<PAGE>
PROSPECTUS SUPPLEMENT
(To Prospectus dated June 10, 1997)
- --------------------------------------------------------------------------------
ABFS Mortgage Loan Trust 1998-1
$39,900,000 Adjustable Rate Class A-1 Certificates
$10,000,000 6.490% Class A-2 Certificates
$19,900,000 6.490% Class A-3 Certificates
$11,400,000 6.695% Class A-4 Certificates
$11,725,000 7.145%(1) Class A-5 Certificates
$10,500,000 6.595% Class A-6 Certificates
(1) Subject to increase as set forth herein
[GRAPHIC OMITTED]
PRUDENTIAL SECURITIES SECURED FINANCING CORPORATION
(Depositor)
Mortgage Pass-Through Certificates, Series 1998-1
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The Mortgage Pass-Through Certificates, Series 1998-1 (the "Certificates")
will consist of six classes (each, a "Class") of senior Certificates, the Class
A-1 Certificates (the "Class A-1 Certificates" or "Adjustable Rate
Certificates"), the Class A-2 Certificates (the "Class A-2 Certificates"), the
Class A-3 Certificates (the "Class A-3 Certificates"), the Class A-4
Certificates (the "Class A-4 Certificates"), the Class A-5 Certificates (the
"Class A-5 Certificates") and the Class A-6 Certificates (the "Class A-6
Certificates" or "Lockout Certificates" and collectively with the Class A-2
Certificates, the Class A-3 Certificates, the Class A-4 Certificates and the
Class A-5 Certificates, the "Fixed Rate Certificates") and one class of
residual Certificates, the Class R Certificates (the "Class R Certificates").
Only the Adjustable Rate Certificates and the Fixed Rate Certificates
(together, the "Class A Certificates") are being offered hereby. Interest on
each Class of Class A Certificates will be payable monthly at the rate for such
Class (each, a "Pass-Through Rate") on the certificate principal balance of
such Class (each, a "Certificate Principal Balance") on each Distribution Date
(as defined herein). The original Certificate Principal Balances (each, an
"Original Certificate Principal Balance") of the Class A-1 Certificates, the
Class A-2 Certificates, the Class A-3 Certificates, the Class A-4 Certificates,
the Class A-5 Certificates and the Class A-6 Certificates are $39,900,000,
$10,000,000, $19,900,000, $11,400,000, $11,725,000 and $10,500,000,
respectively.
The Certificates will evidence in the aggregate all of the beneficial
ownership interests in a trust fund (the "Trust Fund") consisting primarily of a
pool of fixed-rate, closed-end, monthly pay, business and consumer purpose home
equity loans secured by first or second lien mortgages or deeds of trust on
residential real properties (the "Mortgage Loans") held by ABFS Mortgage Loan
Trust 1998-1 (the "Trust"). The Trust will be created pursuant to a Pooling and
Servicing Agreement (the "Pooling and Servicing Agreement") among American
Business Credit, Inc., as servicer (the "Servicer"), Prudential Securities
Secured Financing Corporation, as depositor (the "Depositor"), and The Chase
Manhattan Bank, as trustee (the "Trustee"). On the Closing Date (as defined
herein) Mortgage Loans (the "Initial Mortgage Loans") having an aggregate
Principal Balance (as defined herein) of approximately $92,011,633.51
(determined as of the Cut-Off Date, defined herein) will be transferred to the
Trust Fund. The Pooling and Servicing Agreement provides that additional
mortgage loans (the "Subsequent Mortgage Loans") having an aggregate Principal
Balance of approximately $12,988,366.49 (the "Original Pre-Funded Amount") may
be purchased by the Trust from the Depositor from time to time on or before June
12, 1998 from funds deposited in the Pre-Funding Account (as defined herein) on
the Closing Date from proceeds of the sale of the Class A Certificates.
The Seller will cause Financial Security Assurance Inc. (the "Certificate
Insurer") to issue a financial guaranty insurance policy (the "Certificate
Insurance Policy") for the benefit of the holders of the Class A Certificates
(the "Class A Certificateholders") pursuant to which it will guarantee certain
payments to the Class A Certificateholders as described herein.
[GRAPHIC OMITTED]
The Class A Certificates are entitled to priority, relative to the Class R
Certificates, in right of distributions on the Mortgage Loans as described
herein. See "Description of the Certificates -- Flow of Funds."
<PAGE>
For a discussion of significant matters affecting investment in the
Certificates, see "Risk Factors" beginning on page S-17 herein and beginning on
page 13 in the Prospectus.
(Cover continued on next page)
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THESE SECURITIES DO NOT REPRESENT INTERESTS IN OR OBLIGATIONS OF THE DEPOSITOR,
THE ORIGINATORS, THE SELLER, THE SERVICER, THE CERTIFICATE INSURER, THE TRUSTEE
OR ANY OF THEIR RESPECTIVE AFFILIATES. NEITHER THESE SECURITIES NOR THE
UNDERLYING MORTGAGE LOANS WILL BE INSURED OR GUARANTEED BY ANY GOVERNMENTAL
AGENCY OR INSTRUMENTALITY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The Class A Certificates will be purchased by Prudential Securities
Incorporated (the "Underwriter") from the Depositor and will be offered by the
Underwriter from time to time to the public in negotiated transactions or
otherwise at varying prices to be determined at the time of sale.
The Class A Certificates will be sold to the public at a price of 100%
plus, with respect to the Fixed Rate Certificates, interest from February 1,
1998. Proceeds to the Depositor from the sale of the Class A Certificates will
be approximately $103,425,000 before deducting expenses payable by the Depositor
estimated to be approximately $280,000 in the aggregate, and before adding
accrued interest. See "Plan of Distribution" in this Prospectus Supplement.
The Class A Certificates are offered by the Underwriter when, as and if
issued, subject to delivery by the Depositor and acceptance by the Underwriter,
to prior sale and to withdrawal, cancellation or modification of the offer
without notice. It is expected that the Class A Certificates will be available
for delivery through the facilities of DTC, CEDEL and Euroclear (each, as
defined herein) on or about March 12, 1998.
Prudential Securities Incorporated
February 27, 1998
<PAGE>
(Cover continued from previous page)
Distributions in respect of principal and interest will be made on
the 25th day of each month or, if the 25th day is not a Business Day (as
defined herein), on the next succeeding Business Day, commencing on March
25th, 1998 (each, a "Distribution Date"), to the holders of Certificates (the
"Holders" or the "Certificateholders") to the extent described herein. On each
Distribution Date, the amount of interest distributed in respect of each Class
of Class A Certificates will equal the interest accrued at the applicable
Pass-Through Rate on the related Certificate Principal Balance during (x) with
respect to the Fixed Rate Certificates, the prior calendar month, and (y) with
respect to the Adjustable Rate Certificates, the period from and including
each Distribution Date (or, with respect to the March 25, 1998 Distribution
Date, the Closing Date) to and including the day preceding the current
Distribution Date, (each such period relating to the accrual of interest, the
"Accrual Period" for the related Class of Certificates). Interest will be
calculated (x) for the Fixed Rate Certificates, on the basis of a 360-day year
consisting of twelve 30-day months, and (y) for the Adjustable Rate
Certificates, on the basis of the actual number of days in the related Accrual
Period, divided by 360.
The last scheduled Distribution Date for the Class A-1 Certificates is January
25, 2013, for the Class A-2 Certificates is January 25, 2013, for the Class
A-3 Certificates is January 25, 2014, for the Class A-4 Certificates is
September 25, 2020, for the Class A-5 Certificates is June 25, 2029, and for
the Class A-6 Certificates is June 25, 2029 (each such date, a "Final
Scheduled Maturity Date"). It is expected that the actual last Distribution
Date for each Class of Class A Certificates will occur significantly earlier
than such Final Scheduled Maturity Date. If purchased at a price other than
par, a Class A Certificate's yield to maturity will be sensitive to the rate
and timing of principal payments (including prepayments) on the Mortgage
Loans, some of which may be prepaid at any time without penalty. Investors in
the Class A Certificates should consider the associated risks, including, in
the case of Class A Certificates purchased at a discount (or premium), the
risk that a slower (or faster) than anticipated rate of payments in respect of
principal (including prepayments) on the Mortgage Loans could result in an
actual yield that is lower than anticipated. See "Description of the
Certificates -- Flow of Funds" in this Prospectus Supplement and "Prepayment
and Yield Considerations" in this Prospectus Supplement and in the Prospectus.
There is currently no secondary market for the Class A Certificates
and there can be no assurance that a secondary market will develop or, if it
does develop, that it will provide Certificateholders with liquidity of
investment at any particular time or for the life of the Certificates.
An election will be made to treat the Trust as a real estate mortgage
investment conduit (a "REMIC") for federal income tax purposes. As described
more fully herein and in the Prospectus, the Class A Certificates will
constitute "regular interests" in the REMIC and the Class R Certificates will
constitute a "residual interest" in the REMIC. See "Summary Terms of the
Certificates -- Federal Income Tax Status" and "Certain Federal Income Tax
Considerations" in this Prospectus Supplement and "Certain Federal Income Tax
Consequences -- REMIC Securities" in the Prospectus.
The Class A Certificates described herein represent a class of a
separate series of Certificates being offered by the Depositor from time to
time pursuant to the Prospectus dated June 10, 1997 accompanying this
Prospectus Supplement. The Prospectus shall not be considered complete without
this Prospectus Supplement. Any prospective investor should not purchase any
of the Class A Certificates described herein unless it shall have received the
Prospectus and this Prospectus Supplement. The Prospectus contains important
information regarding this offering which is not contained herein, and
prospective investors are urged to read the Prospectus and this Prospectus
Supplement in full.
<PAGE>
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN
TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE MARKET PRICE OF
THE CLASS A CERTIFICATES, INCLUDING PURCHASES OF CLASS A CERTIFICATES TO
STABILIZE THE MARKET PRICE AND THE IMPOSITION OF BIDS. FOR A DESCRIPTION OF
THESE ACTIVITIES SEE "PLAN OF DISTRIBUTION" IN THIS PROSPECTUS SUPPLEMENT.
---------------------------------------------
Until ninety days from the date of this Prospectus Supplement, all
dealers effecting transactions in the Class A Certificates, whether or not
participating in this distribution, may be required to deliver this Prospectus
Supplement and the Prospectus. This is in addition to the obligation of
dealers to deliver a Prospectus Supplement and the Prospectus when acting as
underwriters and with respect to their unsold allotments or subscriptions.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
In addition to the documents described in the Prospectus under
"Incorporation of Certain Information by Reference," the financial statements
of the Certificate Insurer included in, or as exhibits to, the following
documents, which have been filed with the Securities and Exchange Commission
(the "Commission") by Financial Security Assurance Holdings Ltd. ("Holdings"),
are hereby incorporated by reference in the Registration Statement (as defined
in the accompanying Prospectus) of which this Prospectus Supplement and the
Prospectus form a part:
(a) Annual Report on Form 10-K for the year ended December 31, 1996;
and
(b) Quarterly Reports on Form 10-Q for the quarters ended March 31,
1997; June 30, 1997 and September 30, 1997
All financial statements of the Certificate Insurer included in
documents filed by Holdings pursuant to Section 13(a), 13(c), 14 or 15(d) of
the Securities Exchange Act of 1934, as amended (the "Exchange Act")
subsequent to the date of this Prospectus Supplement and prior to the
termination of the offering of the Certificates shall be deemed to be
incorporated by reference into this Prospectus Supplement and to be a part
hereof from the respective dates of filing of such documents. Copies of such
financial statements shall be provided without charge to any person to whom
the Prospectus Supplement is delivered upon written or oral request to the
Seller at 111 Presidential Boulevard, Suite 215, Bala Cynwyd, Pennsylvania
19004, (610) 668-2440.
The Seller on behalf of the Trust hereby undertakes that, for
purposes of determining any liability under the Securities Act of 1933, as
amended (the "Securities Act"), each filing of the Trust's annual report
pursuant to section 13(a) or section 15(d) of the Exchange Act and each filing
of the financial statements of the Certificate Insurer included in or as an
exhibit to the annual report of Holdings filed pursuant to section 13(a) or
section 15(d) of the Exchange Act that is incorporated by reference in the
Registration Statement shall be deemed to be a new registration statement
relating to the Certificates offered hereby, and the offering of such
Certificates at that time shall be deemed to be the initial bona fide offering
thereof.
S-2
<PAGE>
SUMMARY TERMS OF THE CERTIFICATES
The following is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus Supplement and in
the Prospectus. Capitalized terms used herein and not otherwise defined herein
have the meanings assigned in the Prospectus.
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Title of Securities...............ABFS Mortgage Loan Trust 1998-1, Mortgage Pass-Through Certificates, Series
1998-1 (the "Certificates").
Trust.............................ABFS Mortgage Loan Trust 1998-1, a trust to be formed under the laws of the
State of New York (the "Trust").
Depositor.........................Prudential Securities Secured Financing Corporation (the "Depositor"). See
"The Depositor" in the Prospectus.
Seller............................ABFS 1998-1, Inc. (the "Seller").
Originators, Servicer
and Subservicer.................American Business Credit, Inc. ("ABC"), Home American Credit, Inc., d/b/a
Upland Mortgage ("Upland") and New Jersey Mortgage Investment Corp.
("NJMIC") originated or purchased the Mortgage Loans (in such capacity,
the "Originators"). The Originators will sell and assign the Mortgage
Loans to the Seller, and the Seller will sell and assign the Mortgage
Loans to the Depositor. ABC will act as servicer of the Mortgage Loans (in
such capacity, the "Servicer") and Upland and NJMIC will act as
subservicers with respect to different portions of the Mortgage Loans
(each in such capacity, a "Subservicer"). The principal office of ABC is
at Balapointe Centre, 111 Presidential Boulevard, Suite 215, Bala Cynwyd,
PA 19004. The obligations of the Servicer with respect to the Certificates
will be limited to its contractual servicing obligations. See "The
Originators, the Seller and the Servicer" in this Prospectus Supplement.
Trustee...........................The Chase Manhattan Bank, a New York banking corporation (the "Trustee").
Certificates Offered..............The Certificates will consist of six classes of senior Certificates, the Class
A-1 Certificates (the "Class A-1 Certificates" or "Adjustable Rate
Certificates"), the Class A-2 Certificates (the "Class A-2 Certificates"),
the Class A-3 Certificates (the "Class A-3 Certificates"), the Class A-4
Certificates (the "Class A-4 Certificates"), the Class A-5 Certificates
(the "Class A-5 Certificates") and the Class A-6 Certificates (the "Class
A-6 Certificates" or "Lockout Certificates", and collectively with the
Class A-2 Certificates, the Class A-3 Certificates, the Class A-4
Certificates and the Class A-5 Certificates, the "Fixed Rate
Certificates") and one class of residual Certificates, the Class R
Certificates (the "Class R Certificates"). Only the Fixed Rate
Certificates and the Adjustable Rate Certificates (together, the "Class A
Certificates") are offered hereby.
Statistical Calculation Date......The close of business on January 31, 1998.
Cut-Off Date......................The close of business on January 31, 1998 or, with respect to Initial Mortgage
Loans originated after January 31, 1998, the date of origination of such
Initial Mortgage Loans (the "Cut-Off Date").
Closing Date......................On or about March 12, 1998 (the "Closing Date").
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S-3
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First Distribution Date...........March 25, 1998. Distributions on the Certificates will be made on the 25th
day of each month (or, if such 25th day is not a Business Day, on the
next succeeding Business Day) (each, a "Distribution Date").
Record Date.......................All distributions, other than the final distribution on the Certificates, will be
made by or on behalf of the Trustee to the persons in whose names the
Certificates are registered at the close of business on (x) with respect
to the Fixed Rate Certificates, the last Business Day of the month
preceding the month in which the related Distribution Date occurs and (y)
with respect to the Adjustable Rate Certificates, the Business Day
immediately preceeding the related Distribution Date (each such date, the
"Record Date" for the related Class of Certificates).
Description of Certificates.......The Certificates will represent the entire beneficial ownership interest in a
trust fund (the "Trust Fund"). The assets of the Trust Fund will consist
primarily of a pool of Mortgage Loans (the "Mortgage Pool"). The Mortgage
Loans transferred to the Trust on the Closing Date are referred to as the
"Initial Mortgage Loans" and the Mortgage Loans transferred on a date
subsequent to the Closing Date but prior to June 12, 1998 are referred to
as the "Subsequent Mortgage Loans." See "The Mortgage Pool" in this
Prospectus Supplement. The Trust will be formed, the Trust Fund will be
transferred to the Trust, and the Certificates will be issued pursuant to
the Pooling and Servicing Agreement. In addition, the Seller will cause
Financial Security Assurance Inc. (the "Certificate Insurer") to issue a
financial guaranty insurance policy (the "Certificate Insurance Policy")
for the benefit of the Class A Certificateholders, pursuant to which it
will guarantee certain payments to the Class A Certificateholders as
described herein.
Book-Entry Form. The Class A Certificates are sometimes referred to in this
Prospectus Supplement as "Book-Entry Certificates." No person acquiring an
interest in the Book-Entry Certificates (a "Beneficial Owner") will be
entitled to receive a definitive certificate representing such person's
interest in the Trust Fund, except under the limited circumstances
described herein. The Book-Entry Certificates initially will be
represented by a single certificate registered in the name of Cede & Co.
("Cede") as the nominee of The Depository Trust Company ("DTC"), which
will be the "Holder" or "Certificateholder" of such Certificates, as such
terms are used herein. The rights of Beneficial Owners may only be
exercised through DTC and its participating organizations, except as
otherwise specified herein. See "Description of the Certificates
--Book-Entry Registration" and " -- Definitive Certificates" in this
Prospectus Supplement.
Denominations.....................The Class A Certificates initially will be issued in book-entry form ("Book-Entry
Certificates"), in denominations of $1,000 original certificate principal
balance and integral multiples of $1,000 in excess thereof (except for one
Certificate in each Class which may be issued in a lesser amount).
The Mortgage Pool.................The Mortgage Loans to be included in the Trust Fund will be primarily fixed-rate,
closed-end, monthly pay, business and consumer purpose home equity loans
secured by first, second or multiple mortgages or deeds of trust (the
"Mortgages") on residential real properties (the "Mortgaged Properties").
The Mortgage Loans have original terms to stated maturity ranging from 12
months to 360 months and have an aggregate Principal Balance as of the
Statistical Calculation Date, after application of all payments due on or
before January 31, 1998, of $57,621,881.57 (the "Statistical Calculation
Date Aggregate Principal Balance"). Unless otherwise noted, all
statistical percentages in this Prospectus Supplement are approximate and
measured by the aggregate Principal Balances of the applicable Mortgage
Loans in relation to the Statistical Calculation Date Aggregate Principal
Balance, in each case as of the Statistical Calculation Date.
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S-4
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The due dates for monthly payments on the Mortgage Loans occur throughout
a month, with 11.90% occurring on the first day of each month (each, a
"Due Date"). See "The Mortgage Pool" herein. The majority of the business
purpose loans have a prepayment fee clause. Such prepayment fee clauses
generally provide that the mortgagor pay one or more of the following: (i)
a fee equal to a percentage of the outstanding principal balance of the
Mortgage Loan, such percentage having been negotiated at the time of
origination, (ii) a fee which is designed to allow the holder of the
Mortgage Note to earn interest on the Mortgage Loan as if the Mortgage
Loan remained outstanding until a designated point in time, or (iii) a fee
equal to the amount of interest on the outstanding principal balance of
the Mortgage Loan calculated pursuant to a Rule of 78's calculation, which
has the effect of requiring the mortgagor to pay a greater amount of
interest than would be required to be paid if the actuarial method of
calculating interest was utilized. See "Certain Legal Aspects of the
Mortgage Loans and Contracts -- The Mortgage Loans" in the Prospectus.
The Mortgage Loans were underwritten in accordance with the underwriting
standards described in this Prospectus Supplement under "The Originators,
the Seller and the Servicer." Approximately 31.13%, 27.66% and 14.33% of
the Mortgage Loans by Statistical Calculation Date Aggregate Principal
Balance are secured by Mortgaged Properties located in New Jersey,
Pennsylvania and New York, respectively. See "Risk Factors -- Geographic
Concentration" in this Prospectus Supplement.
The Subsequent Mortgage Loans to be purchased by the Trust, if available,
will be originated or purchased by the Originators, sold by the
Originators to the Seller, sold by the Seller to the Depositor and then
sold by the Depositor to the Trust. The Pooling and Servicing Agreement
will provide that the Subsequent Mortgage Loans, as well as all of the
Mortgage Loans following the conveyance of such Subsequent Mortgage Loans
to the Trust, must conform to certain specified characteristics. See "The
Mortgage Pool -- Conveyance of Subsequent Mortgage Loans" in this
Prospectus Supplement.
The Trust will be obligated to purchase the Subsequent Mortgage Loans from
time to time on or before June 12, 1998, subject to the availability
thereof. In connection with each purchase of Subsequent Mortgage Loans,
the Trust will be required to pay to the Depositor a cash purchase price
of 100% of the aggregate Principal Balance of such Subsequent Mortgage
Loans from the Pre-Funding Account. Under the Pooling and Servicing
Agreement, the Depositor will be obligated to sell Subsequent Mortgage
Loans to the Trust and the Trust will be obligated, subject to the
satisfaction of certain conditions described herein, to purchase such
Subsequent Mortgage Loans. The Depositor will designate as a cut-off date
(each, a "Subsequent Cut-Off Date") the first day of the month in which
such Subsequent Mortgage Loans will be conveyed by the Depositor to the
Trust (each, a "Subsequent Transfer Date") occurring during the
Pre-Funding Period (as defined herein). The Trust may purchase the
Subsequent Mortgage Loans only from the Depositor and not from any other
person. See "The Mortgage Pool -- Conveyance of Subsequent Mortgage Loans"
in this Prospectus Supplement.
Class A-1 Original Certificate
Principal Balance...............$39,900,000 (the "Class A-1 Original Certificate Principal Balance").
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S-5
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Class A-2 Original Certificate
Principal Balance...............$10,000,000 (the "Class A-2 Original Certificate Principal Balance").
Class A-3 Original Certificate
Principal Balance...............$19,900,000 (the "Class A-3 Original Certificate Principal Balance").
Class A-4 Original Certificate
Principal Balance...............$11,400,000 (the "Class A-4 Original Certificate Principal Balance").
Class A-5 Original Certificate
Principal Balance...............$11,725,000 (the "Class A-5 Original Certificate Principal Balance").
Class A-6 Original Certificate
Principal Balance...............$10,500,000 (the "Class A-6 Original Certificate Principal Balance").
Class A-1
Pass-Through Rate...............On each Distribution Date, the lesser of (i) the London Interbank offered
rate for one-month United States dollar deposits ("LIBOR") (calculated as
described under "Description of the Certificates--Calculation of LIBOR")
as of the second to last business day prior to the immediately preceding
Distribution Date (or, in the case of the March 25, 1998 Distribution
Date, as of the second to the last business day prior to the Closing Date)
plus 0.13% per annum and (ii) the weighted average net Mortgage Interest
Rate (i.e., the weighted average Mortgage Interest Rate on the Mortgage
Loans less the sum of the per annum rates at which the Servicing Fees, the
Trustee Fees and the Certificate Insurer premium amounts are calculated)
for such Distribution Date (the "Available Funds Pass-Through Rate") (such
lesser amount, the "Class A-1 Pass-Through Rate").
Class A-2
Pass-Through Rate...............6.490% per annum (the "Class A-2 Pass-Through Rate").
Class A-3
Pass-Through Rate...............6.490% per annum (the "Class A-3 Pass-Through Rate").
Class A-4
Pass-Through Rate...............6.695% per annum (the "Class A-4 Pass-Through Rate").
Class A-5
Pass-Through Rate...............7.145% per annum, plus with respect to any Distribution Date after the
Clean-up Call Date (as defined herein), 0.50% (the "Class A-5
Pass-Through Rate").
Class A-6
Pass-Through Rate...............6.595% per annum (the "Class A-6 Pass-Through Rate").
Distributions, Generally..........Distributions on the Certificates will be made on each Distribution Date to the
related Holders of record. Distributions to a Holder will be made in an
amount equal to the product of such Holder's Percentage Interest (as
defined herein) and the amount distributed in respect of such Holder's
Class of Certificates on such Distribution Date.
The "Percentage Interest" represented by any Certificate will be equal to
the percentage obtained by dividing the Original Certificate Principal
Balance of such Certificate by the Original Certificate Principal Balance
of all Certificates of the same Class. The "Certificate Principal Balance"
of any Certificate is equal to the Original Certificate Principal Balance
of such Certificate less any amounts actually distributed to the Holder of
such Certificate on account of principal.
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S-6
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The Class A Distribution Amount (as defined herein) for each Distribution
Date (to the extent funds are available therefor) shall be allocated among
the Class A Certificates in the following amounts and in the following
order of priority:
(i) First, to the Holders of each Class of Class A Certificates, the Class
A Interest Distribution Amount (as defined below under the heading
"Distributions of Interest") on a pro rata basis without any priority
among the Classes of Class A Certificates.
(ii) Second, to the Holders of the Class A Certificates, the Class A
Principal Distribution Amount (as defined below under the heading
"Distributions of Principal") shall be distributed in the following order:
(A) to the Holders of the Class A-6 Certificates, to the extent of the
least of (x) the Class A Principal Distribution Amount, (y) the Class A-6
Certificate Principal Balance immediately prior to such Distribution Date,
and (z) the Class A-6 Lockout Distribution Amount (as defined herein), (B)
to the Holders of the Class A-1 Certificates, until the Certificate
Principal Balance of the Class A-1 Certificates is reduced to zero; (C) to
the Holders of the Class A-2 Certificates, until the Certificate Principal
Balance of the Class A-2 Certificates is reduced to zero; (D) to the
Holders of the Class A-3 Certificates, until the Certificate Principal
Balance of the Class A-3 Certificates is reduced to zero; (E) to the
Holders of the Class A-4 Certificates, until the Certificate Principal
Balance of the Class A-4 Certificates is reduced to zero; (F) to the
Holders of the Class A-5 Certificates, until the Certificate Principal
Balance of the Class A-5 Certificates is reduced to zero; and (G) to the
Holders of the Class A-6 Certificates, until the Certificate Principal
Balance of the Class A-6 Certificates is reduced to zero.
The "Class A-6 Lockout Distribution Amount" for any Distribution Date will
be the product of (i) the applicable Class A-6 Lockout Percentage for such
Distribution Date (as set forth below) and (ii) the Class A-6 Lockout
Pro-Rata Distribution Amount (as defined herein) for such Distribution
Date. The "Class A-6 Lockout Percentage" for each Distribution Date shall
be as follows:
Class A-6
Distribution Date Lockout Percentage
----------------- ------------------
March 1998-February 2001 0%
March 2001-February 2003 45%
March 2003-February 2004 80%
March 2004-February 2005 100%
March 2005 and thereafter 300%
The "Class A-6 Lockout Pro Rata Distribution Amount" for any Distribution
Date will be an amount equal to the product of (x) a fraction, the
numerator of which is the Class A-6 Certificate Principal Balance
immediately prior to such Distribution Date and the denominator of which
is the aggregate of the Class A-1 Certificate Principal Balance, the Class
A-2 Certificate Principal Balance, the Class A-3 Certificate Principal
Balance, the Class A-4 Certificate Principal Balance, the Class A-5
Certificate Principal Balance and the Class A-6 Certificate Principal
Balance (collectively, the "Class A Certificate Principal Balance"), in
each case immediately prior to such Distribution Date, and (y) the Class A
Principal Distribution Amount for such Distribution Date.
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S-7
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During certain periods, no principal payments or a disproportionately
small portion of the Class A Principal Distribution Amount will be
distributed on the Lockout Certificates. During certain other periods, a
disproportionately large portion of the Class A Principal Distribution
Amount will be distributed on the Lockout Certificates. Unless the
Certificate Principal Balance of the Class A Certificates (other than the
Lockout Certificates) has been reduced to zero or unused Pre-Funding
Account moneys are distributed to the Holders of the Class A Certificates
as described herein, the Lockout Certificates will not be entitled to
receive any distributions of principal payments prior to the Distribution
Date in March 2001.
Distributions of Interest.........Interest will accrue on each Class of Class A Certificates at the applicable
Pass-Through Rate on the related Certificate Principal Balance during the
related Accrual Period (such interest, the "Current Interest"). The amount
of interest payable will generally be equal to the sum of the Current
Interest for each Class, reduced by an amount equal to the aggregate of
the Prepayment Interest Shortfalls (as defined herein) and the Civil
Relief Act Interest Shortfalls (as defined herein) (together, the
"Mortgage Loan Interest Shortfalls"), if any, for such Distribution Date,
to the extent such Mortgage Loan Interest Shortfalls are not paid by the
Servicer as Compensating Interest (as defined herein). Mortgage Loan
Interest Shortfalls will not be covered by or under the Certificate
Insurance Policy. The amount of interest (as described above) payable with
respect to the Class A Certificates on any Distribution Date, plus any
related Carry-Forward Amount (as defined herein), constitutes the "Class A
Interest Distribution Amount" and shall be distributable, to the extent of
the Available Amount, less Trustee's Fees, on the related Distribution
Date. See "Description of the Certificates" in this Prospectus Supplement.
Distributions of Principal........The following discussion makes use of a number of terms which are defined under
"Description of the Certificates -- Overcollateralization Provisions" in
this Prospectus Supplement.
The Holders of the Classes of Class A Certificates then entitled to
receive principal, are entitled to receive certain monthly distributions
of principal on each Distribution Date which generally reflect collections
of principal during the related Due Period. The Certificate Insurance
Policy only guarantees the amount by which the sum of the Insured
Distribution Amount exceeds the Available Amount, less Trustee's Fees
(after taking into account the portion of the Class A Principal
Distribution Amount to actually be distributed on such Distribution Date,
without regard to any Insured Payment to be made with respect to such
Distribution Date) as more fully described herein under "The Certificate
Insurance Policy" in this Prospectus Supplement.
The subordination provisions of the Trust result in a limited acceleration
of the principal payments to the Holders of the Class of Class A
Certificates then entitled to receive principal, as more fully described
under "Description of the Certificates -- Overcollateralization
Provisions" in this Prospectus Supplement. Such subordination provisions
have the effect of shortening the weighted average lives of the Class A
Certificates by increasing the rate at which principal is distributed to
the Class A Certificateholders. See "Prepayment and Yield Considerations"
in this Prospectus Supplement and in the Prospectus.
