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Filed pursuant to Rule 424(b)(5)
Registration File No. 333-67593
PROSPECTUS SUPPLEMENT
(To Prospectus dated September 8, 1999)
$168,300,000 (approximate)
PROVIDENT HOME EQUITY LOAN TRUST 1999-A
HOME EQUITY LOAN ASSET-BACKED NOTES, SERIES 1999-A
The Provident Bank
Seller, Transferor and Master Servicer
THE NOTES REPRESENT NON-RECOURSE OBLIGATIONS OF THE TRUST
ONLY AND DO NOT REPRESENT AN INTEREST IN OR OBLIGATION OF
THE PROVIDENT BANK, THE INDENTURE TRUSTEE, THE OWNER
TRUSTEE OR ANY OF THEIR AFFILIATES.
This prospectus supplement may be used to offer and
sell the notes only if accompanied by the prospectus.
THE TRUST WILL ISSUE
o one class of Class A Notes, which
is offered hereby.
o one transferor interest, which is
not offered hereby.
THE NOTES
o are principally secured by the
assets of the trust, which consist
of adjustable rate home equity
revolving credit line loan
agreements and closed-end home
equity loans that primarily have
fixed rates of interest.
CREDIT ENHANCEMENT
o The spread account will fund shortfalls in payments due on the Class A Notes.
o The transferor interest will absorb up to a certain percentage of all losses
on the mortgage loans.
o An irrevocable and unconditional guaranty insurance policy issued by MBIA
Insurance Corporation will guarantee interest and ultimate principal payments
on the Class A Notes.
o If MBIA Insurance Corporation defaults, certain payments to the holder of the
transferor interest will only be paid after payments due on the Class A Notes
are made.
REVIEW THE INFORMATION IN "RISK FACTORS" ON PAGE S-8 IN THIS PROSPECTUS
SUPPLEMENT AND ON PAGE 1 IN THE PROSPECTUS.
Prudential Securities Incorporated, on behalf of the underwriters, will buy the
Class A Notes from The Provident Bank at a price equal to approximately 99.65%
of their face value. The underwriters will sell the notes from time to time in
negotiated transactions.
NEITHER THE SEC NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED
OF THESE NOTES OR PASSED UPON THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
---------------------------
PRUDENTIAL SECURITIES LEHMAN BROTHERS
(Joint Book Lead)
September 27, 1999
<PAGE>
For 90 days following the date of this prospectus supplement, all dealers
selling the Class A Notes will deliver a prospectus supplement and prospectus.
This is in addition to the dealers' obligation to deliver a prospectus when
acting as underwriters of the Class A Notes and with respect to their unsold
allotments or subscriptions.
You should rely only on the information contained or incorporated by reference
in this prospectus supplement and the accompanying prospectus. We have not
authorized anyone to provide you with different information.
We are not offering the Class A Notes in any state where the offer is not
permitted.
TABLE OF CONTENTS
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PAGE
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PROSPECTUS SUPPLEMENT
Summary................................................................................................. S-3
Risk Factors............................................................................................ S-8
The Insurer............................................................................................. S-12
The Trust............................................................................................... S-14
The Provident Bank...................................................................................... S-15
Description of the Mortgage Loans....................................................................... S-20
Description of the Notes................................................................................ S-32
Pool Factor............................................................................................. S-46
Maturity and Prepayment Considerations.................................................................. S-47
Description of the Agreements........................................................................... S-48
Use of Proceeds......................................................................................... S-58
Federal Income Tax Consequences......................................................................... S-59
State Taxes............................................................................................. S-62
ERISA Considerations.................................................................................... S-63
Legal Investment Considerations......................................................................... S-64
Underwriting............................................................................................ S-64
Legal Matters........................................................................................... S-65
Experts................................................................................................. S-65
Ratings................................................................................................. S-65
Index of Defined Terms.................................................................................. S-66
Annex I--Global Clearance, Settlement and Tax Documentation Procedures.................................. I-1
PROSPECTUS
Risks Factors........................................................................................... 1
The Trust Fund.......................................................................................... 3
Use of Proceeds......................................................................................... 7
The Provident Bank...................................................................................... 8
Loan Program............................................................................................ 9
Description of the Securities........................................................................... 11
Credit Enhancement...................................................................................... 22
Yield and Prepayment Consideration...................................................................... 27
The Agreements.......................................................................................... 29
Legal Aspects of the Loans.............................................................................. 41
Federal Income Tax Consequences......................................................................... 48
State Tax Considerations................................................................................ 73
ERISA Considerations.................................................................................... 73
Legal Investment........................................................................................ 77
Method of Distribution.................................................................................. 78
Legal Matters........................................................................................... 79
Financial Information................................................................................... 79
Rating.................................................................................................. 79
Index of Defined Terms.................................................................................. 81
</TABLE>
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SUMMARY
This summary highlights selected information from this document and does
not contain all of the information that you need to consider in making your
investment decision. Please read this entire prospectus supplement and the
accompanying prospectus for additional information about the Class A Notes.
HOME EQUITY LOAN ASSET-BACKED NOTES, SERIES 1999-A
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INITIAL NOTE
CLASS/INTEREST NOTE RATE PRINCIPAL BALANCE MATURITY DATE
- ------------------------------- -------------------- -------------- -----------------
<S> <C> <C> <C>
Class A Notes Variable $168,300,000 December 25, 2029
Transferor Interest N.A. $1,700,000 N.A.
</TABLE>
The initial principal balance of the notes and the transferor interest is
subject to a variance of 5%.
The actual maturity date for the notes will be significantly earlier than
the maturity date specified above.
The note rate on the Class A Notes will be one-month LIBOR plus 0.43%. On
any payment date, if the note rate on the Class A Notes exceeds the weighted
average net loan rate of the mortgage loans, you will receive interest at the
weighted average net loan rate of the mortgage loans. On future payment dates,
you will be entitled to any interest accrued at the note rate in excess of the
weighted average net loan rate up to a per annum rate of 15%. These amounts are
not insured by the insurance policy. We refer you to "Description of the
Notes--Payments on the Notes" for more information.
The transferor interest is not being offered pursuant to this prospectus
supplement and the accompanying prospectus.
THE SELLER, TRANSFEROR 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.
TRUST
o Provident Home Equity Loan Trust 1999-A.
INDENTURE TRUSTEE
o Norwest Bank Minnesota, National Association
OWNER TRUSTEE
o Wilmington Trust Company
INSURER
o MBIA Insurance Corporation, a New York stock insurance company
We refer you to "The Insurer" in this prospectus supplement for additional
information.
CUT-OFF DATE
o For any initial mortgage loan, the cut-off date is September 1, 1999. For any
subsequent mortgage loan, the cut-off date is the transfer date of that
mortgage loan to the trust or, with respect to subsequent mortgage loans
transferred to the trust on the closing date, September 1, 1999.
CLOSING DATE
o September 30, 1999.
PAYMENT DATE
o The 25th day of each month, or if that day is not a business day, the next
business day. The first payment date is October 25, 1999.
COLLECTION PERIOD
o The calendar month preceding the month of a payment date.
REGISTRATION OF NOTES
We will issue the notes in book-entry form. You will hold your interests either
through a depository in the United States or through one of two depositories in
Europe. While the notes are book-entry, they will be registered in the name of
the applicable depository, or in the name of the depository's nominee.
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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 notes
will replace the book-entry notes are described in this prospectus supplement.
We refer you to "Risk Factors--Consequences on Liquidity and Payment Delay
Because of Owning Book-Entry Notes", "Description of the Notes--Book-Entry
Notes" and "Annex I" in this prospectus supplement for additional information.
ASSETS OF THE TRUST
The trust's assets include:
o a pool of adjustable rate home equity revolving credit line loan agreements,
which we also refer to herein as the revolving credit-line loans, and
closed-end home equity loans that primarily have fixed rates of interest,
secured by either first or junior deeds of trust or mortgages primarily on
one- to four-family residential properties;
o payments of interest and principal on the mortgage loans received on and after
the cut-off date, except for certain amounts described in this prospectus
supplement;
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
mortgage loan;
o rights under the hazard insurance policies covering the mortgaged properties;
o amounts on deposit in the accounts described in this prospectus supplement;
and
o the insurance policy for the benefit of the holders of the Class A Notes.
During the life of the trust, new advances made to mortgagors under credit line
loan agreements will become assets of the trust. However, neither the trust nor
the indenture trustee shall be obligated or permitted to fund any future
advances. Due to these advances and principal payments on the mortgage loans,
the pool balance will generally fluctuate.
THE MORTGAGE LOANS
1. Mortgage Loan Statistics
On the closing date, the trust will acquire a pool of initial mortgage loans
which consist of adjustable rate revolving credit line loans and closed-end home
equity loans that primarily have fixed rates of interest. The initial mortgage
loans will have the following characteristics as of September 1, 1999:
o number of mortgage loans: 3,791
o number of revolving credit-line loans: 2,150
o number of closed-end loans: 1,641
o aggregate principal balance: $104,128,344.47
o average credit limit of revolving credit-line loans: $50,328.60
o credit limits on the revolving credit-line loans range: $5,000 to $600,000
o average principal balance of closed-end loans: $29,377.89
o principal balances of closed-end loans range: $4,235.77 to $338,103.33
o mortgaged property location: 25 states
o interest rates range: 6.99% to 12.00%
o weighted average interest rate: 8.62% (approximate)
o interest rates on the revolving credit-line loans range: 6.99% to 12.00%
o weighted average interest rate on the revolving credit-line loans: 8.19%
(approximate)
o interest rates on the closed-end loans range: 7.49% to 11.75%
o weighted average interest rate on the closed-end loans: 9.13% (approximate)
o loan age range: 0 to 22 months
o weighted average loan age: 3 months
o credit limit utilization rate range for revolving credit-line loans: 1.25% to
100.00%
o average credit limit utilization rate for revolving credit-line loans: 58.20%
o margin range for revolving credit-line loans: -0.50% to 4.00%
o weighted average margin for revolving credit-line loans: 0.49%
o combined loan-to-value ratio range 3.68% to 100.97% (approximate)
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o weighted average combined loan-to-value ratio 80.77% (approximate)
o all of the revolving credit-line loans bear interest at an adjustable rate
based on the prime rate published in The Wall Street Journal.
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.
2. Payment Terms of Mortgage Loans
A. Revolving Credit-Line Loans
o Each borrower under a revolving credit-line loan may borrow amounts from time
to time up to the maximum amount of that borrower's line of credit. If
borrowed amounts are repaid, they can again be borrowed.
o Interest--Interest on each revolving credit-line loan is payable monthly on
the outstanding principal balance for each day in the billing cycle. The loan
rate is variable and is equal to the prime rate published in The Wall Street
Journal plus a margin, which, in some cases, may be negative.
o Principal--The revolving credit-line loans have either:
(1) a one year draw period which is renewable by Provident during which
time amounts may be borrowed under the credit line agreement. This draw
period is followed by a five year repayment period during which the
borrower must repay the outstanding principal of the loan; or
(2) a ten year draw period during which time amounts may be borrowed under
the credit line agreement. This draw period is followed by a ten year
repayment period during which the borrower must repay the outstanding
principal of the loan.
B. Closed-End Loans
o The amount borrowed under a closed-end loan is fully disbursed on the date of
origination of that closed-end loan. The borrower is not entitled to future
advances of cash under that loan.
o Interest on each closed-end loan is payable monthly on the outstanding
principal balance of the closed-end loan. The loan rate for substantially all
of the closed-end loans is fixed at origination.
C. Simple Interest Loans
o All of the loans compute interest based on a simple interest method. This
means that interest is computed and charged to the borrower on the outstanding
principal balance of the loan, based on the number of days elapsed between the
date on which interest was last paid through the date on which the borrower's
most current payment is received. The portions of each monthly payment that
are allocated to interest and principal are adjusted based on the actual
amount of interest charged on that basis.
We refer you to "Description of the Mortgage Loans" in this prospectus
supplement for additional information.
MONTHLY ADVANCES
If the master servicer reasonably believes that cash advances can be recovered
from future monthly payments or collections on the mortgage loans, the master
servicer will make cash advances to the trust to cover delinquent interest
payments on the mortgage loans. The master servicer will make advances only to
maintain a regular flow of scheduled interest payments on the notes, not to
guarantee or insure against losses.
We refer you to "Description of the Notes--Monthly Advances" in this prospectus
supplement for additional information.
THE NOTES
1. General
o Each month, the indenture trustee will calculate the amount you are owed.
o If you hold a note on the day immediately preceding a payment date, you will
be entitled to receive payments on that payment date.
2. Interest Payments: Interest on the notes accrues during the period beginning
on the prior payment date, or in the case of the first payment date, beginning
on the closing date, and ending on the day before the applicable payment date.
The indenture trustee will calculate interest based on the actual number of days
in the interest period and a year assumed to consist of 360 days. On each
payment date, you will be entitled to the following amounts:
o interest at the related note rate that accrued during the interest period on
your note balance; and
S-5
<PAGE>
o any interest that was due on a prior payment date that was not paid. In
addition, interest will have accrued on the amount of interest which was
previously due and not paid.
3. Principal Payments: From the first payment date and ending on the payment
date in September 2004 and so long as certain events causing an acceleration of
payment of principal do not occur, noteholders will be entitled to the lesser
of:
(a) 99% of the principal collected during the prior collection period on
the mortgage loans; or
(b) the amount of principal collected on mortgage loans during the prior
collection period minus advances made to the borrowers on the
mortgage loans under the related credit line agreements during that
collection period.
On each payment date following September 2004, or if certain events causing an
acceleration of principal occur, noteholders will be entitled to receive the
amount described in clause (a) above.
We refer you to "Description of the Notes--Payments on the Notes" in this
prospectus supplement for additional information.
CREDIT ENHANCEMENT
1. The Insurance Policy: The insurance policy guarantees the payment of:
o accrued and unpaid interest due on the notes;
o principal losses on the mortgage loans;
o any principal amounts owed to noteholders on the maturity date; and
o any amounts distributed on the notes that are recoverable and sought to be
recovered as a voidable preference payment.
We refer you to "Description of the Notes--The Policy" in this prospectus
supplement for additional information.
2. The Spread Account: Amounts on deposit in the spread account will be
available to the indenture trustee to pay interest due on the notes and to cover
principal losses on the mortgage loans prior to a draw on the insurance policy.
We refer you to "Description of the Notes--The Spread Account" in this
prospectus supplement for additional information.
3. Limited Subordination of Transferor Interest: After the spread account is
depleted and prior to a draw on the insurance policy, losses on the mortgage
loans will be allocable to the transferor interest up to certain levels. In
addition, if the insurer defaults under the insurance policy, certain payments
to the holder of a transferor interest will be made after payments to the
holders of the notes.
PRE-FUNDING ACCOUNT
On the closing date, the indenture trustee shall deposit up to a maximum of
$65,871,656 in the pre-funding account. It is expected that the seller will have
originated or acquired subsequent loans from September 1, 1999 to the closing
date. These loans will be transferred to the trust on the closing date. The
maximum amount to be deposited into the pre-funding account on the closing date
will be reduced by the principal balance of the subsequent mortgage loans
transferred to the trust on the closing date. The trust will use the amounts on
deposit in the pre-funding account to acquire subsequent mortgage loans from the
seller. The trustee may only acquire subsequent mortgage loans until
December 28, 1999.
Any amount left in the pre-funding account after December 28, 1999, will be part
of the principal collections for the January 2000 payment date.
We refer you to "Risk Factors--Increase in Principal Collections Due to
Subsequent Mortgage Loans" and "Description of The Notes--Pre-Funding Account"
in this prospectus supplement for additional information.
CAPITALIZED INTEREST ACCOUNT
On the closing date, the seller shall deposit with the indenture trustee an
amount to cover interest shortfalls on the Class A Notes expected to occur prior
to the trust's purchase of the subsequent mortgage loans. Until the trust
purchases the subsequent mortgage loans, interest payments on the loans may not
cover the amount of interest due on the notes.
Any amounts left on deposit in the capitalized interest account after the
payment date in February 2000 will be paid to the seller.
We refer you to "Description of The Notes--Capitalized Interest Account" in this
prospectus supplement for additional information.
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OPTIONAL TERMINATION
The mortgage loans will be subject to an optional transfer to the owner of the
transferor interest on any payment date after:
o the principal balance of the notes is reduced to any amount less than or equal
to 10% of the original principal balance of the notes; and
o all amounts due and owing to the insurer, including unreimbursed draws on the
insurance policy, with interest thereon have been paid.
We refer you to "Description of the Agreements--Termination; Retirement of the
Notes" in this prospectus supplement for additional information.
FEDERAL TAX CONSIDERATIONS
For federal income tax purposes:
o Tax counsel is of the opinion that the notes will be treated as debt
instruments.
o You must agree to treat your note as indebtedness for federal, state and local
income and franchise tax purposes.
We refer you to "Federal Income Tax Consequences" in this prospectus supplement
and in the prospectus for additional information.
ERISA CONSIDERATIONS
The fiduciary responsibility provisions and the prohibited transaction
provisions of ERISA and Section 4975 of the Internal Revenue Code, can limit
investments by pension, employee benefit and other plans subject to those laws.
Pension and other employee benefit plans should be able to purchase investments
like the notes so long as they are treated as debt under applicable state law
and have no "substantial equity features." Any plan fiduciary considering
whether to purchase the notes on behalf of a plan should consult with its
counsel regarding the applicability of the provisions of ERISA and the internal
revenue code and the availability of any exemptions.
We refer you to "ERISA Considerations" in this prospectus supplement and the
prospectus for additional information.
LEGAL INVESTMENT CONSIDERATIONS
The Secondary Mortgage Market Enhancement Act of 1984 defines "mortgage related
securities" to include only securities backed by first mortgages, and not second
mortgages. Because the mortgage pool includes junior mortgage loans, the notes
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
notes.
We refer you to "Legal Investment Considerations" in this prospectus supplement
and "Legal Investment" in the prospectus for additional information.
NOTE RATINGS
The trust will not issue the notes unless they receive the following ratings:
o "AAA" by Standard & Poor's Ratings Services, a division of The McGraw-Hill
Companies, Inc.
o "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--Note Rating Based Primarily on the
Financial Strength of the Insurer" in this prospectus supplement for additional
information.
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RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS PRIOR TO ANY
PURCHASE OF THE NOTES. 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 NOTES
o Limit on Liquidity of Notes. Issuance of the notes in book-entry form may
reduce the liquidity of the notes in the secondary trading market since
investors may be unwilling to purchase notes for which they cannot obtain
physical notes.
o Limit on Ability to Transfer or Pledge. Since transactions in the
book-entry notes can be effected only through DTC, participating organizations,
indirect participants and some banks, your ability to transfer or pledge a
book-entry note to persons or entities that do not participate in the DTC system
or otherwise to take actions in respect of the notes, may be limited due to lack
of a physical note representing the book-entry notes.
o Delays in Payments. You may experience some delay in the receipt of
payments on the book-entry notes since the payments will be forwarded by the
indenture 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 Notes--Book-Entry Notes" in this prospectus
supplement.
EARLY DEFAULT RISK
All of the initial mortgage loans in the pool as of the cut-off date were
originated within 21 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 (other than the initial one-year draw period loans) was 144.18 months.
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 may 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 insurer fails to perform its obligations under the insurance
policy and the other forms of credit enhancement are insufficient to cover the
loss.
We refer you to "Legal Aspects of the Loans--Foreclosure and Repossession"
in the prospectus.
PREPAYMENTS AFFECT TIMING AND RATE OF RETURN ON YOUR INVESTMENT
The yield to maturity on your notes will be directly related to the rate of
principal payments on the mortgage loans. 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
prepayments in full within three or five years of origination, except that
generally no fee is required for any prepayment in full made after the
expiration of the applicable time period. This fee may result in the rate of
prepayments being slower than would otherwise be the case.
o During the period that a borrower may borrow money under a revolving
credit-line loan, the borrower may make monthly payments only for the accrued
interest or may also repay some or all of the amounts previously borrowed. In
addition, borrowers may borrow additional amounts up to the maximum amounts of
their lines of credit. As a result, the amount the trust receives in any month,
and in turn the amount of principal paid to you, may change significantly.
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o All of the mortgage loans compute interest due on a simple interest
method. This means that the amount of each monthly payment applied to the
payment of principal and interest will vary each month depending on when the
monthly payment is received.
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 Home equity loans generally are not viewed by borrowers as permanent
financing. Accordingly, the mortgage loans may experience a higher rate of
prepayment than purchase money first lien mortgage loans.
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.
o If you purchased your note at a premium and you receive your principal
faster than expected, your yield to maturity will be lower than you anticipated.
If you purchased your note at a discount and you receive your principal slower
than expected, your yield to maturity will be lower than you anticipated.
We refer you to "Maturity and Prepayment Considerations" in this prospectus
supplement.
NOTE RATING BASED PRIMARILY ON THE FINANCIAL STRENGTH OF THE INSURER
The rating on the notes depends primarily on an assessment by the rating
agencies of the mortgage loans and upon the financial strength of the insurer.
Any reduction of the rating assigned to the financial strength of the insurer
may cause a corresponding reduction in the ratings assigned to the Class A
Notes. A reduction in the rating assigned to the notes will reduce the market
value of the Class A Notes and may affect your ability to sell them. In general,
the rating on your notes 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
Most of the mortgage loans are secured by mortgages which are junior in
priority. 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 insurer
fails to perform its obligations under the insurance policy and the other forms
of credit enhancement are insufficient to cover the loss, then:
o there will be a delay in payments 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 or, if
obtained, cannot be collected in full.
We refer you to "Legal Aspects of the Loans" in the prospectus.
PAYMENTS TO AND RIGHTS OF INVESTORS ADVERSELY AFFECTED BY INSOLVENCY OF
PROVIDENT
The sale of the mortgage loans from Provident to the trust will be treated
by Provident and the trust for financial accounting purposes as a sale of the
mortgage loans. If Provident were to become insolvent, a receiver or conservator
for, or a creditor of, Provident may argue that the transaction between
Provident and the depositor is a pledge of mortgage loans as security for a
borrowing rather than a sale. This attempt, even if unsuccessful, could result
in delays in payments to you.
In the event of Provident's insolvency, there is a possibility that the
Federal Deposit Insurance Corporation could be appointed as a receiver or
conservator and prevent the indenture trustee or the owner trustee from taking
any action with respect to the trust. The Federal Deposit Insurance Corporation
may
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enforce Provident's contracts and may have the power to cause Provident to
continue to perform the master servicer's duties. This would prevent the
appointment of a successor master servicer and prevent the liquidation of the
mortgage loans or the early retirement of the notes.
Provident will deliver to the indenture trustee the mortgage notes relating
to the closed-end loans on the closing date (or the date of transfer of any
subsequent mortgage loan) and the assignments of each mortgage in recordable
form relating to the closed-end loans within ninety days of the closing date (or
date of transfer, as applicable). However, Provident will maintain possession of
all other documentation relating to the mortgage loans and no assignment of any
mortgage is required to be recorded in the name of the indenture trustee, unless
Provident's long-term senior unsecured debt rating is reduced below "BBB" by
Standard & Poor's or "Baa2" by Moody's or upon the occurrence of certain other
events. In the event that Provident's long-term senior unsecured debt is not so
rated or such other events occur, Provident will have 30 days to deliver the
mortgage documents to the indenture trustee and 30 days 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 indenture
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
Provident.
In certain states in which the mortgaged properties are located, failure to
record the assignments of the related mortgages to the indenture trustee will
have the result of making the sale of the mortgage loans potentially ineffective
against:
o any creditor of Provident who may have been fraudulently or inadvertently
induced to rely on the mortgage loans as assets of Provident, 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.
If these events occur, the trust would be an unsecured creditor of
Provident.
INTEREST PAYMENTS ON THE MORTGAGE LOANS MAY BE REDUCED
o Prepayments of Principal May Reduce Interest Payments. If a mortgagor
prepays a mortgage loan in full, 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 master servicing fee in the month of the prepayment so
that one month's interest is paid with that prepayment in full. If the servicing
fee is insufficient to pay the interest shortfalls attributed to prepayments, a
shortfall in interest due on the notes may result. The insurer is required to
cover this shortfall. If the other credit enhancements are insufficient to cover
the loss and the insurer fails to perform its obligations under the insurance
policy, you may incur a loss.
o Certain Interest Shortfalls Are Not Covered by the Master Servicer or the
Insurance Policy. The Soldiers' and Sailors' Civil Relief Act of 1940 permits
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 insurer will pay for any interest shortfalls
created by the Soldiers' and Sailors' Civil Relief Act of 1940 (a "Civil Relief
Act Interest Shortfall").
RISK OF LOSSES AS A RESULT OF GEOGRAPHIC CONCENTRATION
The mortgaged properties securing the initial mortgage loans are located in
25 states. However, 57.20% of the initial mortgage loans, by aggregate principal
balance of the initial mortgage loans as of the cut-off date, are secured by
mortgaged properties located in Ohio. If Ohio experiences weaker economic
conditions in the future, or greater rates of decline in real estate values than
the United States generally, then the mortgage loans may experience higher rates
of delinquencies, defaults and foreclosures than would otherwise be the case.
S-10
<PAGE>
INCREASE IN PRINCIPAL COLLECTIONS DUE TO SUBSEQUENT MORTGAGE LOANS
The trust will buy the subsequent mortgage loans from Provident until
December 28, 1999. During this time Provident will sell mortgage loans to the
trust if it has mortgage loans to sell. The ability of Provident to originate or
acquire subsequent mortgage loans is affected by a variety 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 account for the purpose of purchasing the subsequent mortgage loans
cannot be used for that purpose on or prior to December 28, 1999, then any
remaining amounts will be included in principal collections for the January 2000
payment date.
In addition, the subsequent mortgage loans will have different
characteristics than those described in this prospectus supplement. However,
Provident will not select any subsequent mortgage loans that would adversely
affect the interests of the noteholders or the insurer.
We refer you to "Description of the Mortgage Loans-Conveyance of Subsequent
Mortgage Loans" and "Maturity and Prepayment Considerations--Increase in
Principal Collections" in this prospectus supplement.
NOTEHOLDERS COULD BE ADVERSELY AFFECTED IN THE ABSENCE OF 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 payments to you.
S-11
<PAGE>
THE INSURER
The information set forth in this section and in the financial statements
of MBIA Insurance Corporation (the "Insurer") incorporated by reference herein
as described below have been provided by the Insurer. No representation is made
by the underwriters, the seller, the indenture trustee, the owner trustee, the
master servicer or any of their affiliates as to the accuracy or completeness of
any such information.
The 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 note guaranty insurance policy (the "Policy")
and the Insurer set forth under the headings "The Insurer" and "Description of
the Notes--The Policy." Additionally, the Insurer makes no representation
regarding the Class A Notes or the advisability of investing in the Class A
Notes.
THE INSURER
The 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 Insurer. The 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 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 Insurer,
changes in control and transactions among affiliates. Additionally, the Insurer
is required to maintain contingency reserves on its liabilities in certain
amounts and for certain periods of time.
INSURER FINANCIAL INFORMATION
The consolidated financial statements of the Insurer, a wholly owned
subsidiary of MBIA Inc., and its subsidiaries as of December 31, 1998 and
December 31, 1997 and for each of the three years in the period ended December
31, 1998, 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, 1998 and the consolidated financial statements of the Insurer and
its subsidiaries as of June 30, 1999 and for the six month periods ended
June 30, 1999 and June 30, 1998 included in the Quarterly Report on Form 10-Q of
MBIA Inc. for the period ended June 30, 1999 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 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
Class A Notes 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-12
<PAGE>
The tables below present selected financial information of the 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, 1998 JUNE 30, 1999
----------------- -------------
(AUDITED) (UNAUDITED)
(IN MILLIONS)
<S> <C> <C>
Admitted Assets............................................. $ 6,521 $ 6,807
Liabilities................................................. 4,231 4,468
Capital and Surplus......................................... 2,290 2,339
</TABLE>
<TABLE>
<CAPTION>
GAAP
----------------------------------
DECEMBER 31, 1998 JUNE 30, 1999
----------------- -------------
(AUDITED) (UNAUDITED)
(IN MILLIONS)
<S> <C> <C>
Assets...................................................... $ 7,488 $ 7,429
Liabilities................................................. 3,211 3,234
Shareholder's Equity........................................ 4,277 4,195
</TABLE>
WHERE YOU CAN OBTAIN ADDITIONAL INFORMATION ABOUT THE INSURER
Copies of the financial statements of the Insurer incorporated by reference
herein and copies of the Insurer's 1998 year-end audited financial statements
prepared in accordance with statutory accounting practices are available,
without charge, from the Insurer. The address of the Insurer is 113 King Street,
Armonk, New York 10504. The telephone number of the Insurer is (914) 273-4545.
YEAR 2000 READINESS DISCLOSURE
MBIA Inc. is actively managing a high-priority Year 2000 ("Y2K") program.
MBIA Inc. has established an independent Y2K testing lab in its Armonk
headquarters, with a committee of business unit managers overseeing the project.
MBIA Inc. has a budget of $1.13 million for its 1998-2000 Y2K efforts.
Expenditures are proceeding as anticipated, and MBIA Inc. does not expect the
project budget to materially exceed this amount. MBIA Inc. has initiated a
comprehensive Y2K plan that includes assessment, remediation, testing and
contingency planning. This plan covers "mission-critical" internally developed
systems, vendor software, hardware and certain third-party entities through
which MBIA Inc. conducts its business. Testing to date indicates that functions
critical to the financial guarantee business, both domestic and international,
were Y2K ready as of December 31. 1998. Additional testing will continue
throughout 1999.
FINANCIAL STRENGTH RATINGS OF THE INSURER
Moody's Investors Service, Inc. rates the financial strength of the 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 Insurer "AAA."
Each rating of the Insurer should be evaluated independently. The ratings
reflect the respective rating agency's current assessment of the
creditworthiness of the 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 Class A
Notes, 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 Class A Notes.
S-13
<PAGE>
The Insurer does not guaranty the market price of the Class A Notes nor does it
guaranty that the ratings on the Class A Notes will not be revised or withdrawn.
THE TRUST
GENERAL
Provident Home Equity Loan Trust 1999-A is a business trust formed under
the laws of the State of Delaware pursuant to the trust agreement dated as of
September 1, 1999, between The Provident Bank and Wilmington Trust Company, as
owner trustee. The trust will not engage in any activity other than:
o acquiring, holding and managing the mortgage loans and the other assets
of the trust and proceeds therefrom;
o issuing the notes and the transferor interest;
o making payments on the notes and the transferor interest; and
o engaging in other activities that are necessary, suitable or convenient
to accomplish the foregoing or are incidental thereto or in connection
therewith.
On the closing date, the trust will purchase the initial mortgage loans
having an aggregate cut-off date principal balance of $104,128,344.47 and a
portion of the subsequent mortgage loans from the seller pursuant to a sale and
servicing agreement, dated as of September 1, 1999, between the trust,
Provident, as seller, master servicer and transferor, the owner trustee and the
indenture trustee. In addition, a deposit will be made to the pre-funding
account on the closing date.
The assets of the trust will consist primarily of the mortgage loans, which
will be secured by first or junior lien mortgages on the mortgaged properties.
See "Description of the Mortgage Loans" herein. The assets of the trust will
also include:
o collections on the mortgage loans received after the cut-off date
(exclusive of (1) certain payments in respect of interest accrued on the
mortgage loans during August 1999 and (2) payments in respect of interest
on the delinquent mortgage loans due prior to the cut-off date and
received thereafter);
o amounts on deposit in the collection account, the distribution account,
the pre-funding account, the capitalized interest account and the spread
account;
o other ancillary or incidental funds, rights and properties related to the
foregoing;
o all proceeds of the foregoing; and
o the Policy.
The assets of the trust will be pledged to the indenture trustee as
security for the Class A Notes pursuant to the indenture dated as of
September 1, 1999, between the trust and the indenture trustee.
The master servicer is obligated to service the mortgage loans pursuant to
the sale and servicing agreement and will be compensated for servicing the
mortgage loans as described under "Description of the Agreements--Servicing
Compensation and Payment of Expenses" herein.
The trust's principal offices are located in Wilmington, Delaware, in care
of Wilmington Trust Company, as owner trustee, at the address set forth below.
THE OWNER TRUSTEE
Wilmington Trust Company will act as the owner trustee under the trust
agreement. Wilmington Trust Company is a Delaware banking corporation and its
principal offices are located at Rodney Square North, 1100 North Market Street,
Wilmington, Delaware 19890-0001.
S-14
<PAGE>
THE PROVIDENT BANK
GENERAL
The Provident Bank, as seller, will sell the mortgage loans to the trust
pursuant to the sale and servicing agreement. Provident, as master servicer,
will service the mortgage loans in accordance with the terms set forth in the
sale and servicing agreement. As of the closing date, the master servicer will
service the mortgage loans without subservicing arrangements. The master
servicer may perform any of its obligations under the sale and servicing
agreement through one or more subservicers and is permitted under the sale and
servicing agreement to transfer servicing to affiliates, provided that the
affiliate meets the standards specified in the sale and servicing agreement. See
"Description of the Agreements--Certain Matters Regarding the Master Servicer."
Notwithstanding any subservicing arrangements, the master servicer will remain
liable for its servicing duties and obligations under the sale and servicing
agreement as if the master servicer alone were servicing the mortgage loans.
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 June 30, 1999, Provident Financial Group, Inc. had total
assets of $8.5 billion, net loans and leases of $5.8 billion, deposits of
$5.8 billion and total shareholders' equity of $717.1 million. Provident
Financial Group, Inc.'s tier 1 and total risk-based capital ratios were 10.32%
and 11.87%, respectively. For the fiscal year ended December 31, 1998, Provident
Financial Group, Inc. had net earnings of $115 million. For the six months ended
June 30, 1999, Provident Financial Group, Inc. had net earnings of
$69.3 million. Provident represents approximately 94% of Provident Financial
Group, Inc.'s assets.
YEAR 2000 READINESS DISCLOSURE
Provident is actively engaged in a Y2K readiness program. Provident has
utilized both internal and external resources, including an off-site testing
facility, to reprogram, replace and test its computer software and hardware, and
that of its vendors and suppliers, for Y2K readiness. Provident's Y2K readiness
program has been supervised on a quarterly basis since 1998 by the Federal
Reserve Board. Testing to date indicates that functions critical to Provident's
mortgage loan origination business and the servicing of mortgage loans were Y2K
ready as of March 31, 1999. Additional testing, and supervision by the Federal
Reserve Board, will continue throughout 1999.
CREDIT AND UNDERWRITING GUIDELINES
All of the mortgage loans were originated by Provident through its branch
offices, direct mail and telemarketing campaigns and, with respect to a small
portion of the mortgage loans, referrals from mortgage loan brokers. The
following is a description of the underwriting guidelines customarily employed
by Provident with respect to all of its originations of mortgage loans similiar
to the mortgage loans in the pool. Provident believes its underwriting
guidelines are consistent with those utilized by home equity lenders generally.
Provident's underwriting guidelines require an assessment of a prospective
borrower's credit standing and repayment ability, and the value and adequacy of
the mortgaged property as collateral. Each prospective borrower is required to
complete an application that lists assets, liabilities, income, credit history,
employment history and other demographic and personal information. If the
information in the application demonstrates sufficient income and equity in the
mortgaged property to justify the making of the mortgage loan, Provident will
conduct a further credit investigation, including obtaining and reviewing an
independent credit bureau report in order to evaluate the applicant's ability to
repay.
Exceptions to Provident's underwriting guidelines are made when
compensating factors are present. Such factors include the quality and location
of the mortgaged property, length of employment, credit history, prior banking
relationships with Provident, current and pending debt obligations, payment
habits and status of past and currently existing mortgages.
S-15
<PAGE>
Provident has historically used a debt-to-income ratio to determine whether
a prospective borrower has sufficient monthly income available to support the
payments of principal and interest on the mortgage loan in addition to any
senior mortgage loan payments, including any escrows for property taxes and
hazard insurance premiums and other monthly credit obligations. The
debt-to-income ratio is the ratio of a borrower's total monthly payments to the
borrower's gross monthly income. Since December 1996, Provident has also
utilized a credit scoring procedure as an additional guideline in evaluating
applications for mortgage loans. Generally, applicants must meet a minimum score
predetermined by Provident. Scores are calculated on the basis of a standardized
scoring model, which utilizes data provided by financial institutions that
originate home equity loans.
The debt-to-income ratio is reviewed in conjunction with the prospective
borrower's combined loan-to-value ratio and credit score. Generally, the
debt-to-income ratio does not exceed fifty percent; however, the ratio for
prospective borrowers with excellent credit scores and additional compensating
factors may exceed that amount. A majority of the mortgage loan borrowers have
debt-to-income ratios of forty-five percent or less.
The foregoing combined loan-to-value ratio and debt-to-income limitations
may be exceeded if one or more of the compensating factors described above are
present. In addition, these limitations may be exceeded if approved by an
authorized officer of Provident.
The maximum amount permitted to be drawn, or the credit limit, under the
revolving credit line loan agreements generally range from a minimum of $5,000
to a maximum of $250,000. For mortgage loans with combined loan-to-value ratios
in excess of 80%, the portion of the credit limit which increases the combined
loan-to-value ratio above 80% is generally limited to $50,000. These limitations
may be exceeded if approval is obtained from an authorized officer of Provident.
Provident requires a valuation of all mortgaged property representing
security for a loan. The mortgaged property used as collateral to secure the
mortgage loans may be either primary residential, which includes second homes
and vacation homes, or investor owned one to four-family homes, planned unit
developments and condominiums. Commercial or agricultural land is not accepted
as collateral. In some cases, the mortgage loan may be secured by the
owner-occupied residence plus additional collateral.
Provident personnel decide whether property value will be determined by a
full appraisal, a drive-by appraisal, an appraisal based on tax assessment
valuation, or an alternative valuation. A drive-by appraisal consists of the
appraiser reviewing appropriate records concerning the tax valuation of the
mortgaged property and the recent sale prices of homes in the same neighborhood
and an inspection of the exterior of the mortgaged property. If the exterior
inspection indicates that the mortgaged property is well maintained, the
appraiser determines a market value based upon the available records; if the
exterior inspection reveals signs of improper maintenance, Provident requires a
full appraisal, which includes an interior inspection of the mortgaged property.
In some cases, an alternative valuation has been used to obtain the value of the
property. This valuation is obtained from various sources and consists of an
analysis of multiple listing service data, Fannie Mae appraisal information and
tax assessment data to determine the value of the mortgaged property. An
alternative valuation is only used for prospective loans that meet defined
credit score and loan amount guidelines.
A current-owner title search of the mortgaged property is also obtained by
Provident in addition to an appraisal. In connection with originating a mortgage
loan which is in a junior lien position, Provident typically assumes that the
first mortgage lender has obtained an ALTA title insurance policy, although
Provident does not independently verify whether the title insurance policy has
been obtained. Provident does not require borrowers to obtain title insurance.
Applicants are required to secure property insurance in an amount
sufficient to cover the new loan and any prior mortgage. If the sum of any
outstanding first mortgage and the mortgage loan originated by Provident exceeds
replacement value, insurance equal to replacement value may be accepted.
Provident requires 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 this provision is obtained.
S-16
<PAGE>
As a part of Provident's loan application process, each mortgage applicant
is typically required to provide personal financial information. Applicants who
are salaried employees may be required to provide current employment information
in addition to two recent years of employment history and Provident may verify
this information. Verifications are based on the two most recent pay periods,
the two most recent years' W-2 tax forms or the two most recent years' complete
federal income tax returns. Self-employed applicants should be self-employed in
the same field of work for a minimum of two years. Self-employed applicants are
typically required to provide signed copies of complete federal income tax
returns filed for the most recent two years.
Credit reports are obtained from independent credit reporting agencies
reflecting each applicant's credit history. Credit reports usually reflect all
delinquencies of 30 days or more, repossessions, judgments, foreclosures,
garnishments, bankruptcies, divorce actions and other adverse credit events that
can be discovered by a search of public records. If a credit report is obtained
more than 60 days prior to the loan closing, Provident may obtain an updated
credit report to verify that the reported information has not changed.
Verification is obtained of any first mortgage balance if not reported in the
credit report.
Any applicable rescission period must have expired prior to funding any
mortgage loan. The rescission period may not be waived by the applicant except
as permitted by law.
DELINQUENCY AND CHARGE-OFF EXPERIENCE
The following tables set forth Provident's delinquency and charge-off
experience on its servicing portfolio of home equity revolving credit-line loans
and closed-end home equity loans similar to and including the mortgage loans for
the periods indicated. Provident has serviced all of the mortgage loans since
their origination. There can be no assurance that the delinquency and charge-off
experience on the mortgage loans will be consistent with the historical
information provided below. Accordingly, this information should not be
considered to reflect the credit quality of the mortgage loans included in the
trust, or a basis for assessing the likelihood or amount of losses on the
mortgage loans. The statistical data in the tables set forth below are based on
all of the home equity loans in Provident's servicing portfolio.
Delinquency as a percentage of aggregate principal balance of mortgage
loans serviced for each period would be higher than those shown if a group of
mortgage loans were artificially isolated at a point in time and the information
showed the activity only in that isolated group.
