AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 23, 2000
Registration No. 333-________
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
ASSET BACKED SECURITIES CORPORATION
(Exact name of Registrant as specified in its charter)
on behalf of itself and trusts with respect to which
it is the settlor, sponsor or depositor
DELAWARE 13-3354848
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
--------------------------------------
11 Madison Avenue
New York, New York 10010
(212) 325-2000
(Address, including zip code, and telephone number, including area code,
of Registrant's principal executive offices)
-----------------
Joseph M. Donovan
Vice President
Asset Backed Securities Corporation
11 Madison Avenue
New York, New York 10010
(212) 325-3681
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------
Copy to:
Reed D. Auerbach
Stroock & Stroock & Lavan LLP
180 Maiden Lane
New York, New York 10038
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time to
time after this Registration Statement becomes effective.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. |_|
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. |X|
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|
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CALCULATION OF REGISTRATION FEE
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF SECURITIES TO AMOUNT TO BE AGGREGATE AGGREGATE AMOUNT OF
BE REGISTERED(1) REGISTERED(2) PRICE PER UNIT (2) OFFERING PRICE (2) REGISTRATION FEE
<S> <C> <C> <C> <C>
Notes and Certificates $1,000,000 100% $1,000,000 $264
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(1) The securities are also being registered for the purpose of market making.
(2) Estimated solely for the purpose of calculating the registration fee.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(A), MAY
DETERMINE.
<PAGE>
EXPLANATORY NOTE
This Registration Statement contains six base Prospectuses (each, a
"Prospectus") relating to the offering of one or more series of securities each
of which will include one or more classes of certificates and/or one or more
classes of notes.
The first Prospectus (the "Automobile Prospectus") contemplates the
securitization of assets which may include (1) certain new and used automobile
or recreational vehicle, including motor homes, campers, boats, boat motors,
motorcycles, jet skies, wave runners, all terrain vehicles and snowmobiles, van
truck, buses and trailer receivables or (2) asset backed certificates or notes,
each representing an interest in a trust fund consisting of a pool of such
automobile receivables.
The second Prospectus (the "Mortgage Prospectus") contemplates the
securitization of assets which may include (1) one or more mortgage pools,
containing (A) mortgage loans secured by residential, cooperative and
multifamily properties and (B) certain conventional mortgage pass-through
certificates issued by one or more trusts established by one or more private
entities or (2) one or more contract pools containing manufactured housing
conditional sales contracts and installment loan agreements or participation
certificates representing participation interests in such contracts.
The third Prospectus (the "Credit Card Prospectus") contemplates the
securitization of assets that may include a pool of receivables arising from
time to time in the ordinary course of business in one or more designated
portfolios of credit card, charge card or certain other types of accounts and
asset-backed securities consisting of notes secured by, receivables arising in
certain designated portfolios of credit card, charge card or certain other types
of accounts.
The fourth Prospectus (the "Floorplan Prospectus") contemplates the
securitization of assets that may include a pool of receivables arising from
time to time in the ordinary course of business in one or more designated
portfolios of wholesale consumer receivables and asset-backed securities
consisting of notes secured by, receivables arising in certain designated
portfolios of wholesale consumer receivables.
The fifth Prospectus (the "Equipment Prospectus") contemplates the
securitization of assets that may include a pool of receivables arising from
time to time in the ordinary course of business in one or more designated
portfolios of equipment receivables.
The sixth Prospectus (the "Student Loan Prospectus") contemplates the
securitization of assets that may include a pool of receivables arising from
time to time in the ordinary course of business in one or more designated
portfolios of student loans.
This Registration Statement also contains one form of prospectus
supplement with respect to each base Prospectus.
In addition, if and to the extent required by applicable law, each
Prospectus and the related Prospectus Supplement will also be used after the
completion of the related offering in connection with certain offers and sales
related to market-making transactions in the offered securities. In order to
register under Rule 415 those securities which may be offered and sold in
market-making transactions, the appropriate box on the cover page of the
Registration Statement has been checked and the undertakings required by Item
512(a) of Regulation S-X have been included in Item 17 of Part 17.
<PAGE>
The information in this Prospectus is not complete and may be changed.
We may not sell these securities until the Registration Statement filed with the
Securities and Exchange commission is effective. This Prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any jurisdiction where the offer or sale is not permitted.
<PAGE>
SUBJECT TO COMPLETION, DATED _________, ____
PROSPECTUS SUPPLEMENT TO PROSPECTUS DATED ______, _____
$----------
____ AUTO RECEIVABLES OWNER TRUST ____-_
$_________ _____% ASSET BACKED NOTES, CLASS A-1
$_________ _____% ASSET BACKED NOTES, CLASS A-2
---------------------
Seller and Servicer
ASSET BACKED SECURITIES CORPORATION
Company
The notes will be issued by a trust. The sources for payment of the notes are a
pool of non-prime auto loans held by the issuing trust, cash held by the issuing
trust and, in the case of the class A-1 notes and class A-2 notes, a financial
guaranty insurance policy issued by ___________________.
We are only offering to you the class A-1 notes and class A-2 notes. The class B
notes are subordinated to the class A notes to the extent described in this
prospectus supplement. Interest and principal on the notes are scheduled to be
paid monthly, on the __th day of the month. The first scheduled payment date is
______, _____.
Credit Suisse First Boston Corporation is purchasing the class A-1 notes from
the issuing trust at approximately __% of the principal amount of the class A-1
notes plus accrued interest from ______, _____ and the class A-2 notes at
approximately _____% of the principal amount of the class A-2 notes plus accrued
interest from ______, _____. Credit Suisse First Boston Corporation is offering
the class A-1 notes and class A-2 notes from time to time in negotiated
transactions or at varying prices which will be determined at the time of sale.
The aggregate proceeds to the issuing trust, before deducting expenses payable
by or on behalf of the issuing trust estimated at $_____, will be $__________.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS SUPPLEMENT OR THE PROSPECTUS TO WHICH IT RELATES IS TRUTHFUL OR
COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THE NOTES
ARE NOT INTERESTS IN OR OBLIGATIONS OF _____________________, ASSET BACKED
SECURITIES CORPORATION OR ANY OF THEIR AFFILIATES.
CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE S-__ OF THIS PROSPECTUS
SUPPLEMENT AND PAGE __ OF THE PROSPECTUS.
CREDIT SUISSE FIRST BOSTON
Prospectus Supplement dated ________, ___
<PAGE>
TABLE OF CONTENTS
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PROSPECTUS SUPPLEMENT PROSPECTUS
Summary...................................S-4 Prospectus Supplement............................
Risk Factors..............................S-9 Reports to Securityholders.......................
The Seller and The Servicer..............S-12 Available Information............................
The Trust................................S-12 Incorporation of Certain Documents by
Trust Property...........................S-13 Reference........................................
The Seller's Automobile Financing ProgramS-15 Summary of Terms.................................
The Backup Servicer......................S-19 Risk Factors.....................................
The Receivables..........................S-19 The Trusts.......................................
Yield Considerations.....................S-30 The Trustee......................................
Use of Proceeds..........................S-30 The Receivables Pools............................
The Insurer..............................S-30 The Collateral Certificates......................
Incorporation of Certain Documents By The Government Securities........................
Reference................................S-31 Weighed Average Life of the Securities...........
The Notes................................S-32 Pool Factors and Trading Information.............
Description of the Transaction Documents.S-48 The Seller and the Servicer......................
The Policy...............................S-57 Use of Proceeds..................................
Material Federal Income Tax Consequences S-60 Description of the Notes.........................
Certain State Tax Consequences...........S-64 Description of the Certificate...................
ERISA Considerations.....................S-64 Certain Information Regarding the
Ratings..................................S-65 Securities.......................................
Underwriting.............................S-65 Description of the Transfer and Servicer
Experts..................................S-66 Agreement........................................
Legal Matters............................S-66 Certain Matters Regarding the Servicer...........
Glossary.................................S-67 Certain Legal Aspects of the
Index of Terms...........................S-71 Receivables......................................
Material Federal Income Tax
Consequences.....................................
State and local Tax Consequences.................
ERISA Considerations.............................
Plan of Distribution.............................
Legal Matters....................................
Index of Terms...................................
Global Clearance, Settlement and.................
Documentation Procedures.........................
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<PAGE>
YOU SHOULD RELY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR TO
WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
INFORMATION THAT IS DIFFERENT. THIS DOCUMENT MAY ONLY BE USED WHERE IT IS LEGAL
TO SELL THESE SECURITIES. THE INFORMATION IN THIS DOCUMENT MAY ONLY BE ACCURATE
ON THE DATE OF THIS DOCUMENT.
We provide information to you about the class A-1 notes and class A-2
notes in two separate documents that progressively provide more detail: (a) the
accompanying prospectus, which provides general information, some of which may
not apply to your class A-1 notes and class A-2 notes and (b) this prospectus
supplement, which describes the specific terms of your class A-1 notes and class
A-2 notes.
IF THERE IS A CONFLICT BETWEEN THIS PROSPECTUS SUPPLEMENT AND THE
ACCOMPANYING PROSPECTUS, YOU SHOULD RELY ON THE INFORMATION IN THIS PROSPECTUS
SUPPLEMENT.
This prospectus supplement and the accompanying prospectus include
cross-references to captions in these materials where you can find further
related discussions. The following table of contents provides the pages on which
these captions are located.
[We have filed preliminary information regarding the trust's assets
and the class A-1 notes and class A-2 notes with the SEC. The information
contained in this document supersedes all of that preliminary information, which
was prepared by the underwriters for prospective investors.]
Until _________, _____ all dealers that effect transactions in the
class A-1 notes and class A-2 notes, whether or not participating in this
offering, may be required to deliver a prospectus and prospectus supplement.
This requirement is in addition to the dealer's obligation to deliver a
prospectus and prospectus supplement when acting as underwriters with respect to
their unsold allotments or subscriptions.
We are not offering the class A-1 notes and class A-2 notes in any
state where the offer is not permitted.
We do not claim the accuracy of the information in this prospectus
supplement and the accompanying prospectus as of any date other than the dates
stated on their respective covers.
<PAGE>
SUMMARY
o This summary highlights selected information from this prospectus
supplement and does not contain all of the information that you need to
consider in making your investment decision. To understand all of the terms
of the offering of the notes, read carefully this entire prospectus
supplement and the accompanying prospectus.
o This summary provides an overview of calculations, cash flows and other
information to aid your understanding and is qualified by the full
description of these calculations, cash flows and other information in this
prospectus supplement and the accompanying prospectus.
o You can find a listing of the pages where capitalized terms used in this
summary are defined under the caption "Index of Terms" beginning on page
S-__ in this prospectus supplement.
<PAGE>
PARTIES
THE TRUST
___ Auto Receivables Owner Trust ____-_ is a Delaware business trust. The trust
will issue the notes and be liable for their payment. The issuing trust's
principal asset will be a pool of auto loans.
SELLER AND SERVICER
_____________________ is a ______ corporation. It will sell the auto loans to
Asset Backed Securities Corporation. _____________________ will also
service the auto loans held by the issuing trust.
COMPANY
Asset Backed Securities Corporation is a special purpose Delaware corporation.
Asset Backed Securities Corporation is an indirect, wholly owned subsidiary of
Credit Suisse First Boston Corporation. Asset Backed Securities Corporation will
sell the auto loans to the issuing trust. Neither Credit Suisse First Boston,
Inc. nor any of its affiliates has guaranteed, will guarantee or is or will be
otherwise obligated with respect to any notes.
THE INSURER
___________________ is a ________ financial guaranty insurance company.
___________ will issue a policy, which will guarantee the payment of timely
interest and principal due on the class A-1 notes and class A-2 notes but only
as set forth in the section of this prospectus supplement titled "The Policy."
THE OWNER TRUSTEE
____________________ is a ________. ____________________ will be the owner
trustee.
THE INDENTURE TRUSTEE
____________________ is a _______________. _____________ will be the indenture
trustee and the backup servicer.
DATES
INITIAL CUTOFF DATE
o ________, _______. The issuing trust will receive payments due on, or
received with respect to, the auto loans after this date.
CLOSING DATE
o On or about ________, ___.
DESCRIPTION OF THE SECURITIES
The issuing trust will issue three classes of asset backed notes. The class A-1
notes will be designated as the "Class A-1 Notes" and the class A-2 notes will
be designated as the "Class A-2 Notes". The Class A-1 Notes together with the
Class A-2 Notes will be designated as the "Class A Notes". The class B notes
will be designated as the "Class B Notes." Only the Class A Notes are offered to
you pursuant to this prospectus supplement. Any information in this prospectus
supplement relating to the Class B Notes is presented solely to provide you with
a better understanding of the Class A Notes.
Each of the Class A-1 Notes and Class A-2 Notes will have the initial principal
amount and the interest rate set forth in the following table. The dates on
which the final payment of principal and interest on each of the Class A-1 Notes
and Class A-2 Notes is scheduled to be made are also set forth in the following
table.
INITIAL NOTE FINAL
CLASS PRINCIPAL INTEREST SCHEDULE
BALANCE RATE PAYMENT DATE
A-1 $ _________ _____% __________
A-2 $ _________ _____% __________
The Class A Notes will initially be issued in book-entry form only. The Class A
Notes will be issued in minimum denominations of $1,000 and multiples of $1,000
in excess of $1,000.
You may hold your Class A Notes through The Depository Trust Company in the
United States.
The notes will be secured solely by the pool of non-prime auto loans and the
other assets of the issuing trust which are described under the section entitled
"The Trust Property."
A collection period means, with respect to a payment date, the calendar month
prior to the month in which the payment date occurs.
The Class A-2 Notes will not receive any payment of principal on a payment date
until the full amount of the Class A-1 Notes principal has been paid in full. On
each payment date, the Class B Notes will not receive any payment of interest or
principal until all amounts due the Class A Notes on the payment date have been
paid in full.
PAYMENT DATES
o The payment date will be the __th day of each month, or, if that day is not
a business day, on the next succeeding business day. The first payment date
will be ______, _____.
o The record date for all payment dates is the __th day of each month, or, if
that day is not a business day, on the prior business day.
INTEREST
o In the case of the first payment date, interest will accrue from ______,
_____ through and excluding the first payment date of ______, _____. For
any subsequent payment interest will accrue on the Class A Notes during the
month preceding each payment date. Interest on the notes will be calculated
on a "30/360" basis.
PRINCIPAL
o Prior to achieving a required level of overcollateralization, the amount of
principal available to be distributed to the Class A Notes is generally
equal to (1) the amount of collections on the auto loan pool allocable to
principal during the prior calendar month plus any losses recognized on the
auto loan pool during the prior calendar month and (2) a specified amount
of excess interest received on the auto loan pool during the prior calendar
month, after paying specific expenses of the trust, interest on the Class A
Notes and funding the reserve account to the required level, necessary to
achieve the required level of overcollateralization.
o Once the required level of overcollateralization has been reached, the
amount of principal available to be distributed to the Class A Notes will
be equal to (1) the amount of collections on the auto loan pool allocable
to principal during the prior calendar month plus any losses recognized on
the auto loan pool during the prior calendar month less (2) the excess of
(a) the amount of overcollateralization on the payment date less (b) the
required level of overcollateralization on the payment date. Additionally,
once the required level of overcollateralization has been reached, excess
interest will no longer be used to create any further
overcollateralization.
o Principal distributable to the Class A Notes will be distributed first to
the Class A-1 Notes until its principal balance is reduced to zero and then
will be distributed to the Class A-2 Notes until its principal balance has
been reduced to zero.
o In addition, the outstanding principal amount of the Class A-1 Notes and
the Class A-2 Notes, to the extent not previously paid, will be payable on
the final scheduled payment date of the related class of notes.
THE TRUST ASSETS
The issuing trust's assets will include:
o non-prime motor vehicle retail installment sale contracts secured by new
and used automobiles and light-duty trucks;
o monies due on, or received under the receivables, after ________, _____;
o an assignment of the security interests in the vehicles securing the auto
loan pool;
o the related files;
o all rights to proceeds from claims on physical damage, credit life and
disability insurance policies covering the vehicles or the obligors;
o all rights to liquidation proceeds with respect to the auto loan pool;
o an assignment of the rights of Asset Backed Securities Corporation under a
receivables purchase agreement with _____________;
o an assignment of the rights of ____________ against dealers under
agreements between ________________ and these dealers;
o specific bank accounts;
o all proceeds of the foregoing; and
o particular rights under the principal transaction documents for this
offering.
THE AUTO LOAN POOL
The auto loans consist of non-prime motor vehicle retail installment sale
contracts originated by dealers and then acquired by _____________________
pursuant to its contract acquisition program. [The motor vehicle retail
installment sale contracts consist primarily of contracts with individuals with
less than perfect credit due to various factors. These factors include the
manner in which the individuals have handled previous credit, the limited extent
of their prior credit history and/or their limited financial resources.]
STATISTICAL INFORMATION
The statistical information in this prospectus supplement is based on the auto
loans in the pool as of ________, _______. It is expected that the composition
and characteristics of the pool of auto loans on the closing date will be
similar to the information set forth in this prospectus supplement. However,
some auto loans in the pool may be excluded on the closing date as a result of
administrative considerations. _____________________ does not believe that the
characteristics of the auto loans included in the trust on the closing date in
the aggregate will differ materially from the information set forth in this
prospectus supplement.
o As of ________, _______ the auto loans in the pool have:
- an aggregate principal balance of $___________;
- a weighted average annual percentage rate of approximately _____%;
- a weighted average original term to scheduled maturity of
approximately 60 months;
- a weighted average remaining term to scheduled maturity of
approximately ___ months; and
- a remaining term to scheduled maturity of not more than 72 months and
not less than ___ months.
PRE-FUNDING FEATURE
Approximately $___________ of the proceeds of the notes will be held by
_______________ in an account which is formed solely to hold this money, and
used to purchase additional auto loans with the prior written consent of
___________________ in each case. The issuing trust will purchase from Asset
Backed Securities Corporation additional non-prime auto loans from time to time
on or before ______, _____, from funds on deposit in this account. The
obligation of Asset Backed Securities Corporation to sell additional auto loans
to the trust is conditioned on these loans having been sold to Asset Backed
Securities Corporation from _____________________.
The auto loans acquired by the issuing trust during the period between the day
of the closing and ______, _____, will also be originated or acquired by
_____________________. The characteristics of the subsequently-acquired auto
loans are not expected to differ to any great extent from the auto loans
acquired by the issuing trust on the day of the closing.
THE INSURANCE POLICY
On the day of the closing, ___________________ will issue a financial guaranty
insurance policy for the benefit of the Class A noteholders. Pursuant to this
policy, ___________________ will unconditionally and irrevocably guarantee the
payments of interest and principal for each payment date with respect to the
Class A Notes required to be made during the term of the policy, subject to the
further provisions of the policy as described in this prospectus supplement. The
Class B Notes do not have the benefit of the policy.
OPTIONAL REDEMPTION
The notes, if still outstanding, may be redeemed in whole, but not in part, on
any payment date on which _____________________ exercises its "clean-up call"
option to purchase the auto loan pool. This can only occur after the pool
balance declines to 10% or less of the original pool balance.
_____________________'s exercise of the "clean-up call" is also subject to the
satisfaction of particular conditions, including obtaining the prior written
consent, in some circumstances, of ___________________ The redemption price is
equal to the unpaid principal amount of the notes plus accrued and unpaid
interest on the notes.
MANDATORY REDEMPTION
IF PRE-FUNDING ACCOUNT IS NOT DEPLETED
Each of the Class A-1 Notes and Class A-2 Notes will be redeemed in part on a
pro rata basis if any portion of the $___________ deposited in a segregated
pre-funding account with ____________________ remains on deposit in that account
on ______, _____, or prior to this date if the amount remaining in the account
is less than $100,000, provided, however if the amount remaining in the
pre-funding account is less than $100,000, only the Class A-1 Notes will be
redeemed.
UPON EVENT OF DEFAULT
The notes may be accelerated and subject to immediate payment at par upon the
occurrence of an event of default under the indenture. So long as
___________________ is not in default, the power to declare an event of default
will be held by ___________________. In the case of an event of default, the
notes will automatically be accelerated and subject to immediate payment at par.
The policy issued by ___________________ does not guarantee payment of any
amounts that become due on an accelerated basis, unless ___________________
elects, in its sole discretion, to pay the amounts in whole or in part.
RATING OF THE NOTES
The Class A Notes must receive at least the following ratings from ________ and
___________ in order to be issued.
RATING
-----------
CLASS ____ _____
A-1..........................
A-2..........................
TAX STATUS
Stroock & Stroock & Lavan LLP, special federal tax counsel, will deliver an
opinion of counsel that, for federal income tax purposes, the Class A Notes will
be treated as indebtedness. Each noteholder, by accepting a Class A Note, will
agree to treat the notes as indebtedness.
ERISA CONSIDERATION
Subject to particular considerations discussed in this prospectus supplement
under "ERISA Considerations," the Class A Notes are eligible for purchase by
employee benefit plans.
<PAGE>
RISK FACTORS
YOU SHOULD CONSIDER, IN ADDITION TO THE FACTORS DESCRIBED UNDER "RISK
FACTORS" IN THE PROSPECTUS, THE FOLLOWING RISK FACTORS IN CONNECTION WITH THE
PURCHASE OF THE CLASS A NOTES:
THE INFORMATION RELATING TO THE AUTO LOANS MAY NOT REFLECT ACTUAL EXPERIENCE.
There can be no assurance that the net loss experience calculated and
presented in this prospectus supplement by _____________________ with respect to
its portfolio of serviced contracts will reflect actual experience with respect
to the auto loans included in the issuing trust. In addition, there can be no
assurance that the future delinquency or loan loss experience of the servicer
with respect to the auto loans will be better or worse than that set forth in
this prospectus supplement with respect to _____________________'s servicing
portfolio.
THE _____________________ FINANCE PROGRAM AND THE NATURE OF OBLIGORS MAY
INCREASE THE RISK OF DELINQUENCIES AND LOSSES.
_____________________ purchases loans generally originated by
automobile dealers for sale and assignment to _____________________.
_____________________ purchases retail automobile installment sale contracts
which may not meet the credit standards of traditional primary lenders. As a
result, the underwriting standards applied by _____________________ are not as
stringent as those of the finance companies of motor vehicle manufacturers or
other financial institutions. The _____________________ finance program focuses
on the non-prime market, including borrowers with sub-standard credit profiles
who may not be able to receive financing from more traditional sources. The
borrowers may have had credit problems in the past, including prior
delinquencies, repossessions, bankruptcy filings or charge-offs by other credit
companies. Accordingly, borrowers may have greater difficulty or be less likely
to make their scheduled payments. The number of delinquencies and losses on the
auto loans is expected to be higher than would be the case with lower risk
borrowers. Due to the credit quality of these borrowers, the auto loans have
been originated with higher annual percentage interest rates than more
traditional lenders charge lower risk borrowers. Any increase in losses on the
auto loans will result in accelerated prepayments on the Class A Notes. Any
reinvestment risks associated with prepayment will be borne by the noteholders.
Additionally, if ___________________, as the security insurer, defaults under
the policy, you will bear the risk of loss on the auto loans. You are urged to
consider the credit quality of the auto loans when analyzing an investment in
the notes.
A CHANGE IN SERVICER MAY ADVERSELY AFFECT COLLECTIONS ON THE AUTO LOANS.
_____________________ believes that its credit loss and delinquency
experience reflect in part its trained staff and collection procedures. If a
servicer termination event occurs under the sale and servicing agreement and
_____________________ is removed as servicer, or if _____________________
resigns or is terminated as servicer, the backup servicer has agreed to assume
the obligations of successor servicer. Typically, a change in servicers results
in a temporary disruption of servicing. There can be no assurance, however, that
collections with respect to the auto loans will not be adversely affected by any
change in servicer.
THE ISSUING TRUST HAS ONLY LIMITED ASSETS.
The sole sources for repayment of the notes are payments on the auto
loans, amounts on deposit in the pre-funding account, other cash accounts held
by ____________________, proceeds from the repossession and sale of related
financed vehicles that secure defaulted auto loans and payments made under the
insurance policy. The receivables are NOT insured or guaranteed by any person.
The notes represent obligations of the trust and will not be insured or
guaranteed by any entity. The money in the pre-funding account will be used
solely to purchase additional auto loans or, in limited circumstances, redeem a
portion of the Class A Notes and is not available to cover losses on the auto
loan pool. The capitalized interest account is designed to cover obligations of
the issuing trust relating to the portion of its assets not invested in auto
loans and is not designed to provide protection against losses on the auto loan
pool. Although the insurance policy will be available to cover shortfalls in
distributions of the payments due on the Class A Notes, pursuant to, and in
accordance with, the insurance policy, the issuing trust will depend on current
distributions on the auto loan pool, including amounts otherwise payable to the
Class B Notes, and amounts, if any, available in specific collateral accounts
maintained for the benefit of ___________________ to make payments on the Class
A Notes. The Class A Notes represent limited obligations of the issuing trust,
and the Class A Notes will not be insured or guaranteed by
_____________________, Asset Backed Securities Corporation, ____________________
or any other person or entity. If ____________________ has not perfected
security interests in the related financed vehicles, its ability to realize on
the collateral securing the auto loans may be affected and the proceeds to be
distributed to the noteholders on a current basis may be reduced.
GEOGRAPHIC CONCENTRATION OF AUTO LOANS MAY INCREASE CONCENTRATION RISKS.
Obligors with respect to approximately ____% of the auto loans were
located in _______ as of ________, _______, based on current principal balance
as of the Initial Cutoff Date and the address of the Obligor. Adverse economic
conditions or other factors affecting _______ could increase the delinquency,
loan loss or repossession experience of the issuing trust with respect to the
auto loans.
LIMITED ABILITY TO RESELL CLASS A NOTES.
The underwriter may assist in resales of the Class A Notes, but they
are not required to do so. A secondary market for the Class A Notes may not
develop. If a secondary market does develop, it might not continue or it might
not be sufficiently liquid to allow you to resell any of your Class A Notes.
THE RATE AT WHICH THE CLASS A NOTES WILL AMORTIZE CANNOT BE PREDICTED.
Interest on the auto loans will be payable to the holders of the Class
A-1 Notes and Class A-2 Notes on each payment date. This amount will equal
one-twelfth of the interest rate on the note balance of the class as of the
close of business on the last day of the month immediately preceding the payment
date. The auto loans have different APRs.
All of the auto loans are prepayable at any time. The rate of
prepayments on the auto loans may be influenced by a variety of economic, social
and other factors. These factors include the fact that a consumer obligor
generally may not sell or transfer the related financed vehicle securing an auto
loan without the consent of _____________________ unless the loan is repaid by
the Obligor at the time of the sale or transfer. The rate of prepayment on the
auto loans may also may be influenced by the structure of the loan, the nature
of the consumer obligors and the related financed vehicles and servicing
decisions. In addition, under some circumstances, _____________________ is
obligated to purchase auto loans as a result of breaches of particular
representations and warranties, pursuant to the sale and servicing agreement and
the receivables purchase agreement. Under some circumstances, the servicer is
obligated to purchase auto loans pursuant to the sale and servicing agreement as
a result of specified uncured breaches of covenants by it. The servicer may also
purchase all the auto loans if the pool balance has declined to less than 10% of
the original pool balance, subject to specified limitations in the sale and
servicing agreement.
_____________________ is not aware of publicly available industry
statistics that set forth principal prepayment experience for motor vehicle
retail installment contracts similar to the auto loans. None of the issuing
trust, Asset Backed Securities Corporation or _____________________ make any
representation as to the actual prepayment rates on the auto loans.
_____________________, however, believes that the actual rate of prepayments
will result in the Class A Notes being repaid prior to their respective final
scheduled payment date. The amounts paid to noteholders will include prepayments
on the auto loans. The noteholders will bear all reinvestment risk resulting
from the timing of payments on the notes.
EFFECT OF LITIGATION ON _____________________'S FINANCIAL CONDITION.
Due to the consumer-oriented nature of _____________________'s
industry and the application of particular laws and regulations, industry
participants are regularly named as defendants in litigation alleging violations
of federal and state laws and regulations and consumer law torts, including
fraud. Many of these actions involve alleged violations of consumer protection
laws. A significant judgment against _____________________ or others within the
industry could have a material adverse effect on _____________________. It could
affect _____________________'s financial condition, results of operations and/or
its ability to perform its obligations under the receivables purchase agreement,
the sale and servicing agreement and the trust agreement.
RATINGS OF THE CLASS A NOTES ARE NOT GUARANTEED TO REMAIN IN PLACE.
A rating is not a recommendation to purchase, hold or sell notes. The
ratings of the Class A Notes address the likelihood of the payment of principal
and interest on the Class A Notes pursuant to their terms. There is no assurance
that a rating will remain in effect for any given period of time or that a
rating will not be lowered or withdrawn entirely by a rating agency if in its
judgment circumstances in the future so warrant. In the event that any ratings
initially assigned to the Class A Notes are subsequently lowered or withdrawn
for any reason, including by reason of a downgrading of the claims-paying
ability of ___________________, no person or entity will be obligated to provide
any additional credit enhancement with respect to the Class A Notes. Any
reduction or withdrawal of a rating may have an adverse effect on the liquidity
and market price of the Class A Notes.
EVENTS OF DEFAULT UNDER THE INDENTURE MAY RESULT IN AN ACCELERATION.
Upon the occurrence of an event of default under the indenture, so
long as ___________________ shall not have defaulted and the default is not
continuing, ____________________ as indenture trustee, will continue to submit
claims under the insurance policy as necessary in accordance with the terms of
the insurance policy to enable the issuing trust to continue to make payments
due with respect to the Class A Notes on each payment date. However, following
the occurrence of an event of default, ___________________ may, at its option,
elect to cause the liquidation of the assets of the issuing trust, in whole or
in part, and pay all or any portion of the outstanding amount of the Class A
Notes, plus accrued interest on the Class A Notes.
IF THE ISSUING TRUST DOES NOT USE ALL OF THE MONEY IN THE PRE-FUNDING ACCOUNT A
MANDATORY REDEMPTION OF A PORTION OF THE CLASS A NOTES COULD RESULT.
If the issuing trust has not used all of the money deposited in the
pre-funding account to purchase additional auto loans by ______, _____, then the
holders of each of the Class A-1 Notes and the Class A-2 Notes will receive a
pro rata prepayment of principal in an amount equal to the unused amount or if
the amount remaining in the pre-funding account is less than $100,000, only the
Class A-1 Notes will be redeemed. Any reinvestment risk from the mandatory
redemption of a portion of the Class A Notes from the unused amount will be
borne by the holders of the Class A Notes.
____________________ MAY NOT BE ABLE TO ORIGINATE SUFFICIENT AUTO LOANS TO USE
ALL MONEYS IN THE PRE-FUNDING ACCOUNT.
The ability of _____________________ to acquire or originate
sufficient additional auto loans may be affected by a variety of social and
economic factors including: interest rates; unemployment levels; the rate of
inflation and consumer perception of economic conditions generally. If
_____________________ does not originate sufficient additional auto loans then
the money deposited in the pre-funding account will not be completely used and a
mandatory redemption of a portion of the Class A Notes will result.
THE SELLER AND THE SERVICER
[To be inserted]
THE TRUST
The issuing trust, ___ Auto Receivables Owner Trust ____-_ (the
"Trust" or the "Issuer"), is a business trust formed under the laws of the State
of Delaware pursuant to the trust agreement for the transactions described in
this prospectus supplement. On or about ________, ___ (the "Closing Date"), the
Trust will issue Class A-1 _____% Asset Backed Notes (the "Class A-1 Notes"),
Class A-2 _____% Asset Backed Notes (the "Class A-2 Notes", and together with
the Class A-1 Notes, the "Class A Notes") and Class B _______% Asset Backed
Notes (the "Class B Notes" and, together with the Class A Notes, the "Notes.")
The Class A-1 Notes will have an aggregate original principal amount of
$_________, the Class A-2 Notes will have an aggregate original principal amount
of $_________ and the Class B Notes will have an aggregate original principal
amount of $________. Only the Class A Notes are offered to you pursuant to this
prospectus supplement. Any information in this prospectus supplement relating to
the Class B Notes is presented solely to provide you with a better understanding
of the Class A Notes. On the Closing Date, the Trust will also issue an Asset
Backed Certificate (the "Certificate") which represents the equity ownership in
the trust and is subordinate in right of payment to the Notes. The Certificate
is not being offered by this prospectus supplement.
After its formation, the Trust will not engage in any activity other
than
o acquiring, holding and managing motor vehicle retail installment
sales contracts secured by new and used automobiles and
light-duty trucks financed by these motor vehicle retail
installment sales contracts (the "Receivables") and the other
assets of the Trust and proceeds from the Trust,
o issuing the Notes and the Certificate,
o making payments on the Notes, and
o engaging in other activities that are necessary, suitable or
convenient to accomplish the foregoing or are incidental to the
foregoing or connected with the foregoing.
The proceeds from the initial sale of the Notes will be used by the
Trust to purchase the Initial Receivables from the Company pursuant to the Sale
and Servicing Agreement and to fund deposits in the Pre-Funding Account and the
Capitalized Interest Account. The Servicer will service the Receivables pursuant
to the Sale and Servicing Agreement and will be compensated for acting as
Servicer. See "Description of the Transaction Documents--Servicing Compensation"
in this prospectus supplement.
The Trust's principal offices are located in Wilmington, Delaware, in
care of ____________________, as Owner Trustee, at the address listed below
under "--The Owner Trustee."
CAPITALIZATION OF THE TRUST
The following table illustrates the capitalization of the Trust as of
the Initial Cutoff Date, as if the issuance and sale of the Notes had taken
place on this date:
Class A-1 Notes.................... $________
Class A-2 Notes.................... $________
Class B Notes...................... $________
Total......................... $========
THE OWNER TRUSTEE
____________________, the Owner Trustee (the "Owner Trustee") under
the Trust Agreement dated as of ______, _____, as amended as of ______, _____
among the Seller, the Company and the Owner Trustee (the "Trust Agreement") is a
________ and its principal offices are located at
______________________________________. The Owner Trustee will perform limited
administrative functions under the Trust Agreement. The Owner Trustee's
liability in connection with the issuance and sale of the Notes is limited
solely to the express obligations of the Owner Trustee set forth in the Trust
Agreement and the Sale and Servicing Agreement.
THE INDENTURE TRUSTEE
____________________ will be the Indenture Trustee under the Indenture
dated as of ______, _____, among the Trust and the Indenture Trustee (the
"Indenture"). ____________________ is a ____________________, the corporate
trust office of which is located at __________________________.
TRUST PROPERTY
Each Note represents a limited obligation of the Trust secured by the
property of the Trust (the "Trust Property"). The Trust Property will include,
among other things, the following:
o non-prime motor vehicle retail installment sale contracts (the
"Initial Receivables") secured by new and used automobiles and
light-duty trucks (the "Initial Financed Vehicles");
o monies due or received under the Initial Receivables (a) with
respect to the Initial Receivables, after ________, _______ (the
"Initial Cutoff Date"), or (b) with respect to the Subsequent
Receivables after the related cutoff date (each a "Subsequent
Cutoff Date");
o amounts as from time to time may be held in one or more separate
trust accounts established and maintained by the Indenture
Trustee, including the Collection Account, the Pre-Funding
Account and the Capitalized Interest Account, and the proceeds of
these accounts, as described below (see "Description of the
Transaction Documents--Accounts");
o security interests in the Financed Vehicles granted by the
obligors (the "Obligors") pursuant to the Receivables and any
accessions;
o the interest of the Seller in any proceeds from claims on any
credit life, credit disability, and physical damage insurance
policies or other insurance policies covering the Financed
Vehicles or Obligors;
o specific rights under the Sale and Servicing Agreement and the
Receivables Purchase Agreement;
o amounts payable to the Seller under all Dealer Recourse
obligations;
o all items contained in the related receivable files and any and
all other documents that the Seller keeps on file in accordance
with its customary procedures relating to the Receivables;
o property, including the right to receive future Liquidation
Proceeds, that secures any of the Receivables and that has been
acquired pursuant to the liquidation of any Receivable; and
o any and all payments on and proceeds of the foregoing.
Additional non-prime motor vehicle retail installment sale contracts
(the "Subsequent Receivables") secured by new and used automobiles and
light-duty trucks (the "Subsequent Financed Vehicles") and related property are
intended to be purchased by the Trust from the Seller from time to time on or
before ______, _____, from funds on deposit in the Pre-Funding Account. The
Subsequent Receivables will be purchased by the Company from the Seller pursuant
to one or more subsequent purchase agreements (each, a "Subsequent Purchase
Agreement") between the Company and the Seller, and from the Company by the
Trust pursuant to one or more subsequent transfer agreements. The purchase by
the Trust of the Initial Receivables and the Subsequent Receivables are in this
prospectus supplement referred to as the "Receivables," and the Initial Financed
Vehicles and the Subsequent Financed Vehicles are in this prospectus supplement
referred to as the "Financed Vehicles."
Pursuant to the dealer agreement between the Dealer and the Seller, a
Dealer generally is obligated to pay the Seller for the unpaid balance of those
Receivables which do not meet limited representations made by the Dealers (these
obligations referred to in this prospectus supplement as "Dealer Recourse").
These representations and warranties relate primarily to the origination of the
contracts and the perfection of the security interests in the related Financed
Vehicles, and do not typically relate to the creditworthiness of the related
Obligors or the collectability of the relevant contracts. Although the Dealer
Agreements with respect to the Receivables will not be assigned to the Trust or
Indenture Trustee, the Receivables Purchase Agreement and the Sale and Servicing
Agreement will require the Seller to cause the amount of any recovery in respect
to any Receivable pursuant to any Dealer Recourse to be deposited in the
Collection Account in satisfaction of the Seller's obligations under the Sale
and Servicing Agreement. The sales by the Dealers of installment sale contracts
to the Seller do not generally provide for recourse against the Dealers for
unpaid amounts in the event of a default by an Obligor under the installment
sales contract, other than in connection with the breach of the foregoing
representations and warranties. There can be no assurance that the Seller will
pursue all claims under the Dealer Agreements nor that the Seller will prevail
if any claim is made.
The Receivables were generally originated by Dealers in accordance
with the Seller's requirements under agreements with Dealers for assignment to
the Seller and were so assigned. All the Initial Receivables will be sold and
assigned by the Seller to the Company pursuant to the Receivables Purchase
Agreement and by the Company to the Trust pursuant to the Sale and Servicing
Agreement on or prior to the Closing Date. The Subsequent Receivables will be
sold and assigned on one or more future dates occurring no later than ______,
_____ (each, a "Subsequent Transfer Date"). The Indenture Trustee, as custodian,
will hold the original installment sales contract or promissory note as well as
copies of documents and instruments relating to each Receivable (the
"Receivables File").
Pursuant to the Indenture, the Trust will grant a security interest in
the Trust Property in favor of the Indenture Trustee on behalf of the
Noteholders and for the benefit of the ___________________ (the "Insurer") in
support of the obligations owing to it under the Insurance and Indemnity
Agreement, dated as of ______, _____, between the Seller, the Trust, the
Certificateholder and the Insurer. Any proceeds of the security interest in the
Trust Property would be distributed according to the Indenture as described
under "The Notes--Priority of Distribution Amounts." The Insurer would be
entitled to the distributions only after payment of amounts owing to, among
others, Noteholders.
THE SELLER'S AUTOMOBILE FINANCING PROGRAM
[To Be Inserted]
DELINQUENCY AND LOSS EXPERIENCE
The following tables set forth information relating to the delinquency
and loss experience of the Seller for the periods indicated. The data presented
in the delinquency and loss tables below are for illustrative purposes only.
There is no assurance that the delinquency and credit loss experience with
respect to the Seller's automobile, light-duty truck and sports utility vehicle
installment contracts in the future, or that the experience of the Trust
Property with respect to the Receivables pledged to the Indenture Trustee for
the benefit of the Noteholders, will be similar to that set forth below. Losses
and delinquencies are affected by, among other things, general and regional
economic conditions and the supply of and demand for automobiles, light-duty
trucks and sports utility vehicles. The delinquency and loss percentages may be
affected by the increase in size of, and the relative lack of seasoning of, a
substantial portion of the portfolio. THE INFORMATION IN THE TABLE BELOW IS NOT
INTENDED TO INDICATE OR PREDICT THE EXPECTED DELINQUENCY EXPERIENCE ON PAST,
CURRENT OR FUTURE POOLS OF AUTOMOBILE LOANS FOR WHICH THE SERVICER IS THE
PRIMARY SERVICER. See "Risk Factors--The information relating to the auto loans
may not reflect actual experience."
<PAGE>
<TABLE>
<CAPTION>
HISTORICAL DELINQUENCY EXPERIENCE
AS OF __________________________ AS OF ________________________ AS OF _______________________
% OF % OF % OF
NO. OF PRINCIPAL PRINCIPAL NO. OF PRINCIPAL PRINCIPAL NO. OF PRINCIPAL PRINCIPAL
RECEIVABLES BALANCE BALANCE RECEIVABLES BALANCE BALANCE RECEIVABLES BALANCE BALANCE
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Aggregate Principal Balance
at Period End(1), (2).........
Delinquencies
31-60 Days...................
61-90 Days...................
91+ Days.....................
Total Delinquencies............
Amount in Repossession(3)......
Total Delinquencies and Amount
in Repossession.............. ========== ======== ========= ========== ========= ======== ========== ======= ========
AS OF ____________________________ AS OF _____________________________
% OF % OF
NO. OF PRINCIPAL PRINCIPAL NO. OF PRINCIPAL PRINCIPAL
RECEIVABLES BALANCE BALANCE RECEIVABLES BALANCE BALANCE
<S> <C> <C> <C> <C> <C> <C>
Aggregate Principal Balance at Period End(1), (2).....
Delinquencies
31-60 Days..........................................
61-90 Days..........................................
91+ Days............................................
Total Delinquencies...................................
Amount in Repossession(3).............................
Total Delinquencies and Amount in Repossession........ ========== ========= ======== =========== ======== =========
(1) The aggregate principal balance is equal to the gross receivable less
unearned finance charges on Precomputed Receivables plus the principal
balance on Simple Interest Receivables.
(2) Represents the aggregate principal balance of all contracts purchased and
serviced by the Seller.
(3) Represents the aggregate principal balance as of the repossession date.
HISTORICAL NET LOSS EXPERIENCE
DURING THE PERIOD ENDED
------- -------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Average Aggregate Principal
Balance(1)........................................
Gross Charge-Offs(2)................................
Recoveries(3).......................................
Net Losses..........................................
Net Losses as a Percentage of Average Aggregate
Principal Balance.................................
------------------
(1) The aggregate principal balance is equal to the gross receivable less
unearned finance charges on Precomputed Receivables plus the principal
balance on Simple Interest Receivables.
(2) Gross Charge-Offs are defined as the remaining principal balance of the
charged-off contract less the net proceeds of the liquidation of the related
vehicle.
(3) Recoveries include post-liquidation amounts received on previously
charged-off contracts, including deficiency payments, rebates on related
extended service contracts and insurance policies.
</TABLE>
<PAGE>
THE BACKUP SERVICER
If a Servicer Termination Event occurs and remains unremedied and the
Seller is terminated as Servicer or resigns as Servicer, in each case in
accordance with the Sale and Servicing Agreement, ____________________, a
____________________, will serve as Backup Servicer.
The Backup Servicer will receive a fee on each Payment Date equal to
one-twelfth the product of _____ basis points and the then outstanding Note
Balance as compensation for, among other things, (1) standing by to act as
successor Servicer and (2) confirming particular calculations made by the
Servicer on the monthly statement to Noteholders, including but not limited to
(a) interest and principal payments due to the Noteholders and (b) some of the
Receivables performance ratios.
THE RECEIVABLES
Pursuant to the Receivables Purchase Agreement, the Seller will sell
and assign to the Company all of its right, title and interest in and to the
Receivables and the other Trust Property, and the Company, pursuant to the Sale
and Servicing Agreement, will sell and assign to the Trust all of its right,
title and interest in and to the Receivables and any other Trust Property. The
Trust will then pledge all of its right, title and interest in and to the
Receivables to the Indenture Trustee for the benefit of the Noteholders and the
Insurer pursuant to the Indenture. The Receivables consist of non-prime motor
vehicle retail installment sales contracts. The Receivables were purchased by
the Seller in the ordinary course of its business pursuant to its finance
programs and underwriting standards. As detailed in this prospectus supplement,
credit guidelines may be less stringent than those applied in the origination of
other automobile loans by other lenders. See "The Seller's Automobile Financing
Program."
No selection procedures adverse to the Noteholders or the Insurer were
utilized in selecting the Initial Receivables sold and assigned to the Company
and then sold and assigned to the Trust. The Receivables existing as of the
Initial Cutoff Date were selected from the Seller's portfolio according to
several criteria. Among the criteria, each Receivable:
(1) arises from the delivery and acceptance of a Financed Vehicle and
which delivery and acceptance has been fully performed by the
Obligor and the Dealer party to the transaction,
(2) arises from the normal course of the Dealer's business,
(3) is not in default,
(4) the Obligor of which is a natural person residing in any state or
the District of Columbia,
(5) the Obligor of which is not a government or a governmental
subdivision or agency,
(6) met the Seller's underwriting criteria at the time of purchase,
(7) is denominated and payable in Dollars in the United States,
(8) is in full force and effect and constitutes the legal, valid and
binding obligation of the Obligor in accordance with its terms,
(9) is not subject to any dispute, litigation, counterclaim or
defense, or any offset or right of offset at the time of purchase
by the Seller, any exercisable right of rescission,
(10) is not more than ___ days past due,
(11) has an original term to scheduled maturity of not less than ___
or more than 72 months,
(12) has a remaining term to scheduled maturity of not less than ___
months or greater than 72 months,
(13) provides for equal monthly payments which will cause the
Receivable to fully amortize during its term,
(14) has a remaining principal balance of not less than $_____ or more
than $_______,
(15) has an APR of not less than ____% and
(16) the model year of the related Financed Vehicle is not earlier
than ______.
PAYMENTS ON THE RECEIVABLES
All of the Receivables provide for the payment by the related Obligor
of a specific total amount of payments, payable in substantially equal monthly
installments on each scheduled payment date, which total represents the amount
financed plus interest charges on the amount financed for the term of the
Receivable. Each Receivable provides for repayment of the Amount Financed by an
Obligor according to:
o the Rule of 78's (a "Rule of 78's Receivables"),
o the actuarial method (an "Actuarial Receivable" and together with
Rule of 78's Receivables, the "Precomputed Receivables") or
o the simple interest method (a "Simple Interest Receivable").
Under a Rule of 78's Receivable, the rate at which the amount of
finance charges is earned and, correspondingly, the amount of each scheduled
monthly payment allocated to reduction of the outstanding principal balance of
the related Receivable are calculated in accordance with the "Rule of 78's".
Under the Rule of 78's, the portion of a payment allocable to interest earned
during that month is determined by multiplying the total amount of interest
payable over the term of the Receivable by a fraction, the denominator of which
is equal to the sum of a series of numbers beginning with one and ending with
the number of scheduled monthly payments due under the related Receivable, and
the numerator of which is the number of payments remaining under the Receivable
before giving effect to the payment to which the fraction is being applied. The
difference between the amount of the scheduled monthly payment made by the
Obligor and the amount of earned interest calculated for the month is applied to
principal reduction.
An Actuarial Receivable provides for amortization of the loan over a
series of fixed level monthly installments. Each scheduled monthly payment is
deemed to consist of an amount of interest equal to one-twelfth of the stated
APR of the Receivable multiplied by the outstanding principal balance of the
Receivable and an amount of principal equal to the remainder of the scheduled
monthly payment.
All payments received by the Servicer on or in respect of Precomputed
Receivables, including the final scheduled payment, will be allocated pursuant
to the Sale and Servicing Agreement on an actuarial basis. No adjustment will be
made in the event of early or late payments, although in the latter case, the
Obligor may be subject to a late charge.
"Simple Interest Receivables" provide for the amortization of the
amount financed under the Receivable over a series of fixed level monthly
payments. However, unlike the monthly payment under Rule of 78s Receivables,
each monthly payment consists of an installment of interest which is calculated
on the basis of the outstanding principal balance of the receivable multiplied
by the stated APR and further multiplied by the period elapsed, as a fraction of
a calendar year, since the preceding payment of interest was made. As payments
are received under a Simple Interest Receivable, the amount received is applied
first to interest accrued to the date immediately preceding the date of payment
and the balance is applied to reduce the unpaid principal balance. Accordingly,
if an Obligor pays a fixed monthly installment before its scheduled due date,
the portion of the payment allocable to interest for the period since the
preceding payment was made will be less than it would have been had the payment
been made as scheduled, and the portion of the payment applied to reduce the
unpaid principal balance will be correspondingly greater. Conversely, if an
Obligor pays a fixed monthly installment after its scheduled due date, the
portion of the payment allocable to interest for the period since the preceding
payment was made will be greater than it would have been had the payment been
made as scheduled, and the portion of the payment applied to reduce the unpaid
principal balance will be correspondingly less. In either case, the Obligor pays
a fixed monthly installment until the final scheduled payment date, at which
time the amount of the final installment is increased or decreased as necessary
to repay the then outstanding principal balance.
In the event of a prepayment in full, voluntarily or by acceleration,
of a Precomputed Receivable, a "rebate" in the loan accounting records of the
Servicer may be made to the Obligor of that portion of the total amount of
payments under the relevant Receivable allocable to "unearned" finance charges.
In the event of the prepayment in full, voluntarily or by acceleration, of a
Simple Interest Receivable, a "rebate" will not be made to the Obligor, but the
Obligor will be required to pay interest only to the date immediately preceding
the date of prepayment. The amount of a rebate under a Precomputed Receivable
generally will be less than or equal to the remaining scheduled payments of
interest that would have been due under a Simple Interest Receivable for which
all remaining payments were made on schedule.
The amount of a rebate under a Rule of 78's Receivable calculated in
accordance with the Rule of 78's generally will be less than the amount of a
rebate on an Actuarial Receivable calculated in accordance with the actuarial
method. Distributions to Noteholders will not be affected by Rule of 78's
rebates under the Rule of 78's Receivables because pursuant to the Sale and
Servicing Agreements distributions will be determined using the actuarial
method. Amounts received upon prepayment in full of a Rule of 78's Receivable in
excess of the then outstanding principal balance of the Receivable and accrued
interest on the then outstanding principal balance of the Receivable, calculated
pursuant to the actuarial method, will not be passed through to Noteholders.
PURCHASE OR REPLACEMENT OBLIGATIONS
Pursuant to the Receivables Purchase Agreement and the Sale and
Servicing Agreement, the Seller will be obligated to repurchase or replace,
subject to limits on replacement set forth in the Sale and Servicing Agreement,
any Receivable sold and assigned to the Trust as to which a breach has occurred
as to particular representations or warranties made by the Seller with respect
to the Receivable, if the breach has not been cured by the last day of the first
full calendar month following the discovery by or notice to the Seller of the
breach, if the breach will materially and adversely affect the interests of the
Noteholders, the Insurer or the Trust in the relevant Receivable. The Indenture
Trustee will also have rights to enforce the obligations of the Seller under the
Receivables Purchase Agreement. See "Description of the Transaction
Documents--Sale and Assignment of Receivables" and "Trust Property" in this
prospectus supplement.
The Sale and Servicing Agreement also provides that if the Servicer
breaches certain of its servicing obligations under the Sale and Servicing
Agreement, including but not limited to its obligation to maintain perfection of
the first priority security interest of the Seller created by each Receivable in
the related Financed Vehicle, or other covenants with regard to the Servicer, in
each case only in a manner that materially and adversely affects the interests
of the Noteholders, the Insurer or the Trust in any Receivable, the Servicer
will purchase or replace the relevant Receivable from the Trust, unless the
breach has been cured by the last day of the first full calendar month following
the discovery by or notice to the Servicer of the breach.
COMPOSITION OF THE POOL OF INITIAL RECEIVABLES
The tables below set forth information regarding the composition and
characteristics of the pool of Receivables as of the Initial Cutoff Date. It is
expected that the composition and characteristics of the Receivables on the
Closing Date will be similar to the information set forth below. However, some
Receivables may be excluded on the Closing Date as of a result of particular
administrative considerations. The Seller does not believe that the
characteristics of the Receivables included in the Trust on the Closing Date in
the aggregate will differ materially from the information set forth in this
prospectus supplement.
COMPOSITION OF THE INITIAL RECEIVABLES
Aggregate Principal Balance..................... $___________
Number of Receivables........................... _______
Average Amount Financed......................... $_______
Range of Amounts Financed....................... $_______ to $______
Average Current Principal Balance............... $_______
Range of Current Principal Balances............. $______ to $_______
Weighted Average APR............................ _____%
Range of APRs................................... _______% to _____%
Weighted Average Original Term to Scheduled
Maturity(1)................................... ____ months
Range of Original Terms to Scheduled Maturity... ____ to ____ months
Weighted Average Remaining Term to Scheduled
Maturity(1)................................... ___ months
Range of Remaining Terms to Scheduled Maturity.. ___ to 72 months
-----------
(1) Rounded to the nearest month.
<PAGE>
<TABLE>
<CAPTION>
DISTRIBUTION OF RECEIVABLES BY CURRENT PRINCIPAL BALANCE
(AS OF THE INITIAL CUTOFF DATE)
PERCENTAGE OF TOTAL PERCENTAGE OF
NUMBER OF NUMBER OF CURRENT PRINCIPAL AGGREGATE PRINCIPAL
CURRENT PRINCIPAL RECEIVABLES RECEIVABLES(1) BALANCE BALANCE(1)
BALANCE
<S> <C> <C> <C> <C>
$ 5,000.00 to 9,999.99........
10,000.00 to 14,999.99........
15,000.00 to 19,999.99........
20,000.00 to 24,999.99........
25,000.00 to 29,999.99........
30,000.00 to 34,999.99........
--------------- --------------- -------------
TOTAL........................... 100.00% $ ___________ 100.00%
----------- --------------- --------------- ------------
DISTRIBUTION OF RECEIVABLES BY AMOUNT FINANCED
(AS OF THE INITIAL CUTOFF DATE)
PERCENTAGE OF TOTAL PERCENTAGE OF
AMOUNT FINANCED NUMBER OF NUMBER OF CURRENT PRINCIPAL AGGREGATE PRINCIPAL
RECEIVABLES RECEIVABLES(1) BALANCE BALANCE(1)
<S> <C> <C> <C> <C>
$ 5,000.00 to 9,999.99........
10,000.00 to 14,999.99........
15,000.00 to 19,999.99........
20,000.00 to 24,999.99........
25,000.00 to 29,999.99........
30,000.00 to 34,999.99........
35,000.00 to 39,999.99........ ------------- ------------- -----------
TOTAL............................ 100.00% $___________ 100.00%
------------ ------------- ------------- ------------
(1) Percentages may not add to 100.00% due to rounding.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
DISTRIBUTION OF RECEIVABLES BY APR
(AS OF THE INITIAL CUTOFF DATE)
PERCENTAGE OF
PERCENTAGE OF TOTAL CURRENT AGGREGATE
RANGE OF APRS (%) NUMBER OF NUMBER OF PRINCIPAL PRINCIPAL
RECEIVABLES RECEIVABLES(1) BALANCE BALANCE(1)
<S> <C> <C> <C> <C>
10.00 to 10.99...................
11.00 to 11.99...................
12.00 to 12.99...................
13.00 to 13.99...................
14.00 to 14.99...................
15.00 to 15.99...................
16.00 to 16.99...................
17.00 to 17.99...................
18.00 to 18.99...................
19.00 to 19.99...................
20.99 to 20.99...................
21.00 to 21.99...................
22.00 to 22.99...................
23.00 to 23.99...................
24.00 to 24.99...................
25.00 to 25.99................... ------------ --------- -------------- ----------
TOTAL............................ 100.00% $___________ 100.00%
------------ --------- -------------- ----------
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTION OF RECEIVABLES BY MODEL YEAR OF FINANCED VEHICLE
(AS OF THE INITIAL CUTOFF DATE)
PERCENTAGE OF TOTAL PERCENTAGE OF
MODEL YEAR NUMBER OF NUMBER OF CURRENT PRINCIPAL AGGREGATE PRINCIPAL
RECEIVABLES RECEIVABLES(1) BALANCE BALANCE(1)
<S> <C> <C> <C> <C>
1999.............................
1998.............................
1997.............................
1996.............................
1995.............................
1994.............................
1993.............................
1992.............................
1991.............................
TOTAL............................ 100.00% $ ________ 100.00%
============ ============ ============= ===========
(1) Percentages may not add up to 100.00% due to rounding.
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTION OF RECEIVABLES BY REMAINING TERM TO SCHEDULED MATURITY
(AS OF THE INITIAL CUTOFF DATE)
PERCENTAGE OF TOTAL PERCENTAGE OF
NUMBER OF NUMBER OF CURRENT PRINCIPAL AGGREGATE PRINCIPAL
RANGE OF REMAINING RECEIVABLES RECEIVABLES(1) BALANCE BALANCE(1)
TERMS
<S> <C> <C> <C> <C>
24 to 29 months..................
30 to 35 months..................
36 to 41 months..................
42 to 47 months..................
48 to 53 months..................
54 to 59 months..................
60 to 65 months..................
66 to 71 months..................
72 months........................
TOTAL............................ 100.00% $ ___________ 100.00%
========= ============ =============== ==========
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTION OF RECEIVABLES BY ORIGINAL TERM TO SCHEDULED MATURITY
(AS OF THE INITIAL CUTOFF DATE)
PERCENTAGE OF TOTAL PERCENTAGE OF
NUMBER OF NUMBER OF CURRENT PRINCIPAL AGGREGATE PRINCIPAL
RANGE OR ORIGINAL RECEIVABLES RECEIVABLES(1) BALANCE BALANCE(1)
TERMS
<S> <C> <C> <C> <C>
30 to 35 months..................
36 to 41 months..................
42 to 47 months..................
48 to 53 months..................
54 to 59 months..................
60 to 65 months..................
66 to 71 months..................
72 months........................
TOTAL............................ 100.00% $ ___________ 100.00%
========= ============ ============== ========
--------------
(1) Percentages may not add up to 100.00% due to rounding.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
DISTRIBUTION OF RECEIVABLES BY ADDRESS OF OBLIGOR
(AS OF THE INITIAL CUTOFF DATE)
PERCENTAGE OF TOTAL PERCENTAGE OF
NUMBER OF NUMBER OF CURRENT PRINCIPAL AGGREGATE PRINCIPAL
RECEIVABLES RECEIVABLES(1) BALANCE BALANCE(1)
STATE
<S> <C> <C> <C> <C>
--------.........................
---------........................
---------........................
------------.....................
----------.......................
-----------......................
------------.....................
---------........................
-----------......................
-----------......................
---------........................
----------.......................
----------.......................
---------........................
----------.......................
---------........................
-----------......................
-----------......................
---------........................
-----------......................
----------.......................
----------.......................
--------.........................
----------.......................
-----------......................
-----------......................
---------........................
-------..........................
----------.......................
TOTAL............................ 100.00% $ ___________ 100.00%
======== =========== ============== ==========
------------------------
(1) Percentages may not add up to 100.00% due to rounding.
</TABLE>
MATURITY AND PREPAYMENT CONSIDERATIONS
All the Receivables are prepayable at any time. The rate of
prepayments on the Receivables may be influenced by a variety of economic,
social and other factors, including the fact that an Obligor generally may not
sell or transfer the Financed Vehicle securing a Receivable without the consent
of the Seller unless the loan is repaid by the Obligor at the time of the sale
or transfer. For this purpose the term "prepayments" includes prepayments in
full, or in part, including, without limitation, some partial prepayments
related to refunds of extended service contract costs and unearned insurance
premiums, liquidations due to default, as well as receipts of proceeds from
physical damage, credit life and credit accident and health insurance policies
and other Receivables repurchased for administrative reasons. The rate of
prepayment on the Receivables may also be influenced by the structure of the
loan, the nature of the Obligors and the Financed Vehicles and servicing
decisions as discussed above. In addition, under some circumstances, the Seller
is obligated to repurchase or replace Receivables as a result of breaches of
representations and warranties pursuant to the Sale and Servicing Agreement and
the Receivables Purchase Agreement, and under some circumstances, the Servicer
is obligated to purchase Receivables pursuant to the Sale and Servicing
Agreement as a result of breaches of specific covenants. Subject to particular
conditions, the Servicer has the option to purchase the Receivables when the
aggregate principal balance of the Receivables is 10% or less of the Original
Pool Balance.
If prepayments are received on the Receivables, the actual weighted
average life of the Receivables may be shorter than the scheduled weighted
average life, i.e., the weighted average life assuming that payments will be
made as scheduled and that no prepayments will be made. "Weighted Average Life"
means the average amount of time during which each dollar of principal on a
Receivable is outstanding.
Any reinvestment risks resulting from a faster or slower incidence of
prepayment of Receivables will be borne by the Noteholders. See also "The
Notes--Optional Purchase of Receivables" regarding the Servicer's right to
purchase the Receivables and the other Trust Property on any Determination Date
as of which the Aggregate Principal Balance has declined to less than 10% of the
Original Pool Balance.
Prepayments on automobile receivables can be measured relative to a
prepayment standard or model. The model used in this prospectus supplement, the
Absolute Prepayment Model ("ABS"), represents an assumed rate of prepayment each
month relative to the original number of receivables in a pool of receivables.
ABS further assumes that all the Receivables are the same size and amortize at
the same rate and that each Receivable in each month of its life will either be
paid as scheduled or be prepaid in full. For example, in a pool of receivables
originally containing 10,000 receivables, a 1% ABS rate means that 100
receivables prepay each month. ABS does not purport to be an historical
description of prepayment experience or a prediction of the anticipated rate of
prepayment of any pool of receivables, including the Receivables.
The tables captioned "Percent of Initial Note Principal Balance at
Various ABS Percentages" ("ABS Tables") have been prepared on the basis of the
following assumptions:
o the Trust includes two pools of Receivables with the
characteristics set forth in the following table;
o the Receivables prepay in full at the specified constant
percentage of ABS monthly, with no defaults, losses or
repurchases,
o each scheduled monthly payment on the Receivables is made on the
last day of each month and each month has 30 days;
o the initial principal amount of each of the Class A-1 Notes and
Class A-2 Notes are as set forth on the cover page of this
prospectus supplement;
o interest accrues during each Interest Period at the following
assuming coupon rates; Class A-1 Notes, _____% and Class A-2
Notes, _____%;
o payments on the notes are made on the ___(th) of each month
whether or not a Business Day;
o the Class A Notes are purchased on ________, ___;
o the scheduled monthly payment for each Receivable has been
calculated on the basis of the assumed characteristics in the
following table so that each Receivable will amortize in amounts
sufficient to repay the Principal Balance of the Receivable by
its indicated remaining term to maturity;
o the first due date for each Receivable is the last day of the
month of the assumed cutoff date for each Receivable as set forth
in the following table;
o the entire Pre-Funded Amount is used to purchase Subsequent
Receivables;
o the Servicer does exercise its option to purchase the
Receivables; and
o the difference between the gross APR and the net APR is equal to
the Servicer Fee, and the net APR is further reduced by the fees
due to the Indenture Trustee, the Backup Servicer and the
Insurer.
REMAINING TERM
ORIGINAL TO
AGGREGATE TERM TO SCHEDULED
PRINCIPAL GROSS ASSUMED MATURITY (IN MATURITY (IN
POOL BALANCE APR(%) CUTOFF DATE MONTHS MONTHS)
1 $ ________ _____ ________ ______ ___
2 ________ _____ ________ ______ ___
Total $ _________
The ABS Tables indicate, based on the assumptions set forth above, the
percentages of the initial principal amount of the Class A-1 Notes and Class A-2
Notes that would be outstanding after each of the Payment Dates shown at various
percentages of ABS and the corresponding weighted average lives of the Notes.
The actual characteristics and performance of the Receivables will differ from
the assumptions used in constructing the ABS Tables. The assumptions used are
hypothetical and have been provided only to give a general sense of how the
principal cash flows might behave under the varying prepayment scenarios. For
example, it is very unlikely that the Receivables will prepay at a constant
level of ABS until maturity, that all of the Receivables will prepay at the same
level of ABS or that the coupon rates on the Notes will remain constant.
Moreover, the diverse terms of Receivables could produce slower or faster
principal distributions than indicated in the ABS Tables at the various constant
percentage of ABS specified, even if the original and remaining terms of
maturity of the Receivables are as assumed. Any difference between the
assumptions and the actual characteristics and performance of the Receivables,
including actual prepayment experience or losses, will affect the percentages of
initial balances outstanding over time and the weighted average lives of the
Class A-1 Notes and Class A-2 Notes.
<PAGE>
<TABLE>
<CAPTION>
PERCENT OF INITIAL NOTE PRINCIPAL BALANCE
AT VARIOUS ABS PERCENTAGES(1)
PAYMENT CLASS A-1 NOTES CLASS A-2 NOTES
DATE ___% ___% ___% ___% ___% ___% ___% ___%
INITIAL
<S> <C> <C> <C> <C> <C> <C> <C> <C>
=========
=========
=========
=========
=========
=========
=========
=========
=========
=========
=========
=========
=========
=========
=========
=========
=========
=========
=========
=========
=========
=========
=========
=========
=========
=========
=========
Weighted
Average Life
in Years(2)
-------------------------------------------------------------------------------
(1) The percentages in this table have been rounded to nearest whole number.
(2) The weighted average life of a note is determined by (1) multiplying the
amount of each principal payment on a note by the number of years from the
date of the Issuance of the note to the related Payment Date, (b) adding
the results and (c) dividing the sum by the related initial principal
amount of the note.
</TABLE>
<PAGE>
YIELD CONSIDERATIONS
Other than on the first Payment Date, on each Payment Date, interest
on the Receivables will be passed through to the Class A-1 and Class A-2
Noteholders in an amount equal to one-twelfth of the Interest Rate multiplied by
the Note Balance of the applicable Class on the last day of the immediately
preceding Collection Period. In the event of prepayments on Receivables,
Noteholders will nonetheless be entitled to receive interest for the full month
on the Notes. See also "The Receivables--Payments on the Receivables" in this
prospectus supplement.
USE OF PROCEEDS
The Trust will use the net proceeds from the sale of the Notes to
purchase Receivables from the Company and to make the initial deposit into the
Capitalized Interest Account and the Pre-Funding Account. The Company will use
the net proceeds paid to the Company by the Trust to purchase Receivables from
the Seller, which in turn will use the proceeds to pay related expenses and
repay specific warehouse loans and any additional proceeds will be added to the
Seller's general funds and used for its general corporate purposes.
THE INSURER
The following information has been obtained from the Insurer and has
not been verified by the Seller, the Company or the Underwriter. No
representations or warranty is made by the Seller, the Company or the
Underwriter with respect to this information.
<PAGE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
In addition to the documents described in the prospectus under
"Incorporation of Certain Documents by Reference," the consolidated financial
statements of the Insurer and its subsidiaries included in, or as exhibits to,
the following documents which have been filed with the Commission by Holdings,
are incorporated by reference in this prospectus supplement:
o Annual Report on Form 10-K for the year ended ______________,
o Quarterly Report on Form 10-Q for the period ended ____________,
o Quarterly Report on Form 10-Q for the period ended __________,
and
o Quarterly Report on Form 10-Q for the period ended
_______________.
All financial statements of the Insurer included in documents filed by
the Insurer pursuant to Section 13(a), 13(c), 14 or 15(d) of the Securities and
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
Class A Notes shall be deemed to be incorporated by reference into this
prospectus supplement and to be a part of this prospectus supplement from the
respective dates of filing of these documents.
The Seller will provide without charge to any person to whom this
prospectus supplement is delivered, upon their oral or written request, a copy
of any or all of the foregoing financial statements incorporated in this
prospectus supplement by reference. Requests for copies should be directed to:
_____________________, _________________________________________.
The Seller on behalf of the Trust undertakes that, for purposes of
determining any liability under the Securities Act of 1933, 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 Insurer included in or as
an exhibit to the annual report the Insurer of 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 Class A Notes offered by this prospectus supplement, and the
offering of the Class A Notes at that time shall be deemed to be the initial
bona fide offering of the Class A Notes.
All documents filed by the Company with respect to the Registration
Statement, either on its own behalf or on behalf of the Trust, relating to the
Class A Notes, with the Securities and Exchange pursuant to Section 13(a),
13(c), 14 or 15(d) of the Exchange Act, after the date of this prospectus
supplement and prior to the termination of any offering of the Class A Notes
offered by this prospectus supplement, shall be deemed to be incorporated by
reference in this prospectus supplement and to be a part of this prospectus
supplement from the date of the filing of these documents. Any statement
contained in this prospectus supplement or in a document incorporated or deemed
to be incorporated by reference in this prospectus supplement shall be deemed to
be modified or superseded for purposes of this prospectus supplement to the
extent that a statement contained in this prospectus supplement or in any other
subsequently filed document which also is or is deemed to be incorporated by
reference in this prospectus supplement, modifies or replaces the statement. Any
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this prospectus supplement.
THE NOTES
The Notes will be issued pursuant to the Indenture, a form of which
has been filed as an exhibit to the Registration Statement. The following
summary describes some of the terms of the Class A Notes and the Indenture. The
summary does not purport to be complete and is subject to, and is qualified in
its entirety by reference to, all the provisions of the Notes and the Indenture.
The following summary supplements the description of the general terms and
provisions of the Notes of any given series and the related Indenture set forth
in the accompanying prospectus, to which description reference is made by this
prospectus supplement.
The Class A Notes initially will be represented by notes registered in
the name of Cede & Co., as the nominee of The Depository Trust Company ("DTC"),
and will only be available in the form of book-entries on the records of DTC and
participating members of DTC in denominations of $1,000. All references to
"Holders" or "Noteholders" and to authorized denominations, when used with
respect to the Notes, shall reflect the rights of Note Owners, and limitations
of Note Owners, as they may be indirectly exercised through DTC and its
participating members, except as otherwise specified in this prospectus
supplement. See "Certain Information Regarding the Securities--Book-Entry
Regulation" in the prospectus supplement and Annex I to the prospectus.
In general, the Class A-1 Noteholders will be entitled to receive, on
each Payment Date, the Class A-1 Principal Payment Amount and the Class A-1
Interest Payment Amount and the Class A-2 Noteholders will be entitled to
receive, on each Payment Date, the Class A-2 Principal Payment Amount and the
Class A-2 Interest Payment Amount, subject to the priority of payments as
described in "--Priority of Distribution Amounts." Payments on the Notes will be
made from the Note Distribution Account.
MANDATORY REDEMPTION
The Class A Notes will be redeemed in part on the Mandatory Redemption
Date in the event that any portion of the Pre-Funded Amount remains on deposit
in the Pre-Funding Account at the end of the Funding Period. The aggregate
principal amount of the Class A Notes to be redeemed will be an amount equal to
the remaining Pre-Funded Amount on that date (the "Class A Mandatory Redemption
Amount"). The Class A Mandatory Redemption Amount will be distributed pro rata
to each of the Class A-1 Notes and the Class A-2 Notes, based on the current
principal balance of each Class, provided, however, that if the amount remaining
in the Pre-Funding Account is less than $100,000, only the Class A-1 Notes will
be redeemed.
OPTIONAL PURCHASE OF RECEIVABLES
As an administrative convenience, the Servicer may purchase all the
Receivables and other Trust Property on any Payment Date if, as of the last day
of the related Collection Period, the Aggregate Principal Balance has declined
to less than 10% of the sum of (1) the Aggregate Principal Balance as of the
Initial Cutoff Date plus (2) the aggregate principal balances of the Subsequent
Receivables added to the Trust as of their respective Cutoff Dates (the
"Original Pool Balance"). To exercise this option, the Servicer must pay the
aggregate Purchase Amounts for the Receivables and obtain the prior written
consent of the Insurer, or if the redemption would result in a claim under the
Policy or if the redemption would result in any amount owing to the Insurer
remaining unpaid. Upon exercising the option, the Servicer will succeed to all
interests in and to the Trust Property. The purchase price paid by the Servicer
will be deposited into the Collection Account and distributed pursuant to
"--Priority of Distribution Amounts" below. See "Certain Matters Regarding the
Servicer--Termination" in the accompanying prospectus.
This purchase will cause a redemption of the Notes; provided, however,
that the Servicer will provide the Indenture Trustee, the Backup Servicer, the
Insurer and the Rating Agencies at least 10 days' prior written notice of any
redemption. The Indenture Trustee will give notice to each Noteholder at least
five days prior to any redemption. The redemption price for each Note will be no
less than the outstanding principal balance of the relevant Note on the date of
redemption plus accrued and unpaid interest on the outstanding principal balance
(the "Redemption Price"). The Servicer will deposit the Redemption Price into
the Collection Account, and the Indenture Trustee will distribute the amounts so
deposited in accordance with the "Priority of Distribution Amounts" below.
DISTRIBUTIONS FROM THE TRUST
No later than 12:00 p.m. New York City time on each Determination
Date, the Servicer will inform the Indenture Trustee of the amount of aggregate
collections on the Receivables and the aggregate Purchase Amount of Receivables
to be purchased by the Servicer with respect to the related Collection Period.
The Servicer will determine prior to the Determination Date, the Class A-1
Interest Payment Amount, the Class A-1 Principal Payment Amount, the Class A-2
Interest Payment Amount, the Class A-2 Principal Payment Amount, the Payment
Amount, the amounts, if any, required to be deposited in the Class A Reserve
Account, the Class A Overcollateralization Amount and the Class A Target
Overcollateralization Amount.
For purposes of this prospectus supplement, the following terms shall
have the following meanings:
"Additional Funds Available" means, with respect to any Payment Date
the sum of (1) the Deficiency Claim Amount, if any, received by the Indenture
Trustee with respect to the Payment Date plus (2) the Insurer Optional Deposit,
if any, received by the Indenture Trustee with respect to the Payment Date.
"Class A Interest Carryover Shortfall" means, as of the close of
business on any Payment Date, the sum of (1) the Class A-1 Interest Carryover
Shortfall and (2) the Class A-2 Interest Carryover Shortfall.
"Class A Interest Payment Amount" means, with respect to any Payment
Date, the sum of (1) the Class A-1 Interest Payment Amount and (2) the Class A-2
Interest Payment Amount.
"Class A Mandatory Redemption Amount" means the amount, if any,
remaining of the Pre-Funded Amount on the Mandatory Redemption Date.
"Class A Overcollateralization Amount" means, with respect to any
Payment Date, an amount equal to the excess, if any, of:
(1) the sum of,
(a) the remaining Aggregate Principal Balance as of the last
day of the related Collection Period and
(b) all amounts, if any, in the Pre-Funding Account, over
(2) the remaining Class A Note Balance, after giving effect to
the amounts payable on the Payment Date pursuant to clauses (1) through
(5) under "--Priority of Distribution Amounts" on the Payment Date.
"Class A Principal Payment Amount" means, with respect to any Payment
Date, the sum of the Class A-1 Principal Payment Amount and the Class A-2
Principal Payment Amount.
"Class A Target Overcollateralization Amount" means, with respect to
any Payment Date, an amount equal to the product of (1) _____%, or any lesser
percentage as the Insurer may decide in its sole discretion, and (2) the sum of
(a) the remaining Aggregate Principal Balance, and (b) amounts, if any, in the
Pre-Funded Account, each determined as of the last day of the related Collection
Period.
"Class A-1 Interest Carryover Shortfall" means, as of the close of
business on any Payment Date, the excess of (a) the Class A-1 Interest Payment
Amount for the Payment Date and any outstanding Class A-1 Interest Carryover
Shortfall from the immediately preceding Payment Date plus interest on this
outstanding Class A-1 Interest Carryover Shortfall, to the extent permitted by
law, at the Class A-1 Interest Rate from the preceding Payment Date through the
current Payment Date, calculated on the basis of a 360-day year consisting of
twelve 30-day months, over (b) the amount of interest that the Holders of the
Class A-1 Notes actually received on the current Payment Date.
"Class A-1 Interest Payment Amount" means, with respect to any Payment
Date, 30 days' interest, calculated on the basis of a 360-day year consisting of
twelve 30-day months or, in the case of the first Payment Date, the number of
days (on a "30/360" basis) from and including ______, _____, to but excluding
______, _____, at the Class A-1 Interest Rate on the Class A-1 Note Balance as
of the close of business on the last day of the related Collection Period.
"Class A-1 Mandatory Redemption Amount" means, (1) with respect to the
Mandatory Redemption Date on which the Class A Mandatory Redemption Amount is
less than $100,000, the Class A Mandatory Redemption Amount, and (2) with
respect to any Payment Date on which the Class A Mandatory Redemption Amount is
greater than $100,000, the product of (A) the Class A Mandatory Redemption
Amount and (B) a fraction, the numerator of which is the Class A-1 Note Balance
as of the class of business on the date prior to the related Payment Date and
the denominator of which is the Class A Note Balance as of the class of business
on the date prior to the related Payment Date.
"Class A-1 Principal Carryover Shortfall" means, as of the close of
business on any Payment Date, the excess of (a) the Class A-1 Principal Payment
Amount and any outstanding Class A-1 Principal Carryover Shortfall from the
immediately preceding Payment Date, over (b) the amount of principal that the
Holders of the Class A-1 Notes actually received on the current Payment Date.
"Class A-2 Interest Payment Amount" means, with respect to any Payment
Date, 30 days' interest, calculated on the basis of a 360-day year consisting of
twelve 30-day months or, in the case of the first Payment Date, the number of
days (on a "30/360" basis) from and including ______, _____, to but excluding
______, _____, at the Class A-2 Interest Rate on the Class A-2 Note Balance as
of the close of business on the last day of the related Collection Period.
"Class A-1 Principal Payment Amount" means:
(a) with respect to any Payment Date other than the Class A-1 Final
Scheduled Payment Date: the lesser of,
(1) the Class A-1 Note Balance immediately prior to the Payment
Date and
(2) the sum of
(A) the Principal Payment Amount and
(B) the Class A-1 Mandatory Redemption Amount and
(b) with respect to the Class A-1 Final Scheduled Payment Date, the
then outstanding Class A-1 Note Balance.
"Class A-2 Interest Carryover Shortfall" means, as of the close of
business on any Payment Date, the excess of (a) the Class A-2 Interest Payment
Amount for the Payment Date and any outstanding Class A-2 Interest Carryover
Shortfall from the immediately preceding Payment Date plus interest on the
outstanding Class A-2 Interest Carryover Shortfall, to the extent permitted by
law, at the Class A-2 Interest Rate from the preceding Payment Date through the
current Payment Date, calculated on the basis of a 360-day year consisting of
twelve 30-day months, over (b) the amount of interest that the Holders of the
Class A-2 Notes actually received on the current Payment Date.
"Class A-2 Mandatory Redemption Amount" means, with respect to the
Mandatory Redemption Payment Date, the positive difference, if any, between the
Class A Mandatory Redemption Amount and the Class A-1 Mandatory Redemption
Amount.
"Class A-2 Principal Carryover Shortfall" means, as of the close of
business on any Payment Date, the excess of (a) the Class A-2 Principal Payment
Amount and any outstanding Class A-2 Principal Carryover Shortfall from the
immediately preceding Payment Date, over (b) the amount of principal that the
Holders of the Class A-2 Notes actually received on the current Payment Date.
"Class A-2 Principal Payment Amount" means:
(a) with respect to any Payment Date other than the Class A-2 Final
Scheduled Payment Date: the lesser of,
(1) the Class A-2 Note Balance immediately prior to the
Payment Date, and
(2) the difference between
(A) the sum of the Principal Payment Amount and the
Class A-2 Mandatory Redemption Amount and
(B) the Class A-1 Principal Payment Amount and
(b) with respect to the Class A-2 Final Scheduled Payment Date, the
then outstanding Class A-2 Note Balance.
"Class B Interest Carryover Shortfall" means, as of the close of
business on any Payment Date, the excess of (a) the Class B Interest Payment
Amount for the Payment Date and any outstanding Class B Interest Carryover
Shortfall from the immediately preceding Payment Date plus interest on the
outstanding Class B Interest Carryover Shortfall, to the extent permitted by
law, at the Class B Interest Rate from the preceding Payment Date through the
current Payment Date, calculated on the basis of a 360-day year consisting of
twelve 30-day months, over (b) the amount of interest that the Holders of the
Class B Notes actually received on the current Payment Date.
"Class B Interest Payment Amount" means, with respect to any Payment
Date, 30 days' interest, calculated on the basis of a 360-day year consisting of
twelve 30-day months or, in the case of the first Payment Date, the number of
days (on a "30/360" basis) from and including ______, _____ to but excluding
______, _____, at the Class B Interest Rate on the Class B Note Balance as of
the close of business on the last day of the related Collection Period.
"Class B Principal Payment Amount" means:
(a) with respect to any Payment Date other than the Class B Final
Scheduled Payment Date: the lesser of,
(x) the Class B Note Balance immediately prior to the Payment
Date, and
(y) amounts remaining from the sum of,
(A) Available Funds and
(B) amounts available from the Class A Reserve
Account in accordance with the terms of the Sale and Servicing Agreement, after
application of priorities First through Ninth under "--Priority of Distribution
Amounts," and
(b) with respect to the Class B Final Scheduled Payment Date, the then
outstanding Class B Note Balance.
"Contract Scheduled Payment" means, for any Collection Period for any
Receivable, the amount indicated in the Receivable as required to be paid by the
Obligor in the relevant Collection Period, without giving effect to deferments
of payments granted to Obligors by the Servicer pursuant to the Sale and
Servicing Agreement or any rescheduling of payments in an insolvency or similar
proceeding.
"Defaulted Receivable" means any Receivable with respect to which any
of the following shall have occurred:
o for which the related Financed Vehicle has been repossessed by
the Servicer;
o for which all or more than 10% of any payment is 120 days or more
past due; or
o a Contract with respect to which the Servicer has determined in
good faith that all amounts expected to be recovered have been
received.
"Draw Date" means, with respect to any Payment Date the third business
Day (as defined in the Policy) immediately preceeding the Payment Date.
"Excess Overcollateralization Amount" means, with respect to any
Payment Date, the excess, if any, of
(1) the Class A Overcollateralization Amount calculated for this
purpose only without deduction for any Excess Overcollateralization Amount
(I.E., assuming that the entire amount described in clause (x) of the definition
of "Principal Payment Amount" is distributed as principal on the Class A Notes)
over
(2) the Class A Target Overcollateralization Amount on the Payment
Date.
"Insurer Optional Deposit" means, with respect to any Payment Date, an
amount delivered by the Insurer, at its sole option, other than amounts in
respect of a Policy Claim Amount, for deposit into the Collection Account for
any of the following purposes:
(1) to provide funds in respect of the payment of fees or expenses of
any provider of services to the Trust with respect to the Payment Date; or
(2) to include this amount as part of the Additional Funds Available
for the Payment Date to the extent that without this amount a draw would be
required to be made on the Policy.
"Liquidated Receivable" means any Receivable with respect to which any
of the following shall have occurred with respect to any Collection Period:
o the sale of the Financed Vehicle;
o for which all or more than 10% of any Contract Scheduled Payment
is 120 days or more past due, except in the case of repossessed
Financed Vehicles,
o the Servicer has determined in good faith that all amounts it
expects to be recovered have been received, or
o 90 days have elapsed since the Servicer repossessed the Financed
Vehicle.
"OC Stabilization Date" means the first Payment Date on which the
Class A Overcollateralization Amount equals the Class A Target
Overcollateralization Amount.
"Policy Claim Amount" means, for any Payment Date, the excess, if any,
of
(1) the sum of the Class A Interest Payment Amount and the Class A
Principal Payment Amount for the Payment Date over
(2) the sum of
(a) the amounts actually deposited into the Class A Note
Distribution Account on the related Payment Date and
(b) the Additional Funds Available to pay the Class A Interest
Payment Amount or the Class A Principal Payment Amount if any, for the
Payment Date.
"Principal Balance" of a Receivable:
o as of the Cutoff Date, means the Amount Financed minus
(1) in the case of a Precomputed Receivable, that portion of all
payments, including all Contract Scheduled Payments and any
prepayments in full or partial prepayments, actually received
on or prior to that date and allocable to principal in
accordance with the actuarial method and
(2) in the case of a Simple Interest Receivable, that portion of
all payments, including all Contract Scheduled Payments and
any prepayments in full or partial prepayments, actually
received on or prior to that date and allocable to principal
in accordance with the simple interest method, and
o as of any date after the Cutoff Date, means the Principal Balance
as of the Cutoff Date minus
(1) in the case of a Precomputed Receivable, that portion of all
payments, including all Contract Scheduled Payments and any
prepayments in full or partial prepayments, actually received
on or prior to that date, but after the Cutoff Date, and
allocable to principal in accordance with the actuarial
method,
(2) in the case of a Simple Interest Receivable, that portion of
all payments, including all Contract Scheduled Payments and
any prepayments in full or partial prepayments, actually
received on or prior to that date, but after the Cutoff Date,
and allocable to principal in accordance with the simple
interest method and
(3) any Cram Down Loss in respect of the Receivable. The
Principal Balance of a Liquidated Receivable for purposes
other than the definition of Principal Payment Amount shall
be equal to $0.