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The Class A Certificates (other than the Class A-6 Certificates) are
"sequential pay" in that the Holders of the Class A-5 Certificates will
receive no payments of principal until the Certificate Principal Balance
of the Class A-4 Certificates has been reduced to zero, the Holders of the
Class A-4 Certificates will receive no payments of principal until the
Certificate Principal Balance of the Class A-3 Certificates is reduced to
zero, the Holders of the Class A-3 Certificates will receive no payments
of principal until the Certificate Principal Balance of the Class A-2
Certificates has been reduced to zero and the Holders of the Class A-2
Certificates will receive no payments of principal until the Certificate
Principal Balance of the Class A-1 Certificates has been reduced to zero;
provided, however, that, to the extent funds in the Pre-Funding Account
are not used to purchase Subsequent Mortgage Loans by June 12, 1998, such
funds will be distributed to the Holders of the Class A Certificates pro
rata, as principal. The Holders of the Class A-6 Certificates are entitled
to receive on each Distribution Date, in respect of principal, payment of
the Class A-6 Lockout Distribution Amount for such Distribution Date to
the extent such Class A-6 Lockout Distribution Amount does not exceed the
lesser of the Class A Principal Distribution Amount or the remaining Class
A-6 Certificate Principal Balance for such Distribution Date; provided,
that if on any Distribution Date the Class A-5 Certificate Principal
Balance is zero, the Class A-6 Certificates will be entitled to receive
the entire Class A Principal Distribution Amount for such Distribution
Date, up to the remaining Class A-6 Certificate Principal Balance.
Class A Principal Distribution Amount
The "Class A Principal Distribution Amount" for any Distribution Date will
be the lesser of:
(a) the excess of (i) the sum, as of such Distribution Date, of (A) the Available
Amount and (B) any Insured Payment over (ii) the sum of the Class A
Interest Distribution Amount, the Trustee's Fees and the Reimbursement
Amount; and
(b) the sum, without duplication, of:
(i) all principal in respect of the Mortgage Loans actually collected
during the calendar month preceding the Distribution Date (the
"Due Period"),
(ii) the Principal Balance of each Mortgage Loan that either was
repurchased by the Seller or by the Depositor or purchased by
the Servicer on the related Distribution Date, to the extent
such Principal Balance is actually received by the Trustee,
(iii) any Substitution Adjustments delivered by the Depositor on
the related Distribution Date in connection with a substitution
of a Mortgage Loan, to the extent such Substitution Adjustments
are actually received by the Trustee,
(iv) the Net Liquidation Proceeds actually collected by the
Servicer of all Mortgage Loans during the prior calendar month
(to the extent such Net Liquidation Proceeds relate to
principal),
(v) with respect to the June 25, 1998 Distribution Date, moneys
released from the Pre-Funding Account, if any, on June 12, 1998
(to the extent such funds are less than 1% of the aggregate
Principal Balance of the Mortgage Loans in the Trust on such
date),
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(vi) the amount of any Subordination Deficit for such Distribution
Date,
(vii) the proceeds received by the Trustee on any termination of
the Trust (to the extent such proceeds relate to principal),
and
(viii) the amount of any Subordination Increase Amount for such
Distribution Date, to the extent of any Net Monthly Excess
Cashflow available for such purpose;
minus
(ix) the amount of any Subordination Reduction Amount for such
Distribution Date.
In no event will the Class A Principal Distribution Amount with respect to
any Distribution Date be (x) less than zero or (y) greater than the then
outstanding Class A Certificate Principal Balance.
Class A Distribution Amount
With respect to any Distribution Date, the sum of the Class A Interest
Distribution Amount and the Class A Principal Distribution Amount is the
"Class A Distribution Amount" for such Distribution Date.
Insured Distribution Amount
With respect to any Distribution Date, the sum of (i) the Class A Interest
Distribution Amount, (ii) the amount of the Subordination Deficit, if any,
with respect to such Distribution Date, and (iii) with respect to the
Distribution Date which is a Final Scheduled Maturity Date, the
outstanding Certificate Principal Balance for the related Class of Class A
Certificates, is the "Insured Distribution Amount" for such Distribution
Date. The "Insured Payment" for a Distribution Date will equal the amount
by which the Insured Distribution Amount with respect to such Distribution
Date exceeds the Available Amount, less the Trustee's Fees, for such
Distribution Date.
The "Carry-Forward Amount" as of any Distribution Date equals the sum of
(a) the amount, if any, by which (i) the Class A Interest Distribution
Amount as of the immediately preceding Distribution Date exceeded (ii) the
amount actually distributed to the Class A Certificateholders on such
Distribution Date on account of interest and (b) 30-days' interest on such
amount at the weighted average Pass-Through Rate (weighted by the related
aggregate Certificate Principal Balance of each Class) of the Class A
Certificates (the "Weighted Average Class A Pass-Through Rate"). See
"Description of Certificates --Distributions" in this Prospectus
Supplement.
A "Liquidated Mortgage Loan" is, in general, a defaulted Mortgage Loan as
to which the Servicer has determined that all amounts that it expects to
recover on such Mortgage Loan have been recovered (exclusive of any
possibility of a deficiency judgment). Any loss on a Liquidated Mortgage
Loan (a "Liquidated Loan Loss") may or may not be recovered by the Holders
of the Class A Certificates on the Distribution Date which immediately
follows the event of loss. However, the Holders of the Class A
Certificates are entitled to receive ultimate recovery with respect to any
Liquidated Loan Losses which occur, receipt of which will be no later than
the Distribution Date occurring after such Liquidated Loan Loss creates a
Subordination Deficit (as described below). Such payment will be in the
form of an Insured Payment if not covered through Net Monthly Excess
Cashflow.
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Insured Payments do not include Liquidated Loan Losses until such time as
such aggregate, cumulative Liquidated Loan Losses have created a
Subordination Deficit; provided, however, that the Certificate Insurer is
permitted, at its sole option, but not required, to pay any Liquidated
Loan Losses in accordance with the Certificate Insurance Policy. A
"Subordination Deficit" as of any Distribution Date, is the amount, if
any, by which (a) the Class A Certificate Principal Balance, after taking
into account the payment of the Class A Principal Distribution Amount on
such date (except for any payment to be made as to principal from the
proceeds of the Certificate Insurance Policy) exceeds (b) the aggregate
Principal Balance of the Mortgage Loans determined as of the end of the
immediately preceding Due Period.
The "Principal Balance" of any Mortgage Loan as of any date of
determination is the outstanding principal balance of such Mortgage Loan
as of such date of determination after giving effect to prepayments
received prior to the end of the related Due Period and Deficient
Valuations incurred prior to the related Due Date. The Principal Balance
of a Mortgage Loan which becomes a Liquidated Mortgage Loan on or prior to
the related Due Date shall be zero.
Pre-Funding Account...............On the Closing Date, the Trustee will deposit the Original Pre-Funded Amount
in an account held in the name of the Trustee on behalf of the Trust (the
"Pre-Funding Account"). Such Original Pre-Funded Amount will be funded
from the sale of the Class A Certificates, and may be used to acquire
Subsequent Mortgage Loans during the period (the "Pre-Funding Period")
from the Closing Date until the earliest of (i) the date on which the
amount on deposit in the Pre-Funding Account is less than $100,000, (ii)
the date on which an Event of Default occurs under the terms of the
Pooling and Servicing Agreement, or (iii) June 12, 1998. The amount on
deposit in the Pre-Funding Account will be reduced during the Pre-Funding
Period by the amount thereof used to purchase Subsequent Mortgage Loans in
accordance with the terms of the Pooling and Servicing Agreement. The
Depositor expects that the Original Pre-Funded Amount will be reduced to
less than $100,000 by June 12, 1998. To the extent funds in the
Pre-Funding Account are not expected to be used to purchase Subsequent
Mortgage Loans by June 12, 1998, such funds will be used to prepay the
principal of the Class A Certificates, pro rata, on the May 25, 1998
Distribution Date. In the event that the funds remaining in the
Pre-Funding Account on June 12, 1998 (i) exceed 1% of the aggregate
Principal Balance of the Mortgage Loans in the Trust on such date, such
funds will be used to prepay the principal of the Class A Certificates,
pro rata, in a special distribution on such date, or (ii) are less than 1%
of the aggregate Principal Balance of the Mortgage Loans in the Trust on
such date, such funds will be distributed in accordance with the
provisions of the Pooling and Servicing Agreement. The Pre-Funding Account
will not be an asset of the REMIC.
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Capitalized Interest
Account.........................On the Closing Date, the Trustee will be required to deposit a portion of the
proceeds of the sale of the Class A Certificates in an account (the
"Capitalized Interest Account") held in the name of the Trustee on behalf
of the Trust. The amount deposited therein will be used, as necessary, by
the Trustee during the Pre-Funding Period to fund the aggregate amount of
interest accruing during the related Accrual Period at the Weighted
Average Class A Pass-Through Rate on the amount by which the Class A
Certificate Principal Balance exceeds the aggregate Principal Balance of
the Mortgage Loans in the Trust. Any amounts remaining in the Capitalized
Interest Account on the Distribution Date which follows the end of the
Pre-Funding Period and not used for such purposes are required to be paid
directly to the Seller on such Distribution Date. The Capitalized Interest
Account will not be an asset of the REMIC.
Credit Enhancement................The credit enhancement provided for the benefit of the Class A
Certificateholders consists solely of (a) overcollateralization and (b)
the Certificate Insurance Policy.
Overcollateralization.
On the Closing Date, the Trust will issue Class A Certificates with an
aggregate Original Certificate Principal Balance which is approximately
1.5% less than the sum of the aggregate Principal Balance of the Initial
Mortgage Loans and the Original Pre-Funded Amount, resulting in initial
overcollateralization. Overcollateralization is increased in the early
months of the transaction pursuant to the subordination provisions of the
Trust which, starting with the First Distribution Date, may cause a
limited acceleration of the Class A Certificates relative to the
amortization of the Mortgage Loans. The accelerated amortization results
from the application of certain excess interest to the payment of
principal on the Classes of Class A Certificates then entitled to receive
principal. Once the required level of overcollateralization is reached,
and subject to the provisions described in the next paragraph, the
acceleration feature will cease, unless necessary to maintain the required
level of overcollateralization.
The Pooling and Servicing Agreement provides that, subject to certain
trigger tests, the required level of overcollateralization may increase or
decrease over time. An increase would result in a temporary period of
accelerated amortization of the Class A Certificates to increase the
actual level of overcollateralization to its required level; a decrease
would result in a temporary period of decelerated amortization to reduce
the actual level of overcollateralization to its required level. See
"Description of the Certificates --Overcollateralization Provisions" in
this Prospectus Supplement.
The Certificate Insurance Policy.
The Class A Certificateholders will have the benefit of the Certificate
Insurance Policy, discussed more fully below. The Certificate Insurance
Policy does not insure the payment of Mortgage Loan Interest Shortfalls.
See "The Certificate Insurance Policy" and "The Certificate Insurer" in
this Prospectus Supplement and "Credit Support -- Other Credit
Enhancement" in the Prospectus.
The Certificate Insurer...........Financial Security Assurance Inc. (the "Certificate Insurer") is a New York
monoline insurance company engaged in the business of writing financial
guaranty insurance, principally in respect of securities offered in
domestic and foreign markets. The Certificate Insurer's claims-paying
ability is rated "Aaa" by Moody's Investors Service, Inc. ("Moody's") and
"AAA" by Standard and Poor's Ratings Group, a division of The McGraw-Hill
Companies, Inc. ("Standard & Poor's"), Fitch IBCA, Inc. ("Fitch"), Nippon
Investors Service, Inc. and Standard & Poor's (Australia) Pty. Ltd. See
"The Certificate Insurance Policy" and "The Certificate Insurer" in this
Prospectus Supplement.
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The Certificate Insurance
Policy..........................The Certificate Insurer will issue the Certificate Insurance Policy with
respect to the Class A Certificates, pursuant to which it will irrevocably
and unconditionally guaranty payment on each Distribution Date of Insured
Payments to the Trustee for the benefit of the Holders of the Class A
Certificates. On any Distribution Date, the Certificate Insurer will
generally be required to make available to the Trustee the amount, if any,
by which the Insured Distribution Amount exceeds the Available Amount,
less the Trustee's Fees (in each case as of the related Distribution
Date). See "Description of the Certificates -- Overcollateralization
Provisions" in this Prospectus Supplement. The Certificate Insurance
Policy does not guarantee the Class A Certificates any specified rate of
prepayments. Mortgage Loan Interest Shortfalls will not be covered under
the Certificate Insurance Policy. A payment by the Certificate Insurer
under the Certificate Insurance Policy is referred to herein as an
"Insured Payment."
So long as there does not exist a failure by the Certificate Insurer to
make a required payment under the Certificate Insurance Policy (such
event, a "Certificate Insurer Default"), the Certificate Insurer shall
have the right to exercise all rights of the Holders of the Class A
Certificates under the Pooling and Servicing Agreement without any consent
of such Holders, and such Holders may exercise such rights only with the
prior written consent of the Certificate Insurer, except as provided in
the Pooling and Servicing Agreement. In addition, the Certificate Insurer
will be entitled to reimbursement for all Insured Payments.
Servicing of the Mortgage
Loans...........................The Servicer will be obligated to service and administer the Mortgage Loans in
accordance with the Pooling and Servicing Agreement and to cause the
Mortgage Loans to be serviced with the same care as it customarily employs
in servicing and administering mortgage loans for its own account, in
accordance with accepted mortgage servicing practices of prudent lending
institutions, and giving due consideration to the Certificate Insurer's
and the Certificateholders' reliance on the Servicer.
Periodic Advances.................Subject to the Servicer's determination that such action would not constitute
a Nonrecoverable Advance (as defined herein), the Servicer is required to
make advances ("Periodic Advances") with respect to delinquent payments of
interest (at a rate equal to the interest rate on the related Mortgage
Note (the "Mortgage Interest Rate"), less the Servicing Fee (as defined
herein)). Such Periodic Advances by the Servicer are reimbursable to the
Servicer subject to certain conditions and restrictions, and are intended
to provide both sufficient funds for the payment of interest to the
Holders of the Class A Certificates, plus an additional amount intended to
maintain a specified level of overcollateralization and to pay the
Trustee's Fees and the premium due the Certificate Insurer.
Notwithstanding the Servicer's good faith determination that a Periodic
Advance was recoverable when made, if such Periodic Advance becomes a
Nonrecoverable Advance, the Servicer will be entitled to reimbursement
therefor from the Trust Fund. See "Description of the Certificates --
Payments on the Mortgage Loans" in this Prospectus Supplement.
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Prepayment Interest
Shortfalls......................Not later than the close of business on the 20th day of each month (each, a "Servicer
Distribution Date"), the Servicer is required to remit to the Trustee an
amount equal to the lesser of (a) the aggregate of the Prepayment Interest
Shortfalls for the related Distribution Date resulting from principal
prepayments in full during the related Due Period and (b) its aggregate
Servicing Fees received in the related Due Period (such lesser amount, the
"Compensating Interest"), and shall not have the right to reimbursement
therefor. With respect to any Distribution Date, the "Prepayment Interest
Shortfall" will be an amount equal to the excess, if any, of (a) 30-days'
interest on the outstanding principal balance of such Mortgage Loans at a
per annum rate equal to the related Mortgage Interest Rate (or at such
lower rate as may be in effect for such Mortgage Loan because of
application of the Soldiers' and Sailors' Civil Relief Act of 1940, as
amended (the "Civil Relief Act"), any reduction as a result of a
bankruptcy proceeding (a "Deficient Valuation") and/or any reduction by a
court of the monthly payment due on such Mortgage Loan (a "Debt Service
Reduction")), minus the rate at which the Servicing Fee is calculated,
over (b) the amount of interest actually remitted by the related mortgagor
(each, a "Mortgagor") in connection with such principal prepayment in
full, less the Servicing Fee for such Mortgage Loan in such month. Insured
Payments do not cover Prepayment Interest Shortfalls.
Civil Relief Act Interest
Shortfalls......................The reduction, if any, in interest payable on the Mortgage Loans
attributable to Civil Relief Act Interest Shortfalls will be borne by the
Class A Certificateholders and will not be covered by payments from the
Servicer, the Certificate Insurance Policy or otherwise. See "Risk Factors
-- Limitations on Interest Payments and Foreclosures" in this Prospectus
Supplement.
Servicing Advances................Subject to the Servicer's determination that such action would not constitute
a Nonrecoverable Advance and that a prudent mortgage lender would make a
like advance if it or an affiliate owned the related Mortgage Loan, the
Servicer is required to advance amounts with respect to the Mortgage Loans
("Servicing Advances") constituting "out-of-pocket" costs and expenses
relating to (a) the preservation and restoration of the Mortgaged
Property, (b) enforcement proceedings, including foreclosures, (c)
expenditures relating to the purchase or maintenance of a first lien not
included in the Trust Fund on the Mortgaged Property, and (d) certain
other customary amounts described in the Pooling and Servicing Agreement.
Such Servicing Advances by the Servicer are reimbursable to the Servicer
subject to certain conditions and restrictions. In the event that,
notwithstanding the Servicer's good faith determination at the time such
Servicing Advance was made, that it would not be a Nonrecoverable Advance,
in the event such Servicing Advance becomes a Nonrecoverable Advance, the
Servicer will be entitled to reimbursement therefor from the Trust Fund.
Servicing Fee.....................The Servicer is entitled to a servicing fee of 0.50% per annum of the Principal
Balance of each Mortgage Loan (the "Servicing Fee"), calculated and
payable monthly from the interest portion of scheduled monthly payments,
liquidation proceeds and certain other proceeds.
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Optional Termination by the
Servicer........................The Servicer may, at its option, terminate the Trust on the Distribution
Date (the first date on which such event occurs, the "Clean-up Call Date")
on which the aggregate Principal Balance of the Mortgage Loans is less
than 10% of the sum of (a) the aggregate Principal Balance of the Initial
Mortgage Loans as of the Cut-Off Date (the "Cut-Off Date Aggregate
Principal Balance") and (b) the Original Pre-Funded Amount, by purchasing
from the Trust all of the Mortgage Loans and REO Properties (as defined
herein) at a price equal to the sum of (a) 100% of the aggregate Principal
Balance of each outstanding Mortgage Loan and each REO Property and (b)
the greater of (i) the aggregate amount of accrued and unpaid interest on
the Mortgage Loans through the related Due Period and (ii) 30-days'
accrued interest thereon computed at a rate equal to the related Mortgage
Interest Rate, less the Servicing Fee, and (c) any unreimbursed amounts
due to the Certificate Insurer under the Pooling and Servicing Agreement
or the Insurance Agreement and any accrued and unpaid Insured Payments. No
such termination is permitted without the prior written consent of the
Certificate Insurer if it would result in a draw on the Certificate
Insurance Policy. See "Servicing of the Mortgage Loans -- Termination;
Purchase of Mortgage Loans" in this Prospectus Supplement.
Optional Purchase of Defaulted
Mortgage Loans..................The Seller, or any affiliate of the Seller, has the option, but is not obligated,
to purchase from the Trust Fund any Mortgage Loan 90 days or more
delinquent at a purchase price equal to the outstanding Principal Balance
thereof as of the date of purchase, plus all accrued and unpaid interest
on such Principal Balance, computed at the related Mortgage Interest Rate
(net of the related Servicing Fee if ABC is the Servicer) plus the amount
of any unreimbursed Servicing Advances made by the Servicer with respect
to such Mortgage Loan in accordance with the provisions specified in the
Pooling and Servicing Agreement.
Book Entry Form of
Certificates....................The Class A Certificates are sometimes referred to in this Prospectus
Supplement as "Book-Entry Certificates." No person acquiring an interest
in the Book-Entry Certificates will be entitled to receive a definitive
certificate representing such person's interest in the Trust Fund, except
under the limited circumstances described herein. Beneficial Owners may
elect to hold their interests through The Depository Trust Company ("DTC"
or the "Depository"), in the United States, or Centrale de Livraison de
Valeurs Mobiliers, S.A. ("CEDEL") or the Euroclear System ("Euroclear"),
in Europe. Transfers within DTC, CEDEL or Euroclear, as the case may be,
will be in accordance with the usual rules and operating procedures of the
relevant system. So long as the Class A Certificates are Book-Entry
Certificates, such Class A Certificates will be evidenced by one or more
Class A Certificates registered in the name of Cede & Co. ("Cede"), which
will be the "Holder" or "Certificateholder" of such Certificates, as the
nominee of DTC or one of the relevant depositaries (the "European
Depositaries"). Cross-market transfers between persons holding directly or
indirectly through DTC, on the one hand, and counterparties holding
directly or indirectly through CEDEL or Euroclear, on the other, will be
effected in DTC through The Chase Manhattan Bank ("Chase"), the relevant
depositories of CEDEL or Euroclear, respectively, and each a participating
member of DTC. The Class A Certificates will initially be registered in
the name of Cede. The interests of the Holders of such Class A
Certificates will be represented by book-entries on the records of DTC and
participating members thereof. No Beneficial Owner will be entitled to
receive a definitive certificate representing such person's interest,
except in the event that Definitive Certificates (as defined herein) are
issued under the limited circumstances described herein. All references
herein to any Class A Certificates reflect the rights of Beneficial Owners
only as such rights may be exercised through DTC and its participating
organizations for so long as such Class A Certificates are held by DTC.
See "Description of the Certificates -- Book-Entry Registration" and " --
Definitive Certificates" in this Prospectus Supplement.
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ERISA Considerations..............A fiduciary of any employee benefit plan or other retirement arrangement
subject to the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), or the Internal Revenue Code of 1986, as amended (the "Code"),
should carefully review with its legal advisors whether the purchase or
holding of Class A Certificates could give rise to a transaction
prohibited or not otherwise permissible under ERISA or the Code. The U.S.
Department of Labor has issued an individual exemption, Prohibited
Transaction Exemption 90-32, to the Underwriter (the "Exemption"). The
Exemption generally exempts from the application of certain of the
prohibited transaction provisions of ERISA, and the excise taxes imposed
on such prohibited transactions by Section 4975(a) and (b) of the Code and
Section 502(i) of ERISA, transactions relating to the purchase, sale and
holding of pass-through certificates such as the Class A Certificates and
the servicing and operation of asset pools such as the Trust Fund,
provided that certain conditions are satisfied. The Class A Certificates
may not be purchased by Plans (as defined herein) until the end of the
Pre-Funding Period. On or after such date, a fiduciary of any Plan should
carefully review with its legal advisors whether the purchase or holding
of Class A Certificates could give rise to a transaction prohibited or not
otherwise permissible under ERISA or the Code. See "ERISA Considerations"
in this Prospectus Supplement.
Legal Investment..................The Class A Certificates will not constitute "mortgage related securities"
for purposes of the Secondary Mortgage Market Enhancement Act of 1984.
Federal Income Tax
Status..........................An election will be made to treat the Trust Fund as a real estate mortgage
investment conduit (a "REMIC") for federal income tax purposes. The Class
A Certificates will be designated as the "regular interests" in the REMIC,
and the Class R Certificates will be designated as the sole "residual
interest" in the REMIC.
The Class A Certificates generally will be treated as newly originated
debt instruments for federal income tax purposes. Beneficial Owners of the
Class A Certificates will be required to report income thereon in
accordance with the accrual method of accounting. See "Certain Federal
Income Tax Considerations" in this Prospectus Supplement and "Certain
Federal Income Tax Consequences--REMIC Securities" in the Prospectus.
Certificate Ratings...............It is a condition to the issuance of the Class A Certificates that the
Class A Certificates shall have been rated not lower than AAA by Standard
& Poor's and Aaa by Moody's (each, a "Rating Agency," and together, the
"Rating Agencies") taking into account the Certificate Insurance Policy
issued with respect to such Certificates. A security 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.
The ratings do not address the possibility that Class A Certificateholders
may suffer a lower than anticipated yield. See "Ratings" in this
Prospectus Supplement and "Prepayment and Yield Considerations" in the
Prospectus.
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RISK FACTORS
Investors should consider, among other things, the following factors in
connection with the purchase of the Class A Certificates.
Prepayment and Maturity Considerations
Borrowers may prepay their loans at any time and may be required to
pay a prepayment fee if permitted by applicable law and if so provided in the
applicable mortgage note. The majority of the business purpose Mortgage Loans
contain substantial prepayment fees. The consumer purpose Mortgage Loans
generally do not contain prepayment fees. The rate of prepayments of the
Mortgage Loans cannot be predicted and may be affected by a wide variety of
economic, social and other factors, including state and federal income tax
policies, interest rates and the availability of alternative financing.
Therefore, no assurance can be given as to the level of prepayments that the
Trust will experience. The Seller is not aware of any publicly available
studies on the effects of changes in interest rates on prepayment rates for
loans such as the business purpose Mortgage Loans.
A number of factors, in addition to the prepayment fees, may impact
on the prepayment behavior of a pool of loans such as the Mortgage Loans. One
such factor is that the principal balance of the Mortgage Loans is relatively
small. A small principal balance may be easier for a borrower to prepay than a
large balance and therefore a higher prepayment rate may result for a loan
pool such as the Mortgage Pool. In addition, in order to refinance a first
priority mortgage loan, the borrower must generally repay any subordinate
mortgage loans. However, a small principal balance may make refinancing a
Mortgage Loan at a lower interest rate less attractive to the borrower as the
perceived impact to the borrower of lower interest rates on the size of the
monthly payment may not be significant. Other factors that might be expected
to affect the prepayment rate include general economic conditions and the
general interest rate environment, possible future changes affecting the
deductibility for federal income tax purposes of interest payments on home
equity loans, the amounts of, and interest rates on, the underlying senior
mortgage loans, and the tendency of borrowers to use first priority mortgage
loans as long-term financing for home purchase and junior 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, the Mortgage Loans may experience a higher rate of prepayment
than traditional fixed rate mortgage loans.
Prepayments may result from voluntary early payments by borrowers
(including payments in connection with refinancings of the related senior
mortgage loan or loans), sales of Mortgaged Properties subject to
"due-on-sale" clauses and liquidations due to default, as well as the receipt
of proceeds from physical damage. In addition, repurchases from the Trust of
Mortgage Loans required to be made by the Seller under the Pooling and
Servicing Agreement will have the same effect on the Class A
Certificateholders as a prepayment of the related Mortgage Loans. Prepayments
and such repurchases will also accelerate the actual final maturity of the
Class A Certificates. All of the Mortgage Loans contain "due-on-sale"
provisions, and the Servicer will enforce such provisions to the extent
permitted by applicable law. In addition, if the Seller is unable to cure
documentation defects or provide Qualified Substitute Mortgage Loans (as
defined herein) for the affected Mortgage Loans, affected Mortgage Loans will
be repurchased, and the Class A Certificateholders will experience a principal
prepayment.
Except as otherwise described herein, distributions of principal will
be made to the Classes of Class A Certificates according to the priorities
described herein, rather than on a pro rata basis among such Classes. The
timing of commencement of principal distributions to each Class of the Class A
Certificates and the weighted average life of each such Class will be affected
by the rates of prepayment on the Mortgage Loans experienced both before and
after the commencement of principal distributions on each such class.
Moreover, because the Lockout Certificates do not receive (unless the
Certificate Principal Balance of the Class A Certificates, other than the
Lockout Certificates, has been reduced to zero or unused Pre-Funding Account
moneys are distributed to the Holders of the Class A Certificates as described
herein) any portion of principal payments prior to the Distribution Date
occurring in March 2001 and thereafter will receive (unless the Certificate
Principal Balance of the Class A Certificates, other than the Lockout
Certificates, has been reduced to zero) a disproportionately small or large
portion of principal payments, the weighted average life of the Lockout
Certificates will be longer or shorter than would otherwise be the case, and
the effect on the market value of the Lockout Certificates of changes in
market interest rates or market yields for similar securities may be greater
or lesser than for the other Classes of Class A Certificates entitled to
principal distributions. To the extent funds in the Pre-Funding Account are
S-17
<PAGE>
not to expected to be used to purchase Subsequent Mortgage Loans by June 12,
1998, such funds will be used on the May 25, 1998 Distribution Date to make a
mandatory prepayment of principal to the Holders of the Class A Certificates,
pro rata. In the event that the funds remaining in the Pre-Funding Account on
June 12, 1998 (i) exceed 1% of the aggregate Principal Balance of the Mortgage
Loans in the Trust on such date, such funds will be used to prepay the
principal of the Class A Certificates, pro rata, in a special distribution on
such date, or (ii) are less than 1% of the aggregate Principal Balance of the
Mortgage Loans in the Trust on such date, such funds will be distributed in
accordance with the provisions of the Pooling and Servicing Agreement. See
"Certain Legal Aspects of the Mortgage Loans and Contracts -- The Mortgage
Loans."
In general, if prevailing interest rates fall significantly below the
interest rates for similar loans at the time of origination, fixed rate
mortgage loans may be subject to higher prepayment rates than if prevailing
rates remain at or above those at the time such Mortgage Loans were
originated. Should prepayments on the Mortgage Loans increase because of such
interest rate reductions, the average life and final maturity of the Class A
Certificates may be shortened. See "Prepayment and Yield Considerations."
The weighted average life of a pool of loans is the average amount of
time that will elapse from the date such pool is formed until each dollar of
principal is scheduled to be repaid to the investors in such pool. Because it
is expected that there will be prepayments and defaults on the Mortgage Loans,
the actual weighted average life of the Class A Certificates is expected to
vary substantially from the weighted average remaining term to stated maturity
of the Mortgage Loans as set forth herein under "The Mortgage Pool --
General." Certain information, based on specified prepayment assumptions, as
to the possible weighted average life of the Class A Certificates is set forth
herein under "Prepayment and Yield Considerations."
The Originators maintain only limited records of the historical
prepayment experience of its portfolio of loans which the Originators believe
do not provide meaningful information with respect to the Mortgage Loans. The
Originators are not aware of any publicly available reliable information
regarding prepayment experience of mortgage loans such as the business purpose
Mortgage Loans. In any event, no assurance can be given that prepayments on
the Mortgage Loans will conform to any historical experience and no prediction
can be made as to the actual prepayment experience on the Mortgage Loans.