DELINQUENCY EXPERIENCE OF THE MASTER SERVICER'S PORTFOLIO OF
HOME EQUITY REVOLVING CREDIT-LINE LOANS
The following table sets forth information relating to the delinquency
experience of mortgage loans similar to and including the revolving credit-line
loans in the pool for the six months ended June 30, 1999, and the years ended
December 31, 1998, December 31, 1997 and December 31, 1996.
<TABLE>
<CAPTION>
SIX
MONTHS
YEAR ENDED ENDED
--------------------------------------------------------------------------- --------
JUNE 30,
DECEMBER 31, 1996 DECEMBER 31, 1997 DECEMBER 31, 1998 1999
----------------------- ----------------------- ----------------------- --------
NUMBER DOLLAR NUMBER DOLLAR NUMBER DOLLAR NUMBER
OF LOANS AMOUNT OF LOANS AMOUNT OF LOANS AMOUNT OF LOANS
-------- ------------ -------- ------------ -------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
Portfolio......................... 7,496 $173,670,000 7,845 $195,838,000 9,435 $230,949,491 10,098
Delinquency Percentage
30-59 days...................... 0.45% 0.40% 0.25% 0.17% 0.11% 0.09% 0.11%
60-89 days...................... 0.08% 0.11% 0.09% 0.06% 0.06% 0.04% 0.01%
90 days or more................. 0.21% 0.23% 0.18% 0.16% 0.13% 0.16% 0.17%
Total............................. 0.74% 0.74% 0.52% 0.39% 0.30% 0.29% 0.29%
<CAPTION>
SIX
MONTHS
ENDED
------------
JUNE 30,
1999
------------
DOLLAR
AMOUNT
------------
<S> <C>
Portfolio......................... $247,377,488
Delinquency Percentage
30-59 days...................... 0.02%
60-89 days...................... 0.02%
90 days or more................. 0.21%
Total............................. 0.25%
</TABLE>
- ------------------
The delinquency percentage represents the number and principal balance of
mortgage loans with monthly payments which are contractually past due for
30 days or more. Mortgage loans for which the related borrower has declared
bankruptcy are not included unless or until the loans are delinquent pursuant to
their repayment terms.
(Footnotes continued on next page)
S-17
<PAGE>
(Footnotes continued from previous page)
The delinquency percentage for 90 days or more includes the principal balance of
loans currently in process of foreclosure and loans acquired through foreclosure
or deed in lieu of foreclosure.
All dollar amounts in the table above are rounded to the nearest $1,000.
DELINQUENCY EXPERIENCE OF THE MASTER SERVICER'S PORTFOLIO
OF CLOSED-END HOME EQUITY LOANS
The following table sets forth information relating to the delinquency
experience of mortgage loans similar to and including the closed-end loans in
the pool for the six months ended June 30, 1999, and the years ended
December 31, 1998, December 31, 1997 and December 31, 1996.
<TABLE>
<CAPTION>
SIX
MONTHS
YEAR ENDED ENDED
-------------------------------------------------------------------------- --------
JUNE 30,
DECEMBER 31, 1996 DECEMBER 31, 1997 DECEMBER 31, 1998 1999
----------------------- ---------------------- ----------------------- --------
NUMBER DOLLAR NUMBER DOLLAR NUMBER DOLLAR NUMBER
OF LOANS AMOUNT OF LOANS AMOUNT OF LOANS AMOUNT OF LOANS
-------- ------------ -------- ----------- -------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
Portfolio.......................... 5,455 $104,444,000 5,262 $92,264,000 5,116 $107,728,243 5,572
Delinquency percentage
30-59 days....................... 0.66% 0.62% 0.67% 0.55% 0.22% 0.12% 0.20%
60-89 days....................... 0.31% 0.21% 0.27% 0.17% 0.14% 0.09% 0.13%
90 days or more.................. 0.46% 0.34% 0.49% 0.46% 0.18% 0.20% 0.18%
Total.............................. 1.43% 1.17% 1.43% 1.19% 0.53% 0.41% 0.51%
<CAPTION>
SIX
MONTHS
ENDED
------------
JUNE 30,
1999
------------
DOLLAR
AMOUNT(4)
------------
<S> <C>
Portfolio.......................... $130,831,508
Delinquency percentage
30-59 days....................... 0.11%
60-89 days....................... 0.09%
90 days or more.................. 0.14%
Total.............................. 0.34%
</TABLE>
- ------------------
The delinquency percentage represents the number and principal balance of
mortgage loans with monthly payments which are contractually past due for
30 days or more. Mortgage loans for which the related borrower has declared
bankruptcy are not included unless or until such loans are delinquent pursuant
to their repayment terms.
The delinquency percentage for 90 days or more includes the principal balance of
loans currently in process of foreclosure and loans acquired through foreclosure
or deed in lieu of foreclosure.
All dollar amounts in the table above are rounded to nearest $1,000.
CHARGE-OFF EXPERIENCE OF THE MASTER SERVICER'S PORTFOLIO
OF HOME EQUITY REVOLVING CREDIT-LINE LOANS
The following table sets forth information relating to the loan charge-off
experience of mortgage loans similar to and including the revolving credit-line
loans in the pool for the six months ended June 30, 1999, and the years ended
December 31, 1998, December 31, 1997 and December 31, 1996.
<TABLE>
<CAPTION>
YEAR ENDED
---------------------------------------------------------
DECEMBER 31, 1996 DECEMBER 31, 1997 DECEMBER 31, 1998
----------------- ----------------- -----------------
DOLLAR DOLLAR DOLLAR
AMOUNT AMOUNT AMOUNT
----------------- ----------------- -----------------
<S> <C> <C> <C>
Average Portfolio Balance.............................. $ 166,948,000 $ 184,754,000 $ 213,394,000
Charge-Offs............................................ $ 162,385 $ 126,763 $ 267,210
Charge-Offs as a percentage of Average Portfolio
Balance.............................................. 0.10% 0.07% 0.13%
<CAPTION>
SIX MONTHS ENDED
----------------
JUNE 30, 1999
----------------
DOLLAR
AMOUNT
----------------
<S> <C>
Average Portfolio Balance.............................. $239,163,000
Charge-Offs............................................ $ 166,727
Charge-Offs as a percentage of Average Portfolio
Balance.............................................. 0.07%
</TABLE>
- ------------------
Average portfolio balance during the period is the arithmetic average of the
principal balances of the mortgage loans outstanding on the first and last days
of each period. The average portfolio balance has been rounded to the nearest
$1,000.
Charge-offs are amounts which have been determined by Provident to be
uncollectable for each respective period and do not include any amount of
collections or recoveries received by Provident subsequent to charge-off dates.
Provident's policy regarding charge-offs provides that mortgaged properties are
reappraised when a mortgage loan has been delinquent for 120 days and based upon
the appraisals, a decision is then made concerning the amounts determined to be
uncollectable.
The charge-offs as a percentage of average portfolio balance is annualized.
S-18
<PAGE>
CHARGE-OFF EXPERIENCE OF THE MASTER SERVICER'S PORTFOLIO
OF CLOSED-END HOME EQUITY LOANS
The following table sets forth information relating to the loan charge-off
experience of mortgage loans similar to and including the closed-end loans in
the pool for the six months ended June 30, 1999, and the years ended December
31, 1998, December 31, 1997 and December 31, 1996.
<TABLE>
<CAPTION>
YEAR ENDED
---------------------------------------------------------
DECEMBER 31, 1996 DECEMBER 31, 1997 DECEMBER 31, 1998
----------------- ----------------- -----------------
DOLLAR DOLLAR DOLLAR
AMOUNT AMOUNT AMOUNT
----------------- ----------------- -----------------
<S> <C> <C> <C>
Average Portfolio Balance.............................. $95,491,000 $98,354,000 $99,996,000
Charge-offs............................................ $ 165,050 $ 197,988 $ 407,458
Charge-offs as a Percentage of Average
Portfolio Balance.................................... 0.17% 0.20% 0.41%
<CAPTION>
SIX MONTHS ENDED
----------------
JUNE 30, 1999
----------------
DOLLAR
AMOUNT
----------------
<S> <C>
Average Portfolio Balance.............................. $119,280,000
Charge-offs............................................ $ 143,161
Charge-offs as a Percentage of Average
Portfolio Balance.................................... 0.12%
</TABLE>
- ------------------
Average portfolio balance during the period is the arithmetic average of the
principal balances of the mortgage loans outstanding on the first and last days
of each period. The average portfolio balance has been rounded to the nearest
$1,000.
Charge-offs are amounts which have been determined by Provident to be
uncollectable for each respective period and do not include any amount of
collections or recoveries received by Provident subsequent to charge-off dates.
Provident's policy regarding charge-offs provides that mortgaged properties are
reappraised when a mortgage loan has been delinquent for 120 days and based upon
the appraisals, a decision is then made concerning the amounts determined to be
uncollectable.
The charge-offs as a percentage of average portfolio balance is annualized.
S-19
<PAGE>
DESCRIPTION OF THE MORTGAGE LOANS
GENERAL
The statistical information presented in this prospectus supplement is only
with respect to the initial mortgage loans in the mortgage pool as of the
cut-off date. As of the cut-off date, the mortgage pool consisted of 3,791
initial mortgage loans with a cut-off date pool balance of approximately
$104,128,344.47. Approximately 2,150 of these initial mortgage loans are
revolving credit-line loans and 1,641 of these initial mortgage loans are
closed-end loans.
The pool balance will be equal to the aggregate of the principal balances
of all mortgage loans on any day of determination plus any amounts on deposit in
the pre-funding account. The principal balance of a mortgage loan, other than a
liquidated mortgage loan, on any day is equal to its cut-off date principal
balance, plus, with respect to the revolving credit-line loans, any additional
balances drawn thereunder, minus all collections credited against, the principal
balance of that mortgage loan in accordance with the related credit line
agreement or mortgage note prior to that day. The principal balance of a
liquidated mortgage loan after final recovery of related liquidation proceeds
shall be zero.
Set forth below is information regarding the initial loans as of their
cut-off date. Prior to the closing date, mortgage loans may be removed and other
mortgage loans with similar characteristics may be substituted. Provident
believes that the information set forth with respect to the mortgage loans as
presently constituted is representative of the mortgage loans as they will be
constituted at the closing date, although characteristics of these mortgage
loans may vary. This variance, however, will not be material.
MORTGAGE LOAN TERMS
Revolving Credit-Line Loans. The home equity revolving credit-line loans
were originated pursuant to credit line agreements. Under the credit line
agreements, the borrowers may receive advances, which are referred to as an
advance or a draw, at any time during the draw period; provided, however,
neither the trust nor the indenture trustee shall be obligated or permitted to
fund any of these draws. The minimum amount of any draw on a one-year draw
period loan is $100. There is no minimum draw amount for a ten-year draw period
loan. The maximum amount of each draw with respect to any revolving credit-line
loan is equal to the excess, if any, of the credit limit over the principal
balance outstanding under the credit line agreement at the time of the draw.
One-Year Draw Period Loans: Approximately 25.44% of the initial mortgage
loans by cut-off date pool balance are one-year draw period loans. The one-year
draw period loans have original terms of six years. This six year original term
consists of a one year draw period and a five year amortization period. These
loans are referred to as one-year draw period loans. The draw period under each
credit line agreement for the one-year draw period loans automatically renews
for an unlimited number of successive one-year terms unless Provident notifies
the borrower of its election to terminate its obligation to make draws. After
this draw period ends, a five year amortization period begins. During the
amortization period, the borrower is obligated to make monthly payments equal to
the sum of 1/60 of the unpaid principal balance of the mortgage loan at the end
of the draw period, plus accrued finance charges. Minimal monthly principal
payments may be required to be made during the draw period, but these payments
will not be sufficient to fully amortize the loan during the draw period.
Provident will agree in the sale and servicing agreement that it will not
terminate its obligation to make draws for any mortgage loan included in the
trust for a period of 48 months after the closing date, unless the borrower is
in default under the credit line agreement or there has been material adverse
change to the mortgaged property or the financial circumstances of the borrower.
Ten-Year Draw Period Loans: Approximately 28.26% of the initial mortgage
loans by cut-off date pool balance are ten-year draw period loans. The ten-year
draw period loans have original terms of twenty years. This twenty year original
term consists of a ten year draw period and a ten year amortization period.
These loans are referred to as ten-year draw period loans. During the
amortization period, the borrower is obligated to make monthly payments equal to
the sum of 1/120 of the unpaid principal balance of the mortgage loan at the end
of the draw period, plus accrued finance charges. Minimal monthly principal
payments may be
S-20
<PAGE>
required to be made during the draw period, but these payments will not be
sufficient to fully amortize the loan during the draw period.
The borrower's right to make a draw under a revolving credit-line loan may
be suspended, or the credit limit may be reduced due to a number of
circumstances; for example, a borrower is in default of a material obligation
under the credit line agreement or a material adverse change has occurred with
respect to the mortgaged property or the financial circumstances of the
borrower. Generally, a suspension or reduction will not affect the payment terms
for previously drawn balances. In the event of default under a revolving
credit-line loan, the right of the borrower to make a draw may be terminated and
the entire outstanding principal balance may be declared immediately due and
payable. A default includes, but is not limited to, the borrower's failure to
make any payment as required, any action or inaction by the borrower that
adversely affects the mortgaged property or the rights of the borrower in the
mortgaged property or any fraud or material misrepresentation by the borrower in
connection with the origination of the revolving credit-line loan. The credit
limits may also be increased upon completion of a satisfactory underwriting
review, as described below.
Finance charges accrue on each revolving credit-line loan on the average
daily outstanding principal balance for each day during the billing cycle (which
is the calendar month preceding each due date) at a specified loan rate. The
finance charge is payable monthly. For one-year draw period loans, the loan rate
is adjusted quarterly on the first day of January, April, July and October. The
loan rate for one-year draw period loans is equal to the Index (as defined
below) on the last day of the month immediately preceding the adjustment date
plus a fixed percentage or margin specified in the related credit line
agreement. The loan rate on ten-year draw period loans is adjusted monthly on
the first day of each month. The loan rate for ten-year draw period loans is
equal to the Index on the twentieth day of the month immediately preceding the
adjustment date plus a margin. The finance charges are computed on the basis of
a 365 day year times the actual number of days elapsed since the most recent
payment due date.
The due date for payments under the revolving credit-line loans is the
fifth, tenth, fifteenth, twentieth or twenty-fifth of each month.
Some initial revolving credit-line loans originated in March 1999 and
thereafter bear interest at a promotional rate of 6.99% per annum for the first
six months following the first draw. After the expiration of the six-month
promotional period, the interest rate on these revolving credit-line loans will
be the loan rate described above.
The finance charges are calculated based on the "Prime Rate" as published
in the "Money Rates" table in The Wall Street Journal (the "Index"). The margins
for the initial revolving credit-line loans as of their cut-off date ranged from
- -0.50% to 4.00% and the weighted average margin as of their cut-off date for the
initial revolving credit-line loans was 0.49%. Substantially all of the initial
one-year draw period loans and the initial ten-year draw period loans are
subject to a maximum loan rate of 19% and 25% per annum, respectively. The
initial revolving credit-line loans have a minimum loan rate equal to the
margin. No initial revolving credit-line loan is subject to a periodic rate cap.
Payments made by or on behalf of the borrower for each revolving
credit-line loan are generally required to be applied, first, to any unpaid
finance charges and second, to the principal balance outstanding.
One year revolving credit-line loans are subject to a $250 termination fee
to the extent the related borrower prepays that loan within either a three or
five year period following origination, as indicated in the related credit line
agreement. Ten year revolving credit-line loans are subject to the lesser of a
$250 termination fee or 1% of the credit limit if they prepay within a three or
five year period following origination, as indicated in the related credit line
agreement.
Closed-End Loans. The closed-end home equity loans are evidenced by
mortgage notes that accrue interest at either a fixed or an adjustable rate of
interest and are secured by deeds of trust or mortgages on the mortgaged
property. Approximately 46.27% of the initial mortgage loans by cut-off date
pool balance are closed-end loans that bear interest at loan rates that are
fixed. The closed-end loans have due dates that occur on different days during
each month. Interest is computed on a simple interest basis and is charged to
the borrower on the outstanding principal balance of the loan on the basis of
the number of days elapsed between each interest payment. The portions of each
monthly payment that are allocated to interest and principal are adjusted based
on the actual amount of interest
S-21
<PAGE>
charged. Interest accrues on the closed-end loans during the calendar month
preceding each due date, computed based on a 365 day year times the actual
number of days elapsed.
Only one initial closed-end loan bears interest at an adjustable loan rate.
This loan rate is based on the five year treasury index plus a margin of 1.95%,
adjusted monthly using the index in effect as of the last day of the prior
month. For each adjustment, the monthly payment is adjusted to an amount
sufficient to fully amortize the mortgage loan over its remaining term. This
loan is subject to a maximum rate of 15% per annum.
LOAN STATISTICS
Unless otherwise specified, all percentages set forth with respect to the
initial mortgage loans are percentages of the cut-off date pool balance. All
weighted averages described below are weighted on the basis of the cut-off date
principal balances of the initial mortgage loans included in the trust unless
otherwise indicated.
Approximately 46.30% of the initial mortgage loans are closed-end loans.
One closed-end loan (approximately 0.03% of the cut-off date pool balance)
accrues interest at an adjustable rate. Approximately 53.70% of the initial
mortgage loans are revolving credit-line loans.
All of the initial mortgage loans were originated between December 1997 and
August 1999. The cut-off date pool balance of the initial mortgage loans was
$104,128,344.47 which is equal to the aggregate principal balances of the
initial loans as of the close of business on the cut-off date. Approximately
20.20% of the initial mortgage loans were secured by a first mortgage on the
related mortgaged property and 79.80% of the initial mortgage loans were secured
by junior liens. No initial mortgage loan had a combined loan-to-value ratio
greater than 101%. Approximately 57.20%, 7.40%, 6.79%, 6.16% and 5.06% of the
initial mortgage loans were secured by mortgaged properties in Ohio, Illinois,
Michigan, Pennsylvania and Kentucky, respectively. As of the cut-off date,
approximately 0.02% of the initial mortgage loans were contractually delinquent
30 days or more. No initial mortgage loan was delinquent more than 60 days as of
the cut-off date.
For initial mortgage loans in the first lien position, the maximum original
principal balance was $600,000. No initial mortgage loan which was secured by a
junior lien had an original principal balance of more than $500,000. For each
initial mortgage loan in the junior lien position, the sum of the unpaid
principal balance of the first and junior liens as of the cut-off date did not
exceed $1,612,350.04.
As of the cut-off date the minimum principal balance of the initial
mortgage loans was $1,000, the maximum principal balance was $465,611.38, and
the average principal balance was $27,467.25. As of the cut-off date, the
weighted average loan rate with respect to the initial revolving credit-line
loans and the initial closed-end loans is 8.19% per annum and 9.13% per annum,
respectively. The average credit limit utilization rate of the initial revolving
credit-line loans was 58.20% as of the cut-off date. The weighted average
combined loan-to-value ratio of the initial mortgage loans was 80.77% and the
weighted average junior mortgage ratio of the initial revolving credit-line
loans was approximately 40.31%.
The combined loan-to-value ratio or CLTV of each revolving credit-line loan
is the ratio, expressed as a percentage, of (a) the sum of (1) the greater of
the credit limit and the current balance as of the cut-off date and (2) the
original principal balance of any senior mortgage loan divided by (b) the value
based on an appraised value or other acceptable valuation method for the related
mortgaged property determined at the origination of the mortgage loan. The CLTV
of each closed-end loan is the ratio, expressed as a percentage, of (1) the sum
of (a) the original principal balance of the closed-end loan at the date of
origination plus (b) the original principal balance of any senior mortgage loans
at the date of origination of the closed-end loan divided by (2) the value of
the related mortgaged property, based upon the appraisal or other acceptable
valuation method, made at the time of origination of the closed-end loan. The
average credit limit utilization rate of a revolving credit-line loan as of its
cut-off date is determined by dividing the cut-off date principal balance of
that mortgage loan by the credit limit of that mortgage loan.
Provident has computed the following additional information as of the
cut-off date with respect to the initial mortgage loans. The following tables
are based on the cut-off date principal balances of the initial mortgage loans.
S-22
<PAGE>
COMBINED LOAN-TO-VALUE RATIOS
<TABLE>
<CAPTION>
PERCENT BY
NUMBER OF CUT-OFF DATE CUT-OFF DATE POOL
COMBINED LOAN-TO-VALUE RATIOS INITIAL LOANS PRINCIPAL BALANCE BALANCE
- ----------------------------------------------------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
(less than or equal to) 5.00%.............................. 2 $ 8,078.62 0.01%
5.01%- 10.00%............................................ 10 135,630.53 0.13
10.01%- 15.00%............................................ 11 148,533.97 0.14
15.01%- 20.00%............................................ 14 215,838.77 0.21
20.01%- 25.00%............................................ 25 453,575.36 0.44
25.01%- 30.00%............................................ 18 415,029.13 0.40
30.01%- 35.00%............................................ 31 725,386.09 0.70
35.01%- 40.00%............................................ 35 1,163,767.79 1.12
40.01%- 45.00%............................................ 44 1,329,080.68 1.28
45.01%- 50.00%............................................ 73 2,712,336.54 2.60
50.01%- 55.00%............................................ 75 1,956,588.45 1.88
55.01%- 60.00%............................................ 88 2,529,408.82 2.43
60.01%- 65.00%............................................ 102 3,404,439.46 3.27
65.01%- 70.00%............................................ 172 4,759,320.24 4.57
70.01%- 75.00%............................................ 216 6,876,359.28 6.60
75.01%- 80.00%............................................ 800 21,798,425.08 20.93
80.01%- 85.00%............................................ 331 11,173,831.24 10.73
85.01%- 90.00%............................................ 454 11,833,761.84 11.36
90.01%- 95.00%............................................ 291 7,477,023.22 7.18
95.01%-100.00%............................................ 654 16,211,763.32 15.57
100.01%-101.00%............................................ 345 8,800,166.04 8.45
------ --------------- -------
Total................................................. 3,791 $104,128,344.47 100.00%
------ --------------- -------
------ --------------- -------
</TABLE>
S-23
<PAGE>
GEOGRAPHIC DISTRIBUTION
<TABLE>
<CAPTION>
PERCENT BY
NUMBER OF CUT-OFF
INITIAL CUT-OFF DATE DATE POOL
STATE LOANS PRINCIPAL BALANCE BALANCE
- ---------------------------------------------------------------- --------- ----------------- -----------------
<S> <C> <C> <C>
Arizona......................................................... 1 $ 25,100.00 0.02%
California...................................................... 2 96,689.70 0.09
Colorado........................................................ 20 724,645.07 0.70
Conneticut...................................................... 1 16,033.08 0.02
Florida......................................................... 138 4,348,930.22 4.18
Georgia......................................................... 33 784,481.07 0.75
Illinois........................................................ 221 7,706,526.51 7.40
Indiana......................................................... 101 2,898,847.88 2.78
Kentucky........................................................ 233 5,272,351.47 5.06
Michigan........................................................ 216 7,071,680.51 6.79
Minnesota....................................................... 71 2,057,716.87 1.98
Missouri........................................................ 36 1,054,012.55 1.01
New York........................................................ 4 87,963.32 0.08
North Carolina.................................................. 21 695,003.49 0.67
Ohio............................................................ 2,328 59,557,109.60 57.20
Oregon.......................................................... 1 37,339.81 0.04
Pennsylvania.................................................... 194 6,410,380.68 6.16
South Carolina.................................................. 16 405,903.48 0.39
Tennesse........................................................ 66 2,187,130.14 2.10
Texas........................................................... 33 932,129.64 0.90
Utah............................................................ 2 120,200.00 0.12
Virginia........................................................ 1 47,079.59 0.05
Washington...................................................... 6 172,633.56 0.17
West Virginia................................................... 26 821,918.23 0.79
Wisconsin....................................................... 20 596,538.00 0.57
----- --------------- -------
Total...................................................... 3,791 $104,128,344.47 100.00%
----- --------------- -------
----- --------------- -------
</TABLE>
- ------------------
Geographic location is determined by address of the mortgaged property securing
the loan.
S-24
<PAGE>
OUTSTANDING PRINCIPAL BALANCES
<TABLE>
<CAPTION>
PERCENT BY
NUMBER OF CUT-OFF DATE CUT-OFF DATE
PRINCIPAL BALANCES INITIAL LOANS PRINCIPAL BALANCE POOL BALANCE
- --------------------------------------------------------------- -------------- ----------------- ------------
<S> <C> <C> <C>
$ 0-$ 2,500.00........................................ 58 $ 104,554.03 0.10%
$ 2,500.01-$ 5,000.00........................................ 152 585,109.91 0.56
$ 5,000.01-$ 7,500.00........................................ 171 1,069,410.51 1.03
$ 7,500.01-$ 10,000.00........................................ 233 2,104,463.77 2.02
$ 10,000.01-$ 15,000.00........................................ 591 7,416,557.43 7.12
$ 15,000.01-$ 20,000.00........................................ 564 9,979,613.61 9.58
$ 20,000.01-$ 30,000.00........................................ 835 20,669,978.68 19.85
$ 30,000.01-$ 40,000.00........................................ 506 17,512,450.90 16.82
$ 40,000.01-$ 50,000.00........................................ 261 11,764,624.85 11.30
$ 50,000.01-$ 60,000.00........................................ 152 8,242,914.79 7.92
$ 60,000.01-$ 70,000.00........................................ 95 6,159,479.66 5.92
$ 70,000.01-$ 80,000.00........................................ 51 3,806,361.23 3.66
$ 80,000.01-$ 90,000.00........................................ 33 2,808,921.96 2.70
$ 90,000.01-$100,000.00........................................ 24 2,292,684.64 2.20
$100,000.01-$150,000.00........................................ 47 5,724,248.95 5.50
$150,000.01-$200,000.00........................................ 11 1,821,987.68 1.75
$200,000.01-$250,000.00........................................ 4 902,280.48 0.87
$300,000.01-$350,000.00........................................ 1 338,103.33 0.32
$350,000.01-$400,000.00........................................ 1 358,986.68 0.34
$450,000.01-$500,000.00........................................ 1 465,611.38 0.45
------ --------------- ------
Total..................................................... 3,791 $104,128,344.47 100.00%
------ --------------- ------
------ --------------- ------
</TABLE>
S-25
<PAGE>
INITIAL REVOLVING CREDIT-LINE LOANS
CREDIT LIMITS
<TABLE>
<CAPTION>
NUMBER
OF INITIAL PERCENT BY
REVOLVING CUT-OFF DATE CUT-OFF DATE
CREDIT LIMITS CREDIT-LINE LOANS PRINCIPAL BALANCE POOL BALANCE
- ------------------------------------------------------------- ----------------- ----------------- ------------
<S> <C> <C> <C>
$ 2,500.01-$ 5,000.00...................................... 4 $ 12,095.35 0.02%
$ 5,000.01-$ 7,500.00...................................... 11 62,610.36 0.11
$ 7,500.01-$ 10,000.00...................................... 52 352,009.56 0.63
$ 10,000.01-$ 15,000.00...................................... 148 1,380,613.52 2.47
$ 15,000.01-$ 20,000.00...................................... 215 2,673,191.07 4.78
$ 20,000.01-$ 30,000.00...................................... 372 6,175,201.94 11.04
$ 30,000.01-$ 40,000.00...................................... 279 6,510,686.41 11.64
$ 40,000.01-$ 50,000.00...................................... 296 7,665,283.29 13.71
$ 50,000.01-$ 60,000.00...................................... 175 5,212,003.56 9.32
$ 60,000.01-$ 70,000.00...................................... 131 4,323,581.11 7.73
$ 70,000.01-$ 80,000.00...................................... 195 6,063,252.37 10.84
$ 80,000.01-$ 90,000.00...................................... 47 1,715,231.00 3.07
$ 90,000.01-$100,000.00...................................... 81 3,389,992.59 6.06
$100,000.01-$150,000.00...................................... 90 4,877,163.27 8.72
$150,000.01-$200,000.00...................................... 28 2,147,703.22 3.84
$200,000.01-$250,000.00...................................... 17 1,832,219.51 3.28
$250,000.01-$300,000.00...................................... 2 199,685.93 0.36
$300,000.01-$350,000.00...................................... 1 187,979.02 0.34
$350,000.01-$400,000.00...................................... 1 358,986.68 0.64
$400,000.01-$450,000.00...................................... 3 180,476.79 0.32
$450,000.01-$500,000.00...................................... 1 133,653.26 0.24
$500,000.01-$600,000.00...................................... 1 465,611.39 0.83
----- --------------- ------
Total................................................... 2,150 $ 55,919,231.19 100.00%
----- --------------- ------
----- --------------- ------
</TABLE>
S-26
<PAGE>
INITIAL REVOLVING CREDIT-LINE LOANS
CREDIT LIMIT UTILIZATION RATES
<TABLE>
<CAPTION>
PERCENT BY
NUMBER OF CUT-OFF DATE
INITIAL REVOLVING CUT-OFF DATE POOL
CREDIT LIMIT UTILIZATION RATES CREDIT-LINE LOANS PRINCIPAL BALANCE BALANCE
- -------------------------------------------------------------- ----------------- ----------------- ------------
<S> <C> <C> <C>
0%- 5.00%................................................ 38 $ 103,705.17 0.19%
5.01%- 10.00%................................................ 103 603,503.98 1.08
10.01%- 15.00%................................................ 114 906,544.66 1.62
15.01%- 20.00%................................................ 95 962,630.49 1.72
20.01%- 25.00%................................................ 86 1,270,440.70 2.27
25.01%- 30.00%................................................ 99 1,855,034.68 3.32
30.01%- 35.00%................................................ 80 1,487,836.96 2.66
35.01%- 40.00%................................................ 96 1,819,360.41 3.25
40.01%- 45.00%................................................ 89 2,238,781.55 4.00
45.01%- 50.00%................................................ 91 1,853,633.81 3.31
50.01%- 55.00%................................................ 89 2,322,644.85 4.15
55.01%- 60.00%................................................ 90 2,520,767.88 4.51
60.01%- 65.00%................................................ 83 2,533,074.84 4.53
65.01%- 70.00%................................................ 92 2,948,832.30 5.27
70.01%- 75.00%................................................ 97 2,578,394.94 4.61
75.01%- 80.00%................................................ 98 3,393,001.42 6.07
80.01%- 85.00%................................................ 101 3,367,738.94 6.02
85.01%- 90.00%................................................ 107 4,070,567.45 7.28
90.01%- 95.00%................................................ 143 4,799,437.02 8.58
95.01%-100.00%................................................ 359 14,283,299.14 25.54
----- --------------- ------
Total.................................................... 2,150 $ 55,919,231.19 100.00%
----- --------------- ------
----- --------------- ------
</TABLE>
LOAN AGE
<TABLE>
<CAPTION>
PERCENT BY
NUMBER OF CUT-OFF DATE
INITIAL CUT-OFF DATE POOL
LOAN AGE (MONTHS) LOANS PRINCIPAL BALANCE BALANCE
- -------------------------------------------------------------------- --------- ----------------- ------------
<S> <C> <C> <C>
0 months............................................................ 1,297 $ 34,807,752.29 33.43%
1-12 months........................................................ 2,448 68,305,835.19 65.60
13-24 months........................................................ 46 1,014,756.99 0.97
----- --------------- ------
Total.......................................................... 3,791 $104,128,344.47 100.00%
----- --------------- ------
----- --------------- ------
</TABLE>
S-27
<PAGE>
INITIAL CLOSED-END LOANS
REMAINING MONTHS TO STATED MATURITY
<TABLE>
<CAPTION>
PERCENT BY
REMAINING TERM TO NUMBER OF CUT-OFF DATE CUT-OFF DATE POOL
STATED MATURITY (MONTHS) INITIAL LOANS PRINCIPAL BALANCE BALANCE
- ------------------------------------------------------------ -------------- ----------------- -----------------
<S> <C> <C> <C>
13- 24..................................................... 5 $ 46,769.76 0.10%
25- 36..................................................... 10 73,148.11 0.15
37- 48..................................................... 16 242,110.66 0.50
49- 60..................................................... 63 999,549.07 2.07
61- 72..................................................... 4 95,457.10 0.20
73- 84..................................................... 83 1,218,192.52 2.53
85- 96..................................................... 1 30,100.00 0.06
97-108..................................................... 3 37,842.02 0.08
109-120..................................................... 428 9,890,982.32 20.52
157-168..................................................... 10 199,649.67 0.41
169-180..................................................... 877 27,402,931.48 56.84
217-228..................................................... 1 22,149.96 0.05
229-240..................................................... 140 7,950,230.61 16.49
------ --------------- -------
Total.................................................. 1,641 $ 48,209,113.28 100.00%
------ --------------- -------
------ --------------- -------
</TABLE>
INITIAL REVOLVING CREDIT-LINE LOANS
LOAN RATES
<TABLE>
<CAPTION>
NUMBER OF PERCENT BY
INITIAL CUT-OFF DATE CUT-OFF DATE POOL
LOAN RATES LOANS PRINCIPAL BALANCE BALANCE
- ----------------------------------------------------------------- --------- ----------------- -----------------
<S> <C> <C> <C>
6.51%- 7.00%.................................................... 114 $ 2,577,275.36 4.61%
7.01%- 7.50%.................................................... 578 20,544,264.80 36.74
7.51%- 8.00%.................................................... 743 16,516,230.82 29.54
8.01%- 8.50%.................................................... 19 749,190.09 1.34
8.51%- 9.00%.................................................... 307 7,480,984.54 13.38
9.01%- 9.50%.................................................... 44 1,276,156.46 2.28
9.51%-10.00%.................................................... 63 1,210,738.28 2.17
10.01%-10.50%.................................................... 121 2,206,586.02 3.95
10.51%-11.00%.................................................... 132 2,893,033.85 5.17
11.01%-11.50%.................................................... 26 397,471.38 0.71
11.51%-12.00%.................................................... 3 67,299.59 0.12
----- --------------- -------
Total....................................................... 2,150 $ 55,919,231.19 100.00%
----- --------------- -------
----- --------------- -------
</TABLE>
S-28
<PAGE>
INITIAL REVOLVING CREDIT-LINE LOANS
DRAW AMOUNTS
<TABLE>
<CAPTION>
NUMBER OF PERCENT BY
INITIAL CUT-OFF DATE
MORTGAGE CUT-OFF DATE POOL
CURRENT BALANCE RANGE LOANS PRINCIPAL BALANCE BALANCE
- ----------------------------------------------------------------- --------- ----------------- -----------------
<S> <C> <C> <C>
Less than-$ 2,500.00 58 $ 104,554.03 0.19%
$ 2,500.01-$ 5,000.00.......................................... 143 542,823.49 0.97
$ 5,000.01-$ 7,500.00.......................................... 141 884,169.21 1.58
$ 7,500.01-$ 10,000.00.......................................... 156 1,392,510.17 2.49
$ 10,000.01-$ 15,000.00.......................................... 337 4,239,381.00 7.58
$ 15,000.01-$ 20,000.00.......................................... 290 5,106,723.13 9.13
$ 20,000.01-$ 30,000.00.......................................... 400 9,894,878.17 17.69
$ 30,000.01-$ 40,000.00.......................................... 257 8,920,475.12 15.95
$ 40,000.01-$ 50,000.00.......................................... 141 6,312,546.87 11.29
$ 50,000.01-$ 60,000.00.......................................... 82 4,471,863.61 8.00
$ 60,000.01-$ 70,000.00.......................................... 48 3,086,459.22 5.52
$ 70,000.01-$ 80,000.00.......................................... 26 1,919,333.34 3.43
$ 80,000.01-$ 90,000.00.......................................... 19 1,618,102.63 2.89
$ 90,000.01-$100,000.00.......................................... 13 1,233,203.06 2.21
$100,000.01-$150,000.00.......................................... 26 3,267,045.55 5.84
$150,000.01-$200,000.00.......................................... 7 1,198,284.05 2.14
$200,000.01-$250,000.00.......................................... 4 902,280.48 1.61
$350,000.01-$400,000.00.......................................... 1 358,986.68 0.64
$450,000.01-$500,000.00.......................................... 1 465,611.38 0.83
----- --------------- -------
Total....................................................... 2,150 $ 55,919,231.19 100.00%
----- --------------- -------
----- --------------- -------
</TABLE>
INITIAL REVOLVING CREDIT-LINE LOANS
MARGINS
<TABLE>
<CAPTION>
PERCENT BY
NUMBER OF CUT-OFF DATE CUT-OFF DATE POOL
MARGIN INITIAL LOANS PRINCIPAL BALANCE BALANCE
- --------------------------------------------------------------- ------------- ----------------- -----------------
<S> <C> <C> <C>
-0.50%- -0.26%................................................ 1 $ 28,476.57 0.05%
-0.25%- -0.01%................................................ 319 11,693,965.70 20.91
Equal to- 0.00%................................................ 823 18,239,177.96 32.62
0.01%- 0.25%................................................ 256 8,328,351.10 14.89
0.26%- 0.50%................................................ 15 924,361.91 1.65
0.51%- 0.75%................................................ 22 844,409.33 1.51
0.76%- 1.00%................................................ 292 7,008,978.20 12.53
1.01%- 1.25%................................................ 22 686,432.45 1.23
1.26%- 1.50%................................................ 21 549,885.79 0.98
1.51%- 1.75%................................................ 14 384,571.39 0.69
1.76%- 2.00%................................................ 49 855,036.83 1.53
2.01%- 2.25%................................................ 47 666,491.74 1.19
2.26%- 2.50%................................................ 76 1,581,050.08 2.83
2.51%- 2.75%................................................ 21 541,834.31 0.97
2.76%- 3.00%................................................ 111 2,351,199.54 4.20
3.01%- 3.25%................................................ 15 204,894.01 0.37
3.26%- 3.50%................................................ 11 192,577.37 0.34
3.76%- 4.00%................................................ 3 67,299.59 0.12
6.51%- 7.00%................................................ 32 770,237.32 1.38
------- --------------- -------
Total..................................................... 2,150 $ 55,919,231.19 100.00%
------- --------------- -------
------- --------------- -------
</TABLE>
S-29
<PAGE>
INITIAL CLOSED-END LOANS
LOAN RATES
<TABLE>
<CAPTION>
PERCENT BY
NUMBER OF CUT-OFF DATE CUT-OFF DATE POOL
LOAN RATES INITIAL LOANS PRINCIPAL BALANCE BALANCE
- -------------------------------------------------------------- ------------- ----------------- -----------------
<S> <C> <C> <C>
7.01%- 7.50%................................................. 20 $ 547,840.18 1.14%
7.51%- 8.00%................................................. 338 14,087,226.66 29.22
8.01%- 8.50%................................................. 165 4,353,673.51 9.03
8.51%- 9.00%................................................. 153 4,681,854.21 9.71
9.01%- 9.50%................................................. 162 4,044,629.26 8.39
9.51%-10.00%................................................. 515 13,667,166.54 28.35
10.01%-10.50%................................................. 166 3,758,239.25 7.80
10.51%-11.00%................................................. 42 996,385.33 2.07
11.01%-11.50%................................................. 74 1,899,116.19 3.94
11.51%-12.00%................................................. 6 172,982.15 .36
----- --------------- -------
Total.................................................... 1,641 $ 48,209,113.28 100.00%
----- --------------- -------
----- --------------- -------
</TABLE>
LIEN PRIORITY
<TABLE>
<CAPTION>
PERCENT BY
NUMBER OF CUT-OFF DATE CUT-OFF DATE
LIEN PRIORITY INITIAL LOANS PRINCIPAL BALANCE POOL BALANCE
- -------------------------------------------------------------- ------------- ----------------- -----------------
<S> <C> <C> <C>
1............................................................. 466 $ 21,028,921.53 20.20%
2............................................................. 3,321 82,822,252.42 79.54
3............................................................. 4 277,170.52 .27
----- --------------- -------
Total.................................................... 3,791 $104,128,344.47 100.00%
----- --------------- -------
----- --------------- -------
</TABLE>
PROPERTY TYPE
<TABLE>
<CAPTION>
PERCENT BY
NUMBER OF CUT-OFF DATE CUT-OFF DATE
PROPERTY TYPE INITIAL LOANS PRINCIPAL BALANCE POOL BALANCE
- ----------------------------------------------------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
Single-Family.............................................. 3,741 $102,870,793.72 98.79%
Two-to-Four Family......................................... 20 535,629.39 0.51
Condominium................................................ 26 580,169.93 0.56
PUD........................................................ 4 141,751.43 0.14
------ --------------- -------
Total................................................. 3,791 $104,128,344.47 100.00%
------ --------------- -------
------ --------------- -------
</TABLE>
OWNER OCCUPANCY STATUS
<TABLE>
<CAPTION>
PERCENT BY
NUMBER OF CUT-OFF DATE CUT-OFF DATE
OWNER OCCUPANCY STATUS INITIAL LOANS PRINCIPAL BALANCE POOL BALANCE
- ----------------------------------------------------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
Owner Occupied............................................. 3,785 $104,019,743.76 99.90%
Non-Owner Occupied......................................... 6 108,600.71 0.10
------ --------------- -------
Total................................................. 3,791 $104,128,344.47 100.00%
------ --------------- -------
------ --------------- -------
</TABLE>
S-30
<PAGE>
CONVEYANCE OF SUBSEQUENT MORTGAGE LOANS
The sale and servicing agreement permits the trust to acquire during the
funding period up to approximately $65,871,656 aggregate principal balance of
subsequent mortgage loans. Accordingly, the statistical characteristics of the
mortgage loans will vary upon the acquisition of subsequent mortgage loans.