"Principal Payment Amount" means the amount equal to the excess, if
any, of (x) the sum of the following amounts, without duplication:
o the principal portion of all Contract Scheduled Payments received
during the Collection Period on Precomputed Receivables,
calculated in accordance with the actuarial method, and all
payments of principal received on Simple Interest Receivables,
calculated in accordance with the simple interest method, during
the Collection Period;
o the principal portion of all prepayments received during the
related Collection Period;
o the portion of the Purchase Amount allocable to principal of each
Receivable that became a Purchased Receivable as of the last day
of the related Collection Period and, at the option of the
Insurer, the Principal Balance of each Receivable that was
required to be but was not so purchased or repurchased;
o the Principal Balance of each Receivable that first became a
Liquidated Receivable during the related Collection Period; and o
the aggregate amount of Cram Down Losses with respect to the
Receivables that have occurred during the related Collection
Period, over
(y) the Excess Overcollateralization Amount, if any, for the Payment
Date.
"Purchase Amount" means, with respect to a Receivable, the Principal
Balance plus interest on the Principal Balance at the respective APR from the
last day through which interest has been paid to the last day of the immediately
preceding Collection Period if purchased prior to the Determination Date
immediately following the end of the Collection Period, and otherwise through
the last day of the month of repurchase.
CALCULATION OF PAYMENT AMOUNTS. The Class A-1 Noteholders will be
entitled to receive, to the extent funds are available, the Class A-1 Principal
Payment Amount and the Class A-1 Interest Payment Amount with respect to each
Payment Date. The Class A-2 Noteholders will be entitled to receive to the
extent funds are available, the Class A-2 Principal Payment Amount and the Class
A-2 Interest Payment Amount with respect to each Payment Date, subject to the
priority of payments as described in "--Priority of Distribution Amounts". The
"Class A-1 Note Balance" will initially represent $___________, and afterward,
an amount equal to the initial Class A-1 Note Balance reduced by all amounts
distributed to the Noteholders that are allocable to principal. The "Class A-2
Note Balance" will initially represent $_________, and afterward, an amount
equal to the initial Class A-2 Note Balance reduced by all amounts distributed
to the Class A-2 Noteholders that are allocable to principal.
PRIORITY OF DISTRIBUTION AMOUNTS
On each Payment Date, the Indenture Trustee will, based on the
information contained in the Servicer's Certificate delivered on the related
Determination Date, distribute the following amounts in the following order of
priority:
(1) first, from the Available Funds, to the Servicer, the Servicer
Fee (as defined in this prospectus supplement) for the related
Collection Period, and any Servicer Expenses for the related or
any prior Collection Period and other amounts mistakenly
deposited in the Collection Account belonging to the Servicer, if
any, or otherwise required to be distributed to the Servicer in
accordance with the Sale and Servicing Agreement;
(2) second, from the remaining Available Funds, to the Lockbox Bank,
the Indenture Trustee, the Owner Trustee and the Backup Servicer,
any accrued and unpaid fees and in the case of the Backup
Servicer, Servicer Transition Expenses, if any, up to an amount
specified in the Sale and Servicing Agreement, in each case, to
the extent the Person (as defined in this prospectus supplement)
has not previously received this amount from the Servicer;
(3) third, from the remaining Available Funds, pro rata in respect of
the amounts due, (a) to the Class A-1 Noteholders, the Class A-1
Interest Payment Amount for the Payment Date and the Class A-1
Interest Carryover Shortfall, if any, and (b) to the Class A-2
Noteholders, the Class A-2 Interest Payment Amount for the
Payment Date and the Class A-2 Interest Carryover Shortfall, if
any;
(4) fourth, from the remaining Available Funds, to the Class A-1
Noteholders, the Class A-1 Principal Payment Amount for the
Payment Date, and the Class A-1 Principal Carryover Shortfall, if
any;
(5) fifth, from the remaining Available Funds, to the Class A-2
Noteholders, the Class A-2 Principal Payment Amount for the
Payment Date, and the Class A-2 Principal Carryover Shortfall, if
any;
(6) sixth, from the remaining Available Funds, to the Insurer to the
extent of any amounts owing the Insurer under the Insurance
Agreement;
(7) seventh, from the remaining Available Funds, to the Class A
Reserve Account to the extent necessary to increase the amount on
deposit tin this prospectus supplement to its then required
level;
(8) eighth, on or prior to the OC Stabilization Date, from the
remaining Available Funds, and together with amounts, if any,
available in accordance with the terms of the Class A Reserve
Account Agreement, sequentially, to the Class A-1 Noteholders and
to the Class A-2 Noteholders, as principal, until the Class A
Target Overcollateralization Amount is achieved;
(9) ninth, from the remaining Available Funds, to the Class B
Noteholders, the Class B Interest Payment Amount for the Payment
Date and the Class B Interest Carryover Shortfall, if any;
(10) tenth, from the remaining Available Funds, and together with
amounts, if any, available from the Class A Reserve Account in
accordance with the terms of the Sale and Servicing Agreement, to
the Class B Noteholders, the Class B Principal Payment Amount;
and
(11) eleventh, from the remaining Available Funds, to the Class A
Reserve Account, or as otherwise specified in the Trust
Documents, any remaining funds.
PAYMENT DATE CALCULATIONS AND PAYMENTS
In the event that any Servicer's Certificate delivered by the Servicer
indicates that the Available Funds with respect to a Payment Date are
insufficient to fund in full the related Scheduled Payments plus the amounts
described in clauses (1), (2) and (6) above in "--Priority of Distribution
Amounts", the Indenture Trustee shall request the Deficiency Claim Amount from
the Class A Reserve Account, at the time required by and pursuant to, the Class
A Reserve Account Agreement. Any funds received by the Indenture Trustee
pursuant to this request will be deposited in the Collection Account and paid on
the related Payment Date to the persons entitled to the funds, in the amounts
described in clauses (1) through (6) of "--Priority of Distributions" in
accordance with the priority of payment. Further, in the event that any
Servicer's Certificate delivered by the Servicer indicates that the sum of (1)
the Available Funds with respect to a Payment Date, plus (2) any related
Deficiency Claim Amount funds deposited in the Collection Account or otherwise
received by the Indenture Trustee is insufficient to fund in full the related
Scheduled Payments, the Indenture Trustee shall furnish to the Insurer no later
than 12:00 noon New York City time on the related Draw Date a completed notice
of claim in the amount of the Policy Claim Amount. Amounts paid by the Insurer
pursuant to any notice of claim shall be deposited by the Insurer into the Note
Distribution Account for payment to Noteholders on the Payment Date.
STATEMENTS TO NOTEHOLDERS
On each Payment Date, the Indenture Trustee must provide to each Class
A Noteholder, the Insurer and the Rating Agencies a statement prepared by the
Servicer based on the information in the related Servicer's Certificate, which
statement sets forth the information required under the Sale and Servicing
Agreement. Each statement will include the following information with respect to
the Payment Date or the immediately preceding Collection Period, as applicable:
(1) the amount of the payment allocable to interest with respect to
the Class A-1 Notes, the Class A-2 Notes and the Class B Notes,
as applicable;
(2) the amount of the payment allocable to principal on or with
respect to the Class A-1 Notes, the Class A-2 Notes and the Class
B Notes;
(3) the amount of the payment pursuant to a claim on the Policy;
(4) the amount of fees paid by the Trust with respect to the related
Collection Period, including any Servicer Fee and Servicer
Expenses;
(5) the Class A-1 Note Balance, the Class A-2 Note Balance and the
Class B Note Balance;
(6) the Class A-1 Interest Carryover Shortfall, the Class A-2
Interest Carryover Shortfall and the Class B Interest Carryover
Shortfall, if any, and the Class A-1 Principal Carryover
Shortfall, the Class A-2 Principal Carryover Shortfall and the
Class B Principal Carryover Shortfall, if any;
(7) the Class A-1 Note Factor, the Class A-2 Note Factor and the
Class B Note Factor;
(8) for each date during the Pre-Funding Period, the remaining
Pre-Funded Amount, the amount in the Pre-Funding Account and the
amount remaining the Capitalized Interest Account;
(9) the number of Receivables and the aggregate Principal Balance due
of the Receivables, for which the related Obligors are delinquent
in making Contract Scheduled Payments (A) between 31 and 60 days,
(B) between 61 and 90 Days, (C) between 91 and 120 days and (D)
more than 120 days;
(10) the number of Receivables which became Liquidated Receivables,
and the aggregate principal amount of the Receivables which
became Liquidated Receivables net of Recoveries;
(11) the number of Receivables which became Defaulted Receivables, and
the aggregate principal amount of these Receivables;
(12) the number and the aggregate Purchase Amount of Receivables that
became Purchased Receivables during the related Collection Period
and the number and aggregate Purchase Amount of Receivables that
were required to be repurchased during the related Collection
Period but were not so repurchased;
(13) the Principal Balance, APR and model year of each Receivable that
was replaced and the Principal Balance, APR and model year of the
corresponding Replacement Receivable;
(14) the number and the aggregate Principal Balance of Receivables
with respect to which, to the knowledge of the Servicer, Obligors
became the subject of bankruptcy proceedings during the
Collection Period, or during a prior Collection Period, if the
Servicer first became aware of the proceeding during the current
Collection Period;
(15) the amount of any Deficiency Claim Amounts deposited in the
Collection Account from the Class A Reserve Account;
(16) the Class A Overcollateralization Amount and the Class A Target
Overcollateralization Amount; and
(17) the beginning balance, amount of claims paid, amount of deposits
made, and ending balance of the applicable collateral
self-insurance fund, if any.
Each amount set forth pursuant to subclauses (1), (2) and (5) will be
expressed as a dollar amount per $1,000 of the initial principal amount of a
Note.
Unless and until Definitive Notes are issued, the reports will be sent
on behalf of the Trust to Cede & Co., as registered holder of the Class A Notes
and the nominee of DTC. See "Reports to Securityholders" and "Description of the
Notes" in the prospectus. Within the required period of time after the end of
each calendar year, the Indenture Trustee will furnish to each person who at any
time during the calendar year was a Noteholder, a statement as to the aggregate
amounts of interest and principal paid to that Noteholder and any other
information as the Servicer deems necessary to enable the Noteholder to prepare
its tax returns. See "Certain Federal Income Tax Consequences."
CREDIT SUPPORT
The Class A Overcollaterization Amount and the Class A Reserve Account
(a funded cash reserve account (the "Class A Reserve Account")), result in
credit support for the Class A Notes. This credit support is required to be
increased to, and subsequently maintained at, a level established by the
Insurer. This level changes over time. The Insurer may permit the required level
of credit support provided by the Class A Reserve Account and the Class A
Overcollateralization Amount to be reduced, or "step down", over time without
the consent of Noteholders.
OVERCOLLATERIZATION Overcollaterization for the Class A Notes is
created as a result of the application of "excess interest" and "excess
principal" to the payment of principal on the Class A Notes. The "excess
interest" is interest which is collected on the Receivables in excess of the
amount of interest that is paid on the Class A Notes, used to pay specific fees,
or, under some circumstances, deposited to the Class A Reserve Account. This
application of excess interest results in the outstanding principal balance of
the Class A Notes amortizing more quickly than the Pool Balance. The "excess
principal" is the principal allocated to the Class A Notes which is in excess of
the principal the Class A Notes would receive if the principal collected on the
Receivables were distributed pro rata to the Class A Notes and Class B Notes
based on their relative outstanding principal balances. This application of the
"excess principal" results in the outstanding principal balance on the Class A
Notes amortizing more quickly than the Aggregate Principal Balance on a
percentage basis.
If the Insurer permits the required level of overcollaterization to
step down, principal collections which would otherwise be paid through to the
Class A Noteholders as part of the Class A Principal Payment Amount may be
instead released to the Class B Noteholders or the Certificateholder.
SUBORDINATION. As of the Closing Date, the principal balance of the
Class B Notes equals ____% of the Note Balance. The transaction is structured so
that until the OC Stabilization Date, the Class B Note Balance will grow as a
percentage of the Note Balance. The Class B Notes are subordinated in right of
payment to the payment of the Class A Notes. No payments of principal will be
made to the Class B Notes until the OC Stabilization Date. Payment of interest
on the Class B Notes is subordinated to payment of interest and principal on the
Class A Notes, the funding of the Class A Reserve Account and, until the OC
Stabilization Date, the payment of excess interest as additional principal to
the Class A Notes. If there are losses on the Receivables, those losses will be
borne entirely by the Certificateholder and by the Class B Notes before there
are any losses on the Class A Notes.
CLASS A RESERVE ACCOUNT. The Class A Reserve Account will be funded
with an initial cash deposit on the Closing Date. On each subsequent Payment
Date, the Indenture Trustee will be required to deposit additional amounts into
the Class A Reserve Account from payments on the Receivables as described under
"The Notes--Priority of Distribution Amounts" above to the extent that the
balance on deposit tin this prospectus supplement is below the then required
level. Amounts, if any, on deposit in the Class A Reserve Account on a Payment
Date will be available to the extent provided in the Class A Reserve Account
Agreement to fund any Deficiency Claim Amount with respect to the Payment Date.
Amounts on deposit in the Class A Reserve Account on any Payment Date on or
prior to the OC Stabilization Date, after giving effect to all distributions
made on the Payment Date, in excess of the specified Class A Reserve Account
Requirements for the Payment Date shall be distributed to Class A Noteholders as
a prepayment of principal on the Class A Notes. On any Payment Date after the OC
Stabilization Date, the excess funds may be released to the Class B Noteholders
or the Certificateholder without the consent of the Class A Noteholders.
In addition, the Certificateholder, the Insurer and the Collateral
Agent under the Class A Reserve Account Agreement may amend the Class A Reserve
Account Agreement, and any provisions in the Insurance Agreement relating to the
Class A Reserve Account, in any respect, including, without limitation, reducing
or eliminating the funding requirements of the Class A Reserve Account or
permitting these funds to be used for the benefit of persons other than Class A
Noteholders, without the consent of, or notice to, the Trustee, the Owner
Trustee or the Noteholders. The Collateral Agent shall not withhold or delay its
consent with respect to any amendment that does not adversely affect the
Collateral Agent in its individual capacity. Notwithstanding any reduction in or
elimination of the funding requirements of the Class A Reserve Account or the
depletion of the Class A Reserve Account, the Insurer will be obligated on each
Payment Date to fund the full amount of each Scheduled Payment required to be
paid by the Payment Date, and which would not be in the absence of a payment
under the Policy. If the Insurer breaches its obligations, any losses on the
Receivables will be borne first by the Class B Noteholders and then by the
Noteholders.
THE INDENTURE
THE INDENTURE TRUSTEE. ____________________ is the Indenture Trustee
under the Indenture. For the purpose of meeting the legal requirements of some
jurisdictions, the Indenture Trustee may appoint co-trustees or separate
trustees of all or any part of the trust estate and confer upon this party any
powers, duties, obligations, rights and trusts as the Indenture Trustee deems
necessary, or desirable. In the event of an appointment, all rights, powers,
duties and obligations conferred or imposed upon the Indenture Trustee by the
Indenture will be conferred or imposed upon the Indenture Trustee and the
separate trustee or co-trustee jointly, or, in any jurisdiction in which the
Indenture Trustee shall be incompetent or unqualified to perform particular
acts, singly upon the separate trustee or co-trustee who will exercise and
perform these rights, powers, duties, and obligations solely at the direction of
the Indenture Trustee.
The Indenture Trustee may resign at any time after 60 days' written
notice to the Issuer, the Insurer and Noteholders in which event the Controlling
Party will be obligated to appoint a successor trustee. The Controlling Party
may remove the Indenture Trustee if, among other reasons, the Indenture Trustee
ceases to be eligible to continue as the Indenture Trustee under the Indenture,
becomes legally unable to act or becomes insolvent. In these circumstances, the
Controlling Party will be obligated to appoint a successor trustee. Any
resignation or removal of the Indenture Trustee and appointment of a successor
trustee will not become effective until acceptance of the appointment of a
successor trustee.
The Sale and Servicing Agreement will provide that the Indenture
Trustee will be entitled to indemnification by the Servicer for, and will be
held harmless against, any loss, liability, fee, disbursement or expense
incurred by the Indenture Trustee not resulting from the Indenture Trustee's own
willful misfeasance, bad faith or negligence and other than by reason of a
breach of any of the Indenture Trustee's representations or warranties set forth
in the Sale and Servicing Agreement. The Sale and Servicing Agreement will
further provide that the Servicer will indemnify the Indenture Trustee for some
of the taxes that may be asserted in connection with the transaction.
The Indenture Trustee makes no representations as to the validity or
sufficiency of the Sale and Servicing Agreement, the Notes, other than the
authentication of the Notes, or any Receivables or the Related Documents and is
not accountable for the use or application by the Seller or the Servicer of any
funds paid to the Seller or the Servicer in respect of the Notes or the
Receivables, or the investment of any monies received by the Servicer before the
monies are deposited in the Collection Account. The Indenture Trustee has not
independently verified the Receivables. The Indenture Trustee is required to
perform only those duties specifically required of it under the Sale and
Servicing Agreement and the Indenture. The Indenture Trustee shall determine
whether the certificates, reports or other instruments required to be furnished
to the Indenture Trustee under the Sale and Servicing Agreement and the
Indenture conform to the requirements of the Sale and Servicing Agreement and
the Indenture, respectively.
MODIFICATION OF INDENTURE WITHOUT NOTEHOLDER CONSENT. The Trust and
Indenture Trustee may, with the prior written consent of the Insurer, prior to
the occurrence and continuance of an Insurer Default, but without consent of the
Noteholders, enter into one or more supplemental indentures for any of the
following purposes:
o to correct or amplify the description of the property subject to
the lien of the Indenture or add additional property to it;
o to evidence the succession of another Person to the Trust and the
assumption by the successor of the covenants of the Trust;
o to add additional covenants for the benefit of the Noteholders or
to surrender any right or power conferred on the Trust;
o to convey, transfer, assign, mortgage or pledge any additional
property to or with the Indenture Trustee;
o to cure any ambiguity, or to correct or supplement any provision
in the Indenture or in any supplemental indenture that may be
inconsistent with any other provision of the Indenture or any
supplemental indenture;
o to add to or change any of the provisions of the Indenture as
shall be necessary and permitted to facilitate the administration
by more than one trustee; and
o to add any provisions to, change in any manner or eliminate any
of the provisions of the Indenture or modify in any manner the
rights of Noteholders under the Indenture; provided that any
action must not, as evidenced by an opinion of counsel, adversely
affect in any material respect the interests of any Noteholder.
MODIFICATION OF INDENTURE WITH NOTEHOLDER CONSENT. With the prior
written consent of the Insurer, prior to the occurrence and continuance of an
Insurer Default, and the Note Majority, the Trust and the Indenture Trustee may
execute one or more supplemental indentures to add, change or eliminate any
other provisions of the Indenture, modify in any manner the rights of the
Noteholders or provide for the acceptance of the appointment of a successor
Indenture Trustee. Without the prior written consent of the Insurer, prior to
the occurrence and continuance of an Insurer Default, and the Holder of each
outstanding related Note affected, however, no supplemental indenture will:
o change the due date of any installment of principal of or
interest on any Note or reduce the principal amount of any Note,
the interest rate on the Note or the redemption price with
respect to the Note, change the provisions of the Indenture
relating to the application of collections on, or the proceeds of
the sale of, the collateral to the payment of principal of or
interest on the Notes, change any place of payment where or the
coin or currency in which any Note or any interest on the Note is
payable;
o impair the right to institute suit for the enforcement of
particular provisions of the Indenture regarding payment;
o reduce the percentage of the aggregate amount of the outstanding
Notes the consent of the Holders of which is required for any
supplemental indenture or the consent of the Holders of which is
required for any waiver of compliance with particular provisions
of the Indenture or of some of the defaults under the Indenture
and their consequences as provided for in the Indenture;
o modify or alter the provisions of the Indenture regarding
particular aspects of what constitutes an "Outstanding" Note;
o reduce the percentage of the aggregate outstanding amount of the
Notes the consent of the Holders of which is required to direct
the Indenture Trustee to sell or liquidate the Receivables if the
proceeds of the sale would be insufficient to pay the principal
amount and accrued but unpaid interest on the outstanding Notes;
o modify the provision of the Indenture requiring consent of
Noteholders except to increase the percentage of the aggregate
principal amount of the Notes required to amend the sections of
the Indenture or to provide additional provisions requiring the
consent of each Noteholder prior to modification or waiver;
o modify any of the provisions of the Indenture affecting the
calculation of the amount of any payment of interest or principal
due on any Note on any Payment Date;
o permit the creation of any lien ranking prior to or on a parity
with the lien of the Indenture with respect to any of the
collateral for the Notes or, except as otherwise permitted or
contemplated in the Indenture, terminate the lien of the
Indenture on any collateral or deprive the Holder of any Note of
the security afforded by the lien of the Indenture; or
o become effective if the Rating Agency Condition has not been
satisfied with respect to it.
EVENTS OF DEFAULT; RIGHTS UPON EVENT OF DEFAULT. Unless an Insurer
Default shall have occurred and be continuing, "Events of Default" under the
Indenture will consist of those events defined in the Insurance Agreement as
Insurance Agreement Indenture Cross Defaults, and will constitute an Event of
Default under the Indenture only if the Insurer shall have delivered to the
Indenture Trustee, and not rescinded, a written notice specifying that any
Insurance Agreement Indenture Cross Default constitutes an Event of Default
under the Indenture. "Insurance Agreement Indenture Cross Defaults" consist of:
(1) any payment being made under the Policy;
(2) some events of bankruptcy, insolvency, receivership or
liquidation of the Trust, the Seller or the Certificateholder;
(3) the Trust becoming taxable as an association, or publicly traded
partnership, taxable as a corporation for federal or state income
tax purposes;
(4) the Class A Notes not being treated as indebtedness for federal
or applicable state income tax purposes and the
characterization's having a material adverse effect on the Trust
and the Noteholders or the Insurer;
(5) the sum of the Available Funds with respect to any Payment Date
plus the amount, if any, available from particular collateral
accounts maintained for the benefit of the Insurer is less than
the sum of the amounts described in clauses (1)-(6) under "The
Notes--Priority of Distribution Amounts" in this prospectus
supplement; and
(6) any failure to perform in any material respect any other
covenants or agreements in the Indenture, or any representation
or warranty of the Trust made in the Indenture or in any
certificate or other writing delivered pursuant to the Indenture
or in connection with the Indenture proving to have been
incorrect in any material respect when made, and the failure
continuing or not being cured, or the circumstances or condition
in respect of which the misrepresentation or warranty was
incorrect not having been eliminated or otherwise cured, for 30
days after the giving of written notice of the failure or
incorrect representation or warranty to the Trust and the
Indenture Trustee by the Insurer.
Upon the occurrence of an Event of Default, so long as an Insurer
Default shall not have occurred and be continuing, the Insurer will have the
right, but not the obligation, to cause the Indenture Trustee to liquidate the
Trust Property in whole or in part, on any date or dates following the
acceleration of the Class A Notes due to the Event of Default as the Insurer, in
its sole discretion, shall elect, and to deliver the proceeds of the liquidation
to the Indenture Trustee for distribution to the Class A-1 Noteholders and Class
A-2 Noteholders on a pro rata basis based on the Class A-1 Note Balance and the
Class A-2 Note Balance then outstanding, in accordance with the terms of the
Indenture. The Insurer may not, however, cause the Indenture Trustee to
liquidate the Trust Property in whole or in part if the proceeds of the
liquidation would not be sufficient to pay all outstanding principal of and
accrued interest on the Notes, unless the Event of Default arose from an event
specified in (1), (2), (3), or (4) in the immediately preceding paragraph.
Following the occurrence of any Event of Default, the Indenture Trustee will
continue to submit claims under the Policy for any shortfalls in the Scheduled
Payments on the Class A Notes in accordance with the terms of the Policy.
Following any Event of Default under the Indenture, the Insurer, in its sole
discretion, may elect to pay all or any portion of the outstanding amount of the
Class A Notes, plus accrued interest on the Class A Notes. See "The Policy" in
this prospectus supplement.
If an Insurer Default has occurred and is continuing, "Events of
Default" under the Indenture will consist of the Events of Default described in
the accompanying prospectus under "Description of the Notes--Provisions of the
Indenture" and "--Events of Default; Rights Upon Events of Default"; and the
Indenture Trustee and the Noteholders have the rights under the Indenture
described tin this prospectus supplement.
NOTE FACTORS; STATEMENT TO NOTEHOLDERS; SERVICER REPORTS TO THE INDENTURE
TRUSTEE
The "Class A-1 Note Factor" will be a seven-digit decimal number that
the Servicer will compute each month indicating the Class A-1 Note Balance as of
the close of business on the last day of the related Collection Period in that
month as a fraction of the respective original outstanding principal balance of
the Class A-1 Notes. The Class A-1 Note Factor will be 1.0000000 as of the
Cutoff Date; and afterward, the Class A-1 Note Factor will decline to reflect
reductions in the Class A-1 Note Balance as a result of scheduled payments
collected, partial prepayments, prepayments and liquidations of the Receivables.
The amount of a Class A-1 Noteholder's pro rata share of the Class A-1 Note
Balance can be determined on any date by multiplying the original denomination
of the Holder's Note by the Class A-1 Note Factor as of the close of business on
the most recent Payment Date.
The "Class A-2 Note Factor" will be a seven-digit decimal number that
the Servicer will compute each month indicating the Class A-2 Note Balance as of
the close of business on the last day of the related Collection Period in that
month as a fraction of the respective original outstanding principal balance of
the Class A-2 Notes. The Class A-2 Note Factor will be 1.0000000 as of the
Cutoff Date; and afterward, the Class A-2 Note Factor will decline to reflect
reductions in the Class A-2 Note Balance as a result of scheduled payments
collected, partial prepayments, prepayments and liquidations of the Receivables.
The amount of a Class A-2 Noteholder's pro rata share of the Class A-2 Note
Balance can be determined on any date by multiplying the original denomination
of the Holder's Note by the Class A-2 Note Factor as of the close of business on
the most recent Payment Date.
Under the Sale and Servicing Agreement, the Servicer will perform some
monitoring and reporting functions for the Trust, including the preparation and
delivery of the Servicer's Certificate on each Determination Date to the
Indenture Trustee, the Backup Servicer, the Insurer, and the Rating Agencies
setting forth specified information with respect to the preceding Collection
Period.
Within the prescribed period of time for tax reporting purposes after
the end of each calendar year during the term of the Sale and Servicing
Agreement, the Indenture Trustee will be required to mail to each person who at
any time during the relevant calendar year will have been a Noteholder, a
statement containing information related to the Noteholder's preparation of
federal income tax returns.
DESCRIPTION OF THE TRANSACTION DOCUMENTS
The following summary describes some of the terms of the Transaction
Documents. Forms of the Transaction Documents have been filed as exhibits to the
Registration Statement. This summary does not purport to be complete and is
subject to, and qualified in its entirety by reference to, all the provisions in
the Transaction Documents. The following summary supplements the description of
the general terms and provisions of the Transfer and Servicing Agreements (as
this term is used in the prospectus) set forth in the prospectus, to which
description reference is made by this prospectus supplement.
SALE AND ASSIGNMENT OF RECEIVABLES
Some information with respect to the sale of the Receivables by the
Seller and the Company is set forth under "Description of the Transfer and
Servicing Agreements--Sale and Assignment of Primary Assets" in the prospectus.
See also "The Receivables" in this prospectus supplement and "The Receivables
Pools" in the prospectus for additional information regarding the Receivables
and some of the obligations of the Seller and the Servicer with respect to the
Receivables.
At the time of issuance of the Notes, the Seller will sell and assign
to the Company, the Seller's entire interest in the Receivables, including its
security interests in the Financed Vehicles, and the Company will sell and
assign to the Trust the Company's entire interest in the Receivables, including
the security interests in the Financed Vehicles. On or before the Closing Date,
the Trust will pledge the Receivables to the Indenture Trustee for the benefit
of the Noteholders and the Insurer pursuant to the Indenture. Each Receivable
will be identified in a schedule to the Sale and Servicing Agreement. The
Indenture Trustee will, concurrently with the pledge, authenticate and deliver
the Notes, which have been executed on behalf of the Trust.
Any conveyance of Subsequent Receivables is subject to the
satisfaction, on or before the related Subsequent Transfer Date, of the
following conditions, among others:
(1) each Subsequent Receivable satisfies the eligibility criteria
specified in the Sale and Servicing Agreement;
(2) the Insurer, so long as no Insurer Default shall have occurred
and be continuing, shall in its absolute and sole discretion have
approved the transfer of the Subsequent Receivables to the Trust;
(3) the Seller will not have selected the Subsequent Receivable in a
manner that it believes is adverse to the interests of the
Noteholders or the Insurer;
(4) as of each applicable Subsequent Cutoff Date, the Receivables in
the Trust together with the Subsequent Receivables to be conveyed
by the Seller as of the Subsequent Cutoff Date, meet the
following criteria, computed based on the characteristics of the
Initial Receivables on the Initial Cutoff Date and any Subsequent
Receivables on the related Subsequent Cutoff Date:
(a) the weighted average APR of the Receivables will not be less
than one percent less than the weighted average APR of the
Initial Receivables on the Initial Cutoff Date;
(b) the remaining term of the Receivables will not be greater
than 72 months nor less than ____ months;
(c) not more than ____% of the Principal Balances of the
Receivables will be attributable to Loans for the purchase
of used Financed Vehicles;
(d) the APR is not less than ____% nor more than ____%; and
(e) no vehicle is older than a _____ model year, and the Trust,
the Indenture Trustee, the Owner Trustee
(f) and the Insurer shall have received written confirmation
from a firm of certified independent public accountants as
to the satisfaction of the criteria in clauses (a) through
(e) above;
(5) the Seller shall have executed and delivered to the Trust, with a
copy to the Indenture Trustee, a Subsequent Transfer Agreement
conveying the Subsequent Receivable to the Trust, including a
schedule identifying the Subsequent Receivables;
(6) the Seller shall have delivered certain opinions of counsel to
the Indenture Trustee, the Insurer, the Owner Trustee and the
Rating Agencies with respect to the validity of the conveyance of
the Subsequent Receivables; and
(7) the Rating Agencies shall have each notified the Seller, the
Owner Trustee, the Indenture Trustee and the Insurer in writing
that, following the addition of all of the Subsequent
Receivables, each of the Class A-1 Notes and the Class A-2 Notes
will be rated ______ by ___ and _____ by ______.
Pursuant to the Receivables Purchase Agreement and the Sale and
Servicing Agreement, the Seller will represent and warrant that, among other
things:
o as of each Cutoff Date, the information provided in the schedule
to the Sale and Servicing Agreement with respect to the
Receivables is correct in all material respects;
o at the date of issuance of the Notes and any Subsequent Transfer
Date, the Receivables are free and clear of all liens or claims
and no right of setoff, counterclaim or rescission has been
asserted or, to the best of its knowledge, threatened with
respect to the Receivables;
o at the date of issuance of the Notes and any Subsequent Transfer
Date, each of the Receivables is secured by, or will be when all
necessary steps have been taken to result in, a first priority
perfected security interest in the Financed Vehicle in favor of
the Seller and this security interest has been validly assigned
to the Seller, the Trust and the Indenture Trustee; and
o each Receivable, at the time it was originated, complied, and at
the date of issuance of the Notes and any Subsequent Transfer
Data, complies in all material respects with applicable federal,
state and local laws, including consumer credit, truth in
lending, equal credit opportunity and disclosure laws.
Pursuant to the Receivables Purchase Agreement and the Sale and
Servicing Agreement, the Seller will be obligated to repurchase or replace
subject to limits on replacement set forth in the Sale and Servicing Agreement a
Receivable from the Trust, if the interests of the Noteholders, the Insurer or
the Trust in the Receivable are materially adversely affected by a breach of any
representation or warranty made by the Seller, with respect to the Receivable,
if the breach has not been cured following discovery by or notice to the Seller
of the breach. Pursuant to the Sale and Servicing Agreement, the Servicer will
be obligated to purchase or replace a Receivable from the Trust if the interests
of the Noteholders, the Insurer or the Trust in the Receivables are materially
adversely affected by a breach of some of its servicing obligations under the
Sale and Servicing Agreement, including its obligation to maintain perfection of
the first priority security interest created by each Receivable in the related
Financed Vehicle or other covenants with respect to the Servicer, if the breach
has not been cured following the discovery or notice to the Servicer of the
breach. Each Receivable will be purchased from the Trust or replaced by the
Seller or the Servicer, as the case may be, at a price equal to the Purchase
Amount. The purchase or replacement obligations will constitute the sole remedy
available to the Noteholders or the Indenture Trustee for any uncured breaches.
Pursuant to the Sale and Servicing Agreement, the Servicer will
service and administer the Receivables. The documents evidencing the Initial
Receivables and Subsequent Receivables will be delivered to the Indenture
Trustee on the Closing Date and Subsequent Transfer Date. In addition, the
Seller's accounting records and computer systems will be marked to reflect the
sale and assignment, and UCC financing statements reflecting the sale and
assignment will be filed. See "Certain Legal Aspects of the
Receivables--Security Interests in Financed Vehicles" in the accompanying
prospectus.
ACCOUNTS
Each Obligor has been instructed to make payments with respect to the
Receivables after the applicable Cutoff Date to a Lockbox which has been
established and will be maintained by Mellon Bank, N.A. (the "Lockbox Bank").
Upon receipt of payments in the Lockbox, the Lockbox Bank will deposit funds
into an account maintained by the Lockbox Bank at a depository institution (the
"Lockbox Account") acceptable to the Insurer. The Indenture Trustee will
establish the Collection Account (the "Collection Account") in the name of the
Indenture Trustee for the benefit of the Noteholders and the Insurer. All
payments made on or with respect to the Receivables previously deposited in the
Lockbox Account will be transferred to the Collection Account within two
Business Days of the receipt of available funds tin this prospectus supplement.
Upon receipt, but in no event later than two Business Days after the receipt of
amounts in respect of Receivables, each of the Servicer and the Seller will
remit all amounts received by it in respect of the Receivables in the form of
checks with payment coupons directly to the Lockbox. Other payments received by
each of the Servicer and the Seller will be deposited into a local servicing
account for processing, and then transferred to the Collection Account within
two Business Days of the receipt of available funds tin this prospectus
supplement. The Collection Account will be maintained with the Indenture Trustee
as long as the Indenture Trustee's deposits have a rating acceptable to the
Insurer and the Rating Agencies. If the deposits of the Indenture Trustee no
longer have an acceptable rating, the Indenture Trustee shall cause the accounts
to be moved to a bank or trust company having acceptable ratings.
The Indenture Trustee will also establish and maintain an account, in
its name, on behalf of Noteholders and the Insurer, in which amounts released
from the Collection Account for distribution to Noteholders will be deposited
and from which all distributions to Noteholders will be made (the "Note
Distribution Account").
On the Closing Date, a cash amount equal to approximately $___________
(the "Initial Pre-Funded Amount") will be deposited in an account (the
"Pre-Funding Account") which will be established with the Indenture Trustee. The
"Funding Period" is the period from the Closing Date until the earliest of the
date on which:
(1) the amount on deposit in the Pre-Funding Account is less than
$100,000,
(2) a Servicer Termination Event occurs under the Sale and Servicing
Agreement or an Insurance Agreement Event of Default occurs, or
(3) the Payment Date in __________.
The Initial Pre-Funded Amount, as reduced from time to time during the Funding
Period by the amount used to purchase Subsequent Receivables in accordance with
the Sale and Servicing Agreement, is referred to in this prospectus supplement
as the "Pre-Funded Amount." The Seller expects that the Pre-Funded Amount will
be reduced to less than $100,000 on or before the Payment Date in _______. Any
Pre-Funded Amount remaining at the end of the Funding Period will be payable to
the Noteholders as described in this prospectus supplement. The "Mandatory
Redemption Date" is the earlier of (1) the Payment Date in _______ and (2) if
the last day of the Funding Period occurs on or prior to the Determination Date
in ________, then the _______ Payment Date.
On the Closing Date, a cash amount shall be deposited in an account
(the "Capitalized Interest Account") which will be established with the
Indenture Trustee. The amount, if any, deposited in the Capitalized Interest
Account will be applied on the Payment Dates occurring in ___________, _________
and __________, and to fund an amount (the "Monthly Capitalized Interest
Amount") equal to the amount of interest accrued for each Payment Date at the
excess of (1) the weighted average interest rate on the Class A Notes over (2)
_____%, on the portion of the Class A Notes having a principal balance in excess
of the Aggregate Principal Balances of the Receivables. Any amounts remaining in
the Capitalized Interest Account on the Mandatory Redemption Date and not used
for these purposes are required to be paid to the Class A Noteholders on the
relevant date. See "Description of the Transaction Documents--Accounts."
All of these Accounts shall be Eligible Deposit Accounts (as defined
in the prospectus) acceptable to the Insurer, so long as no Insurer Default has
occurred and is continuing.
Consistent with the Sale and Servicing Agreement and its normal
collection practices and procedures, the Servicer may, in its discretion,
arrange with the Obligor on a Receivable to extend or modify the payment
schedule, subject to particular limitations. No extension or modification in
accordance with the Sale and Servicing Agreement will result in a repurchase
obligation for the Servicer.
SERVICING PROCEDURES
The Servicer will make all reasonable efforts to collect all payments
due with respect to the Receivables and will continue these collection
procedures as it follows with respect to all comparable motor vehicle
receivables that it services for itself or others, in a manner consistent with
the Sale and Servicing Agreement. If the Servicer determines that eventual
payment in full of a Receivable is unlikely, the Servicer will follow its normal
collection practices and procedures, including the repossession and disposition
of the Financed Vehicle securing the Receivable at a public or private auction,
or the taking of any other action permitted by applicable law.
The Servicer will not be required under the Sale and Servicing
Agreement to make any advances of principal or interest due on any Receivable.
COLLECTIONS
The Servicer or the Seller, as the case may be, will remit or cause to
be remitted the aggregate Purchase Amount of any Receivables required to be
purchased by it from the Trust to the Collection Account. Under the Sale and
Servicing Agreement, the amounts of any recoveries in respect of any Receivables
repurchased by Dealers pursuant to any Dealer Recourse constitute collections on
the Receivables.
For purposes of the Sale and Servicing Agreement, collections on a
Receivable, other than a Receivable purchased by the Servicer or the Seller,
which are not late fees or other administrative fees and expenses collected
during a Collection Period are required to be applied first to the Contract
Scheduled Payment. To the extent that the collections on a Receivable during a
Collection Period exceed the Contract Scheduled Payment on the Receivable, the
collections are required to be applied to prepay the Receivable in full. If the
collections are insufficient to prepay the Receivable in full, any partial
prepayment of principal during a Collection Period will be immediately applied
to reduce the principal balance of the Receivable during that Collection Period.
SERVICING COMPENSATION
The Servicer is entitled under the Sale and Servicing Agreement to
receive on each Payment Date a fee (the "Servicer Fee") equal to the sum of (a)
the product of one-twelfth and ______% (the "Servicing Fee Rate") and the
Principal Balance outstanding at the beginning of the calendar month immediately
preceding the month in which the Payment Date occurs and (b) any late fees. If
the Backup Servicer, or any other entity becomes the successor Servicer, it will
receive compensation at the Servicing Fee Rate. The Servicer will also be
reimbursed for particular expenses related to the repossession of Financed
Vehicles (the "Servicer Expenses"). The Servicer Fee and Servicer Expenses will
be paid out of collections from the Receivables pursuant to the distribution
described under "The Notes--Priority of Distribution Amounts".
The Servicer Fee and the Servicer Expenses will compensate the
Servicer for performing the functions of a third-party servicer of the
Receivables as an agent for the Trust, including collecting and posting all
payments, responding to inquiries of Obligors on the Receivables, investigating
delinquencies, reporting any required tax information to Obligors, paying costs
of collections and monitoring the collateral. In addition, the Servicer Fee will
(a) compensate the Servicer for administering the Receivables, including
accounting for collections, furnishing monthly and annual statements with
respect to payments and generating federal income tax information, if any, and
(b) reimburse the Servicer for some of the taxes, independent accountants' fees
and other costs incurred in connection with administering the Receivables.
BACKUP SERVICING AND BACKUP SERVICING COMPENSATION
Pursuant to the Sale and Servicing Agreement, ____________________
will perform particular duties as the Backup Servicer. In addition, following
the resignation or removal of the Servicer, the Backup Servicer has agreed to
serve as the successor Servicer under the Sale and Servicing Agreement. The
Backup Servicer will be required to carry out its duties in accordance with the
customary and usual procedures of institutions which perform similar functions.
On each Payment Date, the Backup Servicer will be entitled to receive a fee for
acting as Backup Servicer (the "Backup Servicer Fee") equal to one-twelfth the
product of _______ basis points and the outstanding Note Balance. In addition,
following the resignation or removal of the Servicer, the Backup Servicer will
be reimbursed for particular costs and expenses associated with the transition
of the Backup Servicer to Servicer (the "Servicer Transition Expenses").
The Sale and Servicing Agreement will provide that the Backup Servicer
may not resign from its obligations and duties as Backup Servicer under the Sale
and Servicing Agreement, except upon determination that, by reason of a change
in legal requirements, the Backup Servicer's performance of these duties would
be in violation of particular legal requirements and the Controlling Party does
not elect to waive the obligations of the Backup Servicer to perform the duties
that render it legally unable to act or to delegate those duties to another
Person. No resignation will become effective until a successor backup servicer
has assumed the Backup Servicer's servicing obligations and duties under the
Sale and Servicing Agreement. Notwithstanding the foregoing, the Backup Servicer
may resign for any reason, provided an entity acceptable to the Controlling
Party has assumed the Backup Servicer's obligations and duties under the Sale
and Servicing Agreement prior to the effectiveness of any resignation and the
Rating Agency Condition is also satisfied with respect to the resignation and
assumption of the Backup Servicer's obligations.
EVIDENCE AS TO COMPLIANCE
The Sale and Servicing Agreement will provide that the Servicer will
cause a firm of nationally recognized independent certified public accountants
to deliver to the Servicer, on or before ______ of each year, commencing ____
_____, a statement to the effect that the firm has audited the books and records
of the Servicer and issued its report on the books and records from the fiscal
year ended on the immediately preceding _____. The Servicer will deliver a copy
of the report to the Indenture Trustee, the Insurer, the Backup Servicer and the
Rating Agencies.
The Sale and Servicing Agreement will also provide for delivery to the
Indenture Trustee, the Insurer, the Backup Servicer and the Rating Agencies, on
or before ______ of each year, commencing ______, ______, of a certificate
signed by an officer of the Servicer stating that, to the officer's knowledge,
the Servicer has fulfilled its obligations under the Sale and Servicing
Agreement throughout the preceding 12 months, or, for the initial report, for a
longer period as will have elapsed from the date of issuance of the Notes, or,
if there has been a default in the fulfillment of any obligation, describing
each default. A copy of the certificate may be obtained by any Noteholder by a
request in writing to the Indenture Trustee addressed to the Corporate Trust
Office.
CERTAIN MATTERS REGARDING THE SERVICER
The Sale and Servicing Agreement will provide that the Servicer may
not resign from its obligations and duties as Servicer under the Sale and
Servicing Agreement, except (1) upon determination that, by reason of a change
in legal requirements, the Servicer's performance of these duties would be in
violation of particular legal requirements and (2) the Insurer, or, if an
Insurer Default has occurred and is continuing, a Note Majority, does not elect
to waive the obligations of the Servicer to perform the duties that render it
legally unable to act or to delegate those duties to another Person. No
resignation will become effective until the Backup Servicer or a successor
servicer has assumed the Servicer's servicing obligations and duties under the
Sale and Servicing Agreement.
The Sale and Servicing Agreement will further provide that neither the
Servicer nor any of its stockholders, directors, officers, employees or agents,
will be liable to the Trust or the Indenture Trustee for taking any action or
for refraining from taking any action pursuant to the Sale and Servicing
Agreement; provided, however, that neither the Servicer nor any Person will be
protected against any liability that would otherwise be imposed by reason of the
Servicer's material breach of the Sale and Servicing Agreement, willful
misfeasance, bad faith or negligence, other than errors in judgment, in the
performance of its duties.
Subject to the provisions of the Sale and Servicing Agreement, any
entity into which the Servicer may be merged or consolidated, resulting from any
merger, conversion or consolidation to which the Servicer is a party, which
acquires all or substantially all of the assets of the Servicer, or succeeding
to the business of the Servicer, which in any case assumes the obligations of
the Servicer, will be the successor of the Servicer, under the Sale and
Servicing Agreement. The Servicer may at any time perform specific duties as
Servicer through other subcontractors with the prior written consent of the
Insurer.
SERVICER TERMINATION EVENTS; RIGHTS UPON SERVICER TERMINATION EVENT
A "Servicer Termination Event" under the Sale and Servicing Agreement
will include:
o the Servicer's failure to make deposits into the Collection
Account or to deliver to the Indenture Trustee any proceeds or
payments payable to the Noteholders or the Insurer required to be
so deposited or delivered in accordance with the Sale and
Servicing Agreement, which failure continues unremedied for a
period of two Business Days, one Business Day with respect to
payment of Purchase Amounts, after the earlier of (x) discovery
of the failure by the Servicer and (y) notice of the failure is
given by the Indenture Trustee to the Servicer;
o the Servicer's failure or failures to satisfy any other covenant
or agreement set forth in the Sale and Servicing Agreement, which
failure or failures, individually or in the aggregate, materially
and adversely affect the rights of Noteholders or the Insurer and
remains uncured for a period of 60 days after the earlier of the
date on which (a) it obtains actual knowledge of the failure or
(b) it receives written notice of the failure from (1) the
Insurer or the Indenture Trustee or (2) if an Insurer Default has
occurred and is continuing, the Note Majority;
o partiuclar events of insolvency, readjustment of debt,
marshalling of assets and liabilities or similar proceedings with
respect to the Servicer indicating its insolvency;
o so long as an Insurer Default shall not have occurred and be
continuing, the Insurer shall not have delivered an extension
notice,
o so long as an Insurer Default shall not have occurred and be
continuing, an Insurance Agreement Event of Default shall have
occurred or an event of default under any other Insurance
Agreement relating to any series of securities shall have
occurred;
o a claim is made under the Policy; or
o any representation or warranty shall prove to be incorrect in any
material respect and this incorrectness shall have a material
adverse effect on the interest of the Trust, the Noteholders or
the Insurer in the Receivables, which has not been cured within
30 days.
"Insurer Default" shall mean the occurrence and continuance of any of
the following events:
(a) the Insurer shall have failed to make a payment required under
the Policy in accordance with its terms;
(b) the Insurer shall have
o filed a petition or commenced any case or proceeding under
any provision or chapter of the United States Bankruptcy
Code or any similar federal or state law relating to the
insolvency, bankruptcy, rehabilitation, liquidation or
reorganization,
o made a general assignment for the benefit of its creditors,
or
o had an order for relief entered against it under the United
States Bankruptcy Code or any other similar federal or state
law relating to insolvency, bankruptcy, rehabilitation,
liquidation or reorganization which is final and
nonappealable; or
(c) a court of competent jurisdiction, the New York Department of
Justice or other competent regulatory authority shall have
entered a final and nonappealable order, judgment or decree (1)
appointing a custodian, trustee, agent or receiver for the
Insurer or for all or any material portion of its property or (2)
authorizing the taking of possession by a custodian, trustee,
agent or receiver of the Insurer, or the taking of possession of
all or any material portion of the property of the Insurer.
As long as a Servicer Termination Event under the Sale and Servicing
Agreement remains unremedied, (x) provided that no Insurer Default shall have
occurred and be continuing, the Insurer in its sole and absolute discretion, or
(y) if an Insurer Default shall have occurred and be continuing, then the Note
Majority may terminate all of the rights and obligations of the Servicer under
the Sale and Servicing Agreement. Upon termination, all authority, power,
obligations and responsibilities of the Servicer under the Sale and Servicing
Agreement, other than obligations and responsibilities arising prior to the
termination, will automatically pass to the Backup Servicer, or other successor
servicer appointed by the Insurer, provided that no Insurer Default shall have
occurred and be continuing.
WAIVER OF PAST DEFAULTS
As set forth under "Certain Matters Regarding Servicer--Waiver of Past
Defaults" in the prospectus, the Insurer may, so long as no Insurer Default
shall have occurred and be continuing, on behalf of the Noteholders, waive any
default by the Servicer in the performance of its obligations under the Sale and
Servicing Agreement and its consequences. No waiver will impair the Noteholders'
rights with respect to subsequent defaults.
AMENDMENT
The Sale and Servicing Agreement may be amended by the Issuer, the
Seller, the Servicer, the Company, the Indenture Trustee and the Backup
Servicer, with the prior written consent of the Insurer, so long as no Insurer
Default has occurred and is continuing, but without the consent of any of the
Certificateholders or the Noteholders, to cure any ambiguity, to correct or
supplement any provision in this prospectus supplement or for the purpose of
adding any provision to or changing in any manner or eliminating any provision
of this prospectus supplement or modifying in any manner the rights of the
Noteholders; PROVIDED, HOWEVER, that the action must not, as evidenced by an
opinion of counsel, adversely affect in any material respect the interests of
the Noteholders. The Seller, the Issuer, the Servicer, the Company, the Backup
Servicer and the Indenture Trustee may also amend the Sale and Servicing
Agreement with the prior written consent of the Insurer, so long as no Insurer
Default has occurred and is continuing, and a Note Majority to add, change or
eliminate any provisions of the Sale and Servicing Agreement or to modify the
rights of the Noteholders; provided, however, that the action will not:
o increase or reduce in any manner the amount of, or accelerate or
delay the timing of, collections of payments on Receivables or
distributions that are required to be made for the benefit of the
Noteholders or Certificateholders;
o reduce the aforesaid percentage of the Noteholders or
Certificateholders which is required to consent to any amendment,
without, in either case, the consent of the Holders of all Notes
and Certificates outstanding; PROVIDED, FURTHER, that if an
Insurer Default has occurred and is continuing, the action shall
not materially adversely affect the interest of the Insurer; or
o result in a downgrade or withdrawal of the then current rating of
the Notes by the Rating Agencies without the consent of each
Noteholder.
The above should in no way be construed to require the consent of the
Noteholders or Certificateholders to a reduction in the Target
Overcollateralization Amount or the required level of the Class A Reserve
Account.
LIST OF NOTEHOLDERS; VOTING OF NOTES
Upon written request by three or more Noteholders or any one or more
Noteholders with an aggregate principal balance evidencing not less than 25% of
the Note Balance and upon compliance by these Noteholders with other provisions
of the Sale and Servicing Agreement, the Indenture Trustee will afford the
Noteholders, within five Business Days after receipt of the request, access
during business hours to the current list of Noteholders for purposes of
communicating with other Noteholders with respect to their rights under the Sale
and Servicing Agreement and the Notes.
If the Seller, the Seller or any of their affiliates owns any Notes,
the Note will not have voting rights under the Sale and Servicing Agreement or
the other Related Documents.
The Sale and Servicing Agreement will not provide for the holding of
any annual or other meetings of Noteholders.
TERMINATION
The respective obligations of the Issuer, the Seller, the Servicer,
the Company, the Backup Servicer and the Indenture Trustee pursuant to the Sale
and Servicing Agreement will terminate upon the latest of: o the maturity or
other liquidation of the last Receivable and the payment to Noteholders and the
Insurer of amounts required to be paid under the Notes, the Indenture and the
Insurance Agreement;
o the expiration of the Policy in accordance with its terms; or
o the payment to Noteholders of all amounts required to be paid to
them pursuant to the Indenture and the expiration of any related
preference period.
In order to avoid excessive administrative expense, the Servicer has
the option to purchase from the Trust, as of the last day of any month as of
which the Aggregate Principal Balance with respect to the Receivables is less
than or equal to 10% of the Original Pool Balance, all remaining Receivables at
a price equal to the aggregate of the Purchase Amounts of the Receivables as of
that last day, plus the appraised value of any other property held by the Trust,
with the prior written consent of the Insurer, if the redemption would result in
a claim under the Policy or if the redemption would result in any amount owing
to the Insurer remaining unpaid. The Indenture Trustee will give written notice
of termination to each Noteholder of record. The final distribution to any
Noteholder will be made only upon surrender and cancellation of that Holder's
Note at the office or agency of the Indenture Trustee specified in the notice of
termination; PROVIDED, HOWEVER, that if on the Payment Date upon which final
payment of the Notes is to be made, there are five or fewer Noteholders of
record, the final payment to that Noteholder will be made by check or wire
transfer as described above and each Noteholder shall present and surrender its
Note at the office or agency designated in the notice of final distribution
referred to above within 30 days after the Payment Date.
THE POLICY
The following summary of the terms of the Policy does not purport to
be complete and is qualified in its entirety by reference to the Policy.
Simultaneously with the issuance of the Class A Notes, the Insurer
will deliver the Policy to the Indenture Trustee for the benefit of each Class A
Noteholder. Under the Policy, the Insurer will unconditionally and irrevocably
guarantee to the Indenture Trustee, on each Payment Date, for the benefit of
each Class A Noteholder the full and complete payment of (1) Scheduled Payments
on the Class A Notes and (2) the amount of any Scheduled Payment which
subsequently is avoided in whole or in part as a preference payment under
applicable law. In the event the Indenture Trustee fails to make a claim under
the Policy, Class A Noteholders do not have the right to make a claim directly
under the Policy, but may sue to compel the Indenture Trustee to do so.
"Scheduled Payments" means payments which are scheduled to be made on
the Class A Notes during the term of the Policy in accordance with the original
terms of the Class A Notes when issued and without regard to any subsequent
amendment or modification of the Class A Notes, the Sale and Servicing Agreement
or the Indenture that has not been consented to by the Insurer, which "Scheduled
Payments", are
(1) the Class A Interest Payment Amount, with respect to a Payment
Date and
(2) the Class A Principal Payment Amount with respect to a Payment
Date. Scheduled Payments do not include payments which become due
on an accelerated basis as a result of
o a default by the Trust,
o an election by the Trust to pay principal on an accelerated
basis,
o the occurrence of an Event of Default under the Indenture or
o any other cause,
unless the Insurer elects, in its sole discretion, to pay in whole or in part
the principal due upon acceleration, together with any accrued interest to the
date of acceleration.
In the event the Insurer does not so elect, the Policy will continue to
guarantee Scheduled Payments due on the Class A Notes in accordance with their
original terms. Scheduled Payments shall not include
(1) any portion of a Class A Interest Payment Amount due to the Class
A Noteholders because the appropriate notice and certificate for
payment in proper form was not timely Received by the Insurer,
(2) any portion of a Class A Interest Payment Amount due to Class A
Noteholders representing interest on any Class A Interest
Carryover Shortfall or
(3) any Class A Mandatory Redemption Amounts,
unless the Insurer elects, in its sole discretion, to pay the amount in whole or
in part. Scheduled Payments shall not include, any amounts due in respect of the
Class A Notes attributable to any increase in interest rate, penalty or other
sum payable by the Trust by reason of any default or event of default in respect
of the Class A Notes or by reason of any deterioration of the creditworthiness
of the Trust nor shall coverage be provided under the Policy in respect of any
taxes, withholding or other charge imposed with respect to any Noteholder by any
governmental authority due in connection with the payment of any Scheduled
Payment to a Class A Noteholder.
Payment of claims on the Policy made in respect of Scheduled Payments
will be made by the Insurer following Receipt by the Insurer of the appropriate
notice for payment on the later to occur of (1) 12:00 noon, New York City time,
on the third Business Day following Receipt of notice for payment, and (2) 12:00
noon, New York City time, on the date on which the payment was due on the Class
A Notes.
If payment of any amount avoided as a preference under applicable
bankruptcy, insolvency, receivership or similar law is required to be made under
the Policy, the Insurer shall cause the payment to be made 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
(1) the fourth Business Day following Receipt by the Insurer
from the Indenture Trustee of
o a certified copy of the order (the "Order") of the court or
other governmental body that exercised jurisdiction to the
effect that the Class A Noteholder is required to return
Scheduled Payments made with respect to the Class A Notes
during the term of the Policy because the payments were
avoidable as preference payments under applicable bankruptcy
law,
o a certificate of the Class A Noteholder that the Order has
been entered and is not subject to any stay and
o an assignment duly executed and delivered by the Class A
Noteholder, in a form as is reasonably required by the
Insurer and provided to the Class A Noteholder by the
Insurer, irrevocably assigning to the Insurer all rights and
claims of the Class A Noteholder relating to or arising
under the Class A Notes against the Trust or otherwise with
respect to the preference payment, or
(2) the date of Receipt by the Insurer from the Indenture
Trustee of the items referred to in clauses (A), (B) and (C)
above if, at least four Business Days prior to the date of
Receipt, the Insurer shall have Received written notice from
the Indenture Trustee that these items were to be delivered
on that date and the date was specified in the notice.
This payment shall be disbursed to the receiver, conservator,
debtor-in-possession or trustee in bankruptcy named in the Order and not to the
Indenture Trustee or any Class A Noteholder directly, unless a Class A
Noteholder has previously paid the amount to the receiver, conservator,
debtor-in-possession or trustee in bankruptcy named in the Order, in which case
the payment shall be disbursed to the Indenture Trustee for distribution to the
Class A Noteholder upon proof of the payment reasonably satisfactory to the
Insurer. In connection with the foregoing, the Insurer shall have the rights
provided pursuant to the Sale and Servicing Agreement including, without
limitation, the right to direct all matters relating to any preference claim and
subrogation to the rights of the Indenture Trustee and each Class A Noteholder
in the conduct of any proceeding with respect to a preference claim.
OTHER PROVISIONS OF THE POLICY
The terms "Receipt" and "Received" with respect to the Policy shall
mean actual delivery to the Insurer and to its fiscal agent, if any, prior to
12:00 noon, New York City time, on a Business Day; delivery either on a day that
is not a Business Day or after 12:00 noon, New York City time, shall be deemed
to be Received on the next succeeding Business Day. If any notice or certificate
given under the Policy by the Indenture Trustee is not in proper form or is not
properly completed, executed or delivered, it shall be denied not to have been
Received, and the Insurer or its fiscal agent shall promptly so advise the
Indenture Trustee, and the Indenture Trustee may submit an amended notice.
Under the Policy, "Business Day" means any day other than a Saturday,
Sunday, legal holiday or other day on which commercial banking institutions in
Wilmington, Delaware, the City of New York or any other location of any
successor Servicer, successor Owner Trustee or successor Indenture Trustee are
authorized or obligated by law, executive order or governmental decree to be
closed.
The Insurer's obligations under the Policy in respect of Scheduled
Payments shall be discharged to the extent funds are transferred to the
Indenture Trustee as provided in the Policy whether or not the funds are
properly applied by the Indenture Trustee.
The Insurer shall be subrogated to the rights of each Class A
Noteholder to receive payments of principal and interest to the extent of any
payment by the Insurer under the Policy.
Claims under the Policy constitute direct, unsecured and
unsubordinated obligations of the Insurer ranking not less than pari passu with
other unsecured and unsubordinated indebtedness of the Insurer for borrowed
money. Claims against the Insurer under the Policy and each other financial
guaranty insurance policy issued by the Policy constitute pari passu claims
against the general assets of the Insurer. The terms of the Policy cannot be
modified or altered by any other agreement or instrument, or by the merger,
consolidation or dissolution of the Trust. The Policy may not be canceled or
revoked prior to distribution in full of all Scheduled Payments with respect to
the Notes. THE POLICY IS NOT COVERED BY THE PROPERTY/CASUALTY INSURANCE SECURITY
FUND SPECIFIED IN ARTICLE 76 OF THE NEW YORK INSURANCE LAW. The Policy is
governed by the laws of the State of New York.
It is a condition to issuance that the Class A Notes be rated ________
by ___ and _____ by ______. The ratings by the Rating Agencies of the Class A
Notes will be based on the issuance of the Policy. A rating is not a
recommendation to purchase, hold or sell Class A Notes. In the event that the
rating initially assigned to any of the Class A Notes is subsequently lowered or
withdrawn for any reason, including by reason of a downgrading of the
claims-paying ability of the Insurer, no person or entity will be obligated to
provide any additional credit enhancement with respect to the Class A Notes. Any
reduction or withdrawal of a rating may have an adverse effect on the liquidity
and market price of the Notes. See "Ratings" in this prospectus supplement.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The following is a general summary of some of the related Federal
income tax consequences of the purchase, ownership and disposition of the Class
A Notes. This discussion does not address every aspect of the Federal income tax
laws that may be relevant to holders of Class A Notes in light of their personal
investment circumstances or to particular types of Class A Noteholders subject
to special treatment under the Federal income tax laws, including, without
limitation, banks and thrifts, insurance companies, dealers in securities,
foreign investors, regulated investment companies, individuals, trusts and
estates and pass-through entities, the equity holders of which are any of the
foregoing. This discussion is directed to prospective purchasers who purchase
Class A Notes in the initial distribution of the Class A Notes and who hold the
Class A Notes as "capital assets" within the meaning of Section 1221 of the
Internal Revenue Code of 1986, as amended (the "Code"). Prospective purchasers
are urged to consult their own tax advisors in determining the Federal, state,
local, foreign and any other tax consequences to them of the purchase, ownership
and disposition of the Class A Notes.
The following summary is based upon current provisions of the Code,
the Treasury regulations promulgated under the Code, judicial authority, and
ruling authority, all of which are subject to change, which change may be
retroactive. The Issuer will be provided with an opinion of Federal Tax Counsel
regarding some of the related Federal income tax matters discussed below. An
opinion of Federal Tax Counsel, however, is not binding on the Internal Revenue
Service (the "IRS") or the courts. Moreover, there are no cases or IRS rulings
on similar transactions with terms similar to those of the Class A Notes. As a
result, the IRS may disagree with all or a part of the discussion below. No
ruling on any of the issues discussed below will be sought from the IRS.
TAX CHARACTERIZATION OF THE ISSUER
Stroock & Stroock & Lavan LLP will deliver its opinion that the Issuer
will not be classified as an association, or publicly traded partnership,
taxable as a corporation for Federal income tax purposes. This opinion will be
based on the assumption of compliance by all parties with the terms of the Trust
Agreement and related documents.
If the Issuer were taxable as a corporation for Federal income tax
purposes, the Issuer would be subject to corporate income tax on its taxable
income. The Issuer's taxable income would include all its income on the
Receivables, possibly reduced by its interest expense on the Class A Notes. Any
corporate income tax could materially reduce cash available to make payments on
the Class A Notes and distributions on the Certificates, and Certificateholders,
and possibly Class A Noteholders, could be liable for any tax that is not paid
by the Trust.
<PAGE>
TAX CONSEQUENCES TO HOLDERS OF THE CLASS A NOTES
TREATMENT OF THE CLASS A NOTES AS INDEBTEDNESS. The Issuer will agree,
and the Class A Noteholders will agree by their purchase of Class A Notes, to
treat the Class A Notes as debt for Federal, state and local income and
franchise tax purposes. Federal Tax Counsel will advise the Issuer that in its
opinion the Class A Notes will be classified as debt for Federal income tax
purposes.
OID, INDEXED SECURITIES, ETC. It is not anticipated that the Class A
Notes will be issued with original issue discount ("OID") within the meaning of
Section 1273 of the Code.
INTEREST INCOME ON THE CLASS A NOTES. Based on the above assumptions,
except as discussed below, the Class A Notes will not be considered issued with
OID. If the Class A Notes were treated as being issued with OID, the excess of
the "stated redemption price at maturity" of the Class A Notes over their issue
price would constitute OID. The stated interest on the Class A Notes will be
taxable to a Class A Noteholder as ordinary interest income when received or
accrued in accordance with the Class A Noteholder's method of tax accounting.
Under the OID Regulations, a holder of a Class A Note issued with a DE MINIMIS
amount of OID must include this OID in income, on a pro rata basis, as principal
payments are made on the Class A Note. A purchaser who buys a Class A Note for
more or less than its principal amount will generally be subject, respectively,
to the premium amortization or market discount rules of the Code.
SALE OR OTHER DISPOSITION. If a Class A Noteholder sells a Class A
Note, the holder will recognize gain or loss in an amount equal to the
difference between the amount realized on the sale and the holder's adjusted tax
basis in the Class A Note. The adjusted tax basis of a Class A Note to a
particular Class A Noteholder will equal the holder's cost for the Class A Note,
increased by any market discount, and gain previously included by the Class A
Noteholder in income with respect to the Class A Note and decreased by the
amount of premium, if any, previously amortized and by the amount of principal
payments previously received by the Class A Noteholder with respect to the
related Class A Note. Any gain or loss will be capital gain or loss, except for
gain representing accrued interest, including OID, and accrued market discount
not previously included in income. Capital losses generally may be used by a
corporate taxpayer only to offset capital gains, and by an individual taxpayer
only to the extent of capital gains plus $3,000 of other income.
Alternatively, if, contrary to the opinion of Federal Tax Counsel, the
Issuer were treated as a publicly traded partnership taxable as a corporation,
it would be subject to Federal income tax, and any similar state or local taxes,
at corporate tax rates on its taxable income generated by ownership of the
Receivables. This tax could result in reduced distributions to Class A
Noteholders. Distributions to Class A Noteholders generally would not be
deductible in computing the taxable income of the publicly traded partnership.
In addition, all or a portion of any distributions would, to the extent of the
current and accumulated earnings and profits of the corporation, be treated as
dividend income to the Class A Noteholders, and in the case of Class A
Noteholders that are foreign persons would be subject to withholding tax.
FOREIGN HOLDERS. Interest paid, or accrued, to a Class A Noteholder
who is a nonresident alien, foreign corporation or other non-United States
person (a "Foreign Person") generally will be considered "portfolio interest,"
and generally will not be subject to United States Federal income tax and
withholding tax, if the interest is not effectively connected with the conduct
of a trade or business within the United States by the foreign person and the
Foreign Person (1) does not own actually or constructively 10% or more of the
capital or profits of interests in the Issuer and is not actually or
constructively a "10 percent shareholder" of the Trust, the Seller or the
Seller, including a 10% owner of the Certificates, or "controlled foreign
corporation" with respect to which the Issuer, the Seller, or the Seller is a
"related person" within the meaning of the Code and (2) provides the Trustee or
other person who is otherwise required to withhold U.S. tax with respect to the
Class A Notes with an appropriate statement, on Form W-8 or a similar form,
signed under penalties of perjury, certifying that the beneficial owner of the
Class A Note is a Foreign Person and providing the foreign person's name and
address. If the information provided in this statement changes, the Foreign
Person must inform the Issuer within 30 days of the change. If a Class A Note is
held through a securities clearing organization or other financial institutions,
the organization or institution may provide the relevant signed statement to the
withholding agent; in that case, however, the signed statement must be
accompanied by a Form W-8 or substitute form provided by the Foreign Person that
owns the Class A Note. Under recently finalized Treasury regulations (the "Final
Regulations") this statement requirement may also be satisfied with other
documentary evidence with respect to an offshore account or through some types
of foreign intermediaries. Those regulations will apply for payments made after
December 31, 1999. If the interest is not portfolio interest, then it will be
subject to United States Federal income and withholding tax at a rate of 30%,
unless reduced or eliminated pursuant to an applicable tax treaty.
Any capital gain realized on the sale, redemption, retirement or other
taxable disposition of a Note by a foreign person will be exempt from United
States Federal income and withholding tax, provided that (a) the gain is not
effectively connected with the conduct of a trade or business in the United
States by the Foreign Person and (b) in the case of an individual foreign
person, the Foreign Person is not present in the United States for 183 days or
more in the taxable year.
If a Foreign Person is engaged in a trade or business and interest on
the Class A Note is effectively connected with the conduct of that trade or
business in the United States, the Foreign Person, although exempt from the
withholding tax discussed above, will be subject to United States federal income
tax on the interest on a net income basis in the same manner as if it were a
United States person if the Foreign Person properly executed IRS Form 4224
annually. In addition, if the Foreign Person is a foreign corporation, it may be
subject to a branch profits tax equal to 30%, or lower treaty rate, of its
effectively connected earnings and profits for the taxable year, subject to
adjustments.
If the IRS were to contend successfully that the Class A Notes are
interests in a partnership, not taxable as a corporation, a Class A Noteholder
that is a foreign person might be required to file a U.S. Federal income tax
return and pay tax on its share of partnership income at regular U.S. rates,
including the branch profits tax, and would be subject to withholding tax on its
share of partnership income. If the Class A Notes were recharacterized as
interests in a "publicly traded partnership" taxable as a corporation,
distributions on the Class A Notes treated as dividends would generally be
subject to withholding tax on the gross amount of the dividends at the rate of
30% unless the rate were reduced by an applicable treaty. If the Class A Notes
are recharacterized as equity interests in a partnership, or, contrary to the
opinion of Federal Tax Counsel, in a publicly traded partnership taxable as a
corporation, any taxes required to be so withheld will be treated for all
purposes of the Class A Notes as having been paid to the related Class A
Noteholder.
BACKUP WITHHOLDING. Each holder of a Class A Note, other than an
exempt holder such as a corporation, tax-exempt organization, qualified pension
and profit-sharing trust, individual retirement account or nonresident alien who
provides certification as to status as a nonresident, will be required to
provide, under penalties of perjury, a certificate containing the holder's name,
address, correct Federal taxpayer identification number and a statement that the
holder is not subject to backup withholding. Should a nonexempt Class A
Noteholder fail to provide the required certification, the Issuer will be
required to withhold 31% of the amount otherwise payable to the holder, and
remit the withheld amount to the IRS as a credit against the holder's Federal
income tax liability. The Final Regulations make modifications to the backup
withholding and information reporting rules. Prospective investors should
consult their own advisors as to the application of the Final Regulations.
CERTAIN STATE TAX CONSEQUENCES
In addition to the federal income tax consequences described in
"Material Federal Income Tax Consequences" above, potential purchasers should
consider the state income tax consequences of the acquisition, ownership and
disposition of the Class A Notes. State income tax law may vary substantially
from state to state, and this discussion does not purport to describe any aspect
of the income tax laws of any state. Therefore, potential purchasers should
consult their own tax advisors with respect to the various tax consequences of
an investment in the Class A Notes.
ERISA CONSIDERATIONS
Section 406 of ERISA and Section 4975 of the Code prohibit a pension,
profit sharing, or other employee benefit plan, as well as individual retirement
accounts and particular types of Keogh Plans subject to those provisions, and
entities deemed to hold plan assets of these plans (each, a "Benefit Plan"),
from engaging in particular transactions involving "plan assets" with persons
that are "parties in interest" under ERISA or "disqualified persons" under the
Code with respect to the Benefit Plan. A violation of these "prohibited
transaction" rules may generate excise tax and other penalties and liabilities
under ERISA and the Code for these persons. ERISA also imposes particular duties
on persons who are fiduciaries of Benefit Plans subject to ERISA. Under ERISA,
any person who exercises any authority or control respecting the management or
disposition of the assets of a Benefit Plan is considered to be a fiduciary of
the Benefit Plan, subject to exceptions not here relevant.
Some transactions involving the Issuer might be deemed to constitute
prohibited transactions under ERISA and the Code with respect to a Benefit Plan
that purchases Class A Notes if assets of the Issuer were deemed to be assets of
the Benefit Plan. Under a regulation issued by the United States Department of
Labor (the "Plan Assets Regulation"), the assets of the Issuer would be treated
as plan assets of a Benefit Plan for the purposes of ERISA and the Code only if
the Benefit Plan acquired an equity interest in the Issuer and none of the
exceptions contained in the Plan Assets Regulation was applicable. An "equity
interest" is defined under the Plan Assets Regulation as an interest other than
an instrument which is treated as indebtedness under applicable local law and
which has no substantial equity features. Although there is little guidance on
the subject, the Issuer believes that, at the time of their issuance the Class A
Notes should be treated as indebtedness without substantial equity features for
purposes of the Plan Assets Regulation. The debt status of the Class A Notes
could be affected subsequent to their issuance by particular types of changes in
the financial condition of the Issuer.
Without regard to whether Class A Notes are treated as an equity
interest under the Plan Assets Regulation, the acquisition or holding of the
Class A Notes by or on behalf of a Benefit Plan could be considered to give rise
to a prohibited transaction if the Issuer, the Seller, the Servicer, the Backup
Servicer, the Indenture Trustee or the Owner Trustee is or becomes a party in
interest or a disqualified person with respect to a Benefit Plan or in the event
that a subsequent transfer of a Class A Note occurs between a Benefit Plan and a
party in interest or disqualified person with respect to the Plan. Some
exemptions from the prohibited transaction rules could be applicable to the
purchase and holding of Class A Notes by a Benefit Plan depending on the type
and circumstances of the plan fiduciary making the decision to acquire the Class
A Notes. Included among these exemptions, each of which contains several
conditions which must be satisfied before the exemption applies, are: PTCE 90-1,
regarding partiuclar transactions entered into by insurance company pooled
separate accounts; PTCE 95-60, regarding particular transactions entered into by
insurance company general accounts; PTCE 96-23, regarding particular
transactions effected by "in-house asset managers"; PTCE 91-38 regarding
particular types of transactions entered into by bank collective investment
funds; and PTCE 84-14, regarding particular transactions effected by "qualified
professional asset managers." By acquiring a Class A Note, each purchaser and
each transferee of a Class A Note shall be deemed to represent and warrant that
either (1) it is not acquiring a Class A Note with the assets of a Benefit Plan;
or (2) its purchase and holding of the Class A Notes will qualify for prohibited
transaction exemptive relief under PTCE 95-60, PTCE 96-23, PTCE 91-38, PTCE
90-1, PTCE 84-14 or some other applicable exemption.
Employee benefit plans that are governmental plans (as defined in
Section 3(32) of ERISA) and some church plans (as defined in Section 3(33) of
ERISA) may not be subject to ERISA requirements. However, governmental plans can
be subject, under federal, fiduciary, state or local law, to restrictions which
are similar to ERISA and church plans may be subject to other types of
prohibited transaction restrictions under the Code.
A Benefit Plan fiduciary considering the purchase of Class A Notes
should consult its tax and/or legal advisors regarding whether the assets of the
Issuer would be considered plan assets, the possibility of exemptive relief from
the prohibited transaction rules and other issues and their potential
consequences.
RATINGS
It is a condition to issuance that each of the Class A-1 Notes and the
Class A-2 Notes be rated _____ by ___ and ____ by ______. The ratings by the
Rating Agencies of the Class A Notes will be based on the issuance of the
Policy. A rating is not a recommendation to purchase, hold or sell Class A
Notes. In the event that the rating initially assigned to any of the Class A
Notes is subsequently lowered or withdrawn for any reason, including by reason
of a downgrading of the claims-paying ability of the Insurer, no person or
entity will be obligated to provide any additional credit enhancement with
respect to the Class A Notes. Any reduction or withdrawal of a rating may have
an adverse effect on the liquidity and market price of the Class A Notes.
UNDERWRITING
Subject to the terms and conditions set forth in an underwriting
agreement dated March 16, 1999 (the "Underwriting Agreement"), the Company has
agreed to cause the Trust to sell to Credit Suisse First Boston Corporation (the
"Underwriter"), and the Underwriter has agreed to purchase, all of the Class A
Notes.
Under the terms and conditions of the Underwriting Agreement, the
Underwriter is committed to take and pay for all the Class A Notes offered by
this prospectus supplement, if any are taken.
The Seller has been advised by the Underwriter that the Underwriter
proposes to offer the Class A Notes from time to time for sale in negotiated
transactions or otherwise, at prices determined at the time of sale. The
Underwriter may effect these transactions by selling Class A Notes to or through
dealers and these dealers may receive compensation in the form of underwriting
discounts, concessions or commissions from the Underwriter and any purchasers of
Class A Notes for whom they may act as agents. The Underwriter and any dealers
that participate with the Underwriter in the distribution of the Class A Notes
may be deemed to be underwriters, and any discounts or commissions received by
them and any profit on the resale of Class A Notes by them may be deemed to be
underwriting discounts or commissions under the Securities Act of 1933, as
amended (the "Securities Act").
The Class A Notes are a new issue of securities with no established
trading market. The Trust has been advised by the Underwriter that it intends to
make a market in the Class A Notes, but the Underwriter is not obligated to make
a market and may discontinue market making at any time without notice. No
assurance can be given as to the liquidity of the trading market for the Class A
Notes.
An affiliate of the underwriter provides a warehouse facility to the
Seller.
The Seller has agreed to indemnify the Underwriter against particular
types of liabilities, including liabilities under the Securities Act.
EXPERTS
The consolidated balance sheets of Financial Security and Subsidiaries
as of December 31, ______ and ______ 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, _____, incorporated by reference in this
prospectus supplement, have been incorporated in this prospectus supplement in
reliance on the report of ______________________, independent accountants, given
on the authority of that firm as experts in accounting and auditing.
LEGAL MATTERS
Some legal matters relating to the Class A Notes and some related
federal income tax and other matters will be passed upon for the Seller by
____________________________________________. Some relevant legal matters
relating to the Class A Notes will be passed upon for the Underwriter by and the
Company Stroock & Stroock & Lavan LLP, New York, New York.
<PAGE>
GLOSSARY
AGGREGATE PRINCIPAL BALANCE: With respect to the Closing Date, the
Cutoff Date Principal Balance, and with respect to any Determination Date, the
sum of the Principal Balances, computed as of the last day of the related
Collection Period end date, for all Receivables, other than Liquidated
Receivables and Purchased Receivables.
AMOUNT FINANCED: With respect to a Receivable, the aggregate amount
advanced extended under the Receivable toward the purchase price of the Financed
Vehicle and related costs, including amounts of credit extended in respect of
accessories, insurance premiums, service and warranty policies or contracts and
other items customarily financed as part of motor vehicle retail installment
contracts or promissory notes, and related costs.
AVAILABLE FUNDS: With respect to any Determination Date, the sum of
(1) the "Collected Funds" received by the Servicer during the related
Collection Period,
(2) all Purchase Amounts deposited in the Collection Account for the
related Collection Period,
(3) all income received from investments of funds in the Collection
Account during the related Collection Period,
(4) the Monthly Capitalized Interest Amount with respect to the
Payment Date,
(5) the Insurer Optional Deposit, if any, and
(6) any remaining Pre-Funded Amount applied to the mandatory
redemption of Notes.
CERTIFICATEHOLDER: The holder of a Certificate
CLASS: A class of Notes.
CLASS A NOTE BALANCE: The sum of (1) the Class A-1 Note Balance and
(2) the Class A-2 Note Balance.
CLASS A-1 FINAL SCHEDULED PAYMENT DATE: ______________, or, if this
day is not a Business Day, the next succeeding Business Day.
CLASS A-2 FINAL SCHEDULED PAYMENT DATE: _________________, or, if this
day is not a Business Day, the next succeeding Business Day.
CLASS B NOTE BALANCE: An amount equal to $____________ on the Closing
Date and after, an amount equal to the initial Class B Note Balance reduced by
all amounts distributed to the Class B Noteholders that are allocable to
principal.
COLLECTED FUNDS: With respect to any Determination Date, the amount of
funds in the Collection Account representing collections on the Receivables
received by the Servicer during the related Collection Period, including all
Liquidation Proceeds collected during the related Collection Period, but
excluding any Purchase Amounts, and all amounts paid by Dealers under Dealer
Agreements or Dealer Assignments with respect to the Receivables during the
related Collection Period.
COLLECTION PERIOD: With respect to any Payment Date or Determination
Date, the calendar month preceding the month in which the Payment Date or
Determination Date occurs.
CONTROLLING PARTY: The Insurer, so long as an Insurer Default shall
not have occurred and be continuing, otherwise, the Indenture Trustee for the
benefit of the Noteholders; provided, however, that the Owner Trustee for the
benefit of the Certificateholder will be the Controlling Party after all unpaid
principal and interest on the Notes shall have been paid in full and all amounts
due to the Insurer have been paid and the Policy has expired in accordance with
its terms.
CORPORATE TRUST OFFICE: The office of the Indenture Trustee at which
its corporate trust business shall be principally administered, which office as
of the date of this prospectus supplement is located at
______________________________.
CRAM DOWN LOSS: With respect to a Receivable, if a court of
appropriate jurisdiction in an insolvency proceeding shall have issued an order
reducing the amount owed on a Receivable or otherwise modifying or restructuring
the Contract Scheduled Payments to be made on a Receivable, an amount equal to
(1) the excess of the Principal Balance of the Receivable immediately prior to
the order over the Principal Balance of the Receivable as so reduced and/or (2)
if the court shall have issued an order reducing the effective rate of interest
on the Receivable, the net present value, using as the discount rate the higher
of the APR on the Receivable or the rate of interest, if any, specified by the
court in the order, of the Contract Scheduled Payments as so modified or
restructured. A Cram Down Loss shall be deemed to have occurred on the date of
issuance of the order.
CUTOFF DATE: With respect to the Initial Receivables, the Initial
Cutoff Date, and with respect to the Subsequent Receivables, the Subsequent
Cutoff Date.
DEALER AGREEMENT: An agreement generally between the Seller and a
Dealer relating to the sale of retail installment contracts to the Seller and
all documents and instruments relating to that agreement.
DEALER ASSIGNMENT: With respect to a Receivable, the executed
assignment conveying a Receivable to the Seller.
DEFICIENCY CLAIM AMOUNT: With respect to any Determination Date, the
positive difference, if any, of (1) the sum of the related Scheduled Payments
plus the amounts described in clauses (1), (2) and (3) under the heading "The
Notes--Priority of Distribution Amounts" minus (2) the amount of Available Funds
with respect to the Determination Date, which amount will be withdrawn from the
Class A Reserve Account to the extent funds are on deposit tin this prospectus
supplement in accordance with the terms of the Class A Reserve Account Agreement
and deposited into the Collection Account on the related Payment Date.
DETERMINATION DATE: With respect to a Collection Period, the 5th
Business Day preceding the Payment Date in the next calendar month; provided,
however that the first Determination Date will be the Closing Date.
HOLDER OR NOTEHOLDER: The Person in whose name a Note is registered in
the Note Register.
LIQUIDATION PROCEEDS: With respect to a Liquidated Receivable,
o proceeds from the disposition of Financed Vehicles securing
the Liquidated Receivables,
o any insurance proceeds or rebates, or
o other monies received from the Obligor or otherwise, less
amounts required to be refunded to the Obligor.
MANAGED RECEIVABLE: Any retail installment contract, including any
related promissory note, for a Financed Vehicle, and all rights and obligations
under the retail installment contract, generally originated by and currently
serviced by the Seller for Obligors.
NOTE BALANCE: The sum of the Class A Note Balance and Class B Note
Balance.
NOTE MAJORITY: As of any date of determination, Holders of Class A-1
Notes and Class A-2 Notes and Class B Notes representing more than 50% of the
Note Balance.
PAYMENT AMOUNT: With respect to a Payment Date, the sum of (1) the
Available Funds as of the last day of a Collection Period, plus (2) the
Deficiency Claim Amount, if any, with respect to the Payment Date.
PERSON: Any legal person, including any individual, corporation,
limited liability company, partnership, joint venture, estate, association,
joint stock company, trust, unincorporated organization or government or any
agency or political subdivision of these or any other entity.
PURCHASED RECEIVABLE: A Receivable that was purchased as of the close
of business on the last day of a Collection Period by the Seller or the Servicer
as the result of the violation of particular representations or warranties of
the Seller under the Sale and Servicing Agreement or a breach by the Servicer of
some of the Servicer's obligations.
RATING AGENCY CONDITION: With respect to any action, that the Rating
Agency has been given prior notice of and that the Rating Agency has notified
the Seller, the Seller, the Servicer and the Indenture Trustee in writing that
the action will not result in a reduction or withdrawal of the then current
rating of the Notes.
SALE AND SERVICING AGREEMENT: The Sale and Servicing Agreement between
the Seller, in its individual capacity and as Servicer, Asset Backed Securities
Corporation, as Company, ___ Auto Receivables Owner Trust ____-_ as purchaser,
and ____________________, as Indenture Trustee and Backup Servicer.
SERVICER'S CERTIFICATE: With respect to each Collection Period, a
certificate, completed by and executed on behalf of the Servicer, in accordance
with the applicable Sale and Servicing Agreement provisions.
SERVICER RECEIVABLES FILES: The following documents or instruments in
the Servicer's possession with respect to each Receivable: (1) documents
evidencing or relating to any Insurance Policy; and (2) any and all other
documents, in original or electronic form, that the Servicer keeps on file in
accordance with its customary procedures relating to the individual Receivable,
Obligor or Financed Vehicle.
STATE: Any state of the United States or the District of Columbia.
TRANSACTION DOCUMENTS: The Sale and Servicing Agreement, the
Indenture, the Trust Agreement, the Notes, the Receivables Purchase Agreement,
the Underwriting Agreement and the other agreements executed in connection with
the closing of the transactions described in this prospectus supplement.
TRUST AGREEMENT: The Trust Agreement between Asset Backed Securities
Corporation, the Certificateholder, the Seller, and ____________________, as
Owner Trustee.