The Subsequent Mortgage Loans and the Pre-Funding Account
If the principal amount of eligible Mortgage Loans available during
the Pre-Funding Period and sold to the Trust is less than 100% of the Original
Pre-Funded Amount, the Depositor will have insufficient Mortgage Loans to sell
to the Trust, thereby resulting in a prepayment of principal to Holders of the
Class A Certificates as described herein. In addition, any conveyance of
Subsequent Mortgage Loans is subject to the following conditions, among
others: (i) each such Subsequent Mortgage Loan must satisfy the
representations and warranties specified in the Unaffiliated Seller's
Agreement (as defined herein) and the Pooling and Servicing Agreement; (ii)
the Seller will not select such Subsequent Mortgage Loans in a manner that it
believes is adverse to the interests of the Holders of the Class A
Certificates and the Certificate Insurer; (iii) the Depositor will deliver
certain opinions of counsel with respect to the validity of the conveyance of
such Subsequent Mortgage Loans; and (iv) as of the Subsequent Cut-Off Date,
the Mortgage Loans at that time, including the Subsequent Mortgage Loans to be
conveyed by the Depositor as of such Subsequent Cut-Off Date, will satisfy the
criteria set forth in the Pooling and Servicing Agreement, as described herein
under "The Mortgage Pool -- Conveyance of Subsequent Mortgage Loans."
To the extent that amounts on deposit in the Pre-Funding Account will
not be fully applied to the purchase of Subsequent Mortgage Loans by the Trust
by the end of the Pre-Funding Period, such remaining amount will be applied as
a prepayment of principal paid to the Holders of the Class A Certificates, pro
rata, on the May 25, 1998 Distribution Date or as a special distribution on
June 12, 1998 as described herein. The amount of any such prepayment will be
applied to the Class A Certificates. Although no assurances can be given, it
is anticipated by the Depositor that the principal amount of Subsequent
Mortgage Loans sold to the Trust will require the application of substantially
all amounts on deposit in the Pre-Funding Account and that there will be no
material principal prepayment to the Holders of the Class A Certificates.
S-18
<PAGE>
Each Subsequent Mortgage Loan must satisfy the eligibility criteria
referred to above at the time of its addition. However, Subsequent Mortgage
Loans may have been originated by the Originators, purchased by the Seller,
and purchased by the Depositor using credit criteria different from those
which were applied to the Initial Mortgage Loans and may be of a different
credit quality. Therefore, following the transfer of Subsequent Mortgage Loans
to the Trust, the aggregate characteristics of the Mortgage Loans then held in
the Trust may vary from those of the Initial Mortgage Loans included in the
Trust Fund. See "The Mortgage Pool--Conveyance of Subsequent Mortgage Loans".
Underwriting Standards, Limited Operating History and Potential Delinquencies
The Originators market loans, in part, to borrowers who, for one
reason or another, are not able, or do not wish, to obtain financing from
traditional sources such as commercial banks. To the extent that such loans
may be considered to be of a riskier nature than loans made by traditional
sources of financing, the Holders of the Certificates may be deemed to be at
greater risk than if the Mortgage Loans were made to other types of borrowers.
As described herein, the Originators' underwriting standards
generally are less stringent than those of the Federal National Mortgage
Association ("FNMA") or the Federal Home Loan Mortgage Corporation ("FHLMC")
with respect to a borrower's credit history and in certain other respects. A
borrower's non-perfect credit history may not preclude the Originators from
making a loan. As a result of this approach to underwriting, the Mortgage
Loans in the Mortgage Pool may experience higher rates of delinquencies,
defaults and foreclosures than mortgage loans underwritten in a manner which
is more similar to the FNMA and FHLMC guidelines.
Geographic Concentration
Certain geographic regions of the United States from time to time
will experience weaker regional economic conditions and housing markets, and,
consequently, will experience higher rates of loss and delinquency on loans
generally. Any concentration of the Mortgage Loans in such a region may
present risk considerations in addition to those generally present for similar
mortgage backed securities without such concentration. The Originators
originate or purchase their loans primarily on the eastern seaboard of the
United States. This practice may subject the Mortgage Pool to the risk that a
downturn in the economy in this area of the country would more greatly affect
the Mortgage Pool than if the Mortgage Pool were more diversified. In
particular, approximately 31.13%, 27.66% and 14.33% of the Mortgage Loans by
Statistical Calculation Date Aggregate Principal Balance are secured by
Mortgaged Properties located in New Jersey, Pennsylvania and New York,
respectively. Because of the relative geographic concentration of the Mortgage
Loans within New Jersey, Pennsylvania and New York, losses on the Mortgage
Loans may be higher than would be the case if the Mortgage Loans were more
geographically diversified. For example, certain of the Mortgaged Properties
may be more susceptible to certain types of special hazards, such as
earthquakes and other natural disasters and major civil disturbances, than
residential properties located in other parts of the country. In addition, the
economies of New Jersey, Pennsylvania and New York may be adversely affected
to a greater degree than the economies of other areas of the country by
certain regional developments. If the New Jersey, Pennsylvania and New York
residential real estate markets experience an overall decline in property
values after the dates of origination of the respective Mortgage Loans, then
the rates of delinquencies, foreclosures and losses on the Mortgage Loans may
be expected to increase and such increase may be substantial.
<PAGE>
Balloon Payments
As of the Statistical Calculation Date, the Mortgage Loans have been
originated at fixed interest rates for fixed terms ranging from 12 to 360
months. As of the Statistical Calculation Date, approximately 35.34% of the
Mortgage Loans are not fully amortized over their terms and instead require
substantial balloon payments on their maturity dates (the "Balloon Loans").
See "The Mortgage Pool." Because the principal balance of such Mortgage Loans
does not fully amortize over the term of the Mortgage Loan, such Mortgage
Loans may involve greater risks of default than Mortgage Loans whose principal
balance is fully amortized over the term of the Mortgage Loan. The borrower's
ability to pay the balloon amount due at maturity of such a Mortgage Loan will
depend on the borrower's ability to obtain adequate refinancing or funds from
other sources to repay the Mortgage Loan.
The Originators believe that the Mortgage Loans are or will be
adequately collateralized and that, in light of the collateralization and the
relatively small average size of the Mortgage Loans, the borrowers will have
the ability to obtain adequate refinancing or secure funds from other sources.
See "The Mortgage Pool." However, the Originators have had only a very limited
historical default experience with respect to its portfolio when loans with
balloon payments come due and the Originators do not believe that the
experience provides meaningful information with respect to the Mortgage Loans.
S-19
<PAGE>
Even assuming that the Mortgaged Properties provide adequate security
for the Mortgage Loans, substantial delays could be encountered in connection
with the liquidation of defaulted Mortgage Loans and corresponding delays in
the receipt of related proceeds by Class A Certificateholders could occur.
Nature of Collateral; Second Lien Mortgage Loans
General economic conditions have an impact on the ability of
borrowers to repay loans. Loss of earnings, illness and other similar factors
may lead to an increase in delinquencies and bankruptcy filings by borrowers.
In the event of a bankruptcy of a mortgagor, it is possible that the Trust
could experience a loss with respect to such mortgagor's Mortgage Loan. In
conjunction with a mortgagor's bankruptcy, a bankruptcy court may suspend or
reduce the payments of principal and interest to be paid with respect to such
Mortgage Loan or permanently reduce the principal balance of such Mortgage
Loan, thus either delaying or permanently limiting the amount received by the
Trust with respect to such Mortgage Loan. Moreover, in the event a bankruptcy
court prevents the transfer of the related Mortgaged Property to the Trust,
any remaining balance on such Mortgage Loan may not be recoverable.
As of the Statistical Calculation Date, approximately 20.76% of the
Mortgage Loans are secured by Second Liens or Multiple Liens (each, as defined
below) which are subordinate to the rights of the mortgagee under related
first mortgages. See "The Mortgage Pool." As a result, the proceeds from any
liquidation, insurance or condemnation proceedings will be available to
satisfy the principal balance of such a Mortgage Loan only to the extent that
the claims, if any, of each related first mortgagee are satisfied in full,
including any related foreclosure costs. In addition, a mortgagee of a second
mortgage may not foreclose on the Mortgaged Property securing such mortgage
unless it forecloses subject to the related first mortgage, in which case it
must either pay the entire amount of each first mortgage to the applicable
mortgagee at or prior to the foreclosure sale or undertake the obligation to
make payments on each senior mortgage in the event of default thereunder. In
servicing business and consumer purpose home equity loans in its portfolio, it
is the Servicer's practice to satisfy or reinstate each such first mortgage at
or prior to the foreclosure sale only to the extent that it determines any
amount so paid will be recoverable from future payments and collections on the
related loans or otherwise. The Trust will have no source of funds to satisfy
any first mortgage or make payments due to any first mortgagee.
An overall decline in the residential real estate market could
adversely affect the values of the Mortgaged Properties such that the
outstanding principal balances, together with the primary senior financing
thereon, equals or exceeds the value of the Mortgaged Properties. Such a
decline would adversely affect the position of a second mortgagee before
having such an effect on that of the related first mortgagee. A rise in
interest rates over a period of time and the general condition of the
Mortgaged Property as well as other factors may have the effect of reducing
the value of the Mortgaged Property from the appraised value at the time the
Mortgage Loan was originated. If there is a reduction in value of the
Mortgaged Property, the ratio of the amount of the Mortgage Loan to the value
of the Mortgaged Property may increase over what it was at the time the
Mortgage Loan was originated. Such an increase may reduce the likelihood of
liquidation or other proceeds being sufficient to satisfy the Mortgage Loan
after satisfaction of any first liens.
Even assuming that the Mortgaged Properties provide adequate security
for the Mortgage Loans, substantial delays could be encountered in connection
with the liquidation of defaulted Mortgage Loans and corresponding delays in
the receipt of related proceeds by Class A Certificateholders. An action to
foreclose on the Mortgaged Property securing a Mortgage Loan is regulated by
state statutes and rules and is subject to many of the delays and expenses of
other lawsuits if defenses or counterclaims are interposed, sometimes
requiring several years to complete. Furthermore, in some states an action to
obtain a deficiency judgment is not permitted following a nonjudicial sale of
a Mortgaged Property. In the event of a default by a Mortgagor, these
restrictions, among other things, may impede the ability of the Servicer to
foreclose on or sell the Mortgaged Property or to obtain Net Liquidation
Proceeds sufficient to repay all amounts due on the related Mortgage Loan. In
addition, the Servicer will be entitled to deduct from collections received
during the preceding Due Period all expenses reasonably incurred in attempting
to recover amounts due on Liquidated Mortgage Loans and not yet repaid,
including payments to first lienholders, legal fees and costs of legal action,
real estate taxes and maintenance and preservation expenses, thereby reducing
collections available to Class A Certificateholders. See "The Originators, the
Seller and the Servicer -- Delinquency and Loan Loss Experience" and
"Description of the Certificates."
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<PAGE>
Liquidation expenses with respect to defaulted loans do not vary
directly with the outstanding principal balance of the loan at the time of
default. Therefore, assuming that a servicer took the same steps in realizing
upon a defaulted loan having a small remaining principal balance as it would
in the case of a defaulted loan having a large remaining principal balance,
the amount realized after expenses of liquidation would be smaller as a
percentage of the outstanding principal balance of the small loan than would
be the case with the defaulted loan having a large remaining principal
balance. Because the average outstanding principal balance of the Mortgage
Loans is relatively small, Net Liquidation Proceeds on Liquidated Mortgage
Loans may be small as a percentage of the principal balance of a Mortgage
Loan.
Decline in Real Estate Values
No assurance can be given that the values of the Mortgaged Properties
have remained or will remain at their levels as of the dates of origination of
the related Mortgage Loans. If the residential real estate market should
experience an overall decline in property values such that the outstanding
balances of the Mortgage Loans (and, in the case of Second Liens and Multiple
Liens (each as defined herein) the outstanding balance of the related first
mortgage) become equal to or greater than the value of the Mortgaged
Properties, the actual rates of delinquencies, foreclosures and losses on
these Mortgaged Properties could be higher than losses now generally
experienced in the mortgage lending industry.
Payments on the Mortgage Loans
The scheduled monthly payment dates with respect to the Mortgage
Loans occur throughout a month. When a principal prepayment in full is made on
a Mortgage Loan, the Mortgagor is charged interest only up to the date of such
prepayment, instead of for a full month. However, such principal receipts will
only be passed through to the Certificateholders once a month, on the
Distribution Date which follows the calendar month in which such prepayment
was received by the Servicer. The Servicer is obligated to pay, without any
right of reimbursement, those shortfalls in interest collections payable on
the Class A Certificates that are attributable to the difference between the
interest paid by a mortgagor in connection with a prepayment in full and
30-days' interest (in such case at the related Mortgage Interest Rate, less
the Servicing Fee, such shortfalls being "Prepayment Interest Shortfalls"),
but only to the extent of the Servicing Fee for the related Due Period (any
such payment, "Compensating Interest"). Prepayment Interest Shortfalls and
Civil Relief Act Interest Shortfalls will not be covered by payments under the
Certificate Insurance Policy.
Prepayment Interest Shortfalls that are not paid by the Servicer as
Compensating Interest, together with Civil Relief Act Interest Shortfalls,
will be allocated among the Holders of Class A Certificates on a pro rata
basis to reduce the interest otherwise payable on the Class A Certificates.
See "Description of the Certificates -- Flow of Funds" in this Prospectus
Supplement.
<PAGE>
Effect of Mortgage Loan Yield on the Class A-1 Pass-Through Rate
The Class A-1 Pass-Through Rate is based upon the value of an
adjustable index (one-month LIBOR), while the Mortgage Interest Rates on the
Mortgage Loans are fixed. Consequently, the interest which becomes due on such
Mortgage Loans (net of the Servicing Fees, the Trustee Fees and the
Certificate Insurer premium amounts) during any Due Period may be less than
the amount of interest that would accrue at one-month LIBOR plus the margin on
the Class A-1 Certificates during the related Accrual Period, and will be
limited to such lower amount. The Class A-1 Certificates do not contain any
"carry-forward" or "catch-up" feature if the amount of interest paid is so
limited.
Effect of Losses; Lockout Certificates
Because principal distributions are paid to certain Classes of Class
A Certificates before other such Classes, Holders of Classes of Class A
Certificates having a later priority of payments bear a greater risk of losses
(because such Certificates will represent an increasing percentage interest in
the Trust Fund during the period prior to the commencement of distributions of
principal thereon) than Holders of Classes having earlier priorities for
distribution of principal. In particular, with respect to the Lockout
Certificates, during certain periods, no principal payments or a
disproportionately small portion of the Class A Principal Distribution Amount
will be distributed on the Lockout Certificates, and during certain other
periods, a disproportionately large portion of the Class A Principal
Distribution Amount will be distributed on the Lockout Certificates. Unless
the Certificate Principal Balance of the Class A Certificates (other than the
Lockout Certificates) has been reduced to zero or unused Pre-Funding Account
moneys are distributed to the Holders of the Class A Certificates as described
herein, the Lockout Certificates will not be entitled to receive any
distributions of principal payments prior to the Distribution Date in March
2001.
S-21
<PAGE>
Legal Considerations
Applicable state laws generally regulate interest rates and other
charges, require certain disclosures, and may require licensing of the
Originators. In addition, many states have other laws, such as consumer
protection laws, unfair and deceptive practices acts and debt collection
practices acts which may apply to the origination or collection of the
Mortgage Loans. Depending on the provisions of the applicable law, violations
of these laws may limit the ability of the Servicer to collect all or part of
the principal of or interest on the Mortgage Loans, may entitle the borrower
to a refund of amounts previously paid and, in addition, could subject the
Trust to damages and administrative enforcement. See "Certain Legal Aspects of
the Mortgage Loans and Contracts" in the Prospectus.
The Mortgage Loans are also subject to federal laws, including: (i)
the Federal Truth in Lending Act and Regulation Z promulgated thereunder as to
consumer purpose Mortgage Loans, which require certain disclosures to the
borrowers regarding the terms of such Mortgage Loans; (ii) the Equal Credit
Opportunity Act and Regulation B promulgated thereunder as to the business and
consumer purpose Mortgage Loans, which prohibit discrimination on the basis of
age, race, color, sex, religion, marital status, national origin, receipt of
public assistance or the exercise of any right under the Consumer Credit
Protection Act, in the extension of credit; and (iii) the Fair Credit
Reporting Act as to the business and consumer purpose Mortgage Loans, which
regulates the use and reporting of information related to the borrower's
credit experience.
Violations of certain provisions of these federal laws may limit the
ability of the Servicer to collect all or part of the principal of or interest
on the Mortgage Loans and in addition could subject the Trust to damages and
administrative enforcement. In addition, under the terms of the Soldiers' and
Sailors' Civil Relief Act of 1940, as amended (the "Civil Relief Act") or
similar state legislation, the interest charged and the ability of the
Servicer to foreclose on loans to certain Mortgagors may be limited.
Generally, under the Civil Relief Act, a mortgagor who enters military service
after the origination of such mortgagor's mortgage loan (including a mortgagor
who was in reserve status and is called to active duty after origination of
the mortgage loan), shall not be charged interest (including fees and charges)
above an annual rate of 6% during the period of such mortgagor's active duty
status, unless a court orders otherwise upon application of the lender. The
Civil Relief Act applies to mortgagors who are members of the Army, Navy, Air
Force, Marines, National Guard, Reserves, Coast Guard and officers of the U.S.
Public Health Service assigned to duty with the military. Because the Civil
Relief Act applies to mortgagors who enter military service (including
reservists who are called to active duty) after origination of the related
mortgage loan, no information can be provided as to the number of loans that
may be affected by the Civil Relief Act. Application of the Civil Relief Act
would adversely affect, for an indeterminate period of time until cessation of
active duty status, the ability of the Servicer to collect full amounts of
interest on certain of the Mortgage Loans to which it applies, if any. Any
shortfall in interest collections on any Mortgage Loan resulting from the
application of the Civil Relief Act (such shortfall, a "Civil Relief Act
Interest Shortfall") will result in a reduction of the amounts distributable
to the Class A Certificateholders, and would not be covered by Periodic
Advances or the Certificate Insurance Policy. The Servicer is not obligated to
offset any of the Servicing Fee against, or to provide any other funds to
cover, any Civil Relief Act Interest Shortfall. In addition, the Civil Relief
Act imposes limitations which would impair the ability of the Servicer to
foreclose on an affected Mortgage Loan during the Mortgagor's period of active
duty status and, under certain circumstances, during an additional period
thereafter. See "Certain Legal Aspects of the Mortgage Loans and Contracts" in
the Prospectus.
It is possible that some of the consumer purpose Mortgage Loans will
be subject to the Riegle Community Development and Regulatory Improvement Act
of 1994 (the "Riegle Act") which incorporates the Home Ownership and Equity
Protection Act of 1994. The Riegle Act adds certain additional provisions to
the Truth in Lending Act which additions are reflected in Regulation Z, the
implementing regulation of the Truth in Lending Act. These provisions impose
additional disclosure and other requirements on creditors with respect to
certain non-purchase money mortgage loans with high interest rates or high
upfront fees and charges. In general, mortgage loans within the purview of the
Riegle Act have annual percentage rates 10 percentage points over the yield on
Treasury Securities of comparable maturity and/or fees and points which exceed
the greater of 8% of the total loan amount or $400. These provisions of the
Riegle Act apply on a mandatory basis to all mortgage loans originated on or
after October 1, 1995. These provisions can impose specific statutory
liabilities upon creditors who fail to comply with their provisions and may
affect the enforceability of the related loans. In addition, any assignee of
the creditor would generally be subject to all claims and defenses that the
consumer could assert against the creditor, including, without limitation, the
right to rescind the mortgage loan.
S-22
<PAGE>
THE MORTGAGE POOL
Difference between Statistical Calculation Date and Closing Date Pools
The statistical information presented in this Prospectus Supplement
concerning the Mortgage Loans is based on the pool as of January 31, 1998
(such date, the " Statistical Calculation Date"). The pool aggregated
$57,621,881.57 as of the Statistical Calculation Date. The Depositor expects
that the actual pool as of the Closing Date will represent approximately
$92,011,633.51 in Mortgage Loans. The additional Mortgage Loans will represent
Mortgage Loans acquired or to be acquired by the Depositor on or prior to the
Closing Date. In addition, with respect to the pool as of the Statistical
Calculation Date as to which statistical information is presented herein, some
amortization of the pool will occur prior to the Closing Date. Moreover,
certain Mortgage Loans included in the pool as of the Statistical Calculation
Date may prepay in full, or may be determined not to meet the eligibility
requirements for the final pool, and may not be included in the final pool. As
a result of the foregoing, the statistical distribution of characteristics as
of the Closing Date for the final Mortgage Loan pool will vary somewhat from
the statistical distribution of such characteristics as of the Statistical
Calculation Date as presented in this Prospectus Supplement, although such
variance will not be material. In the event that the Depositor does not, as of
the Closing Date, have the full amount of Mortgage Loans which the Depositor
expects to sell to the Trust on such date, the Seller will increase the size
of the Pre-Funding Account and the Capitalized Interest Account. Unless
otherwise noted, all statistical percentages in this Prospectus Supplement are
measured by Statistical Calculation Date Aggregate Principal Balance.
General
Additional Mortgage Loans (the "Subsequent Mortgage Loans are
intended to be purchased by the Trust from the Depositor from time to time on
or before June 12, 1998 from funds on deposit in the Pre-Funding Account. The
Initial Mortgage Loans and the Subsequent Mortgage Loans are referred to
herein collectively as the "Mortgage Loans. The Subsequent Mortgage Loans to
be purchased by the Trust, if available, will be originated or purchased by
the Originators, sold by the Originators to the Seller, sold by the Seller to
the Depositor and then sold by the Depositor to the Trust. The Pooling and
Servicing Agreement will provide that the Mortgage Loans, following the
conveyance of the Subsequent Mortgage Loans, must in the aggregate conform to
certain specified characteristics described below under " -- Conveyance of
Subsequent Mortgage Loans."
Unless otherwise noted, all statistical percentages in this
Prospectus Supplement are approximate and are measured by the aggregate
Principal Balance of the related Mortgage Loans in relation to the Statistical
Calculation Date Aggregate Principal Balance, in each case, as of the
Statistical Calculation Date.
The Mortgage Loans will be predominantly business or consumer purpose
residential home equity loans used (x) to refinance an existing mortgage loan,
(y) to consolidate debt, or (z) to obtain cash proceeds by borrowing against
the Mortgagor's equity in the related Mortgaged Property in order to provide
funds for (i) working capital for business, (ii) business expansion, (iii)
equipment acquisition, or (iv) personal acquisitions. The Mortgaged Properties
securing the Mortgage Loans consist primarily of single-family residences
(which may be detached, part of a two-to four-family dwelling, a condominium
unit or a unit in a planned unit development). The Mortgaged Properties may be
owner-occupied (which includes second and vacation homes) and non-owner
occupied investment properties.
As of the Statistical Calculation Date, each of the Mortgage Loans
had remaining terms to maturity of no greater than 360 months and had a
Mortgage Interest Rate of at least 7.99% per annum.
The Combined Loan-to-Value Ratios ("CLTVs") described herein were
calculated based upon the appraised values of the related Mortgaged Properties
at the time of origination (the "Appraised Values"). No assurance can be given
that such appraised values of the Mortgaged Properties have remained or will
remain at their levels on the dates of origination of the related Mortgage
Loans. If property values decline such that the outstanding balances of the
Mortgage Loans, together with the outstanding balances of any first liens,
become equal to or greater than the value of the Mortgaged Properties, the
actual rates of delinquencies, foreclosures and losses could be higher than
those heretofore experienced by the Servicer, as set forth below under "The
Originators, the Seller and the Servicer -- Delinquency and Loan Loss
Experience," and in the mortgage lending industry.
S-23
<PAGE>
As of the Statistical Calculation Date, the Mortgage Loans consist of
932 Mortgage Loans under which the related Mortgaged Properties are located in
17 states, as set forth herein. As of the Statistical Calculation Date, the
Mortgage Loans had an aggregate Principal Balance of $57,621,881.57, the
minimum Principal Balance of any of the Mortgage Loans was $9,876.15, the
maximum principal balance thereof was $382,500.00, and the average Principal
Balance of the Mortgage Loans was $61,826.05. As of the Statistical
Calculation Date, Mortgage Interest Rates on the Mortgage Loans ranged from
7.99% to 16.99% per annum, and the weighted average Mortgage Interest Rate of
the Mortgage Loans was approximately 12.01% per annum. As of the Statistical
Calculation Date, the original term to stated maturity of the Mortgage Loans
ranged from 12 months to 360 months, the remaining term to stated maturity
ranged from 11 months to 360 months, the weighted average original term to
stated maturity was approximately 223 months and the weighted average
remaining term to stated maturity was approximately 223 months. As of the
Statistical Calculation Date, no Mortgage Loan had a stated maturity later
than February 3, 2028. Approximately 64.66% of the aggregate Principal Balance
of the Mortgage Loans as of the Statistical Calculation Date require monthly
payments of principal that will fully amortize the Mortgage Loans by their
respective maturity dates, and approximately 35.34% of the aggregate Principal
Balance of the Mortgage Loans are Balloon Loans. The weighted average CLTV of
the Mortgage Loans as of the Statistical Calculation Date was approximately
71.78%. As of the Statistical Calculation Date, the pool of Mortgage Loans
consists of approximately 79.24% of Mortgage Loans secured by first lien
mortgages ("First Liens") on the related Mortgaged Properties, approximately
17.84% of Mortgage Loans secured by second lien mortgages ("Second Liens") on
the related Mortgaged Properties and approximately 2.91% of Mortgage Loans
secured by liens on more than one Mortgaged Property where not all such liens
are of the same priority, for example, where one is a first lien and the other
a second lien mortgage ("Multiple Liens").