The obligation of the trust to acquire 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 insurer:
o a subsequent mortgage loan may not be 30 or more days contractually
delinquent as of its cut-off date;
o the remaining term to stated maturity of each subsequent mortgage loan
will not exceed 20 years (except for one-year draw period loans);
o a subsequent mortgage loan will be secured by a mortgage in a first or
junior lien position;
o a subsequent mortgage loan will not have a loan rate less than 5.75% per
annum;
o no more than 25% of the subsequent mortgage loans by aggregate cut-off
date principal balance of the subsequent mortgage loans will have a loan
rate of less than 5.99%;
o a subsequent mortgage loan will be otherwise acceptable to the insurer;
o a subsequent mortgage loan shall be secured by a mortgaged property
which, at the time of the origination of such subsequent mortgage loan,
has an appraised value of not more than $2,000,000; and
o following the purchase of the subsequent mortgage loans by the trust, the
mortgage loans (including the subsequent mortgage loans) will have the
following characteristics:
(a) will have a weighted average loan rate of at least 8.25% per annum;
(b) will have a weighted average remaining term to stated maturity of no
more than 240 months (excluding the one-year draw period loans);
(c) will have a weighted average CLTV of not more than 83.00%;
(d) will not include mortgage loans with a cut-off date principal balance
in excess of $675,100;
(e) will not have a state concentration in excess of 58.20% (by aggregate
cut-off date principal balance of the mortgage loans) for any one state;
(f) will have no more than 0.25% of the mortgage loans (by aggregate
cut-off date principal balance of the mortgage loans) secured by mortgages
on non-owner occupied properties and
(g) will not have more than 80.50% of the mortgage loans (by aggregate
cut-off date principal balance of the mortgage loans) secured by a
mortgage in a junior lien position.
In addition, following the purchase of the subsequent mortgage loans, no
more than 49.00% of the mortgage loans (by aggregate cut-off date principal
balance of the mortgage loans) will be closed-end loans.
S-31
<PAGE>
DESCRIPTION OF THE NOTES
The Provident Home Equity Loan Trust 1999-A will issue one class of Home
Equity Loan Asset-Backed Notes, the Class A Notes, pursuant to the indenture to
be dated as of September 1, 1999, between the trust and Norwest Bank Minnesota,
National Association, as indenture trustee. Pursuant to the indenture, the
Class A Notes will be secured by the mortgage loans. The trust will also issue
the transferor interest pursuant to the trust agreement. The indenture, the
trust agreement and the sale and servicing agreement are collectively referred
to as the agreements. The forms of the agreements have been filed as exhibits to
the registration statement of which this prospectus supplement and the
prospectus are a part. The following summaries describe material provisions of
the agreements. 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 agreements. Wherever particular sections or defined terms of the agreements
are referred to, these sections or defined terms are incorporated by reference.
GENERAL
The Class A Notes will be issued in minimum denominations of $1,000 and
multiples of $1 in excess thereof. The Class A Notes will represent non-recourse
obligations of the trust. The property of the trust will include:
o each of the mortgage loans sold by Provident to the trust pursuant
to the sale and servicing agreement, including any additional
balances arising after the cut-off date, and the mortgage files;
o collections on the mortgage loans received on and after the cut-off
date (exclusive of certain payments in respect of (1) interest
accrued on the mortgage loans during August, 1999, (2) payments in
respect of interest on the delinquent mortgage loans due prior to
the cut-off date and received thereafter); mortgaged properties
relating to the mortgage loans that are acquired by foreclosure or
deed in lieu of foreclosure; the collection account, the
distribution account, the pre-funding account, the capitalized
interest account and the spread account; and the policy.
If definitive notes are issued, they will be transferable and exchangeable
at the corporate trust office of the indenture trustee, which will initially act
as note registrar. See "--Book-Entry Notes" below. No service fee will be
charged for any registration of exchange or transfer of notes, but the indenture
trustee may require payment of a sum sufficient to cover any tax or other
governmental charge.
On the closing date, the original note principal balance of the Class A
Notes will equal approximately $168,300,000, which is also referred to as the
original invested amount. The original invested amount represents approximately
99% of the cut-off date pool balance and the amount in the pre-funding account
on the closing date. After the closing date, the invested amount for any payment
date will be equal to the original invested amount, minus (1) the amount of
principal collections previously distributed to the noteholders and, minus
(2) an amount equal to the product of (a) the Investor Floating Allocation
Percentage and (b) Liquidation Loss Amounts for the mortgage loans not allocated
to the transferor interest. The outstanding note principal balance on any
payment date is equal to the original note principal balance of the notes minus
the amounts actually distributed as principal.
At any time of determination, the principal balance of the transferor
interest is equal to the aggregate principal balance of the mortgage loans and
the amount in the pre-funding account less the invested amount at that time. The
transferor interest will initially equal approximately $1,700,000, representing
approximately 1% of the cut-off date pool balance on the closing date and the
amount in the pre-funding account on the closing date. On any date, the
transferor is the owner of the transferor interest, which will be Provident.
Generally, the pool balance will vary each day as principal is paid on the
mortgage loans, liquidation losses are incurred, additional balances are drawn
down by borrowers and subsequent mortgage loans are transferred to the trust.
BOOK-ENTRY NOTES
The notes will be book-entry notes. Persons acquiring beneficial ownership
interests in the notes may elect to hold their notes through the Depository
Trust Company in the United States, or Cedelbank or the Euroclear System in
Europe if they are participants in those systems, or indirectly through
organizations that are participants in those systems. Investors in the Class A
Notes may hold beneficial interests in the book-
S-32
<PAGE>
entry notes in minimum denominations representing note principal balances of
$1,000 and in multiples of $1 in excess of $1,000. Note owners will not be
noteholders as that term is used in the agreements. Note owners are only
permitted to exercise their rights indirectly through the participating
organizations that utilize the services of DTC, including securities brokers and
dealers, banks and trust companies, and clearing corporations and other
participants in DTC, and DTC.
For information with respect to tax documentation procedures relating to
the notes, see "Federal Income Tax Consequences--Foreign Investors" and
"--Backup Withholding" herein and "Global, Clearance, Settlement And Tax
Documentation Procedures--U.S. Federal Income Tax Documentation Requirements" in
Annex I to this prospectus supplement.
Distributions on the book-entry notes will be made on each distribution
date by the trustee to DTC. DTC will be responsible for crediting the amount of
those payments to the accounts of the applicable DTC participants in accordance
with DTC's normal procedures. Each DTC participant will be responsible for
disbursing those payments to the beneficial owners of the book-entry notes that
it represents and to each financial intermediary for which it acts as agent.
Each financial intermediary will be responsible for disbursing funds to the
beneficial owners of the book-entry notes that it represents.
For further discussion about DTC, the European depositaries, and book-entry
procedures see "Description of the Securities--Book-Entry Registration of
Securities" in the prospectus.
If definitive notes are issued, they will be transferable and exchangeable
at the corporate trust office of the indenture trustee, which will initially
maintain the note register for the notes. No service charge will be made for any
registration of exchange or transfer of notes, but the trustee may require
payment of a sum sufficient to cover any tax or other governmental charge.
ASSIGNMENT OF MORTGAGE LOANS
The transfer of the mortgage loans by Provident to the trust will be
treated by Provident and the trust as a sale of the mortgage loans for financial
accounting purposes. Provident will warrant that the transfer constitutes a sale
of its interest in the mortgage loans. In the event of an insolvency of
Provident, it is possible that a receiver or conservator for, or a creditor of,
Provident, may argue that the transfer of the mortgage loans by Provident was a
pledge of the mortgage loans in connection with a borrowing by Provident rather
than a true sale. Such an attempt, even if unsuccessful, could result in delays
in payments on the notes.
If the FDIC were appointed receiver or conservator for Provident, the FDIC
could exercise legal authority to prevent the indenture trustee from taking any
action based solely upon the appointment or insolvency of Provident. For
example, the FDIC has the power to enforce contracts of Provident and may have
the power to cause Provident to continue to perform the duties of the master
servicer. In addition, the FDIC may also prevent the appointment of a successor
master servicer, or cause the sale or liquidation of the mortgage loans and
early retirement of the notes, notwithstanding instructions of the noteholders
or the insurer to the contrary. The FDIC may void some transfers determined to
be fraudulent which occurred prior to the appointment of a receiver or
conservator and has the power to repudiate or disaffirm any contract of
Provident. 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 indenture trustee to comply with certain claims procedures.
Consequently, payments on the notes could be delayed or reduced. In addition,
the FDIC as conservator or receiver may have the power to transfer to another
party all of Provident's rights and obligations with respect to the trust, the
noteholders and the related property.
Provident believes that even if the FDIC were appointed as a receiver or
conservator and a security interest in the mortgage loans were deemed to have
been granted, the FDIC would not void the security interest in the mortgage
loans granted to the trust if:
o the agreement granting the security interest was undertaken in the
ordinary course of business and not in contemplation of Provident's
insolvency;
o the grant of the security interest was not intended to hinder, delay or
defraud Provident or its creditors or any Federal banking regulator;
o the trust, as the secured party, is not an insider or affiliate of
Provident;
S-33
<PAGE>
o the grant of the security interest and the obligation created under the
grant represents a bona fide arms' length transaction;
o the grant or creation of the security interest was for adequate
consideration;
o the agreement creating the security interest is in writing, approved by
Provident's board of directors or loan committee, with the approval
reflected in the minutes of the board;
o the agreement creating the security interest, since the time of its
execution, has been continuously an official record of Provident; and
o the security interest is otherwise legally perfected and enforceable.
This conclusion assumes that the FDIC will abide by its Statement of Policy
Regarding Treatment of Security Interests After Appointment of the FDIC as
Conservator or Receiver, dated March 31, 1993. However, even if the FDIC does
not void the security interest of the trust in the mortgage loans, it could
still require compliance with the claims procedures and limit the amount
recoverable from the mortgage loans or seek to redeem or repay secured
obligations of Provident, to the extent that it recognized a claim for a secured
obligation without permitting the sale of the property. If any claim of the
indenture trustee or the noteholders allowed by the FDIC were not satisfied from
the mortgage loans, the indenture trustee and the noteholders would be unsecured
creditors of Provident, entitled to payment on the claim in the same manner as
other unsecured creditors. The payment of this claim would follow only after
payment of other secured claims, administrative expenses of the receiver and
deposit liabilities of Provident.
On the closing date for the initial mortgage loans and any subsequent
transfer date for the subsequent mortgage loans, Provident will transfer to the
trust all of its interests in each mortgage loan, including any additional
balances arising in the future, the related credit line loan agreements and the
mortgage notes, mortgages and other related documents. Concurrently with this
transfer on the closing date, the trust will deliver or cause to be delivered
the Class A Notes and the transferor interest to Provident. Each mortgage loan
transferred to the trust will be identified on a mortgage loan schedule that
will be attached as an exhibit to the indenture. The loan schedule will include
information as to the cut-off date principal balance of each mortgage loan, as
well as information about the loan rate.
The sale and servicing agreement will permit Provident to maintain
possession of the mortgage files other than for each closed-end loan, the
mortgage note and the assignment of the related mortgage. Assignments of the
related mortgages to the indenture trustee will not be required to be recorded
for so long as the long-term senior unsecured debt of Provident is rated at
least "BBB" by Standard and Poor's and "Baa2" by Moody's and other conditions
are satisifed. If Provident's long-term senior unsecured debt is not so rated or
these ratings are suspended or withdrawn or other assignment event has occurred
under the sale and servicing agreement, Provident will have 30 days for the
closed-end mortgage loans and 90 days for revolving credit-line loans to record
an assignment of mortgage for each mortgage loan in favor of the indenture
trustee and 30 days for the closed-end mortgage loans and 45 days for the
revolving credit-line loans to deliver the mortgage file held by Provident for
each mortgage loan to the indenture trustee, each to be undertaken at
Provident's expense. However, the recording of the assignments and delivery of
the mortgage files will not be required if opinions of counsel are delivered to
and satisfactory to the rating agencies and the insurer to the effect that
recording the assignments or delivery of the mortgage files is not required in
the relevant jurisdiction to protect the interest of the trust in the mortgage
loans. In lieu of delivery of original documentation and only to the extent the
original documentation is unavailable, Provident may deliver documents that have
been imaged optically upon delivery of an opinion of counsel to the rating
agencies and the insurer, satisfactory to each, that failure to deliver those
documents does not impair the enforceability of the transfer to the trust of the
mortgage loans and the optical images of those documents are enforceable in the
relevant jurisdictions to the same extent as the original documents.
With respect to each closed-end loan, the indenture trustee will review or
cause to be reviewed the mortgage notes within 60 days of the closing date (or
date of transfer) and the assignments of each mortgage within 180 days of the
closing date (or date of transfer). The indenture trustee will review or cause
to be reviewed the mortgage files within 90 days of an assignment event. If any
related document is found to be defective in any material respect and the defect
is not cured within 60 days following notification of the defect to Provident by
the indenture trustee, the trust, or the insurer, Provident will be obligated to
accept the transfer of the related mortgage loan from the trust. Upon that
transfer, the principal balance of the mortgage
S-34
<PAGE>
loan will be deducted from the pool balance, reducing the amount of the
transferor interest. If the deduction would cause the transferor interest to
become less than the Minimum Transferor Interest at that time (a "Transfer
Deficiency"), Provident will be obligated either to substitute an Eligible
Substitute Mortgage Loan or to deposit (the "Transfer Deposit Amount") into the
collection account an amount equal to the Transfer Deficiency, or a combination
of an Eligible Substitute Mortgage Loan and a Transfer Deposit Amount. Any such
deduction, substitution, or deposit will be considered for the purposes of the
sale and servicing agreement a payment in full of the mortgage loan. Any
Transfer Deposit Amount will be treated as a principal collection. No such
transfer shall be considered to have occurred until the required deposit to the
collection account for the mortgage loan is actually made. The obligation of
Provident to accept a transfer of a defective mortgage loan is the sole remedy
regarding any defects in the mortgage file and related documents available to
the owner trustee, the indenture trustee or the noteholders.
Eligible Substitute Mortgage Loans are mortgage loans substituted by
Provident for a defective mortgage loan that must, on the date of substitution:
o have an aggregate outstanding principal balance not greater than the
Transfer Deficiency and no more than 10% less than the Transfer
Deficiency;
o 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 the defective
mortgage loan;
o if the defective mortgage loan is an adjustable rate mortgage loan, have
a loan rate based on the same index with adjustments to the interest rate
made on the same interest rate adjustment date as that of the defective
mortgage loan and have a margin that is not less than the margin of the
defective mortgage loan and not more than 100 basis points higher than
the margin for the defective mortgage loan;
o have a remaining term to maturity not more than 6 months earlier and not
later than the remaining term to maturity of the defective mortgage loan;
o have a mortgage of the same or higher level of priority as the mortgage
relating to the defective mortgage loan;
o comply with each mortgage loan representation and warranty set forth in
the sale and servicing agreement (deemed to be made as of the date of
substitution);
o have an original combined loan-to-value ratio not greater than that of
the defective mortgage loan; and
o satisfy the other conditions specified in the sale and servicing
agreement.
More than one Eligible Substitute Mortgage Loan may be substituted for a
defective mortgage loan if the Eligible Substitute Mortgage Loans meet the
attributes listed above in the aggregate and the substitution is approved in
writing in advance by the insurer.
Provident will make representations and warranties as to the accuracy, in
all material respects, of information furnished to the indenture trustee with
respect to each mortgage loan, e.g., cut-off date principal balance and the loan
rate on the mortgage loans. In addition, Provident will represent and warrant on
the closing date (or transfer date of a subsequent mortgage loan) that, among
other things, at the time of transfer to the trust, Provident has transferred or
assigned all of its right, title and interest in and to each mortgage loan and
the related documents, free of any lien (subject to specified exceptions) and
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 of those representations and warranties that materially and adversely
affects the interests of the noteholders or the insurer in the related mortgage
loan and its related documents, Provident will have a period of 60 days after
discovery or notice of the breach to effect a cure. If the breach cannot be
cured within the 60-day period, Provident will be obligated to accept a transfer
of the defective mortgage loan from the trust. The same procedures and
limitations that apply to the transfer of mortgage loans to Provident as a
result of defective documentation will apply to the transfer of a mortgage loan
that is required to be transferred to Provident as a result of a breach of a
representation or warranty.
S-35
<PAGE>
AMENDMENTS TO CREDIT-LINE AGREEMENTS
Subject to applicable law and the terms of the sale and servicing
agreement, the master servicer may change the terms of the credit line
agreements at any time provided that the changes (1) do not adversely affect the
interest of the noteholders or the insurer, and (2) are consistent with prudent
business practice. In addition, the sale and servicing agreement permits the
master servicer, within specified limitations, to increase or reduce the credit
limit or the combined loan-to-value ratio and reduce the margin.
OPTIONAL TRANSFERS OF MORTGAGE LOANS TO THE TRANSFEROR
Subject to the conditions specified in the sale and servicing agreement, on
any payment date, the transferor may, but shall not be obligated to, remove
mortgage loans without notice to the noteholders. The transferor is permitted to
randomly designate the mortgage loans to be removed. Mortgage loans so
designated will only be removed upon satisfaction of certain conditions
specified in the sale and servicing agreement, including:
(1) the transferor interest as of the proposed transfer date after
giving effect to such removal is at least equal to the Minimum Transferor
Interest;
(2) the transferor shall have delivered to the indenture trustee and
the insurer a revised mortgage loan schedule containing a list of all
mortgage loans remaining in the trust after the removal;
(3) the transferor shall represent and warrant that no selection
procedures which the transferor reasonably believes are adverse to the
interests of the noteholders or the insurer were used by the transferor in
selecting mortgage loans and mortgage loans were selected on a random
basis;
(4) in connection with each transfer of mortgage loans, the rating
agencies shall have been notified of the proposed transfer and prior to the
proposed date of transfer, the rating agencies shall have notified the
transferor, the indenture trustee, the owner trustee and the insurer in
writing that the transfer will not result in a reduction or withdrawal of
the ratings assigned to the notes without regard to the policy; and
(5) the transferor shall have delivered to the indenture trustee, the
owner trustee and the insurer an officer's certificate confirming the
satisfaction of the conditions set forth in clauses (1) through (3) above.
As of any date of determination, the "Minimum Transferor Interest" is an
amount equal to the transferor interest as of the closing date.
PAYMENTS ON MORTGAGE LOANS; DEPOSITS TO THE COLLECTION ACCOUNT AND THE
DISTRIBUTION ACCOUNT
The master servicer shall establish and maintain in the name of the
indenture trustee a collection account for the benefit of the noteholders, the
transferor and the insurer, as their interests may appear. The collection
account will be an Eligible Account. Subject to the investment provisions
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 these amounts in the
collection account. Not later than the eighteenth day of the calendar month of
each payment date, which is referred to as a determination date, the master
servicer will notify the indenture trustee of the amount on deposit in the
collection account available for payment to the noteholders and the holder of
the transferor interest for that payment date. Amounts deposited in the
collection account may be invested in Eligible Investments maturing no later
than one business day prior to the date on which amounts on deposit therein are
required to be deposited in the distribution account.
The indenture trustee will establish a distribution account into which will
be deposited on the determination date amounts withdrawn from the collection
account for payment to noteholders. The distribution account will be an Eligible
Account. Amounts on deposit in the distribution account may be invested in
Eligible Investments maturing on or before the business day prior to the next
payment date. Net investment earnings on amounts in the distribution account
will be paid to Provident.
An "Eligible Account" is a segregated account that is:
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o maintained with a depository institution whose debt obligations at the
time of any deposit have the highest short-term debt rating by the rating
agencies and whose accounts are fully insured by either the Savings
Association Insurance Fund or the Bank Insurance Fund of the FDIC with a
minimum long-term unsecured debt rating of "A1" by Moody's and "AA-" by
S&P, and which is any of (a) a federal savings and loan association duly
organized, validly existing and in good standing under the applicable
banking laws of any state, (b) an institution or association duly
organized, validly existing and in good standing under 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 Insurer,
o 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
o otherwise acceptable to each rating agency and the insurer as evidenced
by a letter from each rating agency and the insurer to the indenture
trustee, without reduction or withdrawal of their then current ratings of
the notes without regard to the policy.
Eligible Investments are specified in the sale and servicing agreement and
are limited to investments which are acceptable to the insurer and meet the
criteria of the rating agencies from time to time as being consistent with their
then current ratings of the notes.
MONTHLY ADVANCES
Not later than five business days prior to each payment date, the master
servicer will remit to the indenture trustee for deposit in the distribution
account an amount equal to interest due but not received on each mortgage loan
during the previous collection period, net of the master servicing fee (the
"Monthly Advance"). The Monthly Advances will be included in the payments on the
notes on that payment date. The obligation of the master servicer continues with
respect to each mortgage loan until that mortgage loan becomes a liquidated
mortgage loan.
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 the preservation, restoration and protection of the mortgaged
properties, any enforcement or judicial proceedings, including foreclosures, and
the management and liquidation of mortgaged properties acquired in satisfaction
of the related mortgage. Each of these expenditures 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 other amounts as may be collected by the master
servicer from the related mortgagor. 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 these
reimbursements is prior to the rights of the noteholders.
The master servicer is not required to make any Monthly Advance or
Servicing Advance, if, in its good faith judgment and sole discretion, the
master servicer determines that the advance will not be ultimately recoverable
from collections received from the borrower for the related mortgage loan or
other recoveries for that mortgage loan (a "Nonrecoverable Advance"). However,
if any Servicing Advance or Monthly Advance is determined by the master servicer
to be nonrecoverable from those sources, the amount of the Nonrecoverable
Advance may be reimbursed to the master servicer from other amounts on deposit
in the collection account. The master servicer's right to this reimbursement is
prior to the rights of the noteholders.
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SIMPLE INTEREST EXCESS SUB-ACCOUNT
The sale and servicing agreement requires that the master servicer
establish and maintain in the name of the indenture trustee a simple interest
excess sub-account to the collection account, which must be an Eligible Account.
The indenture trustee will transfer to the simple interest excess sub-account
all Net Simple Interest Excess.
"Net Simple Interest Excess" means, as of any payment date, any excess of
the aggregate amount of Simple Interest Excess over the amount of Simple
Interest Shortfall. "Net Simple Interest Shortfall" means, as of any payment
date, any excess of the aggregate amount of Simple Interest Shortfall over the
amount Simple Interest Excess.
"Simple Interest Shortfall" means, as of any payment date and for each
Simple Interest Qualifying Loan, any excess of 30 days' interest on the
principal balance of the Simple Interest Qualifying Loan at its loan rate over
the portion of the monthly payment received on the Simple Interest Qualifying
Loan allocable to interest for the related collection period.
"Simple Interest Excess" means, as of any payment date and for each Simple
Interest Qualifying Loan, any excess of the portion of the monthly payment
received on the Simple Interest Qualifying Loan allocable to interest for the
related collection period over 30 days' interest on the principal balance of the
Simple Interest Qualifying Loan at the loan rate.
A "Simple Interest Qualifying Loan" as of any determination date is any
mortgage loan that was not prepaid in full during the related collection period
and is not delinquent with respect to a payment that became due during the
related collection period as of the close of business on that determination
date.
The master servicer will withdraw amounts on deposit in the simple interest
excess sub-account for deposit in the collection account before each payment
date to pay Net Simple Interest Shortfalls.
All funds in the simple interest excess sub-account may be invested in
Eligible Investments. So long as no event of servicing termination has occurred
and is continuing, net investment earnings on funds held in the simple interest
excess sub-account will be paid to the master servicer. Upon receipt of
notification of a net investment loss on amounts in the simple interest excess
sub-account, the master servicer shall promptly remit the amount of the loss
from its own funds to the simple interest excess sub-account.
ALLOCATIONS AND COLLECTIONS
All collections on the mortgage loans will generally be allocated in
accordance with the credit line agreements for the revolving credit-line loans
or the mortgage notes for the closed-end loans between principal amounts and
interest amounts.
For any payment date, interest collections will be equal to the amounts
collected during the related collection period on the mortgage loans, including
the portion of net liquidation proceeds, allocated to interest pursuant to the
terms of the credit line agreements and the mortgage notes, less the master
servicing fee for the related collection period and as adjusted for Simple
Interest Shortfalls and Simple Interest Excess as described above under
"--Simple Interest Excess Sub-Account."
For any payment date, principal collections will be equal to the sum of:
(1) the amounts collected during the related collection period on the
mortgage loans, including the portion of net liquidation proceeds
allocated to principal pursuant to the terms of the credit line
agreements and mortgage notes,
(2) any Transfer Deposit Amounts, and
(3) for the January 2000 payment date, any amounts on deposit in the
pre-funding account immediately prior to the January 2000 payment date.
Liquidation proceeds are the proceeds (excluding any amounts drawn on the
policy) received in connection with the liquidation of any mortgage loan,
whether through trustee's sale, foreclosure sale or otherwise. Net liquidation
proceeds with respect to a mortgage loan are equal to the liquidation proceeds,
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reduced by related expenses, but not including any portion of the amount that
exceeds the sum of the principal balance of the mortgage loan plus accrued and
unpaid interest to the end of the collection period during which the mortgage
loan became a liquidated mortgage loan. A liquidated mortgage loan is any
mortgage loan for which the master servicer has determined, based on the
servicing procedures specified in the sale and servicing agreement, that all
liquidation proceeds that it expects to recover in the disposition of the
related mortgaged property have been recovered.
Interest collections will be allocated between the noteholders ("Investor
Interest Collections") and the transferor. For any payment date, Investor
Interest Collections will equal the product of (a) interest collections for that
payment date and (b) the Investor Floating Allocation Percentage for that
payment date.
For any payment date, the "Investor Floating Allocation Percentage" is the
percentage equivalent of a fraction determined by dividing (a) the invested
amount at the close of business on the preceding payment date, or the closing
date in the case of the first payment date, by (b) the pool balance at the
beginning of the collection period. The remaining amount of interest collections
will be allocated to the transferor interest.
For any payment date, the "Investor Fixed Allocation Percentage" is 99%.
Principal collections will be allocated between the noteholders and the
transferor as described below under "--Payments on the Notes--Payments of
Principal Collections."
The "Liquidation Loss Amount" on any liquidated mortgage loan is its
unrecovered principal balance as of the end of the collection period in which
the mortgage loan became a liquidated mortgage loan, after giving effect to the
net liquidation proceeds. The "Investor Loss Amount" is the product of the
Investor Floating Allocation Percentage and the aggregate of the Liquidation
Loss Amounts for all mortgage loans.
Investor Loss Amounts equal to the amount of the Minimum Transferor
Interest will be allocated to the transferor interest after the spread account
is depleted and will not reduce the invested amount.
As to any payment date, the collection period is the calendar month
preceding each payment date.
PAYMENTS ON THE NOTES
Beginning with the first payment date, payments on the notes will be
remitted by the indenture trustee or the paying agent to the persons in whose
names the notes are registered at the close of business on the record date. The
record date for any payment date is the business day prior to each payment date
or, if the notes are no longer book-entry notes, at the close of business on the
last day of the month preceding that payment date. The payment date is the
twenty-fifth day of each month or, if that day is not a business day, then the
next succeeding business day. Payments in amounts calculated as described herein
on the determination date will be made by check or money order mailed, or upon
the request of a noteholder owning notes having denominations aggregating at
least $1,000,000, by wire transfer or otherwise, to the address of the person
entitled thereto, which, in the case of book-entry notes, will be DTC or its
nominee, as it appears on the note register. However, the final payment for the
notes will be made only upon presentation and surrender of the notes at the
office or the agency of the indenture trustee specified in the notice to
noteholders of the final payment. For purposes of the agreements, a business day
is any day other than a Saturday or Sunday or a day on which the insurer or
banking institutions in the States of Ohio or New York are required or
authorized by law to be closed.
Application of Interest Collections. On each payment date, the indenture
trustee or the paying agent will apply the Investor Interest Collections in the
following manner and order of priority:
(1) as payment to the indenture trustee for its fees for services
rendered pursuant to the sale and servicing agreement and as
payment to the owner trustee for its fees for services rendered
pursuant to the trust agreement;
(2) to the trustee, as reimbursement for certain expenses pursuant to
the indenture and the sale and servicing agreement, not to exceed,
in the agggregate, $100,000 during the trust's existence;
(3) as payment to the insurer for the premium for the policy; and
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(4) concurrently, as follows:
(a) to the Class A Noteholders, as payment for the accrued interest
due and any overdue accrued interest, with interest on overdue
accrued interest to the extent permitted by law, on the note
principal balance of the Class A Notes; and
(b) to the holder of the transferor interest, the amount to which
it is entitled in accordance with the provisions of the sale
and servicing agreement, which will generally be equal to the
amount accrued on a notional balance equal to the note
principal balance of the Class A Notes at a rate equal to the
excess of the net funds cap over the Class A note rate, subject
to reduction as described in the sale and servicing agreement;
provided, however, if Investor Interest Collections, prior to giving effect to
withdrawals from the spread account or draws on the policy, on that payment date
are insufficient to make the payments required to be made pursuant to this
clause (4), then Investor Interest Collections will be allocated between
subclauses (a) and (b) above, pro rata, based on the amount required to be paid
pursuant to each subclause without giving effect to any shortfall in the
Investor Interest Collections; provided, further, amounts otherwise payable on
any payment date on the transferor interest, pursuant to clause (4) (b) above
will first be paid to the Class A Noteholders in respect of any outstanding
LIBOR carryover due to the Class A Notes on that payment date; provided,
further, that if the insurer defaults under the policy the amount payable
pursuant to clause (4) (b) above on any payment date thereafter will be paid to
the holder of the transferor interest after payment of principal and interest
due on the Class A Notes are made on that payment date, including any LIBOR
carryover. The policy does not cover the payment of any LIBOR carryover due the
Class A Noteholders.
Interest paid on the notes on each payment date will have accrued on the
note principal balance during an interest period commencing on the preceding
payment date, or in the case of the first payment date, the closing date,
through the day preceding that payment date on the basis of the actual number of
days in the interest period and a 360-day year. Interest for any payment date
due but not paid on that payment date will be due on the next succeeding payment
date together with additional interest on that amount at the Class A note rate.
Calculation of the Note Rate.
The Class A note rate for a payment date will equal the lesser of (A) the
sum of (a) LIBOR, as of the second LIBOR business day prior to the immediately
preceding payment date, or as of two LIBOR business days prior to the closing
date, for the first payment date, plus (b) 0.43% per annum and (B) the net funds
cap.
The net funds cap for any payment date shall be the average of the loan
rates of the mortgage loans net of the master servicing fee rate and the rates
at which the indenture trustee fee, the owner trustee fee and the premium on the
policy are paid, weighted based on the principal balances of the mortgage loans
outstanding on the first day of the related collection period.
With respect to any payment date, LIBOR carryover is the sum of (1) if on
that payment date the note rate is based on the net funds cap, the excess of (a)
the amount of interest the notes would otherwise be entitled to receive had the
rate been calculated without regard to the net funds cap up to a per annum rate
of 15% over (b) the amount of interest payable in respect of such notes at the
net funds cap for that payment date, (2) the LIBOR carryover for all previous
payment dates not previously paid, and (3) one month's interest on the amount
calculated in (2) at the note rate, without regard to the net funds cap but not
exceeding 15% per annum. Neither the spread account nor the policy covers the
payment of any LIBOR carryover.
Calculation of the LIBOR Rates. For any payment date, LIBOR shall be
established by the indenture trustee and will equal the rate for United States
dollar deposits for one month which appears on the Telerate Screen Page 3750 as
of 11:00 A.M., London time, on the second LIBOR business day prior to the first
day of the related interest period. "Telerate Screen Page 3750" means the
display designated as page 3750 on the Telerate Service, or another page that
may replace page 3750 on that service for the purpose of
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displaying London interbank offered rates of major banks. If the rate does not
appear on that page, or another page as may replace that page on that service,
or if the service is no longer offered, another service for displaying LIBOR or
comparable rates as may be selected by the master servicer after consultation
with the indenture trustee, the rate will be the reference bank rate. The
reference bank rate will be determined on the basis of the rates at which
deposits in U.S. Dollars are offered by the reference banks, which shall be
three major banks that are engaged in transactions in the London interbank
market, selected by the master servicer after consultation with the indenture
trustee, as of 11:00 A.M., London time, on the day that is two LIBOR business
days prior to the immediately preceding payment date to prime banks in the
London interbank market for a period of one month in amounts approximately equal
to the principal amount of the Class A Notes then outstanding. The indenture
trustee will request the principal London office of each of the reference banks
to provide a quotation of its rate. If at least two quotations are provided, the
rate will be the arithmetic mean of the quotations. If fewer than two quotations
are provided as requested, the rate will be the arithmetic mean of the rates
quoted by two or more major banks in New York City, selected by the master
servicer after consultation with the indenture trustee, as of 11:00 A.M., New
York City time, on that date for loans in U.S. Dollars to leading European banks
for a period of one month in amounts approximately equal to the principal amount
of the Class A Notes then outstanding. If no quotations can be obtained, the
rate will be LIBOR for the prior payment date.
LIBOR business day is any day other than a Saturday or a Sunday or 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.
Payments of Principal Collections. On any payment date during the period
beginning on the first payment date and, unless a Rapid Amortization Event shall
have earlier occurred, ending immediately after the payment date in September
2004 (such period, the "Managed Amortization Period"), the amount of principal
collections payable to the noteholders will equal, to the extent funds are
available therefor, the Scheduled Principal Collections Payment Amount. The
"Scheduled Principal Collections Payment Amount" shall equal the lesser of
(1) the Maximum Principal Payment and (2) the Alternative Principal Payment. For
any payment date, the "Maximum Principal Payment" will equal the product of the
Investor Fixed Allocation Percentage and principal collections on mortgage loans
for that payment date. For any payment date, the "Alternative Principal Payment"
will equal the amount, but not less than zero, of principal collections on
mortgage loans for that payment date less the aggregate of additional balances
created during the collection period.
The "Rapid Amortization Period" is the period beginning at the earlier of
(1) the occurrence of a Rapid Amortization Event and (2) immediately following
the payment date in September 2004 and continuing until the aggregate note
principal balance is reduced to zero, all amounts then due and owing to the
insurer have been paid and the Trust is terminated. See "Description of the
Agreements--Termination; Retirement of the Notes."
Beginning with the first payment date following the end of the Managed
Amortization Period, the amount of principal collections payable to the
noteholders on each payment date will be equal to the Maximum Principal Payment.
Payments of principal collections based upon the Investor Fixed Allocation
Percentage may result in payments of principal to the noteholders in amounts
that are greater relative to the declining principal balance of the mortgage
loans than would be the case if the Investor Floating Allocation Percentage were
used to determine the percentage of principal collections distributed in respect
of the invested amount. Principal collections not allocated to the noteholders
will be allocated to the transferor interest. The aggregate payments of
principal to the noteholders will not exceed the original note principal
balance.
In addition, to the extent of funds available therefor, including funds
available in the spread account and under the policy, on the payment date in
December 2029, noteholders will be entitled to receive as a payment of principal
an amount equal to the outstanding note principal balance.
Transferor Collections. Interest collections allocable to the transferor
interest will be paid to the transferor on each payment date; provided, however,
if the notes have any outstanding LIBOR carryover on
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any payment date, after giving effect to the payment of the Investor Interest
Collections, interest collections allocable to the transferor interest will be
paid to the noteholders in respect of any LIBOR carryover. Principal collections
allocable to the transferor interest will be distributed to the transferor only
to the extent that the payment will not reduce the amount of the transferor
interest below the Minimum Transferor Interest. Amounts not distributed to the
transferor because of this limitation will be retained in the distribution
account until the transferor interest exceeds the Minimum Transferor Interest,
at which time the excess shall be released to the transferor.
The Paying Agent. The paying agent shall initially be the indenture
trustee. The paying agent shall have the revocable power to withdraw funds from
the distribution account for the purpose of making payments to the noteholders.
THE SPREAD ACCOUNT
The sale and servicing agreement requires the master servicer to establish
in the name of the indenture trustee on the closing date and to maintain a
spread account. The spread account is for the benefit of the insurer and the
noteholders. On the closing date, the transferor will make a deposit to the
spread account, as specified in the sale and servicing agreement. No additional
deposits will be required to be made to the spread account.
On any payment date, prior to giving effect to any draw on the policy, any
amounts on deposit in the spread account will be available to cover any
shortfall in the amount required to be paid in respect of interest (other than
LIBOR carryover) on the notes, after giving effect to the payment of Investor
Interest Collections. In addition, prior to giving effect to any draw on the
policy, any amounts on deposit in a spread account will be available on any
payment date, other than the final payment date, to pay principal on the notes
in an amount, if any, by which the aggregate note principal balance exceeds the
invested amount as of that payment date, after giving effect to the payment of
principal collections on the notes on that payment date. On the final payment
date, prior to giving effect to any draw on the policy, amounts in the spread
account will be available to pay the aggregate note principal balance, after
giving effect to the payment of principal collections on that payment date.
The sale and servicing agreement permits reduction of the amount on deposit
in the spread account as specified in the sale and servicing agreement. Any
reduction will be dependent on the delinquency and loss performance of the
mortgage loans. The maximum amount required to be on deposit at any time in the
spread account is the spread account requirement.
The amounts on deposit in the spread account in excess of the spread
account requirement will first be available to compensate noteholders for any
LIBOR carryover then outstanding and then will be distributed to the transferor.
The transferor will not be required to refund any amounts previously and
properly distributed to it, regardless of whether there are sufficient funds on
a subsequent payment date to make a full payment to the holders of the notes.
Funds credited to the spread account may be invested in Eligible Investments or
other investments specified in the sale and servicing agreement that are
scheduled to mature on or prior to the next payment date. The spread account is
required to be an Eligible Account.
The spread account may be terminated or other assets, including 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 insurer and the rating agencies consent to this action
and the then current ratings of the notes assigned by the rating agencies
without regard to the policy are not lowered as a result.
PRE-FUNDING ACCOUNT
On the closing date, up to $65,871,656 will be deposited into the
pre-funding account. The pre-funding account will be an Eligible Account. It is
expected that the seller will have originated or acquired subsequent mortgage
loans between September 1, 1999 and 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 account on the closing date will be reduced by
the principal balances of the subsequent mortgage loans transferred to the
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trust on the closing date. Amounts on deposit in a pre-funding account may be
used only to acquire subsequent mortgage loans in accordance with the sale and
servicing agreement during the funding period. The funding period begins on the
closing date and ends on December 28, 1999. Any amount in the pre-funding
account remaining at the end of the funding period will be treated as a
principal collection for the January 2000 payment date.
Amounts on deposit in the pre-funding account will be invested in Eligible
Investments or certain other investments specified in the sale and servicing
agreement. Any interest earned on the pre-funding account will taxable to the
seller.
CAPITALIZED INTEREST ACCOUNT
On the closing date, the amount specified in the sale and servicing
agreement will be deposited into a separate capitalized interest account in the
name of the indenture trustee on behalf of the trust. The amounts on deposit in
the capitalized interest account, including reinvestment income, will be used by
the indenture trustee as an interest collection to fund on October 1999,
November 1999, December 1999, January 2000 and February 2000 payment dates the
excess of the amount of interest accruing at the note rate on the amount by
which the note principal balance as of such payment date exceeds the principal
balance of the mortgage loans that have due dates in the related collection
period over the amount of any investment earnings on funds in the pre-funding
account that is available to pay interest on the Class A Notes on such payment
date. Any amounts remaining in the capitalized interest accounts following the
February 2000 payment date will be paid to the seller.
Amounts on deposit in the capitalized interest account will be invested in
Eligible Investments or certain other investments specified in the sale and
servicing agreement that are scheduled to mature on or prior to the next payment
date. Any net reinvestment earnings on amounts in the capitalized interest
account will be taxable to the seller.
RAPID AMORTIZATION EVENTS
As described above, the Managed Amortization Period will continue through
the payment date in September 2004, unless a Rapid Amortization Event occurs
prior to the date, in which case the Rapid Amortization Period will commence.