<PAGE>
INDEX OF TERMS
Set forth below is a list of the defined terms used in this prospectus
supplement and the pages on which the definitions of these terms may be found.
10 percent shareholder............................................S-61
ABS...............................................................S-26
ABS Tables........................................................S-26
Actuarial Receivable..............................................S-19
Additional Funds Available........................................S-32
Aggregate Principal Balance.......................................S-65
Amount Financed...................................................S-65
Available Funds...................................................S-65
Backup Servicer Fee...............................................S-51
Benefit Plan......................................................S-62
Business Day......................................................S-58
capital assets....................................................S-59
Capitalized Interest Account......................................S-50
Certificate.......................................................S-12
Certificateholder.................................................S-65
Class.............................................................S-65
Class A Interest Carryover Shortfall..............................S-32
Class A Interest Payment Amount...................................S-32
Class A Mandatory Redemption Amount...............................S-32
Class A Note Balance..............................................S-65
Class A Notes.....................................................S-12
Class A Overcollateralization Amount..............................S-32
Class A Principal Payment Amount..................................S-33
Class A Reserve Account...........................................S-41
Class A Target Overcollateralization Amount.......................S-33
Class A-1 Final Scheduled Payment Date............................S-65
Class A-1 Interest Carryover Shortfall............................S-33
Class A-1 Interest Payment Amount.................................S-33
Class A-1 Mandatory Redemption Amount.............................S-33
Class A-1 Note Balance............................................S-38
Class A-1 Note Factor.............................................S-46
Class A-1 Notes...................................................S-12
Class A-1 Principal Carryover Shortfall...........................S-33
Class A-1 Principal Payment Amount................................S-33
Class A-2 Final Scheduled Payment Date............................S-65
Class A-2 Interest Carryover Shortfall............................S-34
Class A-2 Interest Payment Amount.................................S-33
Class A-2 Mandatory Redemption Amount.............................S-34
Class A-2 Note Balance............................................S-38
Class A-2 Note Factor.............................................S-46
Class A-2 Notes...................................................S-12
Class A-2 Principal Carryover Shortfall...........................S-34
Class A-2 Principal Payment Amount................................S-34
Class B Interest Carryover Shortfall..............................S-34
Class B Interest Payment Amount...................................S-35
Class B Note Balance..............................................S-65
Class B Notes.....................................................S-12
Class B Principal Payment Amount..................................S-35
Closing Date......................................................S-12
Code..............................................................S-59
Collected Funds...................................................S-65
Collection Account................................................S-49
Collection Period.................................................S-66
Contract Scheduled Payment........................................S-35
controlled foreign corporation....................................S-61
Controlling Party.................................................S-66
Corporate Trust Office............................................S-66
Cram Down Loss....................................................S-66
Cutoff Date.......................................................S-66
Dealer Agreement..................................................S-66
Dealer Assignment.................................................S-66
Dealer Recourse...................................................S-14
Defaulted Receivable..............................................S-35
Deficiency Claim Amount...........................................S-66
Determination Date................................................S-66
disqualified persons..............................................S-62
Draw Date.........................................................S-35
DTC...............................................................S-31
equity interest...................................................S-62
Events of Default.................................................S-45
excess interest...................................................S-41
Excess Overcollateralization Amount...............................S-35
excess principal..................................................S-41
Exchange Act......................................................S-30
Final Regulations.................................................S-61
Financed Vehicles.................................................S-14
Foreign Person....................................................S-60
Funding Period....................................................S-49
Holder............................................................S-66
Holders...........................................................S-31
Indenture.........................................................S-13
in-house asset managers...........................................S-63
Initial Cutoff Date...............................................S-14
Initial Financed Vehicles.........................................S-13
Initial Pre-Funded Amount.........................................S-49
Initial Receivables...............................................S-13
Insurance Agreement Indenture Cross Defaults......................S-45
Insurer...........................................................S-15
Insurer Default...................................................S-53
Insurer Optional Deposit..........................................S-36
IRS...............................................................S-59
Issuer............................................................S-12
Liquidated Receivable.............................................S-36
Liquidation Proceeds..............................................S-67
Lockbox Account...................................................S-49
Lockbox Bank......................................................S-49
Managed Receivable................................................S-67
Mandatory Redemption Date.........................................S-50
Monthly Capitalized Interest Amount...............................S-50
Note Balance......................................................S-67
Note Distribution Account.........................................S-49
Note Majority.....................................................S-67
Noteholder........................................................S-66
Noteholders.......................................................S-31
Notes.............................................................S-12
Obligors..........................................................S-14
OC Stabilization Date.............................................S-36
OID...............................................................S-60
Order.............................................................S-57
Original Pool Balance.............................................S-31
Owner Trustee.....................................................S-13
parties in interest...............................................S-62
Payment Amount....................................................S-67
Person............................................................S-67
plan assets.......................................................S-62
Plan Assets Regulation............................................S-62
Policy Claim Amount...............................................S-36
portfolio interest................................................S-60
Precomputed Receivables...........................................S-19
Pre-Funded Amount.................................................S-50
Pre-Funding Account...............................................S-49
Principal Balance.................................................S-36
Principal Payment Amount..........................................S-36
publicly traded partnership.......................................S-61
Purchase Amount...................................................S-37
Purchased Receivable..............................................S-67
qualified professional asset managers.............................S-63
Rating Agency Condition...........................................S-67
Receipt...........................................................S-58
Receivables.......................................................S-12
Receivables File..................................................S-15
Received..........................................................S-58
Redemption Price..................................................S-32
related person....................................................S-61
Rule of 78's Receivables..........................................S-19
Sale and Servicing Agreement......................................S-67
Scheduled Payments................................................S-56
Securities Act....................................................S-64
Servicer Expenses.................................................S-51
Servicer Fee......................................................S-51
Servicer Receivables Files........................................S-67
Servicer Termination Event........................................S-53
Servicer Transition Expenses......................................S-51
Servicer's Certificate............................................S-67
Servicing Fee Rate................................................S-51
Simple Interest Receivable........................................S-19
State.............................................................S-67
stated redemption price at maturity...............................S-60
Subsequent Cutoff Date............................................S-14
Subsequent Financed Vehicles......................................S-14
Subsequent Purchase Agreement.....................................S-14
Subsequent Receivables............................................S-14
Subsequent Transfer Date..........................................S-15
Transaction Documents.............................................S-68
Trust.............................................................S-12
Trust Agreement...............................................S-13, 68
Trust Property....................................................S-13
Underwriter.......................................................S-63
Underwriting Agreement............................................S-63
Weighted Average Life.............................................S-26
<PAGE>
PROSPECTUS
ASSET BACKED SECURITIES CORPORATION
COMPANY
AUTO RECEIVABLES AND RECEIVABLES SECURITIES TRUSTS
ASSET BACKED CERTIFICATES AND ASSET BACKED NOTES (ISSUABLE IN SERIES)
--------------------
Asset Backed Securities Corporation may offer from time to time under this
prospectus and related prospectus supplements securities that are either asset
backed notes or asset backed certificates which may be sold from time to time in
one or more series. Each series of securities will be issued in one or more
classes.
The related prospectus supplement will set forth the specific assets of the
trust and the seller or sellers from whom the assets are acquired. The assets
may include:
1. One or more pools of
o motor vehicle installment loan agreements or motor vehicle retail
installment sale contracts secured by new and used automobiles,
recreational vehicles, including motor homes, campers, boats,
boat motors, motorcycles, jet skis, waverunners,
all-terrain-vehicles, and snowmobiles, vans, trucks, buses and
trailers, and security interests in the vehicles financed by the
motor vehicle installment loan agreements or retail installment
sale contracts,
o private securities evidencing ownership interests in or secured
by loans similar to the types of loans described above;
2. Government Securities;
3. All monies due under the above assets, which may be net of amounts
payable to the servicer; and
4. Funds or accounts established for the related trust, or one or more
forms of enhancement.
FOR A DISCUSSION OF RISKS ASSOCIATED WITH AN INVESTMENT IN THE SECURITIES, SEE
RISK FACTORS ON PAGE 2.
NEITHER THE SEC NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED
THE OFFERED SECURITIES OR DETERMINED IF THIS PROSPECTUS IS ACCURATE OR COMPLETE.
MAKING ANY CONTRARY REPRESENTATION IS A CRIMINAL OFFENSE.
------------------
CREDIT SUISSE FIRST BOSTON
The date of this prospectus is _________, 2000
<PAGE>
TABLE OF CONTENTS
Risk Factors...........................................................2
The Trusts.............................................................6
The Trustee............................................................7
The Receivables Pools..................................................8
The Collateral Certificates...........................................10
The Government Securities.............................................12
Weighted Average Life of the Securities...............................21
Pool Factors and Trading Information..................................22
The Seller and The Servicer...........................................22
Use of Proceeds.......................................................22
Description of the Notes..............................................22
Description of the Certificates.......................................29
Certain Information Regarding the Securities..........................30
Description of the Transfer and Servicing Agreements..................35
Certain Matters Regarding the Servicer................................44
Certain Legal Aspects of the Receivables..............................47
Material Federal Income Tax Consequences..............................52
State and Local Tax Considerations....................................74
ERISA Considerations..................................................75
Plan of Distribution..................................................83
Legal Matters.........................................................84
Prospectus Supplement.................................................84
Reports to Securityholders............................................84
Available Information.................................................85
Incorporation of Certain Documents by Reference.......................85
Index of Terms........................................................87
Global Clearance, Settlement and Tax Documentation Procedures..........1
<PAGE>
RISK FACTORS
You should carefully consider the following risk factors prior to any
purchase of the securities.
LIMITED LIQUIDITY MAY RESULT IN
DELAYS IN YOUR ABILITY TO SELL
SECURITIES OR LOWER RETURNS....... There will be no market for the
securities of any series prior to their
issuance, and there can be no assurance
that a secondary market will develop. If
a secondary market does develop, there
can be no assurance that it will provide
holders with liquidity of investment or
that the market will continue for the
life of the securities of the related
series. Credit Suisse First Boston
Corporation presently expects to make a
secondary market in the securities, but
has no obligation to do so. Absent a
secondary market for the securities you
may experience a delay if you choose to
sell your securities or the price you
receive may be less than you would
receive for a comparable liquid
security.
LIMITED ASSETS FOR PAYMENTS - NO
RECOURSE TO COMPANY, SELLER OR
SERVICER.......................... The company does not have, nor is it
expected to have, any significant
assets. The securities of a series will
be payable solely from the assets of the
trust fund for that series. Except for
any related insurance policies or credit
support, there will be no recourse to
the company or any other person for any
default on the notes or any failure to
receive distributions on the
certificates with respect to any series.
Consequently, holders of securities of
each series must rely solely upon
payments with respect to the assets
constituting the trust fund for a series
of securities, including, if applicable,
any amounts available pursuant to any
enhancement for that series, for the
payment of principal of and interest on
the securities of that series.
The only obligations, if any, of the
company with respect to the securities
of any series will be with respect to
its breach of specific representations
and warranties. The company does not
have, and is not expected in the future
to have, any significant assets with
which to meet any obligation to
repurchase assets with respect to which
there has been a breach of any
representation or warranty. If, for
example, the company were required to
repurchase a receivable, its only
sources of funds to make the repurchase
would be from funds obtained from the
enforcement of a corresponding
obligation, if any, on the part of the
originator of the receivable, or the
seller, as the case may be, or from a
reserve fund established to provide
funds for repurchases. If the company
does not have sufficient assets and no
other party is obligated to repurchase
defective assets, you may experience a
loss.
LIMITS ON ENHANCEMENT MAY RESULT
IN LOSSES TO YOU................. Although we intend the enhancement for
the securities to reduce the risk of
delinquent payments or losses to holders
of a series of securities entitled to
the benefit of the enhancement, the
amount of the enhancement will be
limited, as set forth in the related
prospectus supplement. In addition, the
amount available will decline and could
be depleted prior to the payment in full
of the related series of securities, and
losses on the primary assets could
result in losses to holders of those
securities.
TIMING AND RATE OF PREPAYMENTS
MAY RESULT IN LOWER YIELD......... The yield to maturity experienced by a
holder of securities may be affected by
the rate and timing of payments of
principal of the receivables or of the
underlying receivables relating to the
private securities. The rate and timing
of principal payments of the securities
of a series will be affected by a number
of factors, including the following:
o the extent of prepayments, which
may be influenced by a variety of
factors,
o the manner of allocating principal
payments among the classes of
securities of a series as specified
in the related prospectus
supplement, and
o the exercise of any right of
optional termination.
Prepayments may also result from
repurchases of receivables or underlying
receivables, as applicable, due to
material breaches of the seller's or the
company's representations or warranties.
Interest payable on the securities of a
series on a distribution date will
include all interest accrued during the
period specified in the related
prospectus supplement. In the event
interest accrues during the calendar
month prior to a distribution date, the
effective yield to holders will be
reduced from the yield that would
otherwise be obtainable if interest
payable on the security were to accrue
through the day immediately preceding
each distribution date, and the
effective yield at par to holders will
be less than the indicated coupon rate.
RISKS OF SUBORDINATED SECURITIES.. To the extent specified in the
applicable prospectus supplement,
distributions of interest on and
principal of one or more classes of
securities of a series may be
subordinated in priority of payment to
interest and principal due on one or
more other classes of securities of the
related series. Any subordinated
securities will be affected to a greater
degree by any losses on the receivables
or of the underlying receivables
relating to the private securities.
POTENTIAL LACK OF SECURITY........ The company will assign security
interests in the financed vehicles
securing the receivables to the related
trust. Due to administrative burden and
expense, however, we will not cause the
certificates of title to the financed
vehicles to be amended to reflect the
assignment to the trust unless otherwise
specified in the prospectus supplement.
In the absence of amendment, a trust may
not have a perfected security interest
in the financed vehicles securing the
receivables in some states. If a trust
does not have a perfected security
interest in a financed vehicle, its
ability to realize in the event of a
default on that financed vehicle may be
adversely affected.
RISK OF COMMINGLING............... We will require the servicer to deposit
all payments on the receivables
collected during each collection period
into the related collection account
within two business days of receipt of
the payments. However, if a servicer
satisfies particular requirements for
less frequent remittances we will not
require the servicer to deposit the
amounts into the collection account
until the business day preceding each
distribution date.
Pending deposit into the collection
account, collections may be invested by
the servicer at its own risk and for its
own benefit and will not be segregated
from funds of the servicer. If the
servicer were unable to remit the funds,
the applicable securityholders might
incur a loss. To the extent set forth in
the related prospectus supplement, the
servicer may, in order to satisfy the
requirements described above, obtain a
letter of credit or other security for
the benefit of the related trust to
secure timely remittances of collections
on the receivables.
REMOVAL OF A SERVICER AFTER A
SERVICER DEFAULT.................. The related prospectus supplement may
provide that with respect to a series of
securities issued by an owner trust,
upon the occurrence of a servicer
default, the related indenture trustee
or noteholders may remove the servicer
without the consent of the related
trustee or any certificateholders. The
trustee or the certificateholders with
respect to a series may not have the
ability to remove the servicer if a
servicer default occurs. In addition,
the noteholders with respect to a series
have the ability, with specified
exceptions, to waive defaults by the
servicer, including defaults that could
materially adversely affect the
certificateholders of the series.
BOOK-ENTRY REGISTRATION--BENEFICIAL
OWNERS NOT RECOGNIZED BY TRUST.... Issuance of the securities in book-entry
form may reduce the liquidity of these
securities in the secondary trading
market since investors may be unwilling
to purchase securities for which they
cannot obtain physical certificates.
Since transactions in the securities can
be effected only through The Depository
Trust Company and any other entities set
forth in the related prospectus
supplement, your ability to pledge a
security to persons or entities that do
not participate in The Depository Trust
Company or any other entities or
otherwise to take actions in respect of
the related securities may be limited
due to lack of a physical certificate
representing the securities.
You may experience some delay in the
receipt of distributions of interest and
principal on the securities since the
distributions will be forwarded by the
trustee to The Depository Trust Company
and The Depository Trust Company will
credit the distributions to the accounts
of its participants which will
subsequently credit them to your account
either directly or indirectly through
indirect participants.
THE TRUSTS
With respect to each series of securities, Asset Backed Securities
Corporation, the company, and/or _________, the seller, or one of its affiliates
will establish a separate trust (each, a "Trust") pursuant to a trust agreement
(a "Trust Agreement") between the company and the related trustee or pooling and
servicing agreement (a "Pooling and Servicing Agreement") among the company, the
servicer and the trustee for the related Trust, as applicable, for the
transactions described in this prospectus and in the related prospectus
supplement. The property of each Trust will include Primary Assets and all
payments due under the Primary Assets on and after the applicable cutoff date in
the case of Precomputed Receivables and all payments received under the
Precomputed Receivables on and after the applicable cutoff date or closing date,
as specified in the related prospectus supplement, in the case of Simple
Interest Receivables, Collateral Certificates, Government Securities and Private
Label Custody Receipt Securities. On the applicable closing date, after the
issuance of the notes and/or certificates of a given series, the company will
transfer or sell Primary Assets to the Trust in the outstanding principal amount
specified in the related prospectus supplement. The property of each Trust may
also include:
o amounts as from time to time may be held in separate trust
accounts established and maintained pursuant to the related Trust
Agreement, sale and servicing agreement (a "Sale and Servicing
Agreement") among the company, the servicer and the related Trust
or Pooling and Servicing Agreement, as applicable, and the
proceeds of these accounts, as described in this prospectus and
in the related prospectus supplement;
o security interests in vehicles financed by the Receivables (the
"Financed Vehicles") and any other interest of a seller in the
Financed Vehicles;
o the rights to proceed from claims on physical damage, credit life
and disability insurance policies covering Financed Vehicles or
the obligors, as the case may be; o any property that has secured
a Receivable and that has been acquired by the applicable Trust;
and
o any and all proceeds of the Primary Assets or the foregoing.
To the extent specified in the related prospectus supplement, a Reserve Account
or other form of credit enhancement may be a part of the property of a given
Trust or may be held by the trustee for the benefit of holders of the related
securities.
The servicer specified in the related prospectus supplement, as
servicer under the Pooling and Servicing Agreement or Sale and Servicing
Agreement, as applicable, will service the Receivables held by each Trust and
will receive fees for these services. See "Description of the Transfer and
Servicing Agreements--Servicing Compensation and Payment of Expenses" in this
prospectus and "Description of the Transfer and Sale and Servicing
Agreement--Servicing Compensation" in the related prospectus supplement. To
facilitate the servicing of Receivables and unless otherwise specified in the
related prospectus supplement, each seller and each trustee will authorize the
servicer to retain physical possession of the Receivables held by each Trust and
other documents relating to possession of the Receivables as custodian for each
Trust. Due to the administrative burden and expense, the certificates of title
to the Financed Vehicles will not be amended to reflect the sale and assignment
of the security interest in the Financed Vehicles to a Trust. In the absence of
an amendment, a Trust may not have a perfected security interest in some of the
Financed Vehicles in some states. See "Certain Legal Aspects of the Receivables"
and "Description of the Transfer and Servicing Agreements--Sale and Assignment
of Primary Assets". In the case of Primary Assets consisting of Collateral
Certificates, Government Securities and/or Private Label Custody Receipt
Securities, the trustee specified in the related prospectus supplement will
manage the Collateral Certificates, Government Securities and/or Private Label
Custody Receipt Securities.
If the protection provided to (1) holders of notes issued by an owner
trust by the subordination of the related certificates and by the Reserve
Account, if any, or any other available form of credit enhancement for the
series or (2) certificateholders by any Reserve Account or other form of credit
enhancement is insufficient, the noteholders or certificateholders, as the case
may be, will have to look to payments by or on behalf of obligors on Receivables
or on the Collateral Certificates, the Government Securities, and the Private
Label Custody Receipt Securities, as applicable, and the proceeds from the
repossession and sale of Financed Vehicles that secure defaulted Receivables for
distributions of principal and interest on the securities. In this event, some
factors, such as the applicable Trust's not having perfected security interests
in all of the Financed Vehicles, may limit the ability of a Trust to realize on
the collateral securing the related Primary Assets, or may limit the amount
realized to less than the amount due under Receivables. Securityholders may be
subject to delays in payment on, or may incur losses on their investment in, the
securities as a result of defaults or delinquencies by obligors and depreciation
in the value of the related Financed Vehicles. See "Description of the Transfer
and Servicing Agreements--Credit and Cash Flow Enhancement" and "Certain Legal
Aspects of the Receivables".
The principal offices of each Trust and the related trustee will be
specified in the applicable prospectus supplement.
THE TRUSTEE
The trustee for each Trust will be specified in the related prospectus
supplement. The trustee's liability in connection with the issuance and sale of
the related securities is limited solely to the express obligations of the
trustee set forth in the related Trust Agreement and Sale and Servicing
Agreement or the related Pooling and Servicing Agreement, as applicable. A
trustee may resign at any time, in which event the servicer will be obligated to
appoint a successor trustee. The servicer may also remove the related trustee if
the trustee ceases to be eligible to continue as trustee under the related Trust
Agreement or Pooling and Servicing Agreement, as applicable, and will be
obligated to appoint a successor trustee. Any resignation or removal of a
trustee and appointment of a successor trustee will not become effective until
the acceptance of the appointment by the successor trustee.
THE RECEIVABLES POOLS
The motor vehicle installment loan agreements or motor vehicle retail
installment sale contracts secured by new and used automobiles, recreational
vehicles, including motor homes, campers, boats, boat motors, motorcycles, jet
skis, waverunners, all-terrain-vehicles and snowmobiles, vans, trucks, buses and
trailers (the "Receivables") in a Receivables Pool have been or will be
originated or acquired by a seller in the ordinary course of business, in
accordance with its credit and underwriting standards as described in the
related prospectus supplement.
The Receivables to be sold to each Trust will be selected from a
seller's portfolio for inclusion in a Receivables Pool based on several
criteria, which criteria include that, subject to particular limitations which,
if applicable, will be specified in the related prospectus supplement, each
Receivable
o is secured by a new or used vehicle,
o was originated or acquired, either from a motor vehicle dealer or
a financial institution, by the seller,
o provides for level monthly payments, except for the last payment,
which may be different from the level payments, that, unless
otherwise provided in the related prospectus supplement, amortize
the amount financed over the original term to maturity of the
related Receivable,
o is a Precomputed Receivable or a Simple Interest Receivable and
o satisfies the other criteria, if any, set forth in the related
prospectus supplement. No selection procedures believed by the
seller to be adverse to Securityholders were or will be used in
selecting the Receivables.
"Precomputed Receivables" consist of either (1) monthly actuarial
receivables ("Actuarial Receivables") or (2) receivables that provide for
allocation of payments according to the "sum of periodic balances" or "sum of
monthly payments" method, similar to the "Rule of 78s" ("Rule of 78S
Receivables"). An Actuarial Receivable provides for amortization of the loan
over a series of fixed level monthly installment payments. Each monthly
installment, including the monthly installment representing the final payment on
the Receivable, consists of (x) an amount of interest equal to 1/12 of the
stated contract interest rate under the related Receivable multiplied by the
unpaid principal balance of the loan, plus (y) an amount allocable to principal
equal to the remainder of the monthly payment. A Rule of 78s Receivable provides
for the payment by the obligor of a specified total amount of payments, payable
in equal monthly installments on each due date, which total represents the
principal amount financed plus add-on interest in an amount calculated at the
stated contract interest rate under the related Receivable for the term of the
receivable. The rate at which the amount of add-on interest is earned and,
correspondingly, the amount of each fixed monthly payment allocated to reduction
of the outstanding principal amount are calculated in accordance with the Rule
of 78s.
"Simple Interest Receivables" are receivables that provide for the
amortization of the amount financed under them over a series of fixed level
monthly payments. However, unlike the monthly payment under an Actuarial
Receivable, each monthly payment consists of an installment of interest that is
calculated on the basis of the outstanding principal balance of the receivable
multiplied by the stated contract interest rate under the related Receivable and
further multiplied by the period elapsed, as a fraction of a calendar year,
since the preceding payment of interest was made. As payments are received under
a Simple Interest Receivable, the amount received generally is applied first to
interest accrued to the date of payment and the balance is applied to reduce the
unpaid principal balance. Accordingly, if an obligor pays a fixed monthly
installment before its scheduled due date, the portion of the payment allocable
to interest for the period since the preceding payment was made will be less
than it would have been had the payment been made as scheduled, and the portion
of the payment applied to reduce the unpaid principal balance will be
correspondingly greater. Conversely, if an obligor pays a fixed monthly
installment after its scheduled due date, the portion of the payment allocable
to interest for the period since the preceding payment was made will be greater
than it would have been had the payment been made as scheduled, and the portion
of the payment applied to reduce the unpaid principal balance will be
correspondingly less. In either case, the obligor is obligated to pay a fixed
monthly installment until the final scheduled payment date, at which time the
amount of the final installment may be increased or decreased as necessary to
repay the then outstanding principal balance.
In the event of the prepayment in full, voluntarily or by
acceleration, of a Rule of 78s Receivable, under the terms of the contract a
"refund" or "rebate" will be made to the obligor of the portion of the total
amount of payments then due and payable allocable to "unearned" add-on interest,
calculated in accordance with a method equivalent to the Rule of 78s. If an
Actuarial Receivable is prepaid in full, with minor variations based upon state
law, the Actuarial Receivable requires that the rebate be calculated on the
basis of a constant interest rate. If a Simple Interest Receivable is prepaid,
rather than receive a rebate, the obligor is required to pay interest only to
the date of prepayment. The amount of a rebate under a Rule of 78s Receivable
generally will be less than the amount of a rebate on an Actuarial Receivable
and generally will be less than the remaining scheduled payments of interest
that would have been due under a Simple Interest Receivable for which all
payments were made on schedule.
To the extent provided in the related prospectus supplement, each
Trust will account for the Rule of 78s Receivables as if the Receivables were
Actuarial Receivables. Amounts received upon prepayment in full of a Rule of 78s
Receivable in excess of the then outstanding principal balance of the Receivable
and accrued interest on the Receivable, calculated pursuant to the actuarial
method, will not be paid to noteholders or passed through to certificateholders
of the applicable series, but will be paid to the servicer as additional
servicing compensation.
Information with respect to each Receivables Pool will be set forth in
the related prospectus supplement, including, to the extent appropriate, the
composition and distribution by annual percentage rate and by states of
origination of the Receivables, the portion of each Receivables Pool consisting
of Precomputed Receivables and of Simple Interest Receivables, and the portion
of each Receivables Pool secured by new vehicles and by used vehicles.
DELINQUENCIES, REPOSSESSIONS AND NET LOSSES
Information concerning the experience of a seller pertaining to
delinquencies, repossessions and net losses with respect to Receivables will be
set forth in each prospectus supplement. There can be no assurance that the
delinquency, repossession and net loss experience on any Receivables Pool will
be comparable to prior experience or to the information.
NEW AND USED FINANCED VEHICLES
The extension of credit to an obligor on a Receivable is based on an
assessment of an applicant's ability to repay the amounts due on the Receivable
and the adequacy of the related Financed Vehicle. An assessment generally does
not distinguish between new or used vehicles. Rather, the amount advanced under
a motor vehicle loan generally will not exceed 100% of the value of the
collateral unless otherwise specified in the related prospectus supplement. For
new motor vehicles, the value equals the dealer invoice for the motor vehicle
that serves as collateral, plus sales tax, license fee, title fee, the cost of
service and warranty contracts, and any premium for credit life and disability
insurance obtained in connection with the loan. For used motor vehicles, the
value equals the wholesale price reported in the most recent edition of the
National Automotive dealers Association Used Car Guide, the National Auto
Research Division Black Book or any other industry guide as specified in the
related prospectus supplement, plus sales tax, license fee, title fee, the cost
of service and warranty contracts, and any premium for credit life and
disability insurance obtained in connection with the loan. The maximum age of
any used motor vehicle acceptable as collateral generally is ten model years.
Additional information with respect to delinquencies, repossessions and net
losses with respect to Receivables secured by new or used Financed Vehicles will
be set forth in each prospectus supplement.
THE COLLATERAL CERTIFICATES
Primary Assets for a series may consist, in whole or in part, of
Collateral Certificates, which include certificates evidencing an undivided
interest in, or notes or loans secured by, motor vehicle installment loan
agreements and motor vehicle retail installment sale contracts. These Collateral
Certificates will have previously been offered and distributed to the public
pursuant to an effective registration statement or are being registered under
the securities Act in connection with the offering of a series of securities,
which offering, distribution and registration may have been undertaken, or may
be undertaken, by the company and/or one or more affiliates of the company, in
each case, subject to exceptions which, if applicable, will be described in the
related prospectus supplement. Collateral Certificates will have been issued
pursuant to a pooling and servicing agreement, a sale and servicing agreement, a
trust agreement, an indenture or similar agreement (an "Underlying Trust
Agreement"). The servicer (the "Underlying Servicer") of the underlying motor
vehicle installment loans or sale contracts will have entered into the
Underlying Trust Agreement with a trustee (the "Underlying Trustee").
The issuer of the Collateral Certificates (the "Underlying Issuer")
will be
o a financial institution, corporation or other entity engaged
generally in the business of purchasing or originating motor
vehicle installment loan agreements and motor vehicle retail
installment sale contracts,
o a limited purpose corporation organized for the purpose of, among
other things, establishing trusts, acquiring and selling
receivables to the trusts and selling beneficial interests in
these trusts, or
o one of the trusts.
If so specified in the related prospectus supplement, the Underlying Issuer may
be the company and/or one or more affiliates of the company. The obligations of
the Underlying Issuer will generally be limited to specific representations and
warranties with respect to the assets conveyed by it to the related trust. The
related prospectus supplement will, subject to exceptions which, if applicable,
will be described in the related prospectus supplement, provide that the
Underlying Issuer will not have guaranteed any of the assets conveyed to the
related trust or any of the Collateral Certificates issued under the Underlying
Trust Agreement.
Distributions of principal and interest will be made on the Collateral
Certificates on the dates specified in the related prospectus supplement. The
Collateral Certificates may be entitled to receive nominal or no principal
distribution or nominal or no interest distributions. Principal and interest
distributions will be made on the Collateral Certificates by the Underlying
Trustee or the Underlying Servicer. The Underlying Issuer or the Underlying
Servicer may have the right to repurchase assets underlying the Collateral
Certificates after a specific date or under other circumstances specified in the
related prospectus supplement.
ENHANCEMENT RELATING TO COLLATERAL CERTIFICATES
Enhancement in the form of reserve funds, subordination of other
securities issued in connection with the Collateral Certificates, guarantees,
letters of credit, cash collateral accounts, insurance policies or other types
of enhancement may be provided with respect to the Receivables underlying the
Collateral Certificates or with respect to the Collateral Certificates
themselves. The type, characteristics and amount of enhancement will be a
function of particular characteristics of the Receivables and other factors and
will have been established for the Collateral Certificates on the basis of
requirements of rating agencies.
ADDITIONAL INFORMATION
The related prospectus supplement for a series for which the Primary
Assets include Collateral Certificates will specify, to the extent relevant and
to the extent the information is reasonably available to the company and the
company reasonably believes the information to be reliable:
o the aggregate approximate principal amount and type of the
Collateral Certificates to be included in the Primary Assets;
o the characteristics of the receivables which comprise the
underlying assets for the Collateral Certificates;
o the expected and final maturity of the Collateral Certificates;
o the interest rate of the Collateral Certificates;
o the Underlying Issuer, the Underlying Servicer, if other than the
Underlying Issuer, and the Underlying Trustee for the Collateral
Certificates;
o characteristics of the enhancement, if any, such as reserve
funds, insurance funds, insurance policies, letters of credit or
guarantees relating to the receivables underlying the Collateral
Certificates or to the Collateral Certificates themselves;
o the terms on which the underlying receivables for the Collateral
Certificates may, or are required to, be purchased prior to their
stated maturity or the stated maturity of the Collateral
Certificates; and
o the terms on which receivables may be substituted for those
originally underlying the Collateral Certificates.
THE GOVERNMENT SECURITIES
Primary Assets for a series may include any combination of
o receipts or other instruments created under the Department of the
Treasury's Separate Trading of Registered Interest and Principal
of securities, or STRIPS, program ("Treasury Strips"), which
interest and/or principal strips evidence ownership of specific
interest and/or principal payments to be made on particular
United States Treasury Bonds ("Treasury Bonds"),
o Treasury Bonds and
o other debt securities ("GSEs Bonds") of United States government
sponsored enterprises ("GSEs"; and together with Treasury Strips
and Treasury Bonds, collectively, "Government Securities").
The Government Securities, if any, included in a Trust are intended to
assure investors that funds are available to make specified payments of
principal and/or interest due on the related securities. Accordingly, the
Government Securities, if any, included in a Trust are intended both to (1)
support the ratings assigned to these securities, and (2) perform a function
similar to that described in this prospectus under "Description of the Transfer
and Servicing Agreements--Credit and Cash Flow Enhancement". A description of
the respective general features of Treasury Bonds, Treasury Strips and GSE Bonds
is set forth below.
The prospectus supplement for each series of securities the Trust with
respect to which contains Government Securities will contain information as to:
(1) the title and series of each Government Security, the aggregate
principal amount, denomination and form of each Government
Security;
(2) the limit, if any, upon the aggregate principal amount of the
Government Security;
(3) the dates on which, or the range of dates within which, the
principal of, and premium, if any, on, the Government Security
will be payable;
(4) the rate or rates, or the method of determination of the rate or
rates, at which the Government Security will bear interest, if
any, the date or dates from which the interest will accrue, and
the dates on which the interest will be payable;
(5) whether the Government Security was issued at a price lower than
the principal amount of that Government Security;
(6) material events of default or restrictive covenants provided for
with respect to the Government Security;
(7) the rating of the Government Security, if any;
(8) the issuer of each Government Security;
(9) the material risks, if any, posed by any Government Securities
and issuers of the Government Securities (which risks, if
appropriate, will be described in the "Risk Factors" section of
the related prospectus supplement); and
(10) any other material terms of the Government Security.
With respect to a Trust which includes a pool of Government Securities, the
related prospectus supplement will, to the extent applicable, describe the
composition of the Government Securities' pool, particular material events of
default or restrictive covenants common to the Government Securities, and, on an
aggregate, percentage or weighted average basis, as applicable, the
characteristics of the pool with respect to the terms set forth in (3), (4) and
(5) of the preceding sentence and any other material terms regarding the pool.
The Government Securities included in a Trust will be senior, unsecured,
nonredeemable obligations of the issuer of the Government Securities, will be
denominated in United States dollars and, if rated, will be rated at least
investment grade by at least one nationally recognized rating agency. In
addition, the inclusion of Government Securities in a Trust with respect to a
series of securities is conditioned upon their characteristics being in form and
substance satisfactory to the Rating Agency rating the related series of
securities.
TREASURY BONDS
Treasury Bonds are issued by and are the obligations of the United
States of America. Accordingly, the payment of principal and interest on each
Treasury Bond will be guaranteed by the full faith and credit of the United
States of America. Interest is typically payable on the Bonds semiannually.
Treasury Bonds are issued in registered form in denominations of $1,000, $5,000,
$10,000, $100,000 and $1,000,000 and in book-entry form in integral multiples of
these amounts.
TREASURY STRIPS
In general, Treasury Strips are created by separating, or stripping,
the principal and interest components of Treasury Bonds that have an original
maturity of 10 or more years from the date of issue. A particular Treasury Strip
evidences ownership of the principal payment or one of the periodic interest
payments, generally semiannual, due on the Treasury Bond to which the Treasury
Strip relates.
In 1985 the Department of the Treasury announced that all new issues
of Treasury Bonds with maturities of 10 years or more would be transferable in
their component pieces on the Federal Reserve wire system. In so doing, the
Treasury created a generic, book-entry Treasury Strip named STRIPS (Separate
Trading of Registered Interest and Principal of Securities) which, unlike
private label Treasury Strips, can be issued without the need for a custodial
arrangement. The STRIPS program has eclipsed the private sector programs (which
are described below under "--Private Label Custody Receipt Securities"), and
investment banks no longer sponsor new issues of custodial receipts.
Treasury Strips may be either "serial" or "callable". A serial
Treasury Strip evidences ownership of one of the periodic interest payments to
be made on a Treasury Bond. No payments are made on the Treasury Strip, nor is
it redeemable, prior to its maturity, at which time the holder becomes entitled
to receive a single payment of the face amount of the Treasury Strip. Callable
Treasury Strips relate to payments scheduled to be made after the related
Treasury Bonds have become subject to redemption. These Treasury Strips evidence
ownership of both principal of the related Treasury Bonds and each of the
related interest payments commencing, typically, on the first interest payment
date following the first optional redemption date. If the underlying Treasury
Bonds are actually redeemed, holders of callable Treasury Strips generally
receive a payment equal to the principal portion of the total face amount of the
Treasury Strips plus the interest payment represented by the Treasury Strips
maturing on the redemption date. No callable Treasury Strips will be included in
a Trust. The face amount of any Treasury Strip is the aggregate of all payments
scheduled to be received on the Treasury Strip. Treasury Strips are available in
registered form and generally may be transferred and exchanged by the holders of
the Treasury Strips in accordance with procedures applicable to the particular
issue of the Treasury Strips.
A holder of a private label Treasury Strip, as opposed to a STRIP,
cannot enforce payment on that Treasury Strip against the Treasury. Instead, the
holder must look to the custodian for payment. The custodian, and the holder of
a Treasury Strip that obtains ownership of the underlying Treasury Bond, can
enforce payment of the underlying Treasury Bond against the Treasury. If any
private label Treasury Strips are included in a Trust with respect to any series
of securities, the prospectus supplement for the series will include the
identity and a brief description of each custodian that issued the Treasury
Strips. If the company knows that the company of the Treasury Bonds underlying
the Treasury Strips is the company or any of its affiliates, the company will
disclose that fact in the related prospectus supplement.
GSE BONDS
As specified in the applicable prospectus supplement, the obligations
of one or more of the following GSEs may be included in a Trust: Federal
National Mortgage Association ("Fannie Mae"), Federal Home Loan Mortgage
Association ("Freddie Mac"), Student Loan Marketing Association ("Sallie Mae"),
REFCO, Tennessee Valley Authority ("TVA"), Federal Home Loan Banks ("FHLB"), to
the extent the obligations represent the joint and several obligations of the
twelve Federal Home Loan Banks, and Federal Farm Credit Banks ("FFCB"). GSE debt
securities are exempt from registration under the securities Act pursuant to
Section 3(a)(2) of the securities Act, or are deemed by statute to be so exempt,
and are not required to be registered under the Exchange Act. The securities of
any GSE, including a GSE Guaranteed Bond, will be included in a Trust only to
the extent that (1) its obligations are supported by the full faith and credit
of the United States government or (2) the organization makes publicly available
its annual report which shall include financial statements or similar financial
information with respect to the organization (a "GSE Issuer"). Unless otherwise
specified in the related prospectus supplement, the GSE Bonds will not be
guaranteed by the United States and do not constitute a debt or obligation of
the United States or of any agency or instrumentality of the United States other
than the related GSE.
Unless otherwise specified in the related prospectus supplement, none
of the GSE Bonds will have been issued pursuant to an indenture, and no trustee
is provided for with respect to any GSE Bonds. There will generally be a fiscal
agent ("Fiscal Agent") for an issuer of GSE Bonds whose actions will be governed
by a fiscal agency agreement. A Fiscal Agent is not a trustee for the holders of
the GSE Bonds and does not have the same responsibilities or duties to act for
the holders as would a trustee.
GSE Bonds may be subject to particular contractual and statutory
restrictions which may provide some protection to securityholders against the
occurrence or effects of specified events. Unless otherwise specified in the
related prospectus supplement, each GSE is limited to activities as will promote
its statutory purposes as set forth in the publicly available information with
respect to the issuer. A GSE's promotion of its statutory purposes, as well as
its statutory, structural and regulatory relationships with the federal
government, may cause or require the GSE to conduct its business in a manner
that differs from what an enterprise which is not a GSE might employ.
THE FEDERAL NATIONAL MORTGAGE ASSOCIATION
Fannie Mae is a federally chartered and stockholder owned corporation
organized and existing under the Federal National Mortgage Association Charter
Act. It is the largest investor in home mortgage loans in the United States.
Fannie Mae originally was established in 1938 as a corporation wholly owned by
the United States government to provide supplemental liquidity to the mortgage
market and was transformed into a stockholder owned and privately managed
corporation by legislation enacted in 1968 and 1970. Fannie Mae provides funds
to the mortgage market by purchasing mortgage loans from lenders, thus
replenishing their funds for additional lending. Fannie Mae acquires funds to
purchase loans from many capital market investors that ordinarily may not invest
in mortgage loans, therefore expanding the total amount of funds available for
housing. Operating nationwide, Fannie Mae helps to redistribute mortgage funds
from capital-surplus to capital-short areas. Fannie Mae also issues
mortgage-backed securities ("MBS"). Fannie Mae receives guaranty fees for its
guaranty of timely payment of principal of and interest on MBS. Fannie Mae
issues MBS primarily in exchange for pools of mortgage loans from lenders. The
issuance of MBS enables Fannie Mae to further its statutory purpose of
increasing the liquidity of residential mortgage loans.
Fannie Mae prepares an Information Statement annually which describes
Fannie Mae, its business and operations and contains Fannie Mae's audited
financial statements. From time to time Fannie Mae prepares supplements to its
Information Statement which include specific unaudited financial data and other
information concerning the business and operations of Fannie Mae. Unless
otherwise specified in the applicable prospectus supplement, these documents can
be obtained without charge from the Office of Investor Relations, Fannie Mae,
3900 Wisconsin Avenue, N.W., Washington, D.C. 20016, telephone (202) 752-7115.
Fannie Mae is not subject to the periodic reporting requirements of the Exchange
Act.
THE FEDERAL HOME LOAN MORTGAGE CORPORATION
Freddie Mac is a publicly held government-sponsored enterprise created
on July 24, 1970 pursuant to the Federal Home Loan Mortgage Corporation Act,
Title III of the Emergency Home Finance Act of 1970, as amended (the "FHLMC
Act"). Freddie Mac's statutory mission is to provide stability in the secondary
market for home mortgages, to respond appropriately to the private capital
market and to provide ongoing assistance to the secondary market for home
mortgages, including mortgages secured by housing for low- and moderate-income
families involving a reasonable economic return to Freddie Mac, by increasing
the liquidity of mortgage investments and improving the distribution of
investment capital available for home mortgage financing. The principal activity
of Freddie Mac consists of the purchase of conventional residential mortgages
and participation interests in those mortgages from mortgage lending
institutions and the sale of guaranteed mortgage securities backed by the
mortgages so purchased. Freddie Mac generally matches and finances its purchases
of mortgages with sales of guaranteed securities. Mortgages retained by Freddie
Mac are financed with short- and long-term debt, cash temporarily held pending
disbursement to security holders, and equity capital.
Freddie Mac prepares an Information Statement annually which describes
Freddie Mac, its business and operations and contains Freddie Mac's audited
financial statements. From time to time Freddie Mac prepares supplements to its
Information Statement which include specific unaudited financial data and other
information concerning the business and operations of Freddie Mac. Unless
otherwise specified in the applicable prospectus supplement, these documents can
be obtained from Freddie Mac by writing or calling Freddie Mac's Investor
Inquiry Department at 8200 Jones Branch Drive, McLean, Virginia, 22102; outside
Washington, D.C. metropolitan area, telephone (800) 336-3672; within Washington,
D.C. metropolitan area, telephone (703) 759-8160. Freddie Mac is not subject to
the periodic reporting requirements of the Exchange Act.
THE STUDENT LOAN MARKETING ASSOCIATION
Sallie Mae is a stockholder-owned corporation established by the 1972
amendments to the Higher Education Act of 1965, as amended, to provide
liquidity, primarily through secondary market and warehousing activities, for
lenders participating in federally sponsored student loan programs, primarily
the Federal Family Education Loan ("FFEL") program and the Health Education
Assistance Loan Program. Under the Higher Education Act, Sallie Mae is
authorized to purchase, warehouse, sell and offer participations or pooled
interests in, or otherwise deal in, student loans, including, but not limited
to, loans insured under the FFEL program, and to make commitments for any of the
foregoing. Sallie Mae is also authorized to buy, sell, hold, underwrite and
otherwise deal in obligations of eligible lenders, if the obligations are issued
by the eligible lenders for the purpose of making or purchasing federally
guaranteed student loans under the Higher Education Act. As a federally
chartered corporation, Sallie Mae's structure and operational authorities are
subject to revision by amendments to the Higher Education Act or other federal
enactments.
Sallie Mae prepares an Information Statement annually which describes
Sallie Mae, its business and operations and contains Sallie Mae's audited
financial statements. From time to time Sallie Mae prepares supplements to its
Information Statement which include specific unaudited financial data and other
information concerning the business and operations of Sallie Mae. Unless
otherwise specified in the applicable prospectus supplement, these documents can
be obtained without charge upon written request to the Corporate and Investor
Relations Division of Sallie Mae at 1050 Thomas Jefferson Street, N.W.,
Washington, D.C. 20007, telephone (202) 298-3010. Sallie Mae is not subject to
the periodic reporting requirements of the Exchange Act.
THE RESOLUTION FUNDING CORPORATION
REFCO is a mixed-ownership government corporation established by Title
V of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989
("FIRREA"). The sole purpose of REFCO is to provide financing for the Resolution
Trust Corporation (the "RTC"). REFCO is to be dissolved, as soon as practicable,
after the maturity and full payment of all obligations issued by it. REFCO is
subject to the general oversight and direction of the Oversight Board, which is
comprised of the Secretary of the Treasury, the Chairman of the Board of
Governors of the Federal Reserve System, the Secretary of Housing and Urban
Development and two independent members to be appointed by the President with
the advice and consent of the Senate. The day-to-day operations of REFCO are
under the management of a three-member Directorate comprised of the Director of
the Office of Finance of the FHLB and two members selected by the Oversight
Board from among the presidents of the twelve FHLB.
The RTC was established by FIRREA to manage and resolve cases
involving failed savings and loan institutions pursuant to policies established
by the Oversight Board. The RTC was granted authority to issue nonvoting capital
certificates to REFCO in exchange for the funds transferred from REFCO to the
RTC. Pursuant to FIRREA, the net proceeds of these obligations are used to
purchase nonvoting capital certificates issued by the RTC or to retire
previously issued REFCO obligations.
Information concerning REFCO may be obtained from the
Secretary/Treasurer, Resolution Funding Corporation, Suite 1000, 11921 Freedom
Drive, Reston, Virginia 22090; telephone (703) 487-9517. REFCO is not subject to
the periodic reporting requirements of the Exchange Act.
THE FEDERAL HOME LOAN BANKS
The Federal Home Loan Banks constitute a system of twelve federally
chartered corporations (collectively, the "FHLB"), each wholly owned by its
member institutions. The mission of the FHLB is to enhance the availability of
residential mortgage credit by providing a readily available, low-cost source of
funds to their member institutions. A primary source of funds for the FHLB is
the proceeds from the sale to the public of debt instruments issued as
consolidated obligations, which are the joint and several obligations of all the
FHLB. The FHLB are supervised and regulated by the Federal Housing Finance
Board, which is an independent federal agency in the executive branch of the
United States government, but obligations of the FHLB are not obligations of the
United States government.
The Federal Home Loan Bank System produces annual and quarterly
financial reports in connection with the original offering and issuance by the
Federal Housing Finance Board of consolidated bonds and consolidated notes of
the FHLB. Unless otherwise specified in the applicable prospectus supplement,
questions regarding financial reports should be directed to the Deputy Director,
Financial Reporting and Operations Division, Federal Housing Finance Board, 1777
F Street, N.W., Washington, D.C. 20006; telephone (202) 408-2901. Unless
otherwise specified in the applicable prospectus supplement, copies of financial
reports may be obtained by written request to Capital Markets Division, Office
of Finance, Federal Home Loan Banks, Suite 1000, 11921 Freedom Drive, Reston,
Virginia 22090, telephone (703) 487-9500. The FHLB are not subject to the
periodic reporting requirements of the Exchange Act.
TENNESSEE VALLEY AUTHORITY
TVA is a wholly owned corporate agency and instrumentality of the
United States of America established pursuant to the Tennessee Valley Authority
Act of 1933, as amended (the "TVA Act"). TVA's objective is to develop the
resources of the Tennessee Valley region in order to strengthen the regional and
national economy and the national defense. The programs of TVA consist of power
and nonpower programs. For the fiscal year ending September 30, 1995, TVA
received $139 million in congressional appropriations from the federal
government for the nonpower programs. The power program is required to be
self-supporting from revenues it produces. The TVA Act authorizes TVA to issue
evidences of indebtedness that may be serviced only from proceeds of its power
program. TVA bonds are not obligations of or guaranteed by the United States
government.
TVA prepares an Information Statement annually which describes TVA,
its business and operations and contains TVA's audited financial statements.
From time to time TVA prepares supplements to its Information Statement which
include specific unaudited financial data and other information concerning the
business and operations of TVA. Unless otherwise specified in the applicable
prospectus supplement, these documents can be obtained by writing or calling
Tennessee Valley Authority, 400 West Summit Hill Drive, Knoxville, Tennessee
37902-1499, Attention: Vice President and Treasurer, telephone (423) 632-3366.
TVA is not subject to the periodic reporting requirements of the Exchange Act.
FEDERAL FARM CREDIT BANKS
The Farm Credit System is a nationwide system of lending institutions
and affiliated service and other entities (the "System"). Through its Banks
("FCBs") and related associations, the System provides credit and related
services to farmers, ranchers, producers and harvesters of aquatic products,
rural homeowners, some farm-related businesses, agricultural and aquatic
cooperatives and rural utilities. System institutions are federally chartered
under the Farm Credit Act of 1971, as amended (the "Farm Credit Act"), and are
subject to regulation by a Federal agency, the Farm Credit Administration (the
"FCA"). The FCBs and associations are not commonly owned or controlled. They are
cooperatively owned, directly or indirectly, by their respective borrowers.
Unlike commercial banks and other financial institutions that lend to the
agricultural sector in addition to other sectors of the economy, under the Farm
Credit Act the System institutions are restricted solely to making loans to
qualified borrowers in the agricultural sector, to some related businesses and
to rural homeowners. Moreover, the System is required to make credit and other
services available in all areas of the nation. In order to fulfill its broad
statutory mandate, the System maintains lending units in all 50 states and the
Commonwealth of Puerto Rico.
The System obtains funds for its lending operations primarily from the
sale of debt securities issued under Section 4.2(d) of the Farm Credit Act
("Systemwide Debt Securities"). The FCBs are jointly and severally liable on all
Systemwide Debt Securities. Systemwide Debt Securities are issued by the FCBs
through the Federal Farm Credit Banks Funding Corporation, as agent for the FCBs
(the "Funding Corporation").
Information regarding the FCBs and the Farm Credit System, including
combined financial information, is contained in disclosure information made
available by the Funding Corporation. This information consists of the most
recent Farm Credit System Annual Information Statement and any Quarterly
Information Statements issued subsequent to the Farm Credit System Annual
Information Statement and particular press releases issued from time to time by
the Funding Corporation. Unless otherwise specified in the applicable prospectus
supplement, this information and the Farm Credit System Annual Report to
Investors for the current and two preceding fiscal years are available for
inspection at the Federal Farm Credit Banks Funding Corporation, Investment
Banking Services Department, 10 Exchange Place, Suite 1401, Jersey City, New
Jersey 07302, telephone (201) 200-8000. Upon request, the Funding Corporation
will furnish, without charge, copies of the above information. The FCBs are not
subject to the periodic reporting requirements of the Exchange Act.
PRIVATE LABEL CUSTODY RECEIPT SECURITIES
If so specified in the applicable prospectus supplement, the Trust for
a series may include any combination of (1) receipts or other instruments, other
than Treasury Strips, evidencing ownership of specific interest and/or principal
payments to be made on particular Treasury Bonds held by a custodian ("Private
Label Custody Strips") and (2) receipts or other instruments evidencing
ownership of specific interest and/or principal payments to be made on specific
Resolution Funding Corporation ("REFCO") bonds ("REFCO Strips"; and together
with Private Label Custody Strips, "Private Label Custody Receipt Securities").
The Private Label Custody Receipt Securities, if any, included in a Trust are
intended to assure investors that funds are available to make specified payments
of principal and/or interest due on the related securities. Accordingly, the
Private Label Custody Receipt Securities, if any, included in a Trust are
intended both to (1) support the ratings assigned to the securities, and (2)
perform a function similar to that described in this prospectus under
"Description of the Transfer and Servicing Agreements--Credit and Cash Flow
Enhancement". A description of the respective general features of Private Label
Custody Strips and REFCO Strips is set forth below.
The prospectus supplement for each series of securities the Trust with
respect to which contains Private Label Custody Receipt Securities will contain
information as to:
(1) the title and series of each Private Label Custody Receipt
Security, the aggregate principal amount, denomination and form
of each Private Label Custody Receipt Security;
(2) the limit, if any, upon the aggregate principal amount of each
Private Label Custody Receipt Security;
(3) the dates on which, or the range of dates within which, the
principal of, and premium, if any, on, each Private Label Custody
Receipt Security will be payable;
(4) the rate or rates, or the method of determination of the rate or
rates, at which each Private Label Custody Receipt Security will
bear interest, if any, the date or dates from which the interest
will accrue, and the dates on which the interest will be payable;
(5) whether each Private Label Custody Receipt Security was issued at
a price lower than the principal amount of that Private Label
Custody Receipt Security;
(6) material events of default or restrictive covenants provided for
with respect to each Private Label Custody Receipt Security;
(7) the rating of each Private Label Custody Receipt Security, if
any;
(8) the issuer of each Private Label Custody Receipt Security;
(9) the material risks, if any, posed by each Private Label Custody
Receipt Security and the issuer of each Private Label Custody
Receipt Security, which risks, if appropriate, will be described
in the "Risk Factors" section of the related prospectus
supplement; and
(10) any other material terms of each Private Label Custody Receipt
Security.
With respect to a Trust which includes a pool of Private Label Custody Receipt
Securities, the related prospectus supplement will, to the extent applicable,
describe the composition of the Private Label Custody Receipt Securities' pool,
particular material events of default or restrictive covenants common to the
Private Label Custody Receipt Securities, and, on an aggregate, percentage or
weighted average basis, as applicable, the characteristics of the pool with
respect to the terms set forth in (3), (4) and (5) of the preceding sentence and
any other material terms regarding the pool.
The Private Label Custody Receipt Securities included in a Trust will
be senior, unsecured, nonredeemable obligations of the issuers of the Private
Label Custody Receipt Securities, will be denominated in United States dollars
and, if rated, will be rated at least investment grade by at least one
nationally recognized rating agency. In addition, the inclusion of Private Label
Custody Receipt Securities in a Trust with respect to a series of securities is
conditioned upon their characteristics being in form and substance satisfactory
to the Rating Agency rating the related series of securities. Each Trust will be
provided with an opinion of Federal Tax Counsel to the effect that the Private
Label Custody Receipt Securities included in the Trust are exempt from the
registration requirements of the securities Act. A copy of the opinion will be
filed with the SEC in a Current Report on Form 8-K or in a post-effective
amendment to the Registration Statement.
PRIVATE LABEL CUSTODY STRIPS
The first "stripping" of Treasury Bonds occurred in the 1970s when
government securities dealers physically separated coupons from definitive
certificates and offered them to investors as tax-deferred investments.
Investors were able to purchase the "strip" at a deep discount and pay no
federal income tax until resale or maturity. This tax treatment was limited in
1982 by the Tax Equity and Fiscal Responsibility Act ("TEFRA") which required
holders of strips to accrue a portion of the discount toward par annually and
report this accrual, even though unrealized, as taxable income. TEFRA also
required that all new Treasury issues be made available only in book-entry form.
The shift to "book-entry only" Treasury Bonds created a shortage of
the physical certificates needed for stripping. In response, various dealers
created custodial receipt programs in which Treasury Bonds in book-entry form
were deposited with custodians who would then issue certificates evidencing
rights in principal and interest payments. Some of the better known programs
first came to market in 1982 and 1983. Although available eventually in
denominations as small as $1,000, these custodial receipts lacked the liquidity
of the physical strips. While physical strips had multiple market-makers,
custodial receipts were proprietary and, as such, the sole market-maker would
usually be an affiliate of the program's sponsor. As a result, the market that
developed for the receipts was segmented.
In early 1984, a group of dealers sought to enhance the liquidity of
custodial receipts by developing a generic, multiple market-maker security known
as a TR (Treasury Receipt). A large secondary market quickly developed in these
generic Treasury Strips.
Treasury Receipts, physical strips and the proprietary receipts trade
at varying discounts from STRIPS which reflect, among other things, lower levels
of liquidity and the structuring difference discussed above.
A holder of a Private Label Custody Strip, as opposed to a STRIP,
cannot enforce payment on a Treasury Strip against the Treasury, instead, the
holder must look to the custodian for payment. The custodian, and the holder of
a Private Label Custody Strip that obtains ownership of the underlying Treasury
Bond, can enforce payment of the underlying Treasury Bond against the Treasury.
If any Private Label Custody Strips are included in a Trust with respect to any
series of securities, the prospectus supplement for the series will include the
identity and a brief description of each custodian that issued the Private Label
Custody Strips. If the company knows that the company of the Treasury Bonds
underlying the Private Label Custody Strips is the company or any of its
affiliates, the company will disclose this fact in the related prospectus
supplement.
REFCO STRIPS
A REFCO Bond may be divided into its separate components, consisting
of: (1) each future semiannual interest distribution (an "Interest Component");
and (2) the principal payment (the "Principal Component") (each component
individually referred to in this prospectus as a "REFCO Strip"). REFCO Strips
are not created by REFCO. Instead, third parties such as investment banking
firms create them. Each REFCO Strip has an identifying designation and CUSIP
number. REFCO Strips generally trade in the market for Treasury Strips at yields
of a few basis points over Treasury Strips of similar maturities. REFCO Strips
are viewed generally by the market as liquid investments.
For a REFCO Bond to be separated into its components, the par amount
of the REFCO Bond must be in an amount which, based on the stated interest rate
of the REFCO Bond, will produce a semiannual interest payment of $1,000 or an
integral multiple of $1,000. REFCO Bonds may be separated into their components
at any time from the issue date until maturity. Once created, REFCO Strips are
maintained and transferred in integral multiples of $1,000.
A holder of a REFCO Strip cannot enforce payment on the REFCO Strip
against REFCO. Instead, the holder must look to the custodian for payment. The
custodian, and the holder of a REFCO Strip that obtains ownership of the
underlying REFCO Bond, can enforce payment of the underlying REFCO Bond against
REFCO. The identity and a brief description of each custodian that has issued
any REFCO Strip included in a Trust will be set forth in the related prospectus
supplement. If the company knows that the company of the REFCO Bonds underlying
the REFCO Strips included in the Trust is the company or any of its affiliates,
the company will disclose this fact in the related prospectus supplement.
WEIGHTED AVERAGE LIFE OF THE SECURITIES
The weighted average life of the notes, if any, and the certificates
of any series generally will be influenced by the rate at which the principal
balances of the related Primary Assets are paid, which payment may be in the
form of scheduled amortization or prepayments. With respect to securities backed
by Receivables and to receivables underlying Collateral Certificates, the term
"prepayments" includes prepayments in full, partial prepayments, including those
related to rebates of extended warranty contract costs and insurance premiums,
liquidations due to defaults, as well as receipts of proceeds from physical
damage, credit life and disability insurance policies, or the Repurchase Amount
of Receivables and/or Collateral Certificates repurchased by the company or a
seller or purchased by a servicer for administrative reasons. With respect to
securities backed by Government Securities and/or Private Label Custody Receipt
Securities, as applicable, the term "prepayments" means the Repurchase Amount of
Government Securities and/or Private Label Custody Receipt Securities
repurchased by the company or purchased by a servicer for administrative
reasons. Substantially all of the Receivables and receivables underlying
Collateral Certificates are prepayable at any time without penalty to the
obligor. The rate of prepayment of automotive receivables is influenced by a
variety of economic, social and other factors, including the fact that an
obligor generally may not sell or transfer the Financed Vehicle securing a
receivable without the consent of the related seller. The rate of prepayment on
receivables may also be influenced by the structure of the loan. In addition,
under some circumstances, the related seller will be obligated to repurchase
Receivables from a given Trust pursuant to the related Receivables Purchase
Agreement as a result of breaches of representations and warranties, and the
servicer will be obligated to purchase Receivables from the Trust pursuant to
the Sale and Servicing Agreement or Pooling and Servicing Agreement as a result
of breaches of specific covenants. See "Description of the Transfer and
Servicing Agreements--Sale and Assignment of Primary Assets" and "Servicing
Procedures". See also "Certain Matters Regarding the Servicer--Termination"
regarding the servicer's option to purchase Primary Assets from a given Trust.
In light of the above considerations, there can be no assurance as to
the amount of principal payments to be made on the notes and/or certificates of
a series on each Distribution Date since the amount will depend, in part, on the
amount of principal collected on the related Primary Assets during the
applicable Collection Period. Any reinvestment risks resulting from a faster or
slower incidence of payment of Primary Assets will be borne entirely by the
noteholders and certificateholders. The related prospectus supplement may set
forth some additional information with respect to the maturity and prepayment
considerations applicable to particular Primary Assets and the related series of
securities.
POOL FACTORS AND TRADING INFORMATION
The "Note Pool Factor" for each class of notes will be a seven-digit
decimal which the servicer or trustee will compute prior to each distribution
with respect to the class of notes indicating the remaining outstanding
principal balance of that class of notes, as of the applicable Distribution
Date, after giving effect to payments to be made on the applicable Distribution
Date, as a fraction of the initial outstanding principal balance of the class of
notes. The "Certificate Pool Factor" for each class of certificates will be a
seven-digit decimal which the servicer or trustee will compute prior to each
distribution with respect to the class of certificates indicating the remaining
certificate balance of the class of certificates, as of the applicable
Distribution Date, after giving effect to distributions to be made on the
applicable Distribution Date, as a fraction of the initial certificate balance
of the class of certificates. Each Note Pool Factor and each Certificate Pool
Factor will be 1.0000000 as of the related closing date, and after will decline
to reflect reductions in the outstanding principal balance of the applicable
class of notes or the reduction of the certificate balance of the applicable
class of certificates. A noteholder's portion of the aggregate outstanding
principal balance of the related class of notes will be the product of (1) the
original denomination of the noteholder's Note and (2) the applicable Note Pool
Factor at the time of determination. A certificateholder's portion of the
aggregate outstanding certificate balance for the related class of certificates
will be the product of (a) the original denomination of the certificateholder's
Certificate and (b) the applicable Certificate Pool Factor at the time of
determination.
As provided in the related prospectus supplement, the noteholders, if
any, and the certificateholders will receive reports on or about each
Distribution Date concerning payments received on the Receivables, the Pool
Balance and each Note Pool Factor or Certificate Pool Factor, as applicable. In
addition, Securityholders of record during any calendar year will be furnished
information for tax reporting purposes not later than the latest date permitted
by law. See "Certain Information Regarding the Securities-- Statements to
Securityholders".
THE SELLER AND THE SERVICER
Information with respect to the seller and the servicer will be set
forth in the related prospectus supplement.
USE OF PROCEEDS
If so provided in the related prospectus supplement, the net proceeds
from the sale of the securities of a series will be applied by the applicable
Trust to the purchase of the Primary Assets from the company or the seller, as
applicable. The company will use the portion of the net proceeds paid to it to
purchase the Primary Assets.
DESCRIPTION OF THE NOTES
Each owner trust will issue one or more classes of notes pursuant to
an indenture (an "Indenture") between the related owner trust and the indenture
trustee, a form of which has been filed as an exhibit to the Registration
Statement of which this prospectus forms a part. The following summary describes
the material provisions of each Indenture which are anticipated to be common to
any notes included in a series of securities. The following summary does not
purport to be a complete description of all terms of the related notes or
Indenture and therefore is subject to, and is qualified in its entirely by
reference to, the provisions of the related notes and Indenture.
If so specified in the related prospectus supplement, each class of
notes will initially be represented by one or more certificates registered in
the name of the nominee of DTC (together with any successor company selected by
the Trust, the "Depository"). The notes will be available for purchase in
minimum denominations of $1,000 or any other minimum denomination as shall be
specified in the related prospectus supplement and integral multiples of $1,000
or any other minimum denomination so specified in the related prospectus
supplement in book-entry form or any other form as shall be specified in the
related prospectus supplement. If the notes are available in book-entry form
only, the company has been informed by DTC that DTC's nominee will be Cede
unless another nominee is specified in the related prospectus supplement.
Accordingly, the nominee is expected to be the holder of record of the notes of
each class. If the notes are available in book-entry form only, unless and until
Definitive notes are issued under the limited circumstances described in this
prospectus or in the related prospectus supplement, no noteholder will be
entitled to receive a physical certificate representing a Note. If the notes are
available in book-entry form only, all references in this prospectus and in the
related prospectus supplement to actions by noteholders refer to action taken by
DTC upon instructions from it participating organizations, and all references in
this prospectus and in the related prospectus supplement to distributions,
notices, reports and statements to noteholders refer to distributions, notices,
reports and statements to DTC or its nominee, as registered holder of the notes,
for distribution to noteholders in accordance with DTC's procedures with respect
to distributions. See "Certain Information Regarding the Securities--Book-Entry
Registration" and "--Definitive Securities".
DISTRIBUTION OF PRINCIPAL AND INTEREST
The timing and priority of payment, seniority, allocations of losses,
interest rate and amount of or method of determining payments of principal and
interest on each class of notes of a series will be described in the related
prospectus supplement. The right of holders of any class of notes to receive
payments of principal and interest may be senior or subordinate to the rights of
holders of one or more other class or classes of notes of the series, as
described in the related prospectus supplement. The related prospectus
supplement may provide that payments of interest on the notes will be made prior
to payments of principal on the notes. If so provided in the related prospectus
supplement, a series of notes may include one or more classes of strip notes
entitled to (1) principal payments with disproportionate, nominal or no interest
payments or (2) interest payments with disproportionate, nominal or no principal
payments. Each class of notes may have a different interest rate, which may be a
fixed, variable or adjustable interest rate, and which may be zero for some
classes of strip notes, or any combination of the foregoing. The related
prospectus supplement will specify the interest rate for each class of notes of
a series or the method for determining the interest rate. One or more classes of
notes of a series may be redeemable in whole or in part under the circumstances
specified in the related prospectus supplement, including as a result of the
exercise by the servicer of its option to purchase the related Receivable Pool.
See "Certain Matters Regarding the Servicer--Termination".
To the extent specified in any prospectus supplement, one or more
classes of notes of a given series may have fixed principal payment schedules,
as set forth in the prospectus supplement. Holders of any notes will be entitled
to receive payments of principal on any given Distribution Date in the
applicable amount set forth on the schedule with respect to the notes, in the
manner and to the extent set forth in the related prospectus supplement.
The related prospectus supplement may also provide that payment of
interest to noteholders of all classes within a series will have the same
priority. Under some circumstances, the amount available for payments could be
less than the amount of interest payable on the notes on a Distribution Date, in
which case each class of notes will receive its ratable share, based upon the
aggregate amount of interest due to the class of notes, of the aggregate amount
available to be distributed on the date as interest on the notes of the series.
See "Description of the Transfer and Servicing Agreements--Distributions" and
"--Credit and Cash Flow Enhancement".
In the case of a series of securities issued by an owner trust that
includes two or more classes of notes, the sequential order and priority of
payment in respect of principal and interest, and any schedule or formula or
other provisions applicable to the determination of the sequential order and
priority of payment in respect of principal and interest, of each class will be
set forth in the related prospectus supplement. Payments in respect of principal
of and interest on any class of notes will be made on a pro rata basis among all
the noteholders of the class or by any other method as is specified in the
prospectus supplement.
If specified in the related prospectus supplement, the Trust may issue
securities from time to time and use the proceeds of this issuance to make
principal payments with respect to a series.
REVOLVING PERIOD
The applicable prospectus supplement may provide that all or a portion
of the principal collections may be applied by the Trustee to the acquisition of
subsequent Receivables or Collateral Certificates during a specified period
rather than used to distribute payments of principal to Securityholders during
that period. These Securities would then possess an interest only period, also
commonly referred to as a "Revolving Period", which will be followed by an
"Amortization Period", during which principal will be paid. Any interest only or
revolving period may terminate prior to the end of the specified period and
result in the earlier than expected principal repayment of the Securities.
PROVISIONS OF THE INDENTURE
EVENTS OF DEFAULT; RIGHTS UPON EVENT OF DEFAULT. "Events of Default"
in respect of a series of notes under the related Indenture will consist of:
(1) a default for five days or more in the payment of any interest on
any Note;
(2) a default in the payment of the principal of, or any installment
of the principal of, any Note when the same becomes due and
payable;
(3) a default in the observance or performance of any material
covenant or agreement of the related Trust made in the related
Indenture and the continuation of any default for a period of 30
days, or for a longer period, not in excess of 90 days, as may be
reasonably necessary to remedy the default; provided that the
default is capable of remedy within 90 days or less and servicer
on behalf of the related trustee delivers an Officer's
Certificate to the related indenture trustee to the effect that
the trustee has commenced, or will promptly commence and
diligently pursue, all reasonable efforts to remedy the default,
after notice of the default is given to the related Trust by the
applicable indenture trustee or to the Trust and the related
indenture trustee by the holders of 25% of the aggregate
outstanding principal amount of the notes;
(4) any representation or warranty made by the Trust in the related
Indenture or in any certificate delivered pursuant to the related
Indenture or in connection with the related Indenture having been
incorrect in a material respect as of the time made, if the
breach is not cured with 30 days, or for a longer period, not in
excess of 90 days, as may be reasonably necessary to remedy the
default; provided that the default is capable of remedy within 90
days or less and servicer on behalf of the related trustee
delivers an Officer's Certificate to the related indenture
trustee to the effect that the trustee has commenced, or will
promptly commence and diligently pursue, all reasonable efforts
to remedy the default, after notice of the breach is given to the
Trust by the applicable indenture trustee or to the Trust and the
indenture trustee by the holder of 25% of the aggregate
outstanding principal amount of the notes;
(5) particular events of bankruptcy, insolvency, receivership or
liquidation with respect to the Trust or a substantial part of
the property of the Trust and
(6) any other events as may be specified in the prospectus
supplement.
The amount of principal required to be paid to noteholders of each series under
the related Indenture on any Distribution Date generally will be limited to
amounts available to be deposited in the applicable Note Distribution Account.
Therefore, the failure to pay principal on a class of notes generally will not
result in the occurrence of an Event of Default until the applicable final
scheduled Distribution Date for the class of notes.
If an Event of Default should occur and be continuing with respect to
the notes of any series, the related indenture trustee or holders of a majority
in principal amount of the notes may declare the principal of the notes to be
immediately due and payable. This declaration may, under some circumstances, be
rescinded by the holders of a majority in principal amount of the notes then
outstanding.
If the notes of any series are declared due and payable following an
Event of Default, the related indenture trustee may institute proceedings to
collect amounts due on the notes, foreclose on the property of the Trust,
exercise remedies as a secured party, sell the related Primary Assets or elect
to have the applicable Trust maintain possession of the Primary Assets and
continue to apply collections on these Primary Assets as if there had been no
declaration of acceleration. Subject to particular limitations that, if
applicable, will be specified in the related prospectus supplement, the
indenture trustee will be prohibited from selling the Primary Assets following
an Event of Default, other than a default in the payment of any principal of, or
a default for five days or more in the payment of any interest on, any Note of
the series, unless
o the holders of all outstanding notes consent to the sale,
o the proceeds of the sale are sufficient to pay in full the
principal of and the accrued interest on the outstanding notes at
the date of sale or
o the indenture trustee determines that the proceeds of the Primary
Assets would not be sufficient on an ongoing basis to make all
payments on the notes as these payments would have become due if
these obligations had not been declared due and payable, and the
indenture trustee obtains the consent of the holders of 66 2/3%
of the aggregate outstanding principal amount of the notes.
Subject to the provisions of the applicable Indenture relating to the
duties of the related indenture trustee, if an Event of Default occurs and is
continuing with respect to a series of notes, the indenture trustee will be
under no obligation to exercise any of the rights or powers under the Indenture
at the request or direction of any of the holders of the notes if it reasonably
believes it will not be adequately indemnified against the costs, expenses and
liabilities that might be incurred by it in complying with the request. Subject
to the provisions for indemnification and particular limitations contained in
the related Indenture, the holders of a majority of the aggregate outstanding
principal amount of the notes of a series will have the right to direct the
time, method and place of conducting any proceeding or exercising any remedy
available to the related indenture trustee. In addition, the holders of notes
representing a majority of the aggregate outstanding principal amount of the
notes may, in some cases, waive any default with respect to the notes, except a
default in the payment of principal of or interest on any Note or a default in
respect of a covenant or provision of the Indenture that cannot be modified or
amended without the waiver or consent of the holders of all the outstanding
notes of the series.
Except to the extent provided in the related prospectus supplement, no
holder of a Note will have the right to institute any proceeding with respect to
the related Indenture, unless:
o the holder previously has given to the applicable indenture
trustee written notice of a continuing Event of Default;
o the holders of not less than 25% of the outstanding principal
amount of the notes have made written request to the indenture
trustee to institute a proceeding in its own name as indenture
trustee;
o the holder or holders have offered the indenture trustee
reasonable indemnity;
o the indenture trustee has for 60 days failed to institute a
proceeding; and
o no direction inconsistent with a written request has been given
to the indenture trustee during the 60-day period by the holders
of a majority of the outstanding principal amount of the notes of
the series.
With respect to any owner trust, none of the related indenture trustee
in its individual capacity, the related trustee in its individual capacity, any
holder of a Certificate representing an ownership interest in the Trust, or any
of their respective beneficiaries, agents, officers, directors, employees,
affiliates, successors or assigns will, in the absence of an express agreement
to the contrary, be personally liable for the payment of the principal of or
interest on the related notes or for the agreements of the Trust contained in
the applicable Indenture.
No Trust may engage in any activity other than as described in this
prospectus or in the related prospectus supplement. No Trust will incur, assume
or guarantee any indebtedness other than indebtedness incurred pursuant to the
related notes and the related Indenture, pursuant to any Advances made to it by
the servicer or otherwise in accordance with the Related Documents.
CERTAIN COVENANTS. Each Indenture will provide that the related Trust
may not consolidate with or merge into any other entity, unless
o the entity formed by or surviving the consolidation or merger is
organized under the laws of the United States, any state or the
District of Columbia;
o the entity expressly assumes the Trust's obligation to make due
and punctual payments upon the notes of the related series and to
perform or observe every agreement and covenant of the Trust
under the Indenture;
o no Event of Default shall have occurred and be continuing
immediately after the merger or consolidation;
o the Trust has been advised by each Rating Agency that the merger
or consolidation will not result in the qualification, reduction
or withdrawal of its then-current rating of any class of the
notes or certificates of the series;
o the Trust has received an opinion of counsel to the effect that
the consolidation or merger would have no material adverse tax
consequence to the Trust or to any related noteholder or
certificateholder;
o any action as is necessary to maintain the lien and security
interest created by the Indenture has been taken; and
o the Trust has delivered to the related indenture trustee an
Officer's Certificate and an opinion of counsel that the merger
complies with the requirements and conditions precedent of the
Indenture.
No owner trust will:
o except as expressly permitted by the applicable Indenture, the
applicable Transfer and Servicing Agreements or other documents
with respect to the Trust (the "Related Documents"), sell,
transfer, exchange or otherwise dispose of any of the assets of
the Trust;
o claim any credit on or make any deduction from the principal and
interest payment in respect to the related notes, other than
amounts withheld under the Code or applicable state tax laws, or
assert any claim against any present or former holder of the
notes because of the payment of taxes levied or assessed upon the
Trust;
o dissolve or liquidate in whole or in part;
o permit the validity or effectiveness of the related Indenture to
be impaired or permit any person to be released from any
covenants or obligations with respect to the related notes under
the Indenture except as may be expressly permitted by the related
Indenture;
o permit any lien, charge, excise, claim, security interest,
mortgage or other encumbrance to be created on or extent to or
otherwise arise upon or burden the assets of the Trust or any
part of the Trust, or any interest in the Trust or the proceeds
of the Trust; or
o permit the lien of the related Indenture not to constitute a
valid first priority security interest, other than with respect
to a tax, mechanics' or similar lien, in the asset of the Trust.
Each indenture trustee and the related noteholders, by accepting the
related notes, will covenant that they will not at any time institute against
the applicable Trust any bankruptcy, reorganization or other proceeding under
any federal or state bankruptcy or similar law.
MODIFICATION OF INDENTURE. Each trustee and the related indenture
trustee may, with the consent of the holders of a majority of the aggregate
outstanding principal amount of the notes of the related series, execute a
supplemental indenture to add provisions to, change in any manner or eliminate
any provisions of, the related Indenture, or modify (except as provided below)
in any manner the rights of the related noteholders. Except as otherwise
provided in the related Indenture, without the consent of the holder of each
outstanding Note affected by the related supplemental indenture, no supplemental
indenture will:
o change the due date of any installment of principal of or
interest on any Note or reduce the principal amount of any Note,
the interest rate specified on any Note or the redemption price
with respect to any Note, change the provisions of the related
Indenture relating to the application of collections on, or the
proceeds of the sale of, the property of the related Trust to
payment of principal or interest on the notes of the series, or
change any place of payment where or the coin or currency in
which any Note or any interest on any Note is payable;
o impair the right to institute suit for the enforcement of
specific provisions of the related Indenture;
o reduce the percentage of the aggregate amount of the outstanding
notes of the series, the consent of the holders of which is
required for any supplemental indenture or for any waiver of
compliance with specific provisions of the related Indenture or of
particular defaults under the related Indenture and their
consequences as provided for in the related Indenture;
o modify or alter the provisions of the related Indenture regarding
the voting of notes held by the applicable owner trust, any other
obligor on the notes, the seller or an affiliate of any of them;
o reduce the percentage of the aggregate outstanding amount of the
notes, the consent of the holders of which is required to direct
the related indenture trustee to sell or liquidate the Primary
Assets if the proceeds of the sale would be insufficient to pay
the principal amount and accrued and unpaid interest on the
outstanding notes of the series;
o decrease the percentage of the aggregate principal amount of the
notes required to amend the sections of the related Indenture
that specify the percentage of the aggregate principal amount of
the notes of the series necessary to amend the related Indenture
or other related agreements; or
o permit the creation of any lien ranking prior to or on a parity
with the lien of the related Indenture with respect to any of the
collateral for the notes or, except as otherwise permitted or
contemplated in the Indenture, terminate the lien of the related
Indenture on any of the collateral or deprive the holder of any
Note of the security afforded by the lien of the related
Indenture.
An owner trust and the related indenture trustee may also enter into
supplemental indentures, without obtaining the consent of the noteholders of the
related series,
(1) to cure any ambiguity;
(2) to correct or supplement any provisions in the Indenture; or
(3) for the purpose of, among other things, adding any provisions to
or changing in any manner or eliminating any of the provisions of
the related Indenture;
provided that the action referred to in clause (3) above will not materially and
adversely affect the interest of any noteholder.
ANNUAL COMPLIANCE STATEMENT. Each owner trust will be required to file
annually with the related indenture trustee a written statement as to the
fulfillment of its obligations under the Indenture.
INDENTURE TRUSTEE'S ANNUAL REPORT. If required by the Trust Indenture
Act, the indenture trustee for each owner trust will mail each year to all
related noteholders a brief report relating to its eligibility and qualification
to continue as indenture trustee under the related Indenture, any amounts
advanced by it under the Indenture, the amount, interest rate and maturity date
of particular indebtedness, if any, owing by the owner trust to the applicable
Indenture Trust in its individual capacity, the property and funds physically
held by the indenture trustee as indenture trustee and any action taken by it
that materially affects the related notes that has not been previously reported.
SATISFACTION AND DISCHARGE OF INDENTURE. Each Indenture will be
discharged with respect to the collateral securing the related notes upon the
delivery to the related indenture trustee for cancellation of all of the notes
or, with limitations, upon deposit with the indenture trustee of funds
sufficient for the payment in full of all the notes.
THE INDENTURE TRUSTEE
The indenture trustee for a series of notes will be specified in the
related prospectus supplement. The indenture trustee for any series may resign
at any time, in which event the related owner trust will be obligated to appoint
a successor indenture trustee for the series. Additionally, the Holders of a
majority of the outstanding amount of the notes of a series may remove the
related indenture trustee and appoint a successor indenture trustee. An owner
trust may also remove the related indenture trustee if the indenture trustee
ceases to be eligible to continue in that capacity under the related Indenture,
if particular insolvency events occur with respect to the indenture trustee or
if the indenture trustee otherwise becomes incapable of acting as indenture
trustee. In these circumstances, the owner trust will be obligated to appoint a
successor indenture trustee for the applicable series of notes. No resignation
or removal of the indenture trustee and appointment of a successor indenture
trustee for a series of notes will become effective until the acceptance of the
appointment by the successor indenture trustee for the series and payment of all
fees and expenses owed to the outgoing indenture trustee.
DESCRIPTION OF THE CERTIFICATES
Each Trust will issue one or more classes of certificates pursuant to
a Trust Agreement or Pooling and Servicing Agreement, as applicable. A form of
each of the Trust Agreement and the Pooling and Servicing Agreement has been
filed as an exhibit to the Registration Statement of which this prospectus forms
a part. The following summary describes the material provisions of the Trust
Agreement and the Pooling and Servicing Agreement, in each case, which are
anticipated to be common to any certificates included in a series of securities.
The following summary does not purport to be a complete description of all terms
of the related notes, Trust Agreement or Pooling and Servicing Agreement and
therefore is subject to, and is qualified in its entirety by reference to, the
provisions of the related certificates and Trust Agreement or Pooling and
Servicing Agreement, as applicable.
If so specified in the related prospectus supplement and except for
the certificates, if any, of a series purchased by the company, a seller or any
of their respective affiliates, each class of certificates will initially be
represented by one or more certificates registered in the name of the
Depository. The certificates will be available for purchase in minimum
denominations of $10,000 or any other minimum denomination as shall be specified
in the related prospectus supplement and integral multiples of $1,000 in excess
of $10,000 or any other minimum denomination so specified in the related
prospectus supplement in book-entry form only, or any other form as shall be
specified in the related prospectus supplement. If the certificates are
available in book-entry form only, the company has been informed by DTC that
DTC's nominee will be Cede. Accordingly, the nominee is expected to be the
holder of record of the certificates of any series. If the certificates are
available in book-entry form only, unless and until Definitive certificates are
issued under the limited circumstances described in this prospectus or in the
related prospectus supplement, no certificateholder, other than the company, a
seller or any of their respective affiliates, will be entitled to receive a
physical certificate representing a Certificate. If the certificates are
available in book-entry form only, all references in this prospectus and in the
related prospectus supplement to actions by certificateholders refer to actions
taken by DTC upon instructions from the Participants, and all references in this
prospectus and in the related prospectus supplement to distributions, notices,
reports and statements to certificateholders refer to distributions, notices,
reports and statements to DTC or its nominee, as the case may be, as the
registered holder of the certificates, for distribution to certificateholders in
accordance with DTC's procedures with respect to distributions. See "Certain
Information Regarding the Securities--Book-Entry Registration" and "--Definitive
Securities". Any Certificate of a series owned by the company, a seller or any
of their respective affiliates will be entitled to equal and proportionate
benefits under the applicable Trust Agreement or Pooling and Servicing
Agreement, as applicable, except that, unless otherwise provided in the related
Trust Agreement, the certificates will be deemed not to be outstanding for the
purpose of determining whether the requisite percentage of certificateholders
has given any request, demand, authorization, direction, notice, or consent or
taken any other action under the Related Documents.
DISTRIBUTIONS OF PRINCIPAL AND INTEREST
The timing and priority of distributions, seniority, allocations of
losses, certificate pass-through rate and amount of or method of determining
distributions with respect to principal and interest on each class of
certificates of a series will be described in the related prospectus supplement.
Distributions of interest on these certificates will be made on the dates
specified in the related prospectus supplement (the "Distribution Date") and
will be made prior to distributions with respect to principal of the
certificates. To the extent provided in the related prospectus supplement, a
series of certificates may include one or more classes of strip certificates
entitled to (1) principal distributions with disproportionate, nominal or no
interest distributions or (2) interest distributions with disproportionate,
nominal or no principal distributions. Each class of certificates may have a
different certificate pass-through rate, which may be a fixed, variable or
adjustable certificate pass-through rate, and which may be zero for some classes
of strip certificates, or any combination of the foregoing. The related
prospectus supplement will specify the certificate pass-through rate for each
class of certificates of a series or the method for determining the certificate
pass-through rate.
