continue to be treated as the holder of the High-Yield
Interest.
The holder of a High-Yield Interest may not use non-FASIT current losses or
net operating loss carryforwards or carrybacks to offset any income derived from
the High-Yield Interest, for either regular federal income tax purposes or for
alternative minimum tax purposes. In addition, the FASIT provisions contain an
anti-abuse rule that imposes corporate income tax on income derived from a FASIT
Regular Security that is held by a pass-through entity (other than another
FASIT) that issues debt or equity securities backed by the FASIT Regular
Security and that have the same features as High-Yield Interests.
TAX TREATMENT OF FASIT OWNERSHIP SECURITIES
A FASIT Ownership Security represents the residual equity interest in a
FASIT. As such, the holder of a FASIT Ownership Security determines its taxable
income by taking into account all assets, liabilities, and items of income,
gain, deduction, loss, and credit of a FASIT. In general, the character of the
income to the holder of a FASIT Ownership Interest will be the same as the
character of such income to the FASIT, except that any tax-exempt interest
income taken into account by the holder of a FASIT Ownership Interest is treated
as ordinary income. In determining that taxable income, the holder of a FASIT
Ownership Security must determine the amount of interest, original issue
discount, market discount, and premium recognized with respect to the FASIT's
assets and the FASIT Regular Securities issued by the FASIT according to a
constant yield methodology and under an accrual method of accounting. In
addition, holders of FASIT Ownership Securities are subject to the same
limitations on their ability to use losses to offset income from their FASIT
Regular Securities as are holders of High-Yield Interest. See "Certain Federal
Income Tax Consequences--FASIT Regular Securities--Tax Treatment of FASIT
Regular Securities--Treatment of High-Yield Interests."
Rules similar to the wash sale rules applicable to REMIC residual
securities also will apply to FASIT Ownership Securities. Accordingly, losses on
dispositions of a FASIT Ownership Security generally will be disallowed where
within six months before or after the disposition, the seller of such Security
acquires any other FASIT Ownership Security that is economically comparable to a
FASIT Ownership Security. In addition, if any security that is sold or
contributed to a FASIT by the holders of the related FASIT Ownership Security
was required to be marked-to-market under section 475 of the Code by such
holder, then section 475 of the Code will continue to apply to such securities,
except that the amount realized under the mark-to-market rules or the
securities' value after applying special valuation rules contained in the FASIT
provisions. Those special valuation rules generally require that the value of
debt instruments that are not traded on an established securities market be
determined by calculating the present value of the reasonably expected payments
under the instrument using a discount rate of 120% of the applicable Federal
rate, compounded semi-annually.
The holder of a FASIT Ownership Security will be subject to a tax equal to
100% of the net income derived by the FASIT from any "prohibited transactions."
Prohibited transactions include (i) the receipt of income derived from assets
that are not permitted assets, (ii) certain dispositions of permitted assets,
(iii) the receipt of any income derived from any loan originated by a FASIT, and
(iv) in certain cases, the receipt of income representing a servicing fee or
other compensation. Any Series for which a FASIT election is made generally will
be structured in order to avoid application of the prohibited transaction tax.
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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 subject to ERISA and
on persons who are fiduciaries with respect to such Plans and Section 4975 of
the Code imposes requirements 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"). 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
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 generally provides that, in addition to certain other
technical exceptions, 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 regulation, 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 and the Code prohibit a broad range of
transactions involving Plan assets and persons ("Parties in Interest") having
certain specified relationships to a Plan and impose 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 or give rise to a prohibited
transaction under ERISA Sections 406 and 407 that is subject to an excise tax
under Code Section 4975 unless a statutory, regulatory 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
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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 those particular
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 (greater than 0%) 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.
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 Senior 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. In
any event, 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.
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<PAGE>
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 IBCA, Inc. ("Fitch")
(each, a "Rating Agency");
(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 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 any 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").
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<PAGE>
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 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.