The "Rapid Amortization Period" is the period commencing on the end of the
Managed Amortization Period and concluding upon the date on which all amounts
due and owing to the insurer and the related noteholders have been paid and the
trust is terminated. A "Rapid Amortization Event" refers to any of the following
events:
(a) failure on the part of Provident to make a payment or deposit
required under the agreements or to observe or perform in any material
respect any other covenant or obligation of Provident set forth in the
agreements, which failure materially and adversely affects the interests of
the noteholders or the insurer and continues unremedied for a period of
30 days after written notice;
(b) any representation or warranty made by Provident in the agreements
proves to have been incorrect in any material respect when made and
continues to be incorrect in any material respect for a period of 30 days
after written notice and as a result of which the interests of the
noteholders or the insurer are materially and adversely affected; provided,
however, that a Rapid Amortization Event shall not be deemed to occur with
respect to a breach of representation and warranty relating to a mortgage
loan if Provident has purchased or made a substitution for that mortgage
loan during that period, or within an additional 60 days, with the consent
of the indenture trustee and the insurer, in accordance with the provisions
of the sale and servicing agreement;
(c) the occurrence of certain events of bankruptcy, insolvency or
receivership relating to Provident;
(d) the trust becomes subject to regulation by the SEC as an
investment company within the meaning of the Investment Company Act, of
1940, as amended;
(e) the aggregate of all draws under the policy exceeds 1% of the pool
balance and the amount on deposit in the pre-funding account as of the
closing date;
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(f) an Event of Default under the indenture resulting in the principal
amount of the notes being then due and payable; or
(g) any other events specified in the sale and servicing agreement.
In the case of any event described in clause (a), (b) or (g), a Rapid
Amortization Event will be deemed to have occurred only if after the applicable
grace period described in such clauses, either the indenture trustee or
noteholders holding notes evidencing more than 51% of the note principal
balance, with the consent of the insurer, or the insurer--so long as there is no
default by the insurer in the performance of its obligations under the
policy--by written notice to the transferor and the master servicer (and to the
indenture trustee, if given by the noteholders) declare that a Rapid
Amortization Event has occurred as of the date of the notice. In the case of any
event described in clause (c), (d), (e) or (f) a Rapid Amortization Event will
be deemed to have occurred without any notice or other action on the part of the
indenture trustee, the insurer or the noteholders immediately upon the
occurrence of the event.
In addition to the consequences of a Rapid Amortization Event discussed
above, if the transferor goes into liquidation or any person is appointed a
receiver of the transferor, on the day of any appointment no further additional
balances will be transferred to the trust, the transferor will immediately cease
to transfer additional balances to the trust and the transferor will promptly
give notice to the indenture trustee and the insurer of the appointment.
Notwithstanding the foregoing, if a conservator or receiver is appointed
for the transferor and no Rapid Amortization Event exists other than the
conservatorship, receivership or insolvency of the transferor, the conservator
or receiver may have the power to prevent the commencement of the Rapid
Amortization Period or the cessation of the transfer of additional balances to
the trust.
THE POLICY
The following information has been supplied by the Insurer for inclusion in
this Prospectus Supplement. Accordingly, Provident does not make any
representation as to the accuracy and completeness of such information.
The Insurer, in consideration of the payment of the premium and subject to
the terms of the note guaranty insurance policy (the "Policy"), thereby
unconditionally and irrevocably guarantees to any Owner (as described below)
that an amount equal to each full and complete Insured Payment (as described
below) will be received by the indenture trustee, or its successor, as trustee
for the Owners (the "Indenture Trustee"), on behalf of the Owners from the
Insurer, for distribution by the Indenture Trustee to each Owner of each Owner's
proportionate share of the Insured Payment. The 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
Indenture Trustee, whether or not such funds are properly applied by the
Indenture 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 Notes, unless such acceleration is at the sole
option of the Insurer.
Notwithstanding the foregoing paragraph, the Policy does not cover
shortfalls, if any, attributable to the liability of the trust or the Indenture
Trustee for withholding taxes, if any (including interest and penalties in
respect of any such liability).
The Insurer will pay any Insured Payment that is a Preference Amount (as
described below) on the Business Day following receipt on a Business Day (as
described below) by the Fiscal Agent (as described below) of
o a certified copy of the order requiring the return of a preference
payment,
o an opinion of counsel satisfactory to the Insurer that such order is
final and not subject to appeal,
o an assignment in such form as is reasonably required by the Insurer,
irrevocably assigning to the Insurer all rights and claims of the
Owner relating to or arising under the Class A Notes against the
debtor that made such preference payment or otherwise with respect
to such preference payment and
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o appropriate instruments to effect the appointment of the Insurer as
agent for such Owner in any legal proceeding related to such
preference payment, such instruments being in a form satisfactory to
the 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 Notes to such receiver or trustee in
bankruptcy, in which case such payment shall be disbursed to such Owner.
The 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 Payment Date on which
the related Deficiency Amount is due or the third Business Day following receipt
in New York, New York on a Business Day by State Street Bank and Trust Company,
N.A., as Fiscal Agent for the Insurer or any successor fiscal agent appointed by
the 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 Insurer or the Fiscal Agent, as the case may be, shall
promptly so advise the Indenture Trustee and the Indenture 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 Indenture 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 Indenture Trustee for the payment of such
Insured Payment and legally available therefor.
The Fiscal Agent is the agent of the 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 Insurer to deposit or cause to be deposited, sufficient funds
to make payments due under the Policy.
Subject to the terms of the Agreement, the Insurer shall be subrogated to
the rights of each Owner to receive payments under the Notes to the extent of
any payment by the Insurer under the Policy.
As used in the Policy, the following terms shall have the following
meanings:
"Agreement" means the Sale and Servicing Agreement dated as of
September 1, 1999 among Provident, as transferor and master servicer, the trust,
and the Indenture Trustee without regard to any amendment or supplement thereto
unless such amendment or modification has been approved in writing by the
Insurer.
"Business Day" means any day other than (1) a Saturday, a Sunday or (2) a
day on which the Insurer or banking institutions in New York City or the city in
which the corporate trust office of the Indenture Trustee under the Agreement is
authorized or obligated by law or executive order to be closed.
"Deficiency Amount" means for any Payment Date the sum of (A) the excess,
if any, of (1) accrued and unpaid interest for the related Interest Period due
on the Class A Notes at the Note Rate on the Note Principal Balance as of the
first day of such Interest Period (after giving effect to distributions made on
such date) net of Civil Relief Act Shortfalls over (2) amounts on deposit in the
Distribution Account (including, without limitation, amounts available from the
Spread Account) available to be distributed therefor on such Payment Date and
(B) the Guaranteed Principal Amount.
"Final Payment Date" means the Payment Date in December 2029.
"Guaranteed Principal Amount" means (a) for any Payment Date (other than
the Final Payment Date) the amount, if any, by which the aggregate Note
Principal Balance exceeds the Invested Amount as of such Payment Date (after
giving effect to all payments of principal on the notes on such Payment Date
pursuant to the Agreement) and (b) on the Final Payment Date, the outstanding
aggregate Note Principal Balance (after giving effect to all other payments of
principal on the Class A Notes on such Payment Date pursuant to the Agreement).
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"Insured Payment" means (1) as of any Payment Date, any Deficiency Amount
and (2) any Preference Amount.
"Notice" means the telephonic or telegraphic notice, promptly confirmed in
writing by telecopy, substantially in the form of Exhibit A attached to the
Policy, the original of which is subsequently delivered by registered or
certified mail, from the Indenture Trustee specifying the Insured Payment which
shall be due and owing on the applicable Payment Date.
"Owner" means each Holder (as defined in the Agreement) who, on the
applicable Payment Date, is entitled under the terms of the Class A Notes to
payment thereunder.
"Preference Amount" means any amount previously distributed to an Owner on
the Class A Notes 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 Insurer.
Any notice under the Policy or service of process on the Fiscal Agent or
the Insurer may be made at the address listed below for the Fiscal Agent or the
Insurer or such other address as the Insurer shall specify in writing to the
Indenture Trustee.
The notice address of the Fiscal Agent is 61 Broadway, 15th Floor, New
York, New York 10006, Attention: Municipal Registrar and Paying Agency, or such
other address as the Fiscal Agent shall specify to the Indenture Trustee in
writing.
The Policy is being issued under and pursuant to, and shall be construed
under, the laws of the State of New York, without giving effect to the conflict
of laws principles thereof.
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 Notes.
POOL FACTOR
The pool factor is a seven-digit decimal which the master servicer will
compute monthly, expressing the note principal balance of the notes as of each
payment date, after giving effect to any payment of principal on that payment
date, as a proportion of the original note principal balance. On the closing
date, the pool factor for the notes will be 1.0000000. Thereafter, the pool
factor for the notes will decline to reflect reductions in the note principal
balance resulting from payments of principal on the notes.
Pursuant to the sale and servicing agreement, monthly reports concerning
the invested amount, pool factor and various other items of information will be
made available to the noteholders. In addition, within 60 days after the end of
each calendar year, beginning with the 1999 calendar year, information for tax
reporting purposes will be made available to each person who has been a
noteholder of record at any time during the preceding calendar year. See
"Description of the Notes--Book-Entry Notes" and "Description of the
Agreements--Reports to Noteholders" herein.
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MATURITY AND PREPAYMENT CONSIDERATIONS
The agreements, except as otherwise described herein, provide that the
noteholders will be entitled to receive on each payment date payments of
principal until the note principal balance is reduced to zero. During the
Managed Amortization Period, noteholders will receive amounts from principal
collections on the mortgage loans based upon the Investor Fixed Allocation
Percentage, subject to reduction as described below. During the Rapid
Amortization Period, noteholders will receive amounts from principal collections
on the mortgage loans based solely upon the Investor Fixed Allocation
Percentage. Because payments of principal collections to noteholders reduce the
Investor Floating Allocation Percentage but do not change the Investor Fixed
Allocation Percentage, allocations of principal collections based on the
Investor Fixed Allocation Percentage may result in payments of principal to the
noteholders in amounts that are greater relative to the declining balance of the
mortgage loans than would be the case if the Investor Floating Allocation
Percentage were used. This is especially true during the Rapid Amortization
Period when the noteholders are entitled to receive the Investor Fixed
Allocation Percentage of principal collections and not a lesser amount.
To the extent obligors on the revolving credit-line loans make more draws
than principal collections, the transferor interest may increase. Because during
the Rapid Amortization Period the noteholders' share of principal collections is
based upon the Investor Fixed Allocation Percentage, an increase in the
transferor interest due to additional draws may also result in noteholders
receiving principal at a greater rate than would otherwise occur if the Investor
Floating Allocation Percentage were used to determine the percentage of
principal collections distributed to noteholders. The sale and servicing
agreement permits the transferor, at its option, but subject to the satisfaction
of conditions specified in the sale and servicing agreement, including the
conditions described below, to remove mortgage loans from the trust at any time
during the life of the trust, so long as the transferor interest, after giving
effect to such removal, is not less than its Minimum Transferor Interest. Such
removals may affect the rate at which principal is distributed to noteholders by
reducing the pool balance and thus the amount of principal collections. See
"Description Of The Notes--Optional Transfers of Mortgage Loans to the
Transferor."
The prepayment experience with respect to the mortgage loans will affect
the weighted average life of the notes.
The rate of prepayment on the mortgage loans cannot be predicted. Provident
is not aware of any publicly available studies or statistics that accurately
predict or forecast the rate of prepayment of mortgage loans similar to the
mortgage loans in the trust. Generally, home equity loans are not viewed by
borrowers as permanent financing. Accordingly, the mortgage loans will
experience a higher rate of prepayment than purchase money first mortgage loans.
Because the revolving credit-line loans will generally not amortize during the
draw period--which in the case of the one-year draw period loans may
automatically renew for extended periods as described herein--rates of principal
payment on the mortgage loans may be slower than those of traditional
fully-amortizing first mortgages in the absence of prepayments on the mortgage
loans. The prepayment experience of the mortgage loans in the trust may be
affected by a wide variety of factors, including general economic conditions,
prevailing interest rate levels, the availability of alternative financing,
homeowner mobility, the frequency and amount of any future draws on the
revolving credit-line loans and changes affecting the deductibility for Federal
income tax purposes of interest payments on home equity loans. Substantially all
of the mortgage loans contain due-on-sale provisions, and the master servicer
intends to enforce the provisions, unless the enforcement is not permitted by
applicable law. The enforcement of a due-on-sale provision will have the same
effect as the prepayment of a 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 fixed-rate closed-end loans, is
affected by prevailing market rates for mortgage loans of a 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 mortgage 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.
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The yield to an investor who purchases the notes in the secondary market at
a price other than par will vary from the anticipated yield if the rate of
payment on the mortgage loans is actually different than the rate assumed by the
investor at the time the notes were purchased.
Collections on the mortgage loans may vary because, among other things,
borrowers may make payments during any month as low as the minimum monthly
payment for the month which, in the case of the revolving credit-line loans may
be the related finance charge or as high as the entire outstanding principal
balance plus accrued interest and the fees and charges. It is possible that
borrowers may fail to make scheduled payments. Collections on the mortgage loans
may vary due to seasonal purchasing and payment habits of borrowers.
No assurance can be given as to the level of prepayments that will be
experienced by the trust, but it can be expected that a portion of borrowers
will not prepay their mortgage loans to any significant degree. See "Description
Of The Securities--Weighted Average Life of the Securities" in the prospectus.
The yield to investors on the notes will be sensitive to, among other
things, the level of one-month LIBOR. As described herein, the interest rate on
the notes may in no event exceed the net funds cap, which depends, in large
part, on the net loan rates. 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 net funds cap. Although the majority of
the mortgage loans bears interest at an adjustable rate, the rate is subject to
a lifetime cap. Thus, the adjusted interest rate on a mortgage loan may not
equal the Index plus the margin due to the constraint of the caps. In such
event, the interest rate will be less than would have been the case in the
absence of the cap. In addition, there may be a lag in time between an increase
in the Index and a corresponding increase in the interest rate which will slow
the adjustment of the net funds cap. See "Description of the Mortgage Loans"
herein.
Several of the interest rates on the adjustable mortgage loans adjust less
frequently than the interest rate on the notes and adjust by reference to the
Index or are fixed over the term of the mortgage loan. 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 notes.
INCREASE IN PRINCIPAL COLLECTIONS
During the pre-funding period, it is expected that approximately
$65,871,656 of subsequent mortgage loans will be transferred to the trust. In
the event that less than such amounts of subsequent mortgage loans are
transferred to the trust, principal collections on the payment date immediately
following the end of the funding period will be increased by an amount equal to
the excess of $65,871,656 over the aggregate cut-off date principal balance of
the subsequent mortgage loans. Although no assurances can be given, Provident
intends that the principal amount of mortgage loans in the trust at the end of
the funding period will substantially equal the note principal balance as of
such date divided by 99%. Accordingly, there should be no material increase in
principal collections due to a lack of subsequent mortgage loans.
DESCRIPTION OF THE AGREEMENTS
The following summary describes certain terms of the sale and servicing
agreement, the trust agreement and the indenture. The summary does not purport
to be complete and is subject to, and qualified in its entirety by reference to,
the respective provisions of the sale and servicing agreement, the trust
agreement and the indenture. Whenever particular defined terms in the indenture
are referred to, the defined terms are incorporated by reference. See "The
Agreements" in the Prospectus.
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REPORTS TO NOTEHOLDERS
Concurrently with each payment to the noteholders, the master servicer will
forward to the indenture trustee and the indenture trustee will make available
to the noteholders and the insurer a statement setting forth among other items:
(1) the Investor Floating Allocation Percentage for the preceding
collection period;
(2) the amount being distributed to noteholders;
(3) the amount of interest included in the payment and the note rate;
(4) the amount, if any, of overdue accrued interest and LIBOR
carryover included in the payment;
(5) the amount, if any, of the remaining overdue accrued interest
after giving effect to the payment;
(6) the amount, if any, of principal included in the payment;
(7) the amount, if any, of the Liquidation Loss Amounts incurred
during the preceding collection period;
(8) the master servicing fee for the payment date;
(9) the invested amount and the note principal balance after giving
effect to the payment;
(10) the pool balance as of the end of the preceding collection
period;
(11) the number and aggregate principal balances of the mortgage loans
as to which the minimum monthly payment is delinquent to 30-59 days,
60-89 days and 90 or more days, respectively, as of the end of the
collection period;
(12) the book value of any real estate which is acquired by the trust
through foreclosure or grant of deed in lieu of foreclosure;
(13) the amount of any draws on the policy; and
(14) the amount on deposit in the spread account and the amount on
deposit in the Simple Interest Excess Sub-Account.
In the case of information furnished pursuant to clauses (2), (3), (4) and
(8) above, the amounts shall be expressed as a dollar amount per note with a
$1,000 denomination.
The indenture trustee will make such reports (and, at its option, any
additional files containing the same information in an alternative format)
available each month to the noteholders, the master servicer, the seller, the
insurer and the other parties to the sale and servicing agreement via the
indenture trustee's internet website and its fax-on-demand service. The
indenture trustee's fax-on-demand service may be accessed by calling
(301) 815-6610. The indenture trustee's internet website shall initially be
located at "www.ctslink.com". Assistance in using the website or fax-on-demand
service can be obtained by calling the indenture trustee's customer service desk
at (301) 815-6600. Parties that are unable to use the above distribution options
are entitled to have a paper copy mailed to them via first class mail by calling
the customer service desk and indicating such. The indenture trustee shall have
the right to change the way such reports are distributed in order to make such
distribution more convenient and/or more accessible to the above parties and the
indenture trustee shall provide timely and adequate notification to all above
parties regarding any such changes.
Each year commencing in 2000, the master servicer will be required to
forward to the indenture trustee a statement containing the information set
forth in clauses (3) and (6) above aggregated for the calendar year.
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 sale and
servicing agreement, follow the same collection procedures as it follows from
time to time with respect to the home equity loans in its servicing portfolio
similar to the
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mortgage loans. 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.
The master servicer may arrange with a borrower a schedule for the payment
of due and unpaid interest, provided that the arrangement is consistent with the
master servicer's policies with respect to the home equity mortgage loans it
owns or services and the terms of the sale and servicing agreement. In
accordance with the terms of the sale and servicing agreement, the master
servicer may consent under some circumstances to the placing of a subsequent
senior lien in respect of a mortgage loan.
HAZARD INSURANCE
The master servicer will cause to be maintained for each mortgage loan 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 the outstanding principal balance on the mortgage loan and any related
mortgage loans secured by senior lien(s) and the maximum insurable value of the
improvements securing the mortgage loan. Generally, if a mortgaged property is
in an area identified in the Federal Register by the Flood Emergency Management
Agency as FLOOD ZONE "A", flood insurance has been made available and the master
servicer determines that the 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. The flood insurance policy will be in an amount
representing coverage not less than the lesser of the outstanding principal
balance of the mortgage loan and any related mortgage loans secured by senior
lien(s) and the maximum amount of insurance available under the National Flood
Insurance Act of 1968, as amended. Any amounts collected by the master servicer
under the 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 related collection account in accordance with the sale and servicing
agreement.
In the event that the master servicer obtains and maintains a blanket
policy as provided in the sale and servicing agreement insuring against fire and
hazards of extended coverage on all of the mortgage loans then, to the extent
the 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 the mortgage loans as they come into
default when, in accordance with applicable servicing procedures under the sale
and servicing agreement, no satisfactory arrangements can be made for the
collection of delinquent payments. In connection with any foreclosure or other
conversion of ownership, the master servicer will follow practices as it deems
necessary or advisable and as are in keeping with its general mortgage servicing
activities. However, the master servicer will not be required to expend its own
funds in connection with any foreclosure or other conversion, correction of
default on any related senior mortgage loans or restoration of any property
unless, in its sole judgment, the 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 noteholders or the
transferor.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
With respect to each collection period, the master servicer will receive
from interest collections in respect of the mortgage loans a portion of the
interest collections as a monthly master servicing fee in the amount equal to
0.50% per annum on the aggregate principal balances of the mortgage loans as of
the first day of the related collection period. All assumption fees, late
payment charges and other fees and charges, to
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the extent collected from borrowers, will be retained by the master servicer as
additional servicing compensation.
Not later than five business days prior to each payment date, the master
servicer is required to remit to the indenture trustee, without any right of
reimbursement, an amount equal to the sum of (1) the lesser of (a) any
prepayment interest shortfalls on the mortgage loans with respect to the related
collection period and (b) the aggregate master servicing fee received by the
master servicer in the most recently ended collection period, and (2) the lesser
of (a) Net Simple Interest Shortfalls, if any, for the collection period
remaining after withdrawing available amounts from the simple interest excess
sub-account, and (b) the amount of the aggregate master servicing fee remaining
after application thereof as provided in clause (1). However, these amounts will
be in addition to any monthly advances on the mortgage loans. With respect to
each mortgage loan as to which a prepayment in full was received during the
collection period, the prepayment interest shortfall is the excess, if any, of
30 days interest on the principal balance of the mortgage loan at the net loan
rate, over the amount of interest actually paid by the related mortgagor in
connection with the principal prepayment.
The master servicer will pay some of the ongoing expenses associated with
the trust and incurred by it in connection with its responsibilities under the
sale and servicing agreement. In addition, the master servicer will be entitled
to reimbursement for certain expenses incurred by it in connection with
defaulted mortgage loans and in connection with the restoration of mortgaged
properties. This right of reimbursement is prior to the rights of noteholders to
receive any related net liquidation proceeds.
EVIDENCE AS TO COMPLIANCE
The sale and servicing agreement provides for delivery on or before May 31
in each year, beginning on May 31, 2000, to the indenture trustee, the rating
agencies and the insurer 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 sale and servicing agreement throughout the
preceding fiscal year, except as specified in the statement.
CERTAIN MATTERS REGARDING THE MASTER SERVICER
The sale and servicing agreement provides that the master servicer may not
resign from its obligations and duties, except in connection with a permitted
transfer of servicing, unless:
o the performance of the duties and obligations by the master servicer
are no longer permissible under applicable law or are in material
conflict by reason of applicable law with any other activities of a
type and nature presently carried on by it or its subsidiaries or
affiliates or
o upon the satisfaction of the following conditions: (a) the master
servicer has proposed a successor master servicer to the indenture
trustee and the insurer in writing and the proposed successor master
servicer is reasonably acceptable to the indenture trustee; (b) the
rating agencies have confirmed to the indenture trustee and the
insurer that the appointment of the proposed successor master
servicer as the master servicer will not result in the reduction or
withdrawal of the then current rating of the notes; and (c) the
proposed successor master servicer is acceptable to the insurer.
No resignation will become effective until the indenture trustee or a successor
master servicer has assumed the master servicer's obligations and duties under
the sale and servicing agreement.
The master servicer may perform any of its duties and obligations under the
sale and servicing agreement through one or more subservicers or delegates,
which may be affiliates of the master servicer. Notwithstanding this
arrangement, the master servicer will remain liable and obligated to the
indenture trustee, the owner trustee, the noteholders and the insurer for the
master servicer's duties and obligations under the sale and servicing agreement,
without any diminution of those duties and obligations and as if the master
servicer itself were performing those duties and obligations.
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Any person into which, in accordance with the sale and servicing agreement,
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
to the master servicer under the sale and servicing agreement.
The sale and servicing agreement provides that the master servicer will
indemnify the trust, the indenture trustee, the insurer and the owner 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 sale and servicing agreement. The
sale and servicing agreement provides that neither the master servicer nor their
directors, officers, employees or agents will be under any other liability to
the trust, the indenture trustee, the owner trustee, the noteholders or any
other person for any action taken or for refraining from taking any action
pursuant to the sale and servicing agreement. However, the master servicer will
not be protected against any liability which would otherwise be imposed by
reason of willful misconduct, bad faith or gross negligence of the master
servicer in the performance of its duties under the sale and servicing agreement
or by reason of reckless disregard of its obligations thereunder. In addition,
the sale and servicing 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 sale and servicing
agreement and which in its opinion may expose it to any expense or liability.
The master servicer may, in its sole discretion, undertake any legal action
which it may deem necessary or desirable with respect to the sale and servicing
agreement and the rights and duties of the parties thereto and the interest of
the noteholders and the insurer thereunder.
EVENTS OF SERVICING TERMINATION
"Events of Servicing Termination" are any of the following:
o any failure by the master servicer to make any Monthly Advance,
subject to the grace period described below, or any other failure by
the master servicer to make any deposit required to be made under
the sale and servicing agreement which continues unremedied for two
business days after written notice of such failure is given to the
master servicer by the indenture trustee or to the master servicer
and the indenture trustee by the insurer or by the holders of notes
evidencing not less than 25% of the aggregate note principal
balance;
o any failure by the master servicer duly to observe or perform in any
material respect any other of its covenants or agreements in the
sale and servicing agreement which, in each case, materially and
adversely affects the interests of the noteholders or the insurer
and continues unremedied for 30 days after written notice of such
failure is given to the master servicer by the indenture trustee, or
to the master servicer and the indenture trustee by the insurer or
noteholders evidencing not less than 25% of the aggregate note
principal balance;
o 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;
o the loss and deliquency performance of the mortgage loans exceeding
levels specified in the sale and servicing agreement; or
o events relating to the financial condition of the master servicer
set forth in the sale and servicing agreement.
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 its failure to
do so as described above, the indenture trustee will, unless the insurer
instructs otherwise and no insurer default exists and is continuing, immediately
terminate the rights and obligations of the master servicer under the sale and
servicing agreement and the indenture trustee, or any other successor master
servicer appointed in accordance with the sale and servicing agreement, will
make the monthly advance, in either case, as the successor master servicer.
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Notwithstanding the foregoing, a delay in or failure of performance
referred to under the first and second bullet points above for a period of ten
or 30 Business Days, respectively, shall not constitute an Event of Servicing
Termination if the delay or failure could not be prevented by the exercise of
reasonable diligence by the master servicer and the delay or failure was caused
by an act of God, or other similar occurrence. Upon the occurrence of any of
these events, 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 sale and servicing agreement and the master servicer shall provide
the indenture trustee and the noteholders prompt notice of its failure or delay,
together with a description of its efforts to perform its obligations.
RIGHTS UPON AN EVENT OF SERVICING TERMINATION
So long as an Event of Servicing Termination, other than an Event of
Servicing Termination resulting from the failure of the master servicer to make
a Monthly Advance (which will be subject to the rights and remedies described in
the second preceding paragraph), remains unremedied, either the indenture
trustee shall at the direction of the insurer or may, with the consent of the
insurer, or noteholders evidencing at least 51% of the aggregate note principal
balance with the consent of the insurer, terminate all of the rights and
obligations of the master servicer under the sale and servicing agreement and in
and to the mortgage loans, whereupon the indenture trustee will succeed to all
the responsibilities, duties and liabilities of the master servicer under the
sale and servicing agreement and will be entitled to similar compensation
arrangements. In the event that the indenture trustee would be obligated to
succeed to the duties and obligations of the 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 sale and servicing agreement and having a net
worth of at least $15,000,000 and acceptable to the insurer to act as successor
to the master servicer under the sale and servicing agreement. Pending an
appointment, the indenture trustee will be obligated to act as master servicer
unless prohibited by law. The successor will be entitled to receive the same
compensation that the master servicer would otherwise have received, or such
lesser compensation as the indenture trustee and the successor may agree.
A receiver or conservator for the master servicer may be empowered to prevent
the termination and replacement of the master servicer where the only Event of
Servicing Termination that has occurred is an insolvency event.
Notwithstanding anything to the contrary above, there will be a transition
period, which shall not exceed 90 days, before any servicing transfer is fully
effected. During this transition period, the indenture trustee or successor
master servicer, as the case may be, may appoint a subservicer (which may be
Provident) with written approval of the insurer. Notwithstanding the foregoing,
the indenture trustee or successor master servicer, as the case may be, will be
the master servicer of record during the transition period, will be deemed to be
the master servicer under the sale and servicing agreement and will be obligated
to make any and all advances upon termination of the defaulting master servicer;
provided however the indenture trustee or successor servicer will not be liable
for any actions of a predecessor servicer during the transition period.
EVENTS OF DEFAULT UNDER THE INDENTURE
"Events of Default" under the indenture include:
(1) a default in the payment of any interest or principal payment when
it becomes due and payable and continuance of the default for a period of
five days;
(2) failure on the part of the indenture trustee to perform in any
material respect any covenant or agreement under the indenture, other than
a covenant covered in clause (1) above, or the breach of a representation
or warranty of the indenture trustee, which continues for a period of
thirty days after notice is given; and
(3) certain events of bankruptcy, insolvency, receivership or
liquidation of the trust.
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REMEDIES ON EVENT OF DEFAULT UNDER THE INDENTURE
If an Event of Default under the indenture has occurred and is continuing,
either the indenture trustee will at the direction of the insurer, or may, with
the consent of the insurer and the noteholders representing a majority of the
then outstanding principal amount of the notes, declare the principal amount of
the notes due and payable immediately. This declaration may with the consent of
the insurer be rescinded by the noteholders representing a majority of the then
outstanding principal amount of the notes.
If the principal of the notes has been declared due and payable as
described in the preceding paragraph, the indenture trustee may with the consent
of the insurer elect not to liquidate the assets of the trust provided that the
assets are generating sufficient cash to pay interest and principal as it
becomes due and payable to the noteholders.
However, the indenture trustee may not sell or otherwise liquidate the
assets of the trust following an Event of Default unless (a) the holders of 100%
of the notes and the insurer consent to the sale, or (b) the proceeds of the
sale or liquidation are sufficient to pay all amounts due and owing to the
noteholders and the insurer, or (c) the indenture trustee determines that the
assets of the trust would not be sufficient on an ongoing basis to make all
payments on the notes as they become due and payable and the indenture trustee
obtains the consent of the holders of 66 2/3% of the aggregate note principal
balance of the notes and the insurer.
CERTAIN MATTERS REGARDING THE INDENTURE TRUSTEE AND THE OWNER TRUSTEE
Neither the indenture trustee nor any director, officer or employee of the
indenture trustee will be under any liability to the trust or the noteholders
for taking any action or for refraining from the taking of any action in good
faith pursuant to the indenture, or for errors in judgment; provided, that none
of the indenture trustee or any director, officer or employee thereof will be
protected against any liability that would otherwise be imposed by reason of
willful malfeasance, bad faith or negligence in the performance of its duties or
by reason of its reckless disregard of its obligations and duties under the
indenture. Subject to the limitations set forth in the indenture, the indenture
trustee and any director, officer, employee or agent will be indemnified by the
trust and held harmless against any loss, liability or expense incurred in
connection with any of its duties under the agreements other than any loss,
liability or expense incurred by reason of its own willful malfeasance, bad
faith or negligence in the performance of its duties under the indenture, or by
reason of its reckless disregard of its obligations and duties under the
indenture. All persons into which the indenture trustee may be merged or with
which it may be consolidated, or any person resulting from such merger or
consolidation, will be the successor to the indenture trustee under the
indenture.
The owner trustee, the indenture trustee and any of their respective
affiliates may hold notes in their own names or as pledgees. For the purpose of
meeting the legal requirements of certain jurisdictions, the owner trustee and
the indenture trustee acting jointly, or in some instances, the owner trustee or
the indenture trustee acting alone, will have the power to appoint co-trustees
or separate trustees of all or any part of the trust. In the event of an
appointment, all rights, powers, duties and obligations conferred or imposed
upon the owner trustee by the sale and servicing agreement and the trust
agreement and the indenture trustee by the indenture will be conferred or
imposed upon the owner trustee and the indenture trustee, respectively, and in
each case that separate trustee or co-trustee jointly, or, in any jurisdiction
in which the owner trustee or indenture trustee will be incompetent or
unqualified to perform certain acts, singly upon such separate trustee or
co-trustee who will exercise and perform the rights, powers, duties and
obligations solely at the direction of the owner trustee or the indenture
trustee, respectively.
The owner trustee may resign at any time, in which event the indenture
trustee will be obligated to appoint a successor acceptable to the insurer. The
indenture trustee may also remove the owner trustee if it ceases to be eligible
under the trust agreement or becomes legally unable to act or becomes insolvent.
Any resignation or removal of the owner trustee and appointment of a successor
thereto will not become effective until acceptance of the appointment by the
successor.
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DUTIES OF THE OWNER TRUSTEE AND INDENTURE TRUSTEE
The owner trustee will make no representations as to the validity or
sufficiency of the trust agreement, the notes, or of any mortgage loan or
related documents, and will not be accountable for the use or application by
Provident or the master servicer of any funds paid to Provident or the master
servicer in respect of the notes, or the mortgage loans, or the investment of
any monies by the master servicer before the monies are deposited into the
collection account or the distribution account. The owner trustee will be
required to perform only those duties specifically required of it under the
trust agreement. Generally, those duties will be limited to the receipt of the
various certificates, reports or other instruments required to be furnished to
the owner trustee under the trust agreement, in which case it will only be
required to examine them to determine whether they conform to the requirements
of the trust agreement.
The indenture trustee will make no representations as to the validity or
sufficiency of the indenture, the notes, other than their execution and
authentication, or of any mortgage loans or related documents, and will not be
accountable for the use or application by Provident or the master servicer of
any funds paid to Provident or the master servicer in respect of the notes or
the mortgage loans, or the use or investment of any monies by the master
servicer before the monies are deposited into the collection account or the
distribution account. So long as no Event of Default has occurred and is
continuing, the indenture trustee will be required to perform only those duties
specifically required of it under the indenture. Generally, those duties will be
limited to the receipt of the various certificates, reports or other instruments
required to be furnished to the indenture trustee under the indenture, in which
case it will only be required to examine them to determine whether they conform
to the requirements of the indenture. The indenture trustee will not be charged
with knowledge of a failure by the master servicer to perform its duties under
the trust agreement or sale and servicing agreement which failure constitutes an
Event of Servicing Termination unless the indenture trustee obtains actual
knowledge of the failure, as will be specified in the indenture.
AMENDMENT
The sale and servicing agreement may be amended from time to time by the
parties to the agreement and with the consent of the insurer, but without the
consent of the noteholders, to cure any ambiguity, to correct or supplement any
provisions which may be inconsistent with any other provisions of the agreement,
to add to the duties of the transferor or the master servicer or to add or amend
any provisions of the agreement as required by the rating agencies in order to
maintain or improve any rating of the notes--it being understood that, after
obtaining the ratings in effect on the closing date, none of the transferor, the
indenture trustee, the owner trustee or the master servicer is obligated to
obtain, maintain, or improve any 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 that agreement, provided that the action
will not, as evidenced by an opinion of counsel, materially and adversely affect
the interests of any noteholder or the insurer; provided, that any amendment
will not be deemed to materially and adversely affect the noteholders and no
opinion will be required to be delivered if the person requesting the amendment
obtains a letter from the rating agencies stating that the amendment would not
result in a downgrading of the then current rating of the notes. The sale and
servicing agreement may also be amended from time to time by the parties to the
agreement, with the consent of noteholders evidencing an undivided interest in
the trust of at least 51% of the aggregate note principal balance and the
insurer for the purpose of adding any provisions to or changing in any manner or
eliminating any of the provisions of the sale and servicing agreement or of
modifying in any manner the rights of the noteholders, provided that the
amendment will not reduce in any manner the amount of, or delay the timing of,
collections of payments on the notes or payments under the policy which are
required to be made on any note without the consent of the holder of that note
and the insurer or reduce the aforesaid percentage required to consent to the
amendment, without the consent of the holders of all notes then outstanding.
The indenture provides that, without the consent of the holders of any
notes, but with the consent of the insurer and prior notice to the trust, the
indenture trustee, when authorized by a request of the trust pursuant to the
indenture, at any time and from time to time, may enter into one or more
supplemental indentures--which will conform to the provisions of the Trust
Indenture Act of 1939, as amended, as in force at the date of the execution--in
form satisfactory to the indenture trustee, for any of the following purposes:
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o to correct or amplify the description of any property at any time subject
to the lien of the indenture, or better to assure, convey and confirm
unto the indenture trustee any property subject or required to be
subjected to the lien of the indenture, or to subject to the lien of the
indenture additional property;
o to evidence the succession, in compliance with the applicable provisions
of the indenture, of another entity to the trust, and the assumption by
any successor of the covenants of the trust contained in the notes or the
indenture;
o to add to the covenants of the trust for the benefit of the holders of
the notes, or to surrender any right or power conferred upon the trust in
the indenture;
o to convey, transfer, assign, mortgage or pledge any property to or with
the indenture trustee;
o to cure any ambiguity, to correct or supplement any provision in the
indenture or in any supplemental indenture that may be inconsistent with
any other provision in the indenture or in any supplemental indenture;
o to make any other provisions with respect to matters or questions arising
under the indenture or in any supplemental indenture; provided, that this
action will not materially and adversely affect the interests of the
noteholders or the insurer;
o to evidence and provide for the acceptance of the appointment under the
indenture by a successor trustee with respect to the notes and to add to
or change any of the provisions of the indenture as will be necessary to
facilitate the administration of the trusts thereunder by more than one
trustee, pursuant to the requirements of the indenture; or
o to modify, eliminate or add to the provisions of the indenture to the
extent necessary to effect the qualification of the indenture under the
Trust Indenture Act or under any similar Federal statute enacted after
the date of the indenture and to add to the indenture other provisions as
may be expressly required by the Trust Indenture Act; provided, however,
that no supplemental indentures will be entered into unless the indenture
trustee shall have received an opinion of counsel to the effect that
entering into the supplemental indenture will not have any material
adverse tax consequences to the noteholders.
The indenture also provides that the parties to the indenture, when
authorized by a written request of the trust, also may, with prior notice to the
insurer and each rating agency and with the consent of the insurer and the
holders of notes affected thereby representing not less than a majority of the
aggregate note principal balance, enter into a supplemental indenture for the
purpose of adding any provisions to, or changing in any manner or eliminating
any of the provisions of, the indenture or of modifying in any manner the rights
of the noteholders; provided, that the supplemental indenture may not, without
the consent of the holder of each note affected thereby:
o change the date of payment of any installment of principal of or interest
on any note, or reduce the principal amount or the interest rate on any
note, change the provisions of the indenture relating to the application
of collections on, or the proceeds of the sale of, the corpus of the
trust to payment of principal of or interest on the notes, or change any
place of payment where, or the coin or currency in which, any note or the
interest on any note is payable, or impair the right to institute suit
for the enforcement of the provisions of the indenture requiring the
application of funds available to the payment of any amount due on the
notes on or after the respective dates such amounts become due;
o reduce the percentage of the note principal balances of the notes, the
consent of the holders of which is required for any supplemental
indenture, or the consent of the holders of which is required for any
waiver of compliance with certain provisions of the indenture or certain
defaults thereunder and their consequences provided for in the indenture;
o modify or alter the provisions of the proviso to the definition of the
term "outstanding" in the indenture or modify or alter the exception in
the definition of the term "holder" therein;
o reduce the percentage of the note principal balances of the notes
required to direct the indenture trustee to direct the trust to sell or
liquidate the corpus of the trust pursuant to the indenture;
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o modify any provision of the amendment provisions of the indenture except
to increase any percentage specified in the indenture or to provide that
additional provisions of the indenture or the other agreements cannot be
modified or waived without the consent of the holder of each note
affected;
o modify any of the provisions of the indenture in a manner as to affect
the calculation of the amount of any payment of interest or principal due
on any note on any payment date; or
o permit the creation of any lien ranking prior to or on a parity with the
lien of the indenture with respect to any part of the trust estate or,
except as otherwise permitted or contemplated in the indenture, terminate
the lien of the indenture on any property at any time subject thereto or
deprive the holder of any note of the security provided by the lien of
the indenture; and provided, further, that the action will not, as
evidenced by an opinion of counsel, cause the trust to be subject to an
entity level tax.
TERMINATION; RETIREMENT OF THE NOTES
The trust will terminate on the payment date following the later of
(A) payment in full of all amounts owing to the insurer and (B) the earliest of
(1) the payment date on which the aggregate note principal balance has been
reduced to zero, (2) the final payment or other liquidation of the last mortgage
loan in the trust or the disposition of all property acquired upon foreclosure
or by deed in lieu of foreclosure of any mortgage loan, (3) the optional
transfer to the transferor of all of the mortgage loans, as described below and
(4) the payment date in December 2029.
The mortgage loans will be subject to an optional transfer to the owner of
the transferor interest on any payment date after the aggregate note principal
balance is reduced to an amount less than 10% of the original note principal
balance of and all amounts due and owing to the insurer including unreimbursed
draws on the policy, together with interest thereon, as provided under the
insurance agreement, have been paid. The transfer price will be equal to the sum
of the aggregate note principal balance and its accrued and unpaid interest
thereon through the day preceding the transfer. In no event, however, will the
trust created by the trust agreement continue for more than 21 years after the
death of individuals named in the sale and servicing agreement. Written notice
of termination of the sale and servicing agreement will be given to each
noteholder, and the final payment will be made only upon surrender and
cancellation of the notes at an office or agency appointed by the indenture
trustee which will be specified in the notice of termination.
THE INDENTURE TRUSTEE
Norwest Bank Minnesota, National Association, a national banking
association, with its principal place of business in Minnesota, has been named
indenture trustee pursuant to the sale and servicing agreement and the
indenture.
The indenture trustee may own notes and have normal banking relationships
with the master servicer, the transferor and the insurer and/or their
affiliates.