S-24
<PAGE>
GEOGRAPHICAL DISTRIBUTION OF MORTGAGED PROPERTIES
<TABLE>
<CAPTION>
Number of Aggregate Unpaid % of Statistical Calculation Date
State Mortgage Loans Principal Balance Aggregate Principal Balance
----- -------------- ------------------ ---------------------------------
<S> <C> <C> <C>
Arizona............... 1 $ 24,910.60 0.04%
Connecticut........... 4 147,886.96 0.26
Delaware.............. 45 2,650,941.24 4.60
Florida............... 17 845,167.24 1.47
Georgia............... 59 3,772,615.62 6.55
Illinois.............. 10 494,756.81 0.86
Indiana............... 5 171,364.48 0.30
Kentucky.............. 9 375,136.10 0.65
Maryland.............. 30 1,984,473.90 3.44
Michigan.............. 1 29,664.65 0.05
North Carolina........ 33 1,412,421.74 2.45
New Jersey............ 245 17,935,856.23 31.13
New York.............. 112 8,258,844.07 14.33
Ohio.................. 31 1,690,141.09 2.93
Pennsylvania.......... 291 15,935,914.07 27.66
South Carolina........ 1 31,000.00 0.05
Virginia.............. 38 1,860,786.77 3.23
-- ------------ ----
TOTAL.............. 932 $57,621,881.57 100.00%
=== ============== =======
</TABLE>
DISTRIBUTION OF CLTV RATIOS
<TABLE>
<CAPTION>
Original Number of Aggregate Unpaid % of Statistical Calculation Date
CLTV Range Mortgage Loans Principal Balance Aggregate Principal Balance
---------- -------------- ----------------- ---------------------------------
<S> <C> <C> <C> <C>
5.000 < CLTV <= 10.000% 4 $ 46,787.21 0.08%
10.000 < CLTV <= 15.000 5 112,902.92 0.20
15.000 < CLTV <= 20.000 9 199,384.21 0.35
20.000 < CLTV <= 25.000 9 316,576.74 0.55
25.000 < CLTV <= 30.000 13 512,037.78 0.89
30.000 < CLTV <= 35.000 19 615,265.25 1.07
35.000 < CLTV <= 40.000 18 786,901.95 1.37
40.000 < CLTV <= 45.000 21 765,138.11 1.33
45.000 < CLTV <= 50.000 42 2,143,582.46 3.72
50.000 < CLTV <= 55.000 33 2,161,376.62 3.75
55.000 < CLTV <= 60.000 56 3,508,752.20 6.09
60.000 < CLTV <= 65.000 59 3,533,415.93 6.13
65.000 < CLTV <= 70.000 95 6,175,937.26 10.72
70.000 < CLTV <= 75.000 142 9,144,196.58 15.87
75.000 < CLTV <= 80.000 212 13,454,441.30 23.35
80.000 < CLTV <= 85.000 120 8,163,070.35 14.17
85.000 < CLTV <= 90.000 72 5,724,597.27 9.93
90.000 < CLTV <= 95.000 3 257,517.43 0.45
--- ------------- -----
TOTAL........................ 932 $57,621,881.57 100.00%
=== ============== =======
</TABLE>
S-25
<PAGE>
DISTRIBUTION OF GROSS MORTGAGE INTEREST RATES
<TABLE>
<CAPTION>
Gross Mortgage Number of Aggregate Unpaid % of Statistical Calculation Date
Interest Rate Range Mortgage Loans Principal Balance Aggregate Principal Balance
------------------- -------------- ----------------- ---------------------------------
<S> <C> <C> <C> <C>
7.75% < Gross Coupon <=8.00% 3 $ 201,273.97 0.35%
8.00 < Gross Coupon <=8.25 5 267,438.32 0.46
8.25 < Gross Coupon <=8.50 1 74,789.04 0.13
8.50 < Gross Coupon <=8.75 3 138,286.99 0.24
8.75 < Gross Coupon <=9.00 10 881,517.71 1.53
9.00 < Gross Coupon <=9.25 5 616,362.60 1.07
9.25 < Gross Coupon <=9.50 17 1,096,167.23 1.90
9.50 < Gross Coupon <=9.75 23 1,430,200.30 2.48
9.75 < Gross Coupon <=10.00 82 6,517,657.73 11.31
10.00 < Gross Coupon <=10.25 25 1,567,919.49 2.72
10.25 < Gross Coupon <=10.50 54 3,671,796.45 6.37
10.50 < Gross Coupon <=10.75 25 2,061,046.99 3.58
10.75 < Gross Coupon <=11.00 112 6,971,306.94 12.10
11.00 < Gross Coupon <=11.25 14 691,353.49 1.20
11.25 < Gross Coupon <=11.50 48 3,283,072.12 5.70
11.50 < Gross Coupon <=11.75 40 2,232,033.60 3.87
11.75 < Gross Coupon <=12.00 100 5,695,662.34 9.88
12.00 < Gross Coupon <=12.25 11 737,829.14 1.28
12.25 < Gross Coupon <=12.50 40 1,771,831.08 3.07
12.50 < Gross Coupon <=12.75 24 1,116,153.77 1.94
12.75 < Gross Coupon <=13.00 41 2,369,046.56 4.11
13.00 < Gross Coupon <=13.25 8 648,532.19 1.13
13.25 < Gross Coupon <=13.50 27 1,123,450.06 1.95
13.50 < Gross Coupon <=13.75 9 348,689.17 0.61
13.75 < Gross Coupon <=14.00 50 2,354,442.11 4.09
14.00 < Gross Coupon <=14.25 2 300,158.95 0.52
14.25 < Gross Coupon <=14.50 9 331,303.32 0.57
14.50 < Gross Coupon <=14.75 1 21,000.00 0.04
14.75 < Gross Coupon <=15.00 18 809,935.21 1.41
15.25 < Gross Coupon <=15.50 4 185,423.26 0.32
15.50 < Gross Coupon <=15.75 8 451,589.18 0.78
15.75 < Gross Coupon <=16.00 106 6,791,529.05 11.79
16.00 < Gross Coupon <=16.25 4 494,000.00 0.86
16.75 < Gross Coupon <=17.00 3 369,083.21 0.64
--- ------------ -----
TOTAL...................... 932 $57,621,881.57 100.00%
=== ============== =======
</TABLE>
S-26
<PAGE>
DISTRIBUTION OF ORIGINAL TERMS TO MATURITY
(in months)
<TABLE>
<CAPTION>
Range of
Original Terms Number of Aggregate Unpaid % of Statistical Calculation Date
(in months) Mortgage Loans Principal Balance Aggregate Principal Balance
-------------- -------------- ----------------- ---------------------------------
<S> <C> <C> <C> <C>
0 < Orig. Term <= 12 1 $ 22,110.39 0.04%
48 < Orig. Term <= 60 20 389,684.50 0.68
72 < Orig. Term <= 84 10 432,774.96 0.75
84 < Orig. Term <= 96 2 57,513.14 0.10
108 < Orig. Term <= 120 73 2,190,258.51 3.80
132 < Orig. Term <= 144 3 97,423.85 0.17
144 < Orig. Term <= 156 1 49,000.00 0.09
168 < Orig. Term <= 180 507 33,757,791.84 58.59
180 < Orig. Term <= 192 2 102,935.06 0.18
228 < Orig. Term <= 240 161 7,827,869.73 13.58
240 < Orig. Term <= 252 1 125,800.00 0.22
288 < Orig. Term <= 300 3 196,900.00 0.34
348 < Orig. Term <= 360 148 12,371,819.59 21.47
--- ------------- -----
TOTAL............. 932 $57,621,881.57 100.00%
=== ============== =======
</TABLE>
DISTRIBUTION OF REMAINING TERMS TO MATURITY
(in months)
<TABLE>
<CAPTION>
Range of
Remaining Terms Number of Aggregate Unpaid % of Statistical Calculation Date
(in months) Mortgage Loans Principal Balance Aggregate Principal Balance
-------------- -------------- ----------------- ---------------------------------
<S> <C> <C> <C> <C>
1 < Rem. Term <= 12 1 $ 22,110.39 0.04%
48 < Rem. Term <= 60 20 389,684.50 0.68
72 < Rem. Term <= 84 10 432,774.96 0.75
84 < Rem. Term <= 96 2 57,513.14 0.10
108 < Rem. Term <= 120 73 2,190,258.51 3.80
132 < Rem. Term <= 144 3 97,423.85 0.17
144 < Rem. Term <= 156 1 49,000.00 0.09
168 < Rem. Term <= 180 508 33,825,910.30 58.70
180 < Rem. Term <= 192 1 34,816.60 0.06
228 < Rem. Term <= 240 161 7,827,869.73 13.58
240 < Rem. Term <= 252 1 125,800.00 0.22
288 < Rem. Term <= 300 3 196,900.00 0.34
348 < Rem. Term <= 360 148 12,371,819.59 21.47
--- ------------- -----
TOTAL................. 932 $57,621,881.57 100.00%
=== ============== =======
</TABLE>
S-27
<PAGE>
DISTRIBUTION OF ORIGINAL MORTGAGE LOAN PRINCIPAL BALANCES
<TABLE>
<CAPTION>
Range of Original
Mortgage Loan Number of Aggregate Unpaid % of Statistical Calculation Date
Principal Balances Mortgage Loans Principal Balance Aggregate Principal Balance
------------------- -------------- ----------------- ---------------------------------
<S> <C> <C> <C> <C>
$ 5,000 < Balance <=$ 10,000 12 $ 119,534.42 0.21%
10,000 < Balance <= 15,000 45 598,333.23 1.04
15,000 < Balance <= 20,000 53 981,845.70 1.70
20,000 < Balance <= 25,000 67 1,545,781.36 2.68
25,000 < Balance <= 30,000 72 2,044,890.51 3.55
30,000 < Balance <= 35,000 79 2,605,159.56 4.52
35,000 < Balance <= 40,000 69 2,637,972.59 4.58
40,000 < Balance <= 45,000 48 2,073,819.76 3.60
45,000 < Balance <= 50,000 44 2,132,939.45 3.70
50,000 < Balance <= 55,000 37 1,936,610.04 3.36
55,000 < Balance <= 60,000 57 3,309,004.48 5.74
60,000 < Balance <= 65,000 35 2,210,689.86 3.84
65,000 < Balance <= 70,000 36 2,465,494.96 4.28
70,000 < Balance <= 75,000 28 2,033,199.62 3.53
75,000 < Balance <= 80,000 27 2,108,688.86 3.66
80,000 < Balance <= 85,000 19 1,564,149.17 2.71
85,000 < Balance <= 90,000 30 2,633,146.28 4.57
90,000 < Balance <= 95,000 14 1,293,489.28 2.24
95,000 < Balance <= 100,000 28 2,743,968.41 4.76
100,000 < Balance <= 105,000 10 1,027,788.34 1.78
105,000 < Balance <= 110,000 6 644,911.48 1.12
110,000 < Balance <= 115,000 18 2,032,046.97 3.53
115,000 < Balance <= 120,000 10 1,186,039.74 2.06
120,000 < Balance <= 125,000 8 985,012.14 1.71
125,000 < Balance <= 130,000 9 1,145,721.71 1.99
130,000 < Balance <= 135,000 8 1,058,098.35 1.84
135,000 < Balance <= 140,000 9 1,249,787.40 2.17
140,000 < Balance <= 145,000 5 719,800.00 1.25
145,000 < Balance <= 150,000 2 296,939.92 0.52
150,000 < Balance <= 200,000 23 3,874,204.32 6.72
200,000 < Balance <= 250,000 12 2,673,108.10 4.64
250,000 < Balance <= 300,000 7 1,905,724.33 3.31
300,000 < Balance <= 350,000 2 674,817.26 1.17
350,000 < Balance <= 400,000 3 1,109,163.97 1.92
--- ------------ ----
TOTAL........... 932 $57,621,881.57 100.00%
=== ============== =======
</TABLE>
S-28
<PAGE>
DISTRIBUTION OF CURRENT MORTGAGE LOAN PRINCIPAL BALANCES
<TABLE>
<CAPTION>
Range of Current
Mortgage Loan Number of AggregateUnpaid % of Statistical Calculation Date
Principal Balances Mortgage Loans Principal Balance Aggregate Principal Balance
------------------- -------------- ----------------- ---------------------------------
<S> <C> <C> <C> <C>
$ 5,000 < Balance <=$ 10,000 12 $ 119,534.42 0.21%
10,000 < Balance <= 15,000 45 598,333.23 1.04
15,000 < Balance <= 20,000 53 981,845.70 1.70
20,000 < Balance <= 25,000 67 1,545,781.36 2.68
25,000 < Balance <= 30,000 72 2,044,890.51 3.55
30,000 < Balance <= 35,000 79 2,605,159.56 4.52
35,000 < Balance <= 40,000 69 2,637,972.59 4.58
40,000 < Balance <= 45,000 48 2,073,819.76 3.60
45,000 < Balance <= 50,000 44 2,132,939.45 3.70
50,000 < Balance <= 55,000 38 1,991,586.20 3.46
55,000 < Balance <= 60,000 56 3,254,028.32 5.65
60,000 < Balance <= 65,000 34 2,145,285.66 3.72
65,000 < Balance <= 70,000 37 2,530,899.16 4.39
70,000 < Balance <= 75,000 28 2,033,199.62 3.53
75,000 < Balance <= 80,000 27 2,108,688.86 3.66
80,000 < Balance <= 85,000 19 1,564,149.17 2.71
85,000 < Balance <= 90,000 30 2,633,146.28 4.57
90,000 < Balance <= 95,000 14 1,293,489.28 2.24
95,000 < Balance <= 100,000 29 2,843,966.36 4.94
100,000 < Balance <= 105,000 9 927,790.39 1.61
105,000 < Balance <= 110,000 6 644,911.48 1.12
110,000 < Balance <= 115,000 18 2,032,046.97 3.53
115,000 < Balance <= 120,000 10 1,186,039.74 2.06
120,000 < Balance <= 125,000 8 985,012.14 1.71
125,000 < Balance <= 130,000 9 1,145,721.71 1.99
130,000 < Balance <= 135,000 8 1,058,098.35 1.84
135,000 < Balance <= 140,000 9 1,249,787.40 2.17
140,000 < Balance <= 145,000 5 719,800.00 1.25
145,000 < Balance <= 150,000 2 296,939.92 0.52
150,000 < Balance <= 200,000 23 3,874,204.32 6.72
200,000 < Balance <= 250,000 12 2,673,108.10 4.64
250,000 < Balance <= 300,000 7 1,905,724.33 3.31
300,000 < Balance <= 350,000 2 674,817.26 1.17
350,000 < Balance <= 400,000 3 1,109,163.97 1.92
--- ------------ ----
TOTAL......................... 932 $57,621,881.57 100.00%
=== ============== =======
</TABLE>
S-29
<PAGE>
DISTRIBUTION BY LIEN STATUS
<TABLE>
<CAPTION>
Number of Aggregate Unpaid % of Statistical Calculation Date
Lien Status Mortgage Loans Principal Balance Aggregate Principal Balance
----------- -------------- ----------------- ---------------------------------
<S> <C> <C> <C>
First Lien............. 633 $45,662,151.09 79.24%
Second Lien............ 287 10,281,414.14 17.84
Multiple Lien.......... 12 1,678,316.34 2.91
-- ------------ ----
TOTAL.............. 932 $57,621,881.57 100.00%
=== ============== =======
</TABLE>
DISTRIBUTION BY AMORTIZATION TYPE
<TABLE>
<CAPTION>
Number of Aggregate Unpaid % of Statistical Calculation Date
Amortization Type Mortgage Loans Principal Balance Aggregate Principal Balance
----------------- -------------- ----------------- ----------------------------------
<S> <C> <C> <C>
Fully Amortizing....... 695 $37,260,439.27 64.66%
Balloon Loans.......... 237 20,361,442.30 35.34
--- ------------- -----
TOTAL.............. 932 $57,621,881.57 100.00%
=== ============== =======
</TABLE>
DISTRIBUTION OF OCCUPANCY STATUS
<TABLE>
<CAPTION>
Number of Aggregate Unpaid % of Statistical Calculation Date
Occupancy Status Mortgage Loans Principal Balance Aggregate Principal Balance
---------------- -------------- ----------------- ---------------------------------
<S> <C> <C> <C>
Owner Occupied......... 808 $47,894,923.28 83.12%
Investor............... 68 4,364,669.15 7.57
Vacation/Second Home... 11 435,370.12 0.76
Business............... 29 2,798,342.50 4.86
Multiple 16 2,128,576.52 3.69
---- --------------- -------
Prop./Occupancy........
TOTAL.............. 932 $57,621,881.57 100.00%
=== ============== =======
</TABLE>
<PAGE>
DISTRIBUTION OF PROPERTY TYPES
<TABLE>
<CAPTION>
Number of Aggregate Unpaid % of Statistical Calculation Date
Property Type Mortgage Loans Principal Balance Aggregate Principal Balance
------------- -------------- ----------------- ---------------------------------
<S> <C> <C> <C>
PUD...................... 16 $912,471.33 1.58%
Commercial............... 8 700,994.99 1.22
2-4 Residential.......... 86 7,263,741.65 12.61
Townhouses............... 44 1,489,563.24 2.59
Condominiums............. 9 482,618.05 0.84
Single Family............ 730 42,393,318.28 73.57
Mobile Home.............. 1 48,600.00 0.08
5+ Family................ 2 157,700.00 0.27
Mixed Use................ 22 2,177,297.51 3.78
Multiple Properties...... 14 1,995,576.52 3.46
---- ---------------- -------
TOTAL................ 932 $57,621,881.57 100.00%
=== ============== =======
</TABLE>
S-30
<PAGE>
Conveyance of Subsequent Mortgage Loans
The Pooling and Servicing Agreement permits the Trust to acquire
approximately $12,988,366.49 aggregate Principal Balance of Subsequent
Mortgage Loans. Accordingly, the statistical characteristics of the Mortgage
Pool will vary as of any Subsequent Cut-Off Date upon the acquisition of
Subsequent Mortgage Loans.
The obligation of the Trust to purchase the Subsequent Mortgage Loans
on a Subsequent Transfer Date is subject to the following requirements: (i)
such Subsequent Mortgage Loan may not be 30 or more days contractually
delinquent as of the related Subsequent Cut-Off Date; (ii) the original term
to maturity of such Subsequent Mortgage Loan may not exceed 360 months; (iii)
such Subsequent Mortgage Loan must have a Mortgage Interest Rate of at least
8.00%; (iv) the purchase of the Subsequent Mortgage Loans is consented to by
the Certificate Insurer and the Rating Agencies; (v) the Principal Balance of
any such Subsequent Mortgage Loan may not exceed $350,000.00; (vi) no more
than 22% of such Subsequent Mortgage Loans may be second liens; (vii) no such
Subsequent Mortgage Loan shall have a CLTV of more than, (a) for consumer
purpose loans, 90%, and (b) for business purpose loans, 75%; (viii) no more
than 35% of such Subsequent Mortgage Loans may be Balloon Loans; (ix) no more
than 18% of such Subsequent Mortgage Loans may be secured by mixed-use
properties, commercial properties, or four or more unit multifamily
properties; (x) no more than 8.5% of such Subsequent Mortgage Loans may be
secured by commercial properties; and (xi) following the purchase of such
Subsequent Mortgage Loans by the Trust, the Mortgage Loans (including the
Subsequent Mortgage Loans) (a) will have a weighted average Mortgage Interest
Rate, (I) for consumer purpose loans, of at least 11.35% and (II) for business
purpose loans, of at least 16%; and (b) will have a weighted average CLTV of
not more than (I) for consumer purpose loans, 73.5%, and (II) for business
purpose loans, 60%. The Pooling and Servicing Agreement will provide that any
of such requirements may be waived or modified in any respect upon prior
written consent of the Certificate Insurer.
THE ORIGINATORS, THE SELLER AND THE SERVICER
General
American Business Credit, Inc., a Pennsylvania corporation ("ABC"),
the Servicer and an Originator, is a wholly-owned direct subsidiary of
American Business Financial Services, Inc., a Delaware corporation ("ABFS").
HomeAmerican Credit, Inc. d/b/a Upland Mortgage, a Pennsylvania corporation
("Upland"), an Originator and a Subservicer, is a wholly-owned subsidiary of
ABC. New Jersey Mortgage Investment Corp., a New Jersey corporation ("NJMIC"),
an Originator and a Subservicer, is a wholly owned subsidiary of ABC. The
Seller, ABFS 1998-1, Inc., a Delaware corporation, is owned by ABC and Upland.
ABFS is a financial services company operating primarily in the
mid-Atlantic region of the United States. ABFS, through ABC, originates, sells
and services loans to businesses secured by real estate and other business
assets, and, through Upland, originates, sells and services non-conforming
mortgage loans, typically to credit impaired borrowers, secured by mortgages
on single-family residences. ABFS, through a subsidiary, also originates small
ticket leases (generally $10,000 to $150,000) for the acquisition of business
equipment. In addition, ABFS, acting through Upland, has recently entered into
business arrangements with several financial institutions pursuant to which
Upland will purchase home equity loans that do not meet the underwriting
guidelines of the selling institution but meet Upland's underwriting criteria
(the "Bank Alliance Program").
ABFS's customers currently consist primarily of two groups. The first
category of customers includes credit impaired borrowers who generally are
unable to obtain financing from banks, savings and loan associations or other
finance companies that have historically provided loans only to individuals
with favorable credit characteristics. These borrowers generally have impaired
or unsubstantiated credit characteristics and/or unverifiable income and
respond favorably to ABFS's marketing efforts. The second category of
customers includes borrowers who would qualify for loans from traditional
lending sources but elect to utilize ABFS's products and services. ABFS's
experience has indicated that these borrowers are attracted to ABFS's loan
products as a result of its marketing efforts, the personalized service
provided by ABFS's staff of lending officers and the timely response to loan
requests. Historically, both categories of customers have been willing to pay
ABFS's origination fees and interest rates which are generally higher than
those charged by traditional lending sources.
S-31
<PAGE>
ABFS was incorporated in Delaware in 1985. ABFS is a publicly traded
company and its common stock is listed on the Nasdaq National Market System
under the symbol "ABFI." The principal executive offices of ABFS and its
operating entities are located at Balapointe Office Centre, 111 Presidential
Boulevard, Suite 215, Bala Cynwyd, PA 19004. Its telephone number at such
address is (610) 668-2440.
The Originators
The Mortgage Loans were or will be originated or purchased by the
Originators directly in the ordinary course of their business. The
Originators' primary source of loan product is retail marketing, directly
targeting small businesses and consumers through various advertising mediums.
The business purpose Mortgage Loans were or will be originated or
purchased by ABC (except for Mortgage Loans which are secured by properties
located in states where the originating or purchasing of mortgage loans
requires a mortgage banking license, in which case Upland has or will
originate or purchase such Mortgage Loans). The consumer purpose Mortgage
Loans were or will be originated or purchased by Upland.
None of ABC Upland or NJMIC will insure or guarantee the Class A
Certificates.
American Business Credit, Inc. ABC originates, services and sells
business purpose loans collateralized by real estate. ABC's operating
subsidiaries include: (i) Upland, a consumer purpose mortgage company; (ii)
Process Servicing Center, Inc., a loan processor for home equity loans
generated by the Bank Alliance Program; (iii) HomeAmerican Consumer Discount
Company, a consumer loan company; (iv) American Business Leasing, Inc., a
small equipment leasing company; (v) ABC Holdings Corporation, a holder of
foreclosed real estate; and (vi) NJMIC, a residential mortgage company. ABC
was incorporated in 1988 pursuant to the laws of the Commonwealth of
Pennsylvania and maintains its corporate headquarters in the metropolitan
Philadelphia area.
ABC currently markets its financial services and originates or
purchases business loans throughout eastern Pennsylvania, Delaware, Maryland,
New Jersey, New York, Virginia, Ohio and Connecticut. ABC is investigating
expanding its market by offering business loans in the southeastern United
States. ABC's origination program is primarily a retail marketing program
utilizing various forms of advertising and a direct sales force. ABC's
marketing effort is principally undertaken by its commissioned sales staff,
which consists of full time professional sales persons who are responsible for
converting advertising leads into loan applications. ABC advertises through
newspapers and radio as well as by conducting large direct mail campaigns
targeted at owners of small businesses located in ABC's market area.
ABC makes business purpose mortgage loans to corporations,
partnerships, other business entities and sole proprietors. ABC primarily
makes loans to borrowers with non-perfect credit histories. As a result, ABC
typically requires lower loan-to-value ratios than are generally required of
borrowers with unblemished credit histories. All such loans are collateralized
by a first or second mortgage lien on a principal residence or some other
parcel of real property, such as office and apartment buildings and mixed use
buildings owned by the borrower, a principal of the borrower, or a guarantor
of the borrower. ABC, generally, further collateralizes its loans by obtaining
a lien on the borrower's other tangible and intangible assets and by filing
appropriate UCC financing statements.
ABC makes loans for various business purposes including, but not
limited to, working capital, business expansion, equipment acquisition and
debt-consolidation. ABC does not target any particular industries or trade
groups.
Loans made by ABC generally range from $20,000 to $350,000 and
average approximately $70,000. See "The Mortgage Pool."
HomeAmerican Credit, Inc. d/b/a Upland Mortgage. Upland, ABC's home
equity lending subsidiary, is a Pennsylvania corporation and was incorporated
in May 1991. Upland primarily originates residential mortgages and consumer
home equity loans. Upland is licensed to act and currently operates as a first
and second mortgage banker/lender in Pennsylvania, New Jersey, Delaware,
Georgia, Maryland, North Carolina, South Carolina, Georgia, Florida and
Virginia. Upland recently has been granted licenses to act as a mortgage
lender and expects to begin originating consumer home equity loans in
Connecticut, New York and Ohio during calendar 1998.
S-32
<PAGE>
Upland originates business loans on behalf of ABC in instances where
state licensing laws require a mortgage license in order to make such loans.
In such circumstances, the credit criteria and collateral requirements
utilized by Upland are identical to those utilized by ABC. As such, ABC's
lending procedures and policies govern Upland when it is originating business
purpose Mortgage Loans.
Upland primarily markets its residential mortgage and consumer home
equity loans through print advertisements in various newspapers, television
and radio advertisements and through direct mail campaigns in the states where
it originates or purchases mortgage loans. Upland takes applications from
potential borrowers over the phone and in person. The loan request is then
processed and closed. Upland attempts to provide its home equity borrowers
with a loan approval within 24 hours and to close its home equity loans within
approximately seven to ten days of obtaining a loan approval.
Upland's growth strategy includes not only geographic expansion into
the markets where it has recently been granted mortgage licenses, but also the
acquisition of other mortgage bankers and brokers which compliment Upland's
market. Toward this goal, HomeAmerican Credit, Inc., in February 1996,
acquired all of the assets of Upland Mortgage Corp., a New Jersey and
Pennsylvania licensed mortgage broker and commenced doing business as "Upland
Mortgage" in August, 1996.
Prior to 1995, each of the non-business residential mortgages and
home equity consumer loans originated and funded by Upland was sold to one of
several third party lenders, at a premium. Upland presently accumulates
portfolios of such non-business loans for the purpose of retaining such loans,
selling such loans in bulk or engaging in securitizations. The business loans
made by Upland are either retained in Upland's portfolio, securitized or sold
to third parties. Upland's residential mortgages and home equity loans are
currently made in accordance with loan-to-value standards set forth in the
underlying credit manual. The loan-to-value ratios and terms and conditions
utilized for its business loans are identical to those utilized by ABC.
In fiscal 1996, Upland, in conjunction with the Processing Service
Center, Inc., implemented the Bank Alliance Program, which is designed to
provide an additional source of home equity loans. The Bank Alliance Program
targets traditional financial institutions, such as banks, which because of
their strict underwriting and credit guidelines have generally provided
mortgage financing only to the most credit-worthy borrowers. The Bank Alliance
Program enables such financial institutions to originate loans to credit
impaired borrowers in order to achieve certain community reinvestment
objectives and subsequently sell such loans to Upland.
Under the program, a borrower who fails to meet a financial
institution's underwriting guidelines will be referred to the Processing
Service Center, Inc. which will process the loan application and underwrite
the loan pursuant to Upland's underwriting guidelines. If the borrower
qualifies under Upland's underwriting standards, the loan will be originated
by the financial institution and subsequently sold to Upland.
Since the introduction of this program, agreements have been entered
into with eight financial institutions which provide Upland with the
opportunity to underwrite, process and purchase loans generated by the branch
networks of such institutions, which consist of approximately 1,000 branches
located in Pennsylvania, Delaware, New Jersey and Maryland. During the fiscal
year ended June 30, 1997, $7.6 million of loans were purchased pursuant to the
Bank Alliance Program. Upland continues to market this program to other
regional and national banking institutions. Upland is also negotiating with
other financial institutions regarding their participation in the program.
New Jersey Mortgage Investment Corp.
Effective October 1, 1997, ABFS acquired all of the outstanding stock
of NJMIC, a mortgage and leasing company based in Roseland, New Jersey, and
its subsidiaries for a combination of cash and common stock. NJMIC is a
full-service diversified residential lender, which directly and through its
subsidiaries offers a broad range of loan and lease products, including Home
Equity Loans, First Mortgage Loans, and Equipment Leases. Historically, NJMIC
originated loans for sale to third parties with servicing released. ABFS
intends that NJMIC will continue to originate First Mortgage Loans for sale in
the secondary market and the Home Equity Loans originated by NJMIC will be
securitized and sold pursuant to ABFS' current securitization program. Loans
originated by NJMIC are secured by properties located in 15 states. Such loans
are originated through its network of six branch sales offices and three
satellite offices located in eight states. NJMIC's Home Equity Loan customers
primarily include credit-impaired borrowers while borrowers on its First
Mortgage Loans are generally borrowers with favorable credit histories.
S-33
<PAGE>
ABFS acquisition of NJMIC and its subsidiaries expands the geographic
scope of ABFS' loan origination activities to include states in the midwestern
part of the United States and leasing activities to include the entire United
States. ABFS believes that certain cross marketing opportunities exist between
the two companies with respect to the products and services offered.
Underwriting Guidelines
General. The Originators' loan underwriting standards are applied to
evaluate prospective borrowers' credit standing and repayment ability and the
value and adequacy of the mortgaged property as collateral. Initially, the
borrower is required to fill out a detailed application providing pertinent
credit information. As part of the description of the borrower's financial
condition, the borrower is required to provide information concerning assets,
liabilities, income, credit, employment history and other demographic and
personal information. If the application demonstrates the borrower's ability
to repay the debt as well as sufficient income and equity, loan processing
personnel obtain and review an independent credit bureau report on the credit
history of the borrower and verification of the borrower's income by obtaining
and reviewing one or more of the borrower's pay stubs, income tax returns,
checking account statements, W-2 tax forms or verification of business or
employment forms. Once all applicable employment, credit and property
information is obtained, a determination is made as to whether sufficient
unencumbered equity in the property exists and whether the prospective
borrower has sufficient monthly income available to meet the borrower's
monthly obligations.
The Originators endeavor at all times to keep their interest and
other charges competitive with the lending rates of other finance companies
for similar type loans. Generally, loans are made at fixed rates for fixed
terms ranging from 5 to 30 years. Generally, the Originators compute interest
due on their outstanding loans by the simple interest method. The Originators
require that title insurance be obtained in connection with their loans.
In determining the adequacy of the mortgaged property as collateral,
an appraisal is made of each property considered for financing. The appraisal
is completed by an independent qualified appraiser and generally includes
pictures of comparable properties and pictures of the subject property's
interior. With respect to business and consumer purpose loans, the appraisal
is completed by a qualified appraiser on a FNMA form.
The due dates for monthly payments on the Mortgage Loans occur
throughout a month, (each, a "Due Date"). See "The Mortgage Pool". The
majority of the business purpose loans have a prepayment fee clause. Such
prepayment fee clauses generally provide that the borrower pay one or more of
the following: (i) a fee equal to a percentage of the outstanding principal
balance of the Mortgage Loan, such percentage having been negotiated at the
time of origination, (ii) a fee which is designed to allow the holder of the
Mortgage Note to earn interest on the Mortgage Loan as if the Mortgage Loan
remained outstanding until a designated point in time, or (iii) a fee equal to
the amount of interest on the outstanding principal balance of the Mortgage
Loan calculated pursuant to a Rule of 78's calculation, which has the effect
of requiring the mortgagor to pay a greater amount of interest than would be
required to be paid if the actuarial method of calculating interest was
utilized. See "Certain Legal Aspects of the Mortgage Loans and Contracts --
The Mortgage Loans" in the Prospectus.
Lending Policies and Practices for Business Purpose Mortgage Loans.
Summarized below are the current lending policies and practices with respect
to the business purpose loans originated or purchased by ABC. It should be
noted that such policies and practices will be altered, amended and
supplemented as conditions warrant. ABC reserves the right to make changes in
its day-to-day practices and policies in its sole discretion.
Generally, business purpose loans collateralized by residential real
estate must have an overall loan-to-value ratio (based solely on the
independent appraised fair market value of the real estate collateral securing
the loan) on the properties collateralizing the loans of no greater than 75%.
Business purpose loans collateralized by commercial real estate generally must
have an overall loan-to-value ratio (based solely on the independent appraised
fair market value of the real estate collateral securing the loan) of no
greater than 60%. In addition, in substantially all instances, ABC receives
additional collateral in the form of, among other things, pledges of
securities, assignments of contract rights, life insurance and lease payments
and liens on business equipment and other business assets, as available.
S-34
<PAGE>
Lending Policies and Practices for Consumer Purpose Mortgage Loans.
The maximum allowed loan-to-value ratio for consumer purpose loans held in
Upland's portfolio is generally 90%. The consumer purpose loans originated by
Upland had an average loan-to-value ratio of 72% for the fiscal year ended
June 30, 1997. When the loan-to-value ratio is equal to 75% or greater, Upland
will not make a second mortgage loan when the second mortgage loan amount is
less than 15% of the existing first lien mortgage loan amount. When the fair
market value of a property exceeds $450,000, Upland will only lend 50% of the
property's value exceeding $450,000. Occasionally, exceptions to these maximum
loan-to-value ratios are made if other collateral is available or if there are
compensating factors. Title insurance generally is obtained in connection with
all real estate secured loans.
Upland attempts to keep its interest rates and other charges
competitive with the lending rates of other finance companies and banks.
Generally, its consumer purpose loans are made at fixed rates for fixed terms
and may extend for a term of up to 30 years. In all instances, Upland permits
borrowers to prepay such loans. Where permitted by applicable law, Upland may
impose a prepayment fee. Whether a prepayment fee is imposed and the amount of
such penalty, if any, is negotiated between Upland and the individual borrower
prior to closing the loan. In the majority of cases, Upland does not impose a
prepayment fee.
Terms of the Mortgage Loans. The principal amount of the Mortgage
Loans outstanding bears interest at a fixed rate as indicated on the Mortgage
Notes. Interest with respect to a majority of the Mortgage Loans included or
to be included in the Mortgage Pool accrues on a simple interest method. The
simple interest method provides for the amortization of the amount of such
Mortgage Loan over a series of monthly payments. Each monthly interest payment
is calculated by multiplying the outstanding principal balance of such loan by
the stated interest rate. Such product is then multiplied by a fraction, the
numerator of which is the number of days elapsed since the preceding payment
of interest was made and the denominator of which is 360. Payments received on
a Mortgage Loan are applied first to interest accrued to the date of payment,
then to late fees and other charges and then to reduce the unpaid principal
balance of the related loan. The remainder of the Mortgage Loans are not fully
amortized over their terms and instead require substantial balloon payments on
their maturity dates.