On July 21, 1997, the DOL published in the Federal Register an amendment to
the Underwriter Exemptions which extends exemptive relief to certain
mortgage-backed and asset-backed securities transactions using pre-funding
accounts for trusts issuing pass-through certificates. The amendment generally
allows Mortgage Loans or other secured receivables (the "Obligations")
supporting payments to holders of Securities and having a value equal to no more
than twenty-five percent of the total principal amount of the Securities being
offered by the Trust Fund, to be transferred to the Trust within the Funding
Period instead of requiring that all such Obligations be either identified or
transferred on or before the applicable Closing Date. The relief is available
when the following conditions are met:
(1) The ratio of the amount allocated to the Pre-Funding Account to
the total principal amount of the Securities being offered (the
"Pre-Funding Limit") must not exceed twenty-five percent.
(2) All Obligations transferred after the applicable Closing Date (the
"Additional Obligations") must meet the same terms and conditions for
eligibility as the original Obligations used to create the Trust Fund,
which terms and conditions have been approved by the Rating Agency.
(3) The transfer of such Additional Obligations to the Trust Fund
during the Funding Period must not result in the Securities to be covered
by the Exemption receiving a lower credit rating from the Rating Agency
upon termination of Funding Period than the rating that was obtained at the
time of the initial issuance of the Securities by the Trust Fund.
(4) Solely as a result of the use of pre-funding, the weighted average
annual percentage interest rate (the "Average Interest Rate") for all of
the Obligations in the trust at the end of the Funding Period must not be
more than 100 basis points lower than the average rate for the Obligations
which were transferred to the Trust Fund on the Closing Date.
(5) In order to ensure that the characteristics of the Additional
Obligations are substantially similar to the original Obligations which
were transferred to the Trust Fund:
(i) the characteristics of the Additional Obligations must be
monitored by an insurer or other credit support provider which is
independent of the Provident; or
(ii) an independent accountant retained by Provident must
provide Provident with a letter (with copies provided to each Rating
Agency, the related underwriter and the related Trustee)
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<PAGE>
stating whether or not the characteristics of the Additional
Obligations conform to the characteristics described in the
Prospectus Supplement for the related Series or the related
Agreement. In preparing such letter, the independent accountant must
use the same type of procedures as were applicable to the Obligations
which were transferred to the Trust Fund as of the Closing Date.
(6) The Funding Period must end no later than three months or 90 days
after the Closing Date or earlier in certain circumstances if the
Pre-Funding Account falls below the minimum level specified in the related
Agreement or an event of default occurs thereunder.
(7) Amounts transferred to Pre-Funding Account and/or Capitalized
Interest Account used in connection with the pre-funding may be invested
only in certain permitted investments.
(8) The Prospectus Supplement for the related Series must describe:
(i) the Pre-Funding Account and/or Capitalized Interest Account
used in connection with the Pre-Funding Account;
(ii) the duration of the Funding Period;
(iii) the percentage and/or dollar amount of the Pre-Funding
Limit for the Trust Fund; and
(iv) that the amounts remaining in the Pre-Funding Account at
the end of the Funding Period will be remitted to holders of the
Securities specified in the Prospectus Supplement for the related
Series as repayments of principal.
(9) The related Agreement must describe the permitted investments for
the Pre-Funding Account and/or Capitalized Interest Account and the terms
and conditions for eligibility of Additional Obligations.
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 (as amended), 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
82
<PAGE>
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 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.
83
<PAGE>
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 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.