In the case of a series of securities that includes two or more
classes of certificates, the timing, sequential order, priority of payment or
amount of distributions in respect of interest and principal, and any schedule
or formula or other provisions applicable to the determination of the timing,
sequential order, priority of payment or amount of distributions in respect of
interest and principal, of each class will be as set forth in the related
prospectus supplement. In the case of certificates issued by an owner trust,
distributions in respect of these certificates will be subordinated to payments
in respect of the notes of the related series and to the extent described in the
related prospectus supplement. Distributions in respect of interest on and
principal of any class of certificates will be made on a pro rata basis among
all holders of certificates of the class.
CERTAIN INFORMATION REGARDING THE SECURITIES
BOOK-ENTRY REGISTRATION
If so specified in the related prospectus supplement, DTC will act as
securities company for each class of securities offered by this prospectus. Each
class of securities initially will be represented by one or more certificates
registered in the name of Cede, the nominee of DTC. As the nominee of DTC, it is
anticipated that the only "noteholder" and/or "certificateholder" with respect
to a series of securities will be Cede. Beneficial owners of the securities
("Security Owners") will not be recognized as "noteholders" by the related
indenture trustee, as the term is used in each Indenture, or as
"certificateholders" by the related trustee, as the term is used in each Trust
Agreement or Pooling and Servicing Agreement, as applicable, and Security Owners
will be permitted to exercise the rights of noteholders or certificateholders
only indirectly through DTC and its participating members ("Participants").
DTC is a limited purpose trust company organized under the laws of the
State of New York, a "banking organization" within the meaning of the New York
Banking Law, a member of the Federal Reserve System, a "clearing corporation"
within the meaning of the Uniform Commercial Code (the "UCC") in effect in the
State of New York, and a "clearing agency" registered pursuant to the provisions
of Section 17A of the Exchange Act. DTC was created to hold securities for the
Participants and to facilitate the clearance and settlement of securities
transactions between Participants through electronic book-entries, thus
eliminating the need for physical movement of certificates. Participants include
securities brokers and dealers, banks, trust companies and clearing
corporations. Indirect access to the DTC system also is available to banks,
brokers, dealers and trust companies that clear through or maintain a custodial
relationship with a Participant, either directly or indirectly (the "Indirect
Participants").
Security Owners that are not Participants or Indirect Participants but
desire to purchase, sell or otherwise transfer ownership of, or an interest in,
the securities may do so only through Participants and Indirect Participants. In
addition, all Security Owners will receive all distributions of principal and
interest from the related indenture trustee or the related trustee, as
applicable, through Participants or Indirect Participants. Under a book-entry
format, Security Owners may experience some delay in their receipt of payments,
since these payments will be forwarded by the applicable trustee or indenture
trustee to DTC's nominee. DTC will then forward the payments to the
Participants, which will then forward them to Indirect Participants or Security
Owners.
Under the rules, regulations and procedures creating and affecting DTC
and its operations (the "Rules"), DTC is required to make book-entry transfers
among Participants on whose behalf it acts with respect to the securities and to
receive and transmit distributions of principal of and interest on the
securities. Participants and Indirect Participants with which Security Owners
have accounts with respect to the securities similarly are required to make
book-entry transfers and to receive and transmit the payments on behalf of their
respective Security Owners. Accordingly, although Security Owners will not
possess physical certificates representing the securities, the Rules provide a
mechanism by which Participants and Indirect Participants will receive payments
and transfer or exchange interests, directly or indirectly, on behalf of
Security Owners.
Because DTC can act only on behalf of Participants, who in turn may
act on behalf of Indirect Participants, the ability of a Security Owner to
pledge securities to persons or entities that do not participate in the DTC
system, or otherwise take actions with respect to the securities, may be limited
due to the lack of a physical certificate representing the securities.
DTC has advised the company that it will take any action permitted to
be taken by a Security Owner under the Indenture, Trust Agreement or Pooling and
Servicing Agreement, as applicable, only at the direction of one or more
Participants to whose account with DTC the securities are credited. DTC may take
conflicting actions with respect to other undivided interests to the extent that
these actions are taken on behalf of Participants whose holdings include the
undivided interests.
Clearstream Banking, societe anonyme, 67 Bd Grande-Duchesse Charlotte,
L-2967 Luxembourg ("Clearstream, Luxembourg"), was incorporated in 1970 as
"Cedel S.A.", a company with limited liability under Luxembourg law (a societe
anonyme). Cedel S.A. subsequently changed its name to Cedelbank. On January 10,
2000, Cedelbank's parent company, Cedel International, societe anonyme ("CI")
merged its clearing, settlement and custody business with that of Deutsche Borse
Clearing AG ("DBC"). The merger involved the transfer by CI of substantially all
of its assets and liabilities (including its shares in CB) to a new Luxembourg
company, New Cedel International, societe anonyme ("New CI"), which is 50% owned
by CI and 50% owned by DBC's parent company Deutsche Borse AG. The shareholders
of these two entities are banks, securities dealers and financial institutions.
Cedel International currently has 92 shareholders, including U.S. financial
institutions or their subsidiaries. No single entity may own more than 5 percent
of Cedel International's stock.
Further to the merger, the Board of Directors of New Cedel
International decided to rename the companies in the group in order to give them
a cohesive brand name. The new brand name that was chosen is "Clearstream". With
effect from January 14, 2000 New CI has been renamed "Clearstream International,
societe anonyme". On January 18, 2000, Cedelbank was renamed "Clearstream
Banking, societe anonyme", and Cedel Global Services was renamed "Clearstream
Services, societe anonyme".
On January 17, 2000 DBC was renamed "Clearstream Banking AG". This
means that there are now two entities in the corporate group headed by
Clearstream International which share the name "Clearstream Banking", the entity
previously named "Cedelbank" and the entity previously named "Deutsche Brse
Clearing AG".
Clearstream, Luxembourg holds securities for its customers
("Clearstream, Luxembourg Participants") and facilitates the clearance and
settlement of securities transactions between Clearstream, Luxembourg customers
through electronic book-entry changes in accounts of Clearstream, Luxembourg
customers, thereby eliminating the need for physical movement of certificates.
Transactions may be settled by Clearstream, Luxembourg in any of 36 currencies,
including United States Dollars. Clearstream, Luxembourg provides to its
customers, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. Clearstream, Luxembourg also deals with domestic
securities markets in over 30 countries through established depository and
custodial relationships. Clearstream, Luxembourg is registered as a bank in
Luxembourg, and as such is subject to regulation by the Commission de
Surveillance du Secteur Financier, "CSSF", which supervises Luxembourg banks.
Clearstream, Luxembourg's customers are world-wide financial institutions
including underwriters, securities brokers and dealers, banks, trust companies
and clearing corporations. Clearstream, Luxembourg's U.S. customers are limited
to securities brokers and dealers, and banks. Currently, Clearstream, Luxembourg
has approximately 2,000 customers located in over 80 countries, including all
major European countries, Canada, and the United States. Indirect access to
Clearstream, Luxembourg is available to other institutions that clear through or
maintain a custodial relationship with an account holder of Clearstream,
Luxembourg. Clearstream, Luxembourg has established an electronic bridge with
Morgan Guaranty Trust Company of New York as the Operator of the Euroclear
System (MGT/EOC) in Brussels to facilitate settlement of trades between
Clearstream, Luxembourg and MGT/EOC.
Except as required by law, none of Credit Suisse First Boston
Corporation, the company, the related seller, the related servicer, or related
indenture trustee, if any, or the related trustee will have any liability for
any aspect of the records relating to or payments made on account of beneficial
ownership interests of securities of any series held by DTC's nominee, or for
maintaining, supervising or reviewing any records relating to the beneficial
ownership interests.
DEFINITIVE SECURITIES
If so stated in the related prospectus supplement, the notes and/or
certificates of a given series will be issued in fully registered, certificated
form ("Definitive notes" and "Definitive certificates", respectively, and,
collectively, "Definitive Securities") to noteholders or certificateholders or
their respective nominees, rather than to DTC or its nominee, only if
o the related trustee of a grantor trust or the related indenture
trustee in the case of an owner trust, as applicable, determines
that DTC is no longer willing or able to discharge properly its
responsibilities as Depository with respect to the related
securities and the indenture trustee or trustee, as applicable,
is unable to locate a qualified successor,
o the indenture trustee or trustee, as applicable, elects, at its
option, to terminate the book-entry system through DTC or
o after the occurrence of an Event of Default or Servicer Default,
Security Owners representing at least a majority of the
outstanding principal amount of the notes or certificates, as
applicable, of the series, advise the related trustee through DTC
that the continuation of a book-entry system through DTC, or a
successor to DTC, is no longer in the best interests of the
related Security Owners.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the related trustee or indenture trustee, as applicable,
will be required to notify the related Security Owners, through Participants, of
the availability of Definitive Securities. Upon surrender by DTC of the
certificates representing all securities of any affected class and the receipt
of instructions for re-registration, the trustee will issue Definitive
Securities to the related Security Owners. Distributions on the related
Definitive Securities will subsequently be made by the related trustee or
indenture trustee, as applicable, directly to the holders in whose name the
related Definitive Securities are registered at the close of business on the
applicable record date, in accordance with the procedures set forth in this
prospectus and in the related Indenture or the related Trust Agreement or
Pooling and Servicing Agreement, as applicable. Distributions will be made by
check mailed to the address of the holders as they appear on the register
specified in the related Indenture, Trust Agreement or Pooling and Servicing
Agreement, as applicable; however, the final payment on any securities, whether
Definitive Securities or securities registered in the name of a Depository or
its nominee, will be made only upon presentation and surrender of the securities
at the office or agency as specified in the notice of final distribution to
Securityholders.
Definitive Securities will be transferable and exchangeable at the
offices of the related trustee or indenture trustee, or any security registrar
appointed by the related trustee or the indenture trustee, as applicable. No
service charge will be imposed for any registration of transfer or exchange, but
the trustee or indenture trustee may require payment of a sum sufficient to
cover any tax or other governmental charge imposed in connection with a
registration of transfer or exchange.
STATEMENTS TO SECURITYHOLDERS
With respect to each series of securities, on or prior to each
Distribution Date, the related servicer will prepare and forward to the related
indenture trustee or trustee to be included with the distribution to each
Securityholder of record a statement setting forth for the related Collection
Period the following information, and any other information specified in the
related prospectus supplement:
(1) the amount of the distribution allocable to principal of each
class of securities of the series;
(2) the amount of the distribution allocable to interest on each
class of securities of the series;
(3) if applicable, the amount of the Servicing Fee paid to the
related servicer with respect to the related Collection Period;
(4) the outstanding principal balance and Note Pool Factor for each
class of notes, if any, and the certificate balance and
Certificate Pool Factor for each class of certificates of the
series as of the related record date;
(5) the balance of any Reserve Account or other form of credit
enhancement, after giving effect to any additions to the balance
of the Reserve Account or withdrawals from the Reserve Account or
reductions to the Reserve Account to be made on the following
Distribution Date; and
(6) the aggregate amount of realized losses, if any, in respect of
Receivables and any other loss, delinquency or other ratios set
forth in the related prospectus supplement for the related
Collection Period.
Items (1), (2) and (4) above with respect to the notes or certificates of a
series will be expressed as a dollar amount per $1,000 of initial principal
balance of the notes or the initial certificate balance of the certificates, as
applicable.
In addition, within the prescribed period of time for tax reporting
purposes after the end of each calendar year during the term of each Trust, the
related trustee or indenture trustee, as applicable, will mail to each person
who at any time during the related calendar year shall have been a registered
Securityholder a statement containing information for the purposes of the
Securityholder's preparation of federal income tax returns. See "Material
Federal Income Tax Consequences".
LIST OF SECURITYHOLDERS
Three or more holders of the notes of any series or one or more
holders of the notes evidencing not less than 25% of the aggregate outstanding
principal balance of the notes of the series may, by written request to the
related indenture trustee, obtain access to the list of all noteholders
maintained by the indenture trustee for the purpose of communicating with other
noteholders with respect to their rights under the related Indenture or under
the notes. The indenture trustee may elect not to afford the requesting
noteholders access to the list of noteholders if it agrees to mail the desired
communication or proxy, on behalf of and at the expense of the requesting
noteholders, to all noteholders of the series.
Three or more holders of the certificates of any series or one or more
holders of the certificates evidencing not less than 25% of the certificate
balance of the certificates may, by written request to the related trustee,
obtain access to the list of all certificateholders maintained by the trustee
for the purpose of communicating with other certificateholders with respect to
their rights under the related Trust Agreement or Pooling and Servicing
Agreement, as applicable, or under the certificates.
DESCRIPTION OF THE TRANSFER AND SERVICING AGREEMENTS
The following summary describes the material provisions, in each case,
to the extent anticipated to be common to any series of securities, of:
o each Receivables Purchase Agreement pursuant to which the seller
will transfer Receivables to the company,
o each Trust Agreement or Pooling and Servicing Agreement pursuant
to which a Trust will be created, Collateral Certificates,
Government Securities and/or Private Label Custody Receipt
Securities, as applicable, may be sold or transferred to the
Trust, certificates will be issued, and the servicer will service
Receivables and the trustee will manage Government Securities, if
any and Private Label Custody Receipt Securities, if any, in the
case of a grantor trust,
o each Sale and Servicing Agreement pursuant to which the company
will transfer Receivables to a Trust and the servicer will
service Receivables, in the case of an owner trust, or
o in the case of securities backed by Collateral Certificates, each
Trust Agreement pursuant to which a Trust will be created,
Collateral Certificates will be sold or transferred to the Trust,
Government Securities and Private Label Custody Receipt
Securities may be sold or transferred to the Trust and a trustee
will manage Collateral Certificates, Government Securities, if
any, and Private Label Custody Receipt Securities, if any
(collectively, the "Transfer and Servicing Agreements").
Forms of the Transfer and Servicing Agreements have been filed as exhibits to
the Registration Statement of which this prospectus forms a part. The following
summary does not purport to be a complete description of all of the terms of the
Transfer and Servicing Agreements and therefore is subject to, and is qualified
in its entirety by reference to, the provisions of the related Transfer and
Servicing Agreement.
SALE AND ASSIGNMENT OF PRIMARY ASSETS
In the case of Primary Assets consisting of Receivables, on or prior to
the related closing date, a seller will transfer and assign to the company,
pursuant to a Receivables Purchase Agreement, without recourse, all of its
right, title and interest in and to Receivables in the outstanding principal
amount specified in the related prospectus supplement, including its security
interests in the related Financed Vehicles. Each Receivable will be identified
in a schedule appearing as an exhibit to the related Receivables Purchase
Agreement (the "Schedule of Receivables").
In each Receivables Purchase Agreement the seller will represent and
warrant to the company, among other things, that
o the information set forth in the Schedule of Receivables is
correct in all material respects as of the applicable cutoff
date;
o the obligor on each Receivable is contractually required to
maintain physical damage insurance covering the related Financed
Vehicle in accordance with the seller's normal requirements;
o on the closing date, the Receivables are free and clear of all
security interests, liens, charges and encumbrances, and no
offsets, defenses or counterclaims have been asserted or
threatened;
o at the closing date, each of the Receivables is secured by a
perfected, first-priority security interest in the related
Financed Vehicle in favor of the seller;
o each Receivable, at the time it was originated, complied and, on
the closing date complies, in all material respects with
applicable federal and state laws, including, without limitation,
consumer credit, truth-in-lending, equal credit opportunity and
disclosure laws; and
o any other representations and warranties that may be set forth in
the related prospectus supplement.
To the extent specified in the related prospectus supplement, as of
the last day of the second Collection Period, or, if the seller so elects, the
last day of the first Collection Period, following the discovery by or notice to
the seller of any breach of a representation and warranty of the seller that
materially and adversely affects the interests of the related Trust in any
Receivable, the seller will be obligated to repurchase the Receivable, unless
the seller cures the breach in a timely fashion. The purchase price for any of
these Receivables will be equal to the unpaid principal balance owed by the
obligor on the Receivable, plus accrued and unpaid interest on the unpaid
principal balance at the applicable APR to the last day of the month of
repurchase (the "Repurchase Amount"). This repurchase obligation will constitute
the sole remedy available to the Securityholders, the related trustee and any
related indenture trustee for any uncured breach.
On the related closing date, the company will transfer and assign to
the related Trust, pursuant to a Sale and Servicing Agreement or Pooling and
Servicing Agreement, as applicable, without recourse, all of its right, title
and interest in and to Primary Assets in the outstanding principal amount
specified in the related prospectus supplement. Concurrently with the transfer
and assignment of Primary Assets to the related Trust, the related trustee or
indenture trustee, as applicable, will execute, authenticate and deliver the
related securities.
Pursuant to the terms of the Sale and Servicing Agreement or the
Pooling and Servicing Agreement, as applicable, the company will assign to the
related Trust the representations and warranties made by the related seller
under the related Receivables Purchase Agreement for the benefit of the related
Securityholders and will make limited representations and warranties with
respect to the other Primary Assets included in the Trust. To the extent that
the related seller does not repurchase a Primary Asset in the event of a breach
of its representations and warranties with respect to the Primary Asset, the
company will not be required to repurchase the Primary Asset unless the breach
also constitutes a breach of one of the company's representations and warranties
under the related Sale and Servicing Agreement or Pooling and Servicing
Agreement, as applicable, with respect to that Primary Asset, if any, and the
breach materially and adversely affects the interests of the Securityholders in
any Primary Asset. Neither the seller nor the company will have any other
obligation with respect to the Primary Assets or the securities.
TRUST ACCOUNTS
With respect to each owner trust, the servicer will establish and
maintain with the related indenture trustee, or the trustee will establish and
maintain, (a) one or more accounts, on behalf of the related Securityholders,
into which all payments made on or in respect of the related Primary Assets will
be deposited (the "Collection Account") and (b) an account, in the name of the
indenture trustee on behalf of the noteholders, into which amounts released from
the Collection Account and any Reserve Account or other form of credit
enhancement for payment to the noteholders will be deposited and from which all
distributions to the noteholders will be made (the "Note Distribution Account").
With respect to each owner trust and grantor trust, the servicer or the related
trustee will establish and maintain an account, in the name of the trustee on
behalf of the certificateholders, into which amounts released from the
Collection Account and any Reserve Account or other form of credit enhancement
for distribution to the certificateholders will be deposited and from which all
distributions to the certificateholders will be made (the "Certificate
Distribution Account"). With respect to any grantor trust, the servicer or the
related trustee will also establish and maintain the Collection Account and any
other Trust Account in the name of the related trustee on behalf of the related
certificateholders.
If so provided in the related prospectus supplement, the servicer will
establish for each series of securities an additional account (the "Payahead
Account"), in the name of the related indenture trustee, in the case of an owner
trust, or trustee, in the case of a grantor trust, into which, to the extent
required in the related Sale and Servicing Agreement or Pooling and Servicing
Agreement, as applicable, early payments made by or on behalf of obligors on
Precomputed Receivables will be deposited until the time these payments become
due. Until the time payments are transferred from the Payahead Account to the
Collection Account, they will not constitute collected interest or collected
principal and will not be available for distribution to noteholders or
certificateholders. Any other accounts to be established with respect to a Trust
will be described in the related prospectus supplement.
For each series of securities, funds in the Collection Account, Note
Distribution Account, Certificate Distribution Account and any Reserve Account
or other accounts identified in the related prospectus supplement (collectively,
the "Trust Accounts") will be invested as provided in the related Sale and
Servicing Agreement or Pooling and Servicing Agreement, as applicable, in
Eligible Investments. "Eligible Investments" will generally be limited to
investments acceptable to the Rating Agencies as being consistent with the
rating of the related securities. Eligible Investments will generally be limited
to obligations or securities that mature on or before the date of the next
scheduled distribution to Securityholders of the series. However, to the extent
permitted by the Rating Agencies, funds in any Reserve Account may be invested
in securities that will not mature prior to the date of the next scheduled
distribution with respect to the notes or certificates and will not be sold
prior to maturity to meet any shortfalls. Thus, the amount of available funds on
deposit in a Reserve Account at any time may be less than the balance of that
Reserve Account. If the amount required to be withdrawn from a Reserve Account
to cover shortfalls in collections on the related Receivables (as provided in
the related prospectus supplement) exceeds the amount of available funds on
deposit in the Reserve Account, a temporary shortfall in the amounts distributed
to the related noteholders or certificateholders could result, which could, in
turn, increase the average life of the related notes or certificates. Unless
otherwise and to the extent provided in the related prospectus supplement,
investment earnings on funds deposited in the Trust Accounts, net of losses and
investment expenses (collectively, "Investment Earnings"), will be deposited in
the applicable Collection Account on each Distribution Date and will be treated
as collections of interest on the related Receivables.
The Trust Accounts will be maintained as Eligible Deposit Accounts.
"Eligible Deposit Account" means either (a) a segregated account with an
Eligible Institution or (b) a segregated trust account with the corporate trust
department of a company institution organized under the laws of the United
States of America or any one of the states of the United States of America or
the District of Columbia, or any domestic branch of a foreign bank, having
corporate trust powers and acting as trustee for funds deposited in the account,
so long as any of the securities of the company institution have a credit rating
from each Rating Agency in one of its generic rating categories that signifies
investment grade. "Eligible Institution" means, with respect to a Trust, (a) the
corporate trust department of the related indenture trustee or trustee, as
applicable, or (b) a company institution organized under the laws of the United
States of America or any one of the states of the United States of America or
the District of Columbia, or any domestic branch of a foreign bank, (1) that has
either (A) a long-term unsecured debt rating acceptable to the Rating Agencies
or (B) a short-term unsecured debt rating or certificate of deposit rating
acceptable to the Rating Agencies and (2) whose deposits are insured by the
FDIC.
PRE-FUNDING
If so specified in the related prospectus supplement, a portion of the
issuance proceeds of the securities of a particular series (this amount, the
"Pre-Funded Amount") will be deposited in an account (the "Pre-Funding Account")
to be established with the trustee, which will be used to acquire additional
Receivables from time to time during the time period specified in the related
prospectus supplement (the "Pre-Funding Period"). Prior to the investment of the
Pre-Funded Amount in additional Receivables, the Pre-Funded Amount may be
invested in one or more Eligible Investments. Except as otherwise provided in
the applicable Agreement, an "Eligible Investment" is any of the following, in
each case as determined at the time of the investment or contractual commitment
to invest in the relevant Eligible Investment, to the extent these investments
would not require registration of the Trust Fund as an investment company
pursuant to the Investment Company Act of 1940:
(a) negotiable instruments or securities represented by instruments in
bearer or registered or book-entry form which evidence
(1) obligations which have the benefit of the full faith and
credit of the United States of America, including company
receipts issued by a bank as custodian with respect to any
instrument or security held by the custodian for the benefit
of the holder of the company receipt,
(2) demand deposits or time deposits in, or bankers' acceptances
issued by, any depositary institution or trust company
incorporated under the laws of the United States of America or
any state of the United States of America and subject to
supervision and examination by Federal or state banking or
depositary institution authorities; provided that at the time
of the trustee's investment or contractual commitment to
invest in the relevant Eligible Investment, the certificates
of deposit or short-term deposits, if any, or long-term
unsecured debt obligations, other than the obligations whose
rating is based on collateral or on the credit of a Person
other than the institution or trust company, of the depositary
institution or trust company has a credit rating in the
highest rating category from each Rating Agency,
(3) certificates of deposit having a rating in the highest rating
category from each Rating Agency or
(4) investments in money market funds which are, or which are
composed of instruments or other investments which are, rated
in the highest rating category from each Rating Agency;
(b) demand deposits in the name of the trustee in any depositary
institution or trust company referred to in clause (a)(2) above;
(c) commercial paper, having original or remaining maturities of no
more than 270 days, having a credit rating in the highest rating
category from each Rating Agency;
(d) Eurodollar time deposits that are obligations of institutions
whose time deposits carry a credit rating in the highest rating
category from each Rating Agency;
(e) repurchase agreements involving any Eligible Investment described
in any of clauses (a)(1), (a)(3) or (d) above, so long as the
other party to the repurchase agreement has its long-term
unsecured debt obligations rated in the highest rating category
from each Rating Agency; and
(f) any other investment with respect to which each Rating Agency
rating the securities indicates will not result in the reduction
or withdrawal of its then existing rating of the securities.
Except as otherwise provided in the applicable Agreement, any
Eligible Investment must mature no later than the Business Day
prior to the next Distribution Date.
During any Pre-Funding Period, the seller or any other party specified
in the related prospectus supplement will be obligated, subject only to the
availability of additional Receivables, to transfer to the related Trust Fund
additional Receivables from time to time during the related Pre-Funding Period.
Additional Receivables will be required to satisfy specific eligibility criteria
more fully set forth in the related prospectus supplement, which eligibility
criteria will be consistent with the eligibility criteria of the Receivables
included in the Trust Fund as of the closing date subject to exceptions as are
expressly stated in the related prospectus supplement.
Although the specific parameters of the Pre-Funding Account with
respect to any issuance of securities will be specified in the related
prospectus supplement, it is anticipated that:
o the Pre-Funding Period will not exceed 90 days from the related
closing date;
o that the additional loans to be acquired during the Pre-Funding
Period will be subject to the same representations and warranties
as the Receivables included in the related Trust Fund on the
closing date, although additional criteria may also be required
to be satisfied, as described in the related prospectus
supplement; and
o the Pre-Funded Amount will not exceed 25% of the principal amount
of the securities issued pursuant to a particular offering.
SERVICING PROCEDURES
To assure uniform quality in servicing the Receivables and to reduce
administrative costs, the company and each Trust will designate the servicer as
custodian to maintain possession, as the Trust's agent, of the related
Receivables and any other documents relating to the Receivables. The seller's
and the servicer's accounting records and computer systems will be marked to
reflect the sale and assignment of the related Receivables to each Trust, and
UCC financing statements reflecting the sale and assignment will be filed.
The servicer will make reasonable efforts to collect all payments due
with respect to the Receivables and will, consistent with the related Sale and
Servicing Agreement or Pooling and Servicing Agreement, as applicable, follow
the collection procedures as it follows with respect to comparable Receivables
it services for itself and others. The prospectus supplement will specify that
the servicer may, in its discretion, arrange with the obligor on a Receivable to
extend or modify the payment schedule, but no arrangement will, if inconsistent
with its normal procedures, for purposes of any Sale and Servicing Agreement or
Pooling and Servicing Agreement, reduce the contract rate of, the amount of the
scheduled payments under, or extend the final payment date of, any Receivable
beyond the "Final Scheduled Maturity Date" (as the term is defined with respect
to any Receivables Pool in the related prospectus supplement). Some arrangements
may result in the servicer purchasing the Receivables for the Repurchase Amount,
while others may result in the servicer making Advances. The servicer may sell
the related Financed Vehicle securing any Receivable at a public or private
sale, or take any other action permitted by applicable law. See "Certain Legal
Aspects of the Receivables".
COLLECTIONS
With respect to each Trust, the servicer or the trustee will deposit
all payments on the related Primary Assets, from whatever source, and all
proceeds of the related Primary Assets, collected during the period specified in
the related prospectus supplement (a "Collection Period") into the related
Collection Account not later than two business days after receipt of payments
and proceeds of the related Primary Assets or any other period as specified in
the related prospectus supplement. However, notwithstanding the foregoing, these
amounts may be remitted to the Collection Account by the servicer on a monthly
basis on or prior to the applicable Distribution Date if no Servicer Default
exists and each other condition to making deposits less frequently than daily as
may be specified by the Rating Agencies or set forth in the related prospectus
supplement is satisfied. Pending deposit into the Collection Account, the
collections may be invested by the servicer at its own risk and for its own
benefit and will not be segregated from its own funds. If the servicer were
unable to remit the funds to the Collection Account on any Distribution Date,
Securityholders might incur a loss. To the extent set forth in the related
prospectus supplement, the servicer may, in order to satisfy the requirements
described above, obtain a letter of credit or other security for the benefit of
the related Trust to secure timely remittances of collections on the related
Primary Assets and payment of the aggregate Repurchase Amount with respect to
Receivables repurchased by the servicer.
Collections on a Precomputed Receivable during any Collection Period
will be applied first to the repayment of any outstanding Precomputed Advances
made by the servicer with respect to the Receivable, as described below, and
then to the scheduled monthly payment due on the Receivable. Any portion of the
collections remaining after the scheduled monthly payment has been made (these
excess amounts, the "Payaheads") will, unless the remaining amount is sufficient
to prepay the Precomputed Receivable in full, and subject to limitations which,
if applicable, will be specified in the related prospectus supplement, be
transferred to and kept in the Payahead Account until a later Distribution Date
on which the Payaheads may be applied either to the scheduled monthly payment
due during the related Collection Period or to prepay the Receivable in full.
ADVANCES
If specified in the related prospectus supplement, to the extent the
collections of interest and principal on a Precomputed Receivable for a
Collection Period fall short of the related scheduled payment, the servicer
generally will advance the shortfall (a "Precomputed Advance"). The servicer
will be obligated to make a Precomputed Advance on a Precomputed Receivable only
to the extent that the servicer, in its sole discretion, expects to recoup the
Advance from subsequent collections or recoveries on the Receivable or other
Precomputed Receivables in the related Receivables Pool. The servicer will
deposit the Precomputed Advance in the applicable Collection Account on or
before the business day preceding the applicable Distribution Date. The servicer
will recoup its Precomputed Advance from subsequent payments by or on behalf of
the related obligor or from insurance or liquidation proceeds with respect to
the related Receivable and will release its right to reimbursement in
conjunction with its purchase of the Receivable as servicer or, upon determining
that reimbursement from the preceding sources is unlikely, will recoup its
Precomputed Advance from any collections made on other Precomputed Receivables
in the related Receivables Pool.
If specified in the related prospectus supplement, on or before the
business day prior to each Distribution Date, the servicer will deposit into the
related Collection Account an amount equal to the amount of interest that would
have been due on the related Simple Interest Receivables at their respective
annual percentage rates for the related Collection Period, assuming that the
Simple Interest Receivables are paid on their respective due dates, minus the
amount of interest actually received on the Simple Interest Receivables during
the applicable Collection Period (a "Simple Interest Advance", and together with
Precomputed Advances, "Advances"). If the calculation results in a negative
number, an amount equal to the amount shall be paid to the servicer in
reimbursement of outstanding Simple Interest Advances. In addition, if specified
in the related prospectus supplement, if a Simple Interest Receivable becomes a
Liquidated Receivable (as the term is defined in the related prospectus
supplement), the amount of accrued and unpaid interest on the Simple Interest
Receivable that became a Liquidated Receivable, but not including interest for
the then current collection Period, will be withdrawn from the Collection
Account and paid to the servicer in reimbursement of outstanding Simple Interest
Advances. No advances of principal will be made with respect to Simple Interest
Receivables.
NET DEPOSITS
For administrative convenience, unless the servicer or the trustee is
required to remit collections to the Collection Account on a daily basis as
described under "Collections" above, the servicer or the trustee will be
permitted to make deposits of collections, aggregate Advances and Repurchase
Amounts for any Trust for or in respect of each Collection Period net of
distributions to be made to the servicer with respect to the Collection Period.
The servicer also may cause a single, net transfer to be made from the
Collection Account to the Payahead Account, or vice versa.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
To the extent provided in the related prospectus supplement, with
respect to each Trust the related servicer will be entitled to receive, out of
interest collected on or in respect of the related Primary Assets serviced by
the servicer, a fee for each Collection Period (the "Servicing Fee") in an
amount equal to the percentage per annum specified in the related prospectus
supplement (the "Servicing Fee Rate") of the Pool Balance related to the Primary
Assets as of the first day of the related Collection Period. Unless otherwise
provided in the related prospectus supplement, the Servicing Fee, together with
any portion of the Servicing Fee that remains unpaid from prior Distribution
Dates, will be paid solely to the extent of the Interest Distribution Amount;
however, the Servicing Fee will be paid prior to the distribution of any portion
of the Interest Distribution Amount to the holders of the notes or certificates
of any series.
To the extent provided in the related prospectus supplement, the
servicer will also collect and retain any late fees, prepayment charges and
other administrative fees or similar charges allowed by applicable law with
respect to Receivables and will be entitled to reimbursement from each Trust for
some liabilities. Payments by or on behalf of obligors will be allocated to
scheduled payments under the related Receivable and late fees and other charges
in accordance with the servicer's normal practices and procedures.
If applicable, the Servicing Fee will compensate the servicer for
performing the functions of a third party servicer of motor vehicle receivables
as an agent for the related Trust, including collecting and posting all
payments, responding to inquiries of obligors on the Receivables, investigating
delinquencies, sending payment statements and reporting the collateral. The
Servicing Fee will also compensate the servicer for administering the
Receivables, including making Advances, accounting for collection, furnishing
monthly and annual statements to the related Indenture Trust and/or trustee, and
generating federal income tax information for the Trust and for the related
noteholders and/or certificateholders as well as the Trust's compliance with the
reporting provisions under the Exchange Act. The Servicing Fee may also
reimburse the servicer for particular taxes, the fees of the related indenture
trustee and/or trustee, accounting fees, outside auditor fees, date processing
cost and other costs incurred in connection with administering the Primary
Assets.
DISTRIBUTIONS
With respect to each series of securities, beginning on the
Distribution Date specified in the related prospectus supplement, distributions
of principal and interest, or, where applicable, principal only or interest
only, on each class of securities entitled to these distributions will be made
by the related trustee or indenture trustee, as applicable, to the
certificateholders and noteholders of the series. The timing, calculation,
allocation, order, source and priorities of, and requirements for, all payments
to the holders of each class of notes and/or distributions to holders of each
class of certificates will be set forth in the related prospectus supplement.
With respect to each Trust, on each Distribution Date collections on
or in respect of the related Primary Assets will be transferred from the
Collection Account to the Note Distribution Account or Certificate Distribution
Account, as applicable, for distribution to the noteholders and
certificateholders to the extent provided in the related prospectus supplement.
Credit enhancement, such as a Reserve Account, will be available to cover
shortfalls in the amount available for distribution on the date to the extent
specified in the related prospectus supplement. As and to the extent described
in the related prospectus supplement, distributions in respect of principal of a
class of securities of a series may be subordinate to distributions in respect
of interests on the class, and distributions in respect of one or more classes
of certificates of the series may be subordinate to payments in respect of the
notes, if any, of the series or other classes of certificates. Distributions of
principal on the securities of a series may be based on the amount of principal
collected or due, or the amount of realized losses incurred, in a Collection
Period.
CREDIT AND CASH FLOW ENHANCEMENT
The amounts and types of any credit and cash flow enhancement
arrangements and the provider of the credit and cash flow enhancement
arrangements, if applicable, with respect to each class of securities of a
series will be set forth in the related prospectus supplement. To the extent
provided in the related prospectus supplement, credit or cash flow enhancement
may be in the form of subordination of one or more classes of securities,
Reserve Accounts, spread accounts, letters of credit, surety bonds, insurance
policies, over-collateralization, credit or liquidity facilities, guaranteed
investment contracts, swaps or other interest rate protection agreements,
repurchase obligations, other agreements with respect to third party payments or
other support, cash deposits, or any other arrangements that are incidental to
or related to the Primary Assets included in a Trust as may be described in the
related prospectus supplement, or any combination of the foregoing. If specified
in the applicable prospectus supplement, credit or cash flow enhancement for a
class of securities may cover one or more other classes of securities of the
same series, and credit enhancement for a series of securities may cover one or
more other series of securities.
The existence of a Reserve Account or other form of credit enhancement
for the benefit of any class or series of securities is intended to enhance the
likelihood of receipt by the Securityholders of the class or series of the full
amount of principal and interest due on the applicable class or series and to
decrease the likelihood that the Securityholders will experience losses. The
credit enhancement for a class or series of securities will not, as a general
rule, provide protection against all types of loss and will not guarantee
repayment of all principal and interest on a class or series of securities. If
losses occur which exceed the amount covered by credit enhancement or which are
not covered by the credit enhancement, Securityholders will bear their allocable
share of these losses, as described in the prospectus supplement. In addition,
if a form of credit enhancement covers more than one series of securities,
Securityholders of any series will be subject to the risk that credit
enhancement may be exhausted by the claims of Securityholders of other series.
RESERVE ACCOUNT. If so provided in the related prospectus supplement,
pursuant to the related Transfer and Servicing Agreement, the company or the
seller will establish for a series or class or classes of securities an account
(the "Reserve Account"), which will be maintained with the related indenture
trustee or trustee, as applicable. A Reserve Account will be funded by an
initial deposit by the company or the seller, as applicable, on the closing date
in the amount set forth in the related prospectus supplement. As further
described in the related prospectus supplement, the amount on deposit in the
Reserve Account may be increased or reinstated on each Distribution Date, to the
extent described in the related prospectus supplement, by the deposit there of
amounts from collections on the Primary Assets. The related prospectus
supplement will describe the circumstances under which and the manner in which
distributions may be made out of the Reserve Account, either to holders of the
securities covered by the Reserve Account or to the company, the seller or to
any other entity.
EVIDENCE AS TO COMPLIANCE
Each Sale and Servicing Agreement or Pooling and Servicing Agreement,
as applicable, will provide that a firm of independent public accountants will
furnish annually to the related Trust and indenture trustee and/or trustee a
statement as to compliance by the Sale and servicer during the preceding twelve
months, or, in the case of the first statement, during a shorter period that
shall have elapsed since the applicable closing date, with particular standards
relating to the servicing of the Receivables, the servicer's accounting records
and computer files with respect to the servicer's compliance and other matters.
Each Sale and Servicing Agreement or Pooling and Servicing Agreement,
as applicable, will also provide for delivery to the related Trust and indenture
trustee and/or trustee each year of a certificate signed by an officer of the
servicer stating that the servicer has fulfilled it obligations under the
related Sale and Servicing Agreement or Pooling and Servicing Agreement, as
applicable, throughout the preceding twelve months, or, in the case of the first
certificate, during a shorter period that shall have elapsed since the
applicable closing date, or, if there has been a default in the fulfillment of
any obligation, describing each default. The servicer will agree to give each
indenture trustee and/or trustee, as applicable, notice of particular Servicer
Defaults under the related Sale and Servicing Agreement or Pooling and Servicing
Agreement, as applicable.
Copies of the foregoing statements and certificates may be obtained by
Securityholders by a request in writing addressed to the related trustee or
indenture trustee, as applicable, at the Corporate Trust Office for the trustee
or indenture trustee specified in the related prospectus supplement.
STATEMENTS TO TRUSTEES AND THE TRUST
Prior to each Distribution Date with respect to each series of
securities, the servicer will provide to the applicable indenture trustee, if
any, and the applicable trustee as of the close of business on the last day of
the preceding Collection Period a statement setting forth substantially the same
information as is required to be provided in the periodic reports provided to
Securityholders of the series as described under "Certain Information Regarding
the Securities--Statements to Securityholders".
CERTAIN MATTERS REGARDING THE SERVICER
Each Sale and Servicing Agreement and Pooling and Servicing Agreement
will provide that the servicer may not resign from its obligations and duties as
servicer under the applicable Agreement, except upon determination that the
servicer's performance of his duties is no longer permissible under applicable
law or if resignation is required by regulatory authorities. No resignation will
become effective until the related indenture trustee or trustee, as applicable,
or a successor servicer has assumed the servicing obligations and duties under
the related Sale and Servicing Agreement or Pooling and Servicing Agreement, as
applicable.
Each Sale and Servicing Agreement and Pooling and Servicing Agreement
will further provide that neither the servicer nor any of its directors,
officers, employees and agents will be under any liability to the related Trust
or Securityholders for taking any action or for refraining from taking any
action pursuant to the related Sale and Servicing Agreement or Pooling and
Servicing Agreement, as applicable, or for errors in judgment; provided, that
neither the servicer nor any person will be protected against any liability that
would otherwise be imposed by reason of wilful misfeasance, bad faith or gross
negligence in the performance of the servicer's duties or by reason of reckless
disregard of its obligations and duties under the applicable Agreement. In
addition, each Sale and Servicing Agreement and Pooling and Servicing Agreement
will provide that the servicer is under no obligation to appear in, prosecute or
defend any legal action that is not incidental to its servicing responsibilities
under the related Sale and Servicing Agreement or Pooling and Servicing
Agreement, as applicable, and that, in its opinion, may cause it to incur any
expense or liability.
Under the circumstances specified in each Sale and Servicing Agreement
and Pooling and Servicing Agreement, any entity into which the servicer may be
merged or consolidated, or any entity resulting from any merger or consolidation
to which the servicer is a party, or any entity succeeding to all or
substantially all of the business of the servicer, or any corporation which
assumes the obligations of the servicer, will be the successor to the servicer
under the related Sale and Servicing Agreement or Pooling and Servicing
Agreement, as applicable.
SERVICER DEFAULTS
A "Servicer Default" under each Sale and Servicing Agreement and
Pooling and Servicing Agreement will consist of:
(1) any failure by the servicer to deliver to the related trustee or
indenture trustee, as applicable, for deposit in any of the Trust
Accounts any required payment or to direct the related trustee or
Indenture Trust, as applicable, to make any required
distributions from the Trust Accounts, which failure continues
unremedied for five business days after discovery by an officer
of the servicer or written notice of failure is given (a) to the
servicer by the related trustee or indenture trustee, as
applicable, or (b) to the servicer and to the related trustee or
indenture trustee, as applicable, by holders of notes, if any,
evidencing not less that 25% of the aggregate outstanding
principal amount of the notes or, in the event a series of
securities includes no notes or if the notes have been paid in
full, by holders of certificates evidencing not less that 25% of
the certificate balance;
(2) any failure by the servicer duly to observe or perform in any
material respect any covenant or agreement in the related Sale
and Servicing Agreement or Pooling and Servicing Agreement, as
applicable, which failure materially and adversely affects the
rights of the related Securityholders and which continues
unremedied for 60 days after written notice of failure is given
to the servicer in the same manner described in clause (1) above;
(3) specific events of bankruptcy, insolvency, readjustment of debt,
marshaling of assets and liabilities or similar proceedings and
particular actions by the servicer indicating its insolvency,
reorganization pursuant to bankruptcy proceedings or inability to
pay its obligations; and
(4) any other events as may be set forth in the related prospectus
supplement.
RIGHTS UPON SERVICER DEFAULT
Generally, in the case of an owner trust, as long as a Servicer
Default under the related Sale and Servicing Agreement remains unremedied, the
related indenture trustee or holders of notes of the related series evidencing
not less than 50% of the aggregate principal amount of the notes then
outstanding may terminate all the rights and obligations of the servicer under
the related Sale and Servicing Agreement, and upon this termination the
indenture trustee or a successor servicer appointed by the indenture trustee
will succeed to all the responsibilities, duties and liabilities of the servicer
under the related Sale and Servicing Agreement and will be entitled to similar
compensation arrangements. Generally, in the case of any grantor trust, as long
as a Servicer Default under the related Pooling and Servicing Agreement remains
unremedied, the related trustee or holders of certificates of the related series
evidencing not less than 25% of the certificate balance may terminate all the
rights and obligations of the servicer under the related Pooling and Servicing
Agreement, and upon this termination the trustee or a successor servicer
appointed by the trustee will succeed to all the responsibilities, duties and
liabilities of the servicer under the related Pooling and Servicing Agreement
and will be entitled to similar compensation arrangements. If, however, a
bankruptcy trustee or similar official has been appointed for the servicer, and
no Servicer Default other than the appointment has occurred, the trustee or
official may have the power to prevent any indenture trustee or the related
noteholders or the trustee or the related certificateholders from effecting a
transfer of servicing. If the related indenture trustee, if any, or the related
trustee is unwilling or unable to act as successor to the servicer, the
indenture trustee or trustee, as applicable, may appoint, or may petition a
court of competent jurisdiction to appoint, a successor with a net worth of at
least $100,000,000 and whose regular business includes the servicing of motor
vehicle receivables. The indenture trustee, if any, or the trustee may arrange
for compensation to be paid to the successor servicer, which in no event may be
greater than the compensation payable to the servicer under the related Sale and
Servicing Agreement or Pooling and Servicing Agreement, as applicable.
WAIVER OF PAST DEFAULTS
To the extent provided in the related prospectus supplement, (1) in
the case of each owner trust, holders of the related notes evidencing not less
than a majority of the aggregate outstanding principal amount of the notes, or
of certificates evidencing not less than a majority of the outstanding
certificate balance, in the case of any default that does not adversely affect
the indenture trustee or noteholders, and (2) in the case of each grantor trust,
holders of certificates evidencing not less than a majority of the certificate
balance, may, on behalf of all the noteholders and certificateholders, waive any
default by the servicer in the performance of its obligations under the related
Sale and Servicing Agreement or Pooling and Servicing Agreement, as applicable,
and its consequences, except a default in making any required deposits to or
payments from any Trust Account or in respect of a covenant or provision in the
Sale and Servicing Agreement or Pooling and Servicing Agreement, as applicable,
that cannot be modified or amended without the consent of each Securityholder,
in which event the related waiver will require the approval of holders of all of
the securities of the series. No waiver will impair the Securityholders' right
with respect to any subsequent Servicer Default.
AMENDMENT
Unless otherwise provided in the related prospectus supplement, each
of the Transfer and Servicing Agreements may be amended by the parties to the
Transfer and Servicing Agreements without the consent of the related noteholders
or certificateholders:
(1) to cure any ambiguity,
(2) to correct or supplement any provisions in the related Transfer
and Servicing Agreement, or
(3) for the purpose of adding any provisions to, or changing in any
manner or eliminating any of the provisions of, the related
Transfer and Servicing Agreement;
provided, that any action in this clause (3) will not, in the opinion of counsel
satisfactory to the related trustee or indenture trustee, as applicable,
adversely affect in any material respect the interests of the company or any
noteholder.
The Transfer and Servicing Agreements may also be amended from time to
time by the parties to the Transfer and Servicing Agreements with the consent of
the holders of notes evidencing at least a majority of the aggregate principal
amount of the then outstanding notes, if any, and with the consent of the
holders of certificates evidencing at least a majority of the aggregate
principal amount of the then outstanding certificates, for the purpose of adding
any provisions to or changing in any manner or eliminating any of the provisions
of the related Transfer and Servicing Agreement or of modifying in any manner
the rights of the noteholders or certificateholders, as applicable; provided
that no amendment may (1) increase or reduce in any manner the amount of, or
accelerate or delay the timing of, collections of payments on or in respect of
the related Primary Assets or distributions that are required to be made for the
benefit of the noteholders or certificateholders or (2) reduce the aforesaid
percentage of the notes or certificates of the series the holders of which are
required to consent to any amendment, without the consent of the holders of all
of the outstanding notes or certificates, as the case may be, of the series.
PAYMENT IN FULL OF THE NOTES
Upon the payment in full of all outstanding notes of a given series
and the satisfaction and discharge of the related Indenture, the related trustee
will succeed to all the rights of the indenture trustee, and the
certificateholders of the series generally will succeed to the rights of the
noteholders of the series under the related Sale and Servicing Agreement.
TERMINATION
The obligations of the related servicer, the related trustee and the
related indenture trustee, if any, with respect to a Trust pursuant to the
related Transfer and Servicing Agreement will terminate upon the latest to occur
of
o the maturity or other liquidation of the last Primary Asset and
the disposition of any amounts received upon liquidation of any
remaining Primary Asset,
o the payment to noteholders, if any, and certificateholders of all
amounts required to be paid to them pursuant to the Transfer and
Servicing Agreements and
o the occurrence of either event described below.
In order to avoid excessive administrative expenses, the related
servicer will be permitted, at its option, to purchase from a Trust all
remaining Primary Assets as of the end of any Collection Period, if the then
outstanding Pool Balance is 10%, or, if any seller is a bank, 5%, or less of the
Pool Balance as of the related cutoff date, at a purchase price equal to the
price specified in the related prospectus supplement.
If and to the extent provided in the related prospectus supplement, the
indenture trustee or trustee, as applicable, will, within ten days following a
Distribution Date as of which the Pool Balance is equal to or less than the
percentage of the original Pool Balance specified in the related prospectus
supplement, solicit bids for the purchase of the Primary Assets remaining in the
Trust, in the manner and subject to the terms and conditions set forth in the
related prospectus supplement. If the indenture trustee or trustee receives
satisfactory bids as described in the related prospectus supplement, then the
Primary Assets remaining in the Trust will be sold to the highest bidder.
CERTAIN LEGAL ASPECTS OF THE RECEIVABLES
SECURITY INTERESTS IN FINANCED VEHICLES
In states in which retail installment contracts such as the
Receivables evidence the credit sale of automobiles, recreational vehicles,
vans, trucks, buses and trailers by dealers to obligors, the contracts also
constitute personal property security agreements and include grants of security
interests in the vehicles under the UCC as in effect in these states. Perfection
of security interests in the automobiles, recreational vehicles, vans, trucks,
buses and trailers financed, directly or indirectly, by a seller is generally
governed by the motor vehicle registration laws of the state in which the
vehicle is located. In general, a security interest in automobiles, recreational
vehicles, vans, trucks, buses and trailers is perfected by obtaining the
certificate of title to the financed vehicle or notation of the secured party's
lien on the vehicles' certificate of title. However, security interests in boats
may be perfected in one of three ways: in certificate of title states, a
security interest is perfected as described above; in other states, a security
interest may be perfected by filing a UCC-1 financing statement, however, a
purchase money lien in consumer goods is perfected without any filing
requirement and if a boat is required to be documented under Federal law, a
preferred mortgage may be obtained under the Ship Mortgage Act by filing the
mortgage with the Coast Guard, which is the exclusive method for perfecting
security interests in documented boats. The applicable seller will represent and
warrant in the Agreement that none of the Receivables are required to be
documented under the Ship Mortgage Act.
Generally all of the Receivables name the seller as obligee or
assignee and as the secured party. The seller will take all actions necessary
under the laws of the state in which the financed vehicle is located to perfect
the seller's security interest in the financed vehicle, including, where
applicable, having a notation of its lien recorded on the vehicle's certificate
of title or file a UCC-1 Financing Statement. If the seller, because of clerical
error or otherwise, has failed to take action with respect to financed vehicle,
it will not have a perfected security interest and its security interest may be
subordinate to the interest of, among others, subsequent purchasers of the
financed vehicle that give value without notice of the seller's security
interest and to whom a certificate of ownership is issued in the purchaser's
name, holders of perfected security interests in the financed vehicle and the
trustee in bankruptcy of the obligor. The seller's security interest may also be
subordinate to third parties in the event of fraud or forgery by the obligor or
administrative error by state recording officials or in the circumstances noted
below.
Pursuant to each Sale and Servicing Agreement and Pooling and
Servicing Agreement, the seller will assign its interests in the Financed
Vehicles securing the related Receivables to the related Trust. However, because
of administrative burden and expense, neither the seller nor the related trustee
will amend any certificate of title to identify the Trust as the new secured
party on the certificates of title relating to the Financed Vehicles. Unless
otherwise specified in the related prospectus supplement, the servicer will hold
certificates of title relating to the Financed Vehicles in its possession as
custodian for the Trust pursuant to the related Sale and Servicing Agreement or
Pooling and Servicing Agreement, as applicable. See "Description of the Transfer
and Servicing Agreements--Sale and Assignment of Primary Assets".
In most states, assignments such as those under the related Trust
Agreement or Pooling and Servicing Agreement, as applicable, are effective
conveyances of a security interest in the related financed vehicle without
amendment of any lien noted on the vehicle's certificate of title, and the
assignee succeeds by assignment to the assignor's rights as secured party.
Although re-registration of the motor vehicle is not necessary in these states
to convey a perfected security interest in the Financed Vehicles to a Trust,
because the related Trust will not be listed as legal owner on the certificates
of title to the Financed Vehicles, a Trust's security interest could be defeated
through fraud or negligence. However, in the absence of fraud or forgery by the
vehicle owner or the servicer or administrative error by state of local
agencies, the notation of the seller's lien on a certificate of title will be
sufficient to protect a Trust against the rights of subsequent purchasers of a
Financed Vehicle or subsequent creditors who take a security interest in a
Financed Vehicle. If there are any Financed Vehicles as to which the seller
fails to obtain a first-priority perfected security interest, the Trust's
security interest would be subordinate to, among others, subsequent purchasers
of Financed Vehicles and holders of perfected security interests in Financed
Vehicles. A failure, however, would constitute a breach of the seller's
representations and warranties under the related Receivables Purchase Agreement
and the seller will be required to repurchase the Receivable from the Trust
unless the breach is cured in a timely manner. See "Description of the Transfer
and Servicing Agreements--Sale and Assignment of Primary Assets" and "Risk
Factors--Certain Legal Aspects--Lack of Security Interests in Financed
Vehicles".
Under the laws of most states in which a perfected security interest
is governed by a certificate of title statute, a perfected security interest in
a motor vehicle continues for four months after the vehicle is moved to a new
state from the one in which it is initially registered and after until the owner
re-registers the motor vehicle in the new state. A majority of these states
require surrender of a certificate of title to re-register a vehicle.
Accordingly, a secured party must surrender possession if it holds the
certificate of title of the vehicle or, in the case of vehicles registered in
states providing for the notation of a lien on the certificate of title but not
possession by the secured party, the secured party would receive notice of
surrender from the state of re-registration if the security interest is noted on
the certificate of title. Thus, the secured party would have the opportunity to
reperfect its security interest in the vehicle in the state of relocation.
However, these procedural safeguards will not protect the secured party if,
through fraud, forgery or administrative error, an obligor somehow procures a
new certificate of title that does not list the secured party's lien.
Additionally, in states that do not require a certificate of title for
registration of a vehicle, re-registration could defeat perfection. In the
ordinary course of servicing the Receivables, the servicer will take steps to
effect re-perfection upon receipt of notice of re-registration or information
from the obligor as to relocation. Similarly, when an obligor sells a Financed
Vehicle and the purchaser of that Financed Vehicle attempts to re-register the
vehicle, the seller must surrender possession of the certificate of title or
will receive notice as a result of having its lien noted on the certificate of
title and accordingly will have an opportunity to require satisfaction of the
related Receivable before its lien is released. Under each Sale and Servicing
Agreement and Pooling and Servicing Agreement, the servicer will be obligated to
take appropriate steps, at its own expense, to maintain perfection of security
interests in the related Financed Vehicles and is obligated to purchase the
related Receivable if it fails to do so.
In states which the perfection of a security interest is governed by
the filing of a UCC-1 financing statement, or the obligor moves from a title
state to a non-title state, the servicer will file a UCC-1 financing statement
in the new state of the obligor as soon as possible after receiving notice of
the obligor's change of residence. UCC-1 financing statements expire after five
years. When the term of a loan exceeds five years, the filing must be continued
in order to maintain the servicer's perfected security interest. The servicer
takes steps to effect continuation. In the event that an obligor moves to a
state other than the state in which the UCC-1 financing statement is filed or in
some states to a different county in the state, under the laws of most states
the perfection of the security interest in the boat would continue for four
months after relocation, unless the perfection in the original jurisdiction
would have expired earlier. A new financing statement must be filed in the state
of relocation or, if the state is a title state, a notation on the certificate
of title must be made in order to continue the security interest. The servicer
generally takes steps to effect re-perfection upon notification of an address
change. Generally, in both title states and in non-title states, the servicer
will not re-perfect a state law security interest which has expired or where the
obligor has moved if the Receivable has a small balance, a short remaining term
and the obligor has a good payment record.
Under the laws of most states, liens for repairs performed on a motor
vehicle and liens for unpaid taxes take priority over even a perfected,
first-priority security interest in the vehicle. The Code also grants priority
to particular federal tax liens over the lien of a secured party. The laws of
some states and federal law permit the confiscation of motor vehicles by
governmental authorities under some circumstances if used in unlawful
activities, which may result in the loss of a secured party's perfected security
interest in a confiscated motor vehicle. In each Receivables Purchase Agreement,
the seller will represent and warrant that, as of the date any Receivable is
sold to the Trust, the security interest in the related Financed Vehicle is or
will be prior to all other present liens, other than tax liens and other liens
that arise by operation of law, upon and security interests in the Financed
Vehicle. However, liens for repairs or taxes could arise, or the confiscation of
a Financed Vehicle could occur, at any time during the term of a Receivable. No
notice will be given to the related trustee, the related indenture trustee, if
any, or related Securityholders in the event a lien arises or confiscation
occurs. Any lien or confiscation arising or occurring after the closing date
will not give rise to a repurchase obligation of the seller under the related
Receivables Purchase Agreement.
REPOSSESSION
In the event of default by an obligor, the holder of the related
retail installment sale contract has all the remedies of a secured party under
the UCC, except where specifically limited by other state laws. The UCC remedies
of a secured party include the right to repossession by self-help means, unless
these means would constitute a breach of the peace. Self-help repossession is
the method employed by the servicer in most cases and is accomplished simply by
taking possession of the related motor vehicle. In cases where the obligor
objects or raises a defense to repossession, or if otherwise required by
applicable state law, a court order must be obtained from the appropriate state
court, and the vehicle must then be recovered in accordance with that order. In
some jurisdictions, the secured party is required to notify an obligor debtor of
the default and the intent to repossess the collateral and to give the obligor a
period of time within which to cure the default prior to repossession.
Generally, the right to cure may only be exercised on a limited number of
occasions during the term of the related contract.
NOTICE OF SALE; REDEMPTION RIGHTS
The UCC and other state laws require the secured party to provide the
obligor with reasonable notice of the date, time and place of any public sale
and/or the date after which any private sale of the collateral may be held. The
obligor has the right to redeem the collateral prior to actual sale by paying
the secured party the unpaid principal balance of the obligation, accrued
interest on the unpaid principal balance of the obligation, plus reasonable
expenses for repossessing, holding and preparing the collateral for disposition
and arranging for its sale, plus, in some jurisdictions, reasonable attorneys'
fees or, in some states, by payment of delinquent installments or the unpaid
principal balance of the related obligation.
DEFICIENCY JUDGMENTS AND EXCESS PROCEEDS
The proceeds of the resale of any Financed Vehicle generally will be
applied first to the expenses of resale and repossession and then to the
satisfaction of the related indebtedness. While some states impose prohibitions
or limitations on deficiency judgments if the net proceeds from any resale do
not cover the full amount of the indebtedness, a deficiency judgment can be
sought in other states that do not prohibit or limit deficiency judgments.
However, the deficiency judgment would be a personal judgment against the
obligor for the shortfall, and a defaulting obligor can be expected to have very
little capital or sources of income available following repossession; in many
cases, therefore, it may not be useful to seek a deficiency judgment or, if one
is obtained, it may be settled at a significant discount or be uncollectible. In
addition to the notice requirement, the UCC requires that every aspect of the
sale or other disposition, including the method, manner, time, place and terms,
be "commercially reasonable". Generally, courts have held that when a sale is
not "commercially reasonable", the secured party loses its right to a deficiency
judgment. In addition, the UCC permits the debtor or other interested party to
recover for any loss caused by noncompliance with the provisions of the UCC.
Also, prior to a sale, the UCC permits the debtor or other interested person to
restrain the secured party from disposing of the collateral if it is established
that the secured party is not proceeding in accordance with the "default"
provisions under the UCC.
Occasionally, after the resale of a motor vehicle and payment of all
related expenses and indebtedness, there is a surplus of funds. In that case,
the UCC requires the creditor to remit the surplus to any holder of a
subordinate lien with respect to the related vehicle or, if no subordinate
lienholder exists, to the former owner of the vehicle.
CONSUMER PROTECTION LAWS
Numerous federal and state consumer protection laws and related
regulations impose substantial requirements upon creditors and servicers
involved in consumer finance. These laws include the Truth-in-Lending Act, the
Equal Credit Opportunity Act, the Federal Trade Commission Act, the Fair Credit
Billing Act, the Fair Credit Reporting Act, the Fair Debt Collection Practices
Act, the Magnuson-Moss Warranty Act, the Federal Reserve Board's Regulations B
and Z, the Soldiers' and Sailors' Relief Act, state adaptations of the National
Consumer Act and of the Uniform Consumer Credit Code, and state motor vehicle
retail installment sales acts, retail installment sales acts and other similar
laws. Also, the laws of some states impose finance charge ceilings and other
restrictions on consumer transactions and require contract disclosures in
addition to those required under other restrictions on consumer transactions and
require contract disclosures in addition to those required under federal law.
These requirements impose specific statutory liabilities upon creditors who fail
to comply with their provisions. In some cases, this liability could affect the
ability of an assignee, such as a Trust, to enforce consumer finance contracts
such as Receivables.
The so-called "Holder-in-Due-Course" rule of the Federal Trade
Commission (the "FTC Rule"), the provisions of which are generally duplicated by
the Uniform Consumer Credit Code, other statutes or the common law, has the
effect of subjecting a seller in a consumer credit transaction, and some related
creditors and their assignees, to all claims and defenses that the obligor in
the transaction could assert against the seller of the goods. Liability under
the FTC Rule is limited to the amounts paid by the obligor under the contract,
and the holder of the contract may also be unable to collect any balance
remaining due under the contract from the obligor. Most of the Receivables will
be subject to the requirements of the FTC Rule. Accordingly, each Trust, as
holder of the related Receivables, will be subject to any claims or defenses
that the purchasers of the related Financed Vehicles may assert against the
sellers of those Financed Vehicles. If an obligor were successful in asserting
any claims or defenses, the claim or defense would constitute a breach of the
seller's warranties under the related Receivables Purchase Agreement and would
create an obligation of the seller to repurchase the Receivable unless the
breach is cured in a timely manner. See "Description of the Transfer and
Servicing Agreements--Sale and Assignment of Primary Assets".
Courts have applied general equitable principles to secured parties
pursuing repossession and litigation involving deficiency balances. These
equitable principles may have the effect of relieving an obligor from some or
all of the legal consequences of a default.
In several cases, consumers have asserted that the self-help remedies
of secured parties under the UCC and related laws violate the due process
protections of the Fourteenth Amendment to the Constitution of the United
States. Courts have generally either upheld the notice provisions of the UCC and
related laws as reasonable or have found that the creditors' repossession and
resale do not involve sufficient state action to afford constitutional
protection to borrowers.
Under each Receivables Purchase Agreement the seller will represent
and warrant that each Receivable complies in all material respects with all
applicable federal and state laws. Accordingly, if an obligor has a claim
against a Trust for a violation of any law and that claim materially and
adversely affects the interests of the Trust in a Receivable, the violation
would constitute a breach of the seller's representation and warranty and would
create an obligation of the seller to repurchase the Receivable unless the
breach is cured. See "Description of the Transfer and Servicing Agreements--Sale
and Assignment of Primary Assets".
OTHER LIMITATIONS
In addition to the laws limiting or prohibiting deficiency judgments,
numerous other statutory provisions, including federal bankruptcy laws and
related state laws, may interfere with or affect the ability of a creditor to
realize upon collateral or enforce a deficiency judgment. For example, in a
Chapter 13 proceeding under the federal bankruptcy law, a court may prevent a
creditor from repossessing a motor vehicle and, as part of the rehabilitation
plan, may reduce the amount of the secured indebtedness to the market value of
the motor vehicle at the time of bankruptcy, as determined by the court, leaving
the party providing financing as a general unsecured creditor for the remainder
of the indebtedness. A bankruptcy court may also reduce the monthly payments due
under the related contract or change the rate of interest and time of repayment
of the indebtedness.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The following is a general discussion of the anticipated material
United States federal income tax consequences of the purchase, ownership and
disposition of securities. The summary does not purport to deal with federal
income tax consequences applicable to all categories of holders, some of which
may be subject to special rules. For example, it does not discuss the tax
treatment of beneficial owners of notes ("Note Owners") or certificates
("Certificate Owners") that are insurance companies, regulated investment
companies or dealers in securities. Moreover, there are no cases or Internal
Revenue Service ("IRS") rulings on similar transactions involving both debt and
equity interests issued by a trust with terms similar to those of the notes and
the certificates. As a result, the IRS might disagree with all or part of the
discussion below. Prospective investors are urged to consult their own tax
advisors in determining the federal, state, local, foreign and any other tax
consequences to them of the purchase, ownership and disposition of the notes and
the certificates.
The following summary is based upon current provisions of the Internal
Revenue Code of 1986, as amended (the "Code"), the Treasury regulations
promulgated under the Code and judicial or ruling authority, all of which are
subject to change, which change may be retroactive. Each Trust will be provided
with an opinion of tax counsel specified in the related prospectus supplement
("Federal Tax Counsel") regarding some related federal income tax matters
discussed below, a copy of which will be filed with the SEC in a Current Report
on Form 8-K or in a post-effective amendment to the Registration Statement. An
opinion of Federal Tax Counsel, however, is not binding on the IRS or the
courts. No ruling on any of the issues discussed below will be sought from the
IRS. The opinion of Federal Tax Counsel specifically addresses only those issues
specifically identified below as being covered by that opinion; however, the
opinion also states that the additional discussion set forth below accurately
sets forth the advice of Federal Tax Counsel with respect to material federal
income tax issues. For purposes of the following summary, references to the
Trust, the notes, the certificates and related terms, parties and documents
shall be deemed to refer, unless otherwise specified in this prospectus, to each
Trust and the notes, certificates and related terms, parties and documents
applicable to the Trust.
OWNER TRUSTS
TAX CHARACTERIZATION OF THE OWNER TRUSTS. In the case of an owner
trust, Federal Tax Counsel will deliver its opinion that the Trust will not be
an association, or publicly traded partnership, taxable as a corporation for
federal income tax purposes. The opinion of Federal Tax Counsel will be based on
the assumption that the terms of the Trust Agreement and related documents will
be complied with, and on counsel's conclusions that the nature of the income of
the Trust, or restrictions, if any, on transfers of the certificates, will
exempt the Trust from the rule that some publicly traded partnerships are
taxable as corporations.
If a Trust were taxable as a corporation for federal income tax
purposes, the Trust would be subject to corporate income tax on its taxable
income. The Trust's taxable income would include all of its income on the
related Primary Assets, which might be reduced by its interest expense on the
notes. Any corporate income tax could materially reduce cash available to make
payments on the notes and distributions on the certificates, and Certificate
Owners, and possibly Note Owners, could be liable for any resulting corporate
income tax that is unpaid by the Trust.
TAX CONSEQUENCES TO NOTE OWNERS.
TREATMENT OF THE NOTES AS INDEBTEDNESS. The Trust will agree, and the
Note Owners will agree by their purchase of notes, to treat the notes as debt
for federal tax purposes. Federal Tax Counsel will, subject to exceptions which,
if applicable, will be specified in the related prospectus supplement, advise
the owner trust that the notes will be classified as debt for federal income tax
purposes, or classified in any other manner as shall be provided in the related
prospectus supplement. If, contrary to the opinion of Federal Tax Counsel, the
IRS successfully asserted that one or more of the notes did not represent debt
for federal income tax purposes, the notes might be treated as equity interests
in the Trust. If so treated, the Trust might be treated as a publicly traded
partnership that would be taxable as a corporation unless it met particular
qualifying income tests, and the resulting taxable corporation would not be able
to reduce its taxable income by deductions for interest expense on notes
recharacterized as equity. Treatment of the notes as equity interests in a
partnership could have adverse tax consequences to some holders, even if the
Trust were not treated as a publicly traded partnership taxable as a
corporation. For example, income allocable to foreign holders might be subject
to U.S. tax and U.S. tax return filing and withholding requirements, and
individual holders might be subject to limitations on their ability to deduct
their share of Trust expenses. The discussion below assumes that the notes will
be characterized as debt for federal income tax purposes.
INTEREST INCOME ON THE NOTES. The taxation of interest on a Note will
depend on whether the interest constitutes "qualified stated interest". Interest
on a Note that constitutes qualified stated interest is includable in a Note
Owner's income as ordinary interest income when actually or constructively
received, if the Note Owner uses the cash method of accounting for federal
income tax purposes, or when accrued, if the Note Owner uses an accrual method
of accounting for federal income tax purposes. Interest that does not constitute
qualified stated interest is included in a Note Owner's income under the rules
described below under "--Original Issue Discount," regardless of the Note
Owner's method of accounting, or, in some circumstances, under rules governing
contingent payments which are set out in regulations issued in final form on
June 11, 1996 (the "1996 Contingent Debt Regulations"). Notwithstanding the
foregoing, interest that is payable on a Note with a fixed maturity of one year
or less from its issue date is included in a Note Owner's income under the rules
described below under "--Short Term notes".
In general, "qualified stated interest" is stated interest that,
during the entire term of the Note, is unconditionally payable at least annually
at a single fixed rate of interest or, subject to some exceptions summarized
below, at a variable rate that is a single "qualified floating rate" or a single
"objective rate". If stated interest is unconditionally payable at two or more
qualified floating rates, a single fixed rate and one or more qualified floating
rates, or a single fixed rate and a single objective rate that is a "qualified
inverse floating rate", all or a portion of the stated interest might be treated
as "qualified stated interest." Under Treasury Regulations issued under Sections
1271-1275 of the Code (the "OID Regulations") interest is considered
unconditionally payable only if reasonable legal remedies exist to compel timely
payment or the debt instrument otherwise contains terms and conditions that make
the likelihood of late payment a remote contingency. If stated interest is
payable at a variable rate other than in accordance with the foregoing, the
interest will not be treated as "qualified stated interest," and it is unclear
whether the payments must be treated as part of a Note's "stated redemption
price at maturity" and governed by the rules described below under "--Original
Issue Discount" or, alternatively, must be taxed as contingent interest under,
or under rules similar to, the 1996 Contingent Debt Regulations, or in some
other manner.
Stated interest generally qualifies as being payable at a "qualified
floating rate" if variations in the value of the rate can reasonably be expected
to measure contemporaneous fluctuations in the cost of newly borrowed funds in
the currency in which the Note is denominated. A variable rate will be
considered a qualified floating rate if the variable rate equals (1) the product
of an otherwise qualified floating rate and a fixed multiple that is greater
than 0.65, but not more than 1.35 or (2) an otherwise qualified floating rate,
or the product described in clause (1), plus or minus a fixed rate. If the
variable rate equals the product of an otherwise qualified floating rate and a
single multiplier greater than 1.35 or less than or equal to 0.65, however, the
rate will generally constitute an objective rate, described more fully below.
Stated interest qualifies as payable at an "objective rate" if the
rate is determined using a single fixed formula and is based on objective
financial information or economic information. However an objective rate does
not include a rate based on information that is within the control of the issuer
or a related party or that is unique to the circumstances of the issuer or a
related party. The IRS may designate other objective rates. An objective rate is
a qualified inverse floating rate if (a) the rate is equal to a fixed rate minus
a qualified floating rate and (b) the variations in the rate can reasonably be
expected to inversely reflect contemporaneous variations in the cost of newly
borrowed funds, disregarding specific caps, floors, governors or similar
restrictions.
All or a portion of interest that otherwise is treated as qualified
stated interest under the rules summarized above will not be treated as
qualified stated interest if, among other circumstances:
o the variable rate of interest is subject to one or more minimum
or maximum rate floors or ceilings or one or more governors
limiting the amount of increase or decrease in each case which
are not fixed throughout the term of the Note and which are
reasonably expected as of the issue date to cause the rate in
particular accrual periods to be significantly higher or lower
than the overall expected return on the Note determined without
the floor or ceiling;
o it is reasonably expected that the average value of the variable
rate during the first half of the term of the Note will be either
significantly less than or significantly greater than the average
value of the rate during the final half of the term of the Note;
o the "issue price" of the Note exceeds the total noncontingent
principal payments by more than an amount equal to the lesser of
.015 multiplied by the product of the total noncontingent
principal payments and the number of complete years to maturity
from the issue date, or, in some cases, its weighted average
maturity, and 15 percent of the total noncontingent principal,
o the Note does not provide that a qualified floating rate or
objective rate in effect at any time during the term of the Note
is set at the value of the rate on any day that is no earlier
than three months prior to the first day on which the value is in
effect and no later than one year following that first day, or
o if interest is not unconditionally payable.
In these situations, as well as others, it is unclear whether interest payments
constitute qualified stated interest, or must be treated either as part of a
Note's "stated redemption price at maturity" resulting in original issue
discount, or represent contingent payments subject to taxation under, or under
rules similar to, the 1996 Contingent Debt Regulations, or in some other manner.
ORIGINAL ISSUE DISCOUNT. notes may be issued with "original issue
discount". Rules governing original issue discount are set forth in Sections
1271-1275 of the Code and the OID Regulations. The discussion in this prospectus
is based in part on the OID Regulations. Note Owners also should be aware that
the OID Regulations do not address some issues relevant to prepayable securities
such as the notes.
In general, a Note's original issue discount, if any, is the
difference between the "stated redemption price at maturity" of the Note and its
"issue price".
The original issue discount with respect to a Note will be considered
to be zero if it is less than a specified DE MINIMIS amount of 0.25% of the
Note's stated redemption price at maturity multiplied by the number of complete
years from the date of issue of the Note to its maturity date or, in the case of
notes that have more than one principal payment or that have interest payments
that are not qualified stated interest, the weighted average maturity of the
Note, as specially defined for tax purposes. Because of the possibility of
prepayments, it is not clear how the DE MINIMIS rules will apply to the notes.
It is likely that the anticipated rate of prepayments assumed in pricing the
debt instrument (the "Prepayment Assumption") will be required to be used in
determining the weighted average maturity of the notes. In the absence of
authority to the contrary, the company presently expects to apply the DE MINIMIS
rule by using the Prepayment Assumption. Generally, a Note Owner includes de
minimis original issue discount in income as principal payments are made. The
amount includable in income with respect to each principal payment equals a pro
rata portion of the entire amount of DE MINIMIS original issue discount with
respect to that Note. Any DE MINIMIS amount of original issue discount
includable in income by a Note Owner is generally treated as a capital gain if
the Note is a capital asset in the hands of the Note Owner.
The "stated redemption price at maturity" of a Note generally will be
equal to the sum of all payments, whether denominated as principal or interest,
to be made with respect to a Note other than "qualified stated interest".
In general, the "issue price" of a Note is the first price at which a
substantial amount of the notes of a class are sold for money to the public,
excluding bond houses, brokers or similar persons or organizations acting in the
capacity of underwriters, placement agents or wholesalers.
If the notes are determined to be issued with original issue discount,
a holder of a Note must generally include the original issue discount in
ordinary gross income for federal income tax purposes as it accrues in advance
of the receipt of any cash attributable to that income. The amount of original
issue discount, if any, required to be included in a Note Owner's ordinary gross
income for federal income tax purposes in any taxable year will be computed in
accordance with Section 1272(a) of the Code and the OID Regulations. Under
Section 1272(a) of the Code and the OID Regulations, original issue discount
accrues on a daily basis under a constant yield method that takes into account
the compounding of interest. The amount of original issue discount to be
included in income by a holder of a debt instrument, such as a Note, under which
principal payments may be subject to acceleration because of prepayments of
other debt obligations securing this type of instrument, is computed by taking
into account the Prepayment Assumption.
The amount of original issue discount includable in income by a Note
Owner is the sum of the "daily portions" of the original issue discount for each
day during the taxable year on which the holder held the Note. The daily
portions of original issue discount are determined by allocating to each day in
any "accrual period" a pro rata portion of the excess, if any, of (A) the sum of
(1) the present value of all remaining payments to be made on the Note as of the
close of the "accrual period" and (2) the payments during the accrual period of
amounts included in the stated redemption price of the Note over (B) the
"adjusted issue price" of the Note at the beginning of the accrual period.
Generally, the "accrual period" for the notes corresponds to the intervals at
which amounts are paid or compounded with respect to the Note, beginning with
their date of issuance and ending with the maturity date. The "adjusted issue
price" of a Note at the beginning of any accrual period is the sum of the issue
price and accrued original issue discount for each prior accrual period reduced
by the amount of payments other than payments of qualified stated interest made
during each prior accrual period. The Code requires the present value of the
remaining payments to be determined on the bases of
o the original yield to maturity, determined on the basis of
compounding at the close of each accrual period and properly
adjusted for the length of the accrual period,
o events, including actual prepayments, which have occurred before
the close of the accrual period and
o the assumption that the remaining payments will be made in
accordance with the original Prepayment Assumption.
Although original issue discount, if any, will be reported to Note Owners based
on the Prepayment Assumption, no representation is made to Note Owners that the
notes will be prepaid at that rate or at any other rate.
In general, a subsequent purchaser of a Note will also be required to
include in that purchaser's ordinary gross income for federal income tax
purposes the original issue discount, if any, accruing with respect to the Note,
unless the price paid equals or exceeds the Note's stated redemption price at
maturity. If the price paid exceeds the Note's "adjusted issue price" (as
described above), but does not equal or exceed the stated redemption price at
maturity, the amount of original issue discount to be accrued will be reduced in
accordance with a formula set forth in Section 1272(a)(7)(B) of the Code. If the
price paid is less than the Note's adjusted issue price, the purchaser will be
required to include in income any original issue discount on the Note and, to
the extent the price paid is less than the adjusted issue price, the Note will
be treated as having been purchased with "market discount". See "--Market
Discount", below.
The company believes that the owner of a Note determined to be issued
with original issue discount will be required to include the original issue
discount in ordinary gross income for federal income tax purposes computed in
the manner described above. However, the OID Regulations either do not address
or are subject to varying interpretations with respect to several issues
concerning the computation of original issue discount for obligations such as
the notes.
If a variable rate Note is deemed to have been issued with original
issue discount, as described above, the amount of original issue discount
accrues on a daily basis under a constant yield method that takes into account
the compounding of interest; provided, however, that the interest associated
with a variable rate Note generally is assumed to remain constant throughout the
term of the Note at a rate that, in the case of a qualified floating rate or
qualified inverse floating rate, equals the value of the qualified floating rate
or qualified inverse floating rate as of the issue date of the Note, or, in the
case of an objective rate other than a qualified floating rate, at a fixed rate
that reflects the yield that is reasonably expected for the Note. A holder of a
variable rate Note would then recognize original issue discount during each
accrual period which is calculated based upon the Note's assumed yield to
maturity. If the interest actually accrued or paid during an accrual period
exceeds (or is less than) the constant interest assumed to be accrued or paid
during the accrual period under the foregoing rules, qualified stated interest
or original issue discount allocable to an accrual period is increased (or
decreased) under rules set forth in the OID Regulations.
The OID Regulations either do not address or are subject to varying
interpretations with respect to several issues concerning the computation of
original issue discount on the notes, including variable rate notes. Additional
information regarding the manner of reporting original issue discount to the
Service and to holders of variable rate notes will be set forth in the
prospectus supplement relating to the issuance of the notes.
MARKET DISCOUNT. notes, whether or not issued with original issue
discount, will be subject to the market discount rules of the Code. A purchaser
of a Note who purchases the Note at a price that is less than the Note's "stated
redemption price at maturity" or, in the case of a Note issued with original
issue discount, at a price that is less than the Note's "adjusted issue price"
(as these terms are described above under "--Original Issue Discount") will be
required to recognize accrued market discount as ordinary income as payments of
principal are received on the Note or upon the sale or exchange of the Note. In
general, the holder of a Note may elect to treat market discount as accruing
either (1) under a constant yield method that is similar to the method for the
accrual of original issue discount or (2) in proportion to accruals of original
issue discount, or, if there is no original issue discount, in proportion to
accruals of stated interest, in each case computed taking into account the
Prepayment Assumption. The amount of accrued market discount for purposes of
determining the amount of ordinary income to be recognized with respect to
subsequent payments on this type of Note is to be reduced by the amount
previously treated as ordinary income.
The Code provides that the market discount in respect of a Note will
be considered to be zero if the amount allocable to the Note is less than a
specified DE MINIMIS amount of 0.25% of the Note's stated redemption price at
maturity multiplied its weighted average remaining life as computed for tax
purposes. If market discount is treated as DE MINIMIS under this rule, the de
minimis market discount would be allocated among the scheduled payments included
in the stated redemption price at maturity of the Note, and the portion of the
discount allocable to each payment would be reported as income when the payment
is made.
The Code grants authority to the Treasury Department to issue
regulations providing for the computation of accrued market discount on debt
instruments such as the notes. Until the time regulations are issued, rules
described in the legislative history for these provisions of the Code will
apply. Note Owners who acquire a Note at a market discount should consult their
tax advisors concerning various methods which are available for accruing that
market discount.
In general, the Code requires a holder of a Note having market
discount to defer a portion of the interest deductions attributable to any
indebtedness incurred or continued to purchase or carry the Note. Alternatively,
a holder of a Note may elect to include market discount in gross income as it
accrues and, if the holder makes this election, the holder will be exempt from
this rule. The adjusted basis of a Note subject to the election will be
increased to reflect market discount included in gross income, thus reducing any
gain or increasing any loss on a sale or other taxable disposition.
AMORTIZABLE PREMIUM. A holder of a Note who holds the Note as a
capital asset and who purchased the Note at a price greater than its stated
redemption price at maturity will be considered to have purchased the Note at a
premium. In general, the Note Owner may elect under Code Section 171 to deduct
the amortizable bond premium as it accrues under a constant yield method. A Note
Owner's tax basis in the Note will be reduced by the amount of the amortizable
bond premium deducted. In addition, it appears that the same methods which apply
to the accrual of market discount on obligations providing for principal
payments prior to maturity are intended to apply in computing the amortizable
bond premium deduction with respect to a Note. Although there are Treasury
regulations dealing with amortizable bond premiums, they specifically do not
apply to prepayable debt instruments subject to Section 1272(a)(6), such as the
notes. However, by analogy to the Treasury regulations, any premium in excess of
interest income may be deductible to the extent of prior accruals of interest.
Note Owners who pay a premium for a Note should consult their tax advisors
concerning elections and rules for determining the method for amortizing bond
premium.
ELECTION TO TREAT ALL INTEREST AS ORIGINAL ISSUE DISCOUNT. The OID
Regulations permit an election to accrue all interest, discount, including de
minimus market or original issue discount, reduced by any premium, in income as
interest, based on a constant yield method. If this election were to be made
with respect to a Note, the Note Owner would be deemed to have made an election
to include in income currently market discount with respect to all other debt
instruments having market discount that the Note Owner acquires during the year
of the election or after the year of election. See "--Market Discount" above.
Similarly, a Note Owner that makes this election for a Note that is acquired as
a premium will be deemed to have made an election to amortize bond premium with
respect to all debt instruments having amortizable bond premium that the Note
Owner owns at the beginning of the first taxable year to which the election
applies or acquires afterward. See "--Amortizable Premium" above. The election
to accrue interest, discount and premium on a constant yield method with respect
to a Note is irrevocable.
GAIN OR LOSS ON DISPOSITION. If a Note is sold, the selling Note Owner
will recognize gain or loss equal to the difference between the amount realized
from the sale and the selling Note Owner's adjusted basis in the Note. The
adjusted basis generally will equal the cost of the Note to the seller,
increased by any original issue discount and market discount on the Note
included in the seller's income and reduced, but not below zero, by any payments
on the Note other than qualified stated interest and any amortizable premium.
Except as discussed above with respect to market discount, any gain or loss
recognized upon a sale, exchange, retirement, or other disposition of a Note
will be capital gain or loss if the Note is held as a capital asset and as
long-term capital gain or loss if the Note Owner's holding period exceeded one
year. Special character rules apply to debt instruments characterized as
contingent debt instruments under the 1996 Contingent Debt Regulations. In
general under those rules gain is treated as ordinary, and loss is treated as
ordinary to the extent of prior ordinary income inclusion.
SHORT-TERM NOTES. In the case of a Note with a maturity of one year or
less from its issue date (a "Short-Term Note"), no interest is treated as
qualified stated interest, and therefore all interest is included in original
issue discount. Note Owners that report income for federal income tax purposes
on an accrual method and some other Note Owners, including banks and dealers in
securities, are required to include original issue discount in income on
Short-Term notes on a straight-line basis, unless an election is made to accrue
the original issue discount according to a constant yield method based on daily
compounding.
Any other Note Owner of a Short Term Note is not required to accrue
original issue discount for federal income tax purposes, unless it elects to do
so. In the case of a Note Owner that is not required, and does not elect, to
include original issue discount in income currently, any gain realized on the
sale, exchange or retirement of a Short-Term Note is ordinary income to the
extent of the original issue discount accrued on a straight-line basis, or, if
elected, according to a constant yield method based on daily compounding,
through the date of sale, exchange or retirement. In addition, Note Owners that
are not required, and do not elect, to include original issue discount in income
currently are required to defer deductions for any interest paid on indebtedness
incurred or continued to purchase or carry a Short-Term Note in an amount not
exceeding the deferred interest income with respect to the Short-Term Note,
which includes both the accrued original issue discount and accrued interest
that are payable but that have not been included in gross income, until the
deferred interest income is realized. A Note Owner may elect to apply the
foregoing rules, except for the rule characterizing gain on sale, exchange or
retirement as ordinary, with respect to "acquisition discount" rather than
original issue discount. Acquisition discount is the excess of the stated
redemption price at maturity of the Short-Term Note over the Note Owner's basis
in the Short-Term Note. This election applies to all obligations acquired by the
taxpayer on or after the first day of the first taxable year to which the
election applies, unless revoked with the consent of the IRS. A Note Owner's tax
basis in a Short-Term Note is increased by the amount included in the Owner's
income on the Note.