The Mortgage Notes provide the holder with the right to require the
borrower to make immediate payment of the entire principal balance plus all
accrued but unpaid interest under the loan agreement if, among other things,
the borrower fails to make any payment under the loan agreement when due
(subject to a grace period or right to cure a default required by state law),
or if the borrower transfers any interest in the property securing the loan
agreement.
In the event of default on a mortgage that is senior to a Mortgage
Loan, the second mortgagee has the right in many states to satisfy the
defaulted first mortgage in full, or to cure such default and make the
defaulted senior mortgage current as to payment, in either event adding any
amounts expended in connection with such satisfaction or cure to the then
current principal balance due for such Mortgage Loan. In such an event of
default, the Servicer will either take the actions described above, take other
appropriate actions, or refrain from taking any action based upon the
Servicer's practices in connection with servicing loans for itself and others.
See "Certain Legal Aspects of the Mortgage Loans and Contracts -- The Mortgage
Loans" in the Prospectus.
The Servicer
ABC will be responsible for servicing the Mortgage Loans in
accordance with its established servicing procedures and the terms of the
Pooling and Servicing Agreement. ABC will contract with Upland to act as
subservicer with respect to the servicing of the consumer purpose Mortgage
Loans. Upland follows the same servicing procedures described below with
respect to ABC.
S-35
<PAGE>
ABC begins the collection process twenty (20) days prior to the
payment date by sending an invoice to the mortgagor. ABC initiates the
telephone collection process one day after a borrower misses a monthly due
date. ABC's daily automated collection system identifies delinquent mortgage
loans and places them on a collector's delinquency file. A collector then
attempts to call the delinquent borrower. The collector attempts to contact
the delinquent borrower every day until either a promise to pay has been made
by such borrower or such borrower makes all delinquent payments. When a
delinquent borrower makes a promise to pay, the collector attempts to contact
the borrower by phone on the expected payment date. If telephone contact is
not made, the collector sends a computer generated reminder notice to the
borrower. During any period of delinquency, ABC generates a payment reminder
letter to the borrower three (3) days after a missed monthly due date, a late
notice is sent to the borrower seven (7) days after the due date and if no
payment or arrangement for payment has been made fifteen (15) days after the
borrower's due date, an attorney referral letter is sent. When a mortgage loan
is fifteen (15) days past due and no contact has been made with the borrower,
a supervisor reviews the account of the borrower to ensure that all procedures
and contacts have been made. At this time, new contact letters are sent to the
delinquent borrower. With respect to second mortgage loans, the servicer of
the first mortgage loan is contacted to determine if the borrower is also
delinquent on the first mortgage loan. When a mortgage loan becomes forty-five
(45) to sixty (60) days delinquent, it is transferred to ABC's loan work-out
department.
When a mortgage loan is received in the work-out department,
telephone contact continues, a new default notice is sent to the borrower, an
updated property value report is ordered for the collateral, the tax status of
the mortgage loan is determined, and the first lien holder (if applicable) is
contacted to determine the status of its loan. If a first mortgage is in
default, ABC may advance funds to keep the first mortgage current or may
choose to pay off the senior mortgage.
If the borrower has declared bankruptcy or the first mortgagor is
foreclosing, the matter is immediately referred to outside counsel. The
work-out department will attempt to reinstate the loan, seek a payoff, or
enter into a loan modification agreement with the borrower to avoid
foreclosure.
Supporting ABC's collection and accounting functions is a network of
computer hardware and software. ABC's current computer system produces
mortgage loan invoices, payment reminders and late notices. In addition to
these collection functions, the computer provides an in-depth customer contact
system which enables ABC's collectors to manage each borrower's loan history
by individually logging all correspondence into the system's data base. The
system also generates numerous management reports detailing collection
activity and accounting information.
Delinquency and Loan Loss Experience
The following tables set forth information relating to the
delinquency and loan loss experience on the mortgage loans included in ABC's,
Upland's and NJMIC's servicing portfolio for the periods shown. The
delinquency and loan loss experience represents the historical experience of
the Originators, and there can be no assurance that the future experience on
the Mortgage Loans in the Trust will be the same as, or more favorable than,
that of the total mortgage loans in ABC's and Upland's servicing portfolio.
S-36
<PAGE>
Delinquency and Foreclosure Experience
(Dollars in Thousands)
<TABLE>
<CAPTION>
At December 31, 1997 At June 30, 1997
------------------------------------------ ----------------------------------------
Number % of % of Number % of % of
of Loans Loans Amount Amount of Loans Loans Amount Amount
Serviced Serviced Serviced Serviced Serviced Serviced Serviced Serviced
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Servicing portfolio... 4,112 100.00% $263,574 100.00% 2,918 100.00% $167,190 100.00%
Past due loans(1):
60-89 days........ 22 0.53% $ 1,821 0.69% 11 0.38% $ 803 0.48%
90 days or more... 3 0.07% $ 405 0.15% 14 0.48% $ 833 0.50%
----- ------- -------- ------- ----- ------- -------- ------
Total past due loans.. 25 0.60% $ 2,226 0.84% 25 0.86% $ 1,636 0.98%
Foreclosures
pending(2).......... 48 1.17% $ 3,320 1.26% 16 0.55% $ 1,124 0.67%
REO Properties(3)..... 10 0.24% $ 1,204 0.46% 7 0.24% $ 443 0.26%
----- ------- -------- ------- ----- ------- -------- ------
Total past due loans,
foreclosures pending
and REO Properties(3). 83 2.02% $ 6,750 2.56% 48 1.65% $ 3,203 1.91%
===== ======= ======== ===== ===== ======= ======== ======
</TABLE>
<TABLE>
<CAPTION>
At June 30, 1996 At June 30, 1995
------------------------------------------ ----------------------------------------
Number % of % of Number % of % of
of Loans Loans Amount Amount of Loans Loans Amount Amount
Serviced Serviced Serviced Serviced Serviced Serviced Serviced Serviced
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Servicing portfolio... 1,368 100.00% $ 55,284 100.00% 372 100.00% $ 15,743 100.00%
Past due loans(1):
60-89 days........ 5 0.37% $ 136 0.25% 2 0.54% $ 105 0.67%
90 days or more... 15 1.10% $ 1,083 1.96% 8 2.15% $ 331 2.10%
----- ------- -------- ------- ----- ------- -------- ------
Total past due loans.. 20 1.46% $ 1,219 2.20% 10 2.69% $ 436 2.77%
Foreclosures
pending(2).......... 7 0.51% $ 600 1.09% 3 0.81% $ 310 1.97%
REO Properties(3)..... 6 0.44% $ 444 0.80% 5 1.34% $ 641 4.07%
----- ------- -------- ------- ----- ------- -------- ------
Total past due loans,
foreclosures pending
and REO Properties(3). 33 2.41% $ 2,263 4.09% 18 4.84% $ 1,387 8.81%
===== ======= ======== ===== ===== ======= ======== ======
</TABLE>
- --------------------------------------------------------------------------------
(1) The past due period is based on the actual number of days that a payment
is contractually past due. A loan as to which a monthly payment was due
60-89 days prior to the reporting period is considered 60-89 days past due,
etc.
(2) Includes bankruptcies which preclude foreclosure.
(3) A "REO Property" is a property acquired and held as a result of foreclosure
or deed in lieu of foreclosure.
S-37
<PAGE>
Loan Charge-Off Experience
(Dollars in Thousands)
<TABLE>
<CAPTION>
At December 31, At June 30, At June 30, At June 30,
1997 1997 1996 1995
--------------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Servicing portfolio at period end...... $263,574 $167,190 $ 55,284 $ 15,743
Average outstanding(1)................. $ 64,099 $111,237 $ 35,514 $ 12,231
Number of loans outstanding.......... 4,112 2,918 1,368 372
Gross losses(2)...................... $ 159 $ 81 $ 129 $ 88
Loan recoveries...................... $ 0 $ 47 $ 0 $ 0
-------- -------- -------- ---------
Net loan charge-offs................. $ 159 $ 34 $ 129 $ 88
Net loan charge-offs as a percentage
of servicing portfolio at period end. 0.06% 0.02% 0.23% 0.56%
Net loan charge-offs as a percentage
of average outstanding............... 0.07% 0.03% 0.36% 0.72%
</TABLE>
- --------------------------------------------------
(1) "Average outstanding" presented is the arithmetic average of the principal
balances of the loans in the Originators' servicing portfolio outstanding at
the opening and closing of business for such period.
(2) "Gross losses" means the outstanding principal balance plus accrued but
unpaid interest on liquidated mortgage loans.
While the above delinquency and foreclosure and loan charge-off
experiences are typical of the Originators' experiences at the dates for the
periods indicated, there can be no assurance that the delinquency and
foreclosure and loan charge-off experiences on the Mortgage Loans will be
similar. Accordingly, the information should not be considered to reflect the
credit quality of the Mortgage Loans included in the Trust, or as a basis of
assessing the likelihood, amount or severity of losses on the Mortgage Loans.
The statistical data in the tables is based on all of the loans in the
Originators' servicing portfolio. The Mortgage Loans, in general, may have
characteristics which distinguish them from the majority of the loans in the
Originators' servicing portfolio.
PREPAYMENT AND YIELD CONSIDERATIONS
The weighted average life of, and, if purchased at other than par,
the yield to maturity on, a Class A Certificate will be directly related to
the rate of payment of principal of the Mortgage Loans, including for this
purpose voluntary payment in full of Mortgage Loans prior to stated maturity,
liquidations due to defaults, casualties and condemnations, and repurchases of
or substitutions for Mortgage Loans by ABC or an affiliate of ABC as required
or permitted under the Pooling and Servicing Agreement or the Unaffiliated
Seller's Agreement.
The actual rate of principal prepayments on pools of mortgage loans
is influenced by a variety of economic, tax, geographic, demographic, social,
legal and other factors and has fluctuated considerably in recent years. In
addition, the rate of principal prepayments may differ among pools of mortgage
loans at any time because of specific factors relating to the mortgage loans
in the particular pool, including, among other things, the age of the mortgage
loans, the geographic locations of the properties securing the loans and the
extent of the mortgagors' equity in such properties, and changes in the
mortgagors' housing needs, job transfers and unemployment.
<PAGE>
The rate of prepayments with respect to conventional mortgage loans
has fluctuated significantly in recent years. In general, if prevailing
interest rates fall significantly below the interest rates at the time of
origination, mortgage loans may be subject to higher prepayment rates than if
prevailing rates remain at or above those at the time such mortgage loans were
originated. Conversely, if prevailing interest rates rise appreciably above
the interest rates at the time of origination, mortgage loans may experience a
lower prepayment rate than if prevailing rates remain at or below those at the
time such mortgage loans were originated. However, there can be no assurance
that the Mortgage Loans will conform to the prepayment experience of
conventional mortgage loans or to any past prepayment experience or any
published prepayment forecast. No assurance can be given as to the level of
prepayments on Mortgage Loans that the Trust Fund will experience.
As indicated above, if purchased at other than par, the yield to
maturity on a Class A Certificate will be affected by the rate of the payment
of principal on the Mortgage Loans. If the actual rate of payments on the
Mortgage Loans is slower than the rate anticipated by an investor who
purchases a Class A Certificate at a discount, the actual yield to such
investor will be lower than such investor's anticipated yield. If the actual
rate of payments on the Mortgage Loans is faster than the rate anticipated by
an investor who purchases a Class A Certificate at a premium, the actual yield
to such investor will be lower than such investor's anticipated yield. Because
the Lockout Certificates do not receive (unless the Certificate Principal
Balances of the Class A Certificates, other than the Lockout Certificates,
have been reduced to zero or unused Pre-Funding Account moneys are distributed
to the Holders of the Class A Certificates
S-38
<PAGE>
as described herein) any portion of principal payments prior to the Distribution
Date occurring in March 2001 and will receive (unless the Certificate Principal
Balances of the Class A Certificates, other than the Lockout Certificates, have
been reduced to zero) a disproportionately small or large portion of the Class A
Principal Distribution Amount thereafter, the weighted average life of the
Lockout Certificates will be longer or shorter than would otherwise be the case,
and the effect on the market value of the Lockout Certificates of changes in
market interest rates or market yields for similar securities may be greater or
lesser than for the other Classes of Class A Certificates entitled to principal
distributions.
The final distribution date is expected to be January 25, 2013 for
the Class A-1 Certificates, January 25, 2013 for the Class A-2 Certificates,
January 25, 2014 for the Class A-3 Certificates, September 25, 2020 for the
Class A-4 Certificates, June 25, 2029 for the Class A-5 Certificates and June
25, 2029 for the Class A-6 Certificates (each, a "Final Scheduled Maturity
Date"). Each such Final Scheduled Maturity Date was calculated using the
following methodolgy assumptions: (i) with respect to the Class A-1
Certificates, the Class A-2 Certificates, the Class A-3 Certificates and the
Class A-4 Certificates, (x) the Modeling Assumptions (as defined below), (y)
0% of the Prepayment Assumption (as defined below) and (z) no Net Monthly
Excess Cashflow is applied as an accelerated payment of principal on the Class
A Certificates, and (ii) with respect to the Class A-5 Certificates and the
Class A-6 Certificates, such Final Scheduled Maturity Date is 13 months after
the final stated maturity date of the Mortgage Loan having the latest maturity
date, assuming a Subsequent Mortgage Loan having a final stated maturity date
of May 2028 is purchased by the Trust. The weighted average life of the Class
A Certificates is likely to be shorter than would be the case if payments
actually made on the Mortgage Loans conformed to the foregoing assumptions,
and the final Distribution Date with respect to any Class of the Class A
Certificates could occur significantly earlier than the Final Scheduled
Maturity Date because (i) prepayments (including, for this purpose,
prepayments attributable to foreclosure, liquidation, repurchase and the like)
on Mortgage Loans are likely to occur, (ii) with respect to the Class A-5
Certificates and the Class A-6 Certificates, thirteen months have been added
to obtain the Final Scheduled Maturity Date above, (iii) the
overcollateralization provisions of the Trust result in the application of
excess interest to the payment of principal and (iv) the Servicer may cause a
liquidation of the Trust Fund when the aggregate outstanding principal amount
of the Mortgage Loans is less than 10% of the sum of (a) the Cut-Off Date
Aggregate Principal Balance and (b) the Original Pre-Funded Amount.
"Weighted average life" refers to the average amount of time that
will elapse from the date of issuance of a security until each dollar of
principal of such security is scheduled to be repaid to an investor. The
weighted average life of the Class A Certificates will be influenced by the
rate at which principal of the Mortgage Loans is paid, which may be in the
form of scheduled amortization or prepayments (for this purpose, the term
"prepayment" includes liquidations due to default).
Prepayments on mortgage loans are commonly measured relative to a
prepayment model or standard. The model used in this Prospectus Supplement
("Home Equity Prepayment" or "HEP") is a prepayment assumption (the
"Prepayment Assumption") which represents an assumed rate of prepayment each
month relative to the then outstanding principal balance of a pool of mortgage
loans for the life of such mortgage loans. 23% HEP assumes a constant
prepayment rate of 2.3% per annum of the then outstanding principal balance of
the Mortgage Loans in the first month of the life of the Mortgage Loans and an
additional 2.3% per annum in each month thereafter up to and including the
tenth month. Beginning in the eleventh month and in each month thereafter
during the life of the Mortgage Loans, 23% HEP assumes a constant prepayment
rate of 23% per annum. As used in the table below, 0% Prepayment Assumption
assumes prepayment rates equal to 0% of the Prepayment Assumption, i.e., no
prepayments on the mortgage loans having the characteristics described below.
The Prepayment Assumption does not purport to be a historical description of
prepayment experience or a prediction of the anticipated rate of prepayment of
any pool of mortgage loans, including the related Mortgage Loans.
<PAGE>
The following table has been prepared on the basis of the following
assumptions (collectively, the "Modeling Assumptions"):
(i) The Mortgage Loans prepay at the indicated percentage of the
Prepayment Assumption, (ii) distributions on the Certificates are received in
cash on the 25th day of each month commencing in March 1998, (iii) no defaults
or delinquencies in, or modifications, waivers or amendments respecting the
payment by the mortgagors of principal and interest on the Mortgage Loans
occur, (iv) scheduled payments are assumed to be received on the last day of
each month commencing in February 1998 (or as set forth in the following
table) and prepayments represent payments in full of individual Mortgage Loans
and are assumed to be received on the last day of each month, commencing in
February 1998 (or as set forth in the following table) and include 30-days'
interest thereon, (v) the Class A-1 Pass-Through Rate remains constant at
5.8175% per annum, (vi) the Certificates are purchased on March 12, 1998,
(vii) the Specified Subordinated Amount is as set forth in the Pooling and
Servicing Agreement, and (viii) the Mortgage Pool consists of eighteen
Mortgage Loans having the following characteristics:
<TABLE>
<CAPTION>
Mortgage Net Original Remaining Remaining
Principal Interest Rate Mortgage Amortizing Term Amortizing Term Term to Maturity
Balance ($) (%) Interest Rate (%) (in months) (in months) (in months)
----------- ------------- ----------------- --------------- --------------- ----------------
<S> <C> <C> <C> <C> <C>
31,980,461.71 11.467 10.967 360 359 179
1,018,995.89 11.793 11.293 76 75 75
3,140,693.36 11.264 10.764 120 119 119
11,375,608.06 11.428 10.928 179 178 178
12,963,047.73 11.227 10.727 240 239 239
20,929,190.92 11.163 10.663 358 357 357
1,589,025.52 16.425 15.925 360 359 179
938,590.02 15.921 15.421 93 93 93
11,064,386.79 15.943 15.443 180 179 179
3,366,364.39 (1) 11.467 10.967(2) 360 360 180
107,262.72 (1) 11.793 11.293(2) 76 76 76
330,599.30 (1) 11.264 10.764(2) 120 120 120
1,197,432.43 (1) 11.428 10.928(2) 179 179 179
1,364,531.34 (1) 11.227 10.727(2) 240 240 240
2,203,072.73 (1) 11.163 10.663(2) 358 358 358
167,265.84 (1) 16.425 15.925(2) 360 360 180
98,798.95 (1) 15.921 15.421(2) 93 93 93
1,164,672.29 (1) 15.943 15.443(2) 180 180 180
</TABLE>
- --------------------------------------------------------------------------------
(1) Assumes transfer to the Trust in March 1998 of Mortgage Loans with the
characteristics set forth above. The actual characteristics of such Mortgage
Loans may vary from such assumptions. Scheduled payments are assumed to be
received on the last day of each month commencing in March 1998. Prepayments
are assumed to be received on the last day of each month commencing in March
1998 and include 30 days' interest thereon.
(2) During the first Due Period, interest is assumed to be available for payment
to the Class A Certificates at the applicable net mortgage interest rate.
S-39
<PAGE>
Based upon the foregoing Modeling Assumptions, the tables below
indicate the weighted average life and earliest retirement date of the Class A
Certificates assuming that the Mortgage Loans prepay according to the
indicated percentages of the Prepayment Assumption.
Weighted Average Lives
Class A-1 Certificates
<TABLE>
<CAPTION>
Prepayment Weighted Average Earliest Retirement
Assumption (HEP) Life in Years (1)(2) Date (2)
---------------- -------------------- -------------------
<S> <C> <C> <C>
0% 7.511 06/25/2012
18% 1.109 06/25/2000
20% 1.027 03/25/2000
23% 0.928 12/25/99
26% 0.850 10/25/99
30% 0.770 08/25/99
</TABLE>
Class A-2 Certificates
<TABLE>
<CAPTION>
Prepayment Weighted Average Earliest Retirement
Assumption (HEP) Life in Years (1)(2) Date (2)
---------------- -------------------- -------------------
<S> <C> <C> <C>
0% 14.781 01/25/2013
18% 2.600 02/25/2001
20% 2.368 11/25/2000
23% 2.091 07/25/2000
26% 1.872 04/25/2000
30% 1.646 01/25/2000
</TABLE>
Class A-3 Certificates
<TABLE>
<CAPTION>
Prepayment Weighted Average Earliest Retirement
Assumption (HEP) Life in Years (1)(2) Date (2)
---------------- -------------------- -------------------
<S> <C> <C> <C>
0% 14.894 04/25/2013
18% 4.011 07/25/2003
20% 3.610 12/25/2002
23% 3.136 04/25/2002
26% 2.771 10/25/2001
30% 2.396 03/25/2001
</TABLE>
S-40
<PAGE>
Class A-4 Certificates
<TABLE>
<CAPTION>
Prepayment Weighted Average Earliest Retirement
Assumption (HEP) Life in Years (1)(2) Date (2)
---------------- -------------------- -------------------
<S> <C> <C> <C>
0% 18.515 10/25/2020
18% 6.830 04/25/2007
20% 5.920 02/25/2006
23% 5.010 05/25/2004
26% 4.355 06/25/2003
30% 3.697 08/25/2002
</TABLE>
Class A-5 Certificates
<TABLE>
<CAPTION>
Prepayment Weighted Average Earliest Retirement
Assumption (HEP) Life in Years (1)(3) Date (3)
---------------- -------------------- -------------------
<S> <C> <C> <C>
0% 24.418 10/25/2022
18% 10.293 08/25/2008
20% 9.330 09/25/2007
23% 7.938 07/25/2006
26% 6.816 08/25/2005
30% 5.712 08/25/2004
</TABLE>
Class A-6 Certificates
<TABLE>
<CAPTION>
Prepayment Weighted Average Earliest Retirement
Assumption (HEP) Life in Years (1)(2) Date (2)
---------------- -------------------- -------------------
<S> <C> <C> <C>
0% 11.292 01/25/2013
18% 6.903 01/25/2013
20% 6.726 01/25/2013
23% 6.490 01/25/2013
26% 6.290 01/25/2013
30% 6.072 10/25/2011
</TABLE>
- --------------------------------------------------------------------------------
(1) The weighted average life of each Class of Class A Certificates is
determined by (a) multiplying the amount of each principal payment by
the number of years from the Closing Date to the related Distribution
Date; (b) adding the results; and (c) dividing the sum by the
Original Certificate Principal Balance.
(2) Determined assuming no early termination of the Trust Fund occurs.
(3) Determined assuming early termination of the Trust Fund occurs as stated
herein.
----------------------
There is no assurance that prepayments will occur or, if they do
occur, that they will occur at any percentage of HEP.
<PAGE>
The Pooling and Servicing Agreement provides that none of the
Certificate Insurer, the Trust, the Trustee, the Seller, the Depositor, the
Originators or the Servicer will be liable to any Certificateholder or Holder
for any loss or damage incurred by such Certificateholder or Holder as a
result of any difference in the rate of return received by such
Certificateholder or Holder as compared to the applicable Pass-Through Rate,
with respect to any Holder of Class A Certificates upon reinvestments of the
funds received in connection with any premature repayment of principal on the
Certificates, including any such repayment resulting from any prepayment by
the Mortgagor, any liquidation of such Mortgage Loan, or any repurchase of or
substitution for any Mortgage Loan by the Seller or the Servicer.
DESCRIPTION OF THE CERTIFICATES
General
The Class A-1 Certificates, the Class A-2 Certificates, the Class A-3
Certificates, the Class A-4 Certificates, the Class A-5 Certificates and the
Class A-6 Certificates (collectively, the "Class A Certificates") will be
issued by the Trust. In addition to the Class A Certificates, the Trust will
also issue the Class R Certificates. The Class R Certificates have been
designated as the single "residual interest" for purposes of the Code. The
Class R Certificates are not being offered hereby.
S-41
<PAGE>
Each Class A Certificate represents a certain fractional undivided
ownership interest in the Trust Fund created and held pursuant to the Pooling
and Servicing Agreement, subject to the limits and the priority of
distribution described therein. The Trust Fund consists of (a) the Mortgage
Loans, together with the mortgage files relating thereto and all collections
thereon and proceeds thereof collected after the Cut-Off Date (other than
monthly payments due on each Mortgage Loan up to and including any Due Date
occurring on or prior to January 31, 1998), (b) such assets as from time to
time are identified as REO Property and collections thereon and proceeds
thereof, (c) assets that are deposited in the Accounts (as defined herein),
including amounts on deposit in the Accounts and invested in accordance with
the Pooling and Servicing Agreement ("Permitted Investments"), (d) the
Trustee's rights with respect to the Mortgage Loans under all insurance
policies required to be maintained pursuant to the Pooling and Servicing
Agreement and any insurance proceeds, (e) Liquidation Proceeds and (f)
released mortgaged property proceeds. In addition, the Seller will cause the
Certificate Insurer to issue the Certificate Insurance Policy under which it
will guarantee payments to the Class A Certificateholders as described herein.
Book-Entry Registration
The Class A Certificates will be issued only in book-entry form, in
denominations of $1,000 initial principal balance and integral multiples of
$1,000 in excess thereof, except that one Class A Certificate of each Class may
be issued in a different amount.
The Beneficial Owners may elect to hold their Class A Certificates
through DTC in the United States, or CEDEL or Euroclear if they are
participants in such systems ("Participants"), or indirectly through
organizations which are Participants in such systems. The Book-Entry
Certificates will be issued in one or more certificates per Class of Class A
Certificates which in the aggregate equal the Certificate Principal Balance of
such Class A Certificates and will initially be registered in the name of
Cede, the nominee of DTC. CEDEL and Euroclear will hold omnibus positions on
behalf of their Participants through customers' securities accounts in CEDEL's
and Euroclear's names on the books of their respective depositaries which in
turn will hold such positions in customers' securities accounts in the
depositaries' names on the books of DTC. Chase will act as depositary for
CEDEL and Morgan will act as depositary for Euroclear (in such capacities,
individually the "Relevant Depositary" and collectively the "European
Depositaries"). Investors may hold such beneficial interests in the Book-Entry
Certificates in minimum denominations representing principal amounts of
$1,000. Except as described below, no Beneficial Owner will be entitled to
receive a physical certificate representing such Certificate (a "Definitive
Certificate"). Unless and until Definitive Certificates are issued, it is
anticipated that the only "Holder" of such Class A Certificates will be Cede,
as nominee of DTC. Beneficial Owners will not be Holders as that term is used
in the Pooling and Servicing Agreement. Beneficial Owners are only permitted
to exercise their rights indirectly through Participants and DTC.
The Beneficial Owner's ownership of a Book-Entry Certificate will be
recorded on the records of the brokerage firm, bank, thrift institution or
other financial intermediary (each, a "Financial Intermediary") that maintains
the Beneficial Owner's account for such purpose. In turn, the Financial
Intermediary's Ownership of such Book-Entry Certificate will be recorded on
the records of DTC (or of a participating firm that acts as agent for the
Financial Intermediary, whose interest will in turn be recorded on the records
of DTC, if the Beneficial Owner's Financial Intermediary is not a DTC
Participant and on the records of CEDEL or Euroclear, as appropriate).
<PAGE>
DTC is a limited purpose trust company organized under the laws of
the State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the New York UCC and a "clearing agency"
registered pursuant to Section 17A of the Exchange Act. DTC was created to
hold securities for its Participants and to facilitate the clearance and
settlement of securities transactions between Participants through electronic
book-entries, thereby eliminating the need for physical movement of
certificates. Participants include securities brokers and dealers (including
the Underwriter), banks, trust companies and clearing corporations. Indirect
access to the DTC system also is available to others such as banks, brokers,
dealers and trust companies that clear through or maintain a custodial
relationship with a Participant, either directly or indirectly ("Indirect
Participants").
Under the rules, regulations and procedures creating and affecting
DTC and its operations (the "Rules"), DTC is required to make book-entry
transfers of Book-Entry Certificates, such as the Class A Certificates, among
Participants on whose behalf it acts with respect to the Book-Entry
Certificates and to receive and transmit distributions of principal of and
interest on the Book-Entry Certificates. Participants and Indirect
Participants with which Beneficial Owners have accounts with respect to the
Book-Entry Certificates similarly are required to make book-entry transfers
and receive and transmit such payments on behalf of their respective
Beneficial Owners.
Beneficial Owners that are not Participants or Indirect Participants
but desire to purchase, sell or otherwise transfer ownership of, or other
interests in, Book-Entry Certificates may do so only through Participants and
Indirect Participants. In addition, Beneficial Owners will receive all
distributions of principal and interest from the Trustee, or a paying agent on
behalf of the Trustee, through DTC Participants. DTC will forward such
distributions to its Participants, which thereafter will forward them to
Indirect Participants or Beneficial Owners. Beneficial Owners will not be
recognized by the Trustee, the Servicer or any paying agent as
Certificateholders, as such term is used in the Pooling and Servicing
Agreement, and Beneficial Owners will be permitted to exercise the rights of
Certificateholders only indirectly through DTC and its Participants.
Because of time zone differences, credits of securities received in
CEDEL or Euroclear as a result of a transaction with a Participant will be
made during subsequent securities settlement processing and dated the business
day following the DTC settlement date. Such credits or any transactions in
such securities settled during such processing will be reported to the
relevant Euroclear or CEDEL Participants on such business day. Cash received
in CEDEL or Euroclear as a result of sales of securities by or through a CEDEL
Participant (as defined below) or Euroclear Participant (as defined below) to
a DTC Participant will be received with value on the DTC settlement date but
will be available in the relevant CEDEL or Euroclear cash account only as of
the business day following settlement in DTC. For information with respect to
tax documentation procedures relating to the Certificates, see "Certain
Federal Income Tax Consequences -- REMIC Securities" in the Prospectus.
S-42
<PAGE>
Transfers between Participants will occur in accordance with DTC
rules. Transfers between CEDEL Participants and Euroclear Participants will
occur in accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through CEDEL
Participants or Euroclear Participants, on the other, will be effected in DTC
in accordance with DTC rules on behalf of the relevant European international
clearing system by the Relevant Depositary; however, such cross-market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in such system in accordance
with its rules and procedures and within its established deadlines (European
time). The relevant European international clearing system will, if the
transaction meets its settlement requirements, deliver instructions to the
Relevant Depositary to take action to effect final settlement on its behalf by
delivering or receiving securities in DTC, and making or receiving payment in
accordance with normal procedures for same day funds settlement applicable to
DTC. CEDEL Participants and Euroclear Participants may not deliver
instructions directly to the European Depositaries.