The indenture trustee may resign at any time, in which event the trust will
be obligated to appoint a successor indenture trustee, with the consent of the
insurer, which consent shall not be unreasonably withheld. The insurer may also
remove the indenture trustee if the indenture trustee ceases to be eligible
under the agreements or if the indenture trustee becomes insolvent. Upon
becoming aware of these circumstances, the trust will be obligated to appoint a
successor indenture trustee, as approved by the insurer. Any resignation or
removal of the indenture trustee and appointment of a successor indenture
trustee will not become effective until acceptance of the appointment by the
successor indenture trustee.
No holder of a note will have any right under the agreements to institute
any proceeding with respect to the sale and servicing agreement unless the
insurer has consented in writing to the institution of the proceeding and the
holder previously has given to the indenture trustee written notice of default
and unless noteholders evidencing an aggregate, undivided interest in the trust
of at least 51% of the aggregate note principal balance have made written
requests upon the indenture trustee to institute such proceeding in its own name
as indenture trustee and have offered to the indenture trustee reasonable
indemnity and the indenture trustee for 60 days has neglected or refused to
institute the proceeding. The indenture trustee will be under no obligation to
exercise any of the trusts or powers vested in it by the agreements or to make
any
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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 noteholders, unless the noteholders have offered to the
indenture trustee reasonable security or indemnity against the costs, expenses
and liabilities which may be incurred therein or thereby and the insurer has
consented to the action, which consent shall not be unreasonably withheld.
USE OF PROCEEDS
The net proceeds to be received from the sale of the notes will be applied
by Provident towards the origination and purchase of the mortgage loans and for
general corporate and banking purposes.
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FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following discussion, which summarizes certain U.S. federal income tax
aspects of the purchase, ownership and disposition of the notes, is based on the
provisions of the Internal Revenue Code of 1986, as amended (the "Code"), the
Treasury Regulations thereunder, and published rulings and court decisions in
effect as of the date hereof, all of which are subject to change, possibly
retroactively. This discussion does not address every aspect of the U.S. federal
income tax laws which may be relevant to note owners in light of their personal
investment circumstances or to certain types of note owners subject to special
treatment under the U.S. federal income tax laws (for example, banks and life
insurance companies). Accordingly, investors should consult their tax advisors
regarding U.S. federal, state, local, foreign and any other tax consequences to
them of investing in the notes.
CHARACTERIZATION OF THE NOTES AS INDEBTEDNESS
Based on the application of existing law to the facts as set forth in the
agreements and other relevant documents and assuming compliance with the terms
of the agreements as in effect on the date of issuance of the notes, Brown &
Wood LLP, special tax counsel to the trust ("Tax Counsel") and counsel to the
Underwriters, is of the opinion that (i) the notes will be treated as debt
instruments for federal income tax purposes as of such date and (ii) the trust
will not be characterized as an association (or publicly traded partnership)
taxable as a corporation or as a taxable mortgage pool within the meaning of
Section 7701(i) of the Code. Accordingly, upon issuance, the notes will be
treated as "Debt Securities" as described in the prospectus. See "Federal Income
Tax Consequences" in the prospectus.
The transferor and the noteholders express in the sale and servicing
agreement their intent that, for applicable tax purposes, the notes will be
indebtedness secured by the mortgage loans. The transferor and the noteholders,
by accepting the notes, and each note owner by its acquisition of a beneficial
interest in a note, have agreed to treat the notes as indebtedness for U.S.
federal income tax purposes. However, because different criteria are used to
determine the non-tax accounting characterization of the transaction, the
transferor intends to treat this transaction as a sale of an interest in the
principal balances of the mortgage loans for financial accounting and certain
regulatory purposes.
In general, whether for U.S. federal income tax purposes a transaction
constitutes a sale of property or loan, the repayment of which is secured by
property, is a question of fact, the resolution of which is based upon the
economic substance of the transaction rather than its form or the manner in
which it is labeled. While the Internal Revenue Service (the "IRS") and the
courts have set forth several factors to be taken into account in determining
whether the substance of a transaction is a sale of property or a secured loan,
the primary factor in making this determination is whether the transferee has
assumed the risk of loss or other economic burdens relating to the property and
has obtained the benefits of ownership thereof. Tax Counsel has analyzed and
relied on several factors in reaching its opinion that the weight of the
benefits and burdens of ownership of the mortgage loans has been retained by the
transferor and has not been transferred to the note owners.
In some instances, courts have held that a taxpayer is bound by the
particular form it has chosen for a transaction, even if the substance of the
transaction does not accord with its form. Tax Counsel has advised that the
rationale of those cases will not apply to this transaction, because the form of
the transaction as reflected in the operative provisions of the documents either
accords with the characterization of the notes as debt or otherwise makes the
rationale of those cases inapplicable to this situation.
TAXATION OF INTEREST INCOME OF NOTE OWNERS
Assuming that the note owners are holders of debt obligations for U.S.
federal income tax purposes, the notes generally will be taxable as debt
securities. See "Federal Income Tax Consequences" in the prospectus.
While it is not anticipated that the notes will be issued at a greater than
de minimis discount, under Treasury regulations (the "OID Regulations") it is
possible that the notes could nevertheless be deemed to have been issued with
original issue discount ("OID") if the interest were not treated as
unconditionally
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payable under the OID Regulations. If such regulations were to apply, all of the
taxable income to be recognized with respect to the notes would be includible in
income of note owners as OID, but would not be includible again when the
interest is actually received. See "Federal Income Tax Consequences--Taxation of
Debt Securities; Interest and Acquisition Discount" in the prospectus for a
discussion of the application of the OID rules if the notes are in fact issued
at a greater than de minimis discount or are treated as having been issued with
OID under the OID Regulations. For purposes of calculating OID, it is likely
that the notes will be treated as Pay-Through Securities.
POSSIBLE CLASSIFICATION OF THE TRUST AS A PARTNERSHIP OR ASSOCIATION TAXABLE AS
A CORPORATION
The opinion of Tax Counsel is not binding on the courts or the IRS. It is
possible that the IRS could assert that for purposes of the Code, the
transaction contemplated by this prospectus with respect to the notes
constitutes a sale of the mortgage loans (or an interest therein) to the note
owners and that the proper classification of the legal relationship between the
transferor and the note owners resulting from this transaction is that of a
partnership (including a publicly traded partnership), a publicly traded
partnership treated as a corporation, or an association taxable as a
corporation. Since Tax Counsel has advised that the notes will be treated as
indebtedness in the hands of the noteholders for U.S. federal income tax
purposes, the transferor will not attempt to comply with U.S. federal income tax
reporting requirements applicable to partnerships or corporations as such
requirements would not apply if the notes were treated as indebtedness.
If it were determined that this transaction created an entity classified as
a corporation (including a publicly traded partnership taxable as a
corporation), the trust would be subject to U.S. federal income tax at corporate
income tax rates on the income it derives from the mortgage loans, which would
reduce the amounts available for payment to the note owners. Cash payments to
the note owners generally would be treated as dividends for tax purposes to the
extent of such corporation's earnings and profits. If the transaction were
treated as creating a partnership between the note owners and the transferor,
the partnership itself would not be subject to U.S. federal income tax (unless
it were to be characterized as a publicly traded partnership taxable as a
corporation); rather, the transferor and each note owner would be taxed
individually on their respective distributive shares of the partnership's
income, gain, loss, deductions and credits. The amount and timing of items of
income and deductions of the note owner could differ if the notes were held to
constitute partnership interests rather than indebtedness.
POSSIBLE CLASSIFICATION AS A TAXABLE MORTGAGE POOL
In relevant part, Section 7701(i) of the Code provides that any entity (or
a portion of an entity) that is a "taxable mortgage pool" will be classified as
a taxable corporation and will not be permitted to file a consolidated U.S.
federal income tax return with another corporation. Subject to a grandfather
provision for existing entities, any entity (or a portion of any entity) will be
a taxable mortgage pool if (i) substantially all of its assets consist of debt
instruments, more than 50% of which are real estate mortgages (ii) the entity is
the obligor under debt obligations with two or more maturities, and (iii) under
the terms of the entity's debt obligations (or an underlying arrangement),
payments on such debt obligations bear a relationship to the debt instruments
held by the entity.
Assuming that all of the provisions of the agreements, as in effect on the
date of issuance, are complied with, Tax Counsel is of the opinion that the
arrangement created by the agreements will not be a taxable mortgage pool under
Section 7701(i) of the Code because only one maturity of indebtedness has been
issued and secured by the mortgage loans of the trust.
The opinion of Tax Counsel is not binding on the IRS or the courts. If the
IRS were to contend successfully (or future regulations were to provide) that
the arrangement created by the agreements is a taxable mortgage pool, such
arrangement would be subject to U.S. federal corporate income tax on its taxable
income generated by ownership of the mortgage loans. Such a tax might reduce
amounts available for payments to note owners. The amount of such a tax would
depend upon whether payments to note owners would be deductible as interest
expense in computing the taxable income of such an arrangement as a taxable
mortgage pool.
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FOREIGN INVESTORS
In general, subject to certain exceptions, interest (including OID) paid on
a note to a nonresident alien individual, foreign corporation or other
non-United States person is not subject to U.S. federal income tax, provided
that such interest is not effectively connected with a trade or business of the
recipient in the United States and the note owner provides the required foreign
person information certification. See "Federal Income Tax Consequences--Tax
Treatment of Foreign Investors" in the prospectus.
If the interests of the note owners were deemed to be partnership
interests, the partnership, if it were considered to be engaged in a U.S. trade
or business, would be required, on a quarterly basis, to pay withholding tax
equal to the product, for each foreign partner, of such foreign partner's
distributive share of "effectively connected" income of the partnership
multiplied by the highest rate of tax applicable to that foreign partner. In
addition, such foreign partner would be subject to branch profits tax. Each
non-foreign partner would be required to certify to the partnership that it is
not a foreign person. The tax withheld from each foreign partner would be
credited against such foreign partner's U.S. income tax liability.
If the trust were taxable as a corporation, payments to foreign persons, to
the extent treated as dividends (or if the trust were characterized as a
partnership that was not engaged in a trade or business, all interest payments),
would generally be subject to withholding at the rate of 30%, unless such rate
were reduced by an applicable tax treaty.
If, contrary to the opinion of Tax Counsel, the notes are recharacterized
as equity interests in a partnership, or in an association or publicly traded
partnership taxable as a corporation, any taxes required to be so withheld will
be treated for all purposes of the notes and the policy as having been paid to
the related noteholder.
BACKUP WITHHOLDING
Certain note owners may be subject to backup withholding at the rate of 31%
with respect to interest paid on the notes if the note owners, upon issuance,
fail to supply the indenture trustee or his broker with his taxpayer
identification number, furnish an incorrect taxpayer identification number, fail
to report interest, dividends, or other "reportable payments" (as defined in the
Code) property, or, under certain circumstances, fail to provide the indenture
trustee or his broker with a certified statement, under penalty of perjury, that
he is not subject to backup withholding.
The indenture trustee will be required to report annually to the IRS, and
to each noteholder of record, the amount of interest paid (and OID accrued, if
any) on the notes (and the amount of interest withheld for U.S. federal income
taxes, if any) for each calendar year, except as to exempt holders (generally,
holders that are corporations, certain tax-exempt organizations or nonresident
aliens who provide certification as to their status as nonresidents). As long as
the only "noteholder" of record is Cede, as nominee for DTC, note owners and the
IRS will receive tax and other information including the amount of interest paid
on the notes from participants and indirect participants rather than from the
indenture trustee. (The indenture 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 note 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 note 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 backup withholding and information reporting
on income paid to a foreign person and related matters (the "New Withholding
Regulations") were published in the Federal Register on October 14, 1997. In
general, the New Withholding Regulations do not significantly alter the
substantive withholding and information reporting requirements, but do unify
current certification procedures and forms and clarify reliance standards. The
New Withholding Regulations generally will be effective for payments made after
December 31, 2000, subject to certain transition rules. The discussion set forth
above does not take the New Withholding Regulations into account. Prospective
note owners are strongly urged to consult their own tax advisor with respect to
the New Withholding Regulations.
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<PAGE>
TAX-EXEMPT ENTITIES
If contrary to the opinion of tax counsel, the notes were treated as
partnership interests in a tax partnership, a tax-exempt note owner may be
subject to less favorable tax treatment. This may result because an interest in
a partnership may generate "unrelated business taxable income" and thereby
subject the note owner to the "unrelated business, taxable income" provisions of
the Code.
STATE TAXES
Except as described below, Provident makes no representations regarding the
tax consequences of purchase, ownership or disposition of the notes under the
tax laws of any state. Investors considering an investment in the notes should
consult their own tax advisors regarding such tax consequences.
All investors should consult their own tax advisors regarding the Federal,
state, local, foreign or any other income tax consequences of the purchase,
ownership and disposition of the notes.
OHIO STATE TAX CONSEQUENCES
The following is a summary of the material Ohio tax consequences to the
trust and of the purchase, ownership and disposition of the notes. This
discussion does not address every aspect of the Ohio tax laws that may be
relevant to noteholders in light of their specific circumstances or their
special treatment under the Ohio tax laws. Therefore, prospective investors are
urged to consult their own tax advisors in determining the Ohio tax consequences
to them as a result of purchasing and owning the notes.
The following summary is based upon existing provisions of the Ohio Revised
Code pertaining to Ohio taxation, the administrative rules promulgated
thereunder, relevant judicial rulings and administrative decisions and
pronouncements, all of which are subject to change, which change may be
retroactive. There are no Ohio authorities addressing similar transactions or
involving a trust that issues interests with terms similar to those of the notes
and no ruling addressing the matters discussed herein will be sought from Ohio
tax officials. Accordingly, there can be no assurance that such officials will
agree with this summary.
Except as noted below, in the opinion of Keating, Muething & Klekamp,
P.L.L., special Ohio tax counsel ("Ohio Tax Counsel"), the trust will not be
subject to the Ohio personal income tax, Ohio corporate franchise tax, or the
Ohio tax on dealers in intangibles as those taxes generally do not apply to the
type of Trust used in this transaction. Furthermore, unless the noteholders are
Ohio residents or are otherwise subject to the Ohio personal income tax, Ohio
corporate franchise tax, or the Ohio tax on dealers in intangibles, the
Noteholders will not be subject to the foregoing taxes solely as a result of
purchasing and owning the notes.
For purposes of determining Ohio taxable income, Ohio has adopted the Code
and the regulations thereunder. Therefore, the Ohio tax consequences to the
noteholders who are Ohio residents or are otherwise subject to the Ohio personal
income tax, Ohio corporate franchise tax, or the Ohio tax on dealers in
intangibles, will be the same as the tax consequences to the noteholders for
federal income tax purposes. Accordingly, the stated interest on the notes will
be taxable as ordinary interest income, and a gain or loss on the sale or
disposition of the notes will be capital gain or loss. See "Federal Income Tax
Consequences" in this Prospectus Supplement.
Effective generally for tax years beginning on or after January 1, 1998, an
Ohio tax may be levied on a "qualifying investor's" distributive share of the
Ohio apportioned income of a "qualifying pass-through entity." As described in
"Federal Income Tax Consequences--Possible Classification of the Trust as a
Partnership or Association Taxable as a Corporation" in this prospectus
supplement, if the transaction is recharacterized as creating a partnership,
then the Trust may be subject to the Ohio tax on qualifying pass-through
entities if the notes were held by any qualifying investors. A "qualifying
investor," in general, is an individual or entity not otherwise subject to the
Ohio personal income, Ohio corporate franchise, or Ohio dealers in intangible
taxes. A "qualifying pass-through entity" is defined as, among other things, a
partnership. Thus, in the event that the transaction is characterized as a
partnership for federal income tax purposes, Ohio tax counsel believes that Ohio
tax officials would likely treat the trust as a partnership for Ohio tax
purposes and, therefore, as a qualifying pass-through entity. The result of this
is that if the trust has non-individual qualifying investors as noteholders, the
Trust will pay an 8.5% entity level tax on the net sum of such noteholders'
distributive share of the trust's income apportioned to Ohio. If the trust has
individual
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<PAGE>
qualifying investors as noteholders, it will be required to withhold 5% of the
net sum of such individual noteholders' distributive share of the trust's income
apportioned to Ohio. The amount of tax paid or withheld may be claimed as a
credit against the qualifying investor's Ohio franchise or income tax liability
in an amount equal to the qualifying investor's proportionate share of the
lesser of the tax due or paid.
ERISA CONSIDERATIONS
GENERAL
The Employee Retirement Income Security Act of 1974, as amended ("ERISA")
and Section 4975 of the Code impose certain restrictions on employee benefit
plans subject to ERISA or plans or arrangements subject to Section 4975 of the
Code ("Plans") and on persons who are parties in interest or disqualified
persons ("parties in interest") with respect to such Plans. Certain employee
benefit plans, such as governmental plans and church plans (if no election has
been made under section 410(d) of the Code), are not subject to the restrictions
of ERISA, and assets of such plans may be invested in the notes without regard
to the ERISA considerations described below, subject to other applicable Federal
and state law. However, any such governmental or church plan which is qualified
under section 401(a) of the Code and exempt from taxation under
section 501(a) of the Code is subject to the prohibited transaction rules set
forth in section 503 of the Code. Any Plan fiduciary which proposes to cause a
Plan to acquire any of the notes should consult with its counsel with respect to
the potential consequences under ERISA, and the Code, of the Plan's acquisition
and ownership of the notes. See "ERISA Considerations" in the prospectus.
Investments by Plans are also subject to ERISA's general fiduciary requirements,
including the requirement of investment prudence and diversification and the
requirement that a Plan's investments be made in accordance with the documents
governing the Plan.
PROHIBITED TRANSACTIONS
GENERAL
Section 406 of ERISA prohibits parties in interest with respect to a Plan
from engaging in certain transactions (including loans) involving a Plan and its
assets unless a statutory or administrative exemption applies to the
transaction. Section 4975 of the Code imposes certain excise taxes (or, in some
cases, a civil penalty may be assessed pursuant to section 502(i) of ERISA) on
parties in interest which engage in non-exempt prohibited transactions.
PLAN ASSET REGULATION
The United States Department of Labor ("Labor") has issued final
regulations concerning the definition of what constitutes the assets of a Plan
for purposes of ERISA and the prohibited transaction provisions of the Code (the
"Plan Asset Regulation"). The Plan Asset Regulation describes the circumstances
under which the assets of an entity in which a Plan invests will be considered
to be "plan assets" such that any person who exercises control over such assets
would be subject to ERISA's fiduciary standards. Under the Plan Asset
Regulation, generally when a Plan invests in another entity, the Plan's assets
do not include, solely by reason of such investment, any of the underlying
assets of the entity. However, the Plan Asset Regulation provides that, if a
Plan acquires an "equity interest" in an entity that is neither a
"publicly-offered security" (as defined therein) nor a security issued by an
investment company registered under the Investment Company Act of 1940, the
assets of the entity will be treated as assets of the Plan investor unless
certain exceptions apply. If the notes were deemed to be equity interests and no
statutory, regulatory or administrative exemption applies, the trust could be
considered to hold plan assets by reason of a Plan's investment in the notes.
Such plan assets would include an undivided interest in any assets held by the
trust. In such an event, the master servicer and other persons, in providing
services with respect to the trust's assets, may be parties in interest with
respect to such Plans, subject to the fiduciary responsibility provisions of
Title I of ERISA, including the prohibited transaction provisions of
Section 406 of ERISA, and Section 4975 of the Code with respect to transactions
involving the trust's assets. Under the Plan Asset Regulation, the term "equity
interest" is defined as any interest in an entity other than an instrument that
is treated as indebtedness under "applicable local law" and which has no
"substantial equity features."
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<PAGE>
Although the Plan Asset Regulation is silent with respect to the question of
which law constitutes "applicable local law" for this purpose, Labor has stated
that these determinations should be made under the state law governing
interpretation of the instrument in question. In the preamble to the Plan Asset
Regulation, Labor declined to provide a precise definition of what features are
equity features or the circumstances under which such features would be
considered "substantial," noting that the question of whether a plan's interest
has substantial equity features is an inherently factual one, but that in making
a determination it would be appropriate to take into account whether the equity
features are such that a Plan's investment would be a practical vehicle for the
indirect provision of investment management services. Brown & Wood LLP has
rendered its opinion that the notes will be classified as indebtedness for tax
purposes and the transferor believes that the notes will be classified as
indebtedness without substantial equity features for ERISA purposes. However, if
the notes are deemed to be equity interests in the trust and no statutory,
regulatory or administrative exemption applies, the trust could be considered to
hold plan assets by reason of a Plan's investment in the notes.
REVIEW BY PLAN FIDUCIARIES
Any Plan fiduciary considering whether to purchase any notes 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 notes, a
fiduciary of a Plan should make its own determination as to whether the trust,
as obligor on the notes, is a party in interest with respect to the Plan, the
availability of the exemptive relief provided in the Plan Asset Regulations and
the availability of any other prohibited transaction exemptions. Purchasers
should analyze whether the decision may have an impact with respect to purchases
of the Notes.
LEGAL INVESTMENT CONSIDERATIONS
Although, as a condition to their issuance, the notes will be rated in the
highest rating category of the rating agencies, the notes will not constitute
"mortgage related securities" for purposes of the Secondary Mortgage Market
Enhancement Act of 1984 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 notes, because they are not "mortgage
related securities". See "Legal Investment" in the prospectus.
UNDERWRITING
Subject to the terms and conditions set forth in the underwriting agreement
among Provident and the underwriters named below, Provident has agreed to sell
to the underwriters, and each of the underwriters has severally agreed to
purchase from Provident the principal amount of notes set forth below opposite
their respective names.
<TABLE>
<CAPTION>
UNDERWRITER CLASS A
- -------------------------------------------------------------------------------------------------- ------------
<S> <C>
Prudential Securities Incorporated................................................................ $ 84,150,000
Lehman Brothers Inc............................................................................... $ 84,150,000
------------
Total........................................................................................ $168,300,000
------------
------------
</TABLE>
In the underwriting agreement, the underwriters have agreed, subject to the
terms and conditions set forth therein, to purchase all the notes offered hereby
if any of the notes are purchased.
Provident has been advised by the underwriters that they presently intend
to make a market in the notes offered hereby; however, the underwriters are not
obligated to do so. Any market-making may be discontinued at any time, and there
can be no assurance that an active public market for the notes will develop.
The underwriting agreement provides that Provident will indemnify the
underwriters against certain civil liabilities, including liabilities under the
Securities Act of 1933, as amended.
Some expenses of the underwriters incurred in connection with this offering
will be paid by Provident.
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<PAGE>
LEGAL MATTERS
Certain legal matters will be passed upon for Provident by Keating,
Muething & Klekamp, P.L.L., Cincinnati, Ohio. Federal income tax consequence
with respect to the notes will be passed upon for the trust by Brown & Wood LLP.
Certain legal matters with respect to the notes will be passed upon for the
Underwriters by Brown & Wood LLP, New York, New York. Certain legal matters will
be passed upon for the insurer by Kutak Rock, Omaha, Nebraska.
EXPERTS
The consolidated balance sheets of MBIA Insurance Corporation and
Subsidiaries as of December 31, 1998 and December 31, 1997 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, 1998,
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.
RATINGS
It is a condition to issuance that the notes be rated "AAA" by Standard &
Poor's and "Aaa" by Moody's.
A securities rating addresses the likelihood of the receipt by noteholders
of payments on the mortgage loans. The rating takes into consideration the
characteristics of the mortgage loans and the structural and legal aspects
associated with the notes. The ratings on the notes do not, however, constitute
statements regarding the likelihood or frequency of prepayments on the mortgage
loans or the possibility that noteholders might realize a lower than anticipated
yield.
The ratings assigned to the notes will depend primarily upon the
creditworthiness of the insurer. Any reduction in a rating assigned to the
financial strength of the insurer below the ratings initially assigned to the
notes may result in a reduction of one or more of the ratings assigned to the
notes.
The ratings assigned to the notes do not address the likelihood of the
payment of any LIBOR carryover.
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-65
<PAGE>
INDEX OF DEFINED TERMS
<TABLE>
<CAPTION>
TERM PAGE
- ---------------------------------------- ----------
<S> <C>
Agreement............................... S-45
Alternative Principal Payment........... S-41
Business Day............................ S-45
CLTV.................................... S-22
Code.................................... S-59
Deficiency Amount....................... S-45
Eligible Account........................ S-36
Eligible Substitute Mortgage Loans...... S-35
ERISA................................... S-63
Events of Default....................... S-53
Events of Servicing Termination......... S-52
Final Payment Date...................... S-45
Fiscal Agent............................ S-45
GAAP.................................... S-13
Guaranteed Principal Amount............. S-45
Index................................... S-21
Insured Payment......................... S-46
Insurer................................. S-12
Investor Fixed Allocation
Percentage............................ S-39
Investor Floating Allocation
Percentage............................ S-5
Investor Interest Collections........... S-39
Investor Loss Amount.................... S-39
IRS..................................... S-59
Labor................................... S-63
LIBOR carryover......................... S-40
<CAPTION>
TERM PAGE
- ---------------------------------------- ----------
<S> <C>
Liquidation Loss Amount................. S-39
Managed Amortization Period............. S-41
Maximum Principal Payment............... S-41
MBIA Inc................................ S-12
Minimum Transferor Interest............. S-36
Monthly Advance......................... S-37
Net Simple Interest Excess.............. S-38
Nonrecoverable Advance.................. S-37
Notice.................................. S-46
OID Regulations......................... S-59
Owner................................... S-46
Plan Asset Regulation................... S-63
Plans................................... S-63
Policy.................................. S-12; S-44
Preference Amount....................... S-46
Rapid Amortization Event................ S-43
Rapid Amortization Period............... S-41; S-43
SAP..................................... S-13
Scheduled Principal Collections Payment
Amount................................ S-41
Servicing Advance....................... S-37
Simple Interest Excess.................. S-38
Simple Interest Qualifying Loan......... S-38
Simple Interest Shortfall............... S-38
Tax Counsel............................. S-59
Telerate Screen Page 3750............... S-40
Transfer Deficiency..................... S-35
Transfer Deposit Amount................. S-35
Y2K..................................... S-13
</TABLE>
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<PAGE>
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered Home Equity
Loan Asset-Backed Notes, Series 1999-A (the "Global Securities") will be
available only in book-entry form. Investors in the Global Securities may hold
such Global Securities through any of 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 U.S. corporate debt obligations and prior Home Equity Loan Asset-Backed Notes
issues.
Secondary cross-market trading between Cedelbank or Euroclear and DTC
Participants holding Notes 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-U.S. holders (as described below) of Global Securities will be subject
to U.S. withholding taxes unless such holders meet certain requirements and
deliver appropriate U.S. tax documents to the securities clearing organizations
or their participants.
INITIAL SETTLEMENT
All Global Securities will be held in book-entry form by DTC in the name of
Cede & Co. as nominee of DTC. Investors' interests in the Global Securities will
be represented through financial institutions acting on their behalf as direct
and indirect Participants in DTC. As a result, 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 Notes
issues. Investor securities custody accounts will be credited with their
holdings against payment in same-day funds on the settlement date.
Investors electing to hold their Global 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 Notes issues in same-day funds.
Trading between Cedelbank and/or Euroclear Participants. Secondary market
trading between Cedelbank Participants or Euroclear Participants will be settled
using the procedures applicable to conventional eurobonds in same-day funds.
Trading between 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
I-1
<PAGE>
respective Depositary, as the case may be, to receive the Global Securities
against payment. Payment will include interest accrued on the Global Securities
from and including the last coupon payment date to and excluding the settlement
date, on the basis of the actual number of days in such accrual period and a
year assumed to consist of 360 days. For transactions selling 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 the finance
settlement. Under their 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 Cedelbank or Euroclear Seller and DTC Purchaser. Due to
time zone differences in their favor, Cedelbank 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 the actual number of days in such accrual period and a year
assumed to consist of 360 days. For transactions settling on the 31st of the
month, payment will include interest accrued to and excluding the first day of
the following month. The payment will then be reflected in the account of the
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.
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<PAGE>
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 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
Cedelbank 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 Note 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 Note). If the treaty provides only for a reduced rate,
withholding tax will be imposed at that rate unless the filer altenatively files
Form W-8. Form 1001 may be filed by the Note 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 Note 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 (i) a citizen or resident of the United
States, (ii) a corporation or partnership organized in or under the laws of the
United States or any political subdivision thereof, (iii) an estate the income
of which is includible in gross income for United States tax purposes,
regardless of its source, or (iv) a trust if a court within the United States is
able to exercise primary supervision over the administration of the trust and
one or more United States trustees have authority to control all substantial
decisions of the trust. 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.
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<PAGE>
Prospectus
Asset Backed Securities
(Issuable in Series)
----------------
Consider carefully the The Provident Bank may periodically issue
risk factors beginning securities, which may be in the form of asset-
on page 1 of this backed certificates or asset-backed notes. Each
prospectus. issue of securities will have its own series
designation and will evidence interests in or
obligations of a trust established by The
Provident Bank.
Each trust will consist of:
o mortgage loans secured by senior or junior liens on one- to four-family
residential properties; and
o closed-end or revolving home equity loans secured by senior or junior liens
on one- to four-family residential properties.
Each series of securities:
o will either evidence beneficial ownership of a trust or be secured by the
assets of a trust; and
o will be issued in one or more classes of securities. A class of securities:
o will be entitled to anywhere from 0% to 100% of the interest payments and
principal payments on the assets of the trust;
o may be senior or subordinate in right of payment to other classes; and
o may receive payments from an insurance policy, cash account, or other
form of credit enhancement to cover losses on the trust assets.
The securities may be offered to the public through different methods as
described in "Method of Distribution" in this prospectus.
Neither the SEC nor any state securities commission has approved or disapproved
these securities or determined if this prospectus is truthful or complete. Any
representation to the contrary is a criminal offense.
September 8, 1999
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Important Notice About Information Presented in this
Prospectus and the Accompanying Prospectus Supplement
We provide information to you about the securities in two separate documents
that progressively provide more detail:
o this prospectus, which provides general information, some of which may
not apply to your series of securities and
o the accompanying prospectus supplement, which describes the specific
terms of your series of securities.
The terms of any particular series of securities as generally described in
this prospectus will be supplemented by the disclosure in the accompanying
prospectus supplement, which must be read in conjunction with this prospectus.
This prospectus may be used to offer and sell the securities only if
accompanied by a prospectus supplement.
We have authorized the use of only the information provided in this
prospectus and the accompanying prospectus supplement, including the
information incorporated by reference. We have not authorized anyone to provide
you with different information. We are not offering the securities in any state
where the offer is not permitted.
We include cross-references in this prospectus and the accompanying
prospectus supplement to captions in these materials where you can find further
related discussions. The following Table of Contents and the Table of Contents
included in the accompanying prospectus supplement provide the pages on which
these captions are located.
You can find a listing of the pages where capitalized terms used in this
prospectus are defined under the caption "Index of Defined Terms" beginning on
page 81.
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Table Of Contents
RISK FACTORS................................................................ 1
THE TRUST FUND.............................................................. 3
General.................................................................... 3
The Loans.................................................................. 4
Substitution of Trust Fund Assets.......................................... 7
USE OF PROCEEDS............................................................. 7
THE PROVIDENT BANK.......................................................... 8
General.................................................................... 8
Available Information...................................................... 8
Incorporation of Certain Documents by Reference............................ 8
LOAN PROGRAM................................................................ 9
Underwriting Standards..................................................... 9
Qualifications of Provident................................................ 10
Representations by Provident; Repurchases.................................. 10
DESCRIPTION OF THE SECURITIES............................................... 11
General.................................................................... 11
Distributions on Securities................................................ 13
Advances................................................................... 14
Reports to Securityholders................................................. 15
Categories of Classes of Securities........................................ 16
Book-Entry Registration of Securities...................................... 19
CREDIT ENHANCEMENT.......................................................... 22
General.................................................................... 22
Subordination.............................................................. 23
Letter of Credit........................................................... 24
Insurance Policies, Surety Bonds, and Guaranties........................... 24
Over-Collateralization..................................................... 24
Reserve Accounts........................................................... 25
Pool Insurance Policies.................................................... 26
Cross-Collateralization.................................................... 27
YIELD AND PREPAYMENT CONSIDERATIONS......................................... 27
THE AGREEMENTS.............................................................. 29
Assignment of the Trust Fund Assets........................................ 29
Payments on Loans; Deposits to Security Account............................ 31
Pre-Funding Account........................................................ 33
Sub-Servicing.............................................................. 33
Collection Procedures...................................................... 33
Hazard Insurance........................................................... 34
Realization Upon Defaulted Loans........................................... 36
Servicing and Other Compensation and Payment of Expenses................... 36
Evidence as to Compliance.................................................. 36
Matters Regarding the Master Servicer and Provident........................ 37
Events of Default; Rights Upon Event of Default............................ 37
Amendment.................................................................. 40
Termination; Optional Termination.......................................... 40
The Trustee................................................................ 41
LEGAL ASPECTS OF THE LOANS.................................................. 41
General.................................................................... 41
Foreclosure and Repossession............................................... 42
Environmental Risks........................................................ 43
Rights of Redemption....................................................... 44
Anti-Deficiency Legislation; Bankruptcy Laws; Tax Liens.................... 45
Due-on-Sale Clauses........................................................ 45
Enforceability of Prepayment and Late Payment Fees......................... 46
Applicability of Usury Laws................................................ 46
Soldiers' and Sailors' Civil Relief Act.................................... 47
Junior Mortgages; Rights of Senior Mortgagees.............................. 47
Consumer Protection Laws................................................... 48
FEDERAL INCOME TAX CONSEQUENCES............................................. 48
General.................................................................... 48
Taxation of Debt Securities................................................ 49
Taxation of the REMIC and its Holders...................................... 54
REMIC Expenses; Single Class REMICs........................................ 54
Taxation of the REMIC...................................................... 55
Taxation of Holders of Residual Interest Securities........................ 56
Administrative Matters..................................................... 58
Tax Status as a Grantor Trust.............................................. 59
Sale or Exchange........................................................... 61
Miscellaneous Tax Aspects.................................................. 62
Tax Treatment of Foreign Investors......................................... 62
Tax Characterization of the Trust Fund as a Partnership.................... 63
Tax Consequences to Holders of the Notes................................... 63
Tax Consequences to Holders of the Certificates............................ 65
Taxation of Trust as FASIT................................................. 69
Treatment of FASIT Regular Securities...................................... 71
Treatment of High-Yield Interests.......................................... 72
Tax Treatment of FASIT Ownership Securities................................ 72
State Tax Considerations................................................... 73
ERISA Considerations....................................................... 73
Legal Investment........................................................... 77
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Method of Distribution..................................................... 78
Legal Matters.............................................................. 79
Financial Information...................................................... 79
Rating..................................................................... 79
Index of Defined Terms..................................................... 81
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Risk Factors
Please carefully consider the following risk factors in deciding whether to
purchase any of the securities.
Limited Resale Market For Securities
No market will exist for the securities of any series before they are
issued. We cannot assure you that a resale market will develop following the
issuance and sale of any series of the securities. Consequently, you may not be
able to sell your securities at prices that will enable you to realize your
desired yield.
Limited Source of Payments--No Recourse to Provident or Master Servicer
The securities of each series will be payable solely from the assets of the
related trust, including any applicable credit enhancement. Moreover, at the
times specified in the related prospectus supplement, some assets of the trust
may be released to The Provident Bank, the master servicer, a credit
enhancement provider, or other person. Once released, those assets will no
longer be available to make payments to you.
The securities will not represent an interest in The Provident Bank, the
master servicer, or any of their respective affiliates, nor will the securities
represent an obligation of any of them. Our only obligation with respect to a
trust is the obligation to repurchase a trust asset if we breach a
representation and warranty concerning that trust asset. You will not have any
recourse against us or the master servicer if any required distribution on the
securities is not made. Consequently, if payments on the trust assets are
insufficient to make all payments required on the securities you may incur a
loss of your investment.
Limitations on the Effectiveness of Credit Enhancement
Credit enhancement is intended to reduce the effect of delinquent payments
or loan losses on those classes of securities that have the benefit of the
credit enhancement. However, the amount of any credit enhancement may decline
or be depleted before the securities are paid in full. As a result, you may
suffer losses. In addition, credit enhancement may not cover all potential
sources of loss, such as a loss from fraud or negligence by a loan originator
or other party.
Nature of Mortgages Securing the Loans
o Decline in Property Values May Increase Loan Losses. Because your
securities represent an interest in mortgage loans or are secured by mortgage
loans, your investment may be affected by a decline in property values. If the
outstanding balance of a mortgage loan and any secondary financing on the
underlying property is greater than the value of the property, the risk of
delinquency, foreclosure, and loss increases. A decline in property values
could extinguish the value of a junior mortgagee's interest in a property.
o Delays Due to Liquidation. Substantial delays may occur before defaulted
loans are liquidated and the proceeds are forwarded to investors. Property
foreclosure actions are regulated by state statutes and rules and are subject
to many of the delays and expenses that characterize lawsuits if defenses or
counterclaims are made. As a result, foreclosure actions can sometimes take
several years to complete and their proceeds may not cover the defaulted loan
amount. Some states prohibit a mortgage lender from obtaining a judgment
against the borrower for amounts not covered by property proceeds.
We refer you to "Legal Aspects of the Loans--Anti-Deficiency Legislation;
Bankruptcy Laws; Tax Liens" for additional information.
o Junior Liens Satisfied After Senior Liens. Some of the loans in the trust
may be junior loans. Mortgages or deeds of trust securing junior loans will be
satisfied after the claims of the senior mortgage holders and the
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foreclosure costs are satisfied. In addition, a junior mortgage lender may only
foreclose subject to any related senior mortgage. As a result, the junior
mortgage lender generally must either pay the related senior mortgage lender in
full at or before the foreclosure sale or agree to make the regular payments on
the senior mortgage. Since the trust will not have any source of funds to
satisfy any senior mortgage or to continue making payments on it, the trust's
ability as a practical matter to foreclose on any junior mortgage will be
limited.
o Regulated by Consumer Protection Laws. Most states have laws and public
policies for the protection of consumers that regulate interest rates and other
loan changes, require licensing of loan originators and servicers, and prohibit
unfair and deceptive practices in making, servicing, and collecting loans.
Violations of these laws may limit the ability of the master servicer to
collect interest or principal on the loans and may entitle the borrowers to a
refund of amounts previously paid.
The loans may also be subject to federal laws relating to the origination
and underwriting of loans. These laws
o require disclosures of the terms of the loans to the borrowers;
o 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;
o regulate the use and reporting of information related to the borrower's
credit experience; and
o require additional application disclosures, limit changes that may be
made to the loan documents without the borrower's consent, and restrict
a lender's ability to declare a default or to suspend or reduce a
borrower's credit limit to enumerated events.
Some violations of these federal laws may render the master servicer unable
to collect all or part of the principal or interest on the loans. The trust
also could be subject to damages and administrative enforcement.
We refer you to "Legal Aspects of the Loans" for additional information.
Trust Subject to Environmental Risks
Under the laws of some states, contamination of a property may create a lien
on the property to assure the costs of cleanup. In several states, that a lien
has priority over the lien of an existing mortgage. In addition, the holder of
a mortgage, such as a trust, may be held responsible for the costs associated
with the clean up of hazardous substances released at a property. These costs
could result your incurring in a loss on your investment.
We refer you to "Legal Aspects of the Loans--Environmental Risks" for
additional information.
Value of Trust Assets
We cannot assure you that the value of the trust assets for any series of
securities at any time will equal or exceed the principal amount of the
outstanding securities of the series. If trust assets have to be sold because
of an event of default or otherwise, providers of services to the trust,
including the trustee, the master servicer, and any credit enhancer, generally
will be entitled to receive the proceeds of the sale to the extent of their
unpaid fees and other amounts due them before any proceeds are paid to
investors. As a result, you may not receive the full amount of interest and
principal due on your investment.
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The Trust Fund
General
The Asset-Backed Certificates and the Asset-Backed Notes that may be issued
from time to time in one or more series will represent interests in the assets
of the related trust fund. 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 holders of the related
securities. Each trust fund will consist of a pool of loans as specified in the
related prospectus supplement, together with payments on the loans, as
specified in the related prospectus supplement. The pool of loans will be
created on the first day of the month of the issuance of the related series of
securities or another 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 from the assets of any other trust fund established by
Provident.
Each loan will have been originated or acquired by The Provident Bank
("Provident") in accordance with the underwriting criteria specified under
"Loan Program--Underwriting Standards" or as otherwise described in the related
prospectus supplement. 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 securityholders. 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 between Provident, the master servicer, and the
trustee with respect to a series consisting of certificates, or 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 its
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 pooling and
servicing agreement as if the master servicer alone were servicing the loans.
As used in this prospectus, agreement means the pooling and servicing
agreement when used with reference to a series consisting of certificates, and
means the trust agreement, the indenture, and the master servicing agreement
when used with reference to a series consisting of certificates and notes.
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 between Provident and the trustee of the trust fund.