TAXATION OF CERTAIN FOREIGN NOTE OWNERS. As used in this prospectus,
the term "Non-United States Person" means any person other than a "United States
Person". A "United States Person" is an individual who is a citizen or resident
of the United States, a corporation, partnership or other entity treated as such
created or organized in or under the laws of the United States or any political
subdivision of the United States, an estate the income of which is subject to
United States federal income taxation regardless of its source and any trust
with respect to which (1) a court within the United States is able to exercise
primary supervision over the administration of the trust and (2) one or more
United States persons have the authority to control all substantial decisions of
the trust. A "Non-United States Holder" means a Non-United States Person who is
a Note Owner.
On October 6, 1997, Treasury Regulations (the "1997 Withholding
Regulations") were issued which affect the United States taxation of Non-United
States Holders. The 1997 Withholding Regulations are generally effective for
payments after December 31, 1999, regardless of the issue date of the Note with
respect to which the payments are made, subject to particular transition rules.
The discussion under this heading and under "--Backup Withholding and
Information Reporting," below, is not intended to include a complete discussion
of the provisions of the 1997 Withholding Regulations, and prospective investors
are urged to consult their tax advisors with respect to the effect of the 1997
Withholding Regulation.
In general, Non-United States Holders will not be subject to United
States federal withholding tax with respect to payments of principal and
interest on notes, provided that specific conditions are met. Under United
States federal income tax law now in effect, and subject to the discussion of
backup withholding in the following section, payments of principal and interest,
including original issue discount, with respect to a Note to any Non-United
States Holder will not be subject to United States federal withholding tax,
provided, in the case of interest, including original issue discount, that
o the Holder does not actually or constructively own 10% or more of
the equity of the Trust,
o the Holder is not for federal income tax purposes a controlled
foreign corporation related, directly or indirectly, to the Trust
through equity ownership,
o the Holder is not a bank receiving interest described in Section
881(c)(3)(A) of the Code and
o either (A) the Note Owner certifies, under penalties of perjury,
to the Trust or paying agent, as the case may be, that the Holder
is a Non-United States Holder and provides the Holder's name and
address, or (B) a securities clearing organization, bank or other
financial institution that holds customers' securities in the
ordinary course of its trade or business (a "financial
institution") and holds the Note, certifies, under penalties of
perjury, to the Trust or paying agent, as the case may be, that
the Certificate has been received from the beneficial owner by it
or by a financial institution between it and the beneficial owner
and furnishes the payor with a copy of the Certificate.
A certificate described in this paragraph is effective only with respect to
payments of interest, including original issue discount, made by the certifying
Non-United States Holder after the issuance of the certificate in the calendar
year of its issuance and the two immediately succeeding calendar years. The
foregoing certification may be provided by the beneficial owner of a Note on IRS
Form W-8.
The 1997 Withholding Regulations provide optional documentation
procedures designed to simplify compliance by withholding agents. The 1997
Withholding Regulations add "intermediary certification" options for some
qualifying withholding agents. Under one option, a withholding agent will be
allowed to rely on an IRS Form W-8 furnished by a financial institution or other
intermediary on behalf of one or more beneficial owners, or other
intermediaries, without having to obtain the beneficial owner certificate
described in the preceding paragraph, provided that the financial institution or
intermediary has entered into a withholding agreement with the IRS and is thus a
"qualified intermediary". Under another option, an authorized foreign agent of a
United States withholding agent will be permitted to act on behalf of the United
States withholding agent, provided particular conditions are met.
The 1997 Withholding Regulations also provide specific presumptions
with respect to withholding for holders not providing the required
certifications to qualify for the withholding exemption described above. In
addition, the 1997 Withholding Regulations replace a number of current tax
certification forms (including IRS Form W-8, IRS Form 1001 and IRS Form 4224,
discussed below) with restated forms and standardize the period of time for
which withholding agents can rely on the certifications.
Notwithstanding the foregoing, interest described in Section 871(h)(4)
of the Code will be subject to United States withholding tax at a 30% rate, or
any lower rate as may be provided by an applicable treaty. In general, interest
described in Section 871(h)(4) of the Code includes, subject to exceptions, any
interest the amount of which is determined by reference to receipts, sales or
other cash flow of the issuer or a related person, any income or profits of the
issuer or a related person, any change in the value of any property of the
issuer or a related person or any dividends, partnership distributions or
similar payments made by the issuer or a related person. Interest described in
Section 871(h)(4) of the Code may include other types of contingent interest
identified by the IRS in future Treasury Regulations. If the Trust issues notes
the interest on which the Trust believes is described in Section 871(h)(4) of
the Code, the United States withholding tax consequences of any of these notes
will be described in the applicable prospectus supplement.
If a Non-United States Holder is engaged in a trade or business in the
United States and interest, including original issue discount, on the Note is
effectively connected with the conduct of that trade or business, the Non-United
States Holder, although exempt from the withholding tax discussed in the
preceding paragraphs, will be subject to United States federal income tax on the
interest, including original issue discount, in the same manner as if it were a
United States person. In lieu of the certificate described above, the Holder
will be required to provide a properly executed IRS Form 4224 annually in order
to claim an exemption from withholding tax. In addition, if the Holder is a
foreign corporation, it may be subject to a branch profits tax equal to 30%, or
any lower rate as may be specified by an applicable treaty, of its effectively
connected earnings and profits for the taxable year, subject to adjustments. For
this purpose, interest, including original issue discount, on a Note will be
included in the earnings and profits of the Holder if the interest, including
original issue discount, is effectively connected with the conduct by the Holder
of a trade or business in the United States.
Generally, any gain or income, other than that attributable to accrued
interest, market discount or original issue discount in some circumstances,
realized upon the sale, exchange, retirement or other disposition of a Note will
not be subject to United States federal income tax unless (1) the gain or income
is effectively connected with a trade or business in the United States of the
Non-United States Holder or (2) in the case of a Non-United States Holder who is
a nonresident alien individual, the Non-United States Holder is present in the
United States for 183 days or more in the taxable year of the sale, exchange,
retirement or other disposition and the individual has a "tax home" (as defined
in Section 911(d)(3) of the Code) in the United States.
BACKUP WITHHOLDING AND INFORMATION REPORTING. Under current United
States federal income tax law, information reporting requirements apply to
interest, including original issue discount, and principal payments made to, and
to the proceeds of sales before maturity by, specific non-corporate Note Owners
that are United States Persons.
In addition, a 31% backup withholding tax will apply if a
non-corporate Note Owner
o fails to furnish its Taxpayer Identification Number ("TIN"),
which, for an individual, would be his or her Social Security
Number, to the payor in the manner required,
o furnishes an incorrect TIN and the payor is so notified by the
IRS,
o is notified by the IRS that it has failed properly to report
payments of interest and dividends or
o in some circumstances, fails to certify, under penalties of
perjury, that it has not been notified by the IRS that it is
subject to backup withholding for failure properly to report
interest and dividend payments.
Backup withholding will not apply with respect to payments made to particular
exempt recipients, such as corporations, within the meaning of Section 7701(a)
of the Code, and tax-exempt organizations.
In the case of a Non-United States Holder, under Treasury Regulations,
backup withholding and information reporting will not apply to payments of
principal and interest made by the Trust or any paying agent of the Trust on a
Note with respect to which the holder has provided the required certification
under penalties of perjury that it is a Non-United States Holder or has
otherwise established an exemption, provided that (1) the Trust or paying agent,
as the case may be, does not have actual knowledge that the payee is a United
States person and (2) other conditions are satisfied.
Subject to the discussion below, payments to or through the United
States office of a broker will be subject to backup withholding and information
reporting unless the holder certifies under penalties of perjury as to its
status as a Non-United States Holder and other qualifications, and no agent of
the broker who is responsible for receiving or reviewing the statement has
actual knowledge that it is incorrect, and provides his or her name and address
or the holder otherwise establishes an exemption.
In general, if principal or interest payments on a Note are collected
outside the United States by a foreign office of a custodian, nominee or other
agent acting on behalf of a Note Owner, the custodian, nominee or other agent
will not be required to apply backup withholding to payments made to the owner
and will not be subject to information reporting. However, if the custodian,
nominee or other agent is a United States Person for United States federal
income tax purposes, a controlled foreign corporation for United States tax
purposes, or a foreign person 50% or more of whose gross income is effectively
connected with its conduct of a United States trade or business for a specified
three-year period, the custodian, nominee or other agent may be subject to
particular information reporting, but not backup withholding, requirements with
respect to the payment unless the custodian, nominee or other agent has in its
records documentary evidence that the Note Owner is not a United States person
and specific conditions are met or the Note Owner otherwise establishes an
exemption.
Under Treasury Regulations, payments on the sale, exchange or
retirement of a Note effected by or through a foreign office of a broker will
not be subject to backup withholding. However, if the broker is a United States
person, a controlled foreign corporation for United States tax purposes, or a
foreign person 50% or more of whose gross income is effectively connected with
its conduct of a United States trade or business for a specified three-year
period, information reporting, but not backup withholding, will be required
unless the broker has in its records documentary evidence that the Note Owner is
not a United States person and other conditions are met or the Note Owner
otherwise establishes an exemption.
The 1997 Withholding Regulations alter the forgoing rules in some
respects. In particular, the 1997 Withholding Regulations would provide specific
presumptions under which Non-United States Holders may be subject to backup
withholding in the absence of required certifications.
Backup withholding tax is not an additional tax. Rather, any amounts
withheld from a payment to a Note Owner under the backup withholding rules will
be allowed as a refund or a credit against the owner's United States federal
income tax, provided that the required information is furnished to the IRS.
Note Owners should consult their tax advisors regarding the
application of information reporting and backup withholding to their particular
situations, the availability of an exemption from reporting and backup
withholding, and the procedure for obtaining an exemption, if available.
TAX CONSEQUENCES TO CERTIFICATES OWNERS.
TREATMENT OF THE TRUST AS A PARTNERSHIP. The Trust will agree, and the
related Certificate Owners will agree by their purchase of certificates, if
there is more than one Certificate Owner, to treat the Trust as a partnership
for purposes of federal and state income tax, franchise tax and any other tax
measured in whole or in part by income, with the assets of the partnership being
the assets held by the Trust, the partners of the partnership being the
Certificate Owners, including, to the extent relevant, the seller in its
capacity as recipient of distributions from any Reserve Fund, and the notes
being debt of the partnership, and if there is one Certificate Owner, to treat
the Certificate Owner as the owner of the assets of the Trust and to treat the
Trust as a disregarded entity. However, the proper characterization of the
arrangement involving the Trust, the certificates, the notes, the seller, the
company and the servicer is not certain because there is no authority on
transactions closely comparable to that contemplated in this prospectus. A
variety of alternative characterizations are possible. For example, to the
extent the certificates have particular features characteristic of debt, the
certificates might be considered debt of the seller, the company or the Trust.
As long as a characterization did not result in the Trust being subject to tax
as a corporation, any characterization would not result in materially adverse
tax consequences to Certificate Owners as compared to the consequences from
treatment of the certificates as equity in a partnership, described below. On
December 17, 1996, final Treasury Regulations (the "Check-the-Box Regulations")
were issued which generally permit non-corporate entities, such as the Trust, to
elect whether to be taxed as corporations or partnerships. Under the
Check-the-Box Regulations, the Trust will be classified as a partnership unless
it elects to be classified as an association taxable as a corporation. Except as
expressly provided in the applicable prospectus supplement, the Trust will not
elect to be classified as an association taxable as a corporation. However, the
Check-the-Box Regulations would have no effect on whether a partnership should
be classified as a publicly traded partnership taxable as a corporation.
The following discussion assumes that the certificates represent
equity interests in a partnership, that all payments on the certificates are
denominated in United States dollars, none of the certificates represents
Stripped Certificates and that a series of securities includes a single class of
certificates. If these conditions are not satisfied with respect to any given
series of certificates, additional tax considerations with respect to the
certificates will be disclosed in the related prospectus supplement.
PARTNERSHIP TAXATION. As a partnership, the Trust will not be subject
to federal income tax. Rather, each Certificate Owner will be required to take
into account separately the Owner's allocable share of income, gains, losses,
deductions and credits of the Trust, whether or not there is a corresponding
cash distribution. Thus, cash basis holders will in effect be required to report
income from the certificates on the accrual basis and Certificate Owners may
become liable for taxes on Trust income even if they have not received cash from
the Trust to pay the taxes. The Trust's income will consist primarily of
interest and finance charges earned on the related Primary Assets, including
appropriate adjustments for market discount, original issue discount and bond
premium, and any gain upon collection or disposition of the Primary Assets.
The Trust's deductions will consist primarily of interest accruing
with respect to the notes, servicing and other fees, and losses or deductions
upon collection or disposition of Primary Assets.
Any Collateral Certificates held by the owner trust will be subject to
the federal income tax treatment described in this prospectus depending on the
terms of the Collateral Certificates and their characterization (for example, as
indebtedness) for federal income tax purposes.
The tax items of a partnership are allocable to the partners in
accordance with the Code, Treasury regulations and the partnership agreement
(i.e., the Trust Agreement and related documents). The Trust Agreement will
provide, in general, that the Certificate Owners will be allocated taxable
income of the Trust for each month equal to the sum of:
o the interest or other income that accrues on the certificates in
accordance with their terms for the relevant month including, as
applicable, interest accruing at the related certificate
pass-through rate for that month and interest on amounts
previously due on the certificates but not yet distributed;
o any Trust income attributable to discount on the related Primary
Assets that corresponds to any excess of the principal amount of
the certificates over their initial issue price;
o any prepayment premium payable to the Certificate Owners for the
applicable month; and
o any other amounts of income payable to the Certificate Owners for
the applicable month.
The allocation will be reduced by any amortization by the Trust of premium on
Primary Assets that corresponds to any excess of the issue price of certificates
over their principal amount. Losses will generally be allocated in the manner in
which they are borne.
Based on the economic arrangement of the parties, the foregoing
approach for allocating Trust income should be permissible under applicable
Treasury regulations, although no assurance can be given that the IRS would not
require a greater amount of income to be allocated to Certificate Owners.
Moreover, even under the foregoing method of allocation, Certificate Owners may
be allocated income equal to the entire certificate pass-through rate plus the
other items described above, even though the Trust might not have sufficient
cash to make current cash distributions of the amount. In addition, because tax
allocations and tax reporting will be done on a uniform basis for all
Certificate Owners, but Certificate Owners may be purchasing certificates at
different times and at different prices, Certificate Owners may be required to
report on their tax returns taxable income that is greater or less than the
amount reported to them by the Trust.
All of the taxable income allocated to a Certificate Owner that is a
pension, profit sharing or employee benefit plan or other tax-exempt entity,
including an individual retirement account, will constitute "unrelated business
taxable income" generally taxable to the holder under the Code.
An individual taxpayer's share of expenses of the Trust, including
fees to the servicer, but not interest expense, would be miscellaneous itemized
deductions and thus deductible only to the extent expenses plus all other
Section 212 expenses exceed two percent of the individual's adjusted gross
income. An individual taxpayer will be allowed no deduction for his share of
expenses of the Trust, other than interest, in determining his liability for
alternative minimum tax. In addition, Section 68 of the Code provides that the
amount of itemized deductions, including those provided for in Section 212 of
the Code, otherwise allowable for the taxable year for an individual whose
adjusted gross income exceeds a threshold amount specified in the Code, $100,000
(or $50,000 in the case of a separate return by a married individual, adjusted
for changes in the cost of living subsequent to 1990) will be reduced by the
lesser of (1) 3% of the excess of adjusted gross income over the specified
threshold amount or (2) 80% of the amount of itemized deductions otherwise
allowable for the applicable taxable year. Accordingly, deductions might be
disallowed to the individual in whole or in part and might result in the
Certificate Owner being taxed on an amount of income that exceeds the amount of
cash actually distributed to the holder over the life of the Trust. For taxable
years beginning after December 31, 1997 in the case of a partnership that has
100 or more partners and elects to be treated as an "electing large
partnership;" 70% of that partnership's miscellaneous itemized deductions will
be disallowed, although the remaining deductions will generally be allowed at
the partnership level and will not be subject to the 2% floor that would
otherwise be applicable to individual partners.
The Trust intends to make all tax calculations relating to income and
allocations to Certificate Owners on an aggregate basis to the extent relevant.
If the IRS were to require that the calculations be made separately for each
Primary Asset, the calculations may result in some timing and character
differences under some circumstances.
DISCOUNT AND PREMIUM. The purchase price paid by the Trust for the
related Primary Assets may be greater or less than the remaining principal
balance of the Primary Assets at the time of purchase. If so, the Primary Assets
will have been acquired at a premium or market discount, as the case may be. See
"Tax Consequences to Note Owners--Market Discount" and "--Amortizable Premium"
above. As indicated above, the Trust will make this calculation on an aggregate
basis, but it is possible that the IRS might require that it be recomputed on a
Primary Asset-by-Primary Asset basis.
If the Trust acquires the Primary Assets at a market discount or
premium, the Trust will elect to include any market discount in income currently
as it accrues over the life of the Primary Assets or to offset any premium
against interest income on the Primary Assets. As indicated above, a portion of
the market discount income or premium deduction may be allocated to Certificate
Owners.
SECTION 708 TERMINATION. Under Section 708 of the Code, the Trust will
be deemed to terminate for federal income tax purposes if 50% or more of the
capital and profits interests in the Trust are sold or exchanged within a
12-month period. If a termination occurs under Section 708 of the Code, the
Trust will be considered to contribute its assets to a new Trust, which would be
treated as a new partnership, in exchange for certificates in the new Trust. The
original Trust will then be deemed to distribute the certificates in the new
Trust to each of the Owners of certificates in the original Trust in liquidation
of the original Trust. The Trust will not comply with particular technical
requirements that might apply when a constructive termination occurs. As a
result, the Trust may be subject to some tax penalties and may incur additional
expenses if it is required to comply with those requirements. Furthermore, the
Trust might not be able to comply with these requirements due to lack of data.
DISPOSITION OF CERTIFICATES. Generally, capital gain or loss will be
recognized on a sale of certificates in an amount equal to the difference
between the amount realized and the seller's tax basis in the certificates sold.
Any gain or loss would be long-term capital gain or loss if the Certificate
Owner's holding period exceeded one year. A Certificate Owner's tax basis in a
Certificate will generally equal its cost, increased by its share of Trust
income allocable to the Certificate Owner and decreased by any distributions
received or losses allocated with respect to the Certificate. In addition, both
the tax basis in the certificates and the amount realized on a sale of a
Certificate would include the Certificate Owner's share, determined under
Treasury Regulations, of the notes and other liabilities of the Trust. A
Certificate Owner acquiring certificates at different prices will generally be
required to maintain a single aggregate adjusted tax basis in the certificates
and, upon a sale or other disposition of some of the certificates, allocate a
portion of the aggregate tax basis to the certificates sold, rather than
maintaining a separate tax basis in each Certificate for purposes of computing
gain or loss on a sale of that Certificate.
If a Certificate Owner is required to recognize an aggregate amount of
income (not including income attributable to disallowed itemized deductions
described above) over the life of the certificates that exceeds the aggregate
cash distributions with respect to the certificates, the excess will generally
give rise to a capital loss upon the retirement of the certificates.
ALLOCATIONS BETWEEN TRANSFERORS AND TRANSFEREES. In general, the
Trust's taxable income and losses will be determined monthly and the tax items
for a particular calendar month will be apportioned among the Certificate Owners
in proportion to the principal amount of certificates owned by them as of the
close of the last day of the applicable month. As a result, a Certificate Owner
purchasing certificates may be allocated tax items, which will affect the
purchaser's tax liability and tax basis, attributable to periods before the
actual transaction.
The use of a monthly convention may not be permitted by existing
Treasury Regulations. If a monthly convention is not allowed, or only applies to
transfers of less than all of the partner's interest, taxable income or losses
of the Trust might be reallocated among the Certificate Owners. The seller will
be authorized to revise the Trust's method of allocation between transferors and
transferees to conform to a method permitted by future laws, regulations or
other IRS guidance.
SECTION 754 ELECTION. In the event that a Certificate Owner sells its
certificates at a profit (or loss), the purchasing Certificate Owner will have a
higher (or lower) basis in the certificates than the selling Certificate Owner
had. The tax basis of the Trust's assets will not be adjusted to reflect that
higher (or lower) basis unless the Trust were to file an election under Section
754 of the Code. In order to avoid the administrative complexities that would be
involved in keeping accurate accounting records, as well as potentially onerous
information reporting requirements, the Trust will not make an election under
Section 754 of the Code. As a result, Certificate Owners might be allocated a
greater or lesser amount of Trust income than would be appropriate based on
their own purchase price for certificates.
ADMINISTRATIVE MATTERS. The trustee is required to keep complete and
accurate books of the Trust. The trustee will file a partnership information
return (IRS Form 1065) with the IRS for each taxable year of the Trust and will
report each Certificate Owner's allocable share of items of Trust income and
expense to holders and the IRS on Schedule K-1. The Trust will provide the
Schedule K-1 information to nominees that fail to provide the Trust with the
information statement described below and the nominees will be required to
forward this information to the beneficial owners of the certificates.
Generally, holders must timely file tax returns that are consistent with the
information return filed by the Trust or be subject to penalties unless the
holder notifies the IRS of all the inconsistencies.
Under Section 6031 of the Code, any person that holds certificates as
a nominee at any time during a calendar year is required to furnish the Trust
with a statement containing specific information on the nominee, the beneficial
owners and the certificates so held. The information includes (1) the name,
address and taxpayer identification number of the nominee and (2) as to each
beneficial owner
o the name, address and identification number of the person,
o whether the person is a United States person, a tax-exempt entity
or a foreign government, an international organization, or any
wholly owned agency or instrumentality of either of the
foregoing, and
o particular information on certificates that were held, bought or
sold on behalf of the person throughout the year.
In addition, brokers and financial institutions that hold certificates through a
nominee are required to furnish directly to the Trust information as to
themselves and their ownership of certificates. A clearing agency registered
under Section 17A of the Exchange Act is not required to furnish any information
statement to the Trust. The information referred to above for any calendar year
must be furnished to the Trust on or before the following January 31. Nominees,
brokers and financial institutions that fail to provide the Trust with the
information described above may be subject to penalties.
The company will be designated as the tax matters partner for each
Trust in the related Trust Agreement and, as the tax matters partner, will be
responsible for representing the Certificate Owners in some specific disputes
with the IRS. The Code provides for administrative examination of a partnership
as if the partnership were a separate and distinct taxpayer. Generally, the
statute of limitations for partnership items does not expire before the later of
three years after the date on which the partnership information return is filed
or the last day for filing the return for the applicable year, determined
without regard to extensions. Any adverse determination following an audit of
the return of the Trust by the appropriate taxing authorities could result in an
adjustment of the returns of the Certificate Owners, and, under some
circumstances, a Certificate Owner may be precluded from separately litigating a
proposed adjustment to the items of the Trust. An adjustment could also result
in an audit of a Certificate Owner's returns and adjustments of items not
related to the income and losses of the Trust.
The Taxpayer Relief Act of 1997 created a special audit system for
qualifying large partnerships that have elected to apply a simplified
flow-through reporting system under new sections 771 through 777. Unless
otherwise specified in the applicable prospectus supplement, a Trust will not
elect to apply the simplified flow-through reporting system.
TAXATION OF CERTAIN FOREIGN CERTIFICATE OWNERS. As used in this
prospectus, the term "Non-United States Owner" means a Certificate Owner that is
not a United States person, as defined under "owner trusts--Tax Consequences to
Note Owners--Backup Withholding and Information Reporting," above.
It is not clear whether the Trust would be considered to be engaged in
a trade or business in the United States for purposes of federal withholding
taxes with respect to Non-United States Owners because there is no clear
authority dealing with that issue under facts substantially similar to those
described in this prospectus. Although it is not expected that the Trust would
be engaged in a trade or business in the United States for these purposes, the
Trust will withhold as if it were so engaged in order to protect the Trust from
possible adverse consequences of a failure to withhold. The Trust expects to
withhold on the portion of its taxable income that is allocable to Non-United
States Owners pursuant to Section 1446 of the Code, as if the income were
effectively connected to a U.S. trade or business, at a rate of 35% for
Non-United States Owners that are taxable as corporations and 39.6% for all
other Owners.
Subsequent adoption of Treasury regulations or the issuance of other
administrative pronouncements may require the Trust to change its withholding
procedures. In determining a Certificate Owner's withholding status, the Trust
may rely on IRS Form W-8, IRS Form W-9 or the Certificate Owner's certification
of nonforeign status signed under penalties of perjury.
Each Non-United States Owner might be required to file a U.S.
individual or corporate income tax return on its share of the Trust's income
including, in the case of a corporation, a return in respect of the branch
profits tax. Each Non-United States Owner must obtain a taxpayer identification
number from the IRS and submit that number to the Trust in order to assure
appropriate crediting of the taxes withheld. Assuming the Trust is not engaged
in a U.S. trade or business, a Non-United States Owner would be entitled to a
refund with respect to all or a portion of taxes withheld by the Trust if, in
particular, the Owner's allocable share of interest from the Trust constituted
"portfolio interest" under the Code.
The interest, however, may not constitute "portfolio interest" if,
among other reasons, the underlying obligation is not in registered form or if
the interest is determined without regard to the income of the Trust, in the
later case, the interest being properly characterized as a guaranteed payment
under Section 707(c) of the Code. If this were the case, Non-United States
Owners would be subject to a United States federal income and withholding tax at
a rate of 30 percent on the Trust's gross income, without any deductions or
other allowances for costs and expenses incurred in producing the income, unless
reduced or eliminated pursuant to an applicable treaty. In this case, a
Non-United States Owner would only be entitled to a refund for that portion of
the taxes, if any, in excess of the taxes that should have been withheld with
respect to the interest.
BACKUP WITHHOLDING. Distributions made on the certificates and
proceeds from the sale of the certificates will be subject to a "backup"
withholding tax of 31% if, in general, the Certificate Owner fails to comply
with particular identification procedures, unless the holder is an exempt
recipient under applicable provisions of the Code.
GRANTOR TRUSTS
TAX CHARACTERIZATION OF THE GRANTOR TRUSTS.
CHARACTERIZATION. In the case of a grantor trust, Federal Tax Counsel
will deliver its opinion that the Trust will not be classified as an association
taxable as a corporation and that the Trust will be classified as a grantor
trust under subpart E, Part I of subchapter J of the Code. In this case,
beneficial owners of certificates (referred to in this prospectus as "grantor
trust certificateholders") will be treated for federal income tax purposes as
owners of a portion of the Trust's assets as described below. The certificates
issued by a Trust that is treated as a grantor trust are referred to in this
prospectus as "grantor trust certificates".
TAXATION OF GRANTOR TRUST CERTIFICATEHOLDERS. Subject to the
discussion below under "Stripped Certificates" and "Subordinated certificates,"
each grantor trust certificateholder will be treated as the owner of a pro rata
undivided interest in the Primary Assets and other assets of the Trust.
Accordingly, and subject to the discussion below of the recharacterization of
the Servicing Fee, each grantor trust certificateholder must include in income
its pro rata share of the interest and other income from the Primary Assets,
including any interest, original issue discount, market discount, prepayment
fees, assumption fees, and late payment charges with respect to the assets, and,
subject to limitations discussed below, may deduct its pro rata share of the
fees and other deductible expenses paid by the Trust, at the same time and to
the same extent as these items would be included or deducted by the grantor
trust certificateholder if the grantor trust certificateholder held directly a
pro rata interest in the assets of the Trust and received and paid directly the
amounts received and paid by the Trust. Any amounts received by a grantor trust
certificateholder in lieu of amounts due with respect to any Primary Asset
because of a default or delinquency in payment will be treated for federal
income tax purposes as having the same character as the payments they replace.
Under Sections 162 and 212 each grantor trust certificateholder will
be entitled to deduct its pro rata share of servicing fees, prepayment fees,
assumption fees, any loss recognized upon an assumption and late payment charges
retained by the servicer, provided that these amounts are reasonable
compensation for services rendered to the Trust. Grantor trust
certificateholders that are individuals, estates or trusts will be entitled to
deduct their share of expenses only to the extent these expenses plus all other
miscellaneous itemized deductions exceed two percent of the grantor trust
certificateholder's adjusted gross income, and will be allowed no deduction for
these expenses in determining their liabilities for alternative minimum tax. In
addition, Section 68 of the Code provides that the amount of itemized
deductions, including those provided for in Section 212 of the Code, otherwise
allowable for the taxable year for an individual whose adjusted gross income
exceeds a threshold amount specified in the Code, $100,000 (or $50,000 in the
case of a separate return by a married individual), adjusted for changes in the
cost of living subsequent to 1990, will be reduced by the lesser of (1) 3% of
the excess of adjusted gross income over the specified threshold amount or (2)
80% of the amount of itemized deductions otherwise allowable for the applicable
taxable year. For taxable years beginning after December 31, 1997, in the case
of a partnership that has 100 or more partners and elects to be treated as an
"electing large partnership," 70% of the partnership's miscellaneous itemized
deductions will be disallowed, although the remaining deductions will generally
be allowed at the partnership level and will not be subject to the 2% floor that
would otherwise be applicable to individual partners.
The servicing compensation to be received by the servicer may be
questioned by the IRS as exceeding a reasonable fee for the services being
performed in exchange for the servicing compensation, and a portion of the
servicing compensation could be recharacterized as an ownership interest
retained by the servicer or other party in a portion of the interest payments to
be made pursuant to the Contracts. In this event, a Certificate might be treated
as a Stripped Certificate subject to the stripped bond rules of Section 1286 of
the Code and the original issue discount provisions rather than to the market
discount and premium rules. See the discussion below under "--Stripped
Certificates". Except as discussed below under "--Stripped Certificates" or
"--Subordinated certificates," this discussion assumes that the servicing fees
paid to the servicer do not exceed reasonable servicing compensation.
A purchaser of a grantor trust Certificate will be treated as
purchasing an interest in each Primary Asset in the Trust at a price determined
by allocating the purchase price paid for the Certificate among all Primary
Assets in proportion to their fair market values at the time of the purchase of
the Certificate. To the extent that the portion of the purchase price of a
grantor trust Certificate allocated to a Primary Asset is less than or greater
than the portion of the stated redemption price at maturity of the Primary
Asset, the interest in the Primary Asset will have been acquired at a discount
or premium. See "--Market Discount" and "--Premium," below.
The treatment of any discount on a Primary Asset will depend on
whether the discount represents original issue discount or market discount.
Except as indicated otherwise in the applicable prospectus supplement, it is not
expected that any Primary Asset will have original issue discount (except as
discussed below under "Stripped Certificates" or "Subordinated certificates").
For the rules governing original issue discount, see "owner trusts--Tax
Consequences to Note Owners--Original Issue Discount" above. However, in the
case of Primary Assets that constitute short-term Government Securities the
rules set out above dealing with short-term obligations (see "owner trusts--Tax
Consequences to Note Owners-- Short-Term notes" above) are applied with
reference to acquisition discount rather than original issue discount, if the
obligations constitute "short-term Government obligations" within the meaning of
Section 1271(a)(3)(B) of the Code.
The information provided to grantor trust certificateholders will not
include information necessary to compute the amount of discount or premium, if
any, at which an interest in each Primary Asset is acquired.
MARKET DISCOUNT. A grantor trust certificateholder that acquires an
undivided interest in Primary Assets may be subject to the market discount rules
of Sections 1276 through 1278 to the extent an undivided interest in a Primary
Asset is considered to have been purchased at a "market discount". For a
discussion of the market discount rules under the Code, see "owner trusts--Tax
Consequences to Note Owners--Market Discount" above.
PREMIUM. To the extent a grantor trust certificateholder is considered
to have purchased an undivided interest in a Primary Asset for an amount that is
greater than the stated redemption price at maturity of the interest, the
grantor trust certificateholder will be considered to have purchased the
interest in the Primary Asset with "amortizable bond premium" equal in amount to
the excess. For a discussion of the rules applicable to amortizable bond
premium, see "owner trusts--Tax Consequences to Note Owners--Amortizable
Premium" above.
STRIPPED CERTIFICATES. Some classes of certificates may be subject to
the stripped bond rules of Section 1286 of the Code and for purposes of this
discussion will be referred to as "Stripped Certificates." In general, a
Stripped Certificate will be subject to the stripped bond rules where there has
been a separation of ownership of the right to receive some or all of the
principal payments on a Primary Asset from ownership of the right to receive
some or all of the related interest payments. In general, where a separation has
occurred, under the stripped bond rules of Section 1286 of the Code the holder
of a right to receive a principal or interest payment on the bond is required to
accrue into income, on a constant yield basis under rules governing original
issue discount (see "owner trust--Tax Consequences to Note Owners--Original
Issue Discount"), the difference between the holder's initial purchase price for
the right to receive and the principal or interest payment to be received with
respect to that right.
Certificates will constitute Stripped Certificates and will be subject
to these rules under various circumstances, including the following:
o if any servicing compensation is deemed to exceed a reasonable
amount (see "Taxation of grantor trust certificateholders,"
above);
o if the company or any other party retains a retained yield with
respect to the Primary Assets held by the Trust;
o if two or more classes of certificates are issued representing
the right to non-pro rata percentages of the interest or
principal payments on the Contracts; or
o if certificates are issued which represent the right to
interest-only payments or principal-only payments.
The tax treatment of the Stripped Certificates with respect to the
application of the original issue discount provisions of the Code is currently
unclear. However, the trustee intends to treat each Stripped Certificate as a
single debt instrument issued on the day it is purchased for purposes of
calculating any original issue discount. Original issue discount with respect to
a Stripped Certificate must be included in ordinary gross income for federal
income tax purposes as it accrues in accordance with the constant yield method
that takes into account the compounding of interest and this accrual of income
may be in advance of the receipt of any cash attributable to that income. See
"owner trust--Tax Consequences to Note Owners--Original Issue Discount" above.
For purposes of applying the original issue discount provisions of the Code, the
issue price of a Stripped Certificate will be the purchase price paid by each
holder of the Stripped Certificate and the stated redemption price at maturity
may include the aggregate amount of all payments to be made with respect to the
Stripped Certificate whether or not denominated as interest. The amount of
original issue discount with respect to a Stripped Certificate may be treated as
zero under the original issue discount DE MINIMIS rules described above.
SUBORDINATED CERTIFICATES. In the event the Trust issues two classes
of grantor trust certificates that are identical except that one class is a
subordinate class, with a relatively high Certificate Pass Through Rate, and the
other is a senior class, with a relatively low Certificate Pass Through Rate
(referred to in this prospectus as the "Subordinate Certificates" and "Senior
Certificates", respectively), the grantor trust certificateholders will be
deemed to have acquired the following assets: (1) the principal portion of each
Primary Asset plus a portion of the interest due on each Primary Asset (the
"Trust Stripped Bond"), and (2) a portion of the interest due on each Primary
Asset equal to the difference between the Certificate Pass Through Rate on the
Subordinate Certificates and the Certificate Pass Through Rate on the Senior
Certificates, if any, which difference is then multiplied by the Subordinate
Class Percentage (the "Trust Stripped Coupon"). The "Subordinate Class
Percentage" equals the initial aggregate principal amount of the Subordinate
Certificates divided by the sum of the initial aggregate principal amount of the
Subordinate Certificates and the Senior Certificates. The "Senior Class
Percentage" equals the initial aggregate principal amount of the Senior
Certificates divided by the sum of the initial aggregate principal amount of the
Subordinate Certificates and the Senior Certificates.
The Senior Certificateholders in the aggregate will own the Senior
Class Percentage of the Trust Stripped Bond and accordingly each Senior
Certificateholder will be treated as owning its pro rata share of each asset.
The Senior Certificateholders will not own any portion of the Trust Stripped
Coupon. The Subordinate Certificateholders in the aggregate own both the
Subordinate Class Percentage of the Trust Stripped Bond plus 100% of the Trust
Stripped Coupon, if any, and accordingly each Subordinate Certificateholder will
be treated as owning its pro rata share in both assets. The Trust Stripped Bond
will be treated as a "stripped bond" and the Trust Stripped Coupon will be
treated as "stripped coupons" within the meaning of Section 1286 of the Code.
Because the purchase price paid by each Subordinate Certificateholder will be
allocated between that certificateholder's interest in the Trust Stripped Bond
and the Trust Stripped Coupon based on the relative fair market value of each
asset on the date the Subordinate Certificate is purchased, the Trust Stripped
Bond may be issued with original issue discount.
Except to the extent modified below, the income of the Trust Stripped
Bond represented by a Certificate will be reported in the same manner as
described generally above for holders of certificates. The interest income on
the Subordinate Certificates at the Senior Certificate pass-through rate and the
portion of the Servicing Fee that does not constitute excess servicing will be
treated as qualified stated interest.
Income of the holder of the Trust Stripped Coupon will be reported by
treating the Trust Stripped Coupon as a single debt instrument with original
issue discount equal to the excess of the total amount payable with respect to
the Trust Stripped Coupon, based on the prepayment assumption used in pricing
the certificates, over the portion of the purchase price allocated to the Trust
Stripped Coupon. The sum of the daily portions of original issue discount on the
Trust Stripped Coupon for each day during a year in which the Subordinate
Certificateholder holds the Trust Stripped Coupon will be included in the
Subordinate Certificateholder's income.
If the Subordinate Certificateholders receive distribution of less
than their share of the Trust's receipts of principal or interest (the
"Shortfall Amount") because of the subordination of the Subordinate
Certificates, holders of Subordinate Certificates would probably be treated for
federal income tax purposes as if they had
o received as distributions their full share of receipts,
o paid over to the Senior Certificateholders an amount equal to the
Shortfall Amount and
o retained the right to reimbursement of the relevant amounts to
the extent these amounts are otherwise available as a result of
collections on the Primary Assets or amounts available from a
Reserve Account or other form of credit enhancement, if any.
Under this analysis,
o Subordinate Certificateholders would be required to accrue as
current income any interest income or original issue discount of
the Trust that was a component of the Shortfall Amount, even
though that amount was in fact paid to the Senior
Certificateholders,
o a loss would only be allowed to the Subordinate
Certificateholders when their right to receive reimbursement of
the Shortfall Amount became worthless (i.e., when it becomes
clear that amount will not be available from any source to
reimburse the loss) and
o reimbursement of the Shortfall Amount prior to a claim of
worthlessness would not be taxable income to Subordinate
Certificateholders because the amount was previously included in
income.
Those results should not significantly affect the inclusion of income for
Subordinate Certificateholders on the accrual method of accounting, but could
accelerate inclusion of income to Subordinate Certificateholders on the cash
method of accounting by, in effect, placing them on the accrual method.
Moreover, the character and timing of loss deductions are unclear. Subordinate
Certificateholders are strongly urged to consult their own tax advisors
regarding the appropriate timing, amount and character of any losses sustained
with respect to the Subordinate Certificates including any loss resulting from
the failure to recover previously accrued interest or discount income.
Election to Treat All Interest as Original Issue Discount. The OID
regulations permit a grantor trust certificateholder to elect to accrue all
interest, discount, including DE MINIMIS market or original issue discount,
reduced by any premium, in income as interest, based on a constant yield method.
If an election were to be made with respect to an interest in a Primary Asset
with market discount, the Certificate Owner would be deemed to have made an
election to include in income currently market discount with respect to all
other debt instruments having market discount that the grantor trust
certificateholder acquires during the year of the election or afterward. See
"--Market Discount" above. Similarly, a grantor trust certificateholder that
makes this election for an interest in a Primary Asset that is acquired at a
premium will be deemed to have made an election to amortize bond premium with
respect to all debt instruments having amortizable bond premium that the grantor
trust certificateholder owns at the beginning of the first taxable year to which
the election applies or acquires afterward. See "--Premium" above. The election
to accrue interest, discount and premium on a constant yield method with respect
to a grantor trust Certificate is irrevocable.
PREPAYMENTS. The Taxpayer Relief Act of 1997 (the "1997 Act") contains
a provision requiring original issue discount on any pool of debt instruments
the yield on which may be affected by reason of prepayments be calculated taking
into account the Prepayment Assumption and requiring the discount to be taken
into income on the basis of a constant yield to assumed maturity taking account
of actual prepayments. The legislative history to the 1986 Act states that
similar rules apply with respect to market discount and amortizable bond premium
on debt instruments.
SALE OR EXCHANGE OF A GRANTOR TRUST CERTIFICATE. Sale or exchange of a
grantor trust Certificate prior to its maturity will result in gain or loss
equal to the difference, if any, between the amount realized, exclusive of
amounts attributable to accrued and unpaid interest, which will be treated as
ordinary income, allocable to the Primary Asset and the owner's adjusted basis
in the grantor trust Certificate. The adjusted basis generally will equal the
seller's cost for the grantor trust Certificate, increased by the original issue
discount and any market discount included in the seller's gross income with
respect to the grantor trust Certificate, and reduced, but not below zero, by
any premium amortized by the seller and by principal payments on the grantor
trust Certificate previously received by the seller. The gain or loss will,
except as discussed below, be capital gain or loss to an owner for which the
Primary Assets represented by a grantor trust Certificate are "capital assets"
within the meaning of Section 1221, except that gain will be treated in whole or
in part as ordinary interest income to the extent of the seller's interest in
accrued market discount not previously taken into income on underlying Primary
Assets having a fixed maturity date of more than one year from the date of
origination. A capital gain or loss will be long-term or short-term depending on
whether or not the grantor trust Certificate has been owned for the long-term
capital gain holding period, currently more than one year.
Notwithstanding the foregoing, any gain realized on the sale or
exchange of a grantor trust Certificate will be ordinary income to the extent of
the seller's interest in accrued market discount on Primary Assets not
previously taken into income. See "--Market Discount," above.
NON-UNITED STATES GRANTOR TRUST CERTIFICATE OWNERS. Amounts paid to
Non-United States Owners of grantor trust certificates will be treated as
interest for purposes of United States withholding tax. The interest
attributable to the underlying Primary Assets will not be subject to the normal
30%, or any lower rate provided for by an applicable tax treaty, withholding tax
imposed on these amounts provided that (1) the Non-U.S. Certificate Owner does
not own, directly or indirectly, 10% or more of, and is not a controlled foreign
corporation, within the definition of Section 957, related to any of the issuers
of the Primary Assets and (2) the Certificate Owner fulfills specific
certification requirements. Under these requirements, the Certificate Owner must
certify, under penalty of perjury, that it is not a "United States person" and
must provide its name and address. "United States person" means a citizen or
resident of the United States, a corporation, partnership or other entity
created or organized in or under the laws of the United States or any political
subdivision of the United States, or an estate or trust the income of which is
includable in gross income for United States federal income tax purposes,
without regard to its source. If, however, interest or gain is effectively
connected to the conduct of a trade or business within the United States by the
Certificate Owner, the owner will be subject to United States federal income tax
on the interest or gain at graduated rates and, in the case of a corporation, to
a possible branch profits tax, and will not be subject to withholding tax
provided that the owner meets applicable documentation requirements. Potential
investors who are not United States persons should consult their own tax
advisors regarding the specific tax consequences of owning a Certificate.
On October 6, 1997, final Treasury Regulations (the "1997 Withholding
Regulations") were issued which affect the United States taxation of Non-United
States Owners of grantor trust certificates. The 1997 Withholding Regulations
are generally effective for payments after December 31, 1999, regardless of the
issue date of the Primary Assets with respect to which payments are made,
subject to particular transition rules. For further discussion, see "owner
trusts--Tax Consequences to Note Owners Taxation of Certain Foreign Note Owners"
above.
BACKUP WITHHOLDING. Distributions made on the grantor trust
certificates and proceeds from the sale of the grantor trust certificates will
be subject to a "backup" withholding tax of 31% if, in general, the grantor
trust certificateholder fails to comply with particular identification
procedures, unless the holder is an exempt recipient under applicable provisions
of the Code. See "owner trusts--Tax Consequences to Note Owners--Backup
Withholding and Information Reporting" above.
STATE AND LOCAL TAX CONSIDERATIONS
An investment in the securities may have state or local income,
franchise, personal property or other tax consequences. These consequences may
depend upon, among other things, the tax laws of the jurisdiction where the
Security Owners reside or are doing business, the characterization of the Trust
(e.g., as a trust, partnership or other entity) for state or local tax purposes,
whether the Trust is considered to be doing business in a particular
jurisdiction, and the classification of the securities as equity or debt or as
an undivided interest in the underlying Primary Assets under the laws of a
jurisdiction.
Generally, the tax treatment of the securities for federal income tax
purposes should apply for state and local tax purposes. Thus, if the
certificates or notes are treated as indebtedness for federal income tax
purposes, they should likewise be treated as indebtedness for state and local
tax purposes. In this case, Certificate Owners and Note Owners not otherwise
subject to state or local tax would not become subject to the tax solely because
of their ownership of the securities. However, except as described in the
following paragraph, a Security Owner already subject to tax in a state or
locality could be required to pay additional tax as a result of the holder's
ownership or disposition of securities.
Interest income, including original issue discount, earned on
obligations of the United States Treasury Department and of some government
sponsored enterprises generally is exempt from state and local income taxation.
Therefore, where a grantor trust holds Government Securities as part of the
Trust Property, interest income attributable to Government Securities earned on
the certificates may be exempt from state and local taxation, depending on the
form of the Government Security. However, some states or localities may take a
contrary position. Investors should consult with their own tax advisors
concerning the exemptions from state and local income taxes.
If some or all of the securities are treated as equity interest in a
partnership, not treated as a publicly traded partnership taxable as a
corporation, for federal income tax purposes, the securities generally should be
treated as partnership interests for state and local income tax purposes. In
this case, the partnership should be viewed as a passive holder of investments
and, as a result, should not be subject to state or local taxation and the
Security Owners should not be subject to taxation on income received through the
partnership unless they are already subject to tax in the jurisdiction. However,
if the state or local jurisdiction viewed the partnership as doing business in
the jurisdiction, Security Owners would normally be subject to taxation in that
jurisdiction on their allocable share of the partnership's income even though
they otherwise had no contact with the jurisdiction. Furthermore, depending on
the specific allocation and apportionment formula, if any, used by the
jurisdiction, it is possible that Security Owners in this case may be subject to
tax in the jurisdiction on their income from other sources. Additionally,
notwithstanding the flow-through treatment that generally applies to
partnerships, some states and localities impose an entity level tax on
partnerships and trusts doing business within their jurisdiction.
The foregoing discussion presents some of the state and local tax
consequences that might apply to Security Owners. However, because of the
variation in each state's and locality's tax laws based in whole or in part upon
income, it is impossible to predict the tax consequences to Note Owners and
Certificate Owners in all of the taxing jurisdictions in which they are already
subject to tax. Accordingly, Security Owners are strongly urged to consult their
own tax advisors with respect to state and local tax consequences arising out of
the purchase, ownership and disposition of securities.
* * *
THE FEDERAL AND STATE TAX DISCUSSIONS SET FORTH ABOVE ARE INCLUDED FOR
GENERAL INFORMATION ONLY AND MAY NOT BE APPLICABLE DEPENDING UPON A NOTEHOLDER'S
OR CERTIFICATEHOLDER'S PARTICULAR TAX SITUATION. PROSPECTIVE PURCHASERS OF NOTES
OR CERTIFICATES SHOULD CONSULT THEIR TAX ADVISORS WITH RESPECT TO THE TAX
CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF NOTES AND
CERTIFICATES, INCLUDING THE TAX CONSEQUENCES UNDER STATE, LOCAL AND FOREIGN AND
OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES IN FEDERAL OR OTHER TAX LAWS.
ERISA CONSIDERATIONS
Set forth below are some consequences under the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"), and the Code that a fiduciary
(a "Plan Fiduciary") of an "employee benefit plan" (as defined in and subject to
ERISA) or of a "plan" (as defined in Section 4975 of the Code) who has
investment discretion should consider before deciding to invest the plan's
assets in securities. The following summary is intended to be a summary of some
relevant ERISA issues and does not purport to address all ERISA considerations
that may be applicable to a particular plan.
In general, the terms "employee benefit plan" as defined in ERISA and
"plan" as defined in Section 4975 of the Code (a "Plan") refer to any plan or
account of various types which provide retirement benefits or welfare benefits
to an individual or to an employer's employees and their beneficiaries. Plans
include corporate pension and profit-sharing plans, "simplified employee pension
plans", Keogh plans for self-employed individuals, including partners in a
partnership, individual retirement accounts described in Section 408 of the Code
and medical benefit plans.
Each Plan Fiduciary must give appropriate consideration to the facts
and circumstances that are relevant to an investment in the securities plays in
the Plan's investment portfolio. Each Plan Fiduciary before deciding to invest
in the securities, must be satisfied that investment in the securities is a
prudent investment for the Plan, that the investments of the Plan, including the
investment in the securities, are diversified so as to minimize the risks of
large losses and that an investment in the securities complies with the Plan and
related trust documents.
Each Plan considering acquiring a Security should consult its own
legal and tax advisors before doing so.
EXEMPT PLANS
ERISA and Section 4975 of the Code do not apply to governmental plans
and some church plans, each as defined in Section 3 of ERISA and Section 4975(g)
of the Code. However, fiduciaries with respect to these plans may be subject to
federal, state or other laws similar in effect to ERISA and Section 4975 of the
Code. The discussion below does not purport to address considerations under the
applicable federal, state or other laws.
INELIGIBLE PURCHASERS
Securities may not be purchased with the assets of a Plan that is
sponsored by or maintained by the company, the trustee, the indenture trustee,
the Trust, the servicer or any of their respective affiliates. securities may
not be purchased with the assets of a Plan if the company, the trustee, the
indenture trustee, the Trust, the servicer or any of their respective affiliates
or any employees of the trustee, the indenture trustee, the Trust or the
servicer: (1) has investment discretion with respect to the investment of the
Plan assets; or (2) has authority or responsibility to give or regularly gives
investment advice with respect to the Plan assets for a fee, pursuant to an
agreement or understanding that the advice will serve as a primary basis for
investment decisions with respect to the Plan assets and that the advice will be
based on the particular investment needs of the Plan. A party that is described
in clause (1) or (2) of the preceding sentence is a fiduciary under ERISA and
the Code with respect to the Plan, and any purchase might result in a
"prohibited transaction" under ERISA and the Code.
PLAN ASSETS
It is possible that the purchase of a Security by a Plan will cause,
for purposes of Title I of ERISA and Section 4975 of the Code, the related
assets of a Trust to be treated as assets of that Plan. A regulation (the "DOL
Regulation") issued under ERISA by the United States Department of Labor (the
"DOL") contains rules for determining when an investment by a Plan in an entity
will result in the underlying assets of the entity being plan assets. The rules
provide that the assets of an entity will not be "plan assets" of a Plan that
purchases an interest in plan assets if the interest is not an "equity
interest". The DOL Regulation defines an equity interest as an interest other
than an instrument that is treated as indebtedness under applicable local law
and that has no substantial equity features. The DOL Regulation provides with
respect to the purchase of an equity interest by a Plan, that the assets of an
entity will not be plan assets of a Plan that purchases an interest in plan
assets if particular exceptions apply including the following: (1) the
investment by all "benefit plan investors" is not "significant"; or (2) the
security issued by the entity is a "publicly offered security". The prospectus
supplement will specify whether any of the exceptions set forth in the
regulation under ERISA may apply with respect to a series of securities.
With respect to clause (1) of the preceding paragraph, the term
"benefit plan investors" includes all plans and accounts of the types described
above as employee benefit plans and accounts, whether or not subject to ERISA,
as well as entities that hold "plan assets" due to investments made in the
entities by any of these plans or accounts. Investments by benefit plan
investors will be deemed not significant if benefit plan investors own, in the
aggregate, less than a 25% interest in the entity, determined without regard to
the investments of persons with discretionary authority or control over the
assets of the entity, of any person who provides investment advice for a fee
with respect to the assets and of "affiliates" of these persons, within the
meaning of the DOL Regulation.
Because the availability of this exception to any Trust depends upon
the identity of the certificateholders of the applicable series at any time,
there can be no assurance that any series or class of certificates will qualify
for this exception.
With respect to clause (2) of the second preceding paragraph, a
publicly offered security is one which is
(a) "freely transferable,"
(b) part of a class of securities that is "widely held" and
(c) either
(1) part of a class of securities registered under Section 12(b)
or 12(g) of the Exchange Act, or
(2) sold to the Plan as part of a public offering pursuant to an
effective registration statement under the securities Act
and registered under the Exchange Act within 120 days, or
any later time as may be allowed by the securities and
Exchange Commission, after the end of the fiscal year of the
issuer in which the offering of the security occurred.
Whether a security is "freely transferable" is based on all relevant facts and
circumstances. A class of securities is "widely held" only if it is of a class
of securities owned by 100 or more investors independent of the issuer and of
each other.
If none of the exceptions set forth in the DOL Regulation apply, the
assets of a Trust will be deemed to be the assets of each Plan investor for the
purposes of ERISA and Section 4975 of the Code. In this case, the discussion set
forth in the following sections will apply.
CONSEQUENCES OF CHARACTERIZATION AS PLAN ASSETS.
If the assets of a Trust are plan assets, the trustee will be a
fiduciary under ERISA with respect to Plan investors and its duties and
liabilities will be subject to the provisions of ERISA.
In addition, Section 406 of ERISA will prohibit the trustee, among
others, from causing the assets of the Trust to be involved, directly or
indirectly, in specific types of transactions with "parties in interest" to
investing Plans unless statutory or administrative exemption applies. If the
prohibited transaction restrictions of Section 406 of ERISA are violated, ERISA
generally provides for criminal and civil penalties upon the Plan Fiduciary and
possibly other persons. Section 4975(c) of the Code generally imposes excise tax
on "disqualified persons" who engage, directly or indirectly, in similar types
of transactions with the assets of Plans subject to the Section, except that an
IRA that engages in a prohibited transaction may instead forfeit its tax exempt
status, and also requires recession of the transaction.
If the Trust assets are plan assets, Section 406 of ERISA will
prohibit the trustee, among others, from causing the assets of the Trust to be
involved, directly or indirectly, in specific types of transactions with
"parties in interest" to investing Plans unless a statutory or administrative
exemption applies. If the prohibited transaction restrictions of Section 406 of
ERISA are violated, ERISA generally provides for criminal and civil penalties
upon the Plan Fiduciary and possibly other persons. Section 4975(c) of the Code
generally imposes an excise tax on "disqualified persons" who engage, directly
or indirectly, in similar types of transactions with the assets of Plans subject
to the Section, except that an IRA that engages in a prohibited transaction may
instead forfeit its tax-exempt status, and also requires recision of the
transaction.
The types of transactions subject to the prohibited transaction
restrictions of ERISA and Section 4975(c) of the Code include:
(1) sales, exchanges or leases of property, such as the securities,
(2) loans or other extensions of credit and
(3) the furnishing of goods and services. As described in Section
406(b)(1) or Section 4975(c)(1)(E) of the Code, the use of plan
assets by or for the benefit of parties in interest or
disqualified persons may also constitute a prohibited transaction.
The company, the trustee, the indenture trustee, the Trust, the
servicer and other persons and some affiliates of the trustee, the indenture
trustee, the Trust and the servicer, might be considered or might become a party
in interest or disqualified person with respect to a Plan. If so, the
acquisition, holding or disposition of securities by or on behalf of the Plan
could give rise to one or more "prohibited transactions" within the meaning of
Section 406 ERISA and Section 4975(c) of the Code unless an exemption described
below or some other exemption is available.
PROHIBITED TRANSACTION EXEMPTIONS FOR CERTIFICATES
Credit Suisse First Boston Corporation ("CSFB") is the recipient of a
final prohibited transaction exemption, 54 Fed. Reg. 42597 (Oct. 17, 1989) (the
"Underwriter's PTE" or "Credit Suisse First Boston Corporation's PTE" if
specified in the applicable prospectus supplement), which may accord protection
from violations under Sections 406 and 407 of ERISA and Section 4975 of the Code
for Plans that acquire certificates. The Underwriter's PTE applies to
certificates (a) which represent (1) a beneficial ownership interest in the
assets of a trust and entitle the holder to pass-through payments of principal,
interest and/or other payments made with respect to the assets of the trust, or
(2) an interest in a REMIC if the certificates are issued by and are obligations
of a trust; and (b) with respect to which CSFB or any of its affiliates is
either the sole underwriter, the manager or co-manager of the underwriting
syndicate or a selling or placement agent. The corpus of a trust to which the
Underwriter's PTE applies include
(1) obligations which bear interest or are purchased at a
discount and which are secured by (A) single-family
residential, multifamily residential or commercial real
property, including obligations secured by leasehold
interests on commercial real property, or (B) shares issued
by a cooperative housing association;
(2) "guaranteed governmental mortgage pool certificates" (as
defined in the Final Regulation) and (3) undivided
fractional interests in the above.
Plans acquiring certificates may be eligible for protection under the
Underwriter's PTE if:
(a) assets of the type included as Primary Assets have been
included in other investment pools ("Other Pools");
(b) certificates evidencing interests in Other Pools have been
both (1) rated in one of the three highest generic rating
categories by Standard & Poor's, a division of The
McGraw-Hill Companies, Inc., Moody's Investors Service,
Inc., Duff & Phelps Credit Rating Co. or Fitch IBCA, Inc.
and (2) purchased by investors, other than Plans, for at
least one year prior to a Plan's acquisition of certificates
in reliance upon the Underwriter's PTE;
(c) at the time of acquisition, the class of certificates
acquired by the Plan has received a rating in one of the
rating categories referred to in condition (b) above;
(d) the trustee is not an affiliate of any member of the
Restricted Group;
(e) the class of certificates acquired by the Plan are not
subordinated to other classes of certificates of that series
with respect to the right to receive payment in the event of
defaults or delinquencies on the underlying Primary Assets;
(f) the Plan is an "accredited investor" (as defined in Rule
501(a)(1) of Regulation D under the securities Act);
(g) the acquisition of the certificates by a Plan is on terms,
including the price for the certificates, that are at least
as favorable to the Plan as they would be in an arm's length
transaction with an unrelated party; and
(h) the sum of all payments made to and retained by the
Underwriter or members of any underwriting syndicate in
connection with the distribution of the certificates
represents not more than reasonable compensation for
underwriting the certificates; the sum of all payments made
to and retained by the seller pursuant to the sale of the
Primary Assets to the Trust represents not more than the
fair market value of the Primary Assets; and the sum of all
payments made to and retained by the servicer and all
subservicers represents not more than reasonable
compensation for the servicer's services under the Pooling
and Servicing Agreement or Sale and Servicing Agreement and
reimbursement of the servicer's reasonable expenses in
connection with the servicer's services.
In addition, the Underwriter's PTE will not apply to a Plan's
investment in certificates if the Plan fiduciary responsible for the decision to
invest in a class of certificates is an obligor with respect to more than 5% of
the fair market value of the obligations constituting the Primary Assets or an
affiliate of the person and will not apply, unless:
(1) in the case of an acquisition in connection with the
initial issuance of any series of certificates, at least 50% of each
class of certificates in which Plans have invested is acquired by
persons independent of the Restricted Group and at least 50% of the
aggregate interest in the Trust is acquired by persons independent of
the Restricted Group;
(2) the Plan's investment in any class of certificates does
not exceed 25% of the outstanding certificates of that class at the
time of acquisition;
(3) immediately after the acquisition, no more than 25% of
the Plan assets with respect to which the investing fiduciary has
discretionary authority or renders investment advice are invested in
certificates evidencing interest in trusts sponsored or containing
assets sold or serviced by the same entity; and
(4) the Plan is not sponsored by the company, any
Underwriter, the trustee, the servicer, any subservicer, any credit
enhancer or the obligor under any other credit support mechanism, an
obligor with respect to obligations constituting more than 5% of the
aggregate unamortized principal balance of the Primary Assets on the
date of the initial issuance of certificates, or any of their
affiliates (the "Restricted Group").
On July 21, 1997, the DOL published in the Federal Register a final
amendment to the Underwriter's PTE which extends exemptive relief to particular
mortgage-backed and asset-backed securities transactions using pre-funding
accounts for trusts issuing pass-through certificates. With respect to the
certificates, the amendment generally allows a portion of the receivables
("Loans") supporting payments to certificateholders and having a principal
amount equal to no more than 25% of the total principal amount of the
certificates to be transferred to the Trust within a 90-day or three-month
period following the closing date ("Pre-Funding Period"), instead of requiring
that all the Loans be either identified or transferred on or before the closing
date. The relief, is effective for transactions occurring on or after May 23,
1997, provided that the following 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") must not exceed 25%;
(2) all Loans transferred after the closing date
("Additional Loans") must meet the same terms and conditions for
eligibility as the original Loans used to create the Trust, which
terms and conditions have been approved by the Rating Agency;
(3) the transfer of the Additional Loans to the Trust during
the Pre-Funding Period must not result in the certificates receiving a
lower credit rating from the 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 Loans in the Trust at the end of the
Pre-Funding Period must not be more than 100 basis points lower than
the average interest rate for the Loans which were transferred to the
Trust on the closing date;
(5) in order to ensure that the characteristics of the
Additional Loans are substantially similar to the original obligations
which were transferred to the Trust, either: (a) the characteristics
of the Additional Loans must be monitored by an insurer or other
credit support provider which is independent of the company or (b) an
independent accountant retained by the company must provide the
company with a letter, with copies provided to the Rating Agency, the
Underwriter and the trustee, stating whether or not the
characteristics of the Additional Loans conform to the characteristics
described in the prospectus, prospectus supplement, Private Placement
Memorandum ("Offering Documents") and/or Pooling and Servicing
Agreement or Sale and Servicing Agreement ("Pooling Agreement"); in
preparing the letter, the independent accountant must use the same
type of procedures as were applicable to the Loans which were
transferred as of the closing date;
(6) the Pre-Funding Period must end no later than three
months or 90 days after the closing date or earlier, in some
circumstances, if the amount on deposit in the Pre-Funding Account is
reduced below the minimum level specified in the Pooling Agreement or
an event of default occurs under the Pooling Agreement;
(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 specifically permitted investments;
(8) the Offering Documents must describe:
o any Pre-Funding Account and/or Capitalized
Interest Account used in connection with a
Pre-Funding Account;
o the duration of the Pre-Funding Period;
o the percentage and/or dollar amount of the
Pre-Funding Limit for the Trust; and
o that the amounts remaining in the Pre-Funding
Account at the end of the Pre-Funding Period will
be remitted to certificateholders as repayments of
principal; and
(9) the Pooling and Servicing Agreement or Sale and
Servicing Agreement must describe the permitted investments for the
Pre-Funding Account and Capitalized Interest Account and, if not
disclosed in the Offering Documents, the terms and conditions for
eligibility of the Additional Loans.
Whether the conditions in the Underwriter's PTE, in addition to, and
including those, relating to pre-funding, will be satisfied as to certificates
or any particular class will depend upon the relevant facts and circumstances
existing at the time the Plan acquires certificates of that class. Any Plan
investor who proposes to use "plan assets" of a Plan to acquire certificates in
reliance upon the Underwriter's PTE should determine whether the Plan satisfies
all of the applicable conditions and consult with its counsel regarding other
factors that may affect the applicability of the Underwriter's PTE.
If for any reason the Underwriter's PTE does not provide an exemption
for a particular Plan's purchase of certificates, some other individual or class
exemption may be applicable, including but not limited to: Prohibited
Transaction class Exemption ("PTCE") 90-1, regarding investments by insurance
company pooled separate accounts; PTCE 91-38 regarding investments by bank
collective investment funds; PTCE 95-60, regarding investments by insurance
company general accounts; PTCE 96-23, regarding transactions affected by
in-house asset managers; and PTCE 84-14, regarding transactions effected by
"qualified professional asset managers" ("Investor Based Exemptions"). There can
be no assurance that any of these exemptions will apply with respect to any
Plan, or even if it were to apply, that the exemption would cover all
transactions involving the applicable Trust.
PURCHASE OF NOTES
Some transactions involving the purchase of securities which are notes
might be deemed to constitute prohibited transactions under ERISA and the Code
if the Primary Assets were deemed to be assets of a Plan. Under the DOL
Regulation, the Trust treated as plan assets of a Plan for the purposes of ERISA
and the Code only if the Plan acquires an equity interest in the Trust fund and
none of the exceptions contained in the DOL Regulation is applicable. The
prospectus supplement will indicate whether the notes will be treated as
indebtedness without substantial equity features for purposes of the DOL
Regulation.
Without regard to whether the notes are characterized as equity
interests, the acquisition, transfer or holding of notes by or on behalf of a
Plan could be considered to give rise to a prohibited transaction if the Trust
Fund, the trustee, the indenture trustee or any of their respective affiliates
is or becomes a party in interest or a disqualified person with respect to the
Plan or in the event that a Note is purchased in the secondary market and that
purchase constitutes a sale or exchange between a Plan and a party in interest
or disqualified person with respect to the Plan. However, one or more of the
Investor Based Exemptions may be applicable depending on the type and
circumstances of the plan fiduciary making the decision to acquire a Note.
GENERAL CONSIDERATIONS
Before a Plan Fiduciary decides to purchase securities on behalf of a
Plan, the Plan Fiduciary should determine whether the Exemption is applicable,
whether any other prohibited transaction exemption, if required, is available
under ERISA and Section 4975 of the Code or whether an exemption from "plan
asset" treatment is available to the applicable Trust. The Plan Fiduciary should
also consult the ERISA discussion in the applicable prospectus supplement for
further information regarding the application of ERISA to any class of
certificates.
ACCEPTANCE OF SUBSCRIPTIONS ON BEHALF OF PLANS IS IN NO RESPECT A
REPRESENTATION BY THE COMPANY, THE SERVICER, THE TRUSTEE OR ANY OTHER PARTY THAT
THIS INVESTMENT MEETS ALL RELEVANT LEGAL REQUIREMENTS WITH RESPECT TO
INVESTMENTS BY ANY PARTICULAR PLAN OR THAT THE INVESTMENT IS APPROPRIATE FOR ANY
PARTICULAR PLAN. EACH PLAN FIDUCIARY SHOULD CONSULT WITH ITS ATTORNEYS AND
FINANCIAL ADVISORS AS TO THE PROPRIETY OF THIS TYPE OF AN INVESTMENT IN LIGHT OF
THE CIRCUMSTANCES OF THE PARTICULAR PLAN AND THE RESTRICTIONS OF ERISA AND
SECTION 4975 OF THE CODE.
PLAN OF DISTRIBUTION
On the terms and conditions set forth in an underwriting agreement
with respect to the notes, if any, of a given series and an underwriting
agreement with respect to the certificates of the series (collectively, the
"Underwriting Agreements"), the company will agree to cause the related Trust to
sell to the underwriters named in the Underwriting Agreement and in the related
prospectus supplement, and each of these underwriters will severally agree to
purchase, the principal amount of each class of notes and certificates, as the
case may be, of the related series set forth in the related Underwriting
Agreement and in the related prospectus supplement.
In the Underwriting Agreements with respect to any given series of
securities, the several underwriters will agree, subject to the terms and
conditions set forth in the related Underwriting Agreement, to purchase all of
the notes and certificates, as the case may be, described in the related
Underwriting Agreement that are offered by this prospectus and by the related
prospectus supplement if any of the notes and certificates, as the case may be,
are purchased.
Each prospectus supplement will either (1) set forth the price at
which each class of notes and certificates, as the case may be, being offered by
the related prospectus supplement will be offered to the public and any
concessions that may be offered to particular dealers participating in the
offering of the notes and certificates, as the case may be, or (2) specify that
the related notes and certificates, as the case may be, are to be resold by the
underwriters in negotiated transactions at varying prices to be determined at
the time of sale. After the initial public offering of any notes and
certificates, as the case may be, public offering prices and concessions may be
changed.
Pursuant to the Receivables Purchase Agreement between the seller, or
its affiliate, and the company, the seller will indemnify the company and the
related underwriters against specific civil liabilities, including liabilities
under the securities Act, or contribute to payments the company and the several
underwriters may be required to make in respect of the Receivables Purchase
Agreement.
Each Trust may, from time to time, invest the funds in its Trust
Accounts in Eligible Investments acquired from the underwriters.
Pursuant to each of the Underwriting Agreements with respect to a
given series of securities, the closing of the sale of any class of securities
will be conditioned on the closing of the sale of all other classes under the
related Underwriting Agreement.
The place and time of delivery for the notes and certificates, as the
case may be, in respect of which this prospectus is delivered will be set forth
in the related prospectus supplement.
If and to the extent required by applicable law or regulation, this
prospectus and the prospectus supplement will also be used by the Underwriter
after the completion of the offering in connection with offers and sales related
to market-making transactions in the offered securities in which the Underwriter
acts as principal. The Underwriter may also act as agent in these transactions.
Sales will be made at negotiated prices determined at the time of sale.
LEGAL MATTERS
Some legal matters relating to the securities of any series will be
passed upon by the law firms specified in the related prospectus supplement.
Some related federal income tax and other matters will be passed upon for the
Trust and the seller, by the law firms specified in the related prospectus
supplement.
PROSPECTUS SUPPLEMENT
The prospectus supplement relating to a series of securities to be
offered under this prospectus will, among other things, set forth with respect
to each class of securities:
o the interest rate and authorized denominations, as applicable, of
each class of securities;
o specific information concerning the Primary Assets and the
related seller and servicer, as applicable;
o the terms of any Credit or Cash Flow Enhancement applicable to
any class or classes of securities;
o information concerning any other assets in the related Trust;
o the expected date or dates on which the principal amount, if any,
of each class of securities will be paid to holders of the
securities;
o the extent to which any class within a series is subordinated to
any other class of the same series; and
o additional information with respect to the plan of distribution
of the securities.
REPORTS TO SECURITYHOLDERS
With respect to each series of securities, the servicer of the related
Primary Assets will prepare for distribution to the related Securityholders
monthly and annual reports concerning the securities and the related Trust. See
"Certain Information Regarding the Securities--Statements to Securityholders."
AVAILABLE INFORMATION
The company, as originator of the Trusts, has filed with the
Securities and Exchange Commission (the "Commission") a Registration Statement
on Form S-3 (together with all amendments and exhibits to the Registration
Statement, the "Registration Statement") under the Securities Act of 1933, as
amended (the "Securities Act"), with respect to the securities being offered by
this prospectus. This prospectus does not contain all of the information set
forth in the Registration Statement, some parts of which have been omitted in
accordance with the rules and regulations of the Commission. In addition,
company is subject to the informational requirements of the securities Exchange
Act of 1934, as amended (the "Exchange Act"), and in accordance with the
Exchange Act files reports and other information with the Commission. The
Registration Statement, reports and other information are available for
inspection without charge at the public reference facilities of the Commission
at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and the
regional offices of the Commission at Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661-2511, and Seven World Trade Center, Suite
1300, New York, New York 10048. Copies of this information can be obtained from
the Public Reference Section of the Commission at Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates. The Commission
maintains a Web site that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission. The address of the site is http://www.sec.gov.
Upon receipt of a request by an investor who has received an
electronic prospectus supplement and prospectus from the Underwriter or a
request by the investor's representative within the period during which there is
an obligation to deliver a prospectus supplement and Prospectus, the Underwriter
will promptly deliver, or cause to be delivered, without charge, to the investor
a paper copy of the prospectus supplement and prospectus.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents filed by the company on behalf of the Trust referred to
in the accompanying prospectus supplement with the Commission pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this
Prospectus and prior to the termination of the offering of the securities
offered by the Trust shall be deemed to be incorporated by reference in this
prospectus and to be a part of this prospectus from the dates of filing of the
documents. Any statement contained in this prospectus or in a document
incorporated or deemed to be incorporated by reference in this prospectus shall
be deemed to be modified or superseded for purposes of this prospectus to the
extent that a statement contained in this prospectus, or in the accompanying
prospectus supplement, or in any subsequently filed document that also is or is
deemed to be incorporated by reference in this prospectus modifies or supersedes
the statement. Any statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this prospectus.
The company on behalf of any Trust will provide without charge to each
person to whom a copy of this prospectus is delivered, on the written or oral
request of the person, a copy of any or all of the documents incorporated in
this prospectus by reference, except the exhibits to these documents. Requests
for copies should be directed to: Secretary, Asset Backed Securities
Corporation, 11 Madison Avenue, New York, New York 10010, telephone, (212)
325-2000.
<PAGE>
INDEX OF TERMS
PAGE
1996 Contingent Debt Regulations............................................52
1997 Act....................................................................71
1997 Withholding Regulations................................................58
accrual period..............................................................55
Actuarial Receivables........................................................8
Additional Loans............................................................79
adjusted issue price........................................................55
Advances....................................................................40
average interest rate.......................................................79
CSFB........................................................................77
Cede.........................................................................1
Certificate Distribution Account............................................36
Certificate Owners..........................................................51
Certificate Pool Factor.....................................................22
Check-the-Box Regulations...................................................62
Code........................................................................51
Collection Account..........................................................35
Collection Period...........................................................39
Credit Suisse First Boston Corporation's PTE................................77
Definitive certificates.....................................................31
Definitive notes............................................................31
Definitive Securities.......................................................32
Depository..................................................................23
Distribution Date...........................................................30
DOL.........................................................................75
DOL Regulation..............................................................75
DTC..........................................................................1
Eligible Deposit Account....................................................36
Eligible Institution........................................................36
Eligible Investment.........................................................37
Eligible Investments........................................................36
ERISA.......................................................................74
Events of Default...........................................................24
Exchange Act................................................................83
Fannie Mae..................................................................14
Farm Credit Act.............................................................18
FCA.........................................................................18
FCBs........................................................................18
Federal Tax Counsel.........................................................51
FFCB........................................................................14
FFEL........................................................................16
FHLB........................................................................14
FHLMC Act...................................................................15
Final Scheduled Maturity Date...............................................38
Financed Vehicles............................................................6
financial institution.......................................................59
FIRREA......................................................................16
Fiscal Agent................................................................14
Freddie Mac.................................................................14
FTC Rule....................................................................50
Funding Corporation.........................................................18
Government Securities.......................................................12
grantor trust certificateholders............................................67
grantor trust certificates..................................................67
GSE Issuer..................................................................14
GSEs........................................................................12
GSEs Bonds..................................................................12
Indenture...................................................................22
Indirect Participants.......................................................31
Interest Component..........................................................20
Investment Earnings.........................................................36
Investor Based Exemptions...................................................80
IRS.........................................................................51
issue price.................................................................53
Loans.......................................................................78
MBS.........................................................................15
Non-United States Holder....................................................58
Non-United States Owner.....................................................66
Non-United States Person....................................................58
Note Distribution Account...................................................35
Note Owners.................................................................51
Note Pool Factor............................................................21
objective rate..............................................................52
Offering Documents..........................................................79
OID Regulations.............................................................53
Other Pools.................................................................77
Participants................................................................30
Payahead Account............................................................36
Payaheads...................................................................39
Plan........................................................................74
Plan Fiduciary..............................................................74
Pooling Agreement...........................................................79
Pooling and Servicing Agreement..............................................6
Precomputed Advance.........................................................39
Precomputed Receivables......................................................8
Pre-Funded Amount...........................................................37
Pre-Funding Account.........................................................37
Pre-Funding Limit...........................................................79
Pre-Funding Period..........................................................37
Prepayment Assumption.......................................................54
Principal Component.........................................................20
Private Label Custody Receipt Securities....................................18
Private Label Custody Strips................................................18
PTCE........................................................................80
qualified inverse floating rate.............................................52
qualified stated interest...................................................52
Receivables..................................................................8
REFCO.......................................................................18
REFCO Strip.................................................................20
Registration Statement......................................................82
Related Documents...........................................................27
Repurchase Amount...........................................................35
Reserve Account.............................................................42
Restricted Group............................................................78
RTC.........................................................................16
Rule of 78S Receivables......................................................8
Rules.......................................................................31
Sale and Servicing Agreement.................................................6
Sallie Mae..................................................................14
Schedule of Receivables.....................................................34
Securities Act..............................................................83
Security Owners.............................................................30
Senior Certificates.........................................................69
Senior Class Percentage.....................................................70
Servicer Default............................................................43
Servicing Fee...............................................................40
Servicing Fee Rate..........................................................40
Shortfall Amount............................................................70
Short-Term Note.............................................................57
Simple Interest Advance.....................................................40
Simple Interest Receivables..................................................9
stated redemption price at maturity.........................................54
Stripped Certificates.......................................................69
Subordinate Certificates....................................................69
Subordinate Class Percentage................................................70
System......................................................................18
Systemwide Debt Securities..................................................18
TEFRA.......................................................................20
TIN.........................................................................60
Transfer and Servicing Agreements...........................................34
Treasury Bonds..............................................................12
Treasury Strips.............................................................12
Trust........................................................................6
Trust Accounts..............................................................36
Trust Agreement..............................................................6
Trust Stripped Bond.........................................................69
Trust Stripped Coupon.......................................................70
TVA.........................................................................14
TVA Act.....................................................................17
UCC.........................................................................30
Underlying Issuer...........................................................10
Underlying Servicer.........................................................10
Underlying Trust Agreement..................................................10
Underlying Trustee..........................................................10
Underwriter's PTE...........................................................77
Underwriting Agreements.....................................................81
United States Person........................................................58
<PAGE>
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in some limited circumstances, the globally offered securities
(the "Global securities") will be available only in book-entry form. Unless
otherwise specified in the related prospectus supplement, investors in the
Global securities may hold Global securities through any of The Depository Trust
company ("DTC"), Clearstream, Luxembourg or Euroclear. Unless otherwise
specified in the related prospectus supplement, Global securities will be
tradeable as home market instruments in both the European and U.S. domestic
markets. Unless otherwise specified in the related prospectus supplement,
Initial settlement and all secondary trades will settle in same-day funds.
Secondary market trading between investors holding Global securities
through Clearstream, Luxembourg and Euroclear will be conducted in the ordinary
way in accordance with their normal rules and operating procedures and in
accordance with conventional eurobond practice (i.e., seven calendar day
settlement).
Secondary market trading between investors holding Global securities
through DTC will be conducted according to the rules and procedures applicable
to U.S. corporate debt obligations.
Secondary cross-market trading between Clearstream, Luxembourg or
Euroclear and DTC Participants holding securities will be effected on a
delivery-against-payment basis through the respective Depositaries of
Clearstream, Luxembourg and Euroclear, in this capacity, and as DTC
Participants.
Non-U.S. holders of Global securities will be subject to U.S.
withholding taxes unless the holders meet particular requirements and deliver
appropriate U.S. tax documents to the securities clearing organizations or their
participants.
INITIAL SETTLEMENT
All Global securities will be held in book-entry form by The
Depository Trust Company ("DTC") in the name of Cede & Co. ("Cede") as nominee
of DTC. Securityholders' interests in the Global securities will be represented
through financial institutions acting on their behalf as direct and indirect
Participants in DTC. As a result, Clearstream, Luxembourg and Euroclear will
hold positions on behalf of their participants through their respective
Depositaries, which in turn will hold these positions in accounts as DTC
Participants.
Securityholders electing to hold their Global securities through DTC
will follow the settlement practices applicable to U.S. corporate debt
obligations. Securityholder securities custody accounts will be credited with
their holdings against payment in same-day funds on the settlement date.
Securityholders electing to hold their Global securities through
Clearstream, Luxembourg or Euroclear accounts will follow the settlement
procedures applicable to conventional eurobonds, except that there will be no
temporary global security and no "lock-up" or restricted period. Global
securities will be credited to the securities custody accounts on the settlement
date against payment in same-day funds.
SECONDARY MARKET TRADING
Since the purchaser determines the place of delivery, it is important
to establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
TRADING BETWEEN DTC PARTICIPANTS. Secondary market trading between DTC
Participants will be settled using the procedures applicable to U.S. corporate
debt obligations in same-day funds.
TRADING BETWEEN CLEARSTREAM, LUXEMBOURG AND/OR EUROCLEAR PARTICIPANTS.
Secondary market trading between Clearstream, Luxembourg Participants or
Euroclear Participants will be settled using the procedures applicable to
conventional eurobonds in same-day funds.
TRADING BETWEEN DTC SELLER AND CLEARSTREAM, LUXEMBOURG OR EUROCLEAR
PURCHASER. When Global securities are to be transferred from the account of a
DTC Participant to the account of a Clearstream, Luxembourg Clearstream,
Luxembourg Participant or a Euroclear Participant, the purchaser will send
instructions to Clearstream, Luxembourg or Euroclear through a Clearstream,
Luxembourg Participant or Euroclear Participant at least one business day prior
to settlement. Clearstream, Luxembourg or Euroclear will instruct the respective
Depositary, as the case may be, to receive the Global securities against
payment. Payment will include interest accrued on the Global securities from and
including the last coupon payment date to and excluding the settlement date.
Payment will then be made by the respective Depositary to the DTC Participant's
account against delivery of the Global securities. After settlement has been
completed, the Global securities will be credited to the respective clearing
system and by the clearing system, in accordance with its usual procedures, to
the Clearstream, Luxembourg Participant's or Euroclear Participant's account.
The Global securities credit will appear the next day (European time) and the
cash debit will be back-valued to, and the interest on the Global securities
will accrue from, the value date, which would be the preceding day when
settlement occurred in New York. If settlement is not completed on the intended
value date (i.e., the trade fails), the Clearstream, Luxembourg or Euroclear
cash debit will be valued instead as of the actual settlement date.
Clearstream, Luxembourg Participants and Euroclear Participants will
need to make available to the respective clearing systems the funds necessary to
process same-day funds settlement. The most direct means of doing so is to
pre-position funds for settlement, either from cash on hand or existing lines of
credit, as they would for any settlement occurring within Clearstream,
Luxembourg or Euroclear. Under this approach, they may take on credit exposure
to Clearstream, Luxembourg or Euroclear until the Global securities are credited
to their accounts one day later.
As an alternative, if Clearstream, Luxembourg or Euroclear has
extended a line of credit to them, Clearstream, Luxembourg Participants or
Euroclear Participants can elect not to pre-position funds and allow that credit
line to be drawn upon the finance settlement. Under this procedure, Clearstream,
Luxembourg Participants or Euroclear Participants purchasing Global securities
would incur overdraft charges for one day, assuming they cleared the overdraft
when the Global securities were credited to their accounts. However, interest on
the Global securities would accrue from the value date. Therefore, in many cases
the investment income on the Global securities earned during that one-day period
may substantially reduce or offset the amount of the overdraft charges, although
this result will depend on each Clearstream, Luxembourg Participant's or
Euroclear Participant's particular cost of funds.
Since the settlement is taking place during New York business hours,
DTC Participants can employ their usual procedures for sending Global securities
to the respective Depositary for the benefit of Clearstream, Luxembourg
Participants or Euroclear Participants. The sale proceeds will be available to
the DTC seller on the settlement date. Thus, to the DTC Participant a
cross-market transaction will settle no differently than a trade between two DTC
Participants.
TRADING BETWEEN CLEARSTREAM, LUXEMBOURG OR EUROCLEAR SELLER AND DTC
PURCHASER. Due to time zone differences in their favor, Clearstream, Luxembourg
Participants and Euroclear Participants may employ their customary procedures
for transactions in which Global securities are to be transferred by the
respective clearing system, through the respective Depositary, to a DTC
Participant. The seller will send instructions to Clearstream, Luxembourg or
Euroclear through a Clearstream, Luxembourg Participant or Euroclear Participant
at least one business day prior to settlement. In these cases, Clearstream,
Luxembourg or Euroclear will instruct the respective Depositary, as appropriate,
to deliver the bonds to the DTC Participant's account against payment. Payment
will include interest accrued on the Global securities from and including the
last coupon payment date to and excluding the settlement date. The payment will
then be reflected in the account of the Clearstream, Luxembourg Participant or
Euroclear Participant the following day, and receipt of the cash proceeds in the
Clearstream, Luxembourg Participant's or Euroclear Participant's account would
be back-valued to the value date, which would be the preceding day, when
settlement occurred in New York. Should the Clearstream, Luxembourg Participant
or Euroclear Participant have a line of credit with its respective clearing
system and elect to be in debit in anticipation of receipt of the sale proceeds
in its account, the back-valuation will extinguish any overdraft charges
incurred over that one-day period. If settlement is not completed on the
intended value date (i.e., the trade fails), receipt of the cash proceeds in the
Clearstream, Luxembourg Participant's or Euroclear Participant's account would
instead be valued as of the actual settlement date. Finally, day traders that
use Clearstream, Luxembourg or Euroclear and that purchase Global securities
from DTC Participants for delivery to Clearstream, Luxembourg Participants or
Euroclear Participants should note that these trades would automatically fail on
the sale side unless affirmative action were taken. At least three techniques
should be readily available to eliminate this potential problem:
(a) borrowing through Clearstream, Luxembourg or Euroclear for one
day, until the purchase side of the day trade is reflected in
their Clearstream, Luxembourg or Euroclear accounts, in
accordance with the clearing system's customary procedures;
(b) borrowing the Global securities in the U.S. from a DTC
Participant no later than one day prior to settlement, which
would give the Global securities sufficient time to be reflected
in their Clearstream, Luxembourg or Euroclear account in order to
settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of the
trade so that the value date for the purchase from the DTC
Participant is at least one day prior to the value date for the
sale to the Clearstream, Luxembourg Participant or Euroclear
Participant.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of Global securities holding securities through
Clearstream, Luxembourg or Euroclear, or through DTC if the holder has an
address outside the U.S., will be subject to the 30% U.S. withholding tax that
generally applies to payments of interest, including original issue discount, on
registered debt issued by U.S. Persons, unless (1) each clearing system, bank or
other financial institution that holds customers' securities in the ordinary
course of its trade or business in the chain of intermediaries between the
beneficial owner and the U.S. entity required to withhold tax complies with
applicable certification requirements and (2) the beneficial owner takes one of
the following steps to obtain an exemption or reduced tax rate:
EXEMPTION FOR NON-U.S. PERSONS (FORM W-8). Beneficial owners of
securities that are non-U.S. Persons can obtain a complete exemption from the
withholding tax by filing a signed Form W-8 (Certificate of Foreign Status). If
the information shown on Form W-8 changes, a new Form W-8 must be filed within
30 days of the change.