CEDEL is incorporated under the laws of Luxembourg as a professional
depository. CEDEL holds securities for its participant organizations ("CEDEL
Participants") and facilitates the clearance and settlement of securities
transactions between CEDEL Participants through electronic book-entry changes
in accounts of CEDEL Participants, thereby eliminating the need for physical
movement of certificates. Transactions may be settled in CEDEL in any of 28
currencies, including United States dollars. CEDEL provides to its CEDEL
Participants, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. CEDEL interfaces with domestic markets in several
countries. As a professional depository, CEDEL is subject to regulation by the
Luxembourg Monetary Institute. CEDEL Participants are recognized financial
institutions around the world, including underwriters, securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations. Indirect access to CEDEL is also available to others, such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a CEDEL Participant, either directly or
indirectly.
Euroclear was created in 1968 to hold securities for participants of
Euroclear ("Euroclear Participants") and to clear and settle transactions
between Euroclear Participants through simultaneous electronic book-entry
delivery against payment, thereby eliminating the need for physical movement
of certificates and any risk from lack of simultaneous transfers of securities
and cash. Transactions may now be settled in any of 31 currencies, including
United States dollars. Euroclear includes various other services, including
securities lending and borrowing and interfaces with domestic markets in
several countries generally similar to the arrangements for cross-market
transfers with DTC described above. Euroclear is operated by the Brussels,
Belgium office of Morgan Guaranty Trust Company of New York (the "Euroclear
Operator"), under contract with Euroclear Clearance Systems S.C., a Belgian
cooperative corporation (the "Cooperative"). All operations are conducted by
the Euroclear Operator, and all Euroclear Securities clearance accounts and
Euroclear cash accounts are accounts with the Euroclear Operator, not the
Cooperative. The Cooperative establishes policy for Euroclear on behalf of
Euroclear Participants. Euroclear Participants include banks (including
central banks), securities brokers and dealers and other professional
financial intermediaries. Indirect access to Euroclear is also available to
other firms that clear through or maintain a custodial relationship with a
Euroclear Participant, either directly or indirectly.
<PAGE>
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it
is regulated and examined by the Board of Governors of the Federal Reserve
System and the New York State Banking Department, as well as the Belgian
Banking Commission.
Securities clearance accounts and cash accounts with the Euroclear
Operator are governed by the Terms and Conditions Governing Use of Euroclear
and the related Operating Procedures of the Euroclear System and applicable
Belgian law (collectively, the "Terms and Conditions"). The Terms and
Conditions govern transfers of securities and cash within Euroclear,
withdrawals of securities and cash from Euroclear, and receipts of payments
with respect to securities in Euroclear. All securities in Euroclear are held
on a fungible basis without attribution of specific certificates to specific
securities clearance accounts. The Euroclear Operator acts under the Terms and
Conditions only on behalf of Euroclear Participants, and has no record of or
relationship with persons holding through Euroclear Participants.
Distributions on the Book-Entry Certificates will be made on each
Distribution Date by the Trustee to Cede, as nominee of DTC. DTC will be
responsible for crediting the amount of such payments to the accounts of the
applicable DTC Participants in accordance with DTC's normal procedures. Each
DTC Participant will be responsible for disbursing such payment to the
Beneficial Owners of the Book-Entry Certificates that it represents and to
each Financial Intermediary for which it acts as agent. Each such Financial
Intermediary will be responsible for disbursing funds to the Beneficial Owners
of the Book-Entry Certificates that it represents.
S-43
<PAGE>
Under a book-entry format, Beneficial Owners of the Book-Entry
Certificates may experience some delay in their receipt of payments, since
such payments will be forwarded by the Trustee to Cede, as nominee of DTC.
Distributions with respect to Class A Certificates held through CEDEL or
Euroclear will be credited to the cash accounts of CEDEL Participants or
Euroclear Participants in accordance with the relevant system's rules and
procedures, to the extent received by the Relevant Depositary. Such
distributions will be subject to tax reporting in accordance with relevant
United States tax laws and regulations. Because DTC can only act on behalf of
Financial Intermediaries, the ability of a Beneficial Owner to pledge
Book-Entry Certificates to persons or entities that do not participate in the
Depository system, or otherwise take actions in respect of such Book-Entry
Certificates, may be limited due to the lack of physical certificates for such
Book-Entry Certificates. In addition, issuance of the Book-Entry Certificates
in book-entry form may reduce the liquidity of such Certificates in the
secondary market since certain potential investors may be unwilling to
purchase Certificates for which they cannot obtain physical certificates.
Monthly and annual reports on the Trust provided by the Trustee to
Cede, as nominee of DTC, may be made available to Beneficial Owners upon
request, in accordance with the rules, regulations and procedures creating and
affecting the Depository, and to the Financial Intermediaries to whose DTC
accounts the Book-Entry Certificates of such Beneficial Owners are credited.
DTC has advised the Depositor and the Servicer that it will take any
action permitted to be taken by a Certificateholder under the Pooling and
Servicing Agreement only at the direction of one or more Participants to whose
accounts with DTC the Book-Entry Certificates are credited. Additionally, DTC
has advised the Depositor that it will take such actions with respect to
specified percentages of voting rights only at the direction of and on behalf
of Participants whose holdings of Book-Entry Certificates evidence such
specified percentages of voting rights. DTC may take conflicting actions with
respect to percentages of voting rights to the extent that Participants whose
holdings of Book-Entry Certificates evidence such percentages of voting rights
authorize divergent action.
None of the Depositor, the Servicer, the Certificate Insurer 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 Certificates held by Cede, as nominee for DTC, or for maintaining,
supervising or reviewing any records relating to such beneficial ownership
interests.
Although DTC, CEDEL and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of Certificates among Participants
of DTC, CEDEL and Euroclear, they are under no obligation to perform or
continue to perform such procedures and such procedures may be discontinued at
any time.
<PAGE>
Calculation of LIBOR
On the second business day preceding each Distribution Date or, in
the case of the March 25, 1998 Distribution Date, on the second business day
preceding the Closing Date (each such date, an "Interest Determination Date"),
the Trustee will determine the London interbank offered rate for one-month
U.S. dollar deposits ("LIBOR") for the next Accrual Period for the Adjustable
Rate Certificates on the basis of the offered rates of the Reference Banks for
one-month U.S. dollar deposits, as such rates appear on Telerate Page 3750, as
of 11:00 a.m. (London time) on such Interest Determination Date. As used in
this section, "business day" means a day on which banks are open for dealing
in foreign currency and exchange in London and New York City; "Telerate Page
3750" means the display designated as page 3750 on the Telerate Service (or
such other page as may replace page on that service for the purpose of
displaying London interbank offered rates of major banks); and "Reference
Banks" means leading banks selected by the Trustee and engaged in transactions
in Eurodollar deposits in the international Eurocurrency market (i) with an
established place of business in London, (ii) whose quotations appear on the
Reuters' Screen LIBO Page on the Interest Determination Date in question,
(iii) which have been designated as such by the Trustee and (iv) not
controlling, controlled by, or under common control with, the Servicer or the
Trustee.
On each Interest Determination Date, LIBOR for the related Accrual
Period for the Adjustable Rate Certificates will be established by the Trustee
as follows:
(a) If on such Interest Determination Date two or more Reference
Banks provide such offered quotations, LIBOR for the related
Accrual Period for the Adjustable Rate Certificates shall be
the arithmetic mean of such offered quotations (rounded
upwards if necessary to the nearest whole multiple of
1/16%).
(b) If on such Interest Determination Date fewer than two
Reference Banks provide such offered quotations, LIBOR for
the related Actual Period for the Adjustable Rate
Certificates shall be the higher of (x) LIBOR as determined
on the previous Interest Determination Date and (y) the
Reserve Interest Rate. The "Reserve Interest Rate" shall be
the rate per annum that the Trustee determines to be either
(i) the arithmetic mean (rounded upwards if necessary to the
nearest whole multiple of 1/16%) of the one-month U.S.
dollar lending rates which New York City banks selected by
the Trustee are quoting on the relevant Interest
Determination Date to the principal London offices of
leading banks in the London interbank market or, in the
event that the Trustee can determine no such arithmetic
mean, (ii) the lowest one-month U.S. dollar lending rate
which New York City banks selected by the Trustee are
quoting on such Interest Determination Date to leading
European banks.
S-44
<PAGE>
The establishment of LIBOR on each Interest Determination Date by the
Trustee and the Trustee's calculation of the rate of interest applicable to
the Adjustable Rate Certificates for the related Accrual Period shall (in the
absence of manifest error) be final and binding.
Definitive Certificates
The Class A Certificates, which will be issued initially as
Book-Entry Certificates, will be converted to Definitive Certificates and
reissued to Beneficial Owners or their nominees, rather than to DTC or its
nominee, only if (a) the Depository or the Servicer advises the Trustee in
writing that DTC is no longer willing or able to discharge properly its
responsibilities as depository with respect to the Book-Entry Certificates and
the Depository or the Servicer is unable to locate a qualified successor or
(b) the Trustee, at its option, elects to terminate the book-entry system
through DTC.
Upon the occurrence of any event described in the immediately
preceding paragraph, DTC will be required to notify all Participants of the
availability through DTC of Definitive Certificates. Upon delivery of
Definitive Certificates, the Trustee will reissue the Book-Entry Certificates
as Definitive Certificates to Beneficial Owners. Distributions of principal
of, and interest on, the Book-Entry Certificates will thereafter be made by
the Trustee, or a paying agent on behalf of the Trustee, directly to holders
of Definitive Certificates in accordance with the procedures set forth in the
Pooling and Servicing Agreement.
Definitive Certificates will be transferable and exchangeable at the
offices of the Trustee or the certificate registrar. No service charge will be
imposed for any registration of transfer or exchange, but the Trustee may
require payment of a sum sufficient to cover any tax or other governmental
charge imposed in connection therewith.
Assignment of Mortgage Loans
Pursuant to an Unaffiliated Seller's Agreement among the Originators,
the Depositor and the Seller (the "Unaffiliated Seller's Agreement"), the
Originators will sell, transfer, assign, set over and otherwise convey the
Mortgage Loans without recourse to the Seller and the Seller will sell,
transfer, assign, set over and otherwise convey the Mortgage Loans, including
all principal outstanding as of, and interest due after, the Cut-Off Date
without recourse to the Depositor on the Closing Date. Pursuant to the Pooling
and Servicing Agreement, the Depositor will sell, transfer, assign, set over
and otherwise convey without recourse to the Trustee in trust for the benefit
of the Certificateholders and the Certificate Insurer all right, title and
interest in and to each Mortgage Loan, including all principal outstanding as
of, and interest accrued after, the Cut-Off Date. Each such transfer will
convey all right, title and interest in and to (a) principal outstanding as of
the Cut-Off Date, and (b) interest due on each such Mortgage Loan after the
Cut-Off Date; provided, however, that the Seller will not convey, and the
Seller reserves and retains all its right, title and interest in and to, (i)
principal (including principal prepayments in full and curtailments (i.e.,
partial prepayments)) received on each such Mortgage Loan on or prior to the
Cut-Off Date and (ii) interest due on each Mortgage Loan on or prior to the
Cut-Off Date.
<PAGE>
In connection with such transfer and assignment, the Depositor will
cause to be delivered to the Trustee on the Closing Date the following
documents (collectively, with respect to each Mortgage Loan, the "Trustee's
Mortgage File") with respect to each Mortgage Loan:
(a) The original Mortgage Note, endorsed without recourse in
blank by the related Originator, including all intervening
endorsements showing a complete chain of endorsement;
(b) The related original Mortgage with evidence of recording
indicated thereon or a copy thereof certified by the applicable
recording office;
(c) The recorded mortgage assignment(s), or copies thereof
certified by the applicable recording office, if any, showing a
complete chain of assignment from the originator of the related
Mortgage Loan to the related Originator (which assignment may, at
such Originator's option, be combined with the assignment referred to
in clause (d) below);
(d) A mortgage assignment in recordable form (which, if
acceptable for recording in the relevant jurisdiction, may be
included in a blanket assignment or assignments) of each Mortgage
from the related Originator to the Trustee;
(e) Originals of all assumption, modification and
substitution agreements in those instances where the terms or
provisions of a Mortgage or Mortgage Note have been modified or such
Mortgage or Mortgage Note has been assumed; and
S-45
<PAGE>
(f) An original title insurance policy (or (A) a copy of the
title insurance policy, or (B) a binder thereof or copy of such
binder together with a certificate from the Originator that the
original Mortgage has been delivered to the title insurance company
that issued such binder for recordation).
Pursuant to the Pooling and Servicing Agreement, the Trustee agrees
to execute and deliver on or prior to the Closing Date an acknowledgment of
receipt of the Certificate Insurance Policy and, for each Mortgage Loan, the
original Mortgage Note, item (a) above, with respect to the Mortgage Loans
(with any exceptions noted). The Trustee agrees, for the benefit of the
Certificateholders and the Certificate Insurer, to review (or cause to be
reviewed) each Trustee's Mortgage File within 30-days after the Closing Date
(or, with respect to any Qualified Substitute Mortgage Loan, within 30-days
after the receipt by the Trustee thereof) and to deliver a certification
generally to the effect that, as to each Mortgage Loan listed in the Mortgage
Loan Schedule, (a) all documents required to be delivered to it pursuant to
the Pooling and Servicing Agreement are in its possession, (b) each such
document has been reviewed by it and has not been mutilated, damaged, torn or
otherwise physically altered, appears regular on its face and relates to such
Mortgage Loan, and (c) based on its examination and only as to the foregoing
documents, certain information set forth on the Mortgage Loan Schedule
accurately reflects the information set forth in the Trustee's Mortgage File
delivered on such date.
If the Trustee, during the process of reviewing the Trustee's
Mortgage Files, finds any document constituting a part of a Trustee's Mortgage
File which is not executed, has not been received or is unrelated to the
Mortgage Loans, or that any Mortgage Loan does not conform to the requirements
above or to the description thereof as set forth in the Mortgage Loan
Schedule, the Trustee shall promptly so notify the Servicer, the Seller and
the Certificate Insurer in writing with details thereof. The Seller agrees to
use reasonable efforts to cause to be remedied a material defect in a document
constituting part of a Trustee's Mortgage File of which it is so notified by
the Trustee. If, however, within 60 days after the Trustee's notice to it
respecting such defect the Seller has not caused to be remedied the defect and
the defect materially and adversely affects the interest of the Holders in the
Mortgage Loan or the interests of the Certificate Insurer, the Seller or the
related Originator will either (a) substitute in lieu of such Mortgage Loan a
Qualified Substitute Mortgage Loan and, if the then outstanding principal
balance of such Qualified Substitute Mortgage Loan is less than the principal
balance of such Mortgage Loan as of the date of such substitution plus accrued
and unpaid interest thereon, deliver to the Servicer as part of the related
monthly remittance remitted by the Servicer the amount of any such shortfall
(the "Substitution Adjustment") or (b) purchase such Mortgage Loan at a price
equal to the outstanding principal balance of such Mortgage Loan as of the
date of purchase, plus the greater of (i) all accrued and unpaid interest
thereon and (ii) 30-days' interest thereon, computed at the related Mortgage
Interest Rate, net of the Servicing Fee if the Servicer is effecting the
repurchase, plus the amount of any unreimbursed Servicing Advances made by the
Servicer, which purchase price shall be deposited in the Certificate Account
on the next succeeding Servicer Distribution Date after deducting therefrom
any amounts received in respect of such repurchased Mortgage Loan or Loans and
being held in the Certificate Account for future distribution to the extent
such amounts have not yet been applied to principal or interest on such
Mortgage Loan (see " -- Flow of Funds" below); provided, however, that the
Seller may not purchase any Mortgage Loan that is not in default or as to
which no default is imminent pursuant to clause (b) preceding unless the
Seller has theretofore caused to be delivered to the Trustee an opinion of
counsel knowledgeable in federal income tax matters which states that such a
purchase would not constitute a prohibited transaction under the Code.
<PAGE>
A "Qualified Substitute Mortgage Loan" is defined in the Pooling and
Servicing Agreement as any mortgage loan or mortgage loans substituted for a
deleted Mortgage Loan and which, among other things, (i) relates or relate to
a detached one-family residence or to the same type of residential dwelling as
the deleted Mortgage Loan and in each case has or have the same or a better
lien priority as the deleted Mortgage Loan and has the same occupancy status
or is an owner-occupied Mortgaged Property, (ii) matures or mature no later
than (and not more than one year earlier than) the deleted Mortgage Loan,
(iii) has or have a Loan-to-Value Ratio ("LTV") or LTVs at the time of such
substitution no higher than the LTV of the deleted Mortgage Loan, (iv) has or
have a CLTV or CLTVs at the time of such substitution no higher than the CLTV
of the deleted Mortgage Loan, (v) has or have a principal balance or principal
balances (after application of all payments received on or prior to the date
of substitution) not substantially less and not more than the principal
balance of the deleted Mortgage Loan as of such date, (vi) satisfies or
satisfy the criteria set forth from time to time in the definition of
"qualified replacement mortgage" at Section 860G(a)(4) of the Code (or any
successor statute thereto), (vii) has or have a mortgage interest rate of at
least the same interest rate as the deleted Mortgage Loan and (viii) complies
or comply as of the date of substitution with each representation and warranty
set forth in the Pooling and Servicing Agreement.
Representations and Warranties of the Seller
The Seller will represent, among other things, with respect to each
Mortgage Loan, as of the Closing Date, the following:
1. The information set forth in the Mortgage Loan Schedule
with respect to each Mortgage Loan is true and correct;
2. All of the original or certified documentation
constituting the Trustee's Mortgage Files (including all material
documents related thereto) has been or will be delivered to the
Trustee on the Closing Date or as otherwise provided in the
Unaffiliated Seller's Agreement;
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3. The Mortgaged Property consists of a single parcel of
real property separately assessed for tax purposes, upon which is
erected a detached or an attached one-family residence or a detached
two-to- six family dwelling, or an individual condominium unit in a
low-rise condominium, or an individual unit in a planned unit
development, or a commercial property, or a mixed use or multiple
purpose property. Such residence, dwelling or unit is not (i) a unit
in a cooperative apartment, (ii) a property constituting part of a
syndication, (iii) a time share unit, (iv) a property held in trust,
(v) a manufactured dwelling, (vi) a log-constructed home, or (vii) a
recreational vehicle;
4. Each Mortgage is a valid first or second lien on a fee
simple (or its equivalent under applicable state law) estate in the
real property securing the amount owed by the Mortgagor under the
Mortgage Note subject only to (i) the lien of current real property
taxes and assessments which are not delinquent, (ii) any related
first mortgage loan, (iii) covenants, conditions and restrictions,
rights of way, easements and other matters of public record as of the
date of recording of such Mortgage, such exceptions appearing of
record being acceptable to mortgage lending institutions generally in
the area wherein the property subject to the Mortgage is located or
specifically reflected in the appraisal obtained in connection with
the origination of the related Mortgage Loan obtained by the Seller
and (iv) other matters to which like properties are commonly subject
which do not materially interfere with the benefits of the security
intended to be provided by such Mortgage;
5. Immediately prior to the transfer and assignment by the
Seller to the Depositor, the Seller had good title to, and was the
sole owner of each Mortgage Loan, free of any interest of any other
person, and the Seller has transferred all right, title and interest
in each Mortgage Loan to the Depositor;
6. Each Mortgage Loan conforms, and all such Mortgage Loans
in the aggregate conform, to the description thereof set forth in this
Prospectus Supplement; and
7. All of the Mortgage Loans were originated in accordance
with the underwriting criteria set forth in this Prospectus Supplement.
<PAGE>
Pursuant to the Pooling and Servicing Agreement, upon the discovery
by any of the Certificateholders, the Seller, the Servicer, any Subservicer,
the Certificate Insurer, or the Trustee that any of the representations and
warranties contained in the Pooling and Servicing Agreement have been breached
in any material respect as of the Closing Date, with the result that the
interests of the Certificateholders in the related Mortgage Loan or the
interests of the Certificate Insurer were materially and adversely affected
(notwithstanding that such representation and warranty was made to the
Seller's best knowledge and the Seller lacked knowledge of such breach), the
party discovering such breach is required to give prompt written notice to the
other parties. Subject to certain provisions of the Pooling and Servicing
Agreement, within 60 days of the earlier to occur of the Seller's or the
applicable Originator's discovery or its receipt of notice of any such breach,
the Seller or the related Originator will (a) promptly cure such breach in all
material respects, (b) remove each Mortgage Loan which has given rise to the
requirement for action by the Seller or the related Originator, substitute one
or more Qualified Substitute Mortgage Loans and, if the outstanding principal
balance of such Qualified Substitute Mortgage Loans as of the date of such
substitution is less than the outstanding principal balance, plus accrued and
unpaid interest thereon, of the replaced Mortgage Loans as of the date of
substitution, deliver to the Trust Fund as part of the amounts remitted by the
Servicer on such Distribution Date the amount of such shortfall, or (c)
purchase such Mortgage Loan at a price equal to the principal balance of such
Mortgage Loan as of the date of purchase plus the greater of (i) all accrued
and unpaid interest thereon and (ii) 30-days' interest thereon computed at the
Mortgage Interest Rate, net of the Servicing Fee if ABC is the Servicer, plus
the amount of any unreimbursed Servicing Advances made by the Servicer, and
deposit such purchase price into the Certificate Account on the next
succeeding Servicer Distribution Date after deducting therefrom any amounts
received in respect of such repurchased Mortgage Loan or Mortgage Loans and
being held in the Certificate Account for future distribution to the extent
such amounts have not yet been applied to principal or interest on such
Mortgage Loan; provided, however, that any substitution of one or more
Qualified Substitute Mortgage Loans pursuant to clause (b) preceding must be
effected not later than two years after the Closing Date unless the Trustee
and the Certificate Insurer receive an opinion of counsel that such
substitution would not constitute a prohibited transaction for purposes of the
REMIC provisions of the Code. In addition, the Seller and the related
Originator shall be obligated to indemnify the Trustee, the Certificateholders
and the Certificate Insurer for any third-party claims arising out of a breach
by the Seller of representations or warranties regarding the Mortgage Loans.
The obligation of the Seller and the related Originator to cure such breach or
to substitute or purchase any Mortgage Loan and to indemnify constitute the
sole remedies respecting a material breach of any such representation or
warranty to the Certificateholders, the Trustee and the Certificate Insurer.
Payments on the Mortgage Loans
The Pooling and Servicing Agreement provides that the Servicer for
the benefit of the Certificateholders shall establish and maintain a
Collection Account (the "Collection Account"), which will generally be (i) an
account maintained with a depository institution or trust company whose long
term unsecured debt obligations are rated by each Rating Agency in one of its
two highest rating categories at the time of any deposit therein or (ii) trust
accounts maintained with a depository institution acceptable to each Rating
Agency (any such account, an "Eligible Account"). The Pooling and Servicing
Agreement permits the Servicer to direct any depository institution
maintaining the Collection Account to invest the funds in the Collection
Account in one or more Permitted Investments (as defined herein) that mature,
unless payable on demand, no later than the Business Day preceding the date on
which the Servicer is required to transfer the Servicer Remittance Amount from
the Collection Account to the Certificate Account, as described below.
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The Servicer is obligated to deposit or cause to be deposited in the
Collection Account on a daily basis, amounts representing the following
payments received and collections made by it after the Cut-Off Date (other
than in respect of Monthly Payments on the Mortgage Loans due on each Mortgage
Loan up to and including any Due Date occurring on or prior to January 31,
1998): (i) all payments on account of principal, including prepayments of
principal ("Principal Prepayments"); (ii) all payments on account of interest
on the Mortgage Loans, (iii) all Liquidation Proceeds and all Insurance
Proceeds to the extent such proceeds are not to be applied to the restoration
of the related Mortgaged Property or released to the related borrower in
accordance with the express requirements of law or in accordance with prudent
and customary servicing practices; (iv) all Net REO Proceeds; (v) all other
amounts required to be deposited in the Collection Account pursuant to the
Pooling and Servicing Agreement; and (vi) any amounts required to be deposited
in connection with net losses realized on investments of funds in the
Collection Account.
The Trustee will be obligated to set up an account (the "Certificate
Account", and together with the Collection Account, the "Accounts"), which is
required to be an Eligible Account, into which the Servicer will deposit or
cause to be deposited the Servicer Remittance Amount on the 20th day of each
month (the "Servicer Distribution Date").
The "Servicer Remittance Amount" for a Servicer Distribution Date is
equal to the sum, without duplication, of (i) all collections of principal and
interest on the Mortgage Loans (including Principal Prepayments, Net REO
Proceeds and Liquidation Proceeds, if any) collected by the Servicer during
the prior calendar month, (ii) all Periodic Advances made by the Servicer with
respect to payments due to be received on the Mortgage Loans on the related
Due Date and (iii) any other amounts required to be placed in the Collection
Account by the Servicer pursuant to the Pooling and Servicing Agreement but
excluding the following:
(a) amounts received on particular Mortgage Loans, with
respect to which the Servicer has previously made an unreimbursed
Periodic Advance, as late payments of interest, or as Net Liquidation
Proceeds, to the extent of such unreimbursed Periodic Advance;
(b) amounts received on a particular Mortgage Loan with
respect to which the Servicer has previously made an unreimbursed
Servicing Advance, to the extent of such unreimbursed Servicing
Advance;
(c) for such Servicer Distribution Date, the aggregate
Servicing Fee;
(d) all net income from Permitted Investments that is held
in the Collection Account for the account of the Servicer;
(e) all amounts in respect of late fees, assumption fees,
prepayment fees and similar fees;
(f) Net Foreclosure Profits; and
(g) certain other amounts which are reimbursable to the
Servicer, as provided in the Pooling and Servicing Agreement.
<PAGE>
The amounts described in clauses (a) through (g) above may be
withdrawn by the Servicer from the Collection Account on or prior to each
Servicer Distribution Date.
"Foreclosure Profits" as to any Servicer Distribution Date, are the
excess, if any, of (i) Net Liquidation Proceeds in respect of each Mortgage
Loan that became a Liquidated Mortgage Loan during the month immediately
preceding the month of such Servicer Distribution Date over (ii) the sum of
such unpaid Principal Balance of each such Liquidated Mortgage Loan plus
accrued and unpaid interest on the unpaid Principal Balance from the Due Date
to which interest was last paid by the Mortgagor.
"Insurance Proceeds" are proceeds paid by any insurer pursuant to any
insurance policy covering a Mortgage Loan to the extent such proceeds are not
applied to the restoration of the related Mortgaged Property or released to the
related Mortgagor. "Insurance Proceeds" do not include "Insured Payments."
"Liquidation Expenses" as to any Liquidated Mortgage Loan are all
expenses incurred by the Servicer in connection with the liquidation of such
Mortgage Loan, including, without duplication, unreimbursed expenses for real
property taxes and unreimbursed Servicing Advances. In no event may
Liquidation Expenses with respect to a Liquidated Mortgage Loan exceed the
related Liquidation Proceeds.
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<PAGE>
"Liquidated Loan Loss" as to any Liquidated Mortgage Loan is the
excess, if any, of (i) the unpaid Principal Balance of such Liquidated
Mortgage Loan plus accrued and unpaid interest on such unpaid Principal
Balance from the Due Date to which interest was last paid by the Mortgagor
over (ii) the sum of the Net Liquidation Proceeds and the amount of any
previously unreimbursed Periodic Advances in respect of such Mortgage Loan.
"Liquidation Proceeds" are amounts (other than Insurance Proceeds)
received by the Servicer in connection with (i) the taking of all or a part of
a Mortgaged Property by exercise of the power of eminent domain or
condemnation or (ii) the liquidation of a defaulted Mortgage Loan through a
trustee's sale, foreclosure sale, REO Disposition or otherwise.
"Net Foreclosure Profits" as to any Servicer Distribution Date, are
the excess, if any, of (i) the aggregate Foreclosure Profits with respect to
such Servicer Distribution Date over (ii) Liquidated Loan Losses with respect
to such Servicer Distribution Date.
"Net Liquidation Proceeds" as to any Liquidated Mortgage Loan, are
Liquidation Proceeds net of Liquidation Expenses and net of any unreimbursed
Periodic Advances made by the Servicer.
"Net REO Proceeds" as to any REO Property, are REO Proceeds net of
any related expenses of the Servicer.
"REO Proceeds" are monies received in respect of any REO Property
(including, without limitation, proceeds from the rental of the related
Mortgaged Property).
Servicing Fees and Other Compensation and Payment of Expenses
As compensation for its activities as Servicer under the Pooling and
Servicing Agreement, the Servicer shall be entitled with respect to each
Mortgage Loan to the Servicing Fee, which shall be payable monthly from
amounts on deposit in the Collection Account. The "Servicing Fee" shall be an
amount equal to interest at one-twelfth of the Servicing Fee Rate for such
Mortgage Loan on the outstanding Principal Balance of such Mortgage Loan. The
"Servicing Fee Rate" with respect to each Mortgage Loan will be 0.50% per
annum. In addition, the Servicer shall be entitled to receive, as additional
servicing compensation, to the extent permitted by applicable law and the
related Mortgage Notes, any late payment charges, assumption fees, prepayment
fees or similar items. The Servicer shall also be entitled to withdraw from
the Collection Account any net interest or other income earned on deposits
therein. The Servicer shall pay all expenses incurred by it in connection with
its servicing activities under the Pooling and Servicing Agreement and shall
not be entitled to reimbursement therefor except as specifically provided in
the Pooling and Servicing Agreement.
<PAGE>
The Servicer may recover Periodic Advances and Servicing Advances to
the extent permitted by the Mortgage Loans or, if not recovered from the
Mortgagor on whose behalf such Servicing Advance or Periodic Advance was made,
from late collections on the related Mortgage Loan, including Liquidation
Proceeds, Insurance Proceeds and such other amounts as may be collected by the
Servicer from the Mortgagor or otherwise relating to the Mortgage Loan. In the
event a Periodic Advance or a Servicing Advance becomes a Nonrecoverable
Advance, the Servicer may be reimbursed for such advance from the Certificate
Account.
The Servicer shall not be required to make any Periodic Advance or
Servicing Advance which it determines would be a nonrecoverable Periodic
Advance or nonrecoverable Servicing Advance (a "Nonrecoverable Advance"). A
Periodic Advance or Servicing Advance is "nonrecoverable" if in the good faith
judgment of the Servicer, such Periodic Advance or Servicing Advance is not
ultimately recoverable.