A trust fund will have no assets or liabilities before the initial offering
of its related series of securities. No trust fund is expected to engage in any
activities other than acquiring, managing and holding the related trust fund
assets and other specified assets contemplated in this prospectus and in the
related prospectus supplement and their proceeds, issuing securities and making
payments and distributions on them, and other 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 specified representations and warranties to the trustee for the
series. Provident will be obligated to cure any breach of a representation or
warranty that materially and adversely affects the interests of a
securityholder or to repurchase or substitute for the affected loans. See "The
Agreements--Assignment of the Trust Fund Assets." The obligations of the master
servicer with respect to the loans will consist principally of its contractual
servicing obligations under the related agreement and its obligation, if any,
to make specified cash advances upon delinquencies in payments on the loans in
the amounts described in this prospectus under "Description of the Securities--
Advances." The obligations of the master servicer under the related agreement
include its
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obligation to enforce the obligations of the sub-servicers or Provident, or
both, as more fully described in this prospectus under "Loan Program--
Representations by Provident; Repurchases" and "The Agreements--Sub-Servicing"
and "--Assignment of the Trust Fund Assets." The obligations of the master
servicer to make advances may be subject to limitations to the extent provided
in this prospectus 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 about trust fund assets is not
known at the time the related series of securities initially is offered, more
general information of the nature described under "the Loans" will be provided
in the related prospectus supplement, and specific information will be provided
in a report on Form 8-K to be filed with the SEC within fifteen days after the
initial issuance of the securities. A copy of the agreement for 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 the series will be attached to the agreement delivered to the
trustee on 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 another 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 combinations of them:
Interest may be payable at
o a fixed rate,
o an adjustable rate based on an index,
o a rate that is fixed for a period of time or under specified
circumstances and is followed by an adjustable rate,
o a rate that otherwise varies, or
o 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 these limitations. Accrued
interest may be deferred and added to the principal of a loan for periods and
under circumstances specified in the related prospectus supplement. A loan may
provide for the interest to be paid by the borrower to be at a rate lower than
the specified interest rate borne by the loan for a period of time or for the
life of the loan. In these cases and the amount of difference would be
contributed from funds supplied by the seller of the property or another
source.
Principal may be payable:
o at an amortization rate calculated on the basis of level debt service
calculated to amortize the loan fully over its term,
o at an amortization rate calculated on the basis of an assumed
amortization schedule that is significantly longer than the original
term to maturity,
o at an amortization rate calculated on the basis of an interest rate that
is different from the interest rate provided for in the mortgage loan
note,
o at an amortization rate that may not amortize principal during all or a
portion of the original term,
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o as a balloon payment where all or a substantial portion of the principal
may be due on maturity, or
o as negative amortization where interest that has been deferred is added
to the principal balance of the loan.
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.
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. Also prepayments may
be prohibited for the life of the loan or for specified periods commonly called
lockout periods. Some loans may permit prepayments after expiration of a
lockout period and may require the payment of a prepayment fee in connection
with that subsequent prepayment. Other loans may permit prepayments without
payment of a fee unless the prepayment occurs during specified time periods.
The loans may include due-on-sale clauses that permit the mortgagee to demand
payment of the entire loan in connection with the sale or specified transfers
of the related mortgaged property. Other loans may be assumable by persons
meeting the then applicable standards in the agreement.
A trust fund may contain loans commonly called buydown loans where a third
party partially subsidizes the monthly payments of the borrowers on the loans
during their early years, the difference being made up from a buydown fund
contributed by the third party when the loan is made. 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 about limitations on the interest rate paid
by the borrower initially, the annual increases in the interest rate, and the
length of the buydown period for any buydown loans.
The real property that secures repayment of a loan is referred to as the
mortgaged property. Each loan 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, the 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 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 other single family
properties. The mortgaged properties may include vacation and second homes,
investment properties, and dwellings situated on land that is leased rather
than owned. 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 mortgaged
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 specified loan-to-value ratios or specified principal balances
may be covered wholly or partially by primary mortgage guaranty insurance
policies. The existence, extent, and duration of the insurance coverage will be
described in the applicable prospectus supplement.
The aggregate principal balance of loans secured by mortgaged 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:
o 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
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o 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 or some of their
balances is computed and payable monthly on the average daily outstanding
principal balance of the loan, except for introduction rates offered from time
to time during promotional periods. Principal amounts up to a maximum amount on
a revolving credit line loan may be drawn down 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 amortize the loan fully 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 the loan multiplied by its interest rate and then by a factor for
the period involved. The factor for the period involved is either the fraction
30 divided by 360 or a fraction whose numerator is the number of days in the
period elapsed since the preceding payment of interest was made and whose
denominator is the number of days in the annual period for which interest
accrues on the loan.
Except to the extent provided in the related prospectus supplement, the
original terms to stated maturity of closed-end loans generally will not exceed
360 months. Under specified 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 that 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,
about its loan pool, including:
o the aggregate outstanding principal balance and the average outstanding
principal balance of the loans as of the applicable Cut-Off Date,
o 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,
o the original terms to maturity of the loans,
o the largest principal balance and the smallest principal balance of any
of the loans,
o the earliest origination date and latest maturity date of any of the
loans,
o the loan-to-value ratios or combined loan-to-value ratios, as
applicable, of the loans,
o the interest rates provided for in the mortgage loan notes or annual
percentage rates or range of interest rates provided for in the mortgage
loan notes or APR's borne by the loans,
o the maximum and minimum per annum interest rate provided for in the
mortgage loan notes, and
o the geographical location of the loans.
This information will be as of the date of the prospectus supplement and to
the extent then specifically known to Provident. If specific information about
the loans is not known to Provident at the time the related securities are
initially offered, more general information of this nature will be provided in
the related prospectus supplement, and specific information will be provided in
a subsequent 8-K filing with the SEC.
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Generally, the loan-to-value ratio of a loan at any given time is equal to a
fraction whose numerator is the original principal balance of the related loan
and whose denominator is the collateral value of the related mortgaged
property. Generally, the combined loan-to-value ratio of a loan at any given
time is the ratio of:
o the sum of:
o the original principal balance of the loan, or, in the case of a
revolving credit line loan, its maximum available amount and
o the outstanding principal balance at the date of origination of the
loan of any senior mortgage loans or, in the case of any open-ended
senior mortgage loan, its maximum available line of credit, to
o the collateral value of the related mortgaged property.
The collateral value of a mortgaged property, other than particular loans the
proceeds of which are used to refinance an existing mortgage loan, is the
lesser of the appraised value determined in an appraisal obtained at
origination of the loan and the sales price for the mortgaged property. The
collateral value of a mortgaged property securing a refinance loan is its
appraised value determined in an appraisal obtained at the time of refinancing.
The residential real estate market could experience an overall decline in
property values. That decline could be so large that the sum of the outstanding
principal balances of the loans and any primary or secondary financing on the
mortgaged properties, in a particular pool becomes greater than the value of
the mortgaged properties. In that case, 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 in any pool. To the extent that these losses are not covered by
subordination provisions or alternative arrangements, they will be borne, at
least in part, by the holders of the securities of the related series.
Substitution of Trust Fund Assets
The sellers of assets that wind up in the trust fund make representations
and warranties about those assets. If the representations and warranties turn
out to be untrue or if the documentation for a trust fund asset is determined
to be incomplete, new assets may be substituted for the defective trust fund
assets. The period during which substitution will be permitted generally will
be indicated in the related prospectus supplement.
Use of Proceeds
The net proceeds to be received by Provident from the sale of the trust fund
assets by Provident to trust funds will be applied by Provident to the purchase
of additional trust fund assets or will be used by Provident for general
corporate purposes. Provident expects to sell securities in series issued by
the related trust fund from time to time, but the timing and amount of
offerings of securities will depend on a number of factors, including the
volume of trust fund assets originated or acquired by Provident and sold to the
trust fund, prevailing interest rates, availability of funds, and general
market conditions.
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The Provident Bank
General
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).
The securities represent obligations of the trust only and do not represent
an interest in or obligation of The Provident Bank, the master servicer, or any
of their affiliates. Neither Provident nor any of Provident's affiliates will
insure or guarantee distributions on the securities of any series.
Available Information
Provident has filed with the Securities and Exchange a registration
statement under the Securities Act of 1933 covering 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 in the
registration statement, but do not contain all of the information in the
registration statement. For further information, reference is made to the
registration statement and its exhibits. The registration statement, exhibits,
and the information incorporated by reference described under "Incorporation of
Certain Documents by Reference" can be inspected and copied at prescribed rates
at the public reference facilities maintained by the SEC at its Public
Reference Room at 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. Information on
the operation of Public Reference Room may be obtained by calling the SEC at 1-
800-SEC-0330. The SEC also maintains a web site at http://www.sec.gov from
which the registration statement and exhibits may be obtained.
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 SEC pursuant to Section
13(a), 13(c), 14, or 15(d) of the Securities Exchange Act of 1934, after the
date of this prospectus and before the termination of any offering of the
securities issued by the trust fund are incorporated by reference in this
prospectus and a part of this prospectus from the date of their filing. Any
statement contained in a document incorporated by reference in this prospectus
shall be modified or superseded for all purposes of this prospectus to the
extent that a statement contained in this prospectus or in the accompanying
prospectus supplement or in any other subsequently filed document that also is
incorporated by reference modifies or replaces the statement. The statement so
modified or superseded shall not constitute a part of this prospectus, except
as so modified or superseded. Neither Provident nor the master servicer for any
series intends to file with the SEC 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 Securities Exchange Act of 1934.
The trustee or another 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 the person, a
copy of any of the documents referred to in the previous paragraph that have
been incorporated by reference in this prospectus. Exhibits to the information
that is incorporated by reference will not be provided unless the exhibits are
specifically incorporated by reference into the information that this
prospectus incorporates. Requests should be directed to the corporate trust
office of the trustee or the address of the 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 the other entity.
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Loan Program
The loans will have been originated or purchased by Provident, either
directly or through affiliates. The loans will have been originated in
accordance with the underwriting criteria specified 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 of any senior mortgage,
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 that 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.
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 (including principal and interest on each
mortgage, tax assessments, other loans, charge accounts, 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
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underwriting. Under a limited documentation program, some credit underwriting
documentation concerning income or income verification 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.
Some of the types of loans that may be included in a trust fund may involve
uncertainties not present in traditional types of loans. For example, some of
the 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 the payments increase. These types of loans may also be
underwritten primarily on 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 and the Federal Home Loan Mortgage Corporation. 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.
Representations by Provident; Repurchases
Provident will have made representations and warranties about the loans sold
by Provident to the trust fund and evidenced by all, or a part, of a series of
securities. These representations and warranties may include, among other
things:
o that title insurance, or in the case of mortgaged properties located in
areas where title 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;
o that Provident had good title to each loan and the loan was subject to
no offsets, defenses, counterclaims, or rights of rescission except to
the extent that any buydown agreement may forgive specified indebtedness
of a borrower;
o that each loan constituted a valid lien on, or a perfected security
interest in, the property, subject only to disclosed permissible liens,
title insurance exceptions, and other exceptions described in the
agreement,
o the property is not damaged by waste, fire, earthquake, earth movement,
windstorm, flood, tornado, or other casualty, so as to affect adversely
the value of the mortgaged property;
o that there were no delinquent tax or assessment liens against the
mortgaged property;
o that no required payment on a loan was delinquent more than the number
of days specified in the related prospectus supplement; and
o 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 about a loan that
materially and adversely affects the interests of the securityholders in the
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loan. If Provident cannot cure the 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 to
substitute for the loan a replacement loan that satisfies the criteria
specified in the related prospectus supplement or to repurchase the loan from
the trust fund at a purchase price equal to 100% of its unpaid principal
balance as of the date of the repurchase plus unpaid accrued interest on it to
the first day of the month following the month of repurchase at the interest
rate provided for in the mortgage loan note, less any servicer advances or
amount payable as related servicing compensation if Provident is the master
servicer. If a trust fund is to elect status as a real estate mortgage
investment conduit, the master servicer or a holder of the related residual
certificate generally will be obligated to pay any prohibited transaction tax
that may arise in connection with any repurchase or substitution and the
trustee must have received a satisfactory opinion of counsel that the
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 we cannot assure you that Provident
will carry out its respective repurchase or substitution obligations.
Description of the Securities
Each series of certificates will be issued pursuant to a pooling and
servicing agreement or a trust agreement between 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 between the related trust fund and the entity named in the related
prospectus supplement as trustee for the 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 will be between Provident, the master servicer, and the trustee for
the benefit of the holders of the securities of the series and will be dated as
of the related Cut-Off Date. The provisions of each agreement will vary
depending upon the nature of the securities to be issued under it and the
nature of the related trust fund. The following are descriptions of the
material provisions that 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 the 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:
o will be issued in book-entry or fully registered form,
o will be in the authorized denominations specified in the related
prospectus supplement,
o will, in the case of certificates, evidence specified beneficial
ownership interests in, the assets of the related trust fund,
o will, in the case of notes, be secured by, the assets of the related
trust fund, and
o will not be entitled to payments on the assets included in any other
trust fund established by Provident.
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Unless otherwise specified in the related prospectus supplement, the securities
will not represent obligations of Provident or any affiliate of Provident. Some
of the loans may be guaranteed or insured as set forth in the related
prospectus supplement. Each trust fund will consist of:
o the trust fund assets, which may exclude specified retained interests,
o the assets required to be deposited in the related security account, as
described under "The Agreements--Payments on Loans; Deposits to Security
Account,"
o property acquired on behalf of the securityholders by foreclosure or
deed in lieu of foreclosure, and
o 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 of future interest payments and a specified percentage of future
principal payments on the related trust fund assets. Some classes may have no
interest in future interest payments, and others may have no interest in future
principal payments. 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 in
the series. Some 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" in this prospectus and in the related
prospectus supplement. Distributions on some classes of a series of securities
may be made before distribution on other classes, and the priority of
distributions may be established or changed 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 distributions may vary among classes or over time as specified in the
related prospectus supplement.
Distributions of principal or interest or both will be made by the trustee
on each distribution date in proportion to the percentages specified in the
related prospectus supplement. The distribution dates may be monthly,
quarterly, semi-annually, or at other intervals and on the dates specified in
the related prospectus supplement. Whoever the securities are registered to at
the close of business on the record dates specified in the related prospectus
supplement will be entitled to receive distributions. Except for the final
distribution, distributions will be made to the persons entitled thereto at the
address appearing in the security register maintained for securityholders in
the manner specified in the related prospectus supplement. The final
distribution in retirement of the securities will be made only on presentation
and surrender of the securities at the office or agency of the trustee or other
person specified in the notice to securityholders of the final distribution.
The securities will be freely transferable and exchangeable at the corporate
trust office of the trustee specified in the related prospectus supplement. No
service charge will be imposed 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 of it as a 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 specified conditions are satisfied. As to that
series, the terms applicable to a REMIC election will be specified in the
related prospectus
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supplement, if a REMIC election is made for a series of securities, one of the
classes will be designated as evidencing the sole class of residual interests
in the REMIC, as defined in the Code. All other classes of securities in the a
series will constitute regular interests in the REMIC, as defined in the Code.
As to each series of securities for 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 to comply with applicable laws
and regulations.
Distributions on Securities
General. In general, the method of determining the amount of distributions
on a particular series of securities will depend on the type of credit support,
if any, that is used for to the series. See "Credit Enhancement." Various
methods that may be used to determine the amount of distributions on the
securities of a particular series are described under this heading. 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 the
series.
Distributions on the securities entitled to distributions will be made
monthly, semi-annually, or at other intervals and on the distribution date
specified in the related prospectus supplement. 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 interest, distributions
made on any distribution date will be applied as specified in the related
prospectus supplement. Likewise, the related prospectus supplement will specify
how distribution will be allocated between distributions of principal payments
and scheduled payments of principal. 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, in accordance with the
terms described in the related prospectus supplement and specified in the
agreement. Available funds for a distribution date will generally equal the
amount on deposit in the related security account on the distribution date, net
of related fees and expenses payable by the related trust fund, other than
specified amounts to be held in the related security account for distribution
on future distribution dates.
Distributions of Interest. Interest will accrue on the aggregate principal
balance of each class of securities entitled to interest at the pass-through
rate or interest rate, as applicable for the periods specified in the
prospectus supplement. Securities entitled only to distributions allocable to
interest will use an aggregate notional amount instead of a principal balance
to compute interest. The pass-through rates and the interest rates may be a
fixed rate or an adjustable rate as specified in the prospectus supplement. To
the extent funds are available therefor, interest accrued during each specified
period on each class of securities entitled to interest currently will be
distributable on the distribution dates specified in the related prospectus
supplement until the aggregate current principal balance of the 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 the
securities is reduced to zero, or for the period of time designated in the
related prospectus supplement. The original current principal balance of the
class of each security will equal the aggregate distributions allocable to
principal to which the 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 the 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 other specified 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. If interest accrues over a period ending two or more
days before 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
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preceding the distribution date, and the effective yield at par to
securityholders will be less than the indicated coupon rate.
Accrual securities provide for interest that accrues but is not paid
currently. If specified in the related prospectus supplement, any interest on
securities that has accrued but is not paid on a given distribution date will
be added to the aggregate current principal balance of that class of securities
on that distribution date. Distributions of interest on any class of accrual
securities will begin only after the conditions specified in the prospectus
supplement have been satisfied. Before that time, the beneficial ownership
interest in the trust fund or the principal balance, as applicable, of the
class of accrued securities, as reflected in the aggregate current principal
balance of the class of the class of accrual securities, will increase on each
distribution date by the amount of interest that accrued on the class of
accrual securities during the preceding interest accrual period but that was
not required to be distributed to the class on the distribution date. A class
of accrual securities will thereafter accrue interest on its outstanding
current principal balance of the class 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 that
amount will be allocated among the classes of securities entitled to
distributions of principal. The aggregate current principal balance of the
class of any class of securities entitled to distributions of principal
generally will be the original aggregate current principal balance of the class
of the class of securities reduced by all distributions to the holders of the
securities allocable to principal. Additionally, the aggregate class security
balance of accrual securities will be increased by interest accrued but not
then distributable and the aggregate class security balance of adjustable rate
securities may increase if they experience negative amortization.
Principal prepayments occur when payments of principal 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 the payments. If
so provided in the related prospectus supplement, some classes of securities
will be entitled to receive all or a disproportionate percentage of principal
prepayments in the percentages and under specified circumstances or for the
specified periods. Disproportionate allocations of principal prepayments to
particular classes of securities will have the effect of accelerating their
amortization while increasing the interests evidenced by the other classes of
securities in the trust fund. Increasing the interests of the other classes of
securities relative to that of the accelerated securities is intended to
preserve the availability of the subordination provided by the other
securities. See "Credit Enhancement--Subordination."
Unscheduled Distributions. If specified in the related prospectus
supplement, the securities may receive distributions before the next scheduled
distribution date under the circumstances and in the manner described below and
in the prospectus supplement. If applicable, the trustee will be required to
make 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 the
distribution date. Unless otherwise specified in the related prospectus
supplement, the amount of that unscheduled distribution 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 any applicable pass-through
rate or interest rate on the amount of the unscheduled distribution allocable
to principal for the period and to the date specified in the 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 an
amount equal to the aggregate of payments of interest or
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principal that were delinquent on the related determination date subject to the
master servicer's determination that the advances may be recoverable out of
late payments by borrowers, liquidation proceeds, insurance proceeds, or
otherwise. These advances may come 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.
The purpose of servicing advances is to maintain a regular flow of scheduled
interest and principal payments to securityholders, rather than to guarantee or
insure against losses. If servicing advances are made by the master servicer
from cash being held for future distribution to securityholders, the master
servicer will replace those funds by the following distribution dates to the
extent that funds in the applicable security account on any following
distribution date would be less than the amount required to be available for
distributions to securityholders on that date. Any master servicer funds
advanced will be reimbursable to the master servicer out of recoveries on the
specific loans with respect to which the 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 or
a sub-servicer also will be reimbursable to the master servicer or sub-servicer
from cash otherwise distributable to junior and senior securityholders to the
extent that the master servicer determines that any of them would not otherwise
be recovered. To the extent provided in the related prospectus supplement, the
master servicer also will be obligated to make advances, for some taxes and
insurance premiums not paid by borrowers on a timely basis to the extent
recoverable out of insurance proceeds, liquidation proceeds, or otherwise.
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 in this prospectus under "Credit
Enhancement," in each case as described in the related prospectus supplement.
If the master servicer or a sub-servicer fails to make a required advance,
the trustee will be obligated to make the advance in its capacity as successor
servicer if it is acting in that capacity. If the trustee makes an advance, it
will be entitled to be reimbursed for the advance just 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
Before or concurrently with each distribution on a distribution date, the
master servicer or the trustee will furnish to each securityholder of record of
a series a statement of each of the following that is applicable to any class
in the series:
(1) the amount of the 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;
(2) the amount of the distribution allocable to interest;
(3) the amount of any servicing advance;
(4) the aggregate amount
o otherwise allocable to the holders of subordinated securities on
the distribution date, and
o withdrawn from the reserve account, that is included in the
amounts distributed to the holders of senior securities;
(5) the outstanding principal balance or notional amount of each class
of the series after giving effect to the distribution of principal on the
distribution date;
(6) the percentage of principal payments on the loans prepayments that
each class will be entitled to receive on the following distribution date
not including principal prepayments;
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(7) the percentage of any principal prepayments on the loans that each
class will be entitled to receive on the following distribution date;
(8) 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 items;
(9) 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 the distribution date;
(10) the book value of any real estate acquired through foreclosure or
grant of a deed in lieu of foreclosure;
(11) the pass-through rate or interest rate, as applicable, of the
class expected to be applicable to the next distribution to the class if is
has changed from the date of the last statement;
(12) the amount remaining in any reserve account at the close of
business on the distribution date;
(13) the pass-through rate or interest rate, as applicable, as of the
day before the preceding distribution date; and
(14) any amounts remaining under letters of credit, pool policies, or
other forms of credit enhancement.
Where applicable, any of these amounts 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 the listed information.
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 the calendar year a report as to
the aggregate of amounts reported pursuant to (1) and (2) above for the
calendar year or, if the person was a securityholder of record only during a
portion of the calendar year, for the applicable portion of the year and any
other customary information deemed appropriate 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. The
classes, in general, fall into different categories. The following chart
identifies and briefly explains some of the more typical categories. The
prospectus supplement for a series of securities may identify the classes that
comprise the series by reference to the following categories:
Categories of Classes Definition
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
interest payment characteristics but
together constitute a
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Categories of Classes Definition
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 the series.
Scheduled Principal Class........ A class that is designed to receive
principal payments using a predetermined
principal balance schedule but is not
designated as a planned principal class or
targeted principal class. In many cases,
the schedule is derived by assuming two
constant prepayment rates for the
underlying trust fund assets. These two
rates are the endpoints for the
"structuring range" for the scheduled
principal class.
Sequential Pay................... Classes that receive principal payments in
a prescribed sequence, that do not have
predetermined principal balance schedules
and that under all circumstances receive
payments of principal continuously from the
first distribution date on which they
receive principal until they are retired. A
single class that receives principal
payments before or after all other classes
in the same series of securities may be
identified as a Sequential Pay class.
Strip............................ A class that receives a constant
proportion, or "strip," of the principal
payments on the underlying trust fund
assets.
Support Class, also sometimes
referred to as companion A class that receives principal payments on
classes......................... any distribution date only if scheduled
payments have been made on specified
planned principal classes, targeted
principal classes, and scheduled principal
classes.
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Categories of Classes Definition
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
the 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
the 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 interest rate borne by the underlying
mortgage loans.
Interest Only.................... A class that receives some or all of the
interest payments made on the underlying
trust fund assets and little or no
principal. Interest only classes have
either a nominal principal balance or a
notional amount. A nominal principal
balance represents actual principal that
will be paid on the class. It is referred
to as nominal since it is extremely small
compared to other classes. A notional
amount is the amount used as a reference to
calculate the amount of interest due on an
interest only class that is not entitled to
any distributions in respect of principal.
Principal Only................... A class that does not bear interest and is
entitled to receive only distributions in
respect of principal.
Partial Accrual.................. A class that accretes a portion of the
amount of accrued interest on it, which
amount will be added to the principal
balance of the class on each applicable
distribution date, with the remainder of
the accrued interest to be distributed
currently as interest on the class. The
accretion may continue until a specified
event has occurred or until the partial
accrual class is retired.
Accrual.......................... A class that accretes the amount of accrued
interest otherwise distributable on the
class, which amount will be added as
principal to the principal balance of the
class on each applicable distribution date.
The accretion may continue until some
specified event has occurred or until the
accrual class is retired.
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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. Persons acquiring beneficial ownership interests in the
securities will hold their securities through DTC in the United States, or the
European depositaries, Cedelbank or the Euroclear System, in Europe, if they
are participants of those systems, or indirectly through organizations that are
participants in those systems. The book-entry securities will be issued in one
or more certificates that equal the aggregate principal balance of the
securities and will initially be registered in the name of Cede & Co., 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 the 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. Except in
limited circumstances, no person acquiring a book-entry security will be
entitled to receive a physical certificate representing the security. Until
definitive securities are issued, Cede & Co., as nominee of DTC, is the only
anticipated securityholder of the securities. Security owners are only
permitted to exercise their rights indirectly through clearing system
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 that maintains the beneficial owner's account for that
purpose. In turn, the financial intermediary's ownership of the book-entry
security will be recorded on the records of DTC, or of a participating firm
that acts as agent for the financial intermediary, whose interest will in turn
be recorded on the records of DTC, if the beneficial owner's financial
intermediary is not a DTC participant, and on the records of Cedelbank 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
book-entry securities are outstanding, under the rules, regulations, and
procedures creating and affecting DTC and its operations, DTC is required to
make book-entry transfers between clearing system 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. Clearing system
participants and indirect participants with whom security owners have
securities accounts are similarly required to make book-entry transfers and
receive and transmit distributions on behalf of their respective security
owners. Accordingly, although security owners will not possess certificates,
the clearing system rules provide a mechanism by which security owners will
receive distributions and will be able to transfer their interest.
Security owners will not receive or be entitled to receive certificates
representing their interests in the securities, except under limited
circumstances. Until definitive securities are issued, security owners who are
not clearing system participants may transfer ownership of securities only
through clearing system participants and indirect participants by instructing
the clearing system participants and indirect participants to transfer
securities, by book-entry transfer, through DTC for the account of the
purchasers of the securities. The purchaser's account must be maintained with
clearing system participants. Under the clearing system 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 clearing system
participants at DTC will be debited and credited. Similarly, the clearing
system 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
Cedelbank or Euroclear as a result of a transaction with a clearing system
participant will be made during subsequent securities settlement processing and
dated the business day following the DTC settlement date. Those credits or any
transactions in the securities settled during that processing will be reported
to the relevant Euroclear or Cedelbank participants on that business day. Cash
received in Cedelbank or Euroclear as a result of sales of securities by or
through a CEDEL participant or Euroclear participant to a DTC participant will
be received with value on the DTC settlement date but will be available in the
relevant Cedelbank or Euroclear cash account only as of the business day
following settlement with DTC.
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Transfers between clearing system 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, the cross-market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in the 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. Cedelbank participants and Euroclear participants may not deliver
instructions directly to the European depositaries.
DTC is a New York-chartered limited purpose trust company that performs
services for its participants. Some of the participants or their
representatives or both own interests in 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 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 other
organizations. Indirect access to Cedelbank is also available to others, such
as banks, brokers, dealers, and trust companies that clear through or maintain
a custodial relationship with a Cedelbank participant, either directly or
indirectly.
Euroclear was created in 1968 to hold securities for its participants and to
clear and settle transactions between Euroclear participants through
simultaneous electronic book-entry delivery against payment, 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. Euroclear is operated by the
Brussels, Belgium office of Morgan Guaranty Trust Company of New York under
contract with Euroclear Clearance Systems S.C., a Belgian cooperative
corporation. All operations are conducted by Morgan Guaranty, and all Euroclear
securities clearance accounts and Euroclear cash accounts are accounts with the
Euroclear operator, not Euroclear Clearance Systems. Euroclear Clearance
Systems establishes policy for Euroclear on behalf of Euroclear participants.
Euroclear participants include banks, 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.
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Morgan Guaranty 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 Guaranty are
governed by the Terms and Conditions Governing Use of Euroclear and the related
Operating Procedures of the Euroclear System and applicable Belgian law. These
provisions govern transfers of securities and cash within Euroclear,
withdrawals of securities and cash from Euroclear, and receipts of payments
with respect to securities in Euroclear. All securities in Euroclear are held
on a fungible basis without attribution of specific certificates to specific
securities clearance accounts. The Euroclear operator acts under these
provisions 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 the payments will
be forwarded by the trustee to Cede & Co., as nominee of DTC. Distributions on
securities held through Cedelbank or Euroclear will be credited to the cash
accounts of Cedelbank participants or Euroclear participants in accordance with
the relevant system's rules and procedures, to the extent received by the
relevant depositary. The 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" in this prospectus.
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 the book-entry securities. In addition, issuance of
the book-entry securities in book-entry form may reduce the liquidity of the
securities in the secondary market since some potential investors may be
unwilling to purchase securities for which they cannot obtain physical
certificates.
Monthly and annual reports on the trust fund will be provided to Cede & Co.,
as nominee of DTC, and may be made available by Cede & Co. to beneficial owners
upon request, in accordance with the rules, regulations, and procedures
creating and affecting the Depository, and to the financial intermediaries to
whose DTC accounts the book-entry securities of the beneficial owners are
credited.
DTC has advised the trustee that, 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 the
financial intermediaries to whose DTC accounts the book-entry securities are
credited, to the extent that the actions are taken on behalf of financial
intermediaries whose holdings include the 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 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
the actions on its behalf through DTC. DTC may take actions, at the direction
of its related clearing system participants, with respect to some securities
which conflict with actions taken with respect to other securities.
Definitive certificates will be issued to beneficial owners of the book-
entry certificates, or their nominees, rather than to DTC, only if:
. 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,
. Provident, in its sole option, with the consent of the trustee, elects
to terminate a book-entry system through DTC, or
. after the occurrence of an event of default, beneficial owners
representing not less than 51% of the principal balance of the book-
entry Class A Certificates advise the trustee and DTC through the
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financial intermediaries and the DTC participants in writing that the
continuation of a book-entry system through DTC is no longer in the best
interests of beneficial owners.
Upon the occurrence of any of the events described in the preceding
paragraph, the trustee will be required to notify all beneficial owners of the
occurrence of the event and the availability through DTC of definitive
securities. Upon surrender by DTC of the global certificate or certificates
representing the book-entry securities and instructions for re-registration,
the trustee will issue definitive securities, and thereafter the trustee will
recognize the holders of the definitive securities as securityholders under the
applicable agreement.
Although DTC, Cedelbank, and Euroclear have agreed to the foregoing
procedures to facilitate transfers of securities between participants of DTC,
Cedelbank, and Euroclear, they are under no obligation to perform or continue
to perform those procedures and those 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 the beneficial ownership interests.
DTC management is aware that some computer applications, systems, and the
like for processing data that are dependent upon calendar dates, including
dates before, on, and after January 1, 2000, may encounter year 2000 problems.
DTC has informed its participants and other members of the financial community
that it has developed and is implementing a program so that its systems, as the
same relate to the timely payment of distributions to securityholders, book-
entry deliveries, and settlement of trades within DTC, 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 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 impress upon them the
importance of their services being year 2000 compliant and 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 contingency
plans it deems appropriate.
According to DTC, the this 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.
Credit Enhancement
General
Credit enhancement may be provided for one or more classes of a series of
securities or for 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 the series, the establishment of one or more reserve
accounts, the use of a cross-collateralization feature, the 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 in this prospectus 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
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protection against all risks of loss and will not guarantee repayment of the
entire principal balance of the securities and interest on them. If losses
occur that 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 the credit
enhancement relates and the manner of determining the amount of coverage
provided to the trust funds by it and of the application of the coverage to the
identified trust funds.
Subordination
Protection afforded to holders of one or more classes of securities of a
series by a subordination feature may be accomplished by the preferential right
of holders of one or more other classes of the series to distributions of
scheduled principal, principal prepayments, interest, or any combination of
them 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 reducing the ownership interest of the related
subordinated securities, a combination of ownership reduction and preferential
payment rights, or as otherwise described in the related prospectus supplement.
The related prospectus supplement may provide that delays in receipt of
scheduled payments on the loans and losses on defaulted loans will be borne
first by the various classes of subordinated securities and thereafter by the
various classes of senior securities under specified circumstances. The related
prospectus supplement may limit the aggregate distributions of delinquent
payments on the loans over the lives of the securities or at any time, the
aggregate losses on defaulted loans that must be borne by the subordinated
securities by virtue of subordination, and the amount of the distributions
otherwise distributable to the holders of subordinated securities that will be
distributable to senior securityholders on any distribution date. If aggregate
distributions of delinquent payments on the loans or aggregate losses on
defaulted loans were to exceed an amount specified in the related prospectus
supplement, the holders of senior securities 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
distributed to senior securityholders or deposited into one or more reserve
accounts established with the trustee. The deposits may be made on each
distribution date for specified periods, until the balance in the reserve
account has reached a specified amount, or 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 specified classes of securities at the times and
under the circumstances specified in the 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 specified distributions to other classes of senior and
subordinated securities, respectively, through a cross-collateralization
mechanism or otherwise. As between classes of senior securities and as between
classes of subordinated securities, distributions may be allocated among the
classes:
o in the order of their scheduled final distribution dates,
o in accordance with a schedule or formula,
o in relation to the occurrence of events, or
o otherwise, in each case as specified in the related prospectus
supplement.
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As between classes of subordinated securities that would otherwise have been
entitled to the payments, the redirection of payments to holders of senior
securities on account of delinquencies or losses or to 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. Under the letter of credit, the letter of credit bank will be
obligated to honor drawings under its letter of credit in an aggregate fixed
dollar amount, net of unreimbursed payments under its letter of credit, equal
to the percentage specified in the related prospectus supplement of the
aggregate principal balance of the loans on the related Cut-Off Date or of one
or more classes of securities. If so specified in the related prospectus
supplement, the letter of credit may permit drawings against 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 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 under it. The obligations of the letter of
credit bank under its 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 any letter of credit for a series
will be filed with the SEC 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
The prospectus supplement for a series of securities, may provide that
deficiencies in amounts otherwise payable on the securities or specified
classes of them will be covered by insurance policies or surety bonds provided
by one or more insurance companies or sureties. These instruments may cover,
with respect to one or more classes of securities of the related series, timely
distributions of interest 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, a trust fund may
also include bankruptcy bonds, special hazard insurance policies, other
insurance, or guaranties:
o to maintain timely payments or provide additional protection against
losses on the assets included in the trust fund,
o to pay administrative expenses, or
o to establish a minimum reinvestment rate on the payments made in respect
of the assets or principal payment rate on the assets.
These arrangements may include agreements under which securityholders are
entitled to receive amounts deposited in various accounts held by the trustee
on the terms specified in the prospectus supplement. A copy of the instrument
providing this enhancement for a series will be filed with the SEC as an
exhibit to a Current Report on Form 8-K to be filed with the SEC within 15 days
of issuance of the securities of the related series.
Over-Collateralization
The prospectus supplement for a series of securities may provide that a
portion of the interest payment on each loan will be applied as an additional
distribution in respect of principal to reduce the principal balance of a
specified class or classes of securities and, thus, accelerate the rate of
payment of principal on the class or classes of securities relative to the
principal balance of the loans in the related trust fund.
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Reserve Accounts
The related prospectus supplement may provide that credit support for a
series of securities will be provided by establishing and maintaining with the
trustee for the series, in trust, of one or more reserve accounts for the
series. The reserve account for a series will be funded:
o by depositing in it cash, United States Treasury securities, instruments
evidencing ownership of principal or interest payments on United States
Treasury securities, letters of credit, demand notes, certificates of
deposit, or a combination of them,
o by depositing in it from time to time specified amounts to which
subordinated securityholders would otherwise be entitled, or
o in any other manner 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. Permitted investments may include:
o 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, if the obligations are backed by the full faith
and credit of the United States;
o repurchase agreements on obligations specified in the first item in this
list maturing not more than three months from the date of their
acquisition, if the short-term unsecured debt obligations of the party
agreeing to repurchase the obligations are at the time rated by each
rating agency in its highest short-term rating category;
o certificates of deposit, time deposits, and bankers' acceptances of any
U.S. depository institution or trust company incorporated under the laws
of the United States or any of its states and subject to supervision and
examination by federal or state banking authorities, if the unsecured
short-term debt obligations of the depository institution or trust
company at the date of their acquisition have been rated by each rating
agency in its highest unsecured short-term debt rating category, and
that, in the case of bankers' acceptances, shall not have an original
maturity of more than 365 days and, if Moody's is a rating agency, shall
each have an original maturity of not more than 90 days;
o commercial paper of any corporation incorporated under the laws of the
United States or any of its states that on the date of acquisition has
been rated by the rating agencies in their highest short-term rating
categories having original maturities of not more than 90 days;
o short-term investment funds sponsored by any trust company or bank
incorporated under the laws of the United States or any of its states
that on the date of acquisition has been rated by the rating agencies in
their respective highest rating category of long-term unsecured debt;
o interests in any money market fund that at the date of acquisition of
the interests in the fund and throughout the time the interest is held
in the fund has the rating specified in the related prospectus
supplement by each rating agency; and
o other obligations or securities that are acceptable to each rating
agency as a permitted investment and will not result in a reduction in
the then current rating of the securities, as evidenced by a letter to
that effect from the rating agency.
A permitted investment may not evidence either the right to receive only
interest on the obligations underlying the instrument or both principal and
interest payments derived from obligations underlying the instrument and the
interest and principal payments on the instrument provide a yield to maturity
at par greater than 120% of the yield to maturity at par of the underlying
obligations. In addition, no permitted investment may be purchased at a price
greater than par if the instrument may be prepaid or called at a price less
than its purchase price before its stated maturity. Unless otherwise specified
in the related prospectus supplement, any instrument
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deposited in the reserve accounts 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. The related prospectus supplement will contain additional
information about the instruments deposited in the reserve accounts.
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.
Pool Insurance Policies
The related prospectus supplement, may provide that a separate pool
insurance policy will be obtained for the pool and issued by the insurer named
in the prospectus supplement. Each pool insurance policy will, subject to
specified limitations, cover loss from default in payment on loans in the pool
in an amount equal to a specified percentage of the aggregate principal balance
of the loans on the Cut-Off Date that are not covered as to their entire
outstanding principal balances by primary mortgage insurance policies. The
master servicer will present claims under that insurance to the pool insurer on
behalf of itself, the trustee, and the holders of the securities of the related
series. However, the pool insurance policies are not blanket policies against
loss, since claims under them may only be made against particular defaulted
loans and only on satisfaction of specified conditions precedent. 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
o any required primary mortgage insurance policy is in effect for the
defaulted loan and a claim under it has been submitted and settled;
o hazard insurance on the related property has been kept in force and real
estate taxes and other protection and preservation expenses have been
paid;
o if there has been physical loss or damage to the mortgaged property, it
has been restored to its physical condition, reasonable wear and tear
excepted, at the time of issuance of the policy; and
o the insured has acquired good and merchantable title to the property
free of liens except specified permitted encumbrances.
On satisfaction of these conditions, the pool insurer will have the option
either to purchase the property securing the defaulted loan at a price equal to
its principal balance plus accrued and unpaid interest and specified expenses
incurred by the master servicer on behalf of the trustee and securityholders,
or to pay the amount by which the sum of the principal balance of the defaulted
loan plus accrued and unpaid interest at the interest rate provided for in the
mortgage loan note to the date of payment of the claim and the aforementioned
expenses exceeds the proceeds received from an approved sale of the mortgaged
property, in either case net of specified 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 any proceeds 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 the restoration will increase the proceeds to securityholders
on liquidation of the loan after reimbursement of the master servicer for its
expenses and the 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, failure to construct a property in
accordance with plans and specifications, or fraud or negligence in the
origination or servicing of a loan, including misrepresentation by the
borrower, the originator, or persons involved in its origination. A
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failure of coverage attributable to one of these events might result in a
breach of Provident's representations and in that case might obligate 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 on a defaulted loan occurring when the servicer of the
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 on disposition of all foreclosed properties. The amount of claims
paid will include specified expenses incurred by the master servicer as well as
accrued interest on delinquent loans to the date of payment of the claim or
another 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.
Cross-Collateralization
The related prospectus supplement may provide that the beneficial ownership
of separate groups of assets included in a trust fund will be evidenced by
separate classes of the related series of securities. In that case, credit
support may be provided by a cross-collateralization feature that 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 before
distributions to subordinated securities evidencing a beneficial ownership
interest in, or secured by, one or more other asset groups within the trust
fund. Cross-collateralization may be provided by the allocation of specified
excess amounts generated by one or more asset groups to one or more other asset
groups within the same trust fund or by the allocation of losses from 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 that includes a cross-
collateralization feature will describe the manner and conditions for applying
the 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
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 in it. Each prospectus supplement will contain information about
the type and maturities of the loans in the related pool. The related
prospectus supplement will specify any circumstances 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 those loans. Generally, home
equity loans and home improvement contracts are not viewed by borrowers as
permanent financing. Accordingly, the 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
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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,
these 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 will have the same effect as a
prepayment of the related loan. See "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 the
investor at the time the securities were purchased.