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INDEX OF DEFINED TERMS
<TABLE>
<CAPTION>
TERM PAGE
- --------------------------------------------------------------------------------------------------- -------------
<S> <C>
Accrual Securities................................................................................. 25
Additional Obligations............................................................................. 81
Advance............................................................................................ 8
Agreement.......................................................................................... 17
Amortizable Bond Premium Regulations............................................................... 61
APR................................................................................................ 20
Available Funds.................................................................................... 25
Average Interest Rate.............................................................................. 81
balloon payment.................................................................................... 18
Belgian Cooperative................................................................................ 31
beneficial owner................................................................................... 30
BIF................................................................................................ 40
Book-Entry Securities.............................................................................. 30
Buydown Fund....................................................................................... 19
Buydown Loans...................................................................................... 19
Capitalized Interest Account....................................................................... 42
Cash Flow Bond Method.............................................................................. 67
CEDEL.............................................................................................. 30
CEDEL Participants................................................................................. 31
CERCLA............................................................................................. 13
Certificates....................................................................................... Cover, 4
Certificateholders................................................................................. 71
Class Security Balance............................................................................. 25
Closed-End Loans................................................................................... Cover, 4
Code............................................................................................... 8
Collateral Value................................................................................... 20
Combined Loan-to-Value Ratio....................................................................... 20
Commission......................................................................................... 2
Companion Classes.................................................................................. 29
Components......................................................................................... 28
Contingent Regulations............................................................................. 58
Cut-Off Date....................................................................................... 4, 17
Cut-Off Date Principal Balance..................................................................... 24
DCR................................................................................................ 80
Debt Securities.................................................................................... 57
debt-to-income ratio............................................................................... 22
Definitive Security................................................................................ 30
Detailed Description............................................................................... 18
Disqualified Organization.......................................................................... 64
Distribution Date.................................................................................. 5
DOL................................................................................................ 78
DTC................................................................................................ 15
Eligible Corporations.............................................................................. 76
EPA................................................................................................ 52
ERISA.............................................................................................. 10
Euroclear.......................................................................................... 30
Euroclear Operator................................................................................. 31
Euroclear Participants............................................................................. 31
European Depositaries.............................................................................. 30
Excess Servicing Fees.............................................................................. 67
Exchange Act....................................................................................... 3
FASIT.............................................................................................. 75
FASIT Ownership Security........................................................................... 75
FASIT Provisions................................................................................... 75
FASIT Qualification Test........................................................................... 75
FASIT Regular Securities........................................................................... 75
FDIC............................................................................................... 22
FHLMC.............................................................................................. 22
Financial Intermediary............................................................................. 30
Fitch.............................................................................................. 80
FNMA............................................................................................... 22
</TABLE>
85
<PAGE>
<TABLE>
<CAPTION>
TERM PAGE
- --------------------------------------------------------------------------------------------------- -------------
<S> <C>
Foreign Holder..................................................................................... 68,69
Funding Period..................................................................................... 15
Garn-St Germain Act................................................................................ 54
Home Equity Loans.................................................................................. Cover, 4
Indenture.......................................................................................... 23
Insurance Proceeds................................................................................. 41
Insured Expenses................................................................................... 41
Interest Weighted Securities....................................................................... 59
IRS................................................................................................ 59
L/C Bank........................................................................................... 7, 34
Liquidation Expenses............................................................................... 41
Liquidation Proceeds............................................................................... 41
Loan Rate.......................................................................................... 5, 18
Loan-to-Value Ratio................................................................................ 20
Loans.............................................................................................. Cover
Lockout Periods.................................................................................... 18
Master Servicer.................................................................................... 4
Master Servicing Agreement......................................................................... 17
Master Servicing Fee............................................................................... 45
Moody's............................................................................................ 80
Morgan............................................................................................. 31
Mortgage........................................................................................... 39
Mortgage Loan...................................................................................... 4