Overcollateralization Provisions
Overcollateralization Resulting from Cash Flow Structure. The Pooling
and Servicing Agreement requires that, starting with the first Distribution
Date, the Net Monthly Excess Cashflow, if any, be applied on each Distribution
Date as an accelerated payment of principal on the Class of Class A
Certificates then entitled to distributions of principal, but only to the
limited extent hereafter described. The "Net Monthly Excess Cashflow" for a
Distribution Date is equal to the excess of (x) the amount on deposit in the
Certificate Account (exclusive of the amount of any Insured Payment and the
Servicing Fee) on such Distribution Date (such amount being the "Available
Amount" for such Distribution Date) over (y) the sum of (i) the Class A
Distribution Amount (calculated for this purpose without regard to any
Subordination Increase Amount or portion thereof included therein), (ii) any
Reimbursement Amount (as defined herein) or other amount owed to the
Certificate Insurer and (iii) the Trustee's Fees.
This application has the effect of accelerating the amortization of
the Class A Certificates relative to the amortization of the Mortgage Loans.
To the extent that any Net Monthly Excess Cashflow is not so used, the Pooling
and Servicing Agreement provides that it will be paid to the Holders of the
Class R Certificates.
With respect to any Distribution Date, the excess, if any, of (x) the
sum of the aggregate Principal Balances of the Mortgage Loans as of the close
of business on the last day of the preceding calendar month over (y) the Class
A Certificate Principal Balance as of such Distribution Date (and following
the making of all distributions on such Distribution Date (other than with
respect to any Subordination Increase Amount for such Distribution Date)) is
the "Subordinated Amount" as of such Distribution Date. The Pooling and
Servicing Agreement requires that, starting with the first Distribution Date,
the Net Monthly Excess Cashflow will be applied as an accelerated payment of
principal on the Class A Certificates until the Subordinated Amount has
increased to the level required by the Pooling and Servicing Agreement. Any
amount of Net Monthly Excess Cashflow actually applied as an accelerated
payment of principal is a "Subordination Increase Amount." The required level
of the Subordinated Amount with respect to a Distribution Date is the
"Specified Subordinated Amount" with respect to such Distribution Date.
Initially, the Subordinated Amount will be an amount equal to approximately
1.5% of the sum of the Cut-Off Date Aggregate Principal Balance and the
Original Pre-Funded Amount.
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<PAGE>
In the event that the required level of the Specified Subordinated
Amount is permitted to decrease or "step down" on a Distribution Date in the
future, the Pooling and Servicing Agreement provides that a portion of the
principal which would otherwise be distributed to the Holders of the Class A
Certificates on such Distribution Date shall be distributed to the Holders of
the Class R Certificates on such Distribution Date. This has the effect of
decelerating the amortization of the Class A Certificates relative to the
amortization of the Mortgage Loans, and of reducing the Subordinated Amount.
With respect to any Distribution Date, the difference, if any, between (a) the
Subordinated Amount that would apply on such Distribution Date after taking
into account all distributions to be made on such Distribution Date (except
for any distributions of related Subordination Reduction Amounts as described
in this sentence) and (b) the Specified Subordinated Amount is the "Excess
Subordinated Amount" with respect to such Distribution Date. If, on any
Distribution Date, the Excess Subordinated Amount is, or, after taking into
account all other distributions to be made on such Distribution Date would be,
greater than zero (i.e., the Subordinated Amount is or would be greater than
the related Specified Subordinated Amount), then any amounts relating to
principal which would otherwise be distributed to the Holders of the Class A
Certificates on such Distribution Date shall instead be distributed to the
Holders of the Class R Certificates, in an amount equal to the lesser of (x)
the Excess Subordinated Amount and (y) the amount available for distribution
on account of principal with respect to the Class A Certificates on such
Distribution Date; such amount being the "Subordination Reduction Amount" for
such Distribution Date.
The Pooling and Servicing Agreement provides that, on any
Distribution Date, all amounts collected on account of principal (other than
any such amount applied to the payment of a Subordination Reduction Amount)
during the prior Due Period will be distributed to the Holders of the Class A
Certificates on such Distribution Date. If any Mortgage Loan became a
Liquidated Mortgage Loan during such prior Due Period, the Net Liquidation
Proceeds related thereto and allocated to principal may be less than the
Principal Balance of the related Mortgage Loan; the amount of any such
insufficiency is a "Liquidated Loan Loss." In addition, the Pooling and
Servicing Agreement provides that the principal balance of any Mortgage Loan
which becomes a Liquidated Mortgage Loan shall then equal zero. The Pooling
and Servicing Agreement does not contain any rule which requires that the
amount of any Liquidated Loan Loss be distributed to the Holders of the Class
A Certificates on the Distribution Date which immediately follows the event of
loss; i.e., the Pooling and Servicing Agreement does not require the current
recovery of losses. However, the occurrence of a Liquidated Loan Loss will
reduce the Subordinated Amount, which, to the extent that such reduction
causes the Subordinated Amount to be less than the Specified Subordinated
Amount applicable to the related Distribution Date, will require the payment
of a Subordination Increase Amount on such Distribution Date (or, if
insufficient funds are available on such Distribution Date, on subsequent
Distribution Dates, until the Subordinated Amount equals the related Specified
Subordinated Amount). The effect of the foregoing is to allocate losses to the
Holders of the Class R Certificates by reducing, or eliminating entirely,
payments of Monthly Excess Cashflow and of Subordination Reduction Amounts
which such Holders would otherwise receive.
<PAGE>
Overcollateralization and the Certificate Insurance Policy. The
Pooling and Servicing Agreement defines a "Subordination Deficit" with respect
to a Distribution Date to be the amount, if any, by which (x) the aggregate
Certificate Principal Balance of the Class A Certificates as of such
Distribution Date, and following the making of all distributions to be made on
such Distribution Date (except for any payment to be made as to principal from
proceeds of the Certificate Insurance Policy), exceeds (y) the aggregate
Principal Balances of the Mortgage Loans as of the close of business on the
last day of the related Due Period. The Pooling and Servicing Agreement
requires the Trustee to make a claim for an Insured Payment under the
Certificate Insurance Policy not later than the third Business Day prior to
any Distribution Date as to which the Trustee has determined that a
Subordination Deficit will occur for the purpose of applying the proceeds of
such Insured Payment as a payment of principal to the Holders of the Class A
Certificates on such Distribution Date. Additionally, under the terms of the
Pooling and Servicing Agreement, the Certificate Insurer will have the option
to cause Net Monthly Excess Cashflow to be applied without regard to any
limitation upon the occurrence of certain trigger events, or in the event of
an event of default under the Insurance Agreement (as defined herein).
However, investors in the Class A Certificates should realize that, under
extreme loss or delinquency scenarios, they may temporarily receive no
distributions of principal.
Flow of Funds
On each Distribution Date, the Trustee shall distribute, to the
extent of funds, including any Insured Payments, on deposit in the Certificate
Account, as follows:
(a) to the Trustee, an amount equal to the fees then due
to it (the "Trustee's Fees");
(b) from amounts then on deposit in the Certificate
Account (excluding any Insured Payments) to the
Certificate Insurer the lesser of (x) the excess of
(i) the amount then on deposit in the Certificate
Account over (ii) the Insured Distribution Amount
for such Distribution Date and (y) the amount of
all Insured Payments and other amounts due to the
Certificate Insurer pursuant to the Insurance
Agreement (including the premium amount) which have
not been previously paid (the "Reimbursement
Amount") as of such Distribution Date;
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<PAGE>
(c) from amounts then on deposit in the Certificate
Account, to the Class A Certificateholders an
amount equal to the Class A Interest Distribution
Amount;
(d) from amounts then on deposit in the Certificate
Account, to the Class A Certificateholders an
amount equal to the Class A Principal Distribution
Amount; and
(e) following the making by the Trustee of all
allocations, transfers and disbursements described
above, from amounts then on deposit in the
Certificate Account, the Trustee shall distribute
to the Holders of the Class R Certificates, the
amount remaining on such Distribution Date, if any.
Report to Certificateholders
Pursuant to the Pooling and Servicing Agreement, on each Distribution
Date the Trustee will deliver to the Servicer, the Certificate Insurer, each
Certificateholder and the Depositor a written report containing information
including, without limitation, the amount of the distribution on such
Distribution Date, the amount of such distribution allocable to principal and
allocable to interest, the aggregate outstanding principal balance of the
Class A Certificates as of such Distribution Date, the amount of any Insured
Payment included in such distributions on such Distribution Date and such
other information as required by the Pooling and Servicing Agreement.
Amendment
The Pooling and Servicing Agreement may be amended from time to time
by the Depositor, the Servicer and the Trustee by written agreement, upon the
prior written consent of the Certificate Insurer, without notice to, or
consent of, the Certificateholders, to cure any ambiguity, to correct or
supplement any provisions herein, to comply with any changes in the Code, or
to make any other provisions with respect to matters or questions arising
under the Pooling and Servicing Agreement which shall not be inconsistent with
the provisions of the Pooling and Servicing Agreement; provided, that such
action shall not, as evidenced by an opinion of counsel delivered to, but not
obtained at the expense of, the Trustee, adversely affect in any material
respect the interests of any Certificateholder; and provided, further, that no
such amendment shall reduce in any manner the amount of, or delay the timing
of, payments received on Mortgage Loans which are required to be distributed
on any Certificate without the consent of the Holder of such Certificate, or
change the rights or obligations of any other party to the Pooling and
Servicing Agreement without the consent of such party.
<PAGE>
The Pooling and Servicing Agreement may be amended from time to time
by the Depositor, the Servicer and the Trustee with the consent of the
Certificate Insurer, and the Holders of the majority of the Percentage
Interest in the Class A Certificates and Class R Certificates for the purpose
of adding any provisions to or changing in any manner or eliminating any of
the provisions of the Pooling and Servicing Agreement or of modifying in any
manner the rights of the Holders; provided, however, that no such amendment
shall be made unless the Trustee receives an opinion of counsel, at the
expense of the party requesting the change, that such change will not
adversely affect the status of the Trust as a REMIC or cause a tax to be
imposed on the REMIC; and provided further, that no such amendment shall
reduce in any manner the amount of, or delay the timing of, payments received
on Mortgage Loans which are required to be distributed on any Certificate
without the consent of the Holder of such Certificate or reduce the percentage
for each Class whose Holders are required to consent to any such amendment
without the consent of the Holders of 100% of each Class of Certificates
affected thereby.
The Unaffiliated Seller's Agreement contains substantially similar
restrictions regarding amendment.
SERVICING OF THE MORTGAGE LOANS
The Servicer
American Business Credit, Inc. will act as the Servicer of the Mortgage
Pool. HomeAmerican Credit Inc., d/b/a Upland Mortgage will act as subservicer
with respect to a portion of the Mortgage Loans. See "The Originators, the
Seller, the Servicer and the Subservicer."
Servicer Reports
The Servicer is required to deliver to the Certificate Insurer, the
Trustee, Standard & Poor's and Moody's, not later than April 30th of each year
an officer's certificate stating that (i) the Servicer has fully complied with
the servicing provisions of the Pooling and Servicing Agreement, (ii) a review
of the activities of the Servicer during the preceding calendar year and of
performance under the Pooling and Servicing Agreement has been made under such
officer's supervision, and (iii) to the best of such officer's knowledge,
based on such review, the Servicer has fulfilled all its obligations under the
Pooling and Servicing Agreement for such year, or, if there has been a default
in the fulfillment of any such obligation, specifying each such default known
to such officer and the nature and status thereof including the steps being
taken by the Servicer to remedy such default. The first such officer's
certificate shall be delivered by the Servicer in 1999.
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<PAGE>
Not later than April 30th of each year, the Servicer, at its expense,
is required to cause to be delivered to the Certificate Insurer, the Trustee,
Standard & Poor's and Moody's from a firm of independent certified public
accountants (who may also render other services to the Servicer) a statement
to the effect that such firm has examined certain documents and records
relating to the servicing of the Mortgage Loans during the preceding calendar
year (or such longer period from the Closing Date to the end of the following
calendar year) and that, on the basis of such examination conducted
substantially in compliance with generally accepted auditing standards and the
requirements of the Uniform Single Attestation Program for Mortgage Bankers or
the Audit Program for Mortgages serviced for FHLMC, such servicing has been
conducted in compliance with the Pooling and Servicing Agreement except for
such significant exceptions or errors in records that, in the opinion of such
firm, generally accepted auditing standards and the Uniform Single Attestation
Program for Mortgage Bankers or the Audit Program for Mortgages serviced for
FHLMC require it to report, in which case such exceptions and errors shall be
so reported.
Collection and Other Servicing Procedures
The Servicer will be responsible for making reasonable efforts to
collect all payments called for under the Mortgage Loans and will, consistent
with the Pooling and Servicing Agreement, follow such collection procedures as
it follows with respect to loans which are comparable to the Mortgage Loans.
Consistent with the above, the Servicer may, in its discretion, (i) waive any
late payment charge and (ii) arrange with a Mortgagor a schedule for the
liquidation of delinquencies, subject to the provisions of the Pooling and
Servicing Agreement.
If a Mortgaged Property has been or is about to be conveyed by the
Mortgagor, the Servicer will be obligated to accelerate the maturity of the
Mortgage Loan, unless it reasonably believes it is unable to enforce that
Mortgage Loan's "due-on-sale" clause under applicable law. If it reasonably
believes it may be restricted for any reason from enforcing such a
"due-on-sale" clause, the Servicer may enter into an assumption and
modification agreement with the person to whom such property has been or is
about to be conveyed, pursuant to which such person becomes liable under the
Mortgage Note.
Any fee collected by the Servicer for entering into an assumption
agreement will be retained by the Servicer as additional servicing
compensation. For a description of circumstances in which the Servicer may be
unable to enforce "due-on-sale" clauses, see "Certain Legal Aspects of the
Mortgage Loans and Contracts -- The Mortgage Loans --'Due-on-Sale' Clauses" in
the Prospectus. In connection with any such assumption, the Mortgage Interest
Rate borne by the mortgage note relating to each Mortgage Loan ("Mortgage
Note") may not be decreased.
<PAGE>
Hazard Insurance
The Servicer is required to cause to be maintained for each Mortgaged
Property a hazard insurance policy with coverage which contains a standard
mortgagee's clause in an amount equal to the lesser of (a) the maximum
insurable value of such Mortgaged Property or (b) the principal balance of
such Mortgage Loan plus the outstanding balance of any mortgage loan senior to
such Mortgage Loan, but in no event may such amount be less than is necessary
to prevent the borrower from becoming a coinsurer thereunder. As set forth
above, all amounts collected by the Servicer under any hazard policy (except
for amounts to be applied to the restoration or repair of the Mortgaged
Property or released to the borrower in accordance with the Servicer's normal
servicing procedures), to the extent they constitute Net Liquidation Proceeds
or Insurance Proceeds, will ultimately be deposited in the Certificate
Account. The ability of the Servicer to assure that hazard insurance proceeds
are appropriately applied may be dependent on its being named as an additional
insured under any hazard insurance policy, or upon the extent to which
information in this regard is furnished to the Servicer by a borrower. The
Pooling and Servicing Agreement provides that the Servicer may satisfy its
obligation to cause hazard policies to be maintained by maintaining a blanket
policy issued by an insurer acceptable to the Rating Agencies insuring against
losses on the Mortgage Loans. If such blanket policy contains a deductible
clause, the Servicer is obligated to deposit in the Certificate Account the
sums which would have been deposited therein but for such clause.
In general, the standard form of fire and extended coverage policy
covers physical damage to or destruction of the improvements on the property
by fire, lightning, explosion, smoke, windstorm and hail, and riot, strike and
civil commotion, subject to the conditions and exclusions specified in each
policy. Although the policies relating to the Mortgage Loans will be
underwritten by different insurers under different state laws in accordance
with different applicable state forms and therefore will not contain identical
terms and conditions, the terms thereof are dictated by respective state laws,
and most such policies typically do not cover any physical damage resulting
from the following: war, revolution, governmental actions, floods and other
weather-related causes, earth movement (including earthquakes, landslides and
mudflows), nuclear reactions, wet or dry rot, vermin, rodents, insects or
domestic animals, theft and, in certain cases, vandalism. The foregoing list
is merely indicative of certain kinds of uninsured risks and is not intended
to be all-inclusive.
S-52
<PAGE>
The hazard insurance policies covering the Mortgaged Properties
typically contain a co-insurance clause which in effect requires the insured
at all times to carry insurance of a specified percentage (generally 80% to
90%) of the full replacement value of the improvements on the property in
order to recover the full amount of any partial loss. If the insured's
coverage falls below this specified percentage, such clause generally provides
that the insurer's liability in the event of partial loss does not exceed the
greater of (i) the replacement cost of the improvements less physical
depreciation or (ii) such proportion of the loss as the amount of insurance
carried bears to the specified percentage of the full replacement cost of such
improvements.
Since residential properties, generally, have historically
appreciated in value over time, if the amount of hazard insurance maintained
on the improvements securing the Mortgage Loans were to decline as the
principal balances owing thereon decreased, hazard insurance proceeds could be
insufficient to restore fully the damaged property in the event of a partial
loss.
Realization Upon Defaulted Mortgage Loans
The Servicer will foreclose upon or otherwise comparably convert to
ownership Mortgaged Properties securing such of the Mortgage Loans as come
into default when, in the opinion of the Servicer, no satisfactory
arrangements can be made for the collection of delinquent payments. In
connection with such foreclosure or other conversion, the Servicer will follow
such practices as it deems necessary or advisable and as are in keeping with
the Servicer's general loan servicing activities and the Pooling and Servicing
Agreement, provided the Servicer will not expend its own funds in connection
with foreclosure or other conversion, correction of a default on a senior
mortgage or restoration of any property unless such foreclosure, correction or
restoration is determined to increase Net Liquidation Proceeds. Any Mortgaged
Property so acquired by the Trust is required to be disposed of in accordance
with applicable federal income tax regulations and consistent with the status
of the Trust as a REMIC.
Removal and Resignation of the Servicer
The Certificate Insurer may, pursuant to the Pooling and Servicing
Agreement, remove the Servicer upon the occurrence and continuation beyond the
applicable cure period of an event described in clause (g) or (h) below and
the Trustee, only at the direction of the Certificate Insurer or the majority
certificateholders, with the consent of the Certificate Insurer (in the case
of any direction of the majority Certificateholders), may remove the Servicer
upon the occurrence and continuation beyond the applicable cure period of an
event described in clause (a), (b), (c), (d), (e) or (f) below:
(a) any failure by the Servicer to remit to the Trustee any
payment required to be made by the Servicer under the terms of the
Pooling and Servicing Agreement which continues unremedied for one
(1) Business Day after the date upon which written notice of such
failure, requiring the same to be remedied, shall have been given to
the Servicer and the Certificate Insurer by the Trustee or to the
Servicer and the Trustee by the Certificate Insurer or the Class A
Certificateholders evidencing Percentage Interests of at least 25%;
<PAGE>
(b) the failure by the Servicer to make any required
Servicing Advance which failure continues unremedied for a period of
one (1) Business Day after the date on which written notice of such
failure, requiring the same to be remedied, shall have been given to
the Servicer by the Trustee or to the Servicer and the Trustee by any
Certificateholder or the Certificate Insurer;
(c) any failure on the part of the Servicer duly to observe
or perform in any material respect any other of the covenants or
agreements on the part of the Servicer contained in this Agreement,
or the failure of any representation and warranty set forth in the
Pooling and Servicing Agreement, which continues unremedied for a
period of 30-days after the date on which written notice of such
failure, requiring the same to be remedied, shall have been given to
the Servicer by the Depositor or the Trustee, or to the Servicer and
the Trustee by any Certificateholder or the Certificate Insurer;
(d) a decree or order of a court or agency or supervisory
authority having jurisdiction in an involuntary case under any
present or future federal or state bankruptcy, insolvency or similar
law or for the appointment of a conservator or receiver or liquidator
in any insolvency, readjustment of debt, marshalling of assets and
liabilities or similar proceedings, or for the winding-up or
liquidation of its affairs, shall have been entered against the
Servicer and such decree or order shall have remained in force,
undischarged or unstayed for a period of 60 days;
(e) the Servicer shall consent to the appointment of a
conservator or receiver or liquidator in any insolvency, readjustment
of debt, marshalling of assets and liabilities or similar proceedings
of or relating to the Servicer or of or relating to all or
substantially all of the Servicer's property;
S-53
<PAGE>
(f) the Servicer shall admit in writing its inability to pay
its debts as they become due, file a petition to take advantage of
any applicable insolvency or reorganization statute, make an
assignment for the benefit of its creditors, or voluntarily suspend
payment of its obligations;
(g) the delinquency or loss experience of the Mortgage Loan
pool exceeds certain levels specified in the Pooling and Servicing
Agreement; or
(h) The Certificate Insurer shall notify the Trustee of any
event of default under the Insurance Agreement.
The Servicer may not assign its obligations under the Pooling and
Servicing Agreement nor resign from the obligations and duties thereby imposed
on it except by mutual consent of the Servicer, ABC (if ABC is not the
Servicer), the Certificate Insurer and the Trustee, or upon the determination
that the Servicer's duties thereunder are no longer permissible under
applicable law and such incapacity cannot be cured by the Servicer without the
incurrence, in the reasonable judgment of the Certificate Insurer, of
unreasonable expense. No such resignation shall become effective until a
successor has assumed the Servicer's responsibilities and obligations in
accordance with the Pooling and Servicing Agreement.
Upon removal or resignation of the Servicer, the Trustee will be the successor
servicer (the "Successor Servicer"). The Trustee, as Successor Servicer, will
be obligated to make Periodic Advances and Servicing Advances and certain
other advances unless it determines reasonably and in good faith that such
advances would not be recoverable. If, however, the Trustee is unwilling or
unable to act as Successor Servicer, or if the majority Certificateholders
(with the consent of the Certificate Insurer) or the Certificate Insurer so
requests, the Trustee shall appoint, or petition a court of competent
jurisdiction to appoint, in accordance with the provisions of the Pooling and
Servicing Agreement and subject to the approval of the Certificate Insurer,
any established mortgage loan servicing institution acceptable to the
Certificate Insurer having a net worth of not less than $15,000,000 as the
Successor Servicer in the assumption of all or any part of the
responsibilities, duties or liabilities of the Servicer.
Pursuant to the Pooling and Servicing Agreement, the Servicer
covenants and agrees to act as the Servicer for an initial term from the
Closing Date to June 30, 1998, which term will be extendable by the
Certificate Insurer by notice to the Trustee for successive terms of three (3)
calendar months each, until the termination of the Trust Fund. The Servicer
will, upon its receipt of each such notice of extension (a "Servicer Extension
Notice") become bound for the duration of the term covered by such Servicer
Extension Notice to continue as the Servicer subject to and in accordance with
the other provisions of the Pooling and Servicing Agreement. If as of the
fifteenth (15th) day prior to the last day of any term of the Servicer the
Trustee shall not have received any Servicer Extension Notice from the
Certificate Insurer, the Trustee will, within five (5) days thereafter, give
written notice of such non-receipt to the Certificate Insurer and the
Servicer. The Certificate Insurer has agreed to extend each three month term
of the Servicer, in the absence of an Event of Default under the Pooling and
Servicing Agreement.
The Trustee and any other Successor Servicer in such capacity is
entitled to the same reimbursement for advances and no more than the same
servicing compensation as the Servicer. See " -- Servicing and Other
Compensation and Payment of Expenses" above.
<PAGE>
Termination; Purchase of Mortgage Loans
The Pooling and Servicing Agreement will terminate upon notice to the
Trustee of either: (a) the later of the distribution to Certificateholders of
the final payment or collection with respect to the last Mortgage Loan (or
Periodic Advances of same by the Servicer), or the disposition of all funds
with respect to the last Mortgage Loan and the remittance of all funds due
under the Pooling and Servicing Agreement and the payment of all amounts due
and payable to the Certificate Insurer and the Trustee or (b) mutual consent
of the Servicer, the Certificate Insurer and all Certificateholders in
writing; provided, however, that in no event will the Trust established by the
Pooling and Servicing Agreement terminate later than twenty-one years after
the death of the last surviving lineal descendant of the person named in the
Pooling and Servicing Agreement.
Subject to provisions in the Pooling and Servicing Agreement
concerning adopting a plan of complete liquidation, the Servicer may, at its
option and at its sole cost and expense, terminate the Pooling and Servicing
Agreement on any date on which the aggregate Principal Balance of the Mortgage
Loans is less than 10% of the sum of (a) the Cut-Off Date Aggregate Principal
Balance and (b) the Original Pre-Funded Amount, by purchasing, on the next
succeeding Distribution Date, all of the outstanding Mortgage Loans and REO
Properties at a price equal to the sum of (a) 100% of the Principal Balance of
each outstanding Mortgage Loan and each REO Property, (b) the greater of (i)
the aggregate amount of accrued and unpaid interest on the Mortgage Loans
through the related Due Period and (ii) 30-days' accrued interest thereon
computed at a rate equal to the Mortgage Interest Rate, in each case net of
the Servicing Fee, and (c) any unreimbursed amounts due to the Certificate
Insurer under the Pooling and Servicing Agreement, the Insurance Agreement
and, without duplication, accrued and unpaid Insured Payments. Any such
purchase shall be accomplished by deposit into the Certificate Account of the
purchase price specified above. No such termination is permitted without the
prior written consent of the Certificate Insurer if it would result in a draw
on the Certificate Insurance Policy.
S-54
<PAGE>
Optional Purchase of Defaulted Mortgage Loans
ABC or any affiliate of ABC has the option to purchase from the Trust
Fund any Mortgage Loan which is 90 days or more delinquent at a purchase price
equal to the outstanding principal balance of such Mortgage Loan as of the
date of purchase, plus all accrued and unpaid interest on such principal
balance, computed at the Mortgage Interest Rate, plus the amount of any
unreimbursed Servicing Advances made by the Servicer with respect to such
Mortgage Loan, in accordance with the provisions specified in the Pooling and
Servicing Agreement.
THE CERTIFICATE INSURANCE POLICY
The following summary of the terms of the Certificate Insurance
Policy does not purport to be complete and is qualified in its entirety by
reference to the Certificate Insurance Policy. A form of the Certificate
Insurance Policy may be obtained, upon request, from the Depositor.
Simultaneously with the issuance of the Certificates, the Certificate
Insurer will deliver the Certificate Insurance Policy to the Trustee for the
benefit of the Class A Certificateholders. Under the Certificate Insurance
Policy, the Certificate Insurer will irrevocably and unconditionally guarantee
payment on each Distribution Date to the Trustee for the benefit of the
Holders of the Class A Certificates, as applicable, of the Insured
Distribution Amounts with respect to the Class A Certificates calculated in
accordance with the original terms of the Class A Certificates when issued and
without regard to any amendment or modification of the Class A Certificates or
the Pooling and Servicing Agreement except amendments or modifications to
which the Certificate Insurer has given its prior written consent. The Insured
Distribution Amounts for each Distribution Date will be the sum of (i) the
Class A Interest Distribution Amount with respect to such Distribution Date,
(ii) the Subordination Deficit, if any, for such Distribution Date, and (iii)
with respect to the Distribution Date which is a Final Scheduled Maturity
Date, the outstanding Certificate Principal Balance of the related Class A
Certificates (without duplication to the amount specified in clause (ii)). In
addition, with respect to any Distribution Date occurring on a date when an
event of default under the Insurance Agreement (described below) has occurred
and is continuing or a date on or after the first date on which a claim is
made under the Certificate Insurance Policy, the Certificate Insurer at its
sole option, may pay any or all of the outstanding Certificate Principal
Balance of the Class A Certificates. Mortgage Loan Interest Shortfalls will
not be covered by payments under the Certificate Insurance Policy.
Payment of claims under the Certificate Insurance Policy will be made
by the Certificate Insurer following Receipt by the Certificate Insurer of the
appropriate notice for payment on the later to occur of (a) 12:00 noon, New
York City time, on the second Business Day following Receipt of such notice
for payment, and (b) 12:00 noon, New York City time, on the relevant
Distribution Date.
<PAGE>
If any payment of an amount guaranteed by the Certificate Insurer
pursuant to the Certificate Insurance Policy is avoided as a preference
payment under applicable bankruptcy, insolvency, receivership or similar law
the Certificate Insurer will pay such amount out of the funds of the
Certificate Insurer on the later of (a) the date when due to be paid pursuant
to the Order referred to below or (b) the first to occur of (i) the fourth
Business Day following Receipt by the Certificate Insurer from the Trustee of
(A) a certified copy of the order of the court or other governmental body
which exercised jurisdiction to the effect that a Class A Certificateholder is
required to return principal or interest distributed with respect to a Class A
Certificate during the term of the Certificate Insurance Policy because such
distributions were avoidable preferences under applicable bankruptcy law (the
"Order"), (B) a certificate of the Class A Certificateholder(s) that the Order
has been entered and is not subject to any stay, and (C) an assignment duly
executed and delivered by the Class A Certificateholder(s), in such form as is
reasonably required by the Certificate Insurer and provided to the Class A
Certificateholder(s) by the Certificate Insurer, irrevocably assigning to the
Certificate Insurer all rights and claims of the Class A Certificateholder(s)
relating to or arising under the Class A Certificates against the debtor which
made such preference payment or otherwise with respect to such preference
payment, or (ii) the date of Receipt by the Certificate Insurer from the
Trustee of the items referred to in clauses (A), (B) and (C) above if, at
least four Business Days prior to such date of Receipt, the Certificate
Insurer shall have Received written notice from the Trustee that such items
were to be delivered on such date and such date was specified in such notice.
Such payment shall be disbursed to the receiver, conservator,
debtor-in-possession or trustee in bankruptcy named in the Order and not to
the Trustee or any Class A Certificateholder directly (unless a Class A
Certificateholder has previously paid such amount to the receiver,
conservator, debtor-in-possession or trustee in bankruptcy named in the Order,
in which case such payment shall be disbursed to the Trustee for distribution
to such Class A Certificateholder upon proof of such payment reasonably
satisfactory to the Certificate Insurer).
The terms "Receipt" and "Received," with respect to the Certificate
Insurance Policy, means actual delivery to the Certificate Insurer and to its
fiscal agent appointed by the Certificate Insurer at its option, if any, prior
to 12:00 p.m., New York City time, on a Business Day; delivery either on a day
that is not a Business Day or after 12:00 p.m., New York City time, shall be
deemed to be Receipt on the next succeeding Business Day. If any notice or
certificate given under the Certificate Insurance Policy by the Trustee is not
in proper form or is not properly completed, executed or delivered, it shall
be deemed not to have been Received, and the Certificate Insurer or the fiscal
agent shall promptly so advise the Trustee and the Trustee may submit an
amended notice.