Collections on home equity loans may vary because, among other things,
borrowers may make payments as high as the entire outstanding principal balance
plus accrued interest and the fees and charges or make payments during any
month as low as the minimum monthly payment for the month that for some loans
is only the interest and the fees and charges for the month. In addition,
collections on the loans may vary due to seasonal purchasing and the payment
habits of borrowers.
Some of the conventional loans will contain due-on-sale provisions
permitting the mortgagee to accelerate the maturity of the loan upon sale or
some transfers by the borrower of the related mortgaged property. Thus, the
rate of prepayments on the 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
"Legal Aspects of the Loans" for a description of each agreement and legal
developments that may affect the prepayment experience on the loans.
The rate of prepayments of conventional mortgage loans has fluctuated
significantly in recent years. In general, if prevailing rates fall
significantly below the interest rate in the mortgage loan notes, the loans are
more likely to be subject to higher prepayment rates than if prevailing
interest rates remain at or above the interest rate in the mortgage loan notes.
Conversely, if prevailing interest rates rise appreciably above the interest
rate in the mortgage loan notes, the loans are more likely to experience a
lower prepayment rate than if prevailing rates remain at or below the interest
rate in the mortgage loan notes. However, we cannot assure you that that will
continue to be the case.
When a full prepayment is made on a loan, the borrower is charged interest
on the principal amount 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 that 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 liquidating 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 law 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 sale of mortgaged property by
the secured party. Upon 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
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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
on 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 various disclosures, and require licensing of some 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 that may apply to originating,
servicing, and collecting loans. Depending on the applicable law and the
specific circumstances involved, violations of these laws, policies, and
principles may limit the ability of the master servicer to collect all or part
of the principal of or interest on the loans, may entitle the borrower to a
refund of amounts previously paid, and, in addition, could subject the master
servicer to damages and administrative sanctions.
If the rate at which interest is passed through or paid to the holders of
securities of a series is calculated on a loan-by-loan basis, disproportionate
principal prepayments among loans with different interest rates will affect the
yield on the 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 generally
accrue on each loan from the first day of the month, the distribution of
interest will not be made earlier than the month following the month of
accrual.
Under specified 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. We cannot provide you assurances about 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 the securities.
The Agreements
A description of the material provisions of each agreement that are not
described elsewhere in this prospectus follows. The description is subject to,
and qualified in its entirety by reference to, the provisions of each
agreement. Where particular terms used in the agreements are referred to, those
terms are as specified in the agreements.
Assignment of the Trust Fund Assets
Assignment of the Loans. When a series of securities is issued, Provident
will assign the loans comprising the related trust fund to the trustee, without
recourse, together with all principal and interest due after the
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Cut-Off Date and received by Provident on the loans after the Cut-Off Date,
other than any retained interest specified in the related prospectus
supplement. The trustee will, concurrently with the assignment, deliver the
securities to Provident in exchange for the loans. Each loan will be identified
in a schedule appearing as an exhibit to the related agreement. The 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 about the APR or the interest rate provided for in the mortgage
loan note, the maturity of the loan, the loan-to-value ratios or combined loan-
to-value ratios, as applicable, at origination, and other information.
Unless otherwise specified in the related prospectus supplement, the
agreement will require that Provident will also deliver or cause to be
delivered to the trustee or to the custodian a loan file for each mortgage loan
or home equity loan. Among other things, the loan file contains:
o the mortgage note or contract endorsed without recourse in blank or to
the order of the trustee,
o the mortgage, deed of trust, or similar instrument with evidence of
recording indicated on it, 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 the mortgage together with a certificate that
the original of the mortgage was delivered to the recording office,
o an assignment of the mortgage to the trustee, which assignment will be
in recordable form in the case of a mortgage assignment, and
o other security documents, including those relating to any senior
interests in the mortgaged property, 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 events specified in the
related prospectus supplement.
The trustee or the custodian will review the loan documents after their
receipt, and the trustee will hold them in trust for the benefit of the related
securityholders. Unless otherwise specified in the related prospectus
supplement, if any document is found to be missing or defective in any material
respect, the trustee or the custodian will notify the master servicer and
Provident. If Provident cannot cure the omission or defect within the
appropriate time period after receipt of the notice, Provident will be
obligated either to purchase the related loan from the trust fund at the
purchase price or if so specified in the related prospectus supplement, to
remove the loan from the trust fund and substitute in its place one or more
other loans that meets specified requirements. We cannot assure you 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 these provisions, no purchase or substitution of a loan will
be made if the purchase or substitution would result in a prohibited
transaction tax under the Code for a trust fund for which a REMIC election is
to be made.
No Recourse to Provident or Master Servicer. As described 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 particular
representations and warranties are breached or for failure to deliver
particular documents relating to the loans as described in this prospectus
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
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securityholders or the trustee for a breach of a 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 for the related trust fund a separate security account or
accounts for the collection of payments on the related trust fund assets in the
trust fund that, unless otherwise specified in the related prospectus
supplement, must be either
o maintained with a depository institution whose short-term debt
obligations and long-term debt obligations at the time of any deposit
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 the account or accounts are fully insured by either
the Bank Insurance Fund or the Savings Association Insurance Fund and
that is any of
o a federal savings and loan association duly organized, validly
existing, and in good standing under the applicable banking laws of
any state,
o an institution duly organized, validly existing, and in good
standing under the applicable banking laws of any state,
o a national banking association duly organized, validly existing, and
in good standing under the federal banking laws,
o a principal subsidiary of a bank holding company,
o 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
o 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 its funds 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 the 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 required standards.
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 after the Cut-Off
Date, other than specified payments due on or before the Cut-Off Date and
exclusive of any amounts representing retained interest:
o all payments on account of principal, including principal prepayments
and, if specified in the related prospectus supplement, any applicable
prepayment penalties, on the loans;
o all payments on account of interest on the loans, net of applicable
servicing compensation;
o all net proceeds of the hazard insurance policies and any primary
mortgage insurance policies, to the extent the 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 and
all other net cash amounts received and retained in connection with the
liquidation of defaulted loans, by foreclosure or otherwise, together
with any net proceeds received on a monthly basis with respect to any
properties
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acquired on behalf of the securityholders by foreclosure or deed in lieu
of foreclosure, netted against these items generally are unreimbursed
expenses associated with them;
o all proceeds of any loan or the property associated with it purchased by
Provident as described under "Loan Program--Representations by
Provident; Repurchases" or "--Assignment of Trust Fund Assets" and all
proceeds of any loan repurchased as described under "--Termination;
Optional Termination";
o 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";
o 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
o 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:
o 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 or
investment income on funds in the security account;
o to reimburse the master servicer for advances, limited in amount to
amounts received that represent late recoveries of payments of principal
or interest on the loan with respect to which the servicing advance was
made, whether the receipt is a payment by the obligor or insurance
proceeds or liquidation proceeds;
o to reimburse the master servicer for any servicing advances previously
made which the master servicer has determined to be nonrecoverable;
o to reimburse the master servicer from insurance proceeds for expenses
incurred by the master servicer and covered by the related insurance
policies;
o to reimburse the master servicer for unpaid master servicing fees and
unreimbursed out-of-pocket costs incurred by the master servicer in the
performance of its servicing obligations, limited to amounts received
representing late recoveries of the payments for which the servicing
advances were made;
o to reimburse the master servicer or Provident for expenses incurred and
reimbursable pursuant to the agreement;
o to withdraw any amount deposited in the security account that was not
required to be deposited in it; and
o to clear and terminate the security account upon termination of the
agreement.
In addition, unless otherwise specified in the related prospectus
supplement, by the business day before 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
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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 the accounts when a deficiency exists in any of them.
Pre-Funding Account
The related prospectus supplement may provide that, the master servicer will
establish and maintain an 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 the trustee
during the funding period specified in the related prospectus supplement 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 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. Any funding period for a trust fund will begin on
the related closing date and will end on the date specified in the related
prospectus supplement, which will not 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
another trust account 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 a capitalized interest account
cash in an amount 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. The capitalized interest account shall be maintained with the
trustee for the related series of securities and is designed solely to cover
these interest shortfalls. Monies on deposit in the capitalized interest
account will not be available to cover losses on loans. To the extent that the
entire amount on deposit in the capitalized interest account has not been
applied to cover shortfalls in interest on the related series of securities by
the end of the funding period, any amounts remaining in the capitalized
interest account will be paid to Provident.
Sub-Servicing
The master servicer may enter into an agreement with any servicing entity
that 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 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 follow customary collection procedures for loans comparable to the loans
that are consistent with each agreement and any pool insurance policy, primary
mortgage insurance policy, bankruptcy bond, or alternative arrangements.
Consistent with that, the master servicer may waive any assumption fee, late
payment, or other charge in connection with a loan and arrange with a borrower
a schedule for the liquidation of delinquencies consistent with the master
servicer's policies with respect to the mortgage
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loans it owns and services for others and consistent with any applicable
coverage of the loan by a pool insurance policy, primary mortgage insurance
policy, bankruptcy bond, or alternative arrangements. To the extent the master
servicer is obligated to make or cause to be made servicing advances, the
obligation will remain during any period of 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 exercise or
cause to be exercised its rights to accelerate the maturity of the loan under
any applicable due-on-sale clause if it has knowledge of the conveyance or
proposed conveyance, but only if 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 the 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 the property has been or is
about to be conveyed, pursuant to which the person becomes liable for repayment
of the loan and, to the extent permitted by applicable law, the mortgagor also
remains liable. 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 "Legal Aspects of the
Loans--Due-on-Sale Clauses." The terms of the related loan may not be changed
in connection with an assumption.
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 the property is located. The coverage
will be in an amount that is at least equal to the lesser of
o the maximum insurable value of the improvements securing the loan from
time to time,
o the combined principal balance owing on the loan and any mortgage loan
senior to the loan, and
o 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 will be
deposited in the related security account 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.
If the master servicer maintains a blanket policy insuring against hazard
losses on all the loans comprising part of a trust fund, that will satisfy its
obligation relating to the maintenance of hazard insurance. The 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 that would have been deposited therein but for that clause.
In general, the standard form of fire and extended coverage policy covers
physical damage to or destruction of the improvements securing a loan by fire,
lightning, explosion, smoke, windstorm and hail, riot, strike, and civil
commotion, subject to the conditions and exclusions particularized in each
policy. Although the policies relating to the loans may have been underwritten
by different insurers under different state laws in accordance with different
applicable forms and therefore may not contain identical terms, their basic
terms are dictated by state laws, and most policies typically do not cover any
physical damage resulting from war, revolution, governmental actions, floods
and other water-related causes, nuclear reactions, wet or dry rot, vermin,
rodents, insects or domestic animals, theft, some cases of vandalism, and earth
movement, including earthquakes, landslides, and mud flows. This list is merely
indicative of some 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 that in effect requires the insured at all times to
carry insurance of a specified percentage of the full replacement value
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of the insured property in order to recover the full amount of any partial
loss. That percentage is generally 80% to 90%. If the insured's coverage falls
below this specified percentage, then the insurer's liability upon partial loss
will not exceed the larger of the actual cash value of the improvements damaged
or destroyed and the proportion of the loss as the amount of insurance carried
bears to the specified percentage of the full replacement cost of the
improvements. Actual cash value of improvements is generally defined as
replacement cost at the time and place of loss, less physical depreciation.
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 the loans decreases, and since improved real estate generally
has appreciated in value over time in the past, the effect of this requirement
upon partial loss may be that hazard insurance proceeds will be insufficient to
restore fully the damaged property. The related prospectus supplement may
require that a special hazard insurance policy be obtained to insure against
some of the uninsured risks. See "Credit Enhancement."
If the property securing a defaulted loan is damaged and any proceeds from
the related hazard insurance policy are insufficient to restore the damaged
mortgaged property, the master servicer is not required to expend its own funds
to restore the damaged property unless it determines that the restoration will
increase the proceeds to securityholders on liquidation of the loan after
reimbursement of the master servicer for its expenses and that the 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 the normal
practices and procedures it deems appropriate 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 the loan plus its accrued interest
that is payable to securityholders, the trust fund will realize a loss in the
amount of the difference plus the aggregate of recovery expenses incurred by
the master servicer that are reimbursable under the agreement. In the unlikely
event that the proceedings result in a total recovery that is, after
reimbursement to the master servicer of its expenses, in excess of the
principal balance of the loan plus its accrued interest 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 the loan and, unless otherwise specified in the
related prospectus supplement, amounts representing the balance of the 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 that,
when added to any related liquidation proceeds and after deduction of expenses
reimbursable to the master servicer, exceed the principal balance of the loan
plus its accrued interest 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 the
loan. If the master servicer has expended its own funds to restore the damaged
property and the 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 the
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 particular expenses incurred by the master servicer, no payment or recovery
will result in a recovery to the trust fund that exceeds the principal balance
of the defaulted loan together with its accrued interest. See "Credit
Enhancement."
The proceeds from any liquidation of a loan will be applied in the following
order of priority:
first, to reimburse the master servicer for any unreimbursed expenses
incurred by it to restore the related property and any unreimbursed
servicing compensation payable to the master servicer with respect to the
loan;
second, to reimburse the master servicer for any unreimbursed servicing
advances with respect to the loan;
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third, to accrued and unpaid interest on the loan to the extent no
servicing advance has been made for that amount; and
fourth, as a recovery of principal of the 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 in full force a primary mortgage insurance policy on each loan for
which coverage is required. Primary mortgage insurance policies reimburse
specified losses sustained due to defaults in payments by borrowers. The master
servicer will not cancel or refuse to renew any 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 the 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 the series that
have been rated.
Servicing and Other Compensation and Payment of Expenses
The principal servicing compensation to be paid to the master servicer for
its master servicing activities for each series of securities will be equal to
the percentage per annum of the outstanding principal balance of each loan, and
that compensation will be retained by it from collections of interest on the
loan in the related trust fund. The master servicing fee percentage may vary
under specified circumstances, and it will be described in the related
prospectus supplement. As compensation for its servicing duties, any sub-
servicer 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 some ongoing expenses
associated with each trust fund and incurred by it in connection with its
responsibilities under the related agreement, including and if so specified in
the related prospectus supplement, payment of any fee or other amount payable
with respect to any credit enhancement arrangements; payment of expenses
incurred in enforcing the obligations of sub-servicers; and payment of the fees
and disbursements of the trustee, any custodian appointed by the trustee, the
certificate registrar, and any paying agent. The master servicer will be
entitled to reimbursement of expenses incurred in enforcing the obligations of
sub-servicers under limited circumstances.
Evidence as to Compliance
Each agreement will provide that by a specified date in each year a firm of
independent public accountants will furnish a statement to the trustee on the
basis of the examination by the firm conducted substantially in compliance with
the Uniform Single Attestation Program for Mortgage Bankers or the Audit
Program for mortgages serviced for Freddie Mac. The statement will be to the
effect that the servicing by or on behalf of the master servicer of the trust
fund assets pursuant to the agreement was conducted in compliance with the
servicing agreement except for any significant exceptions or errors in records
that in its opinion it is required to report under the Audit Program for
mortgages serviced for Freddie Mac or the Uniform Single Attestation Program
for Mortgage Bankers. In rendering its statement the firm may rely, as to
matters relating to the direct servicing of loans by sub-servicers, upon
comparable statements not more than a year old for examinations conducted
substantially in compliance with the Uniform Single Attestation Program for
Mortgage Bankers or the Audit Program for mortgages serviced for Freddie Mac of
firms of independent public accountants with respect to the related sub-
servicer.
Each agreement will also provide for delivery to the trustee, by 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.
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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 on written request to the master servicer at the address in the
related prospectus supplement.
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 under the agreement except upon appointment of a successor servicer
and receipt by the trustee of a letter from the rating agency that the
resignation and appointment will not result in a downgrade of the securities or
a determination that its duties under the agreement are no longer permissible
under applicable law. The master servicer may, however, be removed from its
obligations as set forth in the agreement. No resignation will become effective
until the trustee or a successor servicer has assumed the master servicer's
obligations 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.
However, neither the master servicer, Provident, nor the other person will be
protected against any liability that would otherwise be imposed for willful
misfeasance, bad faith, or negligence in the performance of duties under the
agreement or for reckless disregard of obligations under the agreement. 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
loss, liability or expense otherwise reimbursable pursuant to the agreement,
and any loss, liability or expense incurred for willful misfeasance, bad faith,
or negligence in the performance of duties under the agreement or for reckless
disregard of obligations under the agreement. 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 that is not
incidental to its respective responsibilities under the agreement and that in
its opinion may involve it in any expense or liability. The master servicer or
Provident may, however, in its discretion undertake any action that it deems
appropriate with respect to the agreement and the rights and duties of the
parties to the agreement and the interests of the securityholders under the
agreement. In that case, the legal expenses and costs of the action and any
liability resulting from it will be costs and liabilities of the trust fund,
and the master servicer or Provident, as the case may be, will be entitled to
be reimbursed for them 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, if the
person is qualified to service mortgage loans and meets the net worth
requirement specified in the agreement and if the merger, consolidation, or
succession does not adversely affect the then current rating or ratings of the
class or classes of securities of the series that have been rated.
Events of Default; Rights Upon Event of Default
Pooling and Servicing Agreement; Master Servicing Agreement. Except as
otherwise specified in the related prospectus supplement, events of default
under each agreement will consist of:
o any failure by the master servicer to make any required deposit pursuant
to the related agreement other than a servicing advance that continues
unremedied for five days after written notice of the
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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;
o any failure by the master servicer to make a servicing advance as
required under the agreement;
o 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 that continues unremedied for thirty days after written notice
of the 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
o events of insolvency, readjustments of debt, marshalling of assets and
liabilities, or similar proceedings and particular 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 if payments from them 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
terminate all of the rights and obligations of the master servicer under the
agreement relating to the trust fund and in the related trust fund assets. At
the direction of holders of securities evidencing not less than 51% of the
aggregate of the percentage interests of all the holders and under other
circumstances specified in the agreement, the trustee must take that action if
an event of default under an agreement remains unremedied. Upon the removal of
the master servicer the trustee will succeed to all of the duties and
liabilities of the master servicer under the agreement, including, if
specified in the related prospectus supplement, the obligation to make
servicing advances, and will be entitled to similar compensation arrangements.
If the event of default results from the master servicer's failure to make a
servicing advance, the trustee shall terminate the master servicer. If 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 that appointment, the trustee is
obligated to act in that capacity. The trustee and any successor may agree
upon the servicing compensation to be paid, which may not 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 its status as a securityholder, will have
any right under any agreement to institute any proceeding with respect to the
agreement, unless the securityholder previously has given to the trustee
written notice of default and unless the holders of securities of any class of
the series evidencing not less than 51% of the aggregate of the percentage
interests of all the holders constituting the class have requested that the
trustee institute the proceeding in its own name as trustee under the
agreement and have offered to the trustee reasonable indemnity, and the
trustee for 60 days has neglected or refused to institute a proceeding.
Indenture. Except as otherwise specified in the related prospectus
supplement, events of default under the indenture for each series of notes
include:
o a default in the payment of any principal of or interest on any note of
the series that continues unremedied for five days after written notice
of the default is given as specified in the related prospectus
supplement;
o failure to perform in any material respect any other covenant of
Provident or the trust fund in the indenture that continues for a period
of thirty days after notice of the failure is given in accordance with
the procedures described in the related prospectus supplement;
o events of bankruptcy, insolvency, receivership, or liquidation of
Provident or the trust fund; or
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o any other event of default provided with respect to notes of that series
including specified defaults on the part of the issuer, if any, of a
credit enhancement instrument supporting the 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 the series
may declare the principal amount of all the notes of the series to be due and
payable immediately. If any notes of that series have an interest rate of 0%,
the acceleration of principal shall relate to a portion of the principal amount
specified in the terms of that series, as provided in the related prospectus
supplement the declaration may, under some circumstances, be rescinded by the
holders of more than 50% of the of the percentage interests of all the holders
of the notes of the series.
If, following an event of default with respect to any series of notes, the
notes of the series have been declared to be due and payable, the trustee may,
in its discretion, notwithstanding the acceleration, elect to maintain
possession of the collateral securing the notes of the series and to continue
to apply distributions on the collateral as if no declaration of acceleration
had occurred if the collateral continues to provide sufficient funds for the
payment of principal of and interest on the notes of the series as they would
have become due if there had not been a declaration of acceleration. 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 the series
that continues unremedied for five days after written notice of the default is
given as specified in the related prospectus supplement, unless
o the holders of 100% of the of the percentage interests of all the
holders of the notes of the series consent to the sale,
o the proceeds of the sale or liquidation are sufficient to pay in full
the principal of and accrued interest, due and unpaid, on the
outstanding notes of the series at the date of the sale, or
o the trustee determines that the collateral would not be sufficient on an
ongoing basis to make all payments on the notes as the payments would
have become due if the notes had not been declared due and payable, and
the trustee obtains the consent of the holders of 66 2/3% of the of the
percentage interests of all the holders of the notes of the series.
If 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 that continues unremedied for five days after written notice
of the 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
the 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 enforcement of its lien except in
connection with a proceeding for 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, if the
principal of the notes of a series is declared due and payable after an event
of default, the holders of any notes issued at a discount from par may be
entitled to receive no more than an amount equal to their unpaid principal
amount less the amount of the discount that is unamortized.
Subject to the provisions of the indenture relating to the duties of the
trustee, although an event of default occurs and is 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 the series unless the holders offered to the trustee
security or indemnity satisfactory to it against the costs and liabilities that
might be incurred by it in complying with the request or direction. Subject to
the provisions for indemnification and limitations contained in the indenture,
the holders of a majority of the then aggregate outstanding amount of the notes
of the 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
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on the trustee with respect to the notes of the series, and the holders of a
majority of the then aggregate outstanding amount of the notes of the series
may, in some cases, waive any default with respect to them, except a default in
the payment of principal or interest or a default with respect to 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 the series affected by
it.
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, to cure any ambiguity; to
correct or supplement any provision in it that may be defective or inconsistent
with any other provision in it; or to make any other revisions with respect to
matters or questions arising under the agreement that are not inconsistent with
its provisions, if the action will not adversely affect in any material respect
the interests of any securityholder. An amendment will be considered not to
adversely affect in any material respect the interests of the securityholders
if the person requesting the amendment obtains a letter from each rating agency
requested to rate the class or classes of securities of the series stating that
the amendment will not result in the downgrading or withdrawal of the
respective ratings then assigned to the 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, if that change does not adversely affect the
then current rating on the class or classes of securities of the series that
have been rated. In addition, if a REMIC election is made for a trust fund, the
related agreement may be amended to modify, eliminate, or add to any of its
provisions to the extent necessary to maintain the qualification of the related
trust fund as a REMIC, if the trustee has received an opinion of counsel to the
effect that the action is necessary or helpful to maintain the qualification.
Each agreement may also be amended by Provident, the master servicer, and
the trustee with consent of holders of securities of the series evidencing not
less than 51% of the aggregate of the percentage interests of all the holders
of each class affected by the amendment 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. However, no amendment may reduce the amount of or delay the
timing of, payments received on loans that are required to be distributed on
any security without the consent of the holder of the security, or reduce the
percentage of securities of any class the holders of which are required to
consent to that amendment, without the consent of the holders of all securities
of the class covered by the 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 the amendment will not cause the 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 the
agreement following the later of:
(1) the final payment of or other liquidation of the last of the trust
fund assets or the disposition of all property acquired upon foreclosure of
any trust fund assets remaining in the trust fund and
(2) 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 that right from the related trust fund of all of the remaining
trust fund assets and all property acquired in respect of the trust fund
assets. See "Federal Income Tax Consequences."
Unless otherwise specified by the related prospectus supplement, any
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
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of the master servicer, another specified person, or, if applicable, the holder
of the REMIC residual interest, at a price specified in the related prospectus
supplement. The exercise of that right will affect early retirement of the
securities of that series, but the right of the master servicer, the other
specified person, or, if applicable, the 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 (2) 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 on the delivery to the trustee for cancellation of all the notes of the
series or, with specified limitations, on deposit with the trustee of funds
sufficient for the payment in full of all of the notes of the series. The
discharge does not apply with respect to limited continuing rights specified in
the indenture.
In addition to discharge, the indenture may provide that for the notes of
any series, the related trust fund will be discharged from all obligations in
respect of the notes of the series through defeasance although generally
discharged, the obligations relating to temporary notes and exchange of notes;
to register the transfer of or exchange notes of the series; to replace stolen,
lost, or mutilated notes of the series; to maintain paying agencies; and to
hold monies for payment in trust will continue. Defeasance will require the
deposit with the trustee, in trust, of money or direct obligations of or
obligations guaranteed by the United States of America that through the payment
of their interest and principal in accordance with their terms will provide
money in an amount sufficient to pay the principal of and each installment of
interest on the notes of the series on the last scheduled distribution date for
the notes and any installment of interest on the notes in accordance with the
terms of the indenture and the notes of the series. Upon defeasance and
discharge of notes of the series, holders of notes of the series would be able
to look only to that money and those deposited 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.
Legal Aspects of the Loans
The following discussion contains summaries, which are general in nature, of
legal matters relating to the loans. The legal aspects applicable to the loans,
the mortgages, and the mortgaged properties are governed primarily by
applicable state laws that may differ substantially from state to state. The
descriptions, therefore, will not be exact for every jurisdiction the loans are
found, and do not reflect the laws of any particular state except where so
stated. Nor do the descriptions 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. California uses
almost exclusively deeds of trust instead of mortgages. A mortgage creates a
lien upon the real property encumbered by the mortgage, which lien is generally
not before 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. A mortgage has two parties, the mortgagor, who is the
borrower and owner of the
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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 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 and 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 that
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 some states,
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 some other persons. In some states, including
California, the borrower-trustor has the right to reinstate the loan at any
time following default until shortly before the trustee's sale. In general, the
borrower, or any other person having a junior encumbrance on the real estate,
may, during a statutorily prescribed reinstatement period, cure a monetary
default by paying the entire amount in arrears plus other designated costs and
expenses incurred in enforcing the obligation. Generally, state law controls
the amount of foreclosure expenses and costs, including attorney's fees, which
may be recovered by a lender. After the reinstatement period has expired
without the default having been cured, the borrower or junior lienholder no
longer has the right to reinstate the loan and must pay the loan in full to
prevent the scheduled foreclosure sale. If the deed of trust is not reinstated
within any applicable cure period, a notice of sale must be posted in a public
place and, in most states, including California, published for a specific
period of time in one or more newspapers. In addition, some state laws require
that a copy of the notice of sale be posted on the property and sent to all
parties having an interest of record in the real property. In California, the
entire process from recording a notice of default to a non-judicial sale
usually takes four to five months.
Mortgages. Foreclosure of a mortgage is generally accomplished by judicial
action. In Ohio, judicial foreclosure is mandatory for residential property.
The action is initiated by the service of legal pleadings upon all parties
having an interest in the real property. Delays in completion of the
foreclosure may occasionally result from difficulties in locating necessary
parties. Judicial foreclosure proceedings are often not contested by any of the
parties. When the mortgagee's right to foreclosure is contested, the legal
proceedings necessary to resolve the issue can be time consuming. After the
completion of a judicial foreclosure proceeding, the court generally issues a
judgment of foreclosure and appoints a referee or other court officer to
conduct the sale of the property. In some states, mortgages may also be
foreclosed by advertisement, pursuant to a power of sale provided in the
mortgage. Ohio requires judicial foreclosure, which includes the issuance of a
decree in foreclosure, a statutorily required appraisal process, and 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.
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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 case the mortgagor's debt will be extinguished. On the other hand, the
lender may purchase for a lesser amount to preserve its right against a
borrower to seek a deficiency judgment in states where a deficiency 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 the
repairs necessary to render the property suitable for sale at its own expense.
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 that 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."
Environmental Risks
Real property pledged as security to a lender may be subject to unforeseen
environmental risks. Under the laws of some states, contamination of a property
may give rise to a lien on the property to assure the payment of the costs of
clean-up. In several states that a lien has priority over the lien of an
existing mortgage against the property. In addition, under the federal
Comprehensive Environmental Response, Compensation and Liability Act of 1980
("CERCLA"), the United States Environmental Protection Agency may impose a lien
on property where the EPA has incurred clean-up costs. However, a CERCLA lien
is subordinate to pre-existing, perfected security interests.
Under the laws of some states and under CERCLA, a secured lender conceivably
could 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 these costs on 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. 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 when it fails to market the property in a timely fashion or holds the
facility or property as an investment, including leasing the facility or
property to third party.
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
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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 to be considered 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. Securityholders could conceivably
realize a loss from the costs arising from these circumstances.
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 that 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 mortgaged properties were conducted.
Rights of Redemption
In some states, after sale pursuant to a deed of trust or foreclosure of a
mortgage, the borrower and foreclosed junior lienors are given a statutory
period in which to redeem the property from the foreclosure sale. In 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 after 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
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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
Some 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 some 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 other states, the lender has the option of bringing a personal
action against the borrower on the debt without first exhausting the security.
However, in some of these states, the lender, following judgment on the
personal action, may be deemed to have elected a remedy and may be precluded
from exercising other 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 instances where the value of the lender's security
has been impaired by acts or omissions of the borrower, for example, upon 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 the
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 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 the mortgage loan, change the rate of
interest, and alter the mortgage loan repayment schedule. The effect of any
proceedings under the federal Bankruptcy Code, including 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 the payments.
The federal tax laws provide priority to some 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 that will
generally provide that if the mortgagor or obligor sells, transfers, or conveys
the mortgaged 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 these clauses in
many states. For instance, the California Supreme
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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 some 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 these clauses with respect to mortgage loans that were
originated or assumed during the window period under the Garn-St Germain Act
that ended in all cases not later than October 15, 1982, and that were
originated by lenders other than national banks, federal savings institutions,
and federal credit unions. Freddie Mac has taken the position in its published
mortgage servicing standards that, out of a total of eleven window period
states, five states (Arizona, Michigan, Minnesota, New Mexico, and Utah) have
enacted statutes extending, on various terms and for varying periods, the
prohibition on enforcement of due-on-sale clauses with respect to specified
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, that may affect the average life of the
loans and the number of loans that may extend to maturity.
In addition, under federal bankruptcy law, due-on-sale clauses may not be
enforceable in bankruptcy proceedings and may, under some circumstances, be
eliminated in any modified mortgage resulting from the bankruptcy proceeding.
Enforceability of Prepayment and Late Payment Fees
Forms of notes, mortgages, 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 before maturity. In some states, specific
limitations exist on the late charges that a lender may collect from a borrower
for delinquent payments. Some states also limit the amounts that a lender may
collect from a borrower as an additional charge if the loan is prepaid. Under
some state laws, prepayment charges may not be imposed after a specified period
following the origination of mortgage loans with respect to prepayments on
loans secured by liens encumbering owner-occupied residential properties. Since
many of the mortgaged properties will be owner-occupied, we anticipate 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 high interest rates, may increase the likelihood of
refinancing or other early retirement of the loans or contracts. Late charges
and prepayment fees are typically retained by servicers as additional servicing
compensation.
Applicability of Usury Laws
Title V of the Depository Institutions Deregulation and Monetary Control Act
of 1980 provides that state usury limitations shall not apply to specified
types of residential first mortgage loans originated by specified lenders after
March 31, 1980. The Office of Thrift Supervision 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 that
expressly rejects application of the federal law. Fifteen states adopted such a
law before 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. Some
states have taken action to reimpose interest rate limits or to limit discount
points or other charges.
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Soldiers' and Sailors' Civil Relief Act
Generally, under the Soldiers' and Sailors' Civil Relief Act of 1940, as
amended, a borrower who enters military service after the origination of the
borrower's loan may not be charged interest above an annual rate of 6% during
the period of the borrower's active duty status, unless a court orders
otherwise on application of the lender. 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 is included in this status. It is
possible that the 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 some of the loans. Unless otherwise provided in the
related prospectus supplement, any shortfall in interest collections resulting
from the application of this Act could result in losses to securityholders.
This Act also imposes limitations that 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 Act permits the extension of a loan's
maturity and the re-adjustment of its payment schedule beyond the completion of
military service. Thus, if such a loan goes into default, the inability to
realize upon the property in a timely fashion may occasion delays in payment
and losses.
Junior Mortgages; Rights of Senior Mortgagees
To the extent that the loans in the trust fund for a series are secured by
mortgages that are junior to other mortgages held by other lenders or
institutional investors, the rights of the trust fund as mortgagee under the
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 these proceeds and awards to any indebtedness secured
by the mortgage, in the order the mortgagee determines. Thus, if improvements
on the property are damaged or destroyed by fire or other casualty, or if 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 that appear before the
mortgage or deed of trust, to provide and maintain fire insurance on the
property, to maintain and repair the property, and not to commit or permit any
waste, and to appear in and defend any action or proceeding purporting to
affect the property or the rights of the mortgagee under the mortgage. Upon a
failure of the mortgagor to perform any of these obligations, the mortgagee is
given the right under some 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 that make revolving credit line loans typically contains
a future advance clause, which provides, in essence, that
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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 that 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 the 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 that includes home equity credit lines applies retroactively to the
date of the original recording of the trust deed or mortgage, if 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 on 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 under A, the Real
Estate Settlement Procedures Act and Regulation B promulgated under A, the
Equal Credit Opportunity Act, the Fair Credit Billing Act, the Fair Credit
Reporting Act, and related statutes and regulations. In particular, Regulation
Z requires disclosures to borrowers regarding terms of the loans. The Equal
Credit Opportunity Act and Regulation B promulgated under it 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. The Fair
Credit Reporting Act regulates the use and reporting of information related to
the borrower's credit experience. Some provisions of these laws impose specific
statutory liabilities on lenders who fail to comply with them. In addition,
violations of those 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.
The Reigle Act. Some loans may be subject to the Reigle Community
Development Regulatory Improvement Act of 1994 that 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 this Act apply on a mandatory basis to all loans
originated on or after October 1, 1995. These provisions can impose specific
statutory liabilities on 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 the right to rescind the
loans.
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 Internal Revenue Code of 1986, as
amended (the "Code"), the regulations promulgated under the Code, including,
where applicable, proposed regulations, and the judicial and administrative
rulings and decisions now in effect, all of which are subject to change or
possible differing interpretations. The statutory provisions, regulations, and
interpretations on which this interpretation is based are subject to change,
and the change could apply retroactively.
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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 some types of investors subject to special treatment
under the federal income tax laws. This summary focuses primarily on investors
who will hold securities as "capital assets" (generally, property held for
investment) within the meaning of Section 1221 of the Code, but much of the
discussion is applicable to other investors as well. Prospective investors are
advised to consult their own tax advisers concerning the federal, state, local,
and any other tax consequences to them of the purchase, ownership, and
disposition of the securities.
The federal income tax consequences to securityholders will vary depending
on whether
. the securities of a series are classified as indebtedness;
. an election is made to treat the trust fund relating to a particular
series of securities as a REMIC under the Code;
. the securities represent an ownership interest in some or all of the
assets included in the trust fund for a series; or
. 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 the series.
Before issuance of each series of securities, the trust fund shall file with
the SEC 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 under "Federal
Income Tax Consequences" in this prospectus 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 its securityholders in accordance with
their usual methods of accounting. Securities characterized as debt for federal
income tax purposes and Regular Interest Securities will be referred to
collectively as "Debt Securities."
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
that are set forth in Sections 1271-1275 of the Code and the Treasury
regulations issued under the Code 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 some 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
securityholder of a debt security must include the 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
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substantial amount of a particular class of Debt Securities is sold for cash on
or before the related Closing Date, the issue price for the class will be
treated as the fair market value of that class on the 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 before 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 the 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 if the
interest payments are unconditionally payable at intervals of one year or less
during the entire term of the debt security. The OID Regulations state that
interest payments are unconditionally payable only if a late payment or
nonpayment is expected to be penalized or reasonable remedies exist to compel
payment. Some Debt Securities may provide for default remedies upon late
payment or nonpayment of interest. The interest on those Debt Securities will
be unconditionally payable and constitute qualified stated interest, not OID.
However, absent clarification of the OID Regulations, where Debt Securities do
not provide for default remedies, the interest payments will be included in the
debt security's stated redemption price at maturity and taxed as OID. Interest
is payable at a single fixed rate only if the rate appropriately takes into
account the length of the interval between payments. Distributions of interest
on Debt Securities 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 the Debt Securities includes all distributions
of interest as well as its principal. 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.
In the case of a debt security with a long first period that 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 are encouraged to consult their own tax advisors to
determine the issue price and stated redemption price at maturity of a debt
security.
Under the de minimis rule, OID on a debt security will be considered to be
zero if the OID is less than 0.25% of the stated redemption price at maturity
of the debt security multiplied by the weighted average maturity of the debt
security. For this purpose, the weighted average maturity of the debt security
is computed as the sum of the amounts determined by multiplying the number of
full years (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, whose numerator is the amount of each distribution
included in the stated redemption price at maturity of the debt security and
whose denominator 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 the 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,
o the interest is unconditionally payable at least annually,
o the issue price of the debt instrument does not exceed the total
noncontingent principal payments, and
o interest is based on a "qualified floating rate," an "objective rate,"
or a combination of "qualified floating rates" that do not operate in a
manner that significantly accelerates or defers interest payments on the
debt security.
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In the case of Compound Interest Securities, some Interest Weighted Securities,
and some 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), we cannot assure you
that this methodology represents the correct manner of calculating OID.
The holder of a debt security issued with OID must include in gross income,
for all days during its taxable year on which it holds the debt security, the
sum of the "daily portions" of the OID. The amount of OID includible in income
by a 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 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. An accrual
period is generally the period over which interest accrues on the debt
instrument. The adjusted issue price is the sum of its issue price plus prior
accruals or OID, reduced by the total payments made with respect to the debt
security in all prior periods, other than qualified stated interest payments.
The amount of OID to be included in income by a 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 the
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 the
present value of all payments remaining to be made on the Pay-Through Security
as of the close of the accrual period and the payments during the accrual
period of amounts included in the stated redemption price of the 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:
o 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,
o events that have occurred before the end of the accrual period, and
o 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 the portions of OID for any period 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. The decrease may not be a decrease below zero for any period in the
portions of OID required to be included in income by a securityholder of a Pay-
Through Security. 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,
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although the OID Regulations do not provide for the adjustments. If the
Internal Revenue Service were to require that OID be accrued without the
adjustments, the rate of accrual of OID for a Class of Regular Interest
Securities could increase.
Some classes of Regular Interest Securities may represent more than one
class of REMIC regular interests. Unless otherwise provided in the related
prospectus supplement, the trustee intends, based on the OID Regulations, to
calculate OID on those securities as if, solely for the purposes of computing
OID, the separate regular interests were a single debt instrument.
A subsequent holder of a debt security will also be required to include OID
in gross income, but a subsequent securityholder who purchases the debt
security for an amount that exceeds its adjusted issue price will be entitled
to offset the OID by comparable economic accruals of portions of the excess, as
will an initial securityholder who pays more than a debt security's issue
price.
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 the 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 the
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 the losses or
reductions in income are uncertain and, accordingly, securityholders are
encouraged to 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 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 the OID
should be calculated by treating the Interest Weighted Security as a Compound
Interest Security. However, in the case of Interest Weighted Securities that
are entitled to some payments of principal and that are Regular Interest
Securities, the IRS could assert that income derived from an Interest Weighted
Security should be calculated as if the security were a security purchased at a
premium equal to the excess of the price paid by the securityholder for the
security over its stated principal amount, if any. Under this approach, a
securityholder would be entitled to amortize the premium only if it has in
effect an election under Section 171 of the Code with respect to all taxable
debt instruments held by the securityholder. Alternatively, the IRS could
assert that an Interest Weighted Security should be taxable under the rules
governing bonds issued with contingent payments. This treatment may be more
likely in the case of Interest Weighted Securities that are Stripped
Securities. See "--Tax Status as a Grantor Trust; Discount or Premium on Pass-
Through Securities."
Variable Rate Debt Securities. In the case of Debt Securities bearing
interest at a rate that varies directly, according to a fixed formula, with an
objective index ("Variable Rate Debt Securities"), it appears that the yield to
maturity of the Variable Rate Debt Securities and in the case of Pay-Through
Securities, the present value of all payments remaining to be made on the
Variable Rate Debt Securities, should be calculated as if the interest index
remained at its value as of the issue date of the securities. Because the
proper method of adjusting accruals of OID on a variable rate debt security is
uncertain, holders of Variable Rate Debt Securities are encouraged to consult
their own tax advisers regarding the appropriate treatment of the securities
for federal income tax purposes.
Market Discount. A purchaser of a security may be subject to the market
discount rules of Sections 1276-1278 of the Code. A securityholder that
acquires a debt security with more than a prescribed de minimis amount of
"market discount" 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
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received in that month and, if the securities are sold, the gain realized.