EXEMPTION FOR NON-U.S. PERSONS WITH EFFECTIVELY CONNECTED INCOME (FORM
4224). A non-U.S. Person, including a non-U.S. corporation or bank with a U.S.
branch, for which the interest income is effectively connected with its conduct
of a trade or business in the United States, can obtain an exemption from the
withholding tax by filing Form 4224 (Exemption from Withholding of Tax on Income
Effectively Connected with the Conduct of a Trade or Business in the United
States).
EXEMPTION OR REDUCED RATE FOR NON-U.S. PERSONS RESIDENT IN TREATY
COUNTRIES (FORM 1001). Non-U.S. Persons that are beneficial owners of securities
residing in a country that has a tax treaty with the United States can obtain an
exemption or reduced tax rate, depending on the treaty terms, by filing Form
1001 (Ownership, Exemption or Reduced Rate Certificate). If the treaty provides
only for a reduced rate, withholding tax will be imposed at that rate unless the
filer alternatively files Form W-8. Form 1001 may be filed by the Securityholder
or his agent.
EXEMPTION FOR U.S. PERSONS (FORM W-9). U.S. Persons can obtain
complete exemption from the withholding tax by filing Form W-9 (Payer's Request
for Taxpayer Identification Number and Certification).
U.S. FEDERAL INCOME TAX REPORTING PROCEDURE. The beneficial owner of a
Global Security or in the case of a Form 1001 or a Form 4224 filer, his agent,
files by submitting the appropriate form to the person through whom it holds,
the clearing agency, in the case of persons holding directly on the books of the
clearing agency. Form W-8 and Form 1001 are effective for three calendar years
and Form 4224 is effective for one calendar year.
The term "U.S. Person" means;
(1) a citizen or resident of the United States,
(2) a corporation or partnership organized in or under the laws of the
United States or any political subdivision thereof or
(3) an estate or trust the income of which is includible in gross
income for United States tax purposes, regardless of its source.
This summary does not deal with all aspects of U.S. Federal income tax
withholding that may be relevant to foreign holders of the Global securities.
Securityholders are advised to consult their own tax advisers for specific tax
advice concerning their holding and disposing of the Global securities.
<PAGE>
CREDIT FIRST
SUISSE BOSTON
<PAGE>
SUBJECT TO COMPLETION, DATED ________, 2000
FORM OF PROSPECTUS SUPPLEMENT TO PROSPECTUS DATED _________, _____
$----------
ASSET BACKED SECURITIES CORPORATION HOME
EQUITY LOAN TRUST _____-__
HOME EQUITY LOAN PASS-THROUGH CERTIFICATES
[-------------------------]
Seller
ASSET BACKED SECURITIES CORPORATION
Depositor
[-------------------------]
Servicer
The sources for payment of the certificates are a pool of sub-prime, closed end,
first lien home equity loans held by the trust, cash held by the trust and with
respect to the Class A and Class A-IO certificates only, two financial guaranty
insurance policies to be issued by [_________________________]. The Class B-1
Certificates will not be insured. Interest and principal on the certificates are
scheduled to be paid monthly on the ____ day of the month. The first scheduled
distribution will be made in _____ , _____.
[LOGO]
THE TRUST WILL ISSUE--
<TABLE>
<CAPTION>
Offered Principal Final Scheduled
CERTIFICATES BALANCE CERTIFICATE RATE DISTRIBUTION DATE
------------ ----------- ------------------------ -----------------
<S> <C> <C> <C>
A-1F $__________ [___]% [___]
A-2F $__________ [___]% [___]
A-3A $__________ (1) [___]
A-4A $__________ (1) [___]
A-5A $__________ (1) [___]
A-IO (2) [___]% [___]
B-1 $__________ (3) [___]
(1) The interest rate on this class may change from month to month based on the
London interbank offered rate for one-month U.S. dollar deposits, and is
subject to an interest rate cap.
(2) This class will not receive any principal payments but will accrue interest
on the notional amount of each of the Class A-IO component certificates, as
described in this prospectus supplement.
(3) Interest is payable in an amount equal to the sum of the interest payable
on the Class B component certificates. The interest rate on each Class B
component certificate may change from month to month based on the London
interbank offered rate for one-month U.S. dollar deposits, and is subject
to an interest rate cap.
</TABLE>
Credit Suisse First Boston Corporation will purchase the certificates from the
trust at approximately _____% of the principal amount of the certificates.
Credit Suisse First Boston Corporation will offer the certificates from time to
time in negotiated transactions or at varying prices which will be determined at
the time of sale. The aggregate proceeds to the trust, before deducting expenses
payable by or on behalf of the trust estimated at $______, will be approximately
$__________.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS SUPPLEMENT OR THE PROSPECTUS TO WHICH IT RELATES IS TRUTHFUL OR
COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THE
CERTIFICATES ARE NOT INTERESTS IN OR OBLIGATIONS OF [_________________________],
ASSET BACKED SECURITIES CORPORATION, [_________________________] OR ANY OF THEIR
AFFILIATES.
CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE S-__ OF THIS PROSPECTUS
SUPPLEMENT AND PAGE ____ OF THE PROSPECTUS.
CREDIT SUISSE FIRST BOSTON
Prospectus Supplement dated ______, ____
<PAGE>
YOU SHOULD RELY ON INFORMATION CONTAINED IN THIS DOCUMENT OR TO WHICH WE HAVE
REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT
IS DIFFERENT. THIS DOCUMENT MAY ONLY BE USED WHERE IT IS LEGAL TO SELL THESE
SECURITIES. THE INFORMATION IN THIS DOCUMENT MAY ONLY BE ACCURATE ON THE DATE OF
THIS DOCUMENT.
We provide information to you about the certificates in two separate documents
that progressively provide more detail: (a) the accompanying prospectus, which
provides general information, some of which may not apply to your certificates
and (b) this prospectus supplement, which describes the specific terms of your
certificates.
IF THERE IS A CONFLICT BETWEEN THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING
PROSPECTUS, YOU SHOULD RELY ON THE INFORMATION IN THIS PROSPECTUS SUPPLEMENT.
This prospectus supplement and the accompanying prospectus include
cross-references to captions in these materials where you can find further
related discussions. The following table of contents provides the pages on which
these captions are located.
We have filed preliminary information regarding the trust's assets and the
certificates with the SEC. The information contained in this document supersedes
all of that preliminary information, which was prepared by the underwriters for
prospective investors.
Until ________, _____ all dealers that effect transactions in the offered
certificates, whether or not participating in this offering, may be required to
deliver a prospectus and prospectus supplement. This requirement is in addition
to the dealer's obligation to deliver a prospectus and prospectus supplement
when acting as underwriters with respect to their unsold allotments or
subscriptions.
We are not offering the certificates in any state where the offer is not
permitted.
We do not claim the accuracy of the information in this prospectus supplement
and the accompanying prospectus as of any date other than the dates stated on
their respective covers.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PROSPECTUS SUPPLEMENT PROSPECTUS
<S> <C>
Summary..............................................3 Summary..................................................
Risk Factors........................................10 Risk Factors.............................................
The Servicer........................................14 The Depositor............................................
Origination of the Home Equity Loans................17 Use of Proceeds..........................................
Description of the Home Equity Loans................18 Maturity, Prepayment and Yield Considerations............
Prepayment and Yield Considerations.................52 Description of the Securities............................
Formation of the Trust and Trust Property...........61 Credit Support...........................................
Additional Information..............................61 Description of Insurance.................................
Description of the Certificates.....................62 Certain Legal Aspects of the Mortgage Loans
The Policies and the Certificate Insurer............87 and Contracts.........................................
Use of Proceeds.....................................89 Federal Income Tax Consequences..........................
Certain Legal Aspects of the Home Equity Loans.....101 ERISA Considerations.....................................
Federal Income Tax Consequences....................102 Legal Investment.........................................
Certain State Tax Considerations...................103 Plan of Distribution.....................................
Erisa Considerations...............................104 Legal Matters............................................
Legal Investment Considerations....................105 Index of Terms...........................................
Underwriting.......................................105 prospectus supplement....................................
Experts............................................106 Additional Information...................................
Legal Matters......................................106 Incorporation of Certain Information by Reference........
Ratings............................................106
Index of Defined Terms.............................107
Annex I; Global Clearance, Settlement and Tax
Documentation Procedures...........................111
Annex II; Scheduled Notional Amounts...............115
</TABLE>
<PAGE>
SUMMARY
o This summary highlights selected information from this prospectus
supplement and does not contain all of the information that you need to
consider in making your investment decision. To understand all of the terms
of the offering of the certificates, you should carefully read this entire
prospectus supplement and the accompanying prospectus.
o This summary provides an overview of information to aid your understanding
and is qualified by the full description of this other information in this
prospectus supplement and the accompanying prospectus.
o You can find a listing of the pages where capitalized terms used in this
prospectus supplement are defined under the caption "Index of Principal
Terms" beginning on page S-___ in this prospectus supplement.
ISSUER
Asset Backed Securities Corporation Home Equity Loan Trust _____-__.
SELLER
[-------------------------].
DEPOSITOR
Asset Backed Securities Corporation, a special purpose Delaware
corporation. Asset Backed Securities Corporation is an indirect, wholly owned
special purpose subsidiary of Credit Suisse First Boston, Inc. Asset Backed
Securities Corporation will sell the home equity loans to the issuing trust.
Neither Credit Suisse First Boston, Inc. nor any of its affiliates has
guaranteed, will guarantee is or will be otherwise obligated with respect to any
notes.
SERVICER
[-------------------------].
ORIGINATORS
[_________________________] with respect to ___% of the home equity loans
and [_______________] with respect to ____% of the
THE CERTIFICATE INSURER.
[_________________________], a ___________________.
TRUSTEE.
-------------------.
CLOSING DATE
---------, ----.
CUT-OFF DATE
The close of business on _____ , _____.
DISTRIBUTION DATE
The ____ day of each month or if it is not a business day, then the next
succeeding business day. The first distribution date will be in _____ , _____.
RECORD DATE
With respect to any distribution date, the last business day of the month
immediately preceding the calendar month in which a distribution date occurs.
DUE PERIOD
With respect to any distribution date, the period from the second day of
the preceding month to the first day of each calendar month. Scheduled payments
of principal received by the trust during this period will be passed through to
holders of certificates on each distribution date.
THE CERTIFICATES
On the closing date, the trust will issue the offered certificates and the
non-offered certificates.
OFFERED CERTIFICATES
The Class A certificates, the Class A-IO certificates and the subordinated
offered certificates will be offered for purchase in denominations of $1,000 and
multiples of $1 above $1,000.
CLASS A CERTIFICATES
The Class A-1F, Class A-2F, Class A-3A, Class A-4A and Class A-5A
certificates.
CLASS A-IO CERTIFICATES
The Class A-IO certificates. Distributions will be made on Class A-IO
certificates in an amount equal to the sum of the amounts allocated to the Class
A-IO component certificates.
CLASS A-IO COMPONENT CERTIFICATES
The Class A-IOF and Class A-IOA component certificates. The Class A-IO
component certificates may not be traded separately. The Class A-IO component
certificates will have the following certificate rates and notional amounts:
COMPONENT CERTIFICATE RATENOTIONAL AMOUNT
--------- -------------------------------
Class A-IOF ___% (1)
Class A-IOA ____% (1)
(1) The lesser of (a) in the case of the Class A-IOF component certificates,
$_________for the first twelve distribution dates, $_________for the thirteenth
through the twenty-fourth distribution dates and $_________for the twenty-fifth
through the thirtieth distribution dates and in the case of the Class A-IOA
component certificates $_________for the first twelve distribution dates,
$_________for the thirteenth through the twenty-fourth distribution dates and
$_________for the twenty-fifth through the thirtieth distribution dates and (b)
the outstanding principal balance of the related home equity loan group. Each
notional amount will be $0 after the thirtieth distribution date.
SUBORDINATED OFFERED CERTIFICATES
The Class B-1 certificates. Distributions will be made on Class B-1
certificates in an amount equal to the sum of the amounts allocated to the Class
B component certificates.
SUBORDINATED CERTIFICATES
The Class B-1, Class B-IOF and Class B-IOA certificates.
CLASS B COMPONENT CERTIFICATES
The Class B-1F and Class B-1A component certificates. The Class B component
certificates may not be traded separately. The Class B component certificates
will have the following certificate rates, subject to an interest rate cap, and
initial principal balances:
COMPONENT CERTIFICATE RATE PRINCIPAL BALANCE
--------- ---------------- -----------------
Class B-1F (1) $_________
Class B-1A (1) $_________
(1) The interest rate on this component certificate may change from month to
month based on the London interbank offered rate for one-month U.S. dollar
deposits, and is subject to an interest rate cap.
NON-OFFERED CERTIFICATES
The Class B-IOF, Class B-IOA, Class X-F, Class X-A, Class P-F, Class P-A
and Class R-Certificates are not being offered to the public. Any information
with respect to those certificates is included in this prospectus supplement
solely to provide a better understanding of the offered certificates.
The trustee will distribute to the Class X-F, Class X-A and Class R
certificates excess cashflow as described in this prospectus supplement. The
trustee will distribute to the Class P-F and Class P-A certificates all
prepayment penalties received on the home equity loans. The trustee will
distribute to the Class B-IOF and Class B-IOA certificates interest for the
first thirty six distribution dates at the following certificate rates and on
notional amounts equal to the lesser of the amounts shown below and the related
home equity loan group outstanding principal balance:
COMPONENT CERTIFICATE RATE NOTIONAL AMOUNT
--------- ---------------- ---------------
Class B-IOF _____% (1)
Class B-IOA _____% (1)
(1) This class will not receive any principal payments but will accrue interest
on its notional amount, the lesser of (a) in the case of the Class B-IOF
certificates, $_________and in the case of the Class B-IOA certificates
$_________and (b) the outstanding principal balance of the related loan group.
The notional amounts will be $0 on and after the thirty-sixth distribution date.
GROUP I CERTIFICATES
The Group I certificates will be the Class A-1F, Class A-2F, Class A-IOF
component, Class B-1F component and Class B-IOF certificates. Distributions on
the Group I certificates will be derived from payments on the home equity loans
in Group I. Principal distributions on the Class A-1F Certificates will be based
on the principal received on a subgroup of Group I consisting of home equity
loans with initial principal balances of, in most cases, $240,000 or less.
Principal distributions on the Class A-2F Certificates will be based on the
principal received on a subgroup of Group I consisting of home equity loans with
initial principal balances of greater than, in most cases, $240,000.
GROUP II CERTIFICATES
The Group II certificates will be the Class A-3A, Class A-4A, Class A-5A,
Class A-IOA component, Class B-1A component and Class B-IOA certificates.
Distributions on the Group II certificates will be derived primarily from
payments on the home equity loans in Group II. Principal distributions on the
Class A-3A certificates will be based on the principal received on a subgroup of
Group II consisting of home equity loans with initial principal balances of, in
most cases, $240,000 or less. Principal distributions on the Class A-4A
certificates will be based on the principal received on a subgroup of Group II
consisting of home equity loans with initial principal balances of greater than,
in most cases, $240,000. Principal distributions on the Class A-5A certificates
will be based on the ratio of the outstanding principal balance of the Class
A-5A certificates to the outstanding balance of the Class A certificates with
respect to Group II.
BOOK-ENTRY REGISTRATION
We will issue the offered certificates in book-entry form. You will hold
your interests through a depository. While the offered certificates are
book-entry they will be registered in the name of the applicable depository, or
in the name of the nominee of the depository. Transfers within any depository
system will be in accordance with the usual rules and operating procedures of
that system.
DISTRIBUTIONS TO CERTIFICATEHOLDERS
You will be entitled to receive payments of interest on each distribution
date. The amount of interest that you are entitled to receive on any
distribution date is subject to reduction as a result of (1) the application of
the Soldier's and Sailor's Civil Relief Act of 1940 and (2) the servicer's
failure to pay compensating interest to the trust. The amount of principal you
will be entitled to receive will vary depending on a number of factors,
including the payments received on the home equity loans in the related group.
If you hold an offered certificate on the applicable record date, you will be
entitled to receive payments on the related distribution date.
CERTIFICATE INTEREST
The interest rate on any distribution date for a Class A certificate will
be the interest rate set forth in this prospectus supplement. The Class A-IO
certificates will receive interest based on the interest rates set forth in this
prospectus supplement for the related Class A-IO component certificates. The
subordinated offered certificates will receive interest based on the interest
rates set forth in this prospectus supplement for the related Class B component
certificates. Interest on the Class B and Class A-IO component certificates will
be separately calculated for each Class B or Class A-IO, as applicable,
component certificate and you will be entitled to receive the sum of the
interest on each Class B or Class A-IO, as applicable, component certificate.
You can use the following formula to calculate your current interest
payment on any distribution date:
N x IR x PB= your interest payment
------
360
N= for the fixed rate certificates, 30 and for the adjustable rate
certificates, the number of days from the last distribution date (or in the case
of the initial distribution date, from _________, ____) until the current
distribution date.
IR= the applicable per annum interest rate.
PB= the principal balance or notional amount of your certificates or component
certificate immediately prior to any distributions on each distribution
date.
INTEREST RATE CAP
The interest rate for the Class A-3A, Class A-4A and Class A-5A
certificates and the Class B component certificates is limited by a maximum rate
cap that will be determined based on the weighted average of the interest rates
on the applicable group of home equity loans (net of specified fees and
expenses).
PRINCIPAL
On each distribution date, the trustee will distribute principal of the
classes of offered certificates in the manner and priority discussed under the
caption "Description of the Certificates - Distributions" in this prospectus
supplement.
TRUST PROPERTY
The trust property is held by the trustee for the benefit of the
certificateholders and the certificate insurer. The trust property includes:
o a pool of sub-prime, closed-end, fixed rate and adjustable rate home equity
loans transferred to the trust on the closing date secured by first lien
deeds of trust or mortgages primarily on one- to four-family residential
properties;
o payments on the home equity loans due and received after the cut-off date
(other than payments of interest due on or prior to _______, ____);
o property that secured a home equity loan which has been acquired by
foreclosure or deed in lieu of foreclosure;
o specific rights of the depositor under a mortgage loan purchase agreement;
o amounts on deposit in the accounts specified in this prospectus supplement;
o rights under any hazard insurance policies, if any covering the mortgaged
properties; and
o proceeds of the foregoing.
THE HOME EQUITY LOANS
On the closing date, the trust will purchase a pool of home equity loans.
The statistical information presented in this prospectus supplement is with
respect to ______ home equity loans, in the aggregate principal balance of
approximately $______as of the cut-off date. Some of these home equity loans may
not be purchased by the trust and other home equity loans may be purchased by
the trust on the closing date.
The home equity loans will be divided into two groups. Each of the home
equity loan groups will constitute a separate sub-trust. The Group I home equity
loan group will contain home equity loans that bear interest at fixed rates. The
Group II home equity loan group will contain home equity loans that bear
interest at rates that adjust semi-annually based on six-month LIBOR and the
applicable gross margin (subject to the limitations described in this prospectus
supplement). The home equity loans in each group will be subdivided into
subgroups based on whether the principal balance of each loan is greater than or
equal to or less than, in most cases, $240,000.
The initial rate adjustment date for those home equity loans that bear
interest at an adjustable rate is either (a) six months after the date of
origination of the related home equity loan or (b) two or three years after the
date of origination of the related home equity loan. The home equity loans are
secured by first lien mortgages or deeds of trust primarily on one- to
four-family residential properties, located in ____ states and the District of
Columbia. None of the home equity loans are insured by primary mortgage
insurance policies.
GROUP IA HOME EQUITY LOANS
The home equity loans in Group Ia will have the following characteristics
as of the cut-off date:
o number of home equity loans: __________
o aggregate principal balance: $__________
o average principal balance: $__________
o maximum principal balance: $__________
o minimum principal balance: $__________
o latest maturity date: __________
o interest rates range: ____% to ____%
o weighted average interest rate: _____%
(approximate)
o weighted average remaining
term: ____ months (approximate)
o remaining term range:
____ months to ____ months
o weighted average
original loan-to-value ratio: ____%
(approximate)
o maximum original loan-to-value ratio: ____%
o % of balloon loans: ____%
(approximate)
GROUP IB HOME EQUITY LOANS
The home equity loans in Group Ib will have the following characteristics
as of the cut-off date:
o number of home equity loans: ____
o aggregate principal balance: $____
o average principal balance: $____
o maximum principal balance: $____
o minimum principal balance: $____
o latest maturity date: ____
o interest rates range: ____% to ____%
o weighted average interest rate: ____%
(approximate)
o weighted average remaining
term: ____months (approximate)
o remaining term range:
____ months to ____ months
o weighted average
original loan-to-value ratio: ____%
(approximate)
o maximum original loan-to-value ratio: ____%
o % of balloon loans: ____%
(approximate)
GROUP IIA HOME EQUITY LOANS
The home equity loans in Group IIa will have the following characteristics
as of the cut-off date:
o number of home equity loans: ____
o aggregate principal balance: $____
o average principal balance: $____
o maximum principal balance: $____
o minimum principal balance: $____
o latest maturity date: ____
o weighted average current interest rate: ____%
(approximate)
o current interest rates range: ____% to ____%
o weighted average gross margin: ____%
(approximate)
o gross margin range: ____% to ____%
o weighted average maximum interest rate: ____%
(approximate)
o maximum interest rate range: ____% to ____%
o weighted average minimum interest rate: ____%
(approximate)
o minimum interest rate range: ____% to ____%
o weighted average remaining
term: ____months (approximate)
o remaining term range:
____ months to ____ months
o weighted average original
loan-to-value ratio: ____%
(approximate)
o maximum original loan-to-value
ratio: ____%
o % of Six-Month Adjustable Rate Loans (by
principal balance): ____%
o % of 2/28 Adjustable Rate Loans (by
principal balance): ____%
o % of 3/27 Adjustable Rate Loans (by
principal balance): ____%
o weighted average initial interest rate
adjustment cap: ____%
o weighted average periodic interest
rate adjustment cap: ____%
o weighted average lifetime interest rate
adjustment cap: ____%
GROUP IIB HOME EQUITY LOANS
The home equity loans in Group IIb will have the following characteristics
as of the cut-off date:
o number of home equity loans: ____
o aggregate principal balance: $____
o average principal balance: $____
o maximum principal balance: $____
o minimum principal balance: $____
o latest maturity date: ____
o weighted average current interest rate: ____%
(approximate)
o current interest rates range: ____% to ___%
o weighted average gross margin: ____%
(approximate)
o gross margin range: ____% to ____%
o weighted average maximum interest
rate: ____%
(approximate)
o maximum interest rate range: ____% to ____%
o weighted average minimum interest rate: ____%
(approximate)
o minimum interest rate range: ____% to ____%
o weighted average remaining
term: ____months (approximate)
o remaining term range: ____ months to ____ months
o weighted average original
loan-to-value ratio: ____%
(approximate)
o maximum original loan-to-value
ratio: ____%
o % of Six-Month Adjustable Rate Loans (by
principal balance): ____%
o % of 2/28 Adjustable Rate Loans (by
principal balance): ____%
o % of 3/27 Adjustable Rate Loans (by
principal balance): ____%
o weighted average initial interest rate
adjustment cap: ____%
o weighted average periodic interest
rate adjustment cap: ____%
o weighted average lifetime interest rate
adjustment cap: ____%
DELINQUENCY ADVANCES, SERVICING
ADVANCES AND COMPENSATING INTEREST
Each month the servicer will determine the amount of any unpaid interest
and principal due on the home equity loans due to delinquent payments. If the
servicer believes that the unpaid interest and principal can be recovered, then
the servicer will advance the unpaid interest and principal (net of the
servicing fee) to the trust. The servicer will also pay expenses in connection
with loss mitigation strategies. The trust will reimburse the servicer for the
advances and expenses from future collections on the related home equity loan.
The servicer will provide to the trust any shortfall in the anticipated
collection of interest on a home equity loan (net of the servicing fee) that is
caused by a full prepayment of a home equity loan up to the amount of the
servicing fee.
CREDIT ENHANCEMENT
Credit enhancement refers to a mechanism that is intended to protect the
holders of particular classes of certificates against losses due to defaults by
the borrowers under the home equity loans.
The Class A and Class A-IO component certificates have the benefit of four
types of credit enhancement:
o the use of excess interest to cover losses and to create
overcollateralization;
o the two year interest rate cap agreement;
o subordination of the Class B Certificates; and
o the financial guaranty insurance policies.
The Class B component certificates, and consequently, the subordinated
offered certificates have the benefit of only the first two forms of credit
enhancement described above. THE SUBORDINATED CERTIFICATES ARE NOT COVERED BY
THE FINANCIAL GUARANTY INSURANCE POLICIES.
OPTIONAL TERMINATION
On any date when the aggregate principal balance of the certificates is
less than 10% of their principal balances on the closing date and to the extent
conditions specified in the pooling and servicing agreement are satisfied, the
holder of the Class X-F certificates will have the right to purchase the home
equity loans from the trust. If the holder of the Class X-F certificates does
not exercise the right, the certificate insurer or the servicer may purchase the
home equity loans.
OPTIONAL PURCHASE OF
DEFAULTED HOME EQUITY LOANS.
The holder of the related Class X certificate has the option, but is not
obligated, and if the option is not exercised, the servicer has the option, but
is not obligated, to purchase from the trust any home equity loan that becomes
90 days or more delinquent.
FEDERAL TAX CONSEQUENCES
Stroock & Stroock & Lavan LLP has acted as counsel to the depositor and is
of the opinion that:
o The trust will include four real estate mortgage investment conduits or
"REMICs" for federal income tax purposes.
o The offered certificates will constitute "regular interests" in a REMIC and
will be treated as debt instruments of the REMIC for federal income tax
purposes with payment terms equivalent to the terms of the certificates.
ERISA CONSIDERATIONS
The acquisition of a Class A or Class A-IO certificate by a pension or
other employee benefit plan subject to the Employee Retirement Income Security
Act of 1974, as amended, or ERISA could, in some instances, result in a
"prohibited transaction" or other violation of the fiduciary responsibility
provisions of ERISA and the Internal Revenue Code. Some exemptions from the
prohibited transaction rules could be applicable to the acquisition of the Class
A or Class A-IO certificates. The subordinated offered certificates are not
eligible for purchase by plans other than insurance company general accounts
pursuant to Prohibited Transaction Class Exemption 95-60.
Any plan fiduciary considering whether to purchase any Class A or Class
A-IO certificate on behalf of a plan should consult with its counsel regarding
the applicability of the provisions of ERISA and the Internal Revenue Code.
Subject to the considerations and conditions described in this prospectus
supplement and in the prospectus, it is expected that the Class A or Class A-IO
certificates may be purchased by a plan.
LEGAL INVESTMENT CONSIDERATIONS
The Class A and Class A-IO certificates will constitute "mortgage related
securities" for purposes of the Secondary Mortgage Market Enhancement Act of
1984) as long as they are rated in one of the two highest rating categories by
at least one nationally recognized statistical rating organization. The
subordinated offered certificates will not constitute "mortgage related
securities."
CERTIFICATE RATING
Before the offered certificates can be issued, the trust must obtain the
following ratings:
CLASS A CERTIFICATES
o "AAA" by Standard & Poor's Ratings Services, a division of The McGraw-Hill
Companies, Inc. and Duff & Phelps Credit Rating Co.
o "Aaa" by Moody's Investors Service, Inc.
CLASS A-IO CERTIFICATES
o "AAAr" by Standard & Poor's Ratings Services, a division of The McGraw-Hill
Companies, Inc.
o "Aaa" by Moody's Investors Service, Inc.
o "AAA" by Duff & Phelps Credit Rating Co.
CLASS B-1 CERTIFICATES
o "BBB" by Duff & Phelps Credit Rating Co.
o "Baa3" by Moody's Investors Service, Inc.
<PAGE>
RISK FACTORS
You should carefully consider the following risk factors prior to any
purchase of certificates. You should also consider the information set forth
under "Risk Factors" in the prospectus.
YOU MAY HAVE DIFFICULTY SELLING YOUR CERTIFICATES. The offered certificates
will not be listed on any securities exchange. As a result, if you wish to sell
your certificates, you will have to find a purchaser that is willing to purchase
your certificates. The underwriter intends to make a secondary market for the
offered certificates. The underwriter may do so by offering to buy the offered
certificates from investors that wish to sell. However, the underwriter will not
be obligated to make offers to buy the offered certificates and may stop making
offers at any time. In addition, the prices offered, if any, may not reflect
prices that other potential purchasers, were they to be given the opportunity,
would be willing to pay. There have been times in the past where there have been
very few buyers of similar asset backed securities, and there may be times again
in the future. As a result, you may not be able to sell your certificates when
you wish to do so or you may not be able to obtain the price you wish to
receive.
UNDERWRITING STANDARDS. [_________________________]'s underwriting
standards are primarily intended to assess the value of the mortgaged property
and to evaluate the adequacy of the mortgaged property as collateral for the
mortgage loan and the applicant's credit standing and ability to repay.
[_________________________] provides loans primarily to borrowers who do not
qualify for loans conforming to Fannie Mae and Freddie Mac guidelines but who
generally have equity in their property. While [_________________________]'s
primary consideration in underwriting a mortgage loan is the value of the
mortgaged property as collateral, [_________________________] also considers,
among other things, a mortgagor's credit history, repayment ability and debt
service-to-income ratio, as well as the type and use of the mortgaged property.
[_________________________]'s underwriting standards do not prohibit a mortgagor
from obtaining secondary financing from other sources at the time of origination
of [_________________________]'s first lien. Any secondary financing would
reduce the equity the mortgagor would otherwise have in the related mortgaged
property that is indicated in [_________________________]'s loan-to-value ratio
determination. Asset Backed Securities Corporation believes that
[_______________].'s underwriting standards utilize factors similar to
[_________________________]'s underwriting standards in underwriting mortgage
loans to its underwriting standards.
As a result of the foregoing, the rates of delinquency, foreclosure and
bankruptcy on the home equity loans are likely to be higher, and may be
substantially higher, than on mortgage loans underwritten in a more traditional
manner.
Furthermore, changes in the values of mortgaged properties may have a
greater effect on the delinquency, foreclosure, bankruptcy and loss experience
of the home equity loans than on mortgage loans originated in a more traditional
manner. No assurance can be given that the values of the mortgaged properties
have remained or will remain at the levels in effect on the dates of origination
of the related home equity loans.
SERVICING RISK. The servicing of home equity loans of the type originated
by the originators, as compared to the servicing of prime mortgage loans,
requires special skill and diligence. The servicing of these types of home
equity loans generally require more attention to each account, earlier and more
frequent contact with borrowers in default and commencing the foreclosure
process at an earlier stage of default. The servicer began directly servicing
home equity loans in ____. As a result the servicer has limited experience
servicing home equity loans similar to the home equity loans being sold to the
trust. The servicer's lack of experience in servicing home equity loans may
result in greater defaults and losses on the home equity loans. This may result
in an accelerated prepayment of your certificates and losses on the subordinated
certificates.
Because the servicer commenced its direct servicing operations in ____, the
servicer does not have historical delinquency, bankruptcy, foreclosure or
default experience that may be referred to for purposes of examining the
servicer's performance in servicing mortgage loans similar to the home equity
loans, other than to the limited extent as described under "THE SERVICER--
Delinquency and Loss Experience" in this prospectus supplement. There can be no
assurance that this experience is or will be representative of the performance
of the home equity loans.
Pursuant to the pooling and servicing agreement, the certificate insurer
will have the right to remove the servicer and the holders of the Class X
certificates, with the prior written consent of the certificate insurer, of the
related group will have the right to appoint a special servicer for delinquent
mortgage loans. In the event that the certificate insurer removes the servicer
and appoints a successor servicer or the holder of a Class X certificate, with
the prior written consent of the certificate insurer, appoints a special
servicer, the servicing of the home equity loans or a delinquent home equity
loan will be transferred. As a result, interruptions in servicing may occur,
potentially resulting in the home equity loans suffering a higher default rate.
FOR A DESCRIPTION OF THE SERVICING PROCESS, WE REFER YOU TO "THE SERVICER"
FOR MORE DETAIL.
ADDITIONAL RISKS ASSOCIATED WITH THE HOME EQUITY LOANS. Approximately ____%
of the home equity loans, by aggregate principal balance as of the cut-off date,
had a loan-to-value ratio at origination in excess of ____% but will not be
covered by a primary mortgage insurance policy. No home equity loan will have a
loan-to-value ratio exceeding ____% at origination. Home equity loans with
higher loan-to-value ratios may present a greater risk of loss. There can be no
assurance that the loan-to-value ratio of any home equity loan determined at any
time after origination is less than or equal to its original loan-to-value
ratio.
GEOGRAPHIC CONCENTRATION MAY AFFECT PERFORMANCE. Approximately ____% and
____% of the home equity loans in Group I and Group II, respectively, by
aggregate principal balance as of the cut-off date, are secured by mortgaged
properties located in the state of [California]. The aggregate principal balance
of home equity loans in the [California] zip code with the largest amount of
home equity loans was approximately $____and $____in Group I and Group II,
respectively. If the [California] residential real estate market should
experience an overall decline in property values after the dates of origination
of the home equity loans, the rates of delinquencies, foreclosures, bankruptcies
and losses on the home equity loans may be expected to increase, and may
increase substantially. A higher rate of default may result in accelerated
payments on your certificates. You will bear any reinvestment risk associated
with any accelerated payments.
RISK OF EARLY DEFAULTS. Substantially all of the home equity loans were
originated within twelve months prior to the cut-off date. Although little data
is available, defaults on home equity loans, including home equity loans similar
to the home equity loans to be included in the trust, are generally expected to
occur with greater frequency in the early years of the terms of home equity
loans.
PREPAYMENT RISKS. Approximately ____% of the Group I home equity loans and
approximately ____% of the Group II home equity loans, in each case, as of the
cut-off date, may be prepaid in whole or in part at any time without penalty.
Home equity loans may not be viewed by borrowers as permanent financing.
Accordingly, the home equity loans may experience a higher rate of prepayment
than traditional mortgage loans. The trust's prepayment experience may be
affected by a wide variety of factors, including general economic conditions,
interest rates, the availability of alternative financing and homeowner
mobility. In addition all of the home equity loans contain due-on-sale
provisions and the servicer will be required by the pooling and servicing
agreement to enforce the provisions unless enforcement is not permitted by
applicable law or the servicer, in a manner consistent with reasonable
commercial practice and the pooling and servicing agreement, permits the
purchaser of the related mortgaged property to assume the related home equity
loan. To the extent permitted by applicable law, any assumption will not release
the original borrower from its obligation under any home equity loan.
WE REFER YOU TO "CERTAIN LEGAL ASPECTS OF THE MORTGAGE LOANS AND
CONTRACTS--'DUE-ON-SALE CLAUSES'" IN THE PROSPECTUS FOR MORE DETAIL.
Approximately ____% of the Group II home equity loans as of the cut-off
date are 2/28 Adjustable Rate Loans, having a two year fixed rate term followed
by a 28 year adjustable rate term. Approximately ____% of the Group II home
equity loans as of the cut-off date are 3/27 Adjustable Rate Loans, having a
three year fixed rate term followed by a 27 year adjustable rate term. As with
all home equity loans, the rate of prepayments on home equity loans that are
2/28 Adjustable Rate Loans or 3/27 Adjustable Rate Loans and are in the initial
fixed rate period is sensitive to prevailing interest rates. The prepayment
behavior of the 2/28 Adjustable Rate Loans or 3/27 Adjustable Rate Loans may
differ from that of the other home equity loans. As a 2/28 Adjustable Rate Loan
or a 3/27 Adjustable Rate Loan approaches its initial adjustment date, the
borrower may become more likely to refinance a loan to avoid an increase in the
coupon rate, even if fixed rate loans are only available at rates that are
slightly lower or higher than the coupon rate before adjustment. The existence
of the applicable periodic rate cap, lifetime cap and lifetime floor also may
affect the likelihood of prepayments resulting from refinancings.
Generally, if prevailing interest rates fall significantly below the
interest rates on the home equity loans, the home equity loans are likely to be
subject to higher prepayment rates than if prevailing rates remain at or above
the interest rates on the home equity loans. Conversely, if prevailing interest
rates rise significantly above the interest rates on the home equity loans, the
rate of prepayments is likely to decrease. The average life of your certificates
and, if purchased at other than par, the yields realized by you will be
sensitive to levels of payment, including prepayments relating to the home
equity loans, on the home equity loans. In general, the yield on an offered
certificate that is purchased at a premium from the outstanding principal amount
of the certificate may be adversely affected by a higher than anticipated level
of prepayments of the home equity loans. Conversely, the yield on an offered
certificate that is purchased at a discount from the outstanding principal
amount of the certificate may be adversely affected by a lower than anticipated
level of prepayments.
WE REFER YOU TO "PREPAYMENT AND YIELD CONSIDERATIONS" FOR MORE DETAIL.
EFFECT OF HOME EQUITY LOAN YIELD ON CERTIFICATE RATE OF GROUP II
CERTIFICATES AND SUBORDINATED OFFERED CERTIFICATES; BASIS RISK. Approximately
____% of the Group II home equity loans as of the cut-off date are Six- Month
Adjustable Rate Loans. These home equity loans adjust semi-annually based upon
the London interbank offered rate for six-month United States dollar deposits.
The remaining Group II home equity loans are either 2/28 Adjustable Rate Loans
or 3/27 Adjustable Rate Loans. These home equity loans provide for a fixed
interest rate for a period of approximately two years or three years, as
applicable, following origination and after that time provide for interest rate
and payment adjustments in a manner similar to the Six-Month Adjustable Rate
Loans. The interest rate for the Group II certificates, other than Class A-IOA
component certificate and Class B-IOA certificate, and the Class B component
certificates is determined in accordance with and adjusts monthly based upon
one-month LIBOR, and is subject to interest rate caps. One-month LIBOR and
six-month LIBOR may respond to different economic and market factors, and there
is not necessarily a correlation between them. Thus, it is possible, for
example, that one-month LIBOR may rise during periods in which six-month LIBOR
is stable or is falling or that, even if both one-month LIBOR and six-month
LIBOR rise during the same period, one-month LIBOR may rise more rapidly than
six-month LIBOR. Furthermore, even if one-month LIBOR and six-month LIBOR were
at the same level, various factors may cause an interest rate cap to limit the
amount of interest that would otherwise be distributable on the Group II
certificates, other than Class A-IOA component certificate and Class B-IOA
certificate, and the Class B component certificates. The operation of an
interest rate cap may cause the certificate rate of any of these certificates to
be reduced for extended periods in a rising interest rate environment and could
result in the temporary or permanent decline in the market value of any of these
certificates.
WE REFER YOU TO "DESCRIPTION OF THE CERTIFICATES--CALCULATION OF ONE-MONTH
LIBOR" FOR MORE DETAIL.
In addition, the interest rates on the Group II home equity loans are
subject to periodic interest rate adjustment caps and maximum rate caps, the
weighted average margin of the home equity loans in Group II is subject to
change based upon prepayment experience and the weighted average coupon rate of
the home equity loans in Group II is subject to change based upon prepayment
experience, which also may result in an interest rate cap limiting increases in
the certificate rate for some of the certificates. Finally, the home equity
loans accrue interest on the basis of a 360-day year assumed to consist of
twelve 30-day months, while calculations of interest on the Group II
certificates, other than Class A-IOA component certificate and Class B-IOA
certificate, and the Class B component certificates will be made on the basis of
the actual number of days elapsed in the related interest period and a year of
360 days. This may result in an interest rate cap limiting the certificate rate
for these certificates in interest periods that have more than 30 days.
Consequently, the interest that becomes due on the home equity loans, net of the
sum of the fees payable to each of the servicer, the trustee and the certificate
insurer, with respect to any distribution date may be insufficient to pay you
interest at your stated certificate rate.
YIELD CONSIDERATIONS RELATING TO EXCESS CASH. If the Class A and Class B
component certificates related to a home equity loan group are
overcollateralized below the required amount, excess interest, if any, will be
distributable to you as a payment of principal. If purchased at a premium or a
discount, the yield to maturity on your certificate will be affected by the rate
at which excess interest is distributed as a payment of principal. If the actual
rate of excess interest distribution is slower than the rate anticipated by an
investor who purchases a related offered certificate at a discount, the actual
yield to the investor will be lower than the investor's anticipated yield. If
the actual rate of excess interest distribution is faster than the rate
anticipated by an investor who purchases a related offered certificate at a
premium, the actual yield to the investor will be lower than the investor's
anticipated yield. The amount of excess interest available for distribution with
respect to a home equity loan group on any distribution date will be affected
by:
o the actual amount of interest received, collected or recovered in respect
of the home equity loans in the related home equity loan group during the
calendar month prior to the related distribution date;
o changes in the weighted average of the coupon rates of the related home
equity loans resulting from prepayments and liquidations of home equity
loans in the related home equity loan group; and
o in the case of Group II home equity loans, adjustments in the related
interest rates.
OWNERS OF CLASS A-IO CERTIFICATES MAY NOT RECOVER THEIR INITIAL
INVESTMENTS. An investment in the Class A-IO certificates is risky because the
return of the investment depends solely on the payments of interest by borrowers
under the mortgage loans. If the borrowers prepay their mortgage loans, no
further interest payments will be made. If borrowers prepay their mortgage loans
very fast, investors in the Class A-IO certificates may not recover their
initial investments. In addition, the Class A-IO certificates are not entitled
to any distributions after the 30th distribution date.
THE SUBORDINATED OFFERED CERTIFICATES HAVE A GREATER RISK OF LOSS THAN THE
OTHER OFFERED CERTIFICATES. The Class B component certificates of a group will
not be allocated any distributions of interest until the Class A and Class A-IO
component certificates of the related group receive their interest distributions
and will not receive any distributions of principal until the Class A and Class
A-IO component certificates of the related group receive their principal
distributions. If the available funds are insufficient to make all of the
required distributions on the Class A, Class A-IO component and Class B
component certificates of the related group, one or more of the related Class B
component certificates will not receive all of their distributions. In addition,
losses due to defaults by borrowers of the related group, will be allocated
first to the related Class B component certificates and second to the unrelated
Class B component certificates to the extent not covered by the amount of
overcollateralization and excess interest in the related group at that time. Any
allocation of a loss to a class of Class B component certificates will reduce
the amount of interest and, to the extent not reimbursed from future excess
interest, principal they will receive. Losses are allocated to the Class B
component certificates in the following order: (a) from Group I to the Class
B-1F component certificate and then to the Class B-1A component certificate and
(b) from Group II to the Class B-1A component certificate and then to the Class
B-1F component certificate. The Class A and Class A-IO Component certificates
receive distributions before the Class B component certificates. As a result of
the foregoing, the Class B-1 certificates will be affected to a larger degree by
any losses on the home equity loans. In addition, following the exercise of the
clean-up call, the Class B component certificates and consequently, the Class
B-1 Certificates, may not receive amounts with respect to any losses allocated
to the Class B component certificates that have not been previously reimbursed.
THE TRUST ASSETS ARE THE ONLY SOURCE OF PAYMENTS ON THE OFFERED
CERTIFICATES. All distributions on the offered certificates will be made from
payments by borrowers under the home equity loans or, except in the case of the
subordinated offered certificates, payments under the financial guaranty
insurance policy. The trust has no other assets to make distributions on the
offered certificates. The mortgage loans are NOT insured or guaranteed by any
person. The notes represent obligations of the trust and will not be insured or
guaranteed by any entity. The trust is the only person that is obligated to make
distributions on the offered certificates. The offered certificates are NOT
insured by any governmental agency.
CERTIFICATE RATING. The rating of the offered certificates will depend on
an assessment by the rating agencies of the home equity loans and, with respect
to the Class A and Class A-IO certificates, on an assessment of the
claims-paying ability of the certificate insurer. Any reduction in a rating
assigned to the claims-paying ability of the certificate insurer below the
rating initially given to the Class A and Class A-IO certificates may result in
a reduction in the rating of the Class A and Class A-IO certificates. The rating
by the rating agencies of the offered certificates is not a recommendation for
you to purchase, hold or sell the offered certificates, and the rating does not
comment as to the market price or suitability for a particular investor. There
is no assurance that the ratings will remain in place for any given period of
time or that the ratings will not be lowered or withdrawn by the rating
agencies. In general, the ratings address credit risk and do not address the
likelihood of prepayments on home equity loans, the likelihood of the payment of
any interest payable to the offered certificateholders on a subordinated basis
due to the application of the available funds cap described under the section
"DESCRIPTION OF THE CERTIFICATES--Certificate Rate" or the possibility that
offered certificateholders might realize a lower than anticipated yield. The
ratings of the offered certificates do not address the possibility of the
imposition of United States withholding tax with respect to non-U.S. persons.
Any downgrade in the rating of the certificate insurer will likely result in the
downgrade of the rating of the offered certificates. No rating of the
originator, the servicer or the company is required to maintain the rating of
the offered certificates.
NATURE OF COLLATERAL. Even assuming that the mortgaged properties provide
adequate security for the home equity loans, substantial delays in receiving
proceeds could be encountered by the trust in connection with the liquidation of
defaulted home equity loans. As a result, shortfalls in distributions on offered
certificates could occur if either the certificate insurer, the servicer or any
special servicer were unable to perform their obligations under the pooling and
servicing agreement or the policies. Further, liquidation expenses, including,
legal fees, real estate taxes, and maintenance and preservation expenses, will
reduce the proceeds payable on the offered certificates and thus reduce the
security for the home equity loans. In the event any of the mortgaged properties
fail to provide adequate security for the related home equity loans, Class A and
Class A-IO certificateholders could experience a loss if the certificate insurer
were unable to perform its obligations under the policies.
WE REFER YOU TO "CERTAIN LEGAL ASPECTS OF THE MORTGAGE LOANS AND CONTRACTS"
IN THE PROSPECTUS FOR MORE DETAIL.
PAYMENTS ON THE HOME EQUITY LOANS. When a full principal prepayment is made
on a home equity loan, the mortgagor is charged interest only up to the date of
prepayment, rather than for a full month, which may result in a prepayment
interest shortfall. The servicer is obligated to pay those shortfalls in
interest collections payable on the Class A, Class A-IO component and Class B
component certificates that are attributable to prepayment interest shortfalls,
but only to the extent of the servicing fee for the related due period. The
servicing fee will not be available to cover any shortfalls in interest
collections on the home equity loans that are attributable to the Soldier's and
Sailor's Civil Relief Act of 1940. These interest shortfalls will not be covered
by payments under the policies. Prepayment interest shortfalls, after
application of the servicing fee as described above, will be so covered by the
related policy. The policies will not cover the servicer's failure to pay
compensating interest.
THE OFFERED CERTIFICATES ARE NOT SUITABLE INVESTMENTS FOR ALL INVESTORS.
The offered certificates are not suitable investments for any investor that
requires a regular or predictable schedule of payments or payment on any
specific date. The offered certificates are complex investments that should be
considered only by investors who, either alone or with their financial, tax and
legal advisors, have the expertise to analyze the prepayment, reinvestment,
default and market risk, the tax consequences of an investment, and the
interaction of these factors.
THE SERVICER
The information set forth in the following paragraphs has been provided by
[_________________________]. None of the Depositor, the Seller, the Trustee, the
Certificate Insurer, the Underwriter or any of their respective affiliates has
made or will make any representation as to the accuracy or completeness of
information.
[_________________________], a __________ corporation ("______" or the
"Servicer" ), is a specialty finance company engaged in the business of
originating, purchasing, servicing and selling sub-prime mortgage loans secured
by one- to four-family residences. ______ began originating sub-prime mortgage
loans in ----------.
______ is approved as a seller/servicer for Fannie Mae and as a
non-supervised mortgagee by the U.S. Department of Housing and Urban
Development.
LENDING ACTIVITIES AND LOAN SALES
______ currently originates real estate loans through its network of
offices and loan origination centers. ______ also participates in secondary
market activities by originating and selling mortgage loans while continuing to
service the majority of the loans sold. In other cases ______'s whole loan sale
agreements provide for the transfer of servicing rights.
______'s primary lending activity is funding loans to enable mortgagors to
purchase or refinance residential real property, which loans are secured by
first or second liens on the related real property. ______'s single-family real
estate loans are predominantly "conventional" mortgage loans, meaning that they
are not insured by the Federal Housing Administration or partially guaranteed by
the U.S. Department of Veterans Affairs.
The following table summarizes ______'s one- to four-family residential
mortgage loan origination and sales activity for the periods shown below. Sales
activity may include sales of mortgage loans purchased by ______ from other loan
originators.
<TABLE>
<CAPTION>
Three Months Ended March 31, Year Ended December 31,
------------------------------ -----------------------------------------------------------
1999 1998 1994(1) 1995(1) 1996(1) 1997(1) 1998
-------------- --------------- -- ----------- ----------- ----------- ----------- -----------
(Dollars in Thousands)
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Originations and
Purchases.........
Sales.............
</TABLE>
SERVICING GUIDELINES
______ services all of the mortgage loans it originates that are retained
in its portfolio and continues to service at least a majority of the loans that
have been sold to investors. Servicing includes collecting and remitting loan
payments, accounting for principal and interest, contacting delinquent
mortgagors, and supervising foreclosure in the event of unremedied defaults.
______'s servicing activities are audited periodically by applicable regulatory
authorities. Some of the financial records of ______ relating to its loan
servicing activities are reviewed annually as part of the audit of the ______'s
financial statements conducted by its independent accountants.
When a mortgagor fails to make a required payment on a residential mortgage
loan, ______ attempts to cause the deficiency to be cured by corresponding with
the mortgagor. In most cases deficiencies are cured promptly. Pursuant to
______'s customary procedures for residential mortgage loans serviced by it for
its own account, ______ generally mails a notice of intent to foreclose to the
mortgagor after the loan is delinquent two payments and, within one month of
that time, if the loan remains delinquent, typically institutes appropriate
legal action to foreclose on the property securing the loan. If foreclosed, the
property is sold at public or private sale and may be purchased by ______. In
California, real estate lenders are generally unable as a practical matter to
obtain a deficiency judgment against the mortgagor on a loan secured by
single-family real estate.
DELINQUENCY AND LOSS EXPERIENCE
The following table sets forth the delinquency and loss experience at the
dates indicated for residential (one- to four-family) first lien loans serviced
directly by ______ that were originated or purchased by ______:
(Dollars in Thousands)
Total Outstanding Principal
Balance...................................
Number of Loans.............................
DELINQUENCY
Period of Delinquency:
31-60 Days
Principal Balance...................
Number of Loans.....................
Delinquency as a Percentage
of Total Outstanding
Principal Balance.................
Delinquency as a Percentage
of Number of Loans................
61-90 Days
Principal Balance...................
Number of Loans.....................
Delinquency as a Percentage
of Total Outstanding
Principal Balance.................
Delinquency as a Percentage
of Number of Loans................
91 Days or More
Principal Balance...................
Number of Loans.....................
Delinquency as a Percentage
of Total Outstanding
Principal Balance.................
Delinquency as a Percentage
of Number of Loans................
Total Delinquencies:
Principal Balance...................
Number of Loans.....................
Delinquency as a Percentage
of Total Outstanding
Principal Balance.................
Delinquency as a Percentage
of Number of Loans................
FORECLOSURES PENDING(1)
Principal Balance...................
Number of Loans.....................
Foreclosures Pending as a
Percentage of Total
Outstanding Principal
Balance...........................
Foreclosures Pending as a
Percentage of Number of
Loans.............................
NET LOAN LOSSES for the
Period(2).................................
NET LOAN LOSSES as a
Percentage of Total Outstanding
Principal Balance.........................
(1) Includes mortgage loans which are in foreclosure but as to which title to
the mortgaged property has not been acquired, at the end of the period
indicated. Foreclosures pending are included in the delinquencies set forth
above.
(2) Net Loan Losses is calculated for loans conveyed to REMIC trust funds as
the aggregate of the net loan loss for all the loans liquidated during the
period indicated. The net loan loss for any of these loans is equal to the
difference between (a) the principal balance plus accrued interest through
the date of liquidation plus all liquidation expenses related to the loan
and (b) all amounts received in connection with the liquidation of the
loan. The majority of residential loans serviced by ______ have been
conveyed to REMIC trust funds.
As of ______, __ one to four-family residential properties relating to
loans in ______'s servicing portfolio had been acquired through foreclosure or
deed in lieu of foreclosure and were not liquidated.
There can be no assurance that the delinquency and loss experience of the
Home Equity Loans will correspond to the loss experience of the ______'s
mortgage portfolio set forth in the foregoing table. The statistics shown above
represent the delinquency and loss experience for ______'s total servicing
portfolio only for the periods presented, whereas the aggregate delinquency and
loss experience on the Home Equity Loans will depend on the results obtained
over the life of the Trust. ______'s portfolio includes mortgage loans with
payment and other characteristics which are not representative of the payment
and other characteristics of the Home Equity Loans. A substantial number of the
Home Equity Loans may also have been originated based on ______ Underwriting
Guidelines that are less stringent than those generally applicable to the
servicing portfolio reflected in the foregoing table. If the residential real
estate market should experience an overall decline in property values, the
actual rates of delinquencies, foreclosures and losses could be higher than
those previously experienced by ______. In addition, adverse economic
conditions, which may or may not affect real property values, may affect the
timely payment by mortgagors of scheduled payments of principal and interest on
the Home Equity Loans and, accordingly, the actual rates of delinquencies,
foreclosures and losses with respect to the Home Equity Loans.
The delinquency and loss experience percentages set forth above in the
immediately preceding table are calculated on the basis of the total mortgage
loans serviced as of the end of the periods indicated. However, because the
total outstanding principal balance of residential loans serviced by ______ has
increased from $ ______ at ______ to $ ______ at ______, the total outstanding
principal balance of originated loans serviced as of the end of any indicated
period includes many loans that will not have been outstanding long enough to
give rise to some or all of the indicated periods of delinquency. In the absence
of these substantial and continual additions of newly originated loans to the
total amount of loans serviced, the percentages indicated above would be higher
and could be substantially higher. The actual delinquency percentages with
respect to the Home Equity Loans may be expected to be substantially higher than
the delinquency percentages indicated above because the composition of the Home
Equity Loans will not change.
ORIGINATION OF THE HOME EQUITY LOANS
______ originated ______ % of the Home Equity Loans in Group I and ______ %
of the Home Equity Loans in Group II and [_______________]. ("______" originated
__% of the Home Equity Loans in Group I. Set forth below are the guidelines
pursuant to which ______ originated the Home Equity Loans it originated. Asset
Backed Securities Corporation believes that ______'s underwriting standards
utilizes factors similar to ______'s underwriting standards in underwriting
mortgage loans to its underwriting standards.
______ HOME EQUITY LOANS
The information set forth in the following paragraphs has been provided by
______ with respect to the Home Equity Loans originated by it, and ______ makes
no statement with regard to the Home Equity Loans originated by ______. None of
the Depositor, the Seller, the Trustee, the Certificate Insurer, the Underwriter
or any of their respective affiliates has made or will make any representation
as to the accuracy or completeness of the information.
The Home Equity Loans originated by ______ were originated generally in
accordance with guidelines (the "______ Underwriting Guidelines").
[TO BE INSERTED]
DESCRIPTION OF THE HOME EQUITY LOANS
The statistical information presented in this prospectus supplement
concerning the pool of home equity loans transferred to the Trust (the "Home
Equity Loans") is with respect to ______ Home Equity Loans, in the aggregate
principal balance of approximately $______to be purchased by the Trust on the
Closing Date (the "Home Equity Loans").
This subsection describes generally characteristics of the Home Equity
Loans. Unless otherwise noted, all statistical percentages in this prospectus
supplement are measured by the aggregate outstanding principal balance of the
Home Equity Loans as of the Cut-Off Date (the "Cut-Off Date Loan Balance"). All
principal balances and percentages described in this prospectus supplement are
approximates. The "Loan Balance" with respect to each Home Equity Loan and as of
any date of determination is the Cut-Off Date Loan Balance with respect to the
Home Equity Loan excluding payments of principal due on or prior to the Cut-Off
Date, whether or not received, less any principal payments and Delinquency
Advances with respect to principal relating to the Home Equity Loan included in
previous monthly remittances, provided, however, that the Loan Balance for any
Home Equity Loan that has become a Liquidated Loan shall be deemed to be zero as
of the first day of the Due Period following the Due Period in which the Home
Equity Loan becomes a Liquidated Loan, and at all times afterward.
Each Home Equity Loan in the Trust will be assigned to one of two home
equity loan groups (each, a "Home Equity Loan Group"). Each Home Equity Loan
Group will constitute a separate sub-trust. The Group I Home Equity Loans will
bear interest at fixed interest rates. The Group II Home Equity Loans will bear
interest at adjustable interest rates. Distributions on the Group I Certificates
will be based on amounts available for distribution in respect of the Group I
Home Equity Loans. Distributions on the Group II Certificates will generally be
based on amounts available for distribution in respect of the Group II Home
Equity Loans.
The Home Equity Loans to be transferred to the Trust on the Closing Date
will consist of ______ fixed rate Home Equity Loans and ______ adjustable rate
Home Equity Loans, evidenced by promissory notes (the "Notes") secured by first
lien deeds of trust, security deeds or mortgages, which are located in ______
states and the District of Columbia. The aggregate outstanding Cut-Off Date Loan
Balance of the Group I Home Equity Loans is $______ or approximately ______ % of
the Cut-Off Date Loan Balance of the Home Equity Loans; and the aggregate
outstanding Cut-Off Date Loan Balance of the Group II Home Equity Loans is
$______ or approximately ______ % of the Cut-Off Date Loan Balance of the Home
Equity Loans. The first lien deeds of trust or mortgages on one- to four-family
residential properties (the "Mortgaged Properties") securing the Home Equity
Loans consist primarily of one- to four-family residential properties and
manufactured housing treated as real property under applicable state law. The
Mortgaged Properties may be owner-occupied and non-owner occupied investment
properties, which include second and vacation homes. All of the Home Equity
Loans were originated no earlier than ______. No Original Loan-to-Value Ratio
relating to any Home Equity Loan exceeded ______ % as of the Cut-Off Date. None
of the Home Equity Loans are insured by pool mortgage insurance policies or
primary mortgage insurance policies.
The Original Loan-to-Value Ratios shown below were calculated based upon
the lesser of the appraised values of the Mortgaged Properties at the time of
origination (the "Appraised Values") or the sales price of the Mortgaged
Property, provided that the sales price shall be deemed to equal the Appraised
Value in the case of a Home Equity Loan for which the proceeds were not used to
purchase the related Mortgage Property. The "Original Loan-to-Value Ratio" of a
Home Equity Loan is the ratio, expressed as a percentage, equal to the original
balance of the Home Equity Loan divided by the lesser of the Appraised Value or
the sales price of the Mortgaged Property, provided that the sales price shall
be deemed to equal the Appraised Value in the case of a Home Equity Loan for
which the proceeds were not used to purchase the related Mortgage Property. In
the instance where more than one appraisal was performed on the subject
property, the lesser of the two values was used to determine the Original
Loan-to-Value Ratio.
WE REFER YOU TO "RISK FACTORS--UNDERWRITING STANDARDS" FOR MORE DETAIL.
No assurance can be given that values of the Mortgaged Properties have
remained or will remain at their levels on the dates of origination of the
related Home Equity Loans. If the residential real estate market has experienced
or should experience an overall decline in property values so that the
outstanding balances of the Home Equity Loans, together with the outstanding
balances of any first mortgage, 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 now generally experienced in the mortgage lending
industry.
GROUP I HOME EQUITY LOANS
The average Cut-Off Date Loan Balance of the Home Equity Loans in Group I
("Group I Home Equity Loans") was $______. The minimum and maximum Cut-Off Date
Loan Balance of the Group I Home Equity Loans were $______ and $______
respectively. As of the Cut-Off Date, the weighted average per annum interest
rate (the "Coupon Rate") of the Group I Home Equity Loans was approximately
______ % per annum; the Coupon Rates of the Group I Home Equity Loans ranged
from ______ % to ______ % per annum; the weighted average Original Loan-to-Value
Ratio of the Group I Home Equity Loans was approximately ______ %; the weighted
average original term to maturity was approximately ______ months; the weighted
average remaining term to maturity of the Group I Home Equity Loans was
approximately ______ months; and the remaining terms to maturity of the Group I
Home Equity Loans ranged from ______ months to ______ months. Group I Home
Equity Loans containing "balloon" payments represented approximately ______ % of
the Cut-Off Date Loan Balance of the Group I Home Equity Loans. No Group I Home
Equity Loan will mature later than ______. As of the Cut-Off Date, ______ %
Group I Home Equity Loans were more than ___ days past due but less than ___
days past due. However, investors in the Offered Certificates should be aware
that approximately ______ % of the Group I Home Equity Loans by Cut-Off Date
Loan Balance had a first monthly payment due on or after ______ and it was not
possible for the Group I Home Equity Loans to be more than ___ days past due as
of the Cut-Off Date.
GROUP IA HOME EQUITY LOANS
The average Cut-Off Date Loan Balance of the Home Equity Loans in Group Ia
("Group Ia Home Equity Loans") was $______. The original Loan Balance of each
Group Ia Home Equity Loan at origination will be less than or equal to $240,000,
provided that the Loan Balance of Group Ia Home Equity Loans for which the
related Mortgaged Property is (1) in Alaska or Hawaii or (2) is a 2-4 family
property, may be up to $______. The minimum and maximum Cut-Off Date Loan
Balance of the Group Ia Home Equity Loans were $______ and $______ respectively.
As of the Cut-Off Date, the Coupon Rate of the Group Ia Home Equity Loans was
approximately ______ % per annum; the Coupon Rates of the Group Ia Home Equity
Loans ranged from ______ % to ______ % per annum; the weighted average Original
Loan-to-Value Ratio of the Group Ia Home Equity Loans was approximately ______
%; the weighted average original term to maturity was approximately ______
months; the weighted average remaining term to maturity of the Group Ia Home
Equity Loans was approximately ______ months; and the remaining terms to
maturity of the Group Ia Home Equity Loans ranged from ______ months to ______
months. With respect to each Group Ia Home Equity Loan, the original principal
balance was no more than $______. Group Ia Home Equity Loans containing
"balloon" payments represented approximately ______ % of the Cut-Off Date Loan
Balance of the Group Ia Home Equity Loans. No Group Ia Home Equity Loan will
mature later than ______. As of the Cut-Off Date, ______ % Group Ia Home Equity
Loans were more than _____ days past due but less than ____ days past due.
However, investors in the Offered Certificates should be aware that
approximately ______ % of the Group Ia Home Equity Loans by Cut-Off Date Loan
Balance had a first monthly payment due on or after ______ and it was not
possible for the Group Ia Home Equity Loans to be more than ____ days past due
as of the Cut-Off Date.
Set forth below is approximate statistical information as of the Cut-Off
Date regarding the Group Ia Home Equity Loans. Prior to the Closing Date, Home
Equity Loans may be removed from Group Ia and other fixed rate Home Equity Loans
may be substituted for them. Characteristics of the Group Ia Home Equity Loans
may vary but any variance will not be material. The sum of the percentage
columns in the following tables may not equal 100% due to rounding.
<PAGE>
PRINCIPAL BALANCES AT ORIGINATION OF THE GROUP IA HOME EQUITY LOANS
<TABLE>
<CAPTION>
% of Group Ia Loans
Number of Home Aggregate Original by Aggregate Original
Principal Balance at Origination Equity Loans Principal Balance Principal Balance
<S> <C> <C> <C>
$ 10,000.01 - $ 20,000.00
$ 20,000.01 - $ 30,000.00
$ 30,000.01 - $ 40,000.00
$ 40,000.01 - $ 50,000.00
$ 50,000.01 - $ 60,000.00
$ 60,000.01 - $ 70,000.00
$ 70,000.01 - $ 80,000.00
$ 80,000.01 - $ 90,000.00
$ 90,000.01 - $100,000.00
$100,000.01 - $110,000.00
$110,000.01 - $120,000.00
$120,000.01 - $130,000.00
$130,000.01 - $140,000.00
$140,000.01 - $150,000.00
$150,000.01- $160,000.00
$160,000.01 - $170,000.00
$170,000.01 - $180,000.00
$180,000.01 - $190,000.00
$190,000.01 - $200,000.00
$200,000.01 - $210,000.00
$210,000.01 - $220,000.00
$220,000.01 - $230,000.00
$230,000.01 - $240,000.00
$240,000.01 - $250,000.00
$250,000.01 - $350,000.00
$350,000.01 - $450,000.00
Total
</TABLE>
<PAGE>
REMAINING PRINCIPAL BALANCES OF THE GROUP IA HOME EQUITY LOANS
<TABLE>
<CAPTION>
% of Group Ia Loans
Remaining Number of Home Aggregate Remaining by Aggregate Original
Principal Balance Equity Loans Principal Balance Principal Balance
<S> <C> <C> <C>
$ 10,000.01 - $ 20,000.00
$ 20,000.01 - $ 30,000.00
$ 30,000.01 - $ 40,000.00
$ 40,000.01 - $ 50,000.00
$ 50,000.01 - $ 60,000.00
$ 60,000.01 - $ 70,000.00
$ 70,000.01 - $ 80,000.00
$ 80,000.01 - $ 90,000.00
$ 90,000.01 - $100,000.00
$100,000.01 - $110,000.00
$110,000.01 - $120,000.00
$120,000.01 - $130,000.00
$130,000.01 - $140,000.00
$140,000.01 - $150,000.00
$150,000.01 - $160,000.00
$160,000.01 - $170,000.00
$170,000.01 - $180,000.00
$180,000.01 - $190,000.00
$190,000.01 - $200,000.00
$200,000.01 - $210,000.00
$210,000.01 - $220,000.00
$220,000.01 - $230,000.00
$230,000.01 - $240,000.00
$240,000.01 - $250,000.00
$250,000.01 - $350,000.00
$350,000.01 - $450,000.00
Total
</TABLE>
<PAGE>
GEOGRAPHIC DISTRIBUTION OF THE GROUP IA MORTGAGED PROPERTIES
<TABLE>
<CAPTION>
% of Group Ia Loans
Number of Home Aggregate Remaining by Aggregate Original
State Equity Loans Principal Balance Principal Balance
<S> <C> <C> <C>
Alabama
Alaska
Arizona
Arkansas
California
Colorado
Connecticut
Florida
Georgia
Hawaii
Idaho
Illinois
Indiana
Iowa
Kansas
Louisiana
Maine
Maryland
Massachusetts
Michigan
Minnesota
Mississippi
Missouri
Montana
Nebraska
Nevada
New Hampshire
New Jersey
New Mexico
New York
North Carolina
North Dakota
Ohio
Oklahoma
Oregon
Pennsylvania
Rhode Island
South Carolina
South Dakota
Tennessee
Texas
Utah
Vermont
Virginia
Washington
Washington D C
West Virginia
Wisconsin
Wyoming
Total
</TABLE>
<PAGE>
CURRENT COUPON RATES OF THE GROUP IA HOME EQUITY LOANS
<TABLE>
<CAPTION>
% of Group Ia Loans
Number of Home Aggregate Remaining by Aggregate Original
Coupon Rate Equity Loans Principal Balance Principal Balance
<S> <C> <C> <C>
7.000% to 7.499%
7.500% to 7.999%
8.000% to 8.499%
8.500% to 8.999%
9.000% to 9.499%
9.500% to 9.999%
10.000% to 10.499%
10.500% to 10.999%
11.000% to 11.499%
11.500% to 11.999%
12.000% to 12.499%
12.500% to 12.999%
13.000% to 13.499%
13.500% to 13.999%
Total
</TABLE>
REMAINING MONTHS TO MATURITY OF THE GROUP IA HOME EQUITY LOANS
<TABLE>
<CAPTION>
% of Group Ia Loans
Number of Home Aggregate Remaining by Aggregate Original
Months Remaining Equity Loans Principal Balance Principal Balance
<S> <C> <C> <C>
61 to 120
121 to 180
181 to 300
301 to 360
Total
</TABLE>
<PAGE>
ORIGINAL LOAN-TO-VALUE RATIO OF THE GROUP IA HOME EQUITY LOANS
<TABLE>
<CAPTION>
% of Group Ia Loans
Number of Home Aggregate Remaining by Aggregate Original
Original Loan-to-Value Ratio Equity Loans Principal Balance Principal Balance
<S> <C> <C> <C>
50.00% or less
50.01% to 55.00%
55.01% to 60.00%
60.01% to 65.00%
65.01% to 70.00%
70.01% to 75.00%
75.01% to 80.00%
80.01% to 85.00%
85.01% to 90.00%
Total
</TABLE>
LOAN PROGRAM OF THE GROUP IA HOME EQUITY LOANS(1)
<TABLE>
<CAPTION>
% of Group Ia Loans
Number of Home Aggregate Remaining by Aggregate Original
Program Equity Loans Principal Balance Principal Balance
<S> <C> <C> <C>
Fast Trac
Full Documentation
Stated Income
Total
</TABLE>
(1) Only refers to Home Equity Loans originated by ______.
PURPOSE OF THE GROUP IA HOME EQUITY LOANS
<TABLE>
<CAPTION>
% of Group Ia Loans
Number of Home Aggregate Remaining by Aggregate Original
Purpose Equity Loans Principal Balance Principal Balance
<S> <C> <C> <C>
Purchase
Refinance - No Cash Out
Refinance Equity Take-Out
Total
</TABLE>
<PAGE>
RISK CATEGORY OF THE GROUP IA HOME EQUITY LOANS(1)
<TABLE>
<CAPTION>
% of Group Ia Loans
Number of Home Aggregate Remaining by Aggregate Original
Risk Category Equity Loans Principal Balance Principal Balance
<S> <C> <C> <C>
A-
B
B-
C
D
Total
</TABLE>
(1) Only refers to Home Equity Loans originated by ______.
MORTGAGED PROPERTY TYPES OF THE GROUP IA HOME EQUITY LOANS
<TABLE>
<CAPTION>
% of Group Ia Loans
Number of Home Aggregate Remaining by Aggregate Original
Mortgaged Property Type Equity Loans Principal Balance Principal Balance
<S> <C> <C> <C>
2 to 4 units
Single Family
Total
</TABLE>
OCCUPANCY STATUS OF THE GROUP IA HOME EQUITY LOANS
<TABLE>
<CAPTION>
% of Group Ia Loans
Number of Home Aggregate Remaining by Aggregate Original
Occupancy Status Equity Loans Principal Balance Principal Balance
<S> <C> <C> <C>
Non-Owner Occupied
Owner Occupied
Second Home
Total
</TABLE>
<PAGE>
GROUP IB HOME EQUITY LOANS
The average Cut-Off Date Loan Balance of the Home Equity Loans in Group Ib
("Group Ib Home Equity Loans") was $____________. The minimum and maximum
Cut-Off Date Loan Balance of the Group Ib Home Equity Loans were $______ and
$__________ respectively. As of the Cut-Off Date, the Coupon Rate of the Group
Ib Home Equity Loans was approximately ________% per annum; the Coupon Rates of
the Group Ib Home Equity Loans ranged from _______% to _______% per annum; the
weighted average Original Loan-to-Value Ratio of the Group Ib Home Equity Loans
was approximately _________%; the weighted average original term to maturity was
approximately ________ months; the weighted average remaining term to maturity
of the Group Ib Home Equity Loans was approximately _______ months; and the
remaining terms to maturity of the Group Ib Home Equity Loans ranged from ______
months to ______ months. With respect to each Group Ib Home Equity Loan, the
original principal balance was no more than $__________. Group Ib Home Equity
Loans containing "balloon" payments represented approximately ________% of the
Cut-Off Date Loan Balance of the Group Ib Home Equity Loans. No Group Ib Home
Equity Loan will mature later than ___________. As of the Cut-Off Date, ______%
of Group Ib Home Equity Loans were more than ____ days past due but less than
____ days past due. However, investors in the Offered Certificates should be
aware that approximately _________% of the Group Ib Home Equity Loans by Cut-Off
Date Loan Balance had a first monthly payment due on or after __________ and it
was not possible for the Group Ib Home Equity Loans to be more than ____ days
past due as of the Cut-Off Date.
Set forth below is approximate statistical information as of the Cut-Off
Date regarding the Group Ib Home Equity Loans. Prior to the Closing Date, Home
Equity Loans may be removed from Group Ib and other fixed rate Home Equity Loans
may be substituted for them. Characteristics of the Group Ib Home Equity Loans
may vary but any variance will not be material. The sum of the percentage
columns in the following tables may not equal 100% due to rounding.
<PAGE>
PRINCIPAL BALANCES AT ORIGINATION OF THE GROUP IB HOME EQUITY LOANS
<TABLE>
<CAPTION>
% of Group Ib Loans
Number of Home Aggregate Original by Aggregate Original
Principal Balance at Origination Equity Loans Principal Balance Principal Balance
<S> <C> <C> <C>
$ 0.01 - $ 10,000.00
$ 10,000.01 - $ 20,000.00
$ 20,000.01 - $ 30,000.00
$ 30,000.01 - $ 40,000.00
$ 40,000.01 - $ 50,000.00
$ 50,000.01 - $ 60,000.00
$ 60,000.01 - $ 70,000.00
$ 70,000.01 - $ 80,000.00
$ 80,000.01 - $ 90,000.00
$ 90,000.01 - $100,000.00
$100,000.01 - $110,000.00
$110,000.01 - $120,000.00
$120,000.01 - $130,000.00
$130,000.01 - $140,000.00
$140,000.01 - $150,000.00
$150,000.01- $160,000.00
$160,000.01 - $170,000.00
$170,000.01 - $180,000.00
$180,000.01 - $190,000.00
$190,000.01 - $200,000.00
$200,000.01 - $210,000.00
$210,000.01 - $220,000.00
$220,000.01 - $230,000.00
$230,000.01 - $240,000.00
$240,000.01 - $250,000.00
$250,000.01 - $350,000.00
$350,000.01 - $450,000.00
$450,000.01 and greater
Total
</TABLE>
<PAGE>
REMAINING PRINCIPAL BALANCES OF THE GROUP IB HOME EQUITY LOANS
<TABLE>
<CAPTION>
% of Group Ib Loans
Remaining Number of Home Aggregate Remaining by Aggregate Original
Principal Balance Equity Loans Principal Balance Principal Balance
<S> <C> <C> <C>
$ 0.01 - $ 10,000.00
$ 10,000.01 - $ 20,000.00
$ 20,000.01 - $ 30,000.00
$ 30,000.01 - $ 40,000.00
$ 40,000.01 - $ 50,000.00
$ 50,000.01 - $ 60,000.00
$ 60,000.01 - $ 70,000.00
$ 70,000.01 - $ 80,000.00
$ 80,000.01 - $ 90,000.00
$ 90,000.01 - $100,000.00
$100,000.01 - $110,000.00
$110,000.01 - $120,000.00
$120,000.01 - $130,000.00
$130,000.01 - $140,000.00
$140,000.01 - $150,000.00
$150,000.01 - $160,000.00
$160,000.01 - $170,000.00
$170,000.01 - $180,000.00
$180,000.01 - $190,000.00
$190,000.01 - $200,000.00
$200,000.01 - $210,000.00
$210,000.01 - $220,000.00
$220,000.01 - $230,000.00
$230,000.01 - $240,000.00
$240,000.01 - $250,000.00
$250,000.01 - $350,000.00
$350,000.01 - $450,000.00
$450,000.01 and greater
Total
</TABLE>
<PAGE>
GEOGRAPHIC DISTRIBUTION OF THE GROUP IB MORTGAGED PROPERTIES
<TABLE>
<CAPTION>
% of Group Ib Loans
Number of Home Aggregate Remaining by Aggregate Original
State Equity Loans Principal Balance Principal Balance
<S> <C> <C> <C>
Alabama
Alaska
Arizona
Arkansas
California
Colorado
Connecticut
Florida
Georgia
Hawaii
Idaho
Illinois
Indiana
Iowa
Kentucky
Louisiana
Maryland
Massachusetts
Michigan
Minnesota
Mississippi
Missouri
Montana
Nebraska
Nevada
New Jersey
New Mexico
New York
North Carolina
Ohio
Oklahoma
Oregon
Pennsylvania
South Carolina
Tennessee
Texas
Utah
Virginia
Washington
Total
</TABLE>
<PAGE>
CURRENT COUPON RATES OF THE GROUP IB HOME EQUITY LOANS
<TABLE>
<CAPTION>
% of Group Ib Loans
Number of Home Aggregate Remaining by Aggregate Original
Coupon Rate Equity Loans Principal Balance Principal Balance
<S> <C> <C> <C>
7.000% to 7.499%
7.500% to 7.999%
8.000% to 8.499%
8.500% to 8.999%
9.000% to 9.499%
9.500% to 9.999%
10.000% to 10.499%
10.500% to 10.999%
11.000% to 11.499%
11.500% to 11.999%
12.000% to 12.499%
12.500% to 12.999%
13.000% to 13.499%
13.500% to 13.999%
Total
</TABLE>
REMAINING MONTHS TO MATURITY OF THE GROUP IB HOME EQUITY LOANS
<TABLE>
<CAPTION>
% of Group Ib Loans
Number of Home Aggregate Remaining by Aggregate Original
Months Remaining Equity Loans Principal Balance Principal Balance
<S> <C> <C> <C>
121 to 180
181 to 300
301 to 360
Total
</TABLE>
ORIGINAL LOAN-TO-VALUE RATIO OF THE GROUP IB HOME EQUITY LOANS
<TABLE>
<CAPTION>
% of Group Ib Loans
Number of Home Aggregate Remaining by Aggregate Original
Original Loan-to-Value Ratio Equity Loans Principal Balance Principal Balance
<S> <C> <C> <C>
50.00% or less
50.01% to 55.00%
55.01% to 60.00%
60.01% to 65.00%
65.01% to 70.00%
70.01% to 75.00%
75.01% to 80.00%
80.01% to 85.00%
85.01% to 90.00%
Total
</TABLE>
LOAN PROGRAM OF THE GROUP IB HOME EQUITY LOANS(1)
<TABLE>
<CAPTION>
% of Group Ib Loans
Number of Home Aggregate Remaining by Aggregate Original
Program Equity Loans Principal Balance Principal Balance
<S> <C> <C> <C>
Fast Trac
Full Documentation
Stated Income
Total
</TABLE>
(1) Only refers to Home Equity Loans originated by ______.
PURPOSE OF THE GROUP IB HOME EQUITY LOANS
<TABLE>
<CAPTION>
% of Group Ib Loans
Number of Home Aggregate Remaining by Aggregate Original
Purpose Equity Loans Principal Balance Principal Balance
<S> <C> <C> <C>
Purchase
Refinance - No Cash Out
Refinance Equity Take-Out
Total
</TABLE>
RISK CATEGORY OF THE GROUP IB HOME EQUITY LOANS(1)
<TABLE>
<CAPTION>
% of Group Ib Loans
Number of Home Aggregate Remaining by Aggregate Original
Risk Category Equity Loans Principal Balance Principal Balance
<S> <C> <C> <C>
A-
B
B-
C
D
Total
</TABLE>
(1) Only refers to Home Equity Loans originated by ______.
<PAGE>
MORTGAGED PROPERTY TYPES OF THE GROUP IB HOME EQUITY LOANS
<TABLE>
<CAPTION>
% of Group Ib Loans
Number of Home Aggregate Remaining by Aggregate Original
Mortgaged Property Type Equity Loans Principal Balance Principal Balance
<S> <C> <C> <C>
2 to 4 units
Condo
Manufactured Home
PUD
Single Family
Townhouse
Total
</TABLE>
OCCUPANCY STATUS OF THE GROUP IB HOME EQUITY LOANS
<TABLE>
<CAPTION>
% of Group Ib Loans
Number of Home Aggregate Remaining by Aggregate Original
Occupancy Status Equity Loans Principal Balance Principal Balance
<S> <C> <C> <C>
Non-Owner Occupied
Owner Occupied
Second Home
Total
</TABLE>
<PAGE>
GROUP II HOME EQUITY LOANS
The average Cut-Off Date Loan Balance of the Home Equity Loans in Group II
("Group II Home Equity Loans") was $______. The minimum and maximum Cut-Off Date
Loan Balance of the Group II Home Equity Loans were $_________ and $________,
respectively. As of the Cut-Off Date, the weighted average Original
Loan-to-Value Ratio of the Group II Home Equity Loans was approximately ______%;
the weighted average original term to maturity was approximately ______ months;
the weighted average remaining term to maturity of the Group II Home Equity
Loans was approximately ______ months; and the remaining terms to maturity of
the Group II Home Equity Loans ranged from ______ months to ______ months. No
Group II Home Equity Loan will mature later than __________. As of the Cut-Off
Date, ______% of Group II Home Equity Loans were more than ____days past due but
less than ____ days past due. However, investors in the Offered Certificates
should be aware that approximately ______% of the Group II Home Equity Loans by
Cut-Off Date Loan Balance had a first monthly payment due on or after _________
and it was not possible for the Group II Home Equity Loans to be more than ____
days past due as of the Cut-Off Date.
As of the Cut-Off Date, for approximately ________% of the Cut-Off Date
Loan Balance of the Group II Home Equity Loans the first adjustment date is six
months after the date of origination of the related Home Equity Loan ("Six-Month
Adjustable Rate Loans"), for approximately ______% of the Cut-Off Date Loan
Balance of the Group II Home Equity Loans the first adjustment date is two years
after the date of origination of the related Home Equity Loan ("2/28 Adjustable
Rate Loans") and for approximately _______% of the Cut-Off Date Loan Balance of
the Group II Home Equity Loans the first adjustment date is three years after
the date or origination of the related Home Equity Loan ("3/27 Adjustable Rate
Loans"). As of the Cut-Off Date, and with respect to the Group II Home Equity
Loans, the weighted average remaining period to the next interest rate
adjustment date for the Six-Month Adjustable Rate Loans was approximately ____
months; the weighted average remaining period to the next interest rate
adjustment date for the 2/28 Adjustable Rate Loans was approximately 20 months;
the weighted average remaining period to the next interest rate adjustment date
for the 3/27 Adjustable Rate Loans was approximately ____ months; each Six-Month
Adjustable Rate Loan will have an initial payment adjustment effective with the
seventh monthly payment on the loan, a weighted average initial interest rate
adjustment cap of ______%, a semi-annual interest rate adjustment cap of ____%,
in each case, above the then current interest rate for the Six-Month Adjustable
Rate Loan and a weighted average lifetime interest rate adjustment cap of
______% above the initial rate of the loan; each 2/28 Adjustable Rate Loan will
have an initial payment adjustment effective with the 25th monthly payment on
the loan, a weighted average initial interest rate adjustment cap of ______%, a
semi-annual interest rate adjustment cap of ____%, in each case, above the then
current interest rate for the 2/28 Adjustable Rate Loan and a weighted average
lifetime interest rate adjustment cap of ______% above the initial rate of the
loan; and each 3/27 Adjustable Rate Loan will have an initial payment adjustment
effective with the 37th monthly payment on the loan, a weighted average initial
interest rate adjustment cap of _____%, a semi-annual interest rate adjustment
cap of ______%, in each case, above the then current interest rate for the 3/27
Adjustable Rate Loan and a weighted average lifetime interest rate adjustment
cap of _______% above the initial rate of the loan. As of the Cut-Off Date, the
weighted average Coupon Rate of the Group II Home Equity Loans was approximately
______% per annum. The Coupon Rates borne by the Group II Home Equity Loans as
of the Cut-Off Date ranged from ______% to ____% per annum. The Group II Home
Equity Loans had a weighted average gross margin as of the Cut-Off Date of
approximately _____%. As of the Cut-Off Date, the gross margins for the Group II
Home Equity Loans ranged from ______% to _____%. As of the Cut-Off Date, the
maximum rates at which interest may accrue on the Group II Home Equity Loans
(the "Maximum Rates") ranged from ______% to ______% per annum. The Group II
Home Equity Loans had a weighted average Maximum Rate as of the Cut-Off Date of
approximately _____% per annum. As of the Cut-Off Date, the minimum rates at
which interest may accrue on the Group II Home Equity Loans (the "Minimum
Rates") ranged from ______% to _____% per annum. As of the Cut-Off Date, the
weighted average Minimum Rate on the Group II Home Equity Loans was
approximately ______% per annum.