Under the Certificate Insurance Policy, "Business Day" means any day
other than (i) a Saturday or Sunday or (ii) a day on which banking
institutions in the City of New York, New York or the State of New York, are
authorized or obligated by law or executive order to be closed. The
Certificate Insurer's obligations under the Certificate Insurance Policy to
make Insured Payments shall be discharged to the extent funds are transferred
to the Trustee as provided in the Certificate Insurance Policy, whether or not
such funds are properly applied by the Trustee.
S-55
<PAGE>
The Certificate Insurer shall be subrogated to the rights of each
Class A Certificateholder to receive payments of principal and interest, as
applicable, with respect to distributions on the Class A Certificates to the
extent of any payment by the Certificate Insurer under the Certificate
Insurance Policy. To the extent the Certificate Insurer makes Insured
Payments, either directly or indirectly (as by paying through the Trustee), to
the Class A Certificateholders, the Certificate Insurer will be subrogated to
the rights of the Class A Certificateholders, as applicable, with respect to
such Insured Payment and shall be deemed to the extent of the payments so made
to be a registered Class A Certificateholder for purposes of payment.
Claims under the Certificate Insurance Policy will rank equally with
any other unsecured debt and unsubordinated obligations of the Certificate
Insurer except for certain obligations in respect of tax and other payments to
which preference is or may become afforded by statute. Claims against the
Certificate Insurer under the Certificate Insurance Policy constitute pari
passu claims against the general assets of the Certificate Insurer. The terms
of the Certificate Insurance Policy cannot be modified or altered by any other
agreement or instrument, or by the merger, consolidation or dissolution of the
Depositor. The Certificate Insurance Policy may not be cancelled or revoked
prior to payment in full of the Class A Certificates. The Certificate
Insurance Policy is governed by the laws of the State of New York. The
Certificate Insurance Policy is not covered by the Property/Casualty Insurance
Security Fund specified in Article 76 of the New York Insurance Law.
To the fullest extent permitted by applicable law, the Certificate
Insurer agrees under the Certificate Insurance Policy not to assert, and
waives, for the benefit of each Class A Certificateholder, all its rights
(whether by counterclaim, setoff or otherwise) and defense (including, without
limitation, the defense of fraud), whether acquired by subrogation, assignment
or otherwise, to the extent that such rights and defenses may be available to
the Certificate Insurer to avoid payment of its obligations under the
Certificate Insurance Policy in accordance with the express provisions of the
Certificate Insurance Policy.
Pursuant to the terms of the Pooling and Servicing Agreement, unless
a Certificate Insurer Default exists, the Certificate Insurer shall be deemed
to be the Certificateholders for all purposes (other than with respect to
payment on the Certificates), will be entitled to exercise all rights of the
Class A Certificateholders thereunder, without the consent of such
Certificateholders, and the Class A Certificateholders may exercise such
rights only with the prior written consent of the Certificate Insurer. In
addition, the Certificate Insurer will, as a third party beneficiary to the
Pooling and Servicing Agreement and the Unaffiliated Seller's Agreement, have,
among others, the following rights: (i) the right to give notices of breach or
to terminate the rights and obligations of the Servicer under the Pooling and
Servicing Agreement in the event of an Event of Default by the Servicer and to
institute proceedings against the Servicer; (ii) the right to consent to or
direct any waivers of defaults by the Servicer; (iii) the right to remove the
Trustee pursuant to the Pooling and Servicing Agreement; (iv) the right to
direct the actions of the Trustee during the continuation of a Servicer
default; (v) the right to require the Seller to repurchase Mortgage Loans for
breach of representation and warranty or defect in documentation; (vi) the
right to direct foreclosures upon the failure of the Servicer to do so in
accordance with the Pooling and Servicing Agreement; (vii) the right to direct
all matters relating to a bankruptcy or other insolvency proceeding involving
the Seller; and (viii) the right to direct the Trustee to investigate certain
matters. The Certificate Insurer's consent will be required prior to, among
other things, (i) the removal of the Trustee, (ii) the appointment of any
successor Trustee or Servicer or (iii) any amendment to the Pooling and
Servicing Agreement.
<PAGE>
The Depositor, the Seller, the Servicer and the Certificate Insurer
will enter into an Insurance and Indemnity Agreement (the "Insurance
Agreement") pursuant to which the Servicer will agree to reimburse, with
interest, the Certificate Insurer for amounts paid pursuant to claims under
the Certificate Insurance Policy. The Servicer will further agree to pay the
Certificate Insurer all reasonable charges and expenses which the Certificate
Insurer may pay or incur relative to any amounts paid under the Certificate
Insurance Policy or otherwise in connection with the transaction and to
indemnify the Certificate Insurer against certain liabilities. Except to the
extent provided therein, amounts owing under the Insurance Agreement will be
payable solely from the Trust Fund. An "event of default" under the Insurance
Agreement will constitute an Event of Default under the Pooling and Servicing
Agreement and allow the Certificate Insurer, among other things, to direct the
Trustee to terminate the Servicer. See "Servicing of the Mortgage Loans --
Removal and Resignation of the Servicer" herein. An "event of default" under
the Insurance Agreement includes (i) the Originators', the Seller's, the
Depositor's or the Servicer's failure to pay when due any amount owed under
the Insurance Agreement or certain other documents, (ii) the inaccuracy or
incompleteness in any material respect of any representation or warranty of
the Originators, the Seller, the Depositor or the Servicer in the Insurance
Agreement, the Pooling and Servicing Agreement or certain other documents,
(iii) the Originators', the Seller's, the Depositor's or the Servicer's
failure to perform or to comply with any covenant or agreement in the
Insurance Agreement, the Pooling and Servicing Agreement and certain other
documents, (iv) a finding or ruling by a governmental authority or agency that
the Insurance Agreement, the Pooling and Servicing Agreement or certain other
documents are not binding on the Originators, the Seller, the Depositor or the
Servicer, (v) the Originators', the Seller's, the Depositor's or the
Servicer's failure to pay its debts in general or the occurrence of certain
events of insolvency or bankruptcy with respect to the Seller or the Servicer,
and (vi) the occurrence of certain "performance test violations" designed to
measure the performance of the Mortgage Loans.
S-56
<PAGE>
THE CERTIFICATE INSURER
The following information has been obtained from Financial Security
Assurance Inc. (hereinafter in this section, the "Certificate Insurer" or
"Financial Security") and has not been verified by the Seller, ABC, Upland,
the Depositor or the Underwriter. No representation or warranty is made by the
Seller, ABC, Upland or the Underwriter with respect thereto.
General
Financial Security is a monoline insurance company incorporated in
1984 under the laws of the State of New York. Financial Security is licensed
to engage in the financial guaranty insurance business in all 50 states, the
District of Columbia and Puerto Rico.
Financial Security and its subsidiaries are engaged in the business
of writing financial guaranty insurance, principally in respect of securities
offered in domestic and foreign markets. In general, financial guaranty
insurance consists of the issuance of a guaranty of scheduled payments of an
issuer's securities -- thereby enhancing the credit rating of those securities
- -- in consideration for the payment of a premium to the insurer. Financial
Security and its subsidiaries principally insure asset-backed, collateralized
and municipal securities. Asset-backed securities are generally supported by
residential mortgage loans, consumer or trade receivables, securities or other
assets having an ascertainable cash flow or market value. Collateralized
securities include public utility first mortgage bonds and sale/leaseback
obligation bonds. Municipal securities consist largely of general obligation
bonds, special revenue bonds and other special obligations of state and local
governments. Financial Security insures both newly issued securities sold in
the primary market and outstanding securities sold in the secondary market
that satisfy Financial Security's underwriting criteria.
Financial Security is a wholly owned subsidiary of Financial Security
Assurance Holdings Ltd. ("Holdings"), a New York Stock Exchange listed
company. Major shareholders of Holdings include Fund American Enterprises
Holdings, Inc., U S WEST Capital Corporation and The Tokio Marine and Fire
Insurance Co., Ltd. No shareholder of Holdings is obligated to pay any debt of
Financial Security or any claim under any insurance policy issued by Financial
Security or to make any additional contribution to the capital of Financial
Security.
The principal executive offices of Financial Security are located at
350 Park Avenue, New York, New York 10022, and its telephone number at that
location is (212) 826-0100.
<PAGE>
Reinsurance
Pursuant to an intercompany agreement, liabilities on financial
guaranty insurance written or reinsured from third parties by Financial
Security or any of its domestic operating insurance company subsidiaries are
reinsured among such companies on an agreed-upon percentage substantially
proportional to their respective capital, surplus and reserves, subject to
applicable statutory risk limitations. In addition, Financial Security
reinsures a portion of its liabilities under certain of its financial guaranty
insurance policies with other reinsurers under various quota share treaties
and on a transaction-by-transaction basis. Such reinsurance is utilized by
Financial Security as a risk management device and to comply with certain
statutory and rating agency requirements; it does not alter or limit Financial
Security's obligations under any financial guaranty insurance policy.
Rating of Claims-Paying Ability
Financial Security's claims-paying ability is rated "Aaa" by Moody's
and "AAA" by Standard & Poor's, Fitch, Nippon Investors Service Inc. and
Standard & Poor's (Australia) Pty. Ltd. Such ratings reflect only the views of
the respective rating agencies, are not recommendations to buy, sell or hold
securities and are subject to revision or withdrawal at any time by such rating
agencies. See "Ratings."
S-57
<PAGE>
Capitalization
The following table sets forth the capitalization of Financial
Security and its wholly owned subsidiaries on the basis of generally accepted
accounting principles as of September 30, 1997 (in thousands):
<TABLE>
<CAPTION>
September 30, 1997
(unaudited)
------------------
<S> <C>
Deferred Premium Revenue (net of prepaid reinsurance premiums)........... $ 402,891
-------------
Shareholder's Equity:
Common Stock........................................................ 15,000
Additional Paid-In Capital.......................................... 646,620
Unrealized Gain on Investments (net of deferred income taxes)....... 20,808
Accumulated Earnings................................................ 212,033
-------------
Total Shareholder's Equity............................................... $ 894,461
-------------
Total Deferred Premium Revenue and Shareholder's Equity.................. $ 1,297,352
=============
</TABLE>
For further information concerning Financial Security, see the
Consolidated Financial Statements of Financial Security and Subsidiaries, and
the notes thereto, incorporated by reference herein. Copies of the statutory
quarterly and annual statements filed with the State of New York Insurance
Department by Financial Security are available upon request to the State of
New York Insurance Department.
Insurance Regulation
Financial Security is licensed and subject to regulation as a
financial guaranty insurance corporation under the laws of the State of New
York, its state of domicile. In addition, Financial Security and its insurance
subsidiaries are subject to regulation by insurance laws of the various other
jurisdictions in which they are licensed to do business. As a financial
guaranty insurance corporation licensed to do business in the State of New
York, Financial Security is subject to Article 69 of the New York Insurance
Law which, among other things, limits the business of each such insurer to
financial guaranty insurance and related lines, requires that each such
insurer maintain a minimum surplus to policyholders, establishes contingency,
loss and unearned premium reserve requirements for each such insurer, and
limits the size of individual transactions ("single risks") and the volume of
transactions ("aggregate risks") that may be underwritten by each such
insurer. Other provisions of the New York Insurance Law, applicable to
non-life insurance companies such as Financial Security, regulate, among other
things, permitted investments, payment of dividends, transactions with
affiliates, mergers, consolidations, acquisitions or sales of assets and
incurrence of liability for borrowings.
<PAGE>
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
An election will be made to treat the Trust as a REMIC for federal
income tax purposes. Dewey Ballantine, special tax counsel to the Depositor,
will deliver its opinion that, assuming compliance with the Pooling and
Servicing Agreement, the Trust will be treated as a REMIC for federal income
tax purposes. The Class A Certificates will be designated as "regular
interests" in the REMIC, and the Class R Certificates will be designated as
the sole "residual interest" in the REMIC. The Class R Certificates are
"Residual Certificates" for purposes of the Prospectus.
The Certificates possess certain special tax attributes by virtue of
the REMIC provisions of the Code. See "Certain Federal Income Tax Consequences
- -- REMIC Securities" in the Prospectus. The Small Business Job Protection Act
of 1996 repeals the bad debt reserve method of accounting for mutual savings
banks and domestic building and loan associations for tax years beginning
after December 31, 1995. As a result, section 593(d) of the Code is no longer
applicable to treat REMIC regular interests, including the Certificates, as
"qualifying real property loans."
The Class A Certificates generally will be treated as debt
instruments for federal income tax purposes. Beneficial owners (or registered
holders, in the case of Definitive Certificates) of the Class A Certificates
will be required to report income on such Certificates in accordance with the
accrual method of accounting.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended
("ERISA"), and the Code impose certain restrictions on (a) employee benefit
plans (as defined in Section 3(3) of ERISA), (b) plans described in section
4975(e)(1) of the Code, including individual retirement accounts or Keogh
plans, (c) any entities whose underlying assets include plan assets by reason
of a plan's investment in such entities (each a "Plan") and (d) persons who
have certain specified relationships to such Plans ("Parties-in-Interest"
under ERISA and "Disqualified Persons" under the Code). Section 406 of ERISA
prohibits Plans from engaging in certain transactions involving the assets of
such Plans with Parties in Interest with respect to such Plans, unless a
statutory or administrative exemption is applicable to the transaction. Excise
taxes under Section 4975 of the Code, penalties under Section 502 of ERISA and
other penalties may be imposed on Plan fiduciaries and Parties-in-Interest (or
Disqualified Persons) that engage in "prohibited transactions" involving
assets of a Plan. Individual retirement arrangements and other plans that are
not subject to ERISA, but are subject to Section 4975 of the Code, and
Disqualified Persons with respect to such arrangements and plans, also may be
subject to excise taxes and other penalties if they engage in prohibited
transactions. Moreover, based on the reasoning of the United States Supreme
Court in John Hancock Life Ins. Co. v. Harris Trust and Sav. Bank, 114 S. Ct.
517 (1993), an insurance company's general account may be deemed to include
assets of the Plans investing in the general account (e.g., through the
purchase of an annuity contract). ERISA also imposes certain duties on persons
who are fiduciaries of Plans subject to ERISA.
S-58
<PAGE>
The Department of Labor (the "DOL") has issued a regulation (the
"Plan Asset Regulation") describing what constitutes the assets of a Plan when
the Plan acquires an equity interest in another entity. The Plan Asset
Regulation states that, unless an exemption described in the regulation is
applicable, the underlying assets of an entity in which a Plan makes an equity
investment will be considered, for purposes of ERISA, to be the assets of the
investing Plan. Pursuant to the Plan Asset Regulation, if the assets of the
Trust were deemed to be plan assets by reason of a Plan's investment in any
Class A Certificates, such plan assets would include an undivided interest in
any assets held in such Trust. Therefore, in the absence of an exemption, the
purchase, sale or holding of any Class A Certificate by a Plan subject to
Section 406 of ERISA or Section 4975 of the Code might result in prohibited
transactions and the imposition of excise taxes and civil penalties.
On June 6, 1990, the DOL issued to Prudential Securities Incorporated
an individual administrative exemption, Prohibited Transaction Exemption 90-32
(the "Exemption"), from certain of the prohibited transaction rules of ERISA
with respect to the initial purchase, the holding and the subsequent resale by
a Plan of certificates in pass-through trusts that meet the conditions and
requirements of the Exemption. Among the conditions that must be satisfied for
the Exemption to apply are the following:
1. The Acquisition of the Class A Certificates by a Plan is
on terms (including the price for the Class A Certificates) that are
at least as favorable to the Plan as they would be in an arm's length
transaction with an unrelated party;
2. The rights and interests evidenced by the Class A
Certificates acquired by the Plan are not subordinated to the rights
and interests evidenced by other certificates of the Trust Fund;
3. The Class A Certificates acquired by the Plan have
received a rating at the time of such acquisition that is in one of
the three highest generic rating categories from any of Standard &
Poor's, Moody's, Fitch, or Duff & Phelps Credit Rating Co. ("D&P");
4. The sum of all payments made to the Underwriter in
connection with the distribution of the Class A Certificates
represents not more than reasonable compensation for underwriting the
Class A Certificates. The sum of all payments made to and retained by
the Servicer represents not more than reasonable compensation for the
Servicer's services under the Pooling and Servicing Agreement and
reimbursement of the Servicer's reasonable expenses in connection
therewith;
5. The Trustee is not an affiliate of any other member of the
Restricted Group (as defined below); and
6. The Plan investing in the Class A Certificates is an
"accredited investor" as defined in Rule 501(a)(1) of Regulation D of
the Securities and Exchange Commission under the Securities Act of
1933.
<PAGE>
The Trust Fund also must meet the following requirements:
a. The corpus of the Trust Fund must consist solely of
assets of the type which have been included in other investment pools;
b. certificates in such other investment pools must have
been rated in one of the three highest rating categories of Standard
& Poor's, Moody's, D&P or Fitch for at least one year prior to the
Plan's acquisition of certificates; and
c. certificates evidencing interests in such other
investment pools must have been purchased by investors other than
Plans for at least one year prior to any Plan's acquisition of Class
A Certificates.
In order for the Exemption to apply to certain self-dealing/conflict
of interest prohibited transactions that may occur when a Plan fiduciary
causes the Plan to acquire Class A Certificates, the Exemption requires, among
other matters, that: (i) 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 and at least fifty percent of the aggregate interest
in the Trust Fund is acquired by persons independent of the Restricted Group
(as defined below); (ii) such fiduciary (or its affiliate) is an obligor with
respect to 5 percent or less of the fair market value of the obligations
contained in the Trust Fund; (iii) the Plan's investment in Class A
Certificates does not exceed twenty-five percent (25%) of all of the
certificates outstanding at the time of the acquisition and (iv) immediately
after the acquisition, no more than twenty-five percent (25%) of the assets of
the Plan are invested in certificates representing an interest in one or more
trusts containing assets sold or serviced by the same entity.
S-59
<PAGE>
The Exemption does not apply to certain prohibited transactions in
the case of Plans sponsored by the Underwriter, the Trustee, the Servicer, any
obligor with respect to more than 5% of the fair market value of the Mortgage
Loans included in the Trust Fund, any entity deemed to be a "sponsor" of the
Trust Fund as such term is defined in the Exemption, or any affiliate of any
such party (the "Restricted Group").
On July 21, 1997, the DOL published in the Federal Register
amendments to the Exemptions ("PTE 97-34"), which extend exemptive relief to
certain mortgage-backed and asset-backed securities transactions using
pre-funding accounts for trusts issuing pass-through certificates. With
respect to the Certificates, PTE 97-34 generally allows Mortgage Loans
supporting payments to Beneficial Owners, and having a value equal to no more
than 25% of the total principal amount of the Certificates being offered by
the Trust, to be transferred to the Trust within a Pre-Funding period no
longer than 90 days or three months following the Closing Date instead of
requiring that all such Mortgage Loans be either identified or transferred on
or before the Closing Date. The relief will apply to the purchase, sale and
holding of the Certificates, provided that the following general conditions
are met:
(1) the ratio of the amount allocated to the Pre-Funding Account to
the total principal amount of the Certificates being offered
("Pre-Funding Limit") does not exceed 25%;
(2) all Subsequent Mortgage Loans meet the same terms and conditions
for eligibility as the original Mortgage Loans used to create the Trust, which
terms and conditions have been approved by the Rating Agencies;
(3) the transfer of such Subsequent Mortgage Loans to the Trust
during the Pre-Funding Period does not result in the Certificates to be
covered by the Exemptions receiving a lower credit rating from a Rating Agency
upon termination of the Pre-Funding Period than the rating that was obtained
at the time of the initial issuance of the Certificates by the Trust;
(4) solely as a result of the use of pre-funding, the weighted
average annual percentage interest rate (the "Average Interest Rate") for all
of the Mortgage Loans and Subsequent Mortgage Loans in the Trust at the end of
the Pre-Funding Period is not more than 100 basis points lower than the
Average Interest Rate for the Mortgage Loans which were transferred to the
Trust on the Closing Date;
<PAGE>
(5) either;
(i) the characteristics of the Subsequent Mortgage Loans are
monitored by an insurer or other credit support provider which
is independent of the Depositor; or
(ii) an independent accountant retained by the Depositor provides
the Depositor with a letter (with copies provided to the
Rating Agencies, the Underwriter and the Trustee) stating
whether or not the characteristics of the Subsequent
Mortgage Loans conform to the characteristics described in
the Prospectus Supplement and/or Pooling and Servicing
Agreement. In preparing such letter, the independent
accountant must use the same type of procedures as were
applicable to the Mortgage Loans which were transferred to
the Trust as of the Closing Date;
(6) the Pre-Funding Period ends no later than three months or 90 days
after the Closing Date or earlier in certain circumstances if the Pre-Funding
Account falls below the minimum level specified in the Pooling and Servicing
Agreement or an event of default occurs;
(7) amounts transferred to any Pre-Funding Account and/or Capitalized
Interest Account used in connection with the pre-funding may be invested only
in investments which are permitted by the Rating Agencies and:
(i) are direct obligations of, or obligations fully guaranteed
as to timely payment of principal and interest by, the
United States or any agency or instrumentality thereof
(provided that such obligations are backed by the full faith
and credit of the United States); or
(ii) have been rated (or the obligor has been rated) in one of the
three highest generic rating categories by such Rating Agency;
S-60
<PAGE>
(8) the Prospectus or Prospectus Supplement describes;
(i) any Pre-Funding Account and/or Capitalized Interest Account;
(ii) the duration of the Pre-Funding Period;
(iii) the percentage and/or dollar amount of the Pre-Funding Limit
for the Pre-Funding Period that will be remitted to Owners
of Certificates as repayments of principal; and
(iv) that the amounts remaining in the Pre-Funding Account at the
end of the Pre-Funding Period will be remitted to Owners of
Certificates as repayments of principal; and
(9) the Pooling and Servicing Agreement describes the permitted
investments for the Pre-Funding Account and/or Capitalized Interest Account
and, if not disclosed in the Prospectus or Prospectus Supplement, the terms
and conditions for eligibility of Subsequent Mortgage Loans.
The Exemption, as amended by PTE 97-34, may be available for the
purchase of Class A Certificates by Plans. Before purchasing a Class A
Certificate, a fiduciary of an ERISA Plan should make its own determination as
to the availability of the exemptive relief provided in the Exemption, as
amended by PTE 97-34, and whether the conditions of such Exemption will be
applicable to the Class A Certificates. Any fiduciary of an ERISA Plan
considering whether to purchase a Class A Certificate should also carefully
review with its own legal advisors the applicability of the fiduciary duty and
prohibited transaction provisions of ERISA and the Code to such investment.
A governmental plan as defined in Section 3(32) of ERISA is not
subject to ERISA, or Code Section 4975. However, such a governmental plan may
be subject to a federal, state, or local law, which is, to a material extent,
similar to the provisions of ERISA or Code Section 4975 ("Similar Law"). A
fiduciary of a governmental plan should make its own determination as to the
need for and the availability of any exemptive relief under Similar Law.
The sale of Certificates to a Plan is in no respect a representation
by the Depositor or the Underwriter that this investment meets all relevant
legal requirements with respect to investments by Plans generally or any
particular Plan, or that this investment is appropriate for Plans generally or
any particular ERISA Plan.
<PAGE>
LEGAL INVESTMENT
The Class A Certificates will not constitute "mortgage related
securities" for purposes of the Secondary Mortgage Market Enhancement Act of
1984 ("SMMEA").
PLAN OF DISTRIBUTION
Subject to the terms and conditions of the Underwriting Agreement
dated as of February 27, 1998 (the "Underwriting Agreement") between the
Depositor and Prudential Securities Incorporated (the "Underwriter"), the
Depositor has agreed to sell to the Underwriter and the Underwriter has agreed
to purchase from the Depositor the Class A Certificates.
The Depositor is obligated to sell, and the Underwriter is obligated
to purchase, all of the Class A Certificates offered hereby if any are
purchased.
The Underwriter has advised the Depositor that it proposes to offer
the Class A Certificates purchased by the Underwriter for sale from time to
time in one or more negotiated transactions or otherwise, at market prices
prevailing at the time of sale, at prices related to such market prices or at
negotiated prices. The Underwriter may effect such transactions by selling
such Certificates to or through dealers, and such dealers may receive
compensation in the form of underwriting discounts, concessions or commissions
from the Underwriter or purchasers of the Class A Certificates for whom they
may act as agent. Any dealers that participate with the Underwriter in the
distribution of the Class A Certificates purchased by the Underwriter may be
deemed to be underwriters, and any discounts or commissions received by them
or the Underwriter and any profit on the resale of Class A Certificates by
them or the Underwriter may be deemed to be underwriting discounts or
commissions under the Securities Act.
In connection with the offering of the Class A Certificates, the
Underwriter and its affiliates may engage in transactions that stabilize,
maintain or otherwise affect the market price of the Class A Certificates.
Such transactions may include stabilization transactions effected in
accordance with Rule 104 of Regulation M, pursuant to which such person may
bid for or purchase the Class A Certificates for the purpose of stabilizing
its market price. Any of the transactions described in this paragraph may
result in the maintenance of the price of the Class A Certificates at a level
above that which might otherwise prevail in the open market. None of the
transactions described in this paragraph is required, and, if they are taken,
may be discontinued at any time without notice.
S-61
<PAGE>
For further information regarding any offer or sale of the Class A
Certificates pursuant to this Prospectus Supplement and the Prospectus, see
"Plan of Distribution" in the Prospectus.
The Underwriting Agreement provides that the Depositor will indemnify
the Underwriter or contribute to losses arising out of certain liabilities,
including liabilities under the Securities Act.
Prudential Securities Incorporated is an affiliate of the Depositor.
EXPERTS
The consolidated balance sheets of Financial Security Assurance Inc.
and subsidiaries as of December 31, 1996 and 1995 and the related consolidated
statements of income, changes in shareholder's equity, and cash flows for each
of the three years in the period ended December 31, 1996, incorporated by
reference in this Prospectus Supplement, have been incorporated herein in
reliance on the report of Coopers & Lybrand L.L.P., independent accountants,
given on the authority of that firm as experts in accounting and auditing.
RATINGS
It is a condition to the original issuance of the Class A
Certificates that they will receive ratings of "AAA" by Standard & Poor's and
"Aaa" by Moody's. The ratings assigned to the Class A Certificates will take
into account the claims-paying ability of the Certificate Insurer.
Explanations of the significance of such ratings may be obtained from Moody's
Investors Service, Inc., 99 Church Street, New York, New York 10007 and
Standard & Poor's Rating Services, 25 Broadway, New York, New York 10004. Such
ratings will be the views only of such rating agencies. There is no assurance
that any such ratings will continue for any period of time or that such
ratings will not be revised or withdrawn. Any such revision or withdrawal of
such ratings may have an adverse effect on the market price of the Class A
Certificates.
LEGAL MATTERS
Certain legal matters in connection with the Class A Certificates
will be passed upon for the Originators, the Seller and the Servicer by Blank
Rome Comisky & McCauley LLP, Philadelphia, Pennsylvania, and for the Depositor
and the Underwriter by Dewey Ballantine LLP, New York, New York.
S-62
<PAGE>
================================================================================
No dealer, salesman or other person has been authorized to give any information
or to make any representations not contained in this Prospectus and, if given
or made, such information or representations must not be relied upon as having
been authorized by the Depositor or by the Underwriter. This Prospectus
Supplement and the Prospectus do not constitute an offer to sell, or a
solicitation of an offer to buy, the securities offered hereby by anyone in any
jurisdiction in which such an offer or solicitation is not authorized or in
which the person making such offer or solicitation is not qualified to do so or
to anyone to whom it is unlawful to make any such offer or solicitation.
Neither the delivery of this Prospectus Supplement and the Prospectus nor any
sale made hereunder shall, under any circumstances, create an implication that
information herein or therein is correct as of any time since the date of this
Prospectus Supplement or the Prospectus.
TABLE OF CONTENTS
Page
---
PROSPECTUS SUPPLEMENT
Incorporation of Certain Information by Reference ................. S-2
Summary Terms of the Certificates ................................. S-3
Risk Factors ...................................................... S-17
The Mortgage Pool ................................................. S-23
The Originators, the Seller and the Servicer ...................... S-31
Prepayment and Yield Considerations ............................... S-38
Description of the Certificates ................................... S-41
Servicing of the Mortgage Loans ................................... S-51
The Certificate Insurance Policy .................................. S-55
The Certificate Insurer ........................................... S-57
Certain Federal Income Tax Considerations ......................... S-58
ERISA Considerations .............................................. S-58
Legal Investment .................................................. S-61
Plan of Distribution .............................................. S-61
Experts ........................................................... S-62
Ratings ........................................................... S-62
Legal Matters ..................................................... S-62
PROSPECTUS
Reports ........................................................... 3
Available Information ............................................. 3
Incorporation of Certain Information by Reference ................. 3
Summary of Prospectus ............................................. 4
Risk Factors ...................................................... 13
The Trust Funds ................................................... 18
Description of the Certificates ................................... 29
Credit Support .................................................... 43
Prepayment and Yield Considerations ............................... 48
Use of Proceeds ................................................... 52
The Depositor ..................................................... 52
Underwriting Guidelines ........................................... 52
Servicing of the Mortgage Loans and Contracts ..................... 54
The Pooling and Servicing Agreement ............................... 64
Certain Legal Aspects of the Mortgage Loans and Contracts ......... 67
Certain Federal Income Tax Consequences ........................... 81
ERISA Considerations .............................................. 93
Legal Investment .................................................. 96
Plan of Distribution .............................................. 98
Legal Matters ..................................................... 99
Rating ............................................................ 99
Additional Information ............................................ 99
Index of Significant Definitions .................................. 100
================================================================================
<PAGE>
================================================================================
ABFS Mortgage Loan Trust 1998-1
American Business Credit, Inc.
(Servicer)
&
Prudential Securities
Secured Financing Corporation
(Depositor)
$39,900,000
Adjustable Rate Class A-1 Certificates
$10,000,000
6.490% Class A-2 Certificates
$19,900,000
6.490% Class A-3 Certificates
$11,400,000
6.695% Class A-4 Certificates
$11,725,000
7.145%(1) Class A-5 Certificates
$10,500,000
6.595% Class A-6 Certificates
(1) Subject to increase as set forth herein
Mortgage Pass-Through Certificates,
Series 1998-1
------------------------------
PROSPECTUS SUPPLEMENT
------------------------------
Prudential Securities
Incorporated
February 27, 1998
================================================================================