Market discount is generally the excess of the principal amount of the debt
security over the purchaser's purchase price. The market discount would accrue
in a manner to be provided in Treasury regulations but, until the regulations
are issued, the market discount would in general accrue either on the basis of
a constant yield in the case of a Pay-Through Security, taking into account a
Prepayment Assumption or in the ratio of
o in the case of securities (or in the case of a Pass-Through Security,
the loans underlying the security) not originally issued with OID,
stated interest payable in the relevant period to total stated interest
remaining to be paid at the beginning of the period or
o in the case of securities (or, in the case of a Pass-Through Security,
the loans underlying the security) originally issued at a discount, OID
in the relevant period to total OID remaining to be paid.
Section 1277 of the Code provides that, regardless of the origination date
of the debt security (or, in the case of a Pass-Through Security, the loans),
the excess of interest paid or accrued to purchase or carry a security (or, in
the case of a Pass-Through Security, the underlying loans) with market discount
over interest received on the security is allowed as a current deduction only
to the extent the excess is greater than the market discount that accrued
during the taxable year in which the interest expense was incurred. In general,
the deferred portion of any interest expense will be deductible when the market
discount is included in income, including on 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
the securityholder during the taxable year the 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 the security on a constant yield method and not as
a separate deduction item. 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 the class. If a securityholder makes an
election to amortize premium on a debt security, the election will apply to all
taxable debt instruments (including all REMIC regular interests and all pass-
through certificates representing ownership interests in a trust holding debt
obligations) held by the securityholder at the beginning of the taxable year in
which the election is made, and to all taxable debt instruments acquired
thereafter by the securityholder, and will be irrevocable without the consent
of the IRS. Purchasers who pay a premium for the securities are encouraged to
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 are encouraged
to 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 the holder of the debt security acquires during the year
of the election or thereafter. Similarly, a holder of a debt security that
makes this election for a
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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 the 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,
(1) 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
(2) 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 (1) or
(2) above, then a security will qualify for the tax treatment described in (1)
or (2) in the proportion that the 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 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 some pass-through entities, but not including real estate
investment trusts), the expenses will be deductible only to the extent that the
expenses, plus other "miscellaneous itemized deductions" of the securityholder,
exceed 2% of the securityholder's adjusted gross income. In addition, the
amount of itemized deductions otherwise allowable for the taxable year for an
individual whose adjusted gross income exceeds the applicable amount, adjusted
for inflation, will be reduced by the lesser of 3% of the excess of adjusted
gross income over the applicable amount or 80% of the amount of itemized
deductions otherwise allowable for the taxable year. The reduction or
disallowance of this deduction may have a significant impact on the yield of
the Regular Interest Security to the a securityholder. In general terms, a
single class REMIC is one that either
o 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
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o is similar to the 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. 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 the gross income produced by
the REMIC's assets, including stated interest and any OID or market discount on
loans and other assets, and deductions, including stated interest and OID
accrued on Regular Interest Securities, amortization of any premium with
respect to loans, and Servicing Fees and other expenses of the REMIC. A holder
of a Residual Interest Security that is an individual or a "pass-through
interest holder" (including some pass-through entities, but not including real
estate investment trusts) will be unable to deduct Servicing Fees payable on
the loans or other administrative expenses of the REMIC for a given taxable
year, to the extent that the expenses, when aggregated with the
securityholder's other miscellaneous itemized deductions for that year, do not
exceed two percent of the 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, which is 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 those loans
will be equivalent to the method under which holders of Pay-Through Securities
accrue OID, i.e., under the constant yield method taking into account the
Prepayment Assumption. The REMIC will deduct OID on the Regular Interest
Securities in the same manner that the holders of the Regular Interest
Securities include the discount in income, but without regard to the de minimis
rules. See "Taxation of Debt Securities." However, a REMIC that acquires loans
at a market discount must include the market discount in income currently, as
it accrues, on a constant interest basis.
To the extent that the REMIC's basis allocable to loans that it holds
exceeds their principal amounts, the resulting premium, if attributable to
mortgages originated after September 27, 1985, will be amortized over the life
of the loans (taking into account the Prepayment Assumption) on a constant
yield method. Although the law is somewhat unclear regarding recovery of
premium attributable to loans originated on or before that date, it is possible
that the premium may be recovered in proportion to payments of loan principal.
Prohibited Transactions and Contributions Tax. The REMIC will be subject to
a 100% tax on any net income derived from a "prohibited transaction." For this
purpose, net income will be calculated without taking into account any losses
from prohibited transactions or any deductions attributable to any prohibited
transaction that resulted in a loss. In general, prohibited transactions
include:
. subject to limited exceptions, the sale or other disposition of any
qualified mortgage transferred to the REMIC;
. subject to limited exceptions, the sale or other disposition of a cash
flow investment;
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o the receipt of any income from assets not permitted to be held by the
REMIC pursuant to the Code; or
o the receipt of any fees or other compensation for services rendered by
the REMIC.
We do not anticipate that a REMIC will 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 those taxes imposed on the REMIC. To the extent
not paid by the securityholders or otherwise, however, those taxes will be paid
out of the trust fund and will be allocated pro rata to all outstanding classes
of securities of the REMIC.
Taxation of Holders of Residual Interest Securities
The holder of a 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
the holder held the Residual Interest Security. The daily portion is determined
by allocating to each day in any calendar quarter its ratable portion of the
taxable income or net loss of the REMIC for that quarter, and by allocating
that amount among the holders on that day of the Residual Interest Securities
in proportion to their respective holdings on that day.
The holder of a Residual Interest Security must report its proportionate
share of the taxable income of the REMIC whether or not it receives cash
distributions from the REMIC attributable to the income or loss. The reporting
of taxable income without corresponding distributions could occur, for example,
in some 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 some REMIC issues
because 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 the
loss arises. A securityholder's basis in a Residual Interest Security will
initially equal the securityholder's purchase price, and will subsequently be
increased by the amount of the REMIC's taxable income allocated to the
securityholder, and decreased by the amount of distributions made and the
amount of the REMIC's net loss allocated to the securityholder, but not below
zero. 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 the
securityholders are encouraged to consult their tax advisers.
Distributions. Distributions on a Residual Interest Security will generally
not result in any additional taxable income or loss to a securityholder of a
Residual Interest Security whether they occur at their scheduled times or as a
result of prepayments. If the amount of the payment exceeds a securityholder's
adjusted basis in
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the Residual Interest Security, however, the securityholder will recognize gain
to the extent of the excess. That gain will be treated as gain from the sale of
the Residual Interest Security.
Sale or Exchange. A holder of a Residual Interest Security will recognize
gain or loss on the sale or exchange of a Residual Interest Security equal to
the difference, if any, between the amount realized and the securityholder's
adjusted basis in the Residual Interest Security at the time of the sale or
exchange. Except to the extent provided in regulations, which have not yet been
issued, any loss upon disposition of a Residual Interest Security will be
disallowed if the selling securityholder acquires any residual interest in a
REMIC or similar mortgage pool within six months before or after the
disposition.
Excess Inclusions. The portion of the REMIC taxable income of a holder of a
Residual Interest Security consisting of "excess inclusion" income may not be
offset by other deductions or losses, including net operating losses, on the
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, the securityholder's excess
inclusion income will be treated as unrelated business taxable income of the
securityholder. In addition, under Treasury regulations yet to be issued, if a
real estate investment trust, a regulated investment company, a common trust
fund, or some cooperatives were to own a Residual Interest Security, a portion
of dividends or other distributions paid by the real estate investment trust or
other entity would be treated as excess inclusion income. If a Residual
Interest 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 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 the 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 Security
holder's alternative minimum taxable income for a tax year cannot be less than
excess inclusions for the year. Third, the amount of any alternative minimum
tax net operating loss deductions must be computed without regard to any excess
inclusions. These rules are effective for tax years beginning after December
31, 1986, unless a holder of a Residual Interest Security elects to have the
rules apply only to tax years beginning after August 20, 1996.
The excess inclusion portion of a REMIC's income is generally equal to the
excess, if any, of REMIC taxable income for the quarterly period allocable to a
Residual Interest Security, over the daily accruals for the quarterly period of
120% of the long-term applicable federal rate on the Startup Day multiplied by
the adjusted issue price of the Residual Interest Security at the beginning of
the quarterly period. The adjusted issue price of a Residual Interest
Securities at the beginning of each calendar quarter will equal its issue price
which is 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 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, but not below zero. The long-term
federal rate, which is announced monthly by the Treasury Department, is an
interest rate that is based on the average market yield of outstanding
marketable obligations of the United States government having remaining
maturities in excess of nine years.
Under the REMIC Regulations, in some circumstances, transfers of Residual
Interest Securities may be disregarded. See "--Restrictions on Ownership and
Transfer of Residual Interest Securities" and "--Tax Treatment of Foreign
Investors."
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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 the 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 has furnished to the trustee an affidavit representing
and warranting that it is neither a Disqualified Organization nor an agent or
nominee acting on behalf of a Disqualified Organization.
If a Residual Interest Security is transferred to a Disqualified
Organization in violation of these restrictions, a substantial tax will be
imposed on the transferor of the Residual Interest Security at the time of the
transfer. In addition, if a Disqualified Organization holds an interest in a
pass-through entity 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. Pass-through entity includes, among
others, a partnership, trust, real estate investment trust, regulated
investment company, or any person holding as nominee.
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
the 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," 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
o 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
o 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 on 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 some
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.
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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 that series, "Pass-Through Securities"). In some
series there will be no separation of the principal and interest payments on
the loans. In those 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 those 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, the 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, the
income will 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 the Servicing Fees
under Section 162 or Section 212 of the Code to the extent that the Servicing
Fees represent "reasonable" compensation for the services rendered by the
trustee and the 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 the
securityholder's regular tax liability only to the extent that the fees, when
added to other miscellaneous itemized deductions, exceed 2% of adjusted gross
income and may not be deductible to any extent in computing the
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, adjusted for
inflation, will be reduced by the lesser of 3% of the excess of adjusted gross
income over the applicable amount or 80% of the amount of itemized deductions
otherwise allowable for the taxable year.
Discount or Premium on Pass-Through Securities. The 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 will be
required to report as interest income in each taxable year its share of the
amount of OID that accrues during that year. 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, 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
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acquires an interest in a loan originated after July 18, 1984 with more than a
de minimis amount of market discount will be required to include accrued market
discount in income. Market discount is generally the excess of the principal
amount of the loan over the purchaser's allocable purchase price. See "--
Taxation of Debt Securities; Market Discount" and "--Premium."
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 the discount that is allocable to a loan
among the principal payments on the loan and to include the discount allocable
to each principal payment in ordinary income at the time the principal payment
is made. That treatment 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 specified payments of
both interest and principal. Some 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 the stripped interest is
purchased with an issue price equal to its purchase price or, if more than one
stripped interest is purchased, the ratable share of the purchase price
allocable to the stripped interest.
Servicing Fees in excess of reasonable Servicing Fees will be treated under
the stripped bond rules. If those excess Servicing Fees are less than 100 basis
points 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 described method 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 the 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 that method applies to any pool of debt instruments the yield on
which may be affected by prepayments. Nevertheless, we believe that the Cash
Flow Bond Method is a reasonable method of reporting income for the securities,
and we expect 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 some 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.
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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 described characterizations of
the Stripped Securities are not the only possible interpretations of the
applicable Code provisions. Among other possibilities, the IRS could contend
that:
o in some series, each non-Interest Weighted Security is composed of an
unstripped undivided ownership interest in loans and an installment
obligation consisting of stripped principal payments;
o the non-Interest Weighted Securities are subject to the contingent
payment provisions of the Contingent Regulations; or
o 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 those 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. Interest income
attributable to these securities should be considered to represent "interest on
obligations secured by mortgages on real property or on interests in real
property" within the meaning of Section 856(c)(3)(B) of the Code. Reserves or
funds underlying the securities may cause a proportionate reduction in the
above-described qualifying status categories of securities.
Sale or Exchange
Subject to the discussion under "Tax Characterization of the Trust Fund as a
Partnership" with respect to trust funds as to which a partnership election is
made, a securityholder's tax basis in its security is the price the
securityholder pays for a security, plus amounts of original issue or market
discount included in income and reduced by any amortized premium and any
payments received, other than qualified stated interest payments. 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 the amount that would
have been includible in the securityholder's income if the yield on the Regular
Interest Security had equaled 110% of the applicable federal rate as of the
beginning of the securityholder's holding period, over the amount of ordinary
income actually recognized by the securityholder with respect to the 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
individual taxpayers is 20%. The maximum tax rate on both ordinary income and
long-term capital gains of corporate taxpayers is 35%. Prospective investors
are encouraged to consult their own tax advisors concerning these tax law
changes.
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Miscellaneous Tax Aspects
Backup Withholding. Subject to the discussion under "Tax Characterization of
the Trust Fund as a Partnership" 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 some 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
o fails to furnish the trustee with its taxpayer identification number;
o furnishes the trustee an incorrect taxpayer identification number;
o fails to report properly interest, dividends, or other "reportable
payments" as defined in the Code; or
o under specified circumstances, fails to provide the trustee or the
securityholder's securities broker with a certified statement, signed
under penalty of perjury, that the taxpayer identification number
provided is its correct number and that the securityholder is not
subject to backup withholding.
Backup withholding will not apply, however, with respect to some payments made
to securityholders, including payments to some exempt recipients and to some
Nonresidents. Securityholders are encouraged to 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 the year and the
amount of tax withheld, if any, with respect to payments on the securities.
Tax Treatment of Foreign Investors
Subject to the discussion under "Tax Characterization of the Trust Fund as a
Partnership" 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 "Foreign Holder,"
the interest will normally qualify as portfolio interest and will be exempt
from federal income tax. This interest will not qualify as portfolio interest
where the recipient is a holder, directly or by attribution, of 10% or more of
the capital or profits interest in the issuer, or the recipient is a controlled
foreign corporation to which the issuer is a related person. Upon receipt of
appropriate ownership statements, the issuer normally will be relieved of
obligations to withhold tax from the interest payments. These provisions
supersede the generally applicable provisions of United States law that would
otherwise require the issuer to withhold at a 30% rate (unless that rate were
reduced or eliminated by an applicable tax treaty) on, among other things,
interest and other fixed or determinable, annual or periodic income paid to
Foreign Holders. Foreign Holders of Pass-Through Securities and Stripped
Securities, including Ratio Strip Securities, however, may be subject to
withholding to the extent that the loans were originated on or before July 18,
1984.
Interest and OID of 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% United
States withholding tax or the lower treaty rate. Securityholders should assume
that that 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
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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 the amounts to be taken
into account at an earlier time to prevent the avoidance of tax. Those
regulations could, for example, require withholding before 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 the amounts will be distributed at or after the time at which the
excess inclusions accrue and not later than the calendar year following the
calendar year of accrual. If a Foreign Holder 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:
o any individual who is a citizen or resident of the United States,
o 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,
o an estate the income of which is subject to United States federal income
tax regardless of its source,
o 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
o certain trusts in existence on August 20, 1996, and treated as United
States persons (as defined in Code Section 7701(a)(30)) before the 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 a publicly traded partnership taxable as a corporation for
federal income tax purposes. This opinion will be based on the assumption that
the terms of the 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 some publicly traded partnerships are taxable
as corporations or the issuance of the securities has been structured as a
private placement under an IRS safe harbor, so that the trust 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. That 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.
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, 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
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that the notes will be classified as debt for federal income tax purposes. The
following discussion assumes this characterization of the notes is correct.
OID, Indexed Securities, etc. The discussion following assumes that all
payments on the notes are denominated in U.S. dollars, and that the notes are
not Indexed Securities or Strip Securities. 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 does
not exceed a de minimis amount, all within the meaning of the OID Regulations.
If these conditions are not satisfied with respect to any given series of
notes, additional tax considerations with respect to the notes will be
disclosed in the 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 on them will be taxable to a noteholder as
ordinary interest income when received or accrued in accordance with the
noteholder's method of tax accounting. Under the OID Regulations, a holder of a
note issued with a de minimis amount of OID must include the OID in income, on
a pro rata basis, as principal payments are made on the note. 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 the note (a "Short-Term Note") may be subject to special
rules. An accrual basis noteholder of a Short-Term Note and some 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. 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 the noteholder in income with
respect to the note and decreased by the amount of any bond premium previously
amortized and by the amount of principal payments previously received by the
noteholder with respect to the note. That 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
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 provides the
Owner trustee or other person who is otherwise required to withhold U.S. tax
with respect to the notes with an appropriate statement on Form W-8 or a
similar form, signed under
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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 the interest is not portfolio interest, then it
will be subject to United States federal income and withholding tax at a rate
of 30 percent, unless reduced or eliminated 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, if the gain is not effectively
connected with the conduct of a trade or business in the United States by the
Foreign Holder and 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 except exempt noteholders 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. Exempt
noteholders are 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. 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, 2000, subject to 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
qualifying income tests. Nonetheless, treatment of the notes as equity
interests in such a publicly traded partnership could have adverse tax
consequences to some noteholders. For example, income to some 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 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, 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 in this prospectus.
A variety of alternative characterizations are possible. For example,
because the certificates have certain features characteristic of debt, the
certificates might be considered debt of the trust fund. That characterization
would not result in materially adverse tax consequences to certificateholders
as compared to the consequences
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from treatment of the certificates as equity in a partnership. The following
discussion assumes that the certificates represent equity interests in a
partnership.
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 Securities, and that a series of securities
includes a single class of certificates. If these conditions are not satisfied
with respect to any given series of certificates, additional tax considerations
with respect to the certificates will be disclosed in the applicable prospectus
supplement.
Partnership Taxation. As a partnership, the trust fund will not be subject
to federal income tax. Rather, each certificateholder will be required to
separately take into account its allocated share of income, gains, losses,
deductions, and credits of the trust fund. The trust fund's income will consist
primarily of interest and finance charges earned on the 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 on 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:
o the interest that accrues on the certificates in accordance with their
terms for the month, including interest accruing at the pass-through
rate for the month and interest on amounts previously due on the
certificates but not yet distributed;
o 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;
o prepayment premium payable to the certificateholders for the month; and
o any other amounts of income payable to the certificateholders for the
month.
The 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 we cannot assure you 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 the 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 the 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. Those deductions might be disallowed to the individual
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in whole or in part and might result in the certificateholder being taxed on an
amount of income that exceeds the amount of cash actually distributed to the
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 those 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. We believe 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.
The trust fund will make this calculation on an aggregate basis, but might be
required to recompute it on a loan by loan basis.
If the trust fund acquires the loans at a market discount or premium, the
trust fund will elect to include that discount in income currently as it
accrues over the life of the loans or to offset that premium against interest
income on the loans. A portion of the 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. Those interests would be deemed distributed to the partners of
the old partnership in liquidation of it, 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 securityholder's share of trust fund
income includible in income and decreased by any distributions received with
respect to the certificate. In addition, both the tax basis in the certificates
and the amount realized on a sale of a certificate would include the
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 the certificates, and,
upon sale or other disposition of some of the certificates, allocate a portion
of the aggregate tax basis to the certificates sold, rather than maintaining a
separate tax basis in each certificate for purposes of computing gain or loss
on a sale of that certificate.
Any gain on the sale of a certificate attributable to the
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 the 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 over
the life of the certificates that exceeds the aggregate cash distributions with
respect thereto, the 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 the month. As a result, a
securityholder purchasing certificates may be allocated tax items attributable
to periods before the actual transaction that will affect its tax liability and
tax basis.
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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. If 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. 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 the 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. The 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. The trust fund will provide the Schedule K-l information to nominees that
fail to provide the trust fund with the information statement described in the
next paragraph and the nominees will be required to forward the 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 certificateholder notifies the
IRS of all the inconsistencies.
Under Section 6031 of the Code, any person that holds certificates as a
nominee at any time during a calendar year is required to furnish the trust
fund with a statement containing information on the nominee, the beneficial
owners, and the certificates so held. That information includes the name,
address and taxpayer identification number of the nominee and as to each
beneficial owner
o the name, address, and identification number of the person,
o whether the person is a United States person, a tax-exempt entity or a
foreign government, an international organization, or any wholly owned
agency or instrumentality of either of the foregoing, and
o information on certificates that were held, bought, or sold on behalf of
the person throughout the year.
In addition, brokers and financial institutions that hold certificates through
a nominee are required to furnish directly to the trust 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 that
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 this information 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 some 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.
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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 in this prospectus. Although the trust
fund is not expected to engage in a trade or business in the United States for
those purposes, the trust fund will withhold as if it were so engaged 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 the income were effectively connected to a U.S. trade or
business, at a rate of 35% for Foreign Holders that are taxable as corporations
and 39.6% for all other Foreign Holders. Subsequent adoption of Treasury
regulations or the issuance of other administrative pronouncements may require
the trust fund to change its withholding procedures. In determining a
certificateholder's withholding status, the trust fund may rely on IRS Form W-
8, 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 on its share of the trust fund's income including, in the
case of a corporation, the branch profits tax. Each Foreign Holder must obtain
a taxpayer identification number from the IRS and submit that number to the
trust fund on Form W-8 in order to assure appropriate crediting of the taxes
withheld. A Foreign Holder generally would be entitled to file with the IRS a
claim for refund with respect to taxes withheld by the trust fund taking the
position that no taxes were due because the trust fund was not engaged in a
U.S. trade or business. However, interest payments made or accrued to a
certificateholder who is a Foreign Holder generally will be considered
guaranteed payments to the extent the payments are determined without regard to
the income of the trust fund. If these interest payments are properly
characterized as guaranteed payments, then the interest 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 that case, a Foreign
Holder would only be entitled to claim a refund for that portion of the taxes
in excess of the taxes that should be withheld with respect to the guaranteed
payments.
Backup Withholding. Distributions made on the certificates and proceeds from
the sale of the certificates will be subject to a "backup" withholding tax of
31% if, in general, the certificateholder fails to comply with 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, 2000, subject to 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"), that 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 to 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 in this prospectus 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
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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 the
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 the
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:
o a FASIT election is in effect,
o tests concerning the composition of the FASIT's assets and the nature of
the securityholders' interests in the FASIT are met on a continuing
basis, and
o the trust fund is not a regulated investment company as defined in
section 851(a) of the Code.
Asset Composition. 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:
o cash or cash equivalents,
o 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"), which are generally instruments that provide for interest at
a fixed rate, a qualifying variable rate, or a qualifying interest-only
("IO") type rate,
o foreclosure property,
o hedging instruments that are reasonably required to guarantee or hedge
against the FASIT's risks associated with being the obligor on FASIT
interests, which are generally interest and currency rate swaps and
credit enhancement contracts,
o contract rights to acquire qualifying debt instruments or qualifying
hedging instruments,
o FASIT regular interests, and
o REMIC regular interests.
Permitted assets do not include any debt instruments issued by the holder of
the FASIT's ownership interest or by any person related to the holder.
Interests in a FASIT. In addition to the foregoing asset qualification
requirements, the interests in a FASIT must meet other requirements. All of the
interests in a FASIT must belong to either one or more classes of regular
interests or a single class of ownership interest that is held by a fully
taxable domestic C Corporation.
A FASIT interest generally qualifies as a regular interest if
(1) it is designated as a regular interest,
(2) it has a stated maturity no greater than thirty years,
(3) it entitles its holder to a specified principal amount,
(4) the issue price of the interest does not exceed 125% of its stated
principal amount,
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(5) the yield to maturity of the interest is less than the applicable
Treasury rate published by the IRS plus 5%, and
(6) if it pays interest, payable at either a fixed rate with respect to
the principal amount of the regular interest or a permissible variable rate
with respect to the principal amount.
Permissible variable rates for FASIT regular interests are the same as those
for REMIC regular interests. Interest will be considered to be based on a
permissible variable rate if generally, the interest is unconditionally payable
at least annually, the issue price of the debt instrument does not exceed the
total noncontingent principal payments, and 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 the FASIT regular
interest.
If an interest in a FASIT fails to meet one or more of the requirements set
out in clauses (3), (4), or (5) in the 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 (6), 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 the interests as inventory, rather than for
investment. In addition, holders of High-Yield Interests are subject to
limitations on offset of income derived from the interest. See "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, those 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 the securities under an accrual method of accounting, even if they
otherwise would have used the cash receipts and disbursements method. Except in
the case of FASIT Regular 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 the security will
be treated as a return of capital to the extent that the securityholder's basis
is allocable to that payment. FASIT Regular Securities issued with original
issue discount or acquired with market discount or premium generally will treat
interest and principal payments on the securities in the same manner described
for senior securities. See "Taxation of Trust as Partnership--Treatment of
Senior Securities--OID, Indexed Securities." 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.
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If a FASIT Regular Security is sold, the securityholder generally will
recognize gain or loss upon the sale. See "Taxation of Trust as Partnership--
Treatment of Senior Securities--Sale or Other Disposition." In addition, if a
FASIT regular interest becomes wholly or partially worthless as a result of
losses on the underlying assets, some holders of the 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 the interest, and the ability of the 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 the interests as inventory. If a securities dealer other than an
Eligible Corporation initially acquires a High-Yield Interest as inventory, but
later begins to hold it for investment, the dealer will be subject to an excise
tax equal to the income from the High-Yield Interest multiplied by the highest
corporate income tax rate. In addition, transfers of High-Yield Interests to
disqualified holders will be disregarded for federal income tax purposes, and
the transferor 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 Securities will be the same as the
character of the income to the FASIT, except that any tax-exempt interest
income taken into account by the holder of a FASIT Ownership Securities 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 "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 the 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 the
holder, then section 475 of the Code will continue to apply to the 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.
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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:
o the receipt of income derived from assets that are not permitted assets,
o some dispositions of permitted assets,
o the receipt of any income derived from any loan originated by a FASIT,
and
o in some 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.
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 are encouraged to 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 considerations under the Employee Retirement Income
Security Act of 1974, as amended 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
the securities.
ERISA imposes requirements on employee benefit plans subject to ERISA and on
persons who are fiduciaries with respect to those plans and Section 4975 of the
Code imposes requirements on other specified retirement plans and arrangements,
including individual retirement accounts and annuities, Keogh plans, and
collective investment funds and separate accounts in which those 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 to control the assets of the
Plans. ERISA also imposes duties on persons who are fiduciaries of Plans. Under
ERISA, any person who exercises any authority respecting the management of the
assets of a Plan is considered to be a fiduciary of the Plan, subject to
exceptions not relevant here. Some 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 these
plans may be invested in securities without regard to these ERISA
considerations, subject to the provisions of applicable state law. Any plan
that is not subject to ERISA, but that is qualified and exempt from taxation
under Code Sections 401(a) and 501(a), however, is subject to the prohibited
transaction rules in Code Section 503.
On November 13, 1986, the United States Department of Labor issued final
regulations concerning the definition of what constitutes the assets of a Plan.
See Labor Reg. Section 2510.3-101. Under this regulation, the underlying assets
and properties of corporations, partnerships, trusts, and other specified
entities in which a Plan makes an "equity" investment could be deemed for
purposes of ERISA to be assets of the investing Plan in specified
circumstances. However, the regulation generally provides that, in addition to
other technical exceptions, the assets of a corporation, partnership, or trust
in which a Plan invests will not be deemed for purposes of ERISA to be assets
of the Plan if the equity interest acquired by the investing Plan is a
publicly-
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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
specified relationships to a Plan and impose additional prohibitions where
Parties in Interest are fiduciaries with respect to the 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 cause 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") the DOL exempted from
ERISA's specified transaction rules specified 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 the certificates. PTE 83-1 permits, subject to specified
conditions, transactions that might otherwise be prohibited between Plans and
Parties in Interest with respect to those Plans related to the origination,
maintenance, and termination of mortgage pools consisting of mortgage loans
secured by first or second mortgages or deeds of trust on single-family
residential property, and the acquisition and holding of some mortgage pool
pass-through certificates representing an interest in the mortgage pools by
Plans. If the general conditions 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 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) 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 that 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:
(1) securities issued in a series consisting of only a single class of
securities, and
(2) senior securities issued in a series in which there is only one
class of senior securities,
if the securities in the case of clause (1), or the senior securities in the
case of clause (2) evidence the beneficial ownership of both a specified
percentage greater than 0% of future interest payments and a specified
percentage greater than 0% of future principal payments on the loans. It is not
clear whether any of the following would be a mortgage pass-through certificate
for purposes of PTE 83-1:
o a class of securities that evidences the beneficial ownership of a trust
fund divided into loan groups,
o beneficial ownership of a specified percentage of interest payments only
or principal payments only,
o beneficial ownership of payments of either principal or interest based
on a notional amount,
o 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 specified events.
PTE 83-1 sets forth three general conditions that must be satisfied for any
transaction to be eligible for exemption:
o the maintenance of a system of insurance or other protection for the
pooled mortgage loans and property securing the 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
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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;
o the existence of a pool trustee who is not an affiliate of the pool
sponsor; and
o 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 of these general conditions 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, if credit enhancement described under "Credit Enhancement" in this
prospectus is maintained for a series of securities 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"
in this prospectus. 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, we cannot assure you 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.
The DOL has granted to some underwriters individual administrative
exemptions (the "Underwriter Exemptions") from some of the prohibited
transaction rules of ERISA and the related excise tax provisions of Section
4975 of the Code with respect to the initial purchase, the holding and the
subsequent resale by Plans of certificates in pass-through trusts that consist
of specified types of secured 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 that generally apply to the
Underwriter Exemptions are substantially the following:
o the acquisition of the certificates by a Plan is on terms that are at
least as favorable to the Plan as they would be in an arm's-length
transaction with an unrelated party, including the price for the
certificates;
o the interests evidenced by the certificates acquired by the Plan are not
subordinated to the interests evidenced by other certificates of the
trust fund;
o the certificates acquired by the Plan have received a rating at the time
of their acquisition that is one of the three highest generic rating
categories from Standard & Poor's Ratings Group, a division of The
McGraw-Hill Companies, Moody's Investors Service, Inc., Duff & Phelps
Credit Rating Co., or Fitch IBCA, Inc.;
o the trustee must not be an affiliate of any other member of the
Restricted Group;
o 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;
o 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 the loans;
o the sum of all payments made to and retained by any servicer represents
not more than reasonable compensation for the person's services under
the agreement pursuant to which the loans are pooled and reimbursements
of the person's reasonable expenses in connection therewith; and
o the Plan investing in the certificates is an accredited investor as
defined in Rule 501(a)(1) of Regulation D of the SEC under the
Securities Act of 1933, as amended.
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The trust fund must also meet the following requirements:
o the corpus of the trust fund must consist solely of assets of a type
that have been included in other investment pools;
o certificates in the other investment pools must have been rated in one
of the three highest rating categories of S&P, Moody's, Fitch, or Duff &
Phelps for at least one year before the Plan's acquisition of
certificates; and
o certificates evidencing interests in the other investment pools must
have been purchased by investors other than Plans for at least one year
before any Plan's acquisition of certificates.
Moreover, the Underwriter Exemptions generally provide relief from specified
self-dealing and conflict of interest prohibited transactions that may occur
when the Plan fiduciary causes a Plan to acquire certificates in a trust
holding receivables as to which the fiduciary or its affiliate is an obligor on
the receivables held in the trust, if, among other requirements:
o in the case of an acquisition in connection with the initial issuance of
certificates, at least fifty percent of each class of certificates in
which Plans have invested is acquired by persons independent of the
Restricted Group;
o the fiduciary or its affiliate is an obligor with respect to five
percent or less of the fair market value of the obligations contained in
the trust;
o a Plan's investment in certificates of any class does not exceed twenty-
five percent of all of the certificates of that class outstanding at the
time of the acquisition; and
o immediately after the acquisition, no more than twenty-five percent of
the assets of any Plan with respect to which the 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, any
Underwriter, the trustee, the master servicer, any insurer with respect to the
trust, any obligor with respect to loans included in the trust fund
constituting more than five percent of the aggregate unamortized principal
balance of the assets in the trust fund, or any affiliate of those parties (the
"Restricted Group").
The prospectus supplement for each series of securities will indicate the
classes of securities, if any, offered thereby as to which it is expected that
an Underwriter Exemption will apply.
On July 21, 1997, the DOL published in the Federal Register an amendment to
the Underwriter Exemptions that extends exemptive relief to specified 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 certificates being
offered by the trust fund, to be transferred to the trust during the Funding
Period instead of requiring that all the Obligations be either identified or
transferred on or before the applicable Closing Date. The relief is available
when the following conditions are met:
o The ratio of the amount allocated to the pre-funding account to the
total principal amount of the certificates being offered (the "Pre-
Funding Limit") must not exceed twenty-five percent.
o All Obligations transferred after the applicable Closing Date (the
"Additional Obligations") must meet the same terms for eligibility as
the original Obligations used to create the trust fund, which terms have
been approved by the rating agency.
o The transfer of the Additional Obligations to the trust fund during the
Funding Period must not result in the certificates to be covered by the
Exemption receiving a lower credit rating from the rating
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agency on termination of Funding Period than the rating that was
obtained at the time of the initial issuance of the securities by the
trust fund.
o 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 interest rate for
the Obligations that were transferred to the trust fund on the Closing
Date.
o The Funding Period must end no later than three months or 90 days after
the Closing Date or earlier in some circumstances if the pre-funding
account falls below the minimum level specified in the related agreement
or an event of default occurs thereunder.
o Amounts transferred to the pre-funding account or Capitalized Interest
Account used in connection with the pre-funding may be invested only in
particular permitted investments.
o The prospectus supplement for the related series must describe:
o the pre-funding account or Capitalized Interest Account used in
connection with the pre-funding account;
o the duration of the Funding Period;
o the percentage or dollar amount of the pre-funding limit for the
trust fund; and
o 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.
o The related agreement must describe the permitted investments for the
pre-funding account or Capitalized Interest Account and the terms and
conditions for eligibility of Additional Obligations.
o To ensure that the characteristics of the Additional Obligations are
substantially similar to the original Obligations that were transferred
to the trust fund:
o the characteristics of the Additional Obligations must be monitored
by an insurer or other credit support provider that is independent of
Provident; or
o an independent accountant retained by Provident must provide
Provident with a letter 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. A copy of the letter must be delivered to the
underwriters, the rating agencies, and the trustee. In preparing that
letter, the independent accountant must use the same type of
procedures as were applicable to the Obligations that were
transferred to the trust fund as of the Closing Date.
Any Plan fiduciary that proposes to cause a Plan to purchase securities is
encouraged to consult with its counsel concerning the impact of ERISA and the
Code, the applicability of PTE 83-1 and the Underwriter Exemption and the
potential consequences in their specific circumstances, before making an
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 by it are 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
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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 those entities. Under SMMEA, if
a state enacted legislation before October 4, 1991 specifically limiting the
legal investment authority of those entities with respect to mortgage related
securities, securities will constitute legal investments for entities subject
to such legislation only to the extent provided in the legislation.
Approximately twenty-one states adopted such legislation before 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 by them,
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 any regulations 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 restrictions on
investments by federal credit unions in mortgage related securities, in each
case whether or not the class of securities under consideration for purchase
constituted a mortgage related security.
All depository institutions considering an investment in the securities,
whether or not the class of securities under consideration for purchase
constitutes a mortgage related security, should review the Federal Financial
Institutions Examination Council's Supervisory Policy Statement on the
Securities Activities to the extent adopted by their respective regulators
setting forth, in relevant part, particular 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, that are high-risk mortgage securities
as defined in the Supervisory Policy Statement on the Securities Activities.
According to the Supervisory Policy Statement on the Securities Activities,
high-risk mortgage securities include securities such as securities not
entitled to distributions allocated to principal or interest, or subordinated
securities. Under the Supervisory Policy Statement on the Securities
Activities, it is the responsibility of each depository institution to
determine, before 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 Supervisory Policy Statement on the Securities Activities.
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 prudent investor
provisions that may restrict or prohibit investment in securities that are not
interest bearing or income paying.
There may be other restrictions on the ability of some investors, including
depository institutions, either to purchase securities or to purchase
securities representing more than a specified percentage of the investor's
assets. Investors are encouraged to consult their own legal advisors in
determining whether and to what extent the securities constitute legal
investments for them.
Method of Distribution
Securities are being offered by this prospectus and a related prospectus
supplement in series from time to time, each series evidencing or relating to a
separate trust fund, through any of the following methods:
o By negotiated firm commitment underwriting and public reoffering by
underwriters;
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o By agency placements through one or more placement agents primarily with
institutional investors and dealers; and
o By placement directly by Provident with institutional investors.
A prospectus supplement will be prepared for each series that will describe
the method of offering being used for that series and will identify any
underwriters thereof and either the price at which the series is being offered,
the nature and amount of any underwriting discounts or additional compensation
to the 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 the series if any of them 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 specified civil liabilities,
including liabilities under the Securities Act of 1933, as amended, or to
contribution with respect to payments that the underwriters or agents may be
required to make with respect to those liabilities.
If a series is offered other than through underwriters, the prospectus
supplement relating to it will contain information regarding the nature of the
offering and any agreements to be entered into between Provident and purchasers
of securities of the series.
Legal Matters
Specified legal matters relating to the securities of each series will be
passed upon for Provident by Keating, Muething & Klekamp, P.L.L., Cincinnati,
Ohio. Legal matters relating to some of the 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 for each series of securities and no trust
fund will engage in any business activities or have any assets or obligations
before the issuance of the related series of securities. Accordingly, no
financial statements for any trust fund will be included in this prospectus or
in the related prospectus supplement.
Rating
The issuance of the securities of each series offered by this prospectus and
a prospectus supplement is conditioned on their having been rated in one of the
four highest rating categories by the nationally recognized statistical rating
agency or agencies specified in the related prospectus supplement.
Any rating would be based on, among other things, the adequacy of the value
of the trust fund assets and any credit enhancement for the class and will
reflect the rating agency's assessment solely of the likelihood that Holders of
a class of securities will receive payments to which the securityholders are
entitled under the related
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agreement. A rating is not an assessment of the likelihood that principal
prepayments on the related loans will be made, the degree to which the rate of
the prepayments might differ from that originally anticipated, or the
likelihood of early optional termination of the series of securities. A rating
should not be considered 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. A rating will not address the possibility that
prepayment at higher or lower rates than anticipated by an investor may cause
the 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 some prepayment scenarios.
We cannot assure you that any 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 for a
series, the rating might also be lowered or withdrawn for other reasons,
including an adverse change in the financial or other condition of a credit
enhancement provider or a change in the rating of the credit enhancement
provider's long-term debt.
The amount, type, and nature of credit enhancement, if any, established for
a series of securities will be determined on the basis of criteria established
by each rating agency rating classes of the series. The criteria are sometimes
based on an actuarial analysis of the behavior of mortgage loans in a larger
group. That analysis is often the basis on which each rating agency determines
the amount of credit enhancement required for each class. We cannot assure you
that the historical data supporting that actuarial analysis will accurately
reflect future experience or assure you 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. We cannot assure you that values of
any mortgaged 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 mortgaged properties become equal to
or greater than the value of the mortgaged 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 that 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
these losses are not covered by credit enhancement, they 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
Term Page
- ---- ----
Additional Obligations..................................................... 76
Amortizable Bond Premium Regulations....................................... 53
Average Interest Rate...................................................... 77
Cash Flow Bond Method...................................................... 60
CERCLA..................................................................... 43
Code....................................................................... 48
Contingent Regulations..................................................... 51
Cut-Off Date............................................................... 3
Debt Securities............................................................ 49
Disqualified Organization.................................................. 58
Eligible Corporations...................................................... 71
FASIT Ownership Security................................................... 70
FASIT Provisions........................................................... 69
FASIT Qualification Test................................................... 70
FASIT Regular Securities................................................... 70
FASIT...................................................................... 69
Foreign Holder............................................................. 63
Garn-St Germain Act........................................................ 46
High-Yield Interest........................................................ 71
Interest Weighted Securities............................................... 52
IO......................................................................... 70
NCUA....................................................................... 78
new partnership............................................................ 67
New Withholding Regulations................................................ 65
Obligations................................................................ 76
OID Regulations............................................................ 49
Term Page
- ---- ----
OID........................................................................ 49
old partnership............................................................ 67
Parties in Interest........................................................ 74
Pay-Through Security....................................................... 51
Plans...................................................................... 73
Pre-Funding Limit.......................................................... 76
Prepayment Assumption...................................................... 51
Provident.................................................................. 3
PTE 83-1................................................................... 74
Ratio Strip Securities..................................................... 60
RCRA....................................................................... 44
Regular Interest Securities................................................ 49
REMIC...................................................................... 70
Residual Interest Security................................................. 56
Regular Interests.......................................................... 54
Residual Interests......................................................... 54
Restricted Group........................................................... 76
Servicing Fees............................................................. 59
Short-Term Note............................................................ 64
Single Family Securities................................................... 74
SMMEA...................................................................... 77
Stripped Securities........................................................ 59
thrift institutions........................................................ 57
Underwriter Exemptions..................................................... 75
Variable Rate Securities................................................... 52
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$168,300,000
PROVIDENT HOME EQUITY
LOAN TRUST 1999-A
HOME EQUITY LOAN
ASSET-BACKED NOTES,
SERIES 1999-A
THE PROVIDENT BANK,
AS SELLER, TRANSFEROR AND MASTER SERVICER
_________________________________________________
PROSPECTUS SUPPLEMENT
SEPTEMBER 27, 1999
_________________________________________________
PRUDENTIAL SECURITIES
LEHMAN BROTHERS
(Joint Book Lead)