GROUP IIA HOME EQUITY LOANS
The average Cut-Off Date Loan Balance of the Home Equity Loans in Group IIa
("Group IIa Home Equity Loans") was $_________. The original Loan Balance of
each Group IIa Home Equity Loan at origination will be less than or equal to
$__________, provided that the Loan Balance of Group IIa Home Equity Loans for
which the related Mortgaged Property is (1) in Alaska or Hawaii or (2) is a 2-4
family property, may be up to $________. The minimum and maximum Cut-Off Date
Loan Balance of the Group IIa Home Equity Loans were $_________, and $________,
respectively. As of the Cut-Off Date, the weighted average Original
Loan-to-Value Ratio of the Group IIa Home Equity Loans was approximately
________%; the weighted average original term to maturity was approximately
______ months; the weighted average remaining term to maturity of the Group IIa
Home Equity Loans was approximately _______ months; and the remaining terms to
maturity of the Group IIa Home Equity Loans ranged from _______ months to ______
months. No Group IIa Home Equity Loan will mature later than ________. As of the
Cut-Off Date, _______% Group IIa Home Equity Loans were more than ____ days past
due but less than ____ days past due. However, investors in the Offered
Certificates should be aware that approximately ________% of the Group IIa Home
Equity Loans by Cut-Off Date Loan Balance had a first monthly payment due on or
after _________ and it was not possible for the Group IIa Home Equity Loans to
be more than ____ days past due as of the Cut-Off Date.
As of the Cut-Off Date, approximately _______% of the Cut-Off Date Loan
Balance of the Group IIa Home Equity Loans are Six-Month Adjustable Rate Loans,
approximately _______% of the Cut-Off Date Loan Balance of the Group IIa Home
Equity Loans are 2/28 Adjustable Rate Loans and approximately _______% of the
Cut-Off Date Loan Balance of the Group II Home Equity Loans are 3/27 Adjustable
Rate Loans. As of the Cut-Off Date, and with respect to the Group IIa Home
Equity Loans, the weighted average remaining period to the next interest rate
adjustment date for the Six-Month Adjustable Rate Loans was approximately 3
months; the weighted average remaining period to the next interest rate
adjustment date for the 2/28 Adjustable Rate Loans was approximately ____
months; the weighted average remaining period to the next interest rate
adjustment date for the 3/27 Adjustable Rate Loans was approximately ____
months; each Six-Month Adjustable Rate Loan will have an initial payment
adjustment effective with the seventh monthly payment on the loan, a weighted
average initial interest rate adjustment cap of _____%, a semi-annual interest
rate adjustment cap of ______%, in each case, above the then current interest
rate for the Six-Month Adjustable Rate Loan and a weighted average lifetime
interest rate adjustment cap of _____% above the initial rate of the loan; each
2/28 Adjustable Rate Loan will have an initial payment adjustment effective with
the 25th monthly payment on the loan, a weighted average initial interest rate
adjustment cap of _____%, a semi-annual interest rate adjustment cap of _____%,
in each case, above the then current interest rate for the 2/28 Adjustable Rate
Loan and a weighted average lifetime interest rate adjustment cap of ______%
above the initial rate of the loan; and each 3/27 Adjustable Rate Loan will have
an initial payment adjustment effective with the 37th monthly payment on the
loan, a weighted average initial interest rate adjustment cap of ______%, a
semi-annual interest rate adjustment cap of 1.00%, in each case, above the then
current interest rate for the 3/27 Adjustable Rate Loan and a weighted average
lifetime interest rate adjustment cap of ______% above the initial rate of the
loan. As of the Cut-Off Date, the weighted average Coupon Rate of the Group IIa
Home Equity Loans was approximately ______% per annum. The Coupon Rates borne by
the Group IIa Home Equity Loans as of the Cut-Off Date ranged from ______% to
_____% per annum. The Group IIa Home Equity Loans had a weighted average gross
margin as of the Cut-Off Date of approximately ______%. As of the Cut-Off Date,
the gross margins for the Group IIa Home Equity Loans ranged from _____% to
______%. As of the Cut-Off Date, the Maximum Rates ranged from ______% to
______% per annum. The Group IIa Home Equity Loans had a weighted average
Maximum Rate as of the Cut-Off Date of approximately ______% per annum. As of
the Cut-Off Date, the Minimum Rates ranged from ______% to _____% per annum. As
of the Cut-Off Date, the weighted average Minimum Rate on the Group IIa Home
Equity Loans was approximately ______% per annum.
Set forth below is approximate statistical information as of the Cut-Off
Date regarding the Group IIa Home Equity Loans. Prior to the Closing Date, Home
Equity Loans may be removed from Group IIa and other fixed and adjustable rate
Home Equity Loans may be substituted for them. Characteristics of the Home
Equity Loans may vary but any variance will not be material. The sum of the
percentage columns in the following tables may not equal 100% due to rounding.
<PAGE>
PRINCIPAL BALANCE AT ORIGINATION OF THE GROUP IIA HOME EQUITY LOANS
<TABLE>
<CAPTION>
% of Group IIa Loans
Number of Home Aggregate Original by Aggregate Original
Principal Balance at Origination Equity Loans Principal Balance Principal Balance
<S> <C> <C> <C>
$ 10,000.01 - $ 20,000.00
$ 20,000.01 - $ 30,000.00
$ 30,000.01 - $ 40,000.00
$ 40,000.01 - $ 50,000.00
$ 50,000.01 - $ 60,000.00
$ 60,000.01 - $ 70,000.00
$ 70,000.01 - $ 80,000.00
$ 80,000.01 - $ 90,000.00
$ 90,000.01 - $100,000.00
$100,000.01 - $110,000.00
$110,000.01 - $120,000.00
$120,000.01 - $130,000.00
$130,000.01 - $140,000.00
$140,000.01 - $150,000.00
$150,000.01 - $160,000.00
$160,000.01 - $170,000.00
$170,000.01 - $180,000.00
$180,000.01 - $190,000.00
$190,000.01 - $200,000.00
$200,000.01 - $210,000.00
$210,000.01 - $220,000.00
$220,000.01 - $230,000.00
$230,000.01 - $240,000.00
$250,000.01 - $350,000.00
Total
</TABLE>
<PAGE>
REMAINING PRINCIPAL BALANCE OF THE GROUP IIA HOME EQUITY LOANS
<TABLE>
<CAPTION>
% of Group IIa Loans
Remaining Number of Home Aggregate Remaining by Aggregate Original
Principal Balance Equity Loans Principal Balance Principal Balance
<S> <C> <C> <C>
$ 10,000.01 - $ 20,000.00
$ 20,000.01 - $ 30,000.00
$ 30,000.01 - $ 40,000.00
$ 40,000.01 - $ 50,000.00
$ 50,000.01 - $ 60,000.00
$ 60,000.01 - $ 70,000.00
$ 70,000.01 - $ 80,000.00
$ 80,000.01 - $ 90,000.00
$ 90,000.01 - $100,000.00
$100,000.01 - $110,000.00
$110,000.01 - $120,000.00
$120,000.01 - $130,000.00
$130,000.01 - $140,000.00
$140,000.01 - $150,000.00
$150,000.01 - $160,000.00
$160,000.01 - $170,000.00
$170,000.01 - $180,000.00
$180,000.01 - $190,000.00
$190,000.01 - $200,000.00
$200,000.01 - $210,000.00
$210,000.01 - $220,000.00
$220,000.01 - $230,000.00
$230,000.01 - $240,000.00
$250,000.01 - $350,000.00
Total
</TABLE>
<PAGE>
GEOGRAPHIC DISTRIBUTION OF THE GROUP IIA MORTGAGED PROPERTIES
<TABLE>
<CAPTION>
% of Group IIa Loans
Number of Home Aggregate Remaining by Aggregate Original
State Equity Loans Principal Balance Principal Balance
<S> <C> <C> <C>
Alabama
Alaska
Arizona
Arkansas
California
Colorado
Connecticut
Delaware
Florida
Georgia
Hawaii
Idaho
Illinois
Indiana
Iowa
Kansas
Kentucky
Louisiana
Maine
Maryland
Massachusetts
Michigan
Minnesota
Mississippi
Missouri
Montana
Nebraska
Nevada
New Hampshire
New Jersey
New Mexico
New York
North Carolina
North Dakota
Ohio
Oklahoma
Oregon
Pennsylvania
Rhode Island
South Carolina
South Dakota
Tennessee
Texas
Utah
Virginia
Washington
Washington DC
West Virginia
Wisconsin
Wyoming
Total
</TABLE>
CURRENT COUPON RATES OF THE GROUP IIA HOME EQUITY LOANS
<TABLE>
<CAPTION>
% of Group IIa Loans
Number of Home Aggregate Remaining by Aggregate Original
Coupon Rates Equity Loans Principal Balance Principal Balance
<S> <C> <C> <C>
6.000% to 6.499%
6.500% to 6.999%
7.000% to 7.499%
7.500% to 7.999%
8.000% to 8.499%
8.500% to 8.999%
9.000% to 9.499%
9.500% to 9.999%
10.000% to 10.499%
10.500% to 10.999%
11.000% to 11.499%
11.500% to 11.999%
12.000% to 12.499%
12.500% to 12.999%
13.000% to 13.499%
13.500% to 13.999%
14.000% to 14.499%
Total
</TABLE>
REMAINING MONTHS TO MATURITY OF THE GROUP IIA HOME EQUITY LOANS
<TABLE>
<CAPTION>
% of Group IIa Loans
Number of Home Aggregate Remaining by Aggregate Original
Months Remaining Equity Loans Principal Balance Principal Balance
<S> <C> <C> <C>
120 to 180
181 to 300
301 to 360
Total
</TABLE>
PRODUCT TYPE OF THE GROUP IIA HOME EQUITY LOANS
<TABLE>
<CAPTION>
% of Group IIa Loans
Number of Home Aggregate Remaining by Aggregate Original
Product Type Equity Loans Principal Balance Principal Balance
<S> <C> <C> <C>
2/28
3/27
6 month-LIBOR
Total
</TABLE>
<PAGE>
ORIGINAL LOAN-TO-VALUE RATIO OF THE GROUP IIA HOME EQUITY LOANS
<TABLE>
<CAPTION>
% of Group IIa Loans
Number of Home Aggregate Remaining by Aggregate Original
Original Loan-to-Value Ratio Equity Loans Principal Balance Principal Balance
<S> <C> <C> <C>
50.00% or Less
50.01% to 55.00%
55.01% to 60.00%
60.01% to 65.00%
65.01% to 70.00%
70.01% to 75.00%
75.01% to 80.00%
80.01% to 85.00%
85.01% to 90.00%
Total
</TABLE>
LOAN PROGRAM OF THE GROUP IIA HOME EQUITY LOANS
<TABLE>
<CAPTION>
% of Group IIa Loans
Number of Home Aggregate Remaining by Aggregate Original
Program Equity Loans Principal Balance Principal Balance
<S> <C> <C> <C>
Fast Trac
Full Documentation
Stated Income
Total
</TABLE>
PURPOSE OF THE GROUP IIA HOME EQUITY LOANS
<TABLE>
<CAPTION>
% of Group IIa Loans
Number of Home Aggregate Remaining by Aggregate Original
Purpose Equity Loans Principal Balance Principal Balance
<S> <C> <C> <C>
Purchase
Refinance - No Cash Out
Refinance Equity Take-Out
Total
</TABLE>
RISK CATEGORY OF THE GROUP IIA HOME EQUITY LOANS
<TABLE>
<CAPTION>
% of Group IIa Loans
Number of Home Aggregate Remaining by Aggregate Original
Risk Category Equity Loans Principal Balance Principal Balance
<S> <C> <C> <C>
A-
B
B-
C
D
Total
</TABLE>
MORTGAGED PROPERTY TYPES OF THE GROUP IIA HOME EQUITY LOANS
<TABLE>
<CAPTION>
% of Group IIa Loans
Number of Home Aggregate Remaining by Aggregate Original
Mortgaged Property Type Equity Loans Principal Balance Principal Balance
<S> <C> <C> <C>
2 to 4 units
Single Family
Total
</TABLE>
OCCUPANCY STATUS OF THE GROUP IIA HOME EQUITY LOANS
<TABLE>
<CAPTION>
% of Group IIa Loans
Number of Home Aggregate Remaining by Aggregate Original
Occupancy Status Equity Loans Principal Balance Principal Balance
<S> <C> <C> <C>
Non-Owner Occupied
Owner Occupied
Second Home
Total
</TABLE>
<PAGE>
MONTH AND YEAR OF NEXT RATE ADJUSTMENT OF THE GROUP IIA HOME EQUITY LOANS
<TABLE>
<CAPTION>
% of Group IIa Loans
Month and Year of Number of Home Aggregate Remaining by Aggregate Original
Next Rate Adjustment Equity Loans Principal Balance Principal Balance
<S> <C> <C> <C>
July 1999
----- , -----
------ ------
------ ------
------ ------
------ ------
------ ------
------ ------
------ ------
------ ------
------ ------
------ ------
------ ------
------ ------
------ ------
------ ------
------ ------
------ ------
------ ------
------ ------
------ ------
------ ------
------ ------
------ ------
Total
</TABLE>
GROSS MARGINS OF THE GROUP IIA HOME EQUITY LOANS
<TABLE>
<CAPTION>
% of Group IIa Loans
Number of Home Aggregate Remaining by Aggregate Original
Gross Margin Equity Loans Principal Balance Principal Balance
<S> <C> <C> <C>
4.000% to 4.499%
4.500% to 4.999%
5.000% to 5.499%
5.500% to 5.999%
6.000% to 6.499%
6.500% to 6.999%
7.000% to 7.499%
7.500% to 7.999%
8.000% to 8.499%
8.500% to 8.999%
9.500% and greater
Total
</TABLE>
MAXIMUM LOAN RATES OF THE GROUP IIA HOME EQUITY LOANS
<TABLE>
<CAPTION>
% of Group IIa Loans
Number of Home Aggregate Remaining by Aggregate Original
Maximum Rate Equity Loans Principal Balance Principal Balance
<S> <C> <C> <C>
12.000% to 12.499%
12.500% to 12.999%
13.000% to 13.499%
13.500% to 13.999%
14.000% to 14.499%
14.500% to 14.999%
15.000% to 15.499%
15.500% to 15.999%
16.000% to 16.499%
16.500% to 16.999%
17.000% to 17.499%
17.500% to 17.999%
18.000% to 18.499%
18.500% to 18.999%
19.000% to 19.499%
19.500% to 19.999%
20.000% to 20.499%
Total
</TABLE>
MINIMUM LOAN RATES OF THE GROUP IIA HOME EQUITY LOANS
<TABLE>
<CAPTION>
% of Group IIa Loans
Number of Home Aggregate Remaining by Aggregate Original
Minimum Rate Equity Loans Principal Balance Principal Balance
<S> <C> <C> <C>
6.000% to 6.499%
6.500% to 6.999%
7.000% to 7.499%
7.500% to 7.999%
8.000% to 8.499%
8.500% to 8.999%
9.000% to 9.499%
9.500% to 9.999%
10.000% to 10.499%
10.500% to 10.999%
11.000% to 11.499%
11.500% to 11.999%
12.000% to 12.499%
12.500% to 12.999%
13.000% to 13.499%
13.500% to 13.999%
14.000% to 14.499%
Total
</TABLE>
<PAGE>
GROUP IIB HOME EQUITY LOANS
The average Cut-Off Date Loan Balance of the Home Equity Loans in Group IIb
("Group IIb Home Equity Loans") was $_________. The minimum and maximum Cut-Off
Date Loan Balance of the Group IIb Home Equity Loans were $________, and
$________, respectively. As of the Cut-Off Date, the weighted average Original
Loan-to-Value Ratio of the Group IIb Home Equity Loans was approximately
______%; the weighted average original term to maturity was approximately ______
months; the weighted average remaining term to maturity of the Group IIb Home
Equity Loans was approximately ______ months; and the remaining terms to
maturity of the Group IIb Home Equity Loans ranged from _____ months to _____
months. No Group IIb Home Equity Loan will mature later than _________. As of
the Cut-Off Date, ______% of Group IIb Home Equity Loans were more than ____
days past due but less than ____ days past due. However, investors in the
Offered Certificates should be aware that approximately ______% of the Group IIb
Home Equity Loans by Cut-Off Date Loan Balance had a first monthly payment due
on or after _______ and it was not possible for the Group IIb Home Equity Loans
to be more than ____ days past due as of the Cut-Off Date.
As of the Cut-Off Date, approximately ______% of the Cut-Off Date Loan
Balance of the Group IIb Home Equity Loans are Six-Month Adjustable Rate Loans,
approximately ______% of the Cut-Off Date Loan Balance of the Group IIb Home
Equity Loans are 2/28 Adjustable Rate and approximately ______% of the Cut-Off
Date Loan Balance of the Group IIb Home Equity Loans are 3/27 Adjustable Rate
Loans. As of the Cut-Off Date, and with respect to the Group IIb Home Equity
Loans, the weighted average remaining period to the next interest rate
adjustment date for the Six-Month Adjustable Rate Loans was approximately 3
months; the weighted average remaining period to the next interest rate
adjustment date for the 2/28 Adjustable Rate Loans was approximately ____
months; the weighted average remaining period to the next interest rate
adjustment date for the 3/27 Adjustable Rate Loans was approximately ____
months; each Six-Month Adjustable Rate Loan will have an initial payment
adjustment effective with the seventh monthly payment on the loan, a weighted
average initial interest rate adjustment cap of ____%, a semi-annual interest
rate adjustment cap of _____%, in each case, above the then current interest
rate for the Six-Month Adjustable Rate Loan and a weighted average lifetime
interest rate adjustment cap of _____% above the initial rate of the loan; each
2/28 Adjustable Rate Loan will have an initial payment adjustment effective with
the 25th monthly payment on the loan, a weighted average initial interest rate
adjustment cap of _____%, a semi-annual interest rate adjustment cap of _____%,
in each case, above the then current interest rate for the 2/28 Adjustable Rate
Loan and a weighted average lifetime interest rate adjustment cap of _____%
above the initial rate of the loan; and each 3/27 Adjustable Rate Loan will have
an initial payment adjustment effective with the 37th monthly payment on the
loan, a weighted average initial interest rate adjustment cap of _____%, a
semi-annual interest rate adjustment cap of _____%, in each case, above the then
current interest rate for the 3/27 Adjustable Rate Loan and a weighted average
lifetime interest rate adjustment cap of ______% above the initial rate of the
loan. As of the Cut-Off Date, the weighted average Coupon Rate of the Group IIb
Home Equity Loans was approximately ______% per annum. The Coupon Rates borne by
the Group IIb Home Equity Loans as of the Cut-Off Date ranged from ____% to
____% per annum. The Group IIb Home Equity Loans had a weighted average gross
margin as of the Cut-Off Date of approximately ____%. As of the Cut-Off Date,
the gross margins for the Group IIb Home Equity Loans ranged from _____% to
_____%. As of the Cut-Off Date, the Maximum Rates ranged from ______% to _____%
per annum. The Group IIb Home Equity Loans had a weighted average Maximum Rate
as of the Cut-Off Date of approximately _____% per annum. As of the Cut-Off
Date, the Minimum ranged from ______% to _____% per annum. As of the Cut-Off
Date, the weighted average Minimum Rate on the Group IIb Home Equity Loans was
approximately ____% per annum.
Set forth below is approximate statistical information as of the Cut-Off
Date regarding the Group IIb Home Equity Loans. Prior to the Closing Date, Home
Equity Loans may be removed from Group IIb and other fixed and adjustable rate
Home Equity Loans may be substituted for them. Characteristics of the Home
Equity Loans may vary but any variance will not be material. The sum of the
percentage columns in the following tables may not equal 100% due to rounding.
<PAGE>
PRINCIPAL BALANCE AT ORIGINATION OF THE GROUP IIB HOME EQUITY LOANS
<TABLE>
<CAPTION>
% of Group IIb Loans
Number of Home Aggregate Original by Aggregate Original
Principal Balance at Origination Equity Loans Principal Balance Principal Balance
<S> <C> <C> <C>
$ 10,000.01 - $ 20,000.00
$ 20,000.01 - $ 30,000.00
$ 30,000.01 - $ 40,000.00
$ 40,000.01 - $ 50,000.00
$ 50,000.01 - $ 60,000.00
$ 60,000.01 - $ 70,000.00
$ 70,000.01 - $ 80,000.00
$ 80,000.01 - $ 90,000.00
$ 90,000.01 - $100,000.00
$100,000.01 - $110,000.00
$110,000.01 - $120,000.00
$120,000.01 - $130,000.00
$130,000.01 - $140,000.00
$140,000.01 - $150,000.00
$150,000.01 - $160,000.00
$160,000.01 - $170,000.00
$170,000.01 - $180,000.00
$180,000.01 - $190,000.00
$190,000.01 - $200,000.00
$200,000.01 - $210,000.00
$210,000.01 - $220,000.00
$220,000.01 - $230,000.00
$230,000.01 - $240,000.00
$240,000.01 - $250,000.00
$250,000.01 - $350,000.00
$350,000.01 - $450,000.00
$450,000.01 and greater
Total
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
REMAINING PRINCIPAL BALANCE OF THE GROUP IIB HOME EQUITY LOANS
% of Group IIb Loans
Remaining Number of Home Aggregate Remaining by Aggregate Original
Principal Balance Equity Loans Principal Balance Principal Balance
<S> <C> <C> <C>
$ 10,000.01 - $ 20,000.00
$ 20,000.01 - $ 30,000.00
$ 30,000.01 - $ 40,000.00
$ 40,000.01 - $ 50,000.00
$ 50,000.01 - $ 60,000.00
$ 60,000.01 - $ 70,000.00
$ 70,000.01 - $ 80,000.00
$ 80,000.01 - $ 90,000.00
$ 90,000.01 - $100,000.00
$100,000.01 - $110,000.00
$110,000.01 - $120,000.00
$120,000.01 - $130,000.00
$130,000.01 - $140,000.00
$140,000.01 - $150,000.00
$150,000.01 - $160,000.00
$160,000.01 - $170,000.00
$170,000.01 - $180,000.00
$180,000.01 - $190,000.00
$190,000.01 - $200,000.00
$200,000.01 - $210,000.00
$210,000.01 - $220,000.00
$220,000.01 - $230,000.00
$230,000.01 - $240,000.00
$240,000.01 - $250,000.00
$250,000.01 - $350,000.00
$350,000.01 - $450,000.00
$450,000.01 and greater
Total
</TABLE>
<PAGE>
GEOGRAPHIC DISTRIBUTION OF THE GROUP IIB MORTGAGED PROPERTIES
<TABLE>
<CAPTION>
% of Group IIb Loans
Number of Home Aggregate Remaining by Aggregate Original
State Equity Loans Principal Balance Principal Balance
<S> <C> <C> <C>
Alabama
Alaska
Arizona
California
Colorado
Florida
Georgia
Hawaii
Idaho
Illinois
Indiana
Iowa
Kansas
Kentucky
Louisiana
Maine
Maryland
Massachusetts
Michigan
Minnesota
Missouri
Montana
Nebraska
Nevada
New Jersey
New Mexico
New York
North Carolina
Ohio
Oklahoma
Oregon
Pennsylvania
South Carolina
Tennessee
Texas
Utah
Virginia
Washington
Wisconsin
Wyoming
Total
</TABLE>
CURRENT COUPON RATES OF THE GROUP IIB HOME EQUITY LOANS
<TABLE>
<CAPTION>
% of Group IIb Loans
Number of Home Aggregate Remaining by Aggregate Original
Coupon Rates Equity Loans Principal Balance Principal Balance
<S> <C> <C> <C>
6.500% to 6.999%
7.000% to 7.499%
7.500% to 7.999%
8.000% to 8.499%
8.500% to 8.999%
9.000% to 9.499%
9.500% to 9.999%
10.000% to 10.499%
10.500% to 10.999%
11.000% to 11.499%
11.500% to 11.999%
12.000% to 12.499%
12.500% to 12.999%
Total
</TABLE>
REMAINING MONTHS TO MATURITY OF THE GROUP IIB HOME EQUITY LOANS
<TABLE>
<CAPTION>
% of Group IIb Loans
Number of Home Aggregate Remaining by Aggregate Original
Months Remaining Equity Loans Principal Balance Principal Balance
<S> <C> <C> <C>
61 to 120
181 to 300
301 to 360
Total
</TABLE>
PRODUCT TYPE OF THE GROUP IIB HOME EQUITY LOANS
<TABLE>
<CAPTION>
% of Group IIb Loans
Number of Home Aggregate Remaining by Aggregate Original
Product Type Equity Loans Principal Balance Principal Balance
<S> <C> <C> <C>
2/28
3/27
Six-Month LIBOR
Total
</TABLE>
<PAGE>
ORIGINAL LOAN-TO-VALUE RATIO OF THE GROUP IIB HOME EQUITY LOANS
<TABLE>
<CAPTION>
% of Group IIb Loans
Number of Home Aggregate Remaining by Aggregate Original
Original Loan-to-Value Ratio Equity Loans Principal Balance Principal Balance
<S> <C> <C> <C>
50.00% or less
50.01% to 55.00%
55.01% to 60.00%
60.01% to 65.00%
65.01% to 70.00%
70.01% to 75.00%
75.01% to 80.00%
80.01% to 85.00%
85.01% to 90.00%
Total
</TABLE>
LOAN PROGRAM OF THE GROUP IIB HOME EQUITY LOANS
<TABLE>
<CAPTION>
% of Group IIb Loans
Number of Home Aggregate Remaining by Aggregate Original
Program Equity Loans Principal Balance Principal Balance
<S> <C> <C> <C>
Fast Trac
Full Documentation
Stated Income
Total
</TABLE>
PURPOSE OF THE GROUP IIB HOME EQUITY LOANS
<TABLE>
<CAPTION>
% of Group IIb Loans
Number of Home Aggregate Remaining by Aggregate Original
Purpose Equity Loans Principal Balance Principal Balance
<S> <C> <C> <C>
Purchase
Refinance - No Cash Out
Refinance Equity Take-Out
Total
</TABLE>
RISK CATEGORY OF THE GROUP IIB HOME EQUITY LOANS
<TABLE>
<CAPTION>
% of Group IIb Loans
Number of Home Aggregate Remaining by Aggregate Original
Risk Category Equity Loans Principal Balance Principal Balance
<S> <C> <C> <C>
A-
B
B-
C
D
Total
</TABLE>
MORTGAGED PROPERTY TYPES OF THE GROUP IIB HOME EQUITY LOANS
<TABLE>
<CAPTION>
% of Group IIb Loans
Number of Home Aggregate Remaining by Aggregate Original
Mortgaged Property Type Equity Loans Principal Balance Principal Balance
<S> <C> <C> <C>
Single Family
2 to 4 units
Condo
Manufactured Home
Townhouse
PUD
Total
</TABLE>
OCCUPANCY STATUS OF THE GROUP IIB HOME EQUITY LOANS
<TABLE>
<CAPTION>
% of Group IIb Loans
Number of Home Aggregate Remaining by Aggregate Original
Occupancy Status Equity Loans Principal Balance Principal Balance
<S> <C> <C> <C>
Owner Occupied
Non-Owner Occupied
Second Home
Total
</TABLE>
<PAGE>
MONTH AND YEAR OF NEXT RATE ADJUSTMENT OF THE GROUP IIB HOME EQUITY LOANS
<TABLE>
<CAPTION>
% of Group IIb Loans
Month and Year of Number of Home Aggregate Remaining by Aggregate Original
Next Rate Adjustment Equity Loans Principal Balance Principal Balance
<S> <C> <C> <C>
July 1999
__________, ____
September 1999
October 1999
November 1999
December 1999
July 2000
August 2000
September 2000
October 2000
November 2000
December 2000
January 2001
February 2001
March 2001
April 2001
November 2001
December 2001
January 2002
February 2002
March 2002
April 2002
Total
</TABLE>
GROSS MARGINS OF THE GROUP IIB HOME EQUITY LOANS
<TABLE>
<CAPTION>
% of Group IIb Loans
Number of Home Aggregate Remaining by Aggregate Original
Gross Margin Equity Loans Principal Balance Principal Balance
<S> <C> <C> <C>
4.000% to 4.499%
4.500% to 4.999%
5.000% to 5.499%
5.500% to 5.999%
6.000% to 6.499%
6.500% to 6.999%
7.000% to 7.499%
7.500% to 7.999%
8.000% to 8.499%
8.500% to 8.999%
9.500% and greater
Total
</TABLE>
<PAGE>
MAXIMUM LOAN RATES OF THE GROUP IIB HOME EQUITY LOANS
<TABLE>
<CAPTION>
% of Group IIb Loans
Number of Home Aggregate Remaining by Aggregate Original
Maximum Rate Equity Loans Principal Balance Principal Balance
<S> <C> <C> <C>
12.500% to 12.999%
13.000% to 13.499%
13.500% to 13.999%
14.000% to 14.499%
14.500% to 14.999%
15.000% to 15.499%
15.500% to 15.999%
16.000% to 16.499%
16.500% to 16.999%
17.000% to 17.499%
17.500% to 17.999%
18.000% to 18.499%
18.500% to 18.999%
Total
</TABLE>
MINIMUM LOAN RATES OF THE GROUP IIB HOME EQUITY LOANS
<TABLE>
<CAPTION>
% of Group IIb Loans
Number of Home Aggregate Remaining by Aggregate Original
Minimum Rate Equity Loans Principal Balance Principal Balance
<S> <C> <C> <C>
6.500% to 6.999%
7.000% to 7.499%
7.500% to 7.999%
8.000% to 8.499%
8.500% to 8.999%
9.000% to 9.499%
9.500% to 9.999%
10.000% to 10.499%
10.500% to 10.999%
11.000% to 11.499%
11.500% to 11.999%
12.000% to 12.499%
12.500% to 12.999%
Total
</TABLE>
<PAGE>
PREPAYMENT AND YIELD CONSIDERATIONS
The rate of principal payments on each class of Offered Certificates, other
than the Class A-IO Certificates, the aggregate amount of distributions on the
Offered Certificates and the yield to maturity of the Offered Certificates will
be related to the rate and timing of payments of principal on the Home Equity
Loans. The rate of principal payments on the Home Equity Loans will in turn be
affected by the amortization schedules of the Home Equity Loans and by the rate
of principal prepayments, including for this purpose prepayments resulting from
refinancing, liquidations of the Home Equity Loans due to defaults, casualties,
condemnations and repurchases by the Originators or the Seller ("Prepayments").
Some of the Home Equity Loans may be prepaid by the Mortgagors at any time
without penalty. Some of the Home Equity Loans are subject to penalties for
prepayments.
SUBORDINATED OFFERED CERTIFICATES
The Subordinated Offered Certificates provide credit enhancement for all of
the Class A and Class A-IO Component Certificates and may absorb losses on the
Home Equity Loans in either Home Equity Loan Group. The weighted average lives
of, and the yields to maturity on, the related Class B Component Certificates,
and consequently, on the Subordinated Offered Certificates, in order of their
relative loss allocation priority will be progressively more sensitive to the
rate and timing of mortgagor defaults and the severity of ensuing losses on the
Home Equity Loans in the related Home Equity Loan Group and in both Home Equity
Loan Groups. If the actual rate and severity of losses on the Home Equity Loans
is higher in a particular Home Equity Loan Group or for both Home Equity Loan
Groups than those assumed by a holder of a Subordinated Offered Certificate, the
actual yield to maturity on the holder's Certificate may be lower than the yield
expected by the holder based on this assumption. Realized Losses on the Home
Equity Loans will reduce the Certificate Principal Balance of the class or
classes of the Class B Component Certificates, and the related Subordinated
Offered Certificates, then due to be allocated a loss if and to the extent that
the aggregate of the Certificate Principal Balances of all classes of
Certificates, following all distributions on a Distribution Date, exceeds the
outstanding principal balance of the Home Equity Loans. As a result of these
reductions, less interest will accrue on the Class B Component Certificates, and
the related class of Subordinated Offered Certificates, than otherwise would be
the case. The related Group Principal Distribution Amount includes the net
proceeds in respect of principal received upon liquidation of a related
Liquidated Loan. If the net proceeds are less than the unpaid principal balance
of the Liquidated Loan, the outstanding principal balance of the Home Equity
Loans will decline more than the aggregate Certificate Principal Balance of the
Offered Certificates, thus reducing the Class B Subordinated Amount. If the
difference is not covered by the Class B Subordinated Amount or the application
of Net Monthly Excess Cash Flow, the class of the Class B Component
Certificates, and the related Subordinated Offered Certificates, then due to be
allocated a loss will bear the loss. In addition, the Class B Component
Certificates, and the related Subordinated Offered Certificates, will not be
entitled to any principal distributions prior to the Stepdown Date or during the
continuation of a Trigger Event, unless all of the Certificates with a higher
relative payment priority have been paid in full. Because of the
disproportionate distribution of principal of the Class A Certificates,
depending on the timing of Realized Losses, the Class B Component Certificates,
and the related Subordinated Offered Certificate,) may bear a disproportionate
percentage of the Realized Losses on the Home Equity Loans. The "Class B
Subordinated Amount" means, with respect to each Home Equity Loan Group and
Distribution Date, the excess, if any, of (x) the aggregate Loan Balances of the
Home Equity Loans in the Home Equity Loan Group as of the close of business on
the last day of the preceding Due Period over (y) the aggregate outstanding
Certificate Principal Balance of the related Class A Certificates and Class B
Component Certificates as of the Distribution Date, after taking into account
the payment of the Group Principal Distribution Amount related to the Home
Equity Loan Group, except for any Subordination Reduction Amount or
Subordination Increase Amount related to the Home Equity Loan Group, on the
Distribution Date.
PREPAYMENTS
On the first Distribution Date, you will receive a payment of principal
equal to the sum of (a) two months of scheduled and unscheduled principal
collections and (b) approximately $______, representing the outstanding
principal balance of home equity loans that were expected to be conveyed to the
Trust on the Closing Date but were not so conveyed. Of the amounts described in
clause (b) above, $______, $______, $______ and $______ will be allocated to
Group Ia, Group Ib, Group IIa, and Group IIb, respectively (the "Closing Date
Deposits").
Prepayments, liquidations and purchases of the Home Equity Loans, including
any optional purchase by the holder of the related Class X Certificates or the
Servicer of a delinquent Home Equity Loan and any optional purchase by the
holders of the Class X-F Certificates of the remaining Home Equity Loans will
result in distributions on the related class or classes of Offered Certificates
then entitled to distributions of principal amounts which would otherwise be
distributed over the remaining terms of the Home Equity Loans. Since the rate of
payment of principal of the Home Equity Loans will depend on future events and a
variety of factors, no assurance can be given as to the rate or the rate of
principal prepayments. The extent to which the yield to maturity of a class of
Offered Certificates may vary from the anticipated yield will depend upon the
degree to which a Certificate of the class is purchased at a discount or
premium, and the degree to which the timing of payments on the Certificates is
sensitive to prepayments, liquidations and purchases of the related Home Equity
Loans.
Holders of the Offered Certificates should consider, in the case of any the
Certificates purchased at a discount, and particularly the Subordinated Offered
Certificates, the risk that a slower than anticipated rate of principal payments
on the related Home Equity Loans could result in an actual yield that is lower
than the anticipated yield and, in the case of any Offered Certificates
purchased at a premium, the risk that a faster than anticipated rate of
principal payments on the related Home Equity Loans could result in an actual
yield that is lower than the anticipated yield. The timing of losses on the
related Home Equity Loans also will affect an investor's actual yield to
maturity, even if the rate of defaults and severity of losses over the life of
the Trust are consistent with an investor's expectations. In general, the
earlier a loss occurs, the greater the effect on an investor's yield of
maturity.
The rate of prepayment on the Home Equity Loans cannot be predicted.
Approximately ______ % of all of the Home Equity Loans by Cut-Off Date Loan
Balance may be prepaid in whole or in part at any time without penalty.
Generally, home equity loans are not viewed by borrowers as permanent financing.
Accordingly, the Home Equity Loans may experience a higher rate of prepayment
than traditional first home equity loans. The prepayment experience of the Trust
with respect to the Home Equity Loans may be affected by a wide variety of
factors, including economic conditions, prevailing interest rate levels, the
availability of alternative financing and homeowner mobility and changes
affecting the deductibility for Federal income tax purposes of interest payments
on home equity loans. All of the Home Equity Loans contain "due-on-sale"
provisions, and the Servicer is required by the Agreement to enforce the
provisions, unless the enforcement is not permitted by applicable law. The
enforcement of a "due-on-sale" provision will have the same effect as a
prepayment of the related Home Equity Loan. The rate of prepayment of the Home
Equity Loans will also be affected by the magnitude of any penalty in connection
with a prepayment.
WE REFER YOU TO "CERTAIN LEGAL ASPECTS OF THE MORTGAGE LOANS AND
CONTRACTS--'DUE-ON-SALE CLAUSES'" IN THE PROSPECTUS FOR MORE DETAIL.
As with fixed rate obligations generally, the rate of prepayment on a pool
of home equity loans with fixed rates, including the Group I Home Equity Loans
is affected by prevailing market rates for home equity loans of a comparable
term and risk level. When the market interest rate is below the mortgage coupon,
mortgagors may have an increased incentive to refinance their home equity loans.
Depending on prevailing market rates, the future outlook for market rates and
economic conditions generally, some mortgagors may sell or refinance mortgaged
properties in order to realize their equity in the mortgaged properties, to meet
cash flow needs or to make other investments. The prepayment behavior of the
2/28 Adjustable Rate Loans and 3/27 Adjustable Rate Loans may differ from that
of the other Home Equity Loans. As a 2/28 Adjustable Rate Loan or 3/27
Adjustable Rate Loan approaches its initial adjustment date, the borrower may
become more likely to refinance the loan to avoid an increase in the Coupon
Rate, even if fixed-rate loans are only available at rates that are slightly
lower or higher than the Coupon Rate before adjustment. The existence of the
applicable periodic rate cap, lifetime cap and lifetime floor also may affect
the likelihood of prepayments resulting from refinancings. As is the case with
conventional fixed-rate home equity loans, adjustable-rate home equity loans may
be subject to a greater rate of principal prepayments in a declining interest
rate environment. For example, if prevailing interest rates fall significantly,
adjustable-rate home equity loans could be subject to higher prepayment rates
than if prevailing interest rates remain constant because the availability of
fixed-rate home equity loans at competitive rates may encourage mortgagors to
refinance their adjustable-rate home equity loans to "lock in" a lower fixed
interest rate. However, no assurance can be given as to the level of prepayments
that the Home Equity Loans will experience.
Net Monthly Excess Cash Flow for the Home Equity Loans in the applicable
Home Equity Loan Group will be distributed in reduction of the Certificate
Principal Balance of the related Class of Class A and Class B Component
Certificates entitled to distributions of principal on each Distribution Date to
the extent that the then required overcollateralization amount for the Home
Equity Loans in the applicable Home Equity Loan Group exceeds the actual
overcollateralization amount. If purchased at a premium or a discount, the yield
to maturity on a Class of Offered Certificates will be affected by the rate at
which the Net Monthly Excess Cash Flow for the Home Equity Loans in the related
Home Equity Loan Group is distributed in reduction of the Certificate Principal
Balance of the applicable Class B Component Certificates. If the actual rate of
the Net Monthly Excess Cash Flow distribution is slower than the rate
anticipated by an investor who purchases a Class of Offered Certificates at a
discount, the actual yield to the investor will be lower than the investor's
anticipated yield. If the actual rate of the Net Monthly Excess Cash Flow
distribution is faster than the rate anticipated by an investor who purchases a
Class of Offered Certificates at a premium, the actual yield to the investor
will be lower than the investor's anticipated yield. The amount of Net Monthly
Excess Cash Flow on any Distribution Date will be affected by the actual amount
of interest received, collected or recovered in respect of the Home Equity Loans
during the related Due Period and the amount will be influenced by changes in
the weighted average of the Coupon Rates of the Home Equity Loans resulting from
prepayments and liquidations. The amount of Net Monthly Excess Cash Flow
distributions applied in reduction of the applicable Certificate Principal
Balance on each Distribution Date will be based on the required
overcollateralization amount.
WE REFER YOU TO "DESCRIPTION OF THE CERTIFICATES--CREDIT ENHANCEMENT" FOR
MORE DETAIL.
PAYMENT DELAY FEATURE OF THE GROUP I CERTIFICATES
The effective yield to the Group I Certificateholders will be lower than
the yield otherwise produced by the Certificate Rate for the Class and the
purchase price of the Certificates because distributions will not be payable to
the Group I Certificates until the Distribution Date following the month of
accrual, without any additional distribution of interest or earnings on the
Certificates in respect of the delay.
WEIGHTED AVERAGE LIVES
Generally, greater than anticipated prepayments of principal will increase
the yield on Offered Certificates purchased at a price less than par and will
decrease the yield on Offered Certificates purchased at a price greater than
par. The effect on an investor's yield due to principal prepayments on the Home
Equity Loans in the related Home Equity Loan Group occurring at a rate that is
faster (or slower) than the rate anticipated by the investor in the period
immediately following the issuance of the Certificates will not be entirely
offset by a subsequent like reduction (or increase) in the rate of principal
payments. The weighted average life of the Class A and Class B Component
Certificates will also be affected by the amount and timing of delinquencies and
defaults on the Home Equity Loans in the related Home Equity Loan Group and the
recoveries, if any, on defaulted Home Equity Loans in the related Home Equity
Loan Group and foreclosed properties.
The "weighted average life" of a Certificate refers to the average amount
of time that will elapse from the date of issuance to the date each dollar in
respect of principal of the Certificate is repaid. The weighted average life of
any Class of the Offered Certificates will be influenced by, among other
factors, the rate at which principal payments are made on the Home Equity Loans,
including final payments made upon the maturity of Home Equity Loans for which
the related monthly payments are insufficient to fully amortize the Home Equity
Loans ("Balloon Loans").
Prepayments of home equity loans are commonly measured relative to a
prepayment standard or model. The model used with respect to the Group I
Certificates (the "Prepayment Assumption") assumes a constant prepayment rate
("CPR") of 4.0% per annum of the then unpaid principal balance of the home
equity loan in the first month of the life of the home equity loans and an
additional approximately 1.455%, precisely 16/11%, per annum in each subsequent
month until the 12th month. Beginning in the 12th month and in each subsequent
month during the life of the home equity loans, 100% Prepayment Assumption
assumes a CPR of 20%. The model used with respect to the Group II Certificates
is CPR, which is a prepayment assumption that represents a constant assumed rate
of prepayment each month relative to the then outstanding principal balance of a
pool of home equity loans for the life of the home equity loans. Neither model
purports to be either a historical description of the prepayment experience of
any pool of home equity loans or a prediction of the anticipated rate of
prepayment of any home equity loans, including the Home Equity Loans to be
included in the Trust.
Since the following tables were prepared on the basis of the assumptions in
the following paragraph, there are discrepancies between characteristics of the
actual Home Equity Loans and the characteristics of the Home Equity Loans
assumed in preparing the tables. Any discrepancy may have an effect upon the
percentages of the Certificate Principal Balances outstanding and weighted
average lives of the Offered Certificates set forth in the tables. In addition,
since the actual Home Equity Loans in the Trust have characteristics which
differ from those assumed in preparing the tables set forth below, the
distributions of principal on the Offered Certificates may be made earlier or
later than as indicated in the tables.
The information in the decrement tables has been prepared on the basis of
the following assumed characteristics of the Home Equity Loans and the following
additional assumptions (collectively, the "Structuring Assumptions"):
o the Home Equity Loans consist of pools of loans with the level-pay and
balloon amortization characteristics set forth below,
o the Closing Date for the Offered Certificates is _________, ____ and
interest on the Group II Certificates begins to accrue on the Closing Date,
o distributions on the Offered Certificates are made on the ____ day of each
month, commencing in _____ , _____ and are made in accordance with the
priorities described in this prospectus supplement,
o scheduled monthly payments of principal will be timely delivered on the
first day of each month commencing in ______, with no defaults,
delinquencies, modifications, waivers or amendments,
o scheduled monthly payments of interest will be timely delivered on the
first day of each month commencing in _____ , _____, with no defaults,
delinquencies, modifications, waivers or amendments,
o on the first distribution date in _____ , _____, scheduled monthly payments
of principal due from _______, ____through ______, prepayments of principal
received from ______ through ______ and scheduled monthly payments of
interest due from ______ will be available to be distributed to
Certificateholders,
o the Home Equity Loans prepay at the specified percentages of the Prepayment
Assumption in the case of the Group I Home Equity Loans, or at the
indicated Percentage of CPR, in the case of the Group II Home Equity Loans,
as indicated in the prepayment scenarios below,
o all prepayments are prepayments in full received on the last day of each
month commencing in ______ and include 30 days' interest on the prepayment,
o no optional termination is exercised, except as set forth below with
respect to weighted average life to call,
o the Offered Certificates of each Class have the respective Certificate
Rates and initial Certificate Principal Balances or Notional Amount as set
forth in this prospectus supplement,
o the required overcollateralization levels are set initially as specified in
this prospectus supplement, and subsequently decrease in accordance with
the provisions of the Agreement,
o the Coupon Rate for each Group II Home Equity Loan is adjusted on its next
adjustment date and on subsequent adjustment dates, if necessary, to equal
the sum of the applicable gross margin and the London interbank offered
rate for six-month United States dollar deposits ("Six-Month LIBOR"), this
sum being subject to the applicable periodic rate adjustment caps and
floors and lifetime rate caps and floors,
o Six-Month LIBOR remains constant at ______ % per annum and One-Month LIBOR
remains constant at ______ % per annum;
o the servicing fee rate and the trustee fee rate together are ______ % of
the Loan Balance of each Home Equity Loan and the Minimum Spread is assumed
to be 0%; and
o the definition of Class A Principal Distribution Amount does not have
clause (z) and the definition of Specified Subordinated Amount does not
have clause (3).
<PAGE>
GROUP IA
<TABLE>
<CAPTION>
Remaining
Original Term to Remaining
Pool Coupon Amortization Maturity Amortization Amortization
NUMBER LOAN BALANCE($) RATE (%) TERM (MONTHS) (MONTHS) TERM (MONTHS) METHOD
------ ------------- -------- ------------- --------------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
1 Level Pay
2 Level Pay
3 Level Pay
4 Level Pay
5 Balloon
GROUP IB
Remaining
Original Term to Remaining
Pool Coupon Amortization Maturity Amortization Amortization
NUMBER LOAN BALANCE($) RATE (%) TERM (MONTHS) (MONTHS) TERM (MONTHS) METHOD
------ ------------- -------- ------------- --------------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
1 Level Pay
2 Level Pay
3 Level Pay
4 Balloon
</TABLE>
GROUP IIA
<TABLE>
<CAPTION>
Initial Months
Original Remaining Current Periodic Next Rate Between
Pool Term to Term Coupon Gross Rate Lifetime Lifetime Adjustment Rate
NUMBER LOAN BALANCE($) MATURITY TO MATURITY RATE(%) MARGIN(%) CAP(%) CAP(%) FLOOR(%) PERIOD ADJUSTMENT
------ ------------- -------- ----------- ------ ------- ------- ------- ------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 6
2 6
3 6
4 6
5 6
6 6
7 6
8 6
GROUP IIB
Initial Months
Original Remaining Current Periodic Next Rate Between
Pool Term to Term Coupon Gross Rate Lifetime Lifetime Adjustment Rate
NUMBER LOAN BALANCE($) MATURITY TO MATURITY RATE(%) MARGIN(%) CAP(%) CAP(%) FLOOR(%) PERIOD ADJUSTMENT
------ ------------- -------- ----------- ------ ------- ------- ------- ------ ---------- ----------
1 6
2 6
3 6
4 6
5 6
6 6
7 6
8 6
</TABLE>
<PAGE>
PREPAYMENT SCENARIOS
I II III IV V VI
- -- --- -- - --
Group I(1)
Group II(2)
------------------
(1) Percentage of the Prepayment Assumption.
(2) Percentage of CPR.
DECREMENT TABLES
The following tables indicate, based on the Structuring Assumptions, the
percentages of the initial Certificate Principal Balance of the Offered
Certificates that would be outstanding after each of the dates shown at the
indicated prepayment scenario, and the corresponding weighted average lives of
the Classes. It is not likely that
(1) all of the Home Equity Loans will have the characteristics assumed,
(2) the Home Equity Loans will prepay at the specified percentages of
Prepayment Assumption or CPR or at any other CONSTANT percentage or
(3) the level of One-Month LIBOR or Six-Month LIBOR will remain constant at
the level assumed or at any other level.
Moreover, the diverse remaining terms to maturity of the Home Equity Loans could
produce slower or faster principal distributions than indicated in the tables at
the specified percentages of the Prepayment Assumption or CPR even if the
weighted average remaining term to maturity of the Home Equity Loans is
consistent with the remaining terms to maturity of the Home Equity Loans
specified in the Structuring Assumptions.
<PAGE>
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING
<TABLE>
<CAPTION>
Class A-1F Class A-2F
--------------------------------------- ---------------------------------------------
Prepayment Scenario Prepayment Scenario
DISTRIBUTION DATE I II III IV V VI I II III IV V VI
----------------- - -- --- -- - -- - -- --- -- - --
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage
_____ 2000
_____ 2001
_____ 2002
_____ 2003
_____ 2004
_____ 2005
_____ 2006
_____ 2007
_____ 2008
_____ 2009
_____ 2010
_____ 2011
_____ 2012
_____ 2013
_____ 2014
_____ 2015
_____ 2016
_____ 2017
_____ 2018
_____ 2019
_____ 2020
_____ 2021
_____ 2022
_____ 2023
_____ 2024
_____ 2025
_____ 2026
_____ 2027
_____ 2028
_____ 2029
Weighted Average Life (Years) (1)(2)
Weighted Average Life (Years (1)(3)
(1) The weighted average life of an Offered Certificate is determined by (1)
multiplying the amount of each distribution in reduction of the related
Certificate Principal Balance by the number of years from the date of
issuance of the Offered Certificate to the related Distribution Date, (2)
adding the results, and (3) dividing the sum by the original Certificate
Principal Balance of the Offered Certificate.
(2) To maturity.
(3) To call.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Class A-3A Class A-4A
--------------------------------------- ---------------------------------------------
Prepayment Scenario Prepayment Scenario
DISTRIBUTION DATE I II III IV V VI I II III IV V VI
----------------- - -- --- -- - -- - -- --- -- - --
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage 100 100 100 100 100 100 100 100 100 100 100 100
_____ 2000
_____ 2001
_____ 2002
_____ 2003
_____ 2004
_____ 2005
_____ 2006
_____ 2007
_____ 2008
_____ 2009
_____ 2010
_____ 2011
_____ 2012
_____ 2013
_____ 2014
_____ 2015
_____ 2016
_____ 2017
_____ 2018
_____ 2019
_____ 2020
_____ 2021
_____ 2022
_____ 2023
_____ 2024
_____ 2025
_____ 2026
_____ 2027
_____ 2028
_____ 2029
Weighted Average Life (Years) (1)(2)
Weighted Average Life (Years)(1)(3)
(1) The weighted average life of an Offered Certificate is determined by (1)
multiplying the amount of each distribution in reduction of the related
Certificate Principal Balance by the number of years from the date of
issuance of the Offered Certificate to the related Distribution Date, (2)
adding the results, and (3) dividing the sum by the original Certificate
Principal Balance of the Offered Certificate.
(2) To maturity.
(3) To call.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Class A-5A Class B-1
--------------------------------------- ---------------------------------------------
Prepayment Scenario Prepayment Scenario
DISTRIBUTION DATE I II III IV V VI I II III IV V VI
----------------- - -- --- -- - -- - -- --- -- - --
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage 100 100 100 100 100 100 100 100 100 100 100 100
July 2000
July 2001
July 2002
July 2003
July 2004
July 2005
July 2006
July 2007
July 2008
July 2009
July 2010
July 2011
July 2012
July 2013
July 2014
July 2015
July 2016
July 2017
July 2018
July 2019
July 2020
July 2021
July 2022
July 2023
July 2024
July 2025
July 2026
July 2027
July 2028
July 2029
Weighted Average Life (Years) (1)(2)
Weighted Average Life (Years) (1)(3)
(1) The weighted average life of an Offered Certificate is determined by (1)
multiplying the amount of each distribution in reduction of the related
Certificate Principal Balance by the number of years from the date of
issuance of the Offered Certificate to the related Distribution Date, (2)
adding the results, and (3) dividing the sum by the original Certificate
Principal Balance of the Offered Certificate.
(2) To maturity.
(3) To call.
</TABLE>
These tables have been prepared based on the assumptions described above
(including the assumptions regarding the characteristics and performance of the
Home Equity Loans, which differ from the actual characteristics and performance
of the loans) and should be read in conjunction with them.
<PAGE>
FORMATION OF THE TRUST AND TRUST PROPERTY
Asset Backed Securities Corporation Home Equity Loan Trust _____-__ (the
"Trust") will be created and established pursuant to the Pooling and Servicing
Agreement dated as of _____ , _____ (the "Agreement") among Asset Backed
Securities Corporation (the "Depositor"), the Servicer, and ___________________
(the "Trustee"). On or prior to the Closing Date, the Originators will transfer
without recourse the Home Equity Loans to the Seller. On or before the Closing
Date, the Seller will transfer without recourse the Home Equity Loans to the
Depositor pursuant to the Mortgage Loan Purchase Agreement dated as of _____,
_____ (the "Loan Purchase Agreement") among the Depositor, the Seller and
______. On the Closing Date, the Depositor will convey without recourse the Home
Equity Loans to the Trust and the Trust will issue the Certificates at the
direction of the Depositor.
The property of the Trust shall include:
(1) the Home Equity Loans together with the related Home Equity Loan
documents and the Originators' interest in any Mortgaged Property
which secures a Home Equity Loan and all payments on the Home Equity
Loans and proceeds of the conversion, voluntary or involuntary, of the
foregoing, other than principal received on or before the applicable
Cut-Off Date and interest due on or prior to ----------,
(2) the amounts as may be held by the Trustee in the Certificate Account,
the Cap Reserve Fund, the LIBOR Carryover Funds and any other accounts
held by the Trustee for the Trust together with investment earnings on
these amounts and other amounts as may be held by the Servicer in the
Principal and Interest Account, if any, whether in the form of cash,
instruments, securities or other properties,
(3) the Depositor's rights but not its obligations under the Loan Purchase
Agreement,
(4) the Cap Agreement and
(5) proceeds of all the foregoing, including, but not by way of
limitation, all proceeds of any mortgage insurance, hazard insurance
and title insurance policy relating to the Home Equity Loans, cash
proceeds, accounts, accounts receivable, notes, drafts, acceptances,
chattel paper, checks, deposit accounts, rights to payment of any and
every kind, and other forms of obligations and receivables which at
any time constitute all or part of or are included in the proceeds of
any of the foregoing, to pay the Certificates as specified in the
Agreement (collectively with clause (1) through (4) above, the "Trust
Estate").
In addition to the foregoing, the Depositor shall cause the Certificate
Insurer to deliver the Policies to the Trustee for the benefit of the Owners of
the Class A and Class A-IO Certificates.
The Offered Certificates will not represent an interest in or an obligation
of, nor will the Home Equity Loans be guaranteed by, the Depositor, the Seller,
the Originators, the Servicer, the Trustee or any of their affiliates. Some of
the distributions due to the Owners of the Class A and Class A-IO Certificates
are insured by the Certificate Insurer.
Prior to its formation the Trust will have had no assets or obligations.
Upon formation, the Trust will not engage in any business activity other than
acquiring, holding and collecting payments on the Home Equity Loans, issuing the
Certificates and distributing payments on them. The Trust will not acquire any
receivables or assets other than the Home Equity Loans and the proceeds of the
Home Equity Loans and rights appurtenant to the Home Equity Loans. To the extent
that borrowers make scheduled payments under the Home Equity Loans, the Trust
will have sufficient liquidity to make distributions on the Certificates. As the
Trust does not have any operating history and will not engage in any business
activity other than issuing the Certificates and making distributions on the
Certificates, there has not been included any historical or pro forma ratio of
earnings to fixed charges with respect to the Trust.
ADDITIONAL INFORMATION
The description in this prospectus supplement of the Home Equity Loans and
the Mortgaged Properties is based upon the Home Equity Loans in each Home Equity
Loan Group as constituted at the Cut-Off Date. Prior to the issuance of the
Offered Certificates, Home Equity Loans may be removed from any of the Home
Equity Loan Groups as a result of incomplete documentation or non-compliance
with representations and warranties set forth in the Agreement, if the Depositor
or the Certificate Insurer deems removal necessary or appropriate and other Home
Equity Loans may be added to a Home Equity Loan Group prior to the issuance of
the Offered Certificates.
DESCRIPTION OF THE CERTIFICATES
Pursuant to the Agreement, the Trust will issue on the Closing Date the
Asset Backed Securities Corporation Home Equity Loan Pass-Through Certificates,
Series _____-__, Class A-1F (the "Class A-1F Certificates"), Class A-2F (the
"Class A-2F Certificates" and together with the Class A-1F Certificates, the
"Class AI Certificates"), Class A-3A (the "Class A-3A Certificates"), Class A-4A
(the "Class A-4A Certificates"), Class A-5A (the "Class A-5A Certificates" and
together with the Class A-3A Certificates and together with the Class A-4A
Certificates, the "Class AII Certificates" and together with the Class AI
Certificates, the "Class A Certificates"), Class A-IO (the "Class A-IO
Certificates"), Class B-1 (the "Class B-1 Certificates" or the "Subordinated
Offered Certificates" and together with the Class A and Class A-IO Certificates,
the "Offered Certificates"). The Trust will also issue on the Closing Date the
Class B-IOF Certificates (the "Class B-IOF Certificates"), the Class B-IOA
Certificates (the "Class B-IOA Certificates" and, together with the Class A-IO
and Class B-IOF Certificates, the "Notional Amount Certificates"), the Class X-F
Certificates (the "Class X-F Certificates"), the Class X-A Certificates (the
"Class X-A Certificates" and together with the Class X-F Certificates, the
"Class X Certificates"), the Class P-F Certificates (the "Class P-F
Certificates"), the Class P-A Certificates (the "Class P-A Certificates") and
particular residual classes of certificates (the "Class R Certificates" and
together with the Class X-F Certificates, the Class X-A Certificates, the Class
P-F Certificates and the Class P-A Certificates, the "Nonoffered Certificates"
and together with the Offered Certificates, the "Certificates"). Only the
Offered Certificates are being offered by this rospectus supplement.
The Class B-1 Certificates are comprised of two component certificates, the
Class B-1F Component Certificate (the "Class B-1F Component Certificate") and
the Class B-1A Component Certificate (the "Class B-1A Component Certificate").
The Class A-IO Certificates are comprised of two component certificates, the
Class A-IOF Component Certificate (the "Class A-IOF Component Certificate") and
the Class A-IOA Component Certificate (the "Class A-IOA Component Certificate").
The Class AI Certificates, Class A-IOF Component Certificates, Class B-1F
Component Certificates, Class B-IOF Certificates are referred to as the "Group I
Certificates." The Class AII Certificates, Class A-IOA Component Certificates,
Class B-1A Component Certificates, and Class B-IOA Certificates are referred to
as the "Group II Certificates."
The form of the Agreement has been filed as an exhibit to the Registration
Statement of which this prospectus supplement and the prospectus is a part and
the Agreement will be filed in a current report on Form 8-K within fifteen days
of the Closing Date. The following summaries describe provisions of the
Agreement. The summaries do not purport to be complete and are subject to, and
are qualified in their entirety by reference to, all of the provisions of the
Agreement. Wherever particular sections or defined terms of the Agreement are
referred to, the sections or defined terms are incorporated in this prospectus
supplement by reference.
The Offered Certificates will be issued in denominations of $1,000 and
multiples of $1 in excess of $1,000 and will evidence specified undivided
interests in the Trust. The property of the Trust will consist of, to the extent
provided in the Agreement:
o the Home Equity Loans;
o payments on the Home Equity Loans due and received after the Cut-Off
Date, exclusive of principal received on or prior to the Cut-Off Date
and interest due on or prior to _____, ________;
o Mortgaged Properties relating to the Home Equity Loans that are
acquired by foreclosure or deed in lieu of foreclosure;
o the Principal and Interest Account and the Certificate Account and
funds on deposit in these accounts;
o rights under hazard insurance policies, if any, covering the Mortgaged
Properties;
o an assignment of some of the Depositor's rights, but none of its
obligations, under the Loan Purchase Agreement;
o amounts on deposit in specific accounts including the Cap Reserve
Account and the LIBOR Carryover Funds;
o the Cap Agreement; and
o proceeds of the foregoing.
In addition, the Depositor will cause [_________________________] (the
"Certificate Insurer") to issue two irrevocable and unconditional certificate
guaranty insurance policies (the "Policies") one for the benefit of the holders
of the Class A-1F, Class A-2F and Class A-IOF Component Certificates and the
other for the benefit of the holders of the Class A-3A, Class A-4A, Class A-5A
and Class A-IOA Component Certificates, pursuant to which the Certificate
Insurer will guarantee particular payments to the Class A and Class A-IO
Certificateholders as described in this prospectus supplement and in the
Policies. Definitive Certificates will be transferable and exchangeable at the
corporate trust office of the Trustee, which will initially act as Certificate
Registrar.
WE REFER YOU TO "--BOOK-ENTRY CERTIFICATES" BELOW FOR MORE DETAIL.
No service charge will be made for any registration of exchange or transfer
of Certificates, but the Trustee may require payment of a sum sufficient to
cover any tax or other governmental charge.
Each Home Equity Loan in the trust will be assigned to one of two home
equity loan groups ("Group I", and "Group II," respectively, and each a "Home
Equity Loan Group"). Distributions on the Group I Certificates will be derived
from payments on the home equity loans in Group I. Principal distributions on
the Class A-1F Certificates and the Class A-2F Certificates, respectively will
be based on the principal received on subgroups of Group I consisting of home
equity loans with initial principal balances of $240,000 or less and greater
than $240,000, respectively. The Group II Certificates will receive
distributions primarily based upon collections on the Home Equity Loans in Group
II. Distributions on the Group II Certificates will be derived from payments on
the home equity loans in Group II. Principal distributions on the Class A-3A and
Class A-4A Certificates, respectively, will be based on the principal received
on subgroups of Group II consisting of home equity loans with initial principal
balances of $240,000, or less and greater than $240,000, respectively. Principal
distributions on the Class A-5A Certificates will be based on ratio of the
outstanding principal balance of the Class A-5A Certificates and the outstanding
balance of the Class A Certificates in Group II.
The principal amount of a class of Offered Certificates and a class of
Class B Component Certificates, other than the Class A-I0F and Class A-I0A
Certificates, (each, a "Certificate Principal Balance") on any Distribution Date
is equal to the applicable Certificate Principal Balance on the Closing Date
minus the aggregate of amounts actually distributed as principal to the holders
of the class of Offered Certificates. On any date, the "Aggregate Principal
Balance" with respect to the Group I Certificates or the Group II Certificates
is the aggregate of the related Certificate Principal Balances on the date. The
notional amount of each class of Notional Amount Certificates (each, a "Notional
Amount") will be the notional amount for the Distribution Date as set forth in
this prospectus supplement.
Each class of Class A, Class A-IO Component and Class B Component
Certificates represents the right to receive payments of interest at the
Certificate Rate for the Class and payments of principal, other than with
respect to the Class A-IO Certificates, as described below.
The Person in whose name a Certificate is registered in the Certificate
Register is referred to in this prospectus supplement as a "Certificateholder."
BOOK-ENTRY CERTIFICATES
The Offered Certificates will initially be book-entry Certificates (the
"Book-Entry Certificates"). Persons acquiring beneficial ownership interests in
Book-Entry Certificates ("Certificateowners") may hold through DTC (in the
United States), or Clearstream, Luxembourg, societe anonyme ("Clearstream,
Luxembourg") or the Euroclear System ("Euroclear")(in Europe), which in turn
hold through DTC, if they are participants in the systems, or indirectly through
organizations that are participants in the systems ("Participants"). Investors
may hold beneficial interests in the Book-Entry Certificates in minimum
denominations representing principal amounts or notional amounts, as applicable,
of $1,000 and in integral multiples of $1 in excess of $1,000. Except as
described below, no beneficial owner will be entitled to receive a physical
certificate representing the Certificate (a "Definitive Certificate").
Unless and until Definitive Certificates are issued, it is anticipated that
the only "Owner" of the Book-Entry Certificates will be Cede & Co. ("Cede"), as
nominee of The Depository Trust Company ("DTC"). Clearstream, Luxembourg and
Euroclear will hold omnibus positions on behalf of their Participants through
customers' securities accounts in the Depositaries which in turn will hold
positions in customers' securities accounts in the Depositaries' names on the
books of DTC. Certificateowners will not be Owners as that term is used in the
Agreement. Certificateowners are only permitted to exercise their rights
indirectly through Participants.
Transfers between Participants in DTC ("DTC Participants") will occur in
accordance with DTC rules. Transfers between Participants in Clearstream,
Luxembourg ("Clearstream, Luxembourg Participants") and Participants in
Euroclear ("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 Clearstream
Luxembourg Participants or Euroclear Participants, on the other, will be
effected in DTC in accordance with DTC rules on behalf of Clearstream,
Luxembourg or Euroclear by its Depositary. However, each cross-market
transaction will require delivery of instructions to Clearstream, Luxembourg or
Euroclear by the counterparty in the system in accordance with its rules and
procedures and within its established deadlines (European time). Clearstream,
Luxembourg or Euroclear will, if the transaction meets its settlement
requirements, deliver instructions to its 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. Clearstream, Luxembourg Participants and
Euroclear Participants may not deliver instructions directly to the related
Depositaries.
Because of time-zone differences, credits of securities received in
Clearstream, Luxembourg or Euroclear as a result of a transaction with a DTC
Participant will be made during subsequent securities settlement processing and
dated the business day following the DTC settlement date. Credits or any
transactions in the securities settled during the processing will be reported to
the relevant Clearstream, Luxembourg Participants or Euroclear Participants on
this business day. Cash received in Clearstream, Luxembourg or Euroclear as a
result of sales of Offered Certificates by or through a Clearstream, Luxembourg
Participant or Euroclear Participant to a DTC Participant will be received with
value on the DTC settlement date but will be available in the relevant
Clearstream, Luxembourg or Euroclear cash account only as of the business day
following settlement in DTC.
DTC is a limited-purpose trust company organized under the New York Banking
Law, a "banking organization" within the meaning of the New York Banking Law, a
member of the Federal Reserve System, a "clearing corporation" within the
meaning of the UCC in effect in the State of New York and a "clearing agency"
registered pursuant to the provisions of Section 17A of the Exchange Act. DTC
holds securities that DTC Participants deposit with DTC. DTC also facilitates
the clearance and settlement of securities transactions among DTC Participants
through electronic computerized book-entry changes in accounts of DTC
Participants, thus eliminating the need for physical movement of securities
certificates. DTC Participants include securities brokers and dealers, including
the Underwriters, banks, trust companies, clearing corporations and other
organizations. Indirect access to the DTC system also is available to banks,
brokers, dealers and trust companies that clear through or maintain a custodial
relationship with a DTC Participant, either directly or indirectly (the
"Indirect DTC Participants"). The rules applicable to DTC and DTC Participants
are on file with the Commission.
Certificateowners that are not DTC Participants or Indirect DTC
Participants but that desire to purchase, sell or otherwise transfer ownership
of, or an interest in, Offered Certificates under the DTC System may do so only
through DTC Participants or Indirect DTC Participants. DTC Participants will
receive a credit for the Offered Certificates in DTC's records. The ownership
interest of each Certificateowners in turn will be recorded on the DTC
Participants' and Indirect DTC Participants' respective records.
Certificateowners will not receive written confirmation from DTC of their
purchase, but Certificateowners are expected to receive written confirmations
providing details of the transaction, as well as periodic statements of their
holdings, from the DTC Participant or Indirect DTC Participant through which the
Certificateowner entered into the transaction. Transfers of ownership interests
in the Offered Certificates will be accomplished by entries made on the books of
DTC Participants acting on behalf of Certificateowners.
To facilitate subsequent transfers, all Offered Certificates deposited by
DTC Participants with DTC will be registered in the name of Cede, as nominee of
DTC. The deposit of Offered Certificates with DTC and their registration in the
name of Cede will effect no change in beneficial ownership. DTC will have no
knowledge of the actual Certificateowners and its records will reflect only the
identity of the DTC Participants to whose accounts the Offered Certificates are
credited, which may or may not be the Certificateowners. DTC Participants and
Indirect DTC Participants will remain responsible for keeping account of their
holdings on behalf of their customers.
Conveyance of notices and other communications by DTC to DTC Participants,
by DTC Participants to Indirect DTC Participants and by DTC Participants and
Indirect DTC Participants to Certificateowners will be governed by arrangements
among them, subject to any statutory or regulatory requirements as may be in
effect from time to time.
Principal and interest payments with respect to the Offered Certificates
will be made to DTC. DTC's practice is to credit DTC Participants' accounts on
each Distribution Date in accordance with their respective holdings shown on
DTC's records unless DTC has reason to believe that it will not receive payment
on the Distribution Date. Payments by DTC Participants and Indirect DTC
Participants to Certificateowners will be governed by standing instructions and
customary practices, as in the case with securities held for the accounts of
customers in bearer form or registered in "street name", and will be the
responsibility of the DTC Participant and Indirect DTC Participant and not of
DTC, the Trustee, the Servicer, the Seller or the Depositor, subject to any
statutory or regulatory requirements as may be in effect from time to time.
Payment of principal of and interest on the Offered Certificates to DTC will be
the responsibility of the Trustee, disbursement of payments to DTC Participants
will be the responsibility of DTC and disbursement of payments to
Certificateowners will be the responsibility of DTC Participants and Indirect
DTC Participants. As a result, under the book-entry format, Certificateowners
may experience some delay in their receipt of payments.
Because DTC can only act on behalf of DTC Participants, who in turn act on
behalf of Indirect DTC Participants and specific banks, the ability of a
Certificateowner to pledge Offered Certificates to persons or entities that do
not participate in the DTC system, or otherwise take actions with respect to the
Offered Certificates, may be limited due to the lack of a physical Certificate
for the Offered Certificates.
Neither DTC nor Cede will consent or vote with respect to the Offered
Certificates. Under its usual procedures, DTC mails an "Omnibus Proxy" to the
Trustee as soon as possible after any applicable record date for a consent or
vote. The Omnibus Proxy assigns Cede's consenting or voting rights to those DTC
Participants to whose accounts the Offered Certificates are credited on that
record date, identified in a listing attached to the Omnibus Proxy. None of the
Depositor, the Servicer, the Certificate Insurer, the Trustee nor the Depositor
will have any liability for any aspect of the records relating to or payments
made on account of beneficial ownership interests of the Offered Certificates
held by Cede, as nominee of DTC, or for maintaining, supervising or reviewing
any records relating to beneficial ownership interests.
Clearstream, Luxembourg is incorporated under the laws of Luxembourg as a
professional depository. Clearstream, Luxembourg holds securities for
Clearstream, Luxembourg Participants and facilitates the clearance and
settlement of securities transactions between Clearstream, Luxembourg
Participants through electronic book-entry changes in accounts of Clearstream,
Luxembourg Participants, thus eliminating the need for physical movement of
certificates. Transactions may be settled in Clearstream, Luxembourg in any of
34 currencies, including United States dollars. Clearstream, Luxembourg provides
to Clearstream, Luxembourg Participants, among other things, services for
safekeeping, administration, clearance and settlement of internationally traded
securities and securities lending and borrowing. Clearstream, Luxembourg
interfaces with domestic markets in several countries. As a professional
depositary, Clearstream, Luxembourg is subject to regulation by the Luxembourg
Monetary Institute. Clearstream, Luxembourg Participants are recognized
financial institutions around the world, including underwriters, securities
brokers and dealers, banks, trust companies, clearing corporations and other
organizations. Indirect access to Clearstream, Luxembourg is also available to
others, including banks, brokers, dealers and trust companies that clear through
or maintain a custodial relationship with a Clearstream, Luxembourg Participant,
either directly or indirectly.
Euroclear was created in 1968 to hold securities for Euroclear Participants
and to clear and settle transactions between Euroclear Participants through
simultaneous electronic book-entry delivery against payment, thus 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 34 currencies, including United States dollars. The Euroclear System
includes various other services, including securities lending and borrowing, and
interfaces with domestic markets in more than 25 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
System 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 Board establishes policy for the
Euroclear System. Euroclear Participants include banks, including central banks,
securities brokers and dealers and other professional financial intermediaries.
Indirect access to the Euroclear System is also available to other firms that
clear through or maintain a custodial relationship with a Euroclear Participant,
either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. 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 with respect to Offered Certificates held through
Clearstream, Luxembourg or Euroclear will be credited to the cash accounts of
Clearstream, Luxembourg Participants or Euroclear Participants in accordance
with the relevant system's rules and procedures, to the extent received by its
Depositary. The distributions will be subject to tax reporting and withholding
in accordance with relevant United States tax laws and regulations. For further
information in this regard, see "Global Clearance, Settlement and Tax
Documentation Procedures--Certain U.S. Federal Income Tax Documentation
Requirements" in Annex I to this prospectus supplement. Clearstream, Luxembourg
or the Euroclear Operator, as the case may be, will take any other action
permitted to be taken by a Offered Certificateholder on behalf of a Clearstream,
Luxembourg Participant or Euroclear Participant only in accordance with its
relevant rules and procedures and subject to the related Depositary's ability to
effect the actions on its behalf through DTC.
Although DTC, Clearstream, Luxembourg and Euroclear have agreed to the
foregoing procedures in order to facilitate transfers of Offered Certificates
among Participants of DTC, Clearstream, Luxembourg and Euroclear, they are under
no obligation to perform or continue to perform the procedures and the
procedures may be discontinued at any time.
Definitive Certificates will be issued to Certificateowners of the
Book-Entry Certificates, or their nominees, rather than to DTC, only if:
(1) DTC or the Depositor advises the Trustee in writing that DTC is no
longer willing, qualified or able to discharge properly its
responsibilities as a nominee and depository with respect to the
Book-Entry Certificates and the Depositor or the Trustee is unable to
locate a qualified successor,
(2) the Depositor, at its sole option, elects to terminate a book-entry
system through DTC or
(3) DTC, at the direction of the Certificateowners representing a majority
of the outstanding Percentage Interests of the Offered Certificates,
advises the Trustee in writing that the continuation of a book-entry
system through DTC, or a successor to DTC, is no longer in the best
interests of Certificateowners.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Trustee will be required to notify all
Certificateowners of the occurrence of the event and the availability through
DTC of Definitive Certificates. Upon surrender by DTC of the global certificate
or certificates representing the Book-Entry Certificates and instructions for
re-registration, the Trustee will issue Definitive Certificates, and after the
Trustee will recognize the holders of the Definitive Certificates as Owners
under the Agreement.
Although DTC has agreed to the foregoing procedures in order to facilitate
transfers of Certificates among Participants of DTC, it is under no obligation
to perform or continue to perform the procedures and the procedures may be
discontinued at any time.
ASSIGNMENT OF RIGHTS
A Certificateowner may pledge, encumber, hypothecate or assign all or any
part of its right to receive distributions under any Offered Certificate, but
the pledge, encumbrance, hypothecation or assignment shall not constitute a
transfer of an ownership interest sufficient to render the transferee a
Certificateowner of the Trust without compliance with the provisions of the
Agreement. Notwithstanding the foregoing, the Agreement provides that the
Certificate Insurer will, in connection with the subrogation of the Certificate
Insurer to the rights of the Certificateowners of the Offered Certificates in an
amount equal to Insured Payments for which the Certificate Insurer has not
received reimbursement, be considered to be an "Owner" to the extent, but only
to the extent, of the rights.
DISTRIBUTION DATES
On each Distribution Date, distributions will be made to Certificateholders
from amounts then on deposit in the certificate accounts established and
maintained by the Trustee in accordance with the Agreement (each a "Certificate
Account"). The "Distribution Date" shall be the ____ day of each month and if
this day is not a Business Day, then the next succeeding Business Day.
Distributions will be made in immediately available funds to Certificateholders
of Offered Certificates by wire transfer or otherwise, to the account of the
Certificateholder at a domestic bank or other entity having appropriate
facilities, if the Certificateholder has so notified the Trustee at least five
Business Days prior to the Record Date, or by check mailed to the address of the
person so entitled as it appears on the register (the "Certificate Register")
maintained by the Trustee as registrar (the "Certificate Registrar").
Certificateowners may experience some delay in the receipt of their payments due
to the operations of DTC.
"Business Day" means any day other than:
(1) a Saturday or Sunday,
(2) a day on which the Certificate Insurer is closed or
(3) a day on which banking institutions in the City of New York, New York,
[Orange, California, Houston or Dallas, Texas] or the city in which the
corporate trust office of the Trustee is located are authorized or obligated by
law or executive order to be closed.
"Record Date" means with respect to any Distribution Date, the last day of
the month immediately preceding the calendar month in which the Distribution
Date occurs.
WE REFER YOU TO "--BOOK ENTRY CERTIFICATES" FOR MORE DETAIL.
The Agreement will provide that a Certificateholder, upon receiving the
final distribution on a Certificate, will be required to send the Certificate to
the Trustee. The Agreement additionally will provide that, in any event, any
Certificate as to which the final distribution has been made shall be deemed
cancelled for all purposes of the Agreement and the Policies.
Each Certificateholder of record of a class of Offered Certificates will be
entitled to receive the Certificateholder's Percentage Interest in the amounts
due the Class on each Distribution Date. The "Percentage Interest" of an Offered
Certificate as of any date of determination will be equal to the percentage
obtained by dividing the principal balance or notional amount of the Offered
Certificate as of the Closing Date by the Certificate Principal Balance or
Notional Amount for the related class of Offered Certificates as of the Closing
Date.
DISTRIBUTIONS
The Trustee will be required to deposit into the Certificate Account,
o the proceeds of any liquidation of the assets of the Trust,
o all remittances made to the Trustee by or on behalf of the Servicer,
the Seller or the Depositor,
o any Cap Reserve Fund Transfer Amounts, any withdrawals from the LIBOR
Carryover Funds,
o any Insured Payments from the Certificate Insurer, provided that the
amounts shall only be available to pay the applicable Class A
Certificates and Class A-IO Certificates, and
o other amounts required in the Agreement.
The Agreement establishes a Certificate Rate on each class of Class A,
Class A-IO Component and Class B Component Certificates as set forth in this
prospectus supplement under "--Certificate Rate." The Subordinated Offered
Certificates will receive all of the interest and principal payments paid with
respect to the related Class B Component Certificates. The "Expense Fee" for any
Distribution Date will equal the sum of the Trustee Fee and the amounts payable
to the Certificate Insurer as premium on the Policies (the "Premium Amount") on
the Distribution Date. The Premium Amount as of each Distribution Date and Home
Equity Loan Group will be as set out in the Agreement.
On each Distribution Date, the Trustee is required to make the following
disbursements and transfers from monies then on deposit in the Certificate
Account as specified below in the following order of priority:
(1) FIRST, on each Distribution Date from amounts then on deposit in
the Certificate Account and with respect to a Home Equity Loan Group,
(A) to the Trustee, the Trustee Fee for the related Home Equity
Loan Group and
(B) provided that no Certificate Insurer Default as defined in
clause (x) of the definition of Certificate Insurer Default has
occurred and is continuing, the Premium Amount for the related class
of Class A and Class A-IO Certificates for the Distribution Date to
the Certificate Insurer;
(2) SECOND, on each Distribution Date, the Trustee shall allocate an
amount equal to the sum of
(x) the Total Monthly Excess Spread with respect to each Home
Equity Loan Group with respect to the Distribution Date plus
(y) any Subordination Reduction Amount with respect to the
related Home Equity Loan Group with respect to the Distribution Date
(the sum for each Home Equity Loan Group being the "Total Monthly
Excess Cashflow") as follows:
(A) FIRST, the Total Monthly Excess Cashflow with respect to the
Home Equity Loan Group shall be allocated to the payment of the
related Class A Distribution Amount, excluding any related
Subordination Increase Amount, pursuant to clause (3) below in an
amount equal to the amount, if any, by which (x) the Class A
Distribution Amount, excluding any related Subordination Increase
Amount, exceeds (y) the Available Funds with respect to the Home
Equity Loan Group, net of the related Expense Fees;
(B) SECOND, provided that no Certificate Insurer Default as
defined in clause (x) of the definition of Certificate Insurer Default
has occurred and is continuing, any portion of the Total Monthly
Excess Cashflow with respect to the Home Equity Loan Group remaining
after the allocation described in clause (2) (A) above shall be
allocated to the Certificate Insurer in respect of any Reimbursement
Amount (as defined in the Agreement) with respect to the related class
of Class A and Class A-IO Certificates; provided further that if a
Certificate Insurer Default as defined in clause (x) of the definition
of Certificate Insurer Default has occurred and is continuing, then
the priority of this allocation shall follow immediately after clause
(2)(C) below;
(C) THIRD, any portion of the Total Monthly Excess Cashflow with
respect to the Home Equity Loan Group remaining after the allocation
described in clauses (2) (A) and (B) above shall be used to reduce to
zero, through the payment to the Certificateholders of the related
class of Class A and Class B Component Certificates of a Subordination
Increase Amount included in the related Group Principal Distribution
Amount which shall be paid pursuant to clause (3) (D) below and the
payment priorities specified below under "--Principal Priorities," in
an amount, if any, equal to the excess of the Specified Subordinated
Amount with respect to the Home Equity Loan Group over the
Subordinated Amount with respect to the Home Equity Loan Group,
assuming application of 100% of scheduled principal collections
received during the Due Period and principal prepayments received
during the related Prepayment Period but prior to the application of
any Subordination Increase Amount, (the excess, the "Subordination
Deficiency Amount") as of the Distribution Date;
(D) FOURTH, if the Subordinated Amount for Group II has never
equaled the Specified Subordinated Amount for Group II, any portion of
the Total Monthly Excess Cashflow with respect to Group I remaining
after the allocation described in clauses (2) (A), (B) and (C) above
shall be used to reduce to zero, through the payment to the
Certificateholders of the Class A and Class B Component Certificates
of Group II of a Subordination Increase Amount included in the
Principal Distribution Amount for Group II which shall be paid
pursuant to clause (3) (D) below and the payment priorities specified
below under "--Principal Priorities," in an amount, if any, equal to
the remaining Subordination Deficiency Amount for Group II as of the
Distribution Date;
(E) FIFTH, any Total Monthly Excess Cashflow with respect to the
Home Equity Loan Group remaining after the allocations described in
clauses (2) (A), (B), (C) and (D) above shall be allocated to the
unrelated Class B Component Certificates and paid pursuant to clause
(3)(E) below, to the extent of any unreimbursed Unrelated Principal
Carryover Shortfalls;
(F) SIXTH, any Total Monthly Excess Cashflow with respect to the
Home Equity Loan Group remaining after the allocations described in
clauses (2) (A), (B), (C), (D) and (E) above shall be allocated to the
related Class B Component Certificates and paid pursuant to clause
(3)(F) below, to the extent of any unreimbursed Related Principal
Carryover Shortfalls;
(G) SEVENTH, any portion of Total Monthly Excess Cashflow with
respect to the Home Equity Loan Group remaining after the allocations
described in clauses (2) (A), (B), (C), (D), (E) and (F) above shall
be allocated to the related Class X Certificates and paid to the LIBOR
Carryover Fund pursuant to clause (3)(G) below, to the extent of any
related required LIBOR Carryover Fund Deposit; and
(H) EIGHTH, any Total Monthly Excess Cashflow remaining after the
allocations described in clauses (2) (A), (B), (C), (D), (E), (F) and
(G) above shall be allocated to the Servicer and paid pursuant to
clause (3)(I) below, to the extent of any unreimbursed Delinquency
Advances and unreimbursed Servicing Advances and other amounts
specified in the Agreement;
(3) THIRD, following the making by the Trustee of all allocations,
transfers and disbursements described above from amounts, including any
related Insured Payment which shall be paid only to the Certificateholders
of the related Class A and Class A-IO Certificates, then on deposit in the
Certificate Account with respect to the related Home Equity Loan Group, the
Trustee shall distribute based on and after giving effect to the
allocations provided in clause (2) above:
(A) to the related Class A and Class A-IO Component Certificates,
the related Current Interest for each Class, including the proceeds of
any Insured Payments with respect to Current Interest made by the
Certificate Insurer, on a pro rata basis based on each the Class A and
Class A-IO Component Certificate's Current Interest without priority
among the Class A and Class A-IO Component Certificates;
(B) to the related Class B Component Certificates and the Class
B-IOA or Class B-IOF Certificates, as applicable, the related Current
Interest;
(C) to the Certificate Insurer, the amounts described in clause
(2)(B) above;
(D) the Group Principal Distribution Amount applicable to each of
the Group I and Group II Certificates shall be distributed as
described under "--Principal Priorities" below;
(E) to the unrelated Class B Component Certificate the amounts
described in clause (2)(E) above until its Unrelated Principal
Carryover Shortfall is reduced to zero;
(F) to the related Class B Component Certificate the amounts
described in clause (2)(F) above until its Related Principal Carryover
Shortfall is reduced to zero;
(G) from the amounts described in clause (2) (G) above the
related LIBOR Carryover Fund Deposit to the related Class X
Certificates for concurrent deposit in the related LIBOR Carryover
Fund;
(H) from amounts on deposit in the LIBOR Carryover Fund, the
lesser of the related Certificateholders' Interest Index Carryover and
the Available LIBOR Carryover Amount (1) first, pro rata based on
Certificateholders' Interest Index Carryover, an amount up to the
related outstanding Certificateholders' Interest Index Carryover to
the related Class A Certificates, and (2) second, to the related Class
B Component Certificates, an amount up to the related outstanding
Certificateholders' Interest Index Carryover to the related Class B
Component Certificates; and
(I) to the Servicer the amounts described in clause (2)(H) above;
(4) FOURTH, 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 the remaining
distributable amounts for the Distribution Date to the Trustee, a successor
servicer and the Nonoffered Certificateholders, as specified in the
Agreement.