Mortgage Loans..................................................................................... Cover
Mortgaged Properties............................................................................... 19
NCUA............................................................................................... 82
new partnership.................................................................................... 73
New Withholding Regulations........................................................................ 71
Noteholders........................................................................................ 70
Notes.............................................................................................. Cover, 4
Obligations........................................................................................ 81
OID................................................................................................ 9, 57
OID Regulations.................................................................................... 57
old partnership.................................................................................... 73
PACs............................................................................................... 28
Parties in Interest................................................................................ 78
Pass-Through Rate.................................................................................. 6
Pass-Through Securities............................................................................ 65
Pay-Through Security............................................................................... 59
Permitted Investments.............................................................................. 35
Plans.............................................................................................. 78
Policy Statement................................................................................... 83
Pool............................................................................................... 4, 17
Pool Insurance Policy.............................................................................. 36
Pool Insurer....................................................................................... 36
Pooling and Servicing Agreement.................................................................... 23
Pre-Funded Amount.................................................................................. 15
Pre-Funding Account................................................................................ 4, 15
Pre-Funding Limit.................................................................................. 81
Prepayment Assumption.............................................................................. 59
Primary Mortgage Insurance Policy.................................................................. 19
Principal Prepayments.............................................................................. 26
Properties......................................................................................... 19
Provident.......................................................................................... Cover, 4
PTE 83-1........................................................................................... 78
Purchase Price..................................................................................... 23
Rating Agency...................................................................................... 80, 84
Ratio Strip Securities............................................................................. 66
RCRA............................................................................................... 52
Record Date........................................................................................ 24
Refinance Loan..................................................................................... 20
Regular Interest Securities........................................................................ 57
Relevant Depositary................................................................................ 30
</TABLE>
86
<PAGE>
<TABLE>
<CAPTION>
TERM PAGE
- --------------------------------------------------------------------------------------------------- -------------
<S> <C>
Relief Act......................................................................................... 55
REMIC.............................................................................................. Cover, 75
Reserve Account.................................................................................... 7
Residual Interest Security......................................................................... 63
Restricted Group................................................................................... 80
Retained Interest.................................................................................. 24
Revolving Credit Line Loans........................................................................ Cover, 4
Riegle Act......................................................................................... 14
Rules.............................................................................................. 30
S&P................................................................................................ 79
SAIF............................................................................................... 40
Secured Creditor Exclusion......................................................................... 52
Securities......................................................................................... Cover, 4
Security Account................................................................................... 40
Security Owners.................................................................................... 30
Security Register.................................................................................. 24
Senior Securities.................................................................................. 5, 33
Series............................................................................................. Cover
Servicing Fees..................................................................................... 65
Short-Term Note.................................................................................... 70
Single Family Properties........................................................................... 19
Single Family Securities........................................................................... 79
SMMEA.............................................................................................. 9, 82
STIFS.............................................................................................. 35
Stripped Securities................................................................................ 65
Sub-Servicer....................................................................................... 8
Sub-Servicing Agreement............................................................................ 43
Subordinated Securities............................................................................ 5
Subsequent Loans................................................................................... 15
TACs............................................................................................... 29
Terms and Conditions............................................................................... 32
thrift institutions................................................................................ 64
TIN................................................................................................ 68
Title V............................................................................................ 55
Trust Agreement.................................................................................... 17, 23
Trust Fund......................................................................................... Cover
Trust Fund Assets.................................................................................. Cover, 4, 17
Trustee............................................................................................ 4, 23
Underwriter Exemptions............................................................................. 80
</TABLE>
87
<PAGE>
[ARTWORK]
$350,000,000
PROVIDENT BANK HOME EQUITY
LOAN TRUST 1998-4
$50,373,000 Class A-1 6.28% Certificates
$38,233,000 Class A-2 5.97% Certificates
$21,973,000 Class A-3 6.01% Certificates
$19,997,000 Class A-4 6.17% Certificates
$14,525,000 Class A-5 6.21% Certificates
$31,299,000 Class A-6 6.69% Certificates
$19,600,000 Class A-7 6.20% Certificates
$64,000,000 Class A-8 Variable Rate Certificates
$90,000,000 Class A-9 Auction Rate Certificates
HOME EQUITY LOAN
ASSET-BACKED CERTIFICATES
SERIES 1998-4
THE PROVIDENT BANK,
AS SELLER AND MASTER SERVICER
------------------------------------------
PROSPECTUS SUPPLEMENT
DECEMBER 23, 1998
------------------------------------------
LEHMAN BROTHERS
PRUDENTIAL SECURITIES INCORPORATED