PRINCIPAL PRIORITIES
On each Distribution Date, the Trustee will distribute the Group Principal
Distribution Amount with respect to Group I in the following order of priority,
to the extent of the funds remaining for the distribution:
(A) to the Class AI Certificateholders, the related Class A Principal
Distribution Amount, concurrently, as follows:
(1) an amount equal to the Class A-1F Principal Distribution Amount to
the Class A-1F Certificates until the principal balance of the Class
is reduced to zero; and
(2) an amount equal to the Class A-2F Principal Distribution Amount to
the Class A-2F Certificates until the principal balance of the Class
is reduced to zero;
(B) to the Class B-1F Component Certificates, the related Class B Component
Principal Distribution Amount, until the principal balance of the Class is
reduced to zero; and
(C) to the Nonoffered Certificateholders related to Group I, any remaining
amounts, as specified in the Agreement.
On each Distribution Date, the Trustee will distribute the Group Principal
Distribution Amount with respect to Group II in the following order of priority,
to the extent of the funds remaining for the distribution:
(A) to the Class AII Certificateholders, the related Class A Principal
Distribution Amount, concurrently, as follows:
(1) an amount equal to the Class A-3A Principal Distribution Amount to
the Class A-3A Certificates until the principal balance of the Class
is reduced to zero;
(2) an amount equal to the Class A-4A Principal Distribution Amount to
the Class A-4A Certificates until the principal balance of the Class
is reduced to zero; and
(3) an amount equal to the Class A-5A Principal Distribution Amount to
the Class A-5A Certificates until the principal balance of the Class
is reduced to zero;
(B) to the Class B-1A Component Certificates, the related Class B Component
Principal Distribution Amount, until the principal balance of the Class is
reduced to zero; and
(C) to the Nonoffered Certificateholders related to Group II, any remaining
amounts, as specified in the Agreement.
To the extent that the Trustee receives an Insured Payment with respect to
any Distribution Date, the Trustee will distribute any portion of the Insured
Payment with respect to the related Guaranteed Principal Amount to the related
Class A Certificates in the same manner as Class A Principal Distribution Amount
for the related Home Equity Loan Group is allocated to the related Class A
Certificates.
CERTAIN DEFINITIONS
"Available Funds" as to each Home Equity Loan Group and Distribution Date
is the amount on deposit in the Certificate Account with respect to the related
Home Equity Loan Group on the Distribution Date, excluding any Cap Reserve Fund
Transfer Amount for the Distribution Date and including any amounts to be
transferred from the LIBOR Carryover Funds, net of Total Monthly Excess Cashflow
and any prepayment penalties with respect to the Home Equity Loan Group and
disregarding the amounts of any Insured Payments to be made on the Distribution
Date.
The Trustee or Paying Agent shall (1) receive as attorney-in-fact of each
Certificateholder of Class A and Class A-IO Certificates any Insured Payment
from the Certificate Insurer and deposit the amounts into the Certificate
Account and (2) disburse the same to each Certificateholder of Class A and Class
A-IO Certificates. The Agreement will provide that to the extent the Certificate
Insurer makes Insured Payments, either directly or indirectly, as by paying
through the Trustee or Paying Agent, to the Certificateholders of the Class A
and Class A-IO Certificates the Certificate Insurer will be subrogated to the
rights of the Certificateholders of Class A and Class A-IO Certificates with
respect to the Insured Payments, and shall receive reimbursement for the Insured
Payment as provided in the Agreement, but only from the sources and in the
manner provided in the Agreement; this subrogation and reimbursement to have no
effect on the Certificate Insurer's obligations under the Policies.
"Available LIBOR Carryover Amount" means with respect to any Distribution
Date and a class of Certificates, the amount on deposit in the related LIBOR
Carryover Fund after giving effect to deposits to it on the Distribution Date.
"Cap Reserve Fund Transfer Amount" means with respect to any Distribution
Date, the lesser of (1) the amount to be on deposit in the Cap Reserve Fund with
respect to the Distribution Date and (2) as of any Distribution Date, the
excess, if any, of
(a) the sum of:
o the related Current Interest for the related Certificates for the
Distribution Date,
o the amounts described in clause (b) of the definition of Guaranteed
Principal Amount for the related Class A Certificates for the
Distribution Date,
o the amount by which the Certificate Principal Balance of the related
Group I or Group II Certificates, as applicable, after giving effect
to all payments on the Distribution Date except with respect to any
Cap Reserve Fund Transfer Amounts on the Distribution Date exceeds the
Loan Balance of the Home Equity Loans in the related Home Equity Loan
Group as of the end of the related Due Period;
o on the Cap Reserve Fund Release Date, an amount necessary to cause the
Subordinated Amount for each Home Equity Loan Group to equal the
Specified Subordinated Amount for the Home Equity Loan Group and
o on the Cap Reserve Fund Release Date, Principal Carryover Shortfalls
for the related Class B Component Certificates over
(b) the related Total Available Funds for the Distribution Date, net of
the Premium Amount with respect to the related Class A Certificates
and Class A-IO Component Certificates and the Trustee Fee with respect
to the related Home Equity Loan Group and excluding any transfers to
be made from the Cap Reserve Fund for the Distribution Date.
"Carry-Forward Amount" with respect to any class of Certificates is the
amount as of any Distribution Date, equal to the sum of:
(1) the amount, if any, by which
(x) the Current Interest for the Class for the immediately preceding
Distribution Date exceeded (y) the amount of the actual distribution
in respect to interest on the class of Certificates made to the
Certificateholders of the class of Certificates on the immediately
preceding Distribution Date and
(2) interest on the excess for the related Interest Period at the related
Certificate Rate for the class of Certificates.
"Certificate Insurer Default" is defined under the Agreement as the
occurrence and continuance of (x) the failure by the Certificate Insurer to make
a required payment under any of the Policies, which failure continues unremedied
for five Business Days or (y) specified events of bankruptcy or insolvency of
the Certificate Insurer.
"Class A Distribution Amount" for each Home Equity Loan Group and
Distribution Date shall be the sum of (x) Current Interest for the Class A and
Class A-IO Component Certificates related to the Home Equity Loan Group, and (y)
the Class A Principal Distribution Amount for the Home Equity Loan Group.
"Class A Principal Distribution Amount" for each Home Equity Loan Group and
Distribution Date shall be with respect to
(a) any Distribution Date prior to the Stepdown Date or during the
continuation of a Trigger Event, the lesser of
(1) 100% of the related Group Principal Distribution Amount and
(2) the aggregate Certificate Principal Balance of the related Class A
Certificates, and
(b) any other Distribution Date, an amount equal to the excess, if any, of
(1) the aggregate Certificate Principal Balance of the related Class A
Certificates immediately prior to the Distribution Date over (2) the
lesser of
(x) the product of ____% with respect to Group I and ____% with
respect to Group II and the outstanding Loan Balance of the
related Home Equity Loans as of the last day of the related Due
Period, (y) the outstanding principal balance of the related Home
Equity Loans as of the last day of the related Due Period minus
the sum of
(A) $____in case of Group I and $____in case of Group II and
(B) the related 270-Day Delinquency Amount and
(z) the outstanding Loan Balance of the related Home Equity Loans
as of the last day of the related Due Period minus sum of the
outstanding principal balances of the three largest Home Equity
Loans as of the last day of the related Due Period in the Home
Equity Loan Group;
provided, however, on the Final Scheduled Distribution Date for each class of
Class A Certificates, the related Class A Principal Distribution Amount shall
equal the aggregate Certificate Principal Balance of the related Class A
Certificates.
"Class A Subordination Increase Amount" means with respect to any
Distribution Date and Home Equity Loan Group, the portion of any Subordination
Increase Amount for the Home Equity Loan Group. The Class A Subordination
Increase Amount with respect to Group I will be allocated between the Class A-1F
Certificates and Class A-2F Certificates as follows; (1) first, pro rata, based
on cumulative Realized Losses in Group Ia and Group Ib, respectively until Class
A Subordination Increase Amounts in an amount equal to the cumulative Realized
Losses has been paid the Class A-1F Certificates and Class A-2F Certificates on
the Distribution Date or on prior Distribution Dates and (2) second, the
remainder, pro rata, based upon the percentage that the outstanding Loan Balance
of Group Ia or Group Ib represents of the Group I Home Equity Loans; provided,
however, if the Certificate Principal Balance of either the Class A-1F
Certificates or the Class A-2F Certificates has been reduced to zero, 100% of
the Class A Subordination Increase Amount with respect to Group I shall be
allocated to the outstanding Class A-1F Certificates or Class A-2F Certificates,
as applicable. The Class A Subordination Increase Amount with respect to Group
II will be allocated among the Class A-3A, Class A-4A and Class A-5A
Certificates as follows;
(1) first, an amount equal to the product of
(x) a fraction, the numerator of which is the Certificate Principal
Balance of the Class A-5A Certificates immediately preceding the
Distribution Date and the denominator of which is the Certificate
Principal Balance of the Group AII Certificates immediately preceding
the Distribution Date and (y) the related Class A Subordination
Increase Amount, will be paid to the Class A-5A Certificates,
(2) second, the remainder pro rata, to the Class A-3A and Class A-4A
Certificates, based on cumulative Realized Losses in Group IIa and Group IIb,
respectively until Class A Subordination Increase Amounts in an amount equal to
the cumulative Realized Losses has been paid to the Class A-3A and Class A-4A
Certificates on the Distribution Date or on prior Distribution Dates and
(3) third, the remainder, pro rata, to the Class A-3A and Class A-4A
Certificates based upon the percentage that the outstanding principal balance at
Group IIa or Group IIb represents of the Group II Home Equity Loans;
provided, however, if the Certificate Principal Balance of either the Class A-3A
Certificates or the Class A-4A Certificates has been reduced to zero, the
remainder of the Class A Subordination Increase Amount with respect to Group II
remaining after the allocation in clause (1) shall be allocated to the
outstanding Class A-3A Certificates or Class A-4A Certificates, as applicable.
"Class A-1F Principal Distribution Amount" means with respect to any
Distribution Date and the Class A-1F Certificates, the sum of
o the product of
(1) the Class A Principal Distribution Amount, less any Class A
Subordination Increase Amount included in the Class A Principal
Distribution Amount, for Group I and
(2) (A) if the Certificate Principal Balance of the Class A-2F
Certificates is not zero, a fraction (x) the numerator of which
is the sum of the amounts described in clauses (b) (1) (A) - (D)
of the definition of Group Principal Distribution Amount received
with respect to the Home Equity Loans in Group Ia and (y) the
denominator of which is the sum of the amounts described in
clauses (b) (1) (A) - (D) of the definition of Group Principal
Distribution Amount received with respect to the Home Equity
Loans in Group I and
(B) if the Certificate Principal Balance of the Class A-2F
Certificates is zero, 100%, and
o the Class A Subordination Increase Amount with respect to the
Class A-1F Certificates for the Distribution Date;
provided, however, on the Final Scheduled Distribution Date for the Class A-1F
Certificates, the Class A-1F Principal Distribution Amount shall equal the
Certificate Principal Balance of the Class A-1F Certificates on the Distribution
Date, prior to giving effect to any distributions on this date.
"Class A-2F Principal Distribution Amount" means with respect to any
Distribution Date and the Class A-2F Certificates, the sum of
o the product of
(1) the Class A Principal Distribution Amount, less any Class A
Subordination Increase Amount included in the Class A Principal
Distribution Amount, for Group I and
(2) (A) if the Certificate Principal Balance of the Class A-1F
Certificates is not zero, a fraction (x) the numerator of which is the
sum of the amounts described in clauses (b) (1) (A) - (D) of the
definition of Group Principal Distribution Amount received with
respect to the Home Equity Loans in Group Ib and (y) the denominator
of which is the sum of the amounts described in clauses (b) (1) (A) -
(D) of the definition of Group Principal Distribution Amount received
with respect to the Home Equity Loans in Group I and
(B) if the Certificate Principal Balance of the Class A-1F
Certificates is zero, 100%, and o the Class A Subordination
Increase Amount with respect to the Class A-2F Certificates for
the Distribution Date;
provided, however, on the Final Scheduled Distribution Date for the Class A-2F
Certificates, the Class A-2F Principal Distribution Amount shall equal the
Certificate Principal Balance of the Class A-2F Certificates on the Distribution
Date, prior to giving effect to any distributions on this date.
"Class A-3A Principal Distribution Amount" means with respect to any
Distribution Date and the Class A-3A Certificates, the sum of
o the product of
(1) the Class A Principal Distribution Amount, less any Class A
Subordination Increase Amount included in the Class A Principal
Distribution Amount, for Group II,
(2) (A) if the Certificate Principal Balance of the Class A-4A
Certificates is not zero a fraction (x) the numerator of which is the
sum of the amounts described in clauses (b) (1) (A) - (D) of the
definition of Group Principal Distribution Amount received with
respect to the Home Equity Loans in Group IIa and (y) the denominator
of which is the sum of the amounts described in clauses (b) (1) (A) -
(D) of the definition of Group Principal Distribution Amount received
with respect to the Home Equity Loans in Group II and
(B) if the Certificate Principal Balance of the Class A-4A
Certificates is zero, 100% and
(3) a fraction, (A) the numerator of which is the Certificate Principal
Balance of the Class A-3A and Class A-4A Certificates immediately
preceding the Distribution Date and (B) the denominator of which is
the Certificate Principal Balance of the Group AII Certificates
immediately preceding the Distribution Date, and o the Class A
Subordination Increase Amount with respect to the Class A-3A
Certificates for the Distribution Date;
provided, however, on the Final Scheduled Distribution Date for the Class A-3A
Certificates, the Class A-3A Principal Distribution Amount shall equal the
Certificate Principal Balance of the Class A-3A Certificates on the Distribution
Date, prior to giving effect to any distributions on this date.
"Class A-4A Principal Distribution Amount" means with respect to any
Distribution Date and the Class A-4A Certificates, the sum of o the product of
(1) the Class A Principal Distribution Amount, less any Class A
Subordination Increase Amount included in the Class A Principal
Distribution Amount, for Group II,
(2) (A) if the Certificate Principal Balance of the Class A-3A
Certificates is not zero a fraction (x) the numerator of which is the
sum of the amounts described in clauses (b) (1) (A) - (D) of the
definition of Group Principal Distribution Amount received with
respect to the Home Equity Loans in Group IIb and (y) the denominator
of which is the sum of the amounts described in clauses (b) (1) (A) -
(D) of the definition of Group Principal Distribution Amount received
with respect to the Home Equity Loans in Group II and
(B) if the Certificate Principal Balance of the Class A-3A
Certificates is zero, 100% and
(3) a fraction, (A) the numerator of which is the Certificate Principal
Balance of the Class A-3A and Class A-4A Certificates immediately
preceding the Distribution Date and (B) the denominator of which is
the Certificate Principal Balance of the Group AII Certificates
immediately preceding the Distribution Date, and o the Class A
Subordination Increase Amount with respect to the Class A-4A
Certificates for the Distribution Date;
provided, however, on the Final Scheduled Distribution Date for the Class A-4A
Certificates, the Class A-4A Principal Distribution Amount shall equal the
Certificate Principal Balance of the Class A-4A Certificates on the Distribution
Date, prior to giving effect to any distributions on this date.
"Class A-5A Principal Distribution Amount" means with respect to any
Distribution Date and the Class A-5A Certificates, the sum of
o the product of
(1) the Class A Principal Distribution Amount, less any Class A
Subordination Increase Amount included in the Class A Principal
Distribution Amount, for Group II and
(2) a fraction, the numerator of which is the Certificate Principal
Balance of the Class A-5A Certificates immediately preceding the
Distribution Date and the denominator of which is the Certificate
Principal Balance of the Group AII Certificates immediately preceding
the Distribution Date and o the Class A Subordination Increase Amount
with respect to the Class A-5A Certificates for the Distribution Date;
provided, however, on the Final Scheduled Distribution Date for the Class A-5A
Certificates, the Class A-5A Principal Distribution Amount shall equal the
Certificate Principal Balance of the Class A-5A Certificates, prior to giving
effect to any distributions on this date.
"Class B Component Distribution Amount" for each Home Equity Loan Group and
Distribution Date shall be the sum of (x) Current Interest for the Class B
Component Certificates related to the Home Equity Loan Group and (y) the Class B
Component Principal Distribution Amount for the Home Equity Loan Group.
"Class B Component Principal Distribution Amount" for each Home Equity Loan
Group and Distribution Date shall be (a) prior to the Stepdown Date or during
the occurrence of a Trigger Event, zero and (b) on any Distribution Date on and
after the Stepdown Date and so long as a Trigger Event is not in effect, an
amount equal to the excess of
(1) the sum of (x) the aggregate Certificate Principal Balance of the
related Class A Certificates, after giving effect to the distribution
of the related Group Principal Distribution Amount on the Distribution
Date, and (y) the Certificate Principal Balance of the related Class B
Component Certificates immediately prior to the Distribution Date,
over
(2) the lesser of (x) the product of ____% and the outstanding Loan
Balance of the related Home Equity Loans as of the last day of the
related Due Period and (y) the outstanding principal balance of the
related Home Equity Loans as of the last day of the related Due Period
minus $____in the case of Group I and $____in case of Group II;
PROVIDED, HOWEVER, that if the aggregate Certificate Principal Balance of the
related Class A Certificates is reduced to zero, the related Class B Component
Certificates shall be entitled to all of the remaining related Group Principal
Distribution Amount, whether or not a Trigger Event is in effect.
"Compensating Interest Default Amount" means the excess, if any, of (a) the
aggregate Compensating Interest required to be paid by the Servicer on the
related Monthly Remittance Date pursuant to the Agreement over (b) the aggregate
Compensating Interest actually paid by the Servicer on the Monthly Remittance
Date.
"Current Interest" with respect to each class of Class A, Class A-IO
Component and Class B Component Certificates means, with respect to any
Distribution Date: (1) the aggregate amount of interest accrued at the related
Certificate Rate on the Certificate Principal Balance or Notional Amount, as
applicable, of the related Class A, Class A-IO Component and Class B Component
Certificates plus (2) the Carry-Forward Amount, if any, with respect to the
class of Class A, Class A-IO Component and Class B Component Certificates;
provided, however, that with respect to each class of Class A, Class A-IO
Component and Class B Component Certificates, the amount described in clause (1)
above will be reduced by the Class' pro rata share of the sum of (a) any
shortfalls with respect to the related Home Equity Loan Group resulting from the
application of the Soldier's and Sailor's Civil Relief Act of 1940 ("Civil
Relief Interest Shortfalls") with respect the related Interest Period and (b)
any Compensating Interest Default Amounts with respect to the related Home
Equity Loan Group.
"Delinquency Amount" as to any date of determination, means the product of
the related Delinquency Percentage and the Loan Balance of the Home Equity Loans
in the related Home Equity Loan Group.
"Delinquency Percentage" means with respect to each Home Equity Loan Group,
the rolling three month average of the percentage equivalent of a fraction, the
numerator of which is:
(a) the sum, without duplication, of the
(1) aggregate Loan Balance of all Home Equity Loans in the related
Home Equity Loan Group that are 90 or more days delinquent,
(2) aggregate Loan Balance of all Home Equity Loans in the related
Home Equity Loan Group that are in foreclosure and
(3) the aggregate Loan Balance of all Home Equity Loans in the related
Home Equity Loan Group that are relating to REO Properties and the denominator
of which is
(b) the aggregate Loan Balance of the Home Equity Loans in the related Home
Equity Loan Group, as of the end of the related Due Period.
"Due Period" with respect to any Distribution Date is the period beginning
on the opening of business on the 2nd day of the calendar month preceding the
calendar month in which the Distribution Date occurs and ending on the close of
business on the 1st day of the month in which the Distribution Date occurs.
"Group Principal Distribution Amount" with respect to the Class A
Certificates and the Class B Component Certificates of the related Home Equity
Loan Group and Distribution Date shall be the lesser of: (a) the related Total
Available Funds plus any Insured Payments paid by the Certificate Insurer
related to the Home Equity Loan Group, provided, however, the amounts shall be
payable solely to the Class A Certificates and Class A-IO Certificates, minus
the related Expense Fee, and minus the Current Interest for the Distribution
Date with respect to the related Certificates; and (b) the excess, if any, of
(1) the sum of, without duplication:
(A) the principal portion of all scheduled monthly payments on the
Home Equity Loans related to the Home Equity Loan Group actually
received by the Servicer during the related Due Period, related
Delinquency Advances with respect to principal for the related
Due Period and any full or partial Prepayments on the Home Equity
Loans made by the Mortgagors of Home Equity Loans in the related
Home Equity Loan Group and actually received by the Servicer
during the related Prepayment Period to the extent the amounts
are received by the Trustee;
(B) the outstanding principal balance of each Home Equity Loan in the
related Home Equity Loan Group that was repurchased by the
Originator or the Seller or purchased by the Servicer on or prior
to the related Monthly Remittance Date;
(C) any Substitution Amounts to the extent the Substitution Amounts
relate to principal;
(D) all Net Liquidation Proceeds actually collected by or on behalf
of the Servicer with respect to the Home Equity Loans in the
related Home Equity Loan Group during the related Due Period, to
the extent the Net Liquidation Proceeds relate to principal;
(E) the amount of any Subordination Deficit with respect to the
related Home Equity Loan Group for the Distribution Date;
(F) the principal portion of the proceeds received by the Trustee
with respect to the related Home Equity Loan Group upon
termination of the Trust, to the extent the proceeds relate to
principal;
(G) the amount of any Subordination Increase Amount with respect to
the related Home Equity Loan Group for the Distribution Date to
the extent of any Net Monthly Excess Cashflow available for this
purpose and
(H) the related Closing Date Deposit; over
(2) the amount of any Subordination Reduction Amount with respect to the
related Home Equity Loan Group for the Distribution Date; provided,
however, on the related Final Scheduled Distribution Date for a class
of Class A Certificates the Group Principal Distribution Amount with
respect to the related class of Class A Certificates shall include the
Certificate Principal Balance for the class of Certificates.
"LIBOR Carryover Fund Deposit" for each Distribution Date and each Home
Equity Loan Group, will equal:
(a) any related Certificateholders' Interest Index Carryover for the
Distribution Date, or
(b) if no Certificateholders' Interest Index Carryover is payable on
the Distribution Date, an amount so when it is added to other amounts already on
deposit in the applicable LIBOR Carryover Fund, the aggregate amount on deposit
in the related LIBOR Carryover Fund is equal to $10,000.
"Monthly Remittance Date" means the date on which the Servicer is required
to make deposits to the Certificate Account and reports are required to be
delivered to the Trustee as specified in the Agreement.
"Net Monthly Excess Cashflow" with respect to each Home Equity Loan Group
and Distribution Date, means the excess, if any, of:
(a) the Total Monthly Excess Cashflow for the Home Equity Loan Group
over
(b) the amounts allocated pursuant to clauses (2)(A) through (2)(B)
above under "--Distributions" above for the Distribution Date.
"Prepayment Period" with respect to any Distribution Date is the calendar
month preceding the calendar month in which the Distribution Date occurs.
"Principal Carryover Shortfall" with respect to any Distribution Date and
any Class B Component Certificate is the excess, if any, of:
(1) the sum of:
(x) the amount of the reduction in the Certificate Principal
Balance of that Class B Component Certificate on the Distribution Date as
provided under "--Allocation of Realized Losses" below and
(y) the amount of the reductions on prior Distribution Dates over
(2) the amount distributed in respect of it on prior Distribution
Dates.
"Related Principal Carryover Shortfall" with respect to any Distribution
Date and any Class B Component Certificate is the Principal Carryover Shortfall
of the Class B Component Certificate to the extent that it resulted from a loss
in the related Home Equity Loan Group.
"Senior Enhancement Percentage" means with respect to any Distribution
Date, the percentage equivalent of a fraction, the numerator of which is the
related Subordinated Amount, in each case, prior to taking into account the
distribution of the related Group Principal Distribution Amount on the
Distribution Date, and the denominator of which is the outstanding principal
balance of the related Home Equity Loans as of the last day of the related Due
Period.
"Stepdown Date" with respect to a Home Equity Loan Group means the later to
occur of (x) the Distribution Date in ____and (y) the Distribution Date on which
the Senior Enhancement Percentage is greater than or equal to ____% for Group I
or ____% for Group II.
"Total Available Funds" as to each Distribution Date and Home Equity Loan
Group is the sum of (x) the Available Funds with respect to the Home Equity Loan
Group and (y) any amounts of Total Monthly Excess Cashflow with respect to the
Home Equity Loan Group or the unrelated Home Equity Loan Group to be applied to
the related class of Certificates on the Distribution Date, disregarding the
amount of any Insured Payment to be made on the Distribution Date.
"Total Monthly Excess Spread" with respect to each Home Equity Loan Group
and Distribution Date, means the excess of (1) the aggregate of all interest
which is collected on the Home Equity Loans in the Home Equity Loan Group during
a Due Period, net of the Servicing Fee and Trustee Fee with respect to the Home
Equity Loan Group and any reimbursement of nonrecoverable Delinquency Advances
with respect to the Home Equity Loan Group, plus the sum of any Delinquency
Advances and Compensating Interest paid by the Servicer with respect to the Home
Equity Loan Group plus any Cap Reserve Fund Transfer Amount over (2) the sum of
the Current Interest for the Certificates related to the Home Equity Loan Group
and the Premium Amount with respect to the Class A and Class A-IO Certificates
related to the Home Equity Loan Group.
"Trigger Event" means, with respect to Group I or Group II, as applicable,
if at any time, (x) the product of (1) ____% and (2) the percentage equivalent
of a fraction, the numerator of which is the Delinquency Amount for the related
Home Equity Loan Group and the denominator of which is the outstanding principal
balance of the related Home Equity Loans as of the last day of the related Due
Period for the related Home Equity Loan Group exceeds (y) the Senior Enhancement
Percentage for the related Home Equity Loan Group.
"270-Day Delinquency Amount" means the aggregate principal balance of the
Home Equity Loans in the related Home Equity Loan Group that are 270 or more
days delinquent, including without limitation, Home Equity Loans in foreclosure
and Home Equity Loans relating to REO Properties.
"Unrelated Principal Carryover Shortfall" with respect to any Distribution
Date and any Class B Component Certificate is the Principal Carryover Shortfall
of the Class B Component Certificate to the extent that it resulted from a loss
in the unrelated Home Equity Loan Group.
CERTIFICATE RATE
The "Certificate Rate" on any Distribution Date with respect to the Class
A, Class A-IO Component and Class B Component Certificates will be the rate set
forth in this prospectus supplement except that on any Distribution Date with
respect to the Class A-3A, Class A-4A, Class A-5A, Class B-1F Component and
Class B-1A Component Certificates, the related Certificate Rate will be the
lesser of (A) the related Formula Rate, and (B) the related Available Funds Cap
for the Distribution Date.
The "Class A-3A Formula Rate" for any Distribution Date is the lesser of
(A) the sum of
(1) One-Month LIBOR and
(2) ____%, or ____% for each Distribution Date occurring after the
date on which the holder of the Class X-F Certificate has the right to
terminate the Agreement by purchasing all outstanding Home Equity
Loans, and
(B) ____% per annum.
The "Class A-4A Formula Rate" for any Distribution Date is the lesser of
(A) the sum of
(1) One-Month LIBOR and
(2) ____%, or ____% for each Distribution Date occurring after the
date on which the holder of the Class X-F Certificate has the right to
terminate the Agreement by purchasing all outstanding Home Equity
Loans, and
(B) ____% per annum.
The "Class A-5A Formula Rate" for any Distribution Date is the lesser of
(A) the sum of
(1) One-Month LIBOR and
(2) ____%, or ____% for each Distribution Date occurring after the
date on which the holder of the Class X-F Certificate has the right to
terminate the Agreement by purchasing all outstanding Home Equity
Loans, and
(B) ____% per annum.
The "Class B-1F Component Formula Rate" for any Distribution Date is the
lesser of
(A) the sum of
(1) One-Month LIBOR and
(2) ____%, or ____% for each Distribution Date occurring after the
date on which the holder of the Class X-F Certificate has the right to
terminate the Agreement by purchasing all outstanding Home Equity
Loans, and
(B) ____% per annum.
The "Class B-1A Component Formula Rate" for any Distribution Date is the
lesser of:
(A) the sum of:
(1) One-Month LIBOR and
(2) ____%, or ____% for each Distribution Date occurring after
the date on which the holder of the Class X-F Certificate has the
right to terminate the Agreement by purchasing all outstanding
Home Equity Loans, and
(B) ____% per annum.
The related "Available Funds Cap" with respect to a Certificate or
Component Certificate and any Interest Period and the related Distribution Date
will be a rate per annum equal to the fraction, expressed as a percentage, the
numerator of which is the excess of (1) the product of (a) the weighted average
of the Net Coupon Rates on the Home Equity Loans in the related Home Equity Loan
Group as of the beginning of the related Due Period and (b) the aggregate Loan
Balance of the Home Equity Loans in the related Home Equity Loan Group as of the
beginning of the related Due Period over (2) the interest payable on the related
Notional Amount Certificates on the related Distribution Date, and the
denominator of which is the then outstanding Certificate Principal Balance of
the Group I or Group II Certificates, as applicable (adjusted to an effective
rate reflecting accrued interest calculated on the basis a 360-day year and the
actual number of days elapsed).
The "Net Coupon Rate" will be the rate per annum equal to the Coupon Rate
of the Home Equity Loan minus the sum of:
(1) the rate at which the Servicing Fee accrues,
(2) the rate at which the Trustee Fee accrues,
(3) the applicable Premium Amount, expressed as a per annum
percentage of the aggregate Loan Balance of the related Home
Equity Loans, and (4) in the case of any Group II Home Equity
Loan, the Minimum Spread.
The "Minimum Spread" shall be a percentage per annum equal to ___%.
If on any Distribution Date the Certificate Rate for any Certificates is
based on the related Available Funds Cap, the related Certificateholders will
be entitled to receive on subsequent Distribution Dates the applicable
Certificateholders' Interest Index Carryover. The applicable
"Certificateholders' Interest Index Carryover" is equal to the sum of:
(A) the excess of
(1) the amount of interest the Certificates would otherwise be
entitled to receive on the Distribution Date had the rate been
calculated at the applicable Formula Rate for the Distribution
Date over
(2) the amount of interest payable on the the Certificates at the
applicable Available Funds Cap for the Distribution Date and
(B) the applicable Certificateholders' Interest Index Carryover for
all previous Distribution Dates not previously paid to the related
Certificateholders, including any interest accrued at the related Formula Rate.
The Policies will not cover any Certificateholders' Interest Index Carryover,
and the ratings on the Certificates by the Rating Agencies will not address the
likelihood of receipt by the related Certificateholders of any amounts in
respect Certificateholders' Interest Index Carryovers. Payment of the
Certificateholders' Interest Index Carryover will be subject to availability of
funds for payment in accordance with the priority of payments set forth under
"--Distributions" above.
The "Interest Period" means, (1) with respect to each Distribution Date and
the Class AI, Class A-IOF Component and Class A-IOA Component Certificates, the
period from the first day of the calendar month preceding the month of the
Distribution Date through the last day of the calendar month. Interest on the
Certificates in respect of any Distribution Date will accrue during the related
Interest Period on the basis of a 360-day year consisting of twelve 30-day
months and (2) with respect to each Distribution Date and the Class AII and
Class B Component Certificates, is the period from and including the preceding
Distribution Date, or _________, ____ in the case of the first Distribution
Date, to and including the day preceding the related Distribution Date. Interest
will accrue on the Class AII and Class B Component Certificates during the
related Interest Period on the basis of the actual number of days in the related
Interest Period and a year of 360 days.
CALCULATION OF ONE-MONTH LIBOR
On each LIBOR Determination Date (as defined below), the Trustee will
determine One-Month LIBOR for the next Interest Period.
"One-Month LIBOR" means, as of any LIBOR Determination Date, the London
interbank offered rate for one-month United States dollar deposits which appears
in the Telerate Page 3750 as of 11:00 a.m., London time, on the LIBOR
Determination Date. If the rate does not appear on Telerate Page 3750, the rate
for that day will be determined on the basis of the rates at which deposits in
United States dollars are offered by the Reference Banks at approximately 11:00
a.m. (London time), on that day to prime banks in the London interbank market.
The Trustee will request the principal London office of each of the Reference
Banks to provide a quotation of its rate. If at least two quotations are
provided, the rate for that day will be the arithmetic mean of the quotations,
rounded upwards if necessary to the nearest whole multiple of 1/16%. If fewer
than two quotations are provided as requested, the rate for that day will be the
arithmetic mean of the rates quoted by major banks in New York City, selected by
the Trustee, at approximately 11:00 a.m. (New York City time) on that day for
loans in United States dollars to leading European banks.
"LIBOR Determination Date" means, with respect to any Interest Period, the
second London business day preceding the commencement of the Interest Period, or
in the case of the first Distribution Date, ____. For purposes of determining
One-Month LIBOR, a "London business day" is any day on which dealings in
deposits of United States dollars are transacted in the London interbank market.
"Telerate Page 3750" means the display page currently so designated on the
Dow Jones Telerate Capital Markets Report, or another page as may replace that
page on that service for the purpose of displaying comparable rates or prices,
and "Reference Banks" means leading banks selected by the Depositor and engaged
in transactions in Eurodollar deposits in the international Eurocurrency market.
CREDIT ENHANCEMENT
THE POLICIES
FOR AN EXPLANATION OF THE POLICIES, WE REFER YOU TO "THE POLICIES AND THE
CERTIFICATE INSURER" FOR MORE DETAIL.
OVERCOLLATERALIZATION RESULTING FROM CASH FLOW STRUCTURE. The Agreement
requires that, on each Distribution Date, Net Monthly Excess Cashflow with
respect to a Home Equity Loan Group be applied on the Distribution Date as an
accelerated payment of principal on the related Class(es) of Class A and Class B
Component Certificates, but only to the limited extent described in this
propsectus supplement.
Any application of Net Monthly Excess Cashflow for the payment of principal
has the effect of accelerating the amortization of the related Class A and Class
B Component Certificates relative to the amortization of the Home Equity Loans
in the related Home Equity Loan Group.
Pursuant to the Agreement, each Home Equity Loan Group's Net Monthly Excess
Cashflow will be applied as an accelerated payment of principal on the
applicable Class A and Class B Component Certificates until the related
Subordinated Amount has increased to the level required. "Subordinated Amount"
means, with respect to each Home Equity Loan Group and Distribution Date, the
excess, if any, of (x) the aggregate Loan Balances of the Home Equity Loans in
the Home Equity Loan Group as of the close of business on the last day of the
preceding Due Period over (y) the aggregate outstanding Certificate Principal
Balance of the related Class A Certificates as of the Distribution Date, after
taking into account the payment of the Group Principal Distribution Amount
related to the Home Equity Loan Group, except for any Subordination Reduction
Amount or Subordination Increase Amount related to the Home Equity Loan Group,
on the Distribution Date. With respect to each Home Equity Loan Group and
Distribution Date, the lesser of (1) the related Subordination Deficiency Amount
as of the Distribution Date, after taking into account the payment of the
related Class A Distribution Amounts on the Distribution Date, except for any
Subordination Increase Amount for the Home Equity Loan Group, and (2) the
aggregate amount of Net Monthly Excess Cashflow available to be applied as an
accelerated payment of principal is a "Subordination Increase Amount." The
required level of the Subordinated Amount or the "Specified Subordinated Amount"
for each Home Equity Loan Group with respect to a Distribution Date is:
(a) prior to the Stepdown Date, the sum of;
(x) the product of,
(1) ____% for Group I and ____% for Group II and
(2) the outstanding principal balance of the related Home Equity
Loans as of the Cut-Off Date and
(y) the amount of Unrelated Principal Carryover Shortfalls applied to
the Class B Component Certificates related to the Home Equity Loan
Group; and
(b) on and after the Stepdown Date, the greater of
(x) the lesser of
(1) the amount specified in clause (a) above and
(2) the sum of
(A) the product of ____% for Group I and ____% for Group II
and the outstanding principal balance of the related Home
Equity Loans as of the end of the related Due Period and
(B) the amount of Unrelated Principal Carryover Shortfalls
applied to the Class B Component Certificates related to the
Home Equity Loan Group,
(y) the sum of $____with respect to Group I and $____with respect to
Group II and the applicable 270-Day Delinquency Amount and
(z) the sum of the outstanding principal balances of the three largest
Home Equity Loans in the Home Equity Loan Group;
provided, however, that on each Distribution Date during the continuance of a
Trigger Event, the Specified Subordinated Amount with respect to clause (a) or
(b) above, as applicable, will equal the greater of (1) the amount specified
above for the Distribution Date and (2) ____% of the Delinquency Amount for the
related Home Equity Loan Group.
With respect to any Home Equity Loan Group and Distribution Date, the
excess, if any, of (x) the related Subordinated Amount on the Distribution Date
after taking into account all distributions to be made on the Distribution Date,
except for any distributions of related Subordination Reduction Amounts as
described in this sentence, over (y) the related Specified Subordinated Amount
is the "Excess Subordinated Amount" for the Home Equity Loan Group and
Distribution Date. If, on any Distribution Date, the Excess Subordinated Amount
is, or, after taking into account all other distributions to be made on the
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 with respect
to the related class or classes of Class A and Class B Component Certificates on
the Distribution Date shall instead be distributed with respect to the related
Nonoffered Certificates, to the extent available for distribution, in an amount
equal to the lesser of (x) the related Excess Subordinated Amount for the Home
Equity Loan Group and Distribution Date and (y) the amount available for
distribution on account of principal with respect to the Certificates on the
Distribution Date; this amount being the "Subordination Reduction Amount" with
respect to the related Home Equity Loan Group and Distribution Date. Following
the cure of a Trigger Event, that portion of a Subordination Reduction Amount
necessary to cause, when taken together with other distributions with respect to
the related Class B Component Certificates for a Distribution Date, an amount
equal to the applicable Class B Component Principal Distribution Amount to be
distributed to the applicable Class B Component Certificates will be paid to the
applicable Class B Component Certificates, and consequently to the Class B-1
Certificates.
The Agreement provides generally that, on any Distribution Date all amounts
collected on account of scheduled principal payments, other than any amount
applied to the payment of a Subordination Reduction Amount, during the prior Due
Period and Prepayments during the prior Prepayment Period will be distributed
with respect to the related Class A and Class B Component Certificates on the
Distribution Date. If any Home Equity Loan became a Liquidated Loan during the
prior Due Period, the Net Liquidation Proceeds related to the Home Equity Loan
and allocated to principal may be less than the principal balance of the related
Home Equity Loan; the amount of any insufficiency is a "Realized Loss." In
addition, the Agreement provides that the principal balance of any Home Equity
Loan which becomes a Liquidated Loan shall thenceforth equal zero. The Agreement
does not contain any requirement that the amount of any Realized Loss be
distributed to the Certificateholders of the related Class A and Class B
Component Certificates on the Distribution Date which immediately follows the
event of loss, i.e., the Agreement does not require the current recovery of
losses. However, the occurrence of a Realized Loss will reduce the Subordinated
Amount with respect to a Home Equity Loan Group, which to the extent that the
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 the Distribution Date, or, if
insufficient funds are available on the Distribution Date, on subsequent
Distribution Dates, until the applicable Subordinated Amount equals the
applicable Specified Subordinated Amount. The effect of the foregoing is to
allocate losses initially to the Certificateholders of the Nonoffered
Certificates by reducing, or eliminating entirely, payments of Total Monthly
Excess Spread and Subordination Reduction Amounts which the Certificateholders
would otherwise receive.
A "Liquidated Loan" is a Home Equity Loan with respect to which a
determination has been made by the Servicer that all recoveries have been
recovered or that the Servicer reasonably believes that the cost of obtaining
any additional recoveries would exceed the amount of the recoveries.
OVERCOLLATERALIZATION AND THE POLICIES. The Agreement defines a
"Subordination Deficit" with respect to a Home Equity Loan Group and a
Distribution Date on and after the Distribution Date on which the Certificate
Principal Balance of the Subordinated Offered Certificates has been reduced to
zero to be the amount, if any, by which (x) the aggregate Certificate Principal
Balances of the related Class A Certificates with respect to the Distribution
Date, after taking into account all distributions to be made on the Distribution
Date, except for any Insured Payment or any Subordination Deficit, exceeds (y)
the aggregate Loan Balances of the Home Equity Loans in the Home Equity Loan
Group as of the close of business on the last day of the related Due Period. The
Agreement requires the Trustee to make a claim for an Insured Payment under the
related 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 the Insured Payment as a
payment of principal to the Certificateholders of the related Class A
Certificates on the Distribution Date. Each Policy is thus similar to the
subordination provisions described above insofar as the Policy guarantees
ultimate, rather than current, payment of the amounts of any Realized Losses to
the Certificateholders of the Class A Certificates. Investors in the Class A
Certificates should realize that, under extreme loss or delinquency scenarios
applicable to the related Home Equity Loan Group, they may temporarily receive
no distributions of principal when they would otherwise be entitled to
distributions of principal under the principal allocation provisions described
in this prospectus supplement. Nevertheless, the exposure to risk of loss of
principal of the Certificateholders of the Class A Certificates depends in part
on the ability of the Certificate Insurer to satisfy its obligations under the
Policies. In that respect and to the extent that the Certificate Insurer
satisfies the obligations, the Certificateholders of the Class A Certificates
are insulated from principal losses on the Certificates.
ALLOCATION OF REALIZED LOSSES
The Group Principal Distribution Amount for each Home Equity Loan Group
includes the Net Liquidation Proceeds in respect of principal received upon
liquidation of a Liquidated Loan. If the Net Liquidation Proceeds are less than
the unpaid principal balance of the related Liquidated Loan, the principal
balance of the related Home Equity Loans will decline more than the aggregate
Certificate Principal Balance of the related Class A and Class B Component
Certificates. If the difference is not covered by the related Class B
Subordinated Amount or the application of the related Net Monthly Excess
Cashflow, the losses will be allocated first to the related Class B Component
Certificates in the reverse order of payment priority and second to the
unrelated Class B Component Certificates in the reverse order of payment
priority. Any allocation of a loss to a class of Class B Component Certificates
will reduce the amount of interest and, to the extent not reimbursed from future
Net Monthly Excess Cashflow, principal they will receive and accordingly the
amounts that the related Subordinated Offered Certificates would receive. Losses
are allocated with respect to each Home Equity Loan Group, to the Class B
Component Certificates in the following order: (a) from Group I to the Class
B-1F Component Certificate and then to the Class B-1A Component Certificate and
(b) from Group II to the Class B-1A Component Certificate and then to the Class
B-1F Component Certificate.
If, following the distributions on a Distribution Date, the aggregate
Certificate Principal Balance of the related Class A and Class B Component
Certificates exceeds the principal balance of the related Home Equity Loans,
I.E., the related Certificates are undercollateralized, the Certificate
Principal Balance of the applicable Class B Component Certificates will be
reduced by the amount of the excess. If the Certificate Principal Balance of a
Class B Component Certificate is reduced, the Certificate Principal Balance of
the related Subordinated Offered Certificate will be reduced. This reduction
will constitute a Principal Carryover Shortfall for the Class B Component
Certificates and the related Subordinated Offered Certificate. Although a
Principal Carryover Shortfall will not accrue interest, the amount may be paid
on a future Distribution Date to the extent funds are available as provided
above under "--Distributions."
FINAL SCHEDULED DISTRIBUTION DATE
The last scheduled Distribution Date (the "Final Scheduled Distribution
Date") for each class of Offered Certificates is set forth on the cover page of
this prospectus supplement.
It is expected that the actual last Distribution Date for each class of
Offered Certificates will occur significantly earlier than the Final Scheduled
Distribution Dates.
WE REFER YOU TO "PREPAYMENT AND YIELD CONSIDERATIONS" FOR MORE DETAIL.
The Final Scheduled Distribution Date for each class of Offered
Certificates, other than the Class A-IO Certificates, has been calculated by
adding two months to the maturity date of the latest maturing Home Equity Loan.
SERVICING FEE
As to each Home Equity Loan, the Servicer will retain a fee (the "Servicing
Fee") equal to 0.50% per annum, payable monthly at one-twelfth of this annual
rate of the then outstanding principal balance of the Home Equity Loan serviced
as of the first day of each Due Period, provided, however, that if a successor
Servicer is appointed in accordance with the Agreement, the Servicing Fee shall
be the amount agreed upon by the Trustee, the Certificate Insurer, and the
successor Servicer but in no event in an amount greater than the amount paid to
the predecessor Servicer. The Servicer will also be able to retain late fees,
assumption fees, release fees, bad check charges, investment earnings on the
funds in the Principal and Interest Account and any other servicing related
charges.
TERMINATION; PURCHASE OF HOME EQUITY LOANS
The Trust will terminate on the Distribution Date following the later to
occur of:
(a) the final payment or other liquidation, or any advance made with
respect to the final payment or other liquidation, of the last Home Equity Loan
in the Trust,
(b) the disposition of all property acquired in respect of any Home
Equity Loan remaining in the Trust and
(c) the optional purchase by the Servicer, or, if the Servicer does
not so opt, the Certificate Insurer, of the Home Equity Loans as described
below.
Subject to provisions in the Agreement concerning the adoption of a plan of
complete liquidation, the holder of the Class X-F Certificate may at its option,
on any date on which the Aggregate Principal Balance of all the Certificates is
less than 10% of the initial Aggregate Principal Balance of all of the
Certificates, to the extent conditions specified in the Agreement are satisfied,
purchase, on the next succeeding Distribution Date, all of the outstanding Home
Equity Loans and all property acquired by the Trust in respect of any Home
Equity Loan by foreclosure, deed in lieu of foreclosure or otherwise at a price
equal to the sum of:
(a) the greater of,
(1) the outstanding Loan Balance of the Home Equity Loans and
(2) the greater of
(x) the Aggregate Principal Balance of Group I and Group II and
(y) the fair market value of the Home Equity Loans, excluding
accrued interest,
(b) Current Interest due to the Certificateholders plus the Servicing Fee,
the Trustee Fee and the Premium Amount due for the related Distribution Date and
(c) all amounts due and owing to the Certificate Insurer and any advances
that the Servicer has failed to remit and unreimbursed advances and servicing
fees and other amounts as may be specified in the Agreement (this amount, the
"Termination Price").
The Depositor expects that the Class X-F Certificates will be conveyed to a
third-party. The Depositor expects that this third party will enter into
agreements that will limit the third party's ability to exercise its clean up
call option. If the holder of the Class X-F Certificate does not exercise this
right within the period set forth in the Agreement, the Certificate Insurer or
the Servicer, may, as set forth in the Agreement, exercise the right. Upon
exercise of this option, in addition to the Termination Price, the entity
exercising the option must pay additional amounts to the holder of each Class X
Certificate, as specified in the Agreement.
THE TRUSTEE
___________________, a ____corporation, has been named Trustee pursuant to
the Agreement. The Trustee may have normal banking relationships with the
Depositor, the Originators and the Servicer. As to each Home Equity Loan the
Trustee will receive a fee (the "Trustee Fee") set forth in the Agreement.
The Trustee may resign at any time, in which event the Depositor will be
obligated to appoint a successor Trustee, as approved by the Certificate Insurer
and the Servicer. The Certificate Insurer or the Depositor and, in specific
instances, the Servicer may, in each case with the prior written consent of the
Certificate Insurer, also remove the Trustee if the Trustee ceases to be
eligible to continue under the Agreement, if the Trustee becomes insolvent or if
the Trustee fails to perform its obligations. Upon becoming aware of these
circumstances, the Depositor will be obligated to appoint a successor Trustee,
as approved by the Certificate Insurer. Any resignation or removal of the
Trustee and appointment of a successor Trustee will not become effective until
acceptance of the appointment by the successor Trustee acceptable to the
Certificate Insurer.
No holder of a Certificate will have any right under the Agreement to
institute any proceeding with respect to the Agreement unless (a) so long as no
Certificate Insurer Default constituting a payment default exist, the
Certificate Insurer has given its prior written consent and (b) the holder
previously has given to the Trustee written notice of default and unless
Certificateholders holding Certificates evidencing at least 51% of the
Percentage Interests in the Trust, have made written requests upon the Trustee
to institute the proceeding in its own name as Trustee under the Agreement and
have offered to the Trustee reasonable indemnity and the Trustee for 60 days has
neglected or refused to institute this proceeding. The Trustee will be under no
obligation to exercise any of the trusts or powers vested in it by the Agreement
or to make any investigation of matters arising under the Agreement or to
institute, conduct or defend any litigation under the Agreement or in relation
to the Agreement at the request, order or direction of any of the
Certificateholders, unless the Certificateholders have offered to the Trustee
reasonable security or indemnity against the cost, expenses and liabilities
which may be incurred in or by exercising any of the trusts or powers vested in
the Trustee.
THE POLICIES AND THE CERTIFICATE INSURER
The following information has been supplied by [_________________________]
(the "Certificate Insurer") for inclusion in this prospectus supplement. The
Certificate Insurer does not accept any responsibility for the accuracy or
completeness of this prospectus supplement or any information or disclosure
contained in this prospectus supplement, or omitted from this prospectus
supplement, other than with respect to the accuracy of the information regarding
the two Certificate Guaranty Insurance Policies (the "Policies") and the
Certificate Insurer set forth in this prospectus supplement under the heading
"THE POLICIES AND THE CERTIFICATE INSURER." Additionally, the Certificate
Insurer makes no representation regarding the Certificates or the advisability
of investing in the Certificates.
THE POLICIES
The Certificate Insurer, in consideration of the payment of the premium and
subject to the terms of the Policies, unconditionally and irrevocably guarantees
to any Owner that an amount equal to each full and complete Insured Payment (as
described below) will be received from the Certificate Insurer by
___________________, or its successor, as trustee for the Owners (the
"Trustee"), on behalf of the Owners for distribution by the Trustee to each
Owner of each Owner's proportionate share of the Insured Payment. The
Certificate Insurer's obligations under the Policies with respect to a
particular Insured Payment shall be discharged to the extent funds equal to the
applicable Insured Payment are received by the Trustee, whether or not the funds
are properly applied by the Trustee. Insured Payments shall be made only at the
time set forth in the related Policy and no accelerated Insured Payments shall
be made regardless of any acceleration of the Class A Certificates and Class
A-IO Certificates, unless the acceleration is at the sole option of the
Certificate Insurer.
Notwithstanding the foregoing paragraph, the Policies do not cover
shortfalls, if any, attributable to the liability of the Trust, any REMIC or the
Trustee for withholding taxes, if any, including interest and penalties in
respect this liability. The Policies do not cover, and Insured Payments shall
not include, any Civil Relief Interest Shortfalls, any Compensating Interest
Default Amounts or any Certificateholders' Interest Index Carryover.
The Certificate Insurer will pay any Insured Payment that is a Preference
Amount (as described below) on the Business Day (as described below) following
receipt on a Business Day by the Fiscal Agent (as described below) of:
o a certified copy of the order requiring the return of a preference
payment,
o an opinion of counsel satisfactory to the Certificate Insurer that the
order is final and not subject to appeal,
o an assignment in the form as is reasonably required by the Certificate
Insurer, irrevocably assigning to the Certificate Insurer all rights
and claims of the Owner relating to or arising under the Class A
Certificates and Class A-IO Certificates against the debtor which made
the preference payment or otherwise with respect to the preference
payment, and
o appropriate instruments to effect the appointment of the Certificate
Insurer as agent for the Owner in any legal proceeding related to the
preference payment, the instruments being in a form satisfactory to
the Certificate Insurer,
provided that if the documents are received after 12:00 noon New York City time,
on this Business Day, they will be deemed to be received on the following
Business Day. The payments shall be disbursed to the receiver or trustee in
bankruptcy named in the final order of the court exercising jurisdiction on
behalf of the Owner and not to any Owner directly unless the Owner has returned
principal or interest paid on the Class A Certificates or Class A-IO
Certificates to the receiver or trustee in bankruptcy, in which case the payment
shall be disbursed to the Owner.
The Certificate Insurer will pay any other amount payable under the related
Policy no later than 12:00 noon, New York City time, on the later of the
Distribution Date on which the related Deficiency Amount is due or the third
Business Day following receipt in New York, New York on a Business Day by State
Street Bank and Trust Company, N.A., as Fiscal Agent for the Certificate
Insurer, or any successor fiscal agent appointed by the Certificate Insurer (the
"Fiscal Agent") of a Notice (as described below); provided that if the Notice is
received after 12:00 noon, New York City time, on this Business Day, it will be
deemed to be received on the following Business Day. If the Notice received by
the Fiscal Agent is not in proper form or is otherwise insufficient for the
purpose of making claim under the related Policy, it shall be deemed not to have
been received by the Fiscal Agent for purposes of this paragraph, and the
Certificate Insurer or the Fiscal Agent, as the case may be, shall promptly so
advise the Trustee and the Trustee may submit an amended Notice.
Insured Payments due under the Policies unless otherwise stated in the
Policies will be disbursed by the Fiscal Agent to the Trustee on behalf of the
Owners by wire transfer of immediately available funds in the amount of the
Insured Payment less, in respect of Insured Payments related to Preference
Amounts, any amount held by the Trustee for the payment of the Insured Payment
and legally available for the payment.
The Fiscal Agent is the agent of the Certificate Insurer only and the
Fiscal Agent shall in no event be liable to Owners for any acts of the Fiscal
Agent or any failure of the Certificate Insurer to deposit, or cause to be
deposited, sufficient funds to make payments due under the related Policy.
As used in the Policies, the following terms shall have the following
meanings:
"AGREEMENT" means the Pooling and Servicing Agreement dated as of _____,
_____ among Asset Backed Securities Corporation, as Depositor,
[_________________________], as Servicer and the Trustee, as trustee, without
regard to any amendment or supplement to it unless the amendment or supplement
is approved in writing by the Certificate Insurer.
"BUSINESS DAY" means any day other than:
(a) a Saturday or a Sunday,
(b) a day on which the Certificate Insurer is closed, as notified to the
Trustee by the Certificate Insurer, or
(c) a day on which banking institutions in New York, New York, [Orange,
California, Houston or Dallas, Texas] or the city in which the corporate trust
office of the Trustee under the Agreement is located
are authorized or obligated by law or executive order to be closed.
"DEFICIENCY AMOUNT" means, as of any Distribution Date, the excess, if any,
of:
(a) the sum of
(1) the related Current Interest for the related Class A Certificates
and Class A-IO Certificates for the Distribution Date and
(2) the Guaranteed Principal Amount for the related Class A
Certificates for the Distribution Date over
(b) the related Total Available Funds for the Distribution Date, net of the
Premium Amount with respect to the related Class A Certificates and Class A-IO
Certificates and the Trustee Fee with respect to the related Home Equity Loan
Group.
"GUARANTEED PRINCIPAL AMOUNT" means:
(a) with respect to any Distribution Date on which the Certificate
Principal Balance of the Class B-1 Certificates has been reduced to zero, other
than the Final Scheduled Distribution Date for the Class A Certificates, the
excess, if any, of
(1) the aggregate Certificate Principal Balances of the related Class
A Certificates on the Distribution Date, prior to giving effect to distributions
on the Distribution Date, over
(2) the aggregate Loan Balances of the Home Equity Loans in the
related Home Equity Loan Group as of the close of business on the last day of
the related Due Period and
(b) with respect to the Final Scheduled Distribution Date for the Class A
Certificates, the aggregate Certificate Principal Balances of the related Class
A Certificates for the Final Scheduled Distribution Date.
"INSURED PAYMENT" means (a) as of any Distribution Date, any Deficiency
Amount and (b) any Preference Amount.
"NOTICE" means the telephonic or telegraphic notice, promptly confirmed in
writing by facsimile substantially in the form of Exhibit A attached to the
related Policy, the original of which is subsequently delivered by registered or
certified mail, from the Trustee specifying the Insured Payment which shall be
due and owing on the applicable Distribution Date.
"OWNER" means each Owner (as defined in the Agreement) of a Class A
Certificate or Class A-IO Certificate who, on the applicable Distribution Date,
is entitled under the terms of the applicable Class A Certificates or Class A-IO
Certificates to payment.
"PREFERENCE AMOUNT" means any amount previously distributed to an Owner on
the Class A Certificates or Class A-IO Certificates that is recoverable and
sought to be recovered as a voidable preference by a trustee in bankruptcy
pursuant to the United States Bankruptcy Code (11 U.S.C.), as amended from time
to time in accordance with a final nonappealable order of a court having
competent jurisdiction.
Capitalized terms used in the Policies and not otherwise defined in the
Policies shall have the respective meanings set forth in the Agreement as of the
date of execution of the Policies, without giving effect to any subsequent
amendment to or modification of the Agreement unless the amendment or
modification has been approved in writing by the Certificate Insurer.
Any notice under a Policy or service of process on the Fiscal Agent may be
made at the address listed below for the Fiscal Agent or other addresses
specified by the Certificate Insurer in writing to the Trustee.
The notice address of the Fiscal Agent is 15th Floor, 61 Broadway, New
York, New York 10006 Attention: Municipal Registrar and Paying Agency or other
addresses specified by the Fiscal Agent to the Trustee in writing.
Each Policy is being issued under and pursuant to, and shall be construed
under, the laws of the State of New York, without giving effect to the conflict
of laws principles of the State of New York.
The insurance provided by each Policy is not covered by the
Property/Casualty Insurance Security Fund specified in Article 76 of the New
York Insurance Law.
The Policies are not cancelable for any reason. The premium on the Policies
is not refundable for any reason including payment, or provision being made for
payment, prior to maturity of the Class A Certificates and Class A-IO
Certificates.
THE CERTIFICATE INSURER
[To Be Inserted]
USE OF PROCEEDS
The net proceeds to be received from the sale of the Certificates will be
applied by the Depositor towards the purchase of the Home Equity Loans from the
Seller.
DESCRIPTION OF THE POOLING AND SERVICING AGREEMENT
In addition to the provisions of the Agreement summarized elsewhere in the
prospectus and this prospectus supplement there is set forth below a summary of
other provisions of the Agreement.
COVENANT OF THE ORIGINATORS AND THE SELLER TO TAKE CERTAIN ACTIONS WITH RESPECT
TO THE HOME EQUITY LOANS IN CERTAIN SITUATIONS
Pursuant to the Agreement, upon the discovery by the Depositor, the Seller,
the Certificate Insurer, the Servicer, any Sub-Servicer, any Owner or the
Trustee that the representations and warranties of the Originators or the Seller
(as applicable, the "Responsible Party") in the Loan Purchase Agreement or other
covenants of the Servicer in the Agreement are untrue in any material respect as
of the Closing Date with the result that the interests of the Owners or of the
Certificate Insurer are materially and adversely affected, the party discovering
the breach is required to give prompt written notice to the other parties and to
the Responsible Party.
Upon the earliest to occur of the Responsible Party's discovery or receipt
of notice of breach of a representation or warranty made by it with respect to a
Home Equity Loan from any of the other parties which materially and adversely
affects the interests of the Owners or the Certificate Insurer in the Home
Equity Loan, the Responsible Party will be required promptly to cure the breach
in all material respects or the Responsible Party shall within 60 days, or 90
days if the Responsible Party is attempting in good faith to cure the breach as
determined by the Certificate Insurer, in its sole discretion, of the discovery,
the receipt of notice:
(1) substitute in lieu of each Home Equity Loan which has given rise to the
requirement for action by the Responsible Party a "Qualified Replacement
Mortgage" (as defined in the Agreement) and deliver an amount equal to the sum
of
(a) the excess, if any, of the outstanding principal balance of the
Home Equity Loan being replaced over the outstanding principal balance of the
replacement Home Equity Loan,
(b) accrued and unpaid interest on the Home Equity Loan being
replaced, and
(c) the amount of any Delinquency Advances and Servicing Advances
which have previously been reimbursed or remains unreimbursed on the Home Equity
Loan being replaced (the "Substitution Amount"), to the Trustee (to be deemed
part of the collections remitted by the Servicer on the next Monthly Remittance
Date) or
(2) purchase the Home Equity Loan from the Trust at a purchase price equal
to the Loan Purchase Price (as defined below) of the Home Equity Loan.
Notwithstanding any provision of the Agreement to the contrary, with respect to
any Home Equity Loan which is not in default or as to which no default is
reasonably foreseeable, no repurchase or substitution will be made unless the
Responsible Party obtains for the Trustee and the Certificate Insurer an opinion
of counsel experienced in federal income tax matters and acceptable to the
Trustee and the Certificate Insurer to the effect that the repurchase or
substitution would not constitute a Prohibited Transaction for either REMIC or
otherwise subject either REMIC to tax and would not jeopardize the status of
either REMIC as a REMIC (a "REMIC Opinion"), addressed to the Trustee and the
Certificate Insurer and acceptable to the Trustee and the Certificate Insurer.
Any Home Equity Loan as to which repurchase or substitution was delayed pursuant
to the Agreement shall be repurchased or substituted for, subject to compliance
with the provisions of the Agreement, upon the earlier of (a) the occurrence of
a default or reasonably foreseeable default with respect to the Home Equity Loan
and (b) receipt by the Trustee and the Certificate Insurer of a REMIC Opinion.
In connection with any breach of a representation, warranty or covenant or
defect in documentation giving rise to the repurchase or substitution
obligation, the Responsible Party has agreed that it shall, at its expense,
furnish the Trustee and the Certificate Insurer either a REMIC Opinion or an
opinion of counsel rendered by independent counsel that the effects described in
a REMIC Opinion will not occur as a result of the repurchase or substitution.
The obligation of the Responsible Party to cure the breach or to substitute or
repurchase any Home Equity Loan as to which a representation or warranty is
untrue in any material respect and has not been remedied constitutes the sole
remedy available to the Owners and the Trustee.
"Loan Purchase Price" means an amount equal to the aggregate principal
balance of the Home Equity Loan as of the date of purchase, plus all accrued and
unpaid interest on the Home Equity Loan at the Coupon Rate to the end of the
current Due Period of the purchase together with, without duplication, the
aggregate amount of (1) all unreimbursed Servicing Advances made with respect to
the Home Equity Loan, and (2) all reimbursed Servicing Advances to the extent
that the reimbursement was not made from the Mortgagor or other collections or
recoveries on the related Home Equity Loan.
Under the Agreement, the Seller may, at its option, substitute additional
mortgage loans for Home Equity Loans which are prepaid in full prior to
_________. These additional mortgage loans may have been owned on the Cut-Off
Date by the Seller but were not eligible for sale to the Trust on the Closing
Date. Any substitute mortgage loans must satisfy the conditions set forth in the
Agreement and must be substituted prior to the Monthly Remittance Date
immediately following the calendar month in which the prepayment was received by
the Servicer. In the event the aggregate amount of principal received in respect
of Home Equity Loans prepaid in full in a given calendar month exceeds the
aggregate of the outstanding principal balances of mortgage loans substituted
therefore, the excess shall be distributed to Certificateholders on the related
Distribution Date as a prepayment of principal. Notwithstanding the foregoing,
there is no assurance that the Seller will opt to make any substitutions nor,
should it desire to exercise the option, that mortgage loans will be available.
ASSIGNMENT OF HOME EQUITY LOANS
On or before the Closing Date, the Originators will transfer, assign, set
over and otherwise convey without recourse to the Seller, the Seller will
transfer, assign, set over and otherwise convey without recourse to the
Depositor and the Depositor will transfer, assign, set over and otherwise convey
without recourse to the Trustee in trust for the benefit of the Owners and the
Certificate Insurer all right, title and interest of the related Originator in
and to each Home Equity Loan and all its right, title and interest in and to
principal received on each Home Equity Loan on and after the Cut-Off Date and
interest due on each Home Equity Loan on and after ____; provided, however, that
the Trust will not be entitled to unscheduled principal received, including
Prepayments, and scheduled principal and interest due on each Home Equity Loan
prior to the Cut-Off Date in the case of principal and ____, in the case of
interest. Purely as a protective measure and not to be construed as contrary to
the parties intent that the transfer on the Closing Date is a sale, the
applicable Originator will also be deemed to have granted to the Seller, the
Seller will also be deemed to have granted to the Depositor and the Depositor
will also be deemed to have granted to the Trustee a security interest in the
Home Equity Loans in the event that the transfer of the Home Equity Loans is
deemed to be a loan and not a sale.
In connection with the transfer and assignment of the Home Equity Loans on
the Closing Date the Depositor will be required to:
(1) deliver or cause to be delivered without recourse to the Trustee
or an affiliate or agent of the Trustee (the "Custodian") on behalf of the
Trustee on the Closing Date and with respect to the Home Equity Loans
identified in the Schedule of Home Equity Loans
o the original Notes, endorsed in blank or to the order of the Trustee,
o an original or certified copy of the title search and the original
title insurance commitment or a copy of the original title insurance
commitment certified as a true copy or the original title insurance
policy or a copy certified by the issuer of the title insurance
policy,
o subject to clause (2) below, originals of all intervening assignments,
if any, showing a complete chain of title from origination to the
applicable Originator, including warehousing assignments, if recorded,
o originals of all assumption, modification, consolidation or extension
agreements, if any,
o either: (a) the original Mortgage, with evidence of recording on the
Mortgage, if the original Mortgage has been returned to the applicable
Originator or the Seller from the applicable recording office, or a
copy, if the original Mortgage has not been returned to the applicable
Originator or the Seller from the applicable recording office, of the
Mortgage certified as a true copy by the closing attorney or the
applicable Originator or the Seller or (a) a copy of the Mortgage
certified by the public recording office in those instances where the
original recorded Mortgage has been lost or retained by the recording
office, and
o the original assignments of Mortgages in recordable form, other than
the assignee's name and mortgage recording information not yet
received;
(2) with respect to each Home Equity Loan as to which the applicable
Originator, the Seller or the Depositor has received recording information
by the Closing Date, cause, within 30 days following the Closing Date and
with respect to each other Home Equity Loan cause, within 30 days of
receipt of the recording information assignments of the Mortgages to
"___________________, as Trustee of Asset Backed Securities Corporation
Home Equity Loan Trust _____-__ under the Pooling and Servicing Agreement
dated as of _____ , _____" to be submitted for recording in the appropriate
jurisdictions; provided, however, that the Depositor shall not be required
to prepare or cause to be prepared any assignment of Mortgage for a
Mortgage with respect to which the original recording information has not
been received, until the information has been received from the recording
office; provided, further, that, except as provided in the Agreement, the
Depositor shall not be required to record or cause an Originator to record
an assignment of a Mortgage if the Depositor or Originator furnishes to the
Trustee, the Certificate Insurer and the Rating Agencies, on or before the
Closing Date with respect to the Home Equity Loans, at the Originator's
expense, an opinion of counsel with respect to the relevant jurisdiction
that the recording is not required to perfect the Trustee's interests in
the related Home Equity Loans, in form satisfactory to the Trustee, the
Certificate Insurer and the Rating Agencies; and
(3) deliver the title insurance policy, the original Mortgages and the
recorded assignments, together with originals or duly certified copies of
any and all prior assignments, other than unrecorded warehouse assignments,
to the Trustee or the Custodian on behalf of the Trustee within 15 days of
receipt by the Originator, the Seller or the Depositor, but in any event,
with respect to any Mortgage as to which original recording information has
been made available to the Originator, the Seller or the Depositor, within
12 months after the Closing Date.
The Trustee will agree, for the benefit of the Owners, to review or cause the
Custodian to review each Home Equity Loan file on or before the Closing Date, or
the date of receipt of any documents delivered to the Trustee after the Closing
Date, to ascertain that all required documents, or certified copies of
documents, have been executed and received.
If the Trustee or the Custodian on behalf of the Trustee during the review finds
any document constituting a part of a Home Equity Loan file which is not
properly executed, has not been received, is unrelated to the Home Equity Loans
or that any Home Equity Loan does not conform in a material respect to the
description set forth in the Schedule of Home Equity Loans, the Custodian shall
promptly notify the Trustee, and, the Trustee shall notify the Depositor, the
Originator, and the Certificate Insurer. The Seller and ______, as applicable
will agree in the Loan Purchase Agreement to use reasonable efforts to remedy a
material defect in a document constituting part of a Home Equity Loan file of
which it is so notified by the Trustee. If, however, within 60 days, or 90 days
if ______ or the Seller, as applicable, is attempting in good faith to cure the
defect as determined by the Certificate Insurer, in its sole discretion, after
notice to it respecting the defect ______ or the Seller, as applicable, shall
not have remedied the defect and the defect materially and adversely affects the
interest in the related Home Equity Loan, the Owners or the Certificate Insurer,
______ or the Seller will be required on the next succeeding Monthly Remittance
Date to:
(1) substitute in lieu of the Home Equity Loan a Qualified Replacement
Mortgage and deliver the Substitution Amount to the Trustee, to be deemed part
of the collections remitted by the Servicer on the Monthly Remittance Date, or
(2) purchase the Home Equity Loan at a purchase price equal to the Loan
Purchase Price, which purchase price shall be delivered to the Trustee along
with the monthly remittance remitted by the Servicer on the Monthly Remittance
Date.
However, the substitution or purchase must occur within 60 days, or 90 days if
______ or the Seller, as applicable, is attempting in good faith to cure the
defect as determined by the Certificate Insurer, in its sole discretion, of the
notice of defect if the defect would prevent the Home Equity Loan from being a
Qualified Mortgage (as the term is defined in the Agreement), and no
substitution or purchase of a Home Equity Loan that is not in default or as to
which no default is reasonably foreseeable shall be made unless ______ obtains
for the Trustee and Certificate Insurer a REMIC Opinion, addressed to and
acceptable to the Trustee and Certificate Insurer.
In addition to the foregoing, the Trustee has agreed to perform or cause the
Custodian to perform a review prior to 180 days after the Closing Date
indicating the current status of the exceptions previously indicated (the "Final
Certification"). After delivery of the Final Certification, the Trustee or the
Custodian, on behalf of the Trustee and the Servicer shall provide to the
Certificate Insurer no less frequently than quarterly updated certifications
indicating the then current status of exceptions, until all the exceptions have
been eliminated.
LIBOR CARRYOVER FUND
The Agreement provides for two reserve funds (each, a "LIBOR Carryover
Fund") which are held by the Trustee on behalf of the holders of the adjustable
rate Certificates. One LIBOR Carryover Fund is for the benefit of the adjustable
rate Group I Certificates and the other is for the benefit of the adjustable
rate Group II Certificates. To the extent amounts on deposit are sufficient,
holders of the related Certificates will be entitled to receive payments from
the related LIBOR Carryover Fund equal to any Certificateholders' Interest Index
Carryover. Any investment earnings on amounts on deposit in each fund will be
paid to, and for the benefit of, the holders of the related Class X Certificates
and will not be available to pay any Certificateholders' Interest Index
Carryover. Neither LIBOR Carryover Fund will be included as an asset of any
REMIC.
INTEREST RATE CAP AGREEMENT
The Agreement provides for a reserve fund (the "Cap Reserve Fund") which is
held by the Trustee on behalf of the holders of the Certificates. The Cap
Reserve Fund will be an asset of the Trust but not of a REMIC. The holder of the
Class R Certificates will be the owner of the Cap Reserve Fund for tax purposes
only, and amounts on deposit in the Cap Reserve Fund will be invested at the
direction of the holder of the of the Class R Certificate as provided in the
Agreement. Withdrawals will be made from the Cap Reserve Fund to the extent
necessary to make the Cap Reserve Fund Transfer Amount to the Certificate
Account and to reimburse the Certificate Insurer for any outstanding
Reimbursement Amount.
The only asset of the Cap Reserve Fund will be the Cap Agreement which will
be deposited into the Cap Reserve Fund. The Trust will have the benefit of an
interest rate cap agreement (the "Cap Agreement") pursuant to which
______________ (together with any successor, the "Counterparty") will agree to
pay to the Trust a monthly payment at an annual rate equal to the excess, if
any, of LIBOR over ____% on a scheduled notional amount. The scheduled notional
amounts are set forth with respect to each Distribution Date in "Annex II;
Scheduled Notional Amounts." The initial scheduled notional amount will be
$____, which is equal to the total Loan Balance as of the Cut-Off Date of the
2/28 Adjustable Rate Loans and the 3/27 Adjustable Rate Loans. The scheduled
notional amount declines in accordance with the expected amortization of the
2/28 Adjustable Rate Loans. The Cap Agreement will terminate after the
Distribution Date in ____.
In accordance with the terms of the Agreement, amounts on deposit in the
Cap Reserve Fund will be released (the "Cap Reserve Fund Release Date") one year
after the later of (1) ____ and (2) the payment in full of all amounts payable
to the Certificate Insurer. On the Cap Reserve Fund Release Date, if there are
no Cap Reserve Fund Transfer Amounts for the related Distribution Date, except
as provided in the Agreement, all amounts will be released to the Class X-A
Certificates.
The Cap Agreement will be governed by and construed in accordance with the
law of the State of New York and will be documented on the ISDA Master
Agreement, as supplemented by a schedule and a confirmation. The obligations of
the Counterparty are limited to those specifically set forth in the Cap
Agreement.
The Counterparty is a [To Be Inserted]
SERVICING AND SUB-SERVICING
______ will also serve as the Servicer of each Home Equity Loan. On the
date of issuance of the Certificates, it is anticipated that all of the Home
Equity Loans will be serviced by the Servicer. The Servicer may not assign its
obligations under the Agreement, in whole or in part, unless it shall have first
obtained the written consent of the Trustee and the Certificate Insurer;
provided, however, that any assignee must meet the eligibility requirements for
a successor Servicer set forth in the Agreement.
The Certificates will not represent an interest in or obligation of, nor
are the Home Equity Loans guaranteed by, the Depositor, the Seller, the Trustee,
the Originators, the Servicer, or any of their affiliates.
The Servicer is required to service the Home Equity Loans in accordance
with the Agreement and the terms of the respective Home Equity Loans.
The Servicer is permitted to retain from the interest portion of each
monthly payment, the related Servicing Fee. In addition, the Servicer will be
entitled to retain additional servicing compensation in the form of release
fees, bad check charges, assumption fees, late payment charges, investment
income on funds on deposit in the Principal and Interest Account, and any other
servicing-related fees, and similar items.
The Servicer is required to make reasonable efforts to collect all payments
called for under the terms and provisions of the Home Equity Loans, and, to the
extent the procedures are consistent with the Agreement and the terms and
provisions of any applicable insurance policy, to follow collection procedures
for all Home Equity Loans at least as rigorous as those used in servicing home
equity loans similar to the Home Equity Loans for its own account, giving due
regard to industry standards for servicing home equity similar to the Home
Equity Loans. Consistent with the foregoing, the Servicer may in its discretion
waive or permit to be waived any late payment charge, assumption fee or any
penalty interest in connection with the prepayment of a Home Equity Loan or any
other fee or charge which the Servicer would be entitled to retain as additional
servicing compensation. In the event the Servicer consents to the deferment of
the due dates for payments due on a Note, the Servicer will nonetheless be
required to make payment of any required Delinquency Advances with respect to
the interest payments so extended to the same extent as if the interest portion
of the installment were due, owing and delinquent and had not been deferred.
The Servicer is required to create, or cause to be created, in the name of
the Trustee, at one or more depository institutions, which institutions may be
affiliates of the Servicer, one or more principal and interest accounts
maintained as an eligible account as required by the Agreement (collectively,
the "Principal and Interest Account"). All funds in the Principal and Interest
Account are required to be held (1) uninvested, or (2) invested in Eligible
Investments (as defined in the Agreement). Any investment of funds in the
Principal and Interest Account must mature or be withdrawable at par on or prior
to the immediately succeeding Monthly Remittance Date. Any investment earnings
on funds held in the Principal and Interest Account are for the account of, and
any net losses in the Principal and Interest Account are also for the account
of, and must be promptly replenished by, the Servicer.
The Servicer is required to deposit, or cause to be deposited, to the
Principal and Interest Account daily but no later than three business days
following receipt by the Servicer or with respect to particular collections
prior to the Closing Date, the Seller, all principal and interest on the Home
Equity Loans received on and after the Cut-Off Date, in the case of principal
due on and after ____, in the case of interest, including any Prepayments
received during the related Prepayment Period, the proceeds of any liquidation
of a Home Equity Loan net of expenses and unreimbursed Servicing Fees, Servicing
Advances and Delinquency Advances ("Net Liquidation Proceeds") and, any income
from foreclosed Mortgaged Properties and Delinquency Advances, but net of
o principal, including Prepayments, collected and interest due on the
Home Equity Loans prior to the Cut-Off Date, in the case of principal
and ____, in the case of interest,
o reimbursements for Delinquency Advances, Servicing Advances and other
amounts to the extent provided below, and
o reimbursement for amounts deposited in the Principal and Interest
Account representing payments of principal and/or interest on a Note
by a Mortgagor which are subsequently returned by a depository
institution as unpaid (all the net amounts being referred to in this
prospectus supplement as the "Daily Collections").
The Servicer may make withdrawals from the Principal and Interest Account for
the following purposes:
o to remit to the Trustee amounts to be deposited in the Certificate
Account;
o to withdraw net investment earnings on amounts on deposit in the
Principal and Interest Account;
o to withdraw amounts that have been deposited to the Principal and
Interest Account in error;
o to reimburse itself for unrecovered Delinquency Advances and Servicing
Advances (in each case, solely from amounts recovered on the related
Home Equity Loan) and for any excess interest collected from a
Mortgagor;
o to reimburse itself for Delinquency Advances and Servicing Advances
deemed to be nonrecoverable from collections with respect to the
related Home Equity Loan Group; and
o to clear and terminate the Principal and Interest Account following
the termination of the Trust;
The Servicer will remit to the Trustee for deposit in the Certificate Account
the Daily Collections allocable to the related Distribution Date, the Loan
Purchase Price and Substitution Amounts not later than the related Monthly
Remittance Date.
On each Monthly Remittance Date, the Servicer shall be required to remit to the
Trustee for deposit to the Certificate Account out of the Servicer's own funds
or from collections on any Home Equity Loans that are not required to be
distributed on the Distribution Date occurring during the month in which the
advance is made, which shall be reimbursed by the Servicer on or before any
subsequent Monthly Remittance Dates on which the amounts are required to be part
of the monthly remittance amount, any delinquent payment of interest and
principal with respect to each delinquent Home Equity Loan, which payment was
not received on or prior to the related Monthly Remittance Date and was not
advanced by the Servicer. These amounts of the Servicer's own funds so deposited
are "Delinquency Advances." The Servicer may reimburse itself on any Business
Day for any Delinquency Advances paid from the Servicer's own funds, from
amounts recovered on the related Home Equity Loan from the Principal and
Interest Account or out of Total Monthly Excess Cashflow as provided in the
Agreement.
Notwithstanding the foregoing, in the event that the Servicer determines in its
reasonable business judgment in accordance with the servicing standards of the
Agreement that any proposed Delinquency Advance if made would not be
recoverable, the Servicer shall not be required to make the Delinquency Advances
with respect to the Home Equity Loan. To the extent that the Servicer previously
has made Delinquency Advances with respect to a Home Equity Loan that the
Servicer subsequently determines to be nonrecoverable, the Servicer shall be
entitled to reimbursement for the aggregate unreimbursed Delinquency Advances as
provided above or may withdraw the amounts from the Principal and Interest
Account. The Servicer shall give written notice of the determination as to why
the amount is or would be nonrecoverable to the Trustee and the Certificate
Insurer and may withdraw the amounts from the Principal and Interest Account.
The Servicer will be required to pay all "out of pocket" costs and expenses
incurred in the performance of its servicing obligations, including, but not
limited to,
(1) expenditures in connection with a foreclosed Home Equity Loan prior to
its liquidation, including, without limitation, expenditures for real estate
property taxes, hazard insurance premiums, property restoration or preservation
and environmental audits ("Preservation Expenses"),
(2) the cost of any enforcement or judicial proceedings, including
foreclosures and
(3) the cost of the management and liquidation of Mortgaged Property,
including broker's fees, acquired in satisfaction of the related Mortgage,
except to the extent that the Servicer in its reasonable business judgment
determines that any proposed amount would not be recoverable.
These costs and expenses will constitute "Servicing Advances." The Servicer may
recover a Servicing Advance to the extent permitted by the Home Equity Loans or,
if not recovered from the Mortgagor on whose behalf the Servicing Advance was
made, from Liquidation Proceeds realized upon the liquidation of the related
Home Equity Loan. To the extent that the Servicer previously has made Servicing
Advances with respect to a Home Equity Loan that the Servicer subsequently
determines to be nonrecoverable, the Servicer shall be entitled to reimbursement
for the aggregate unreimbursed Servicing Advances as provided above or may
withdraw these amounts from the Principal and Interest Account.
A full month's interest at the Coupon Rate will be due on the outstanding
Loan Balance of each Home Equity Loan as of the beginning of each Due Period. If
a full Prepayment of a Home Equity Loan occurs during any calendar month, any
shortfall between the interest collected from the Mortgagor in connection with
the payoff and the full month's interest at the Coupon Rate, net of the
Servicing Fee, that would be due on the related due date for the Home Equity
Loan (this shortfall, "Compensating Interest"), but not in excess of the
aggregate Servicing Fee for the related Due Period, will be required to be
deposited in the Certificate Account on the next succeeding Monthly Remittance
Date by the Servicer and shall be included in the monthly remittance amount to
be made available to the Trustee on the next succeeding Monthly Remittance Date.
The holder of the related Class X Certificate will have the right and
option, but not the obligation, and if it does not exercise the option, the
Servicer will have the right and the option, but not the obligation, to purchase
for its own account any Home Equity Loan which becomes delinquent as to three
consecutive monthly installments or any Home Equity Loan as to which enforcement
proceedings have been brought by the Servicer. The purchase price for any Home
Equity Loan is equal to the Loan Purchase Price, which purchase price shall be
deposited in the Certificate Account.
The Servicer is required to cause to be liquidated any Home Equity Loan
relating to a Mortgaged Property as to which ownership has been effected in the
name of the Servicer on behalf of the Trust and which has not been liquidated
within 35 months of the effecting of ownership at the price the Servicer deems
necessary to comply with this requirement, or within the period of time as may,
in the opinion of counsel nationally recognized in federal income tax matters,
be permitted under the Code.
The Servicer will be required to cause hazard insurance to be maintained
with respect to the related Mortgaged Property and to advance sums on account of
the premiums for the insurance if not paid by the Mortgagor if permitted by the
terms of the Home Equity Loan.
The Servicer shall not agree to any modification, waiver or amendment of
any provision of any Home Equity Loan unless, in the Servicer's good faith
judgment, the modification, waiver or amendment would minimize the loss that
might otherwise be experienced with respect to the Home Equity Loan and only in
the event of a payment default with respect to the Home Equity Loan or in the
event that a payment default with respect to the Home Equity Loan is reasonably
foreseeable by the Servicer; provided, however, that no the modification, waiver
or amendment shall change the Coupon Rate, increase or reduce the Loan Balance,
extend the maturity date of the Home Equity Loan, or effect an exchange or
reissuance of the Home Equity Loan under Section 1001 of the Code or cause
either REMIC to fail to qualify as a REMIC under the Code or the imposition of
any tax on "prohibited transactions" on "contributions after the startup date"
under the REMIC provisions; provided that the Certificate Insurer's prior
written consent shall be required for any modification, waiver or amendment if
the aggregate number of Home Equity Loans which have been modified, waived or
amended exceeds 5% of the number of outstanding Home Equity Loans as of the
Cut-Off Date. Notwithstanding anything set forth in the Agreement to the
contrary, the Servicer shall be permitted to modify, waive or amend any
provision of a Home Equity Loan if required by statute or a court of competent
jurisdiction to do so.
The Servicer, with the prior written consent of the Certificate Insurer,
will be permitted under the Agreement to enter into servicing agreements (the
"Sub-Servicing Agreements") with other qualified servicers (the "Sub-Servicers")
for any servicing and administration of Home Equity Loans with any institution
that
(x) is in compliance with the laws of each state necessary to enable it to
perform its obligations under the Sub-Servicing Agreement,
(y) has experience servicing home equity loans that are similar to the Home
Equity Loans and
(z) has equity of not less than $5,000,000, as determined in accordance
with generally accepted accounting principles.
Notwithstanding any Sub-Servicing Agreement, the Servicer will not be
relieved of its obligations under the Agreement and the Servicer will be
obligated to the same extent and under the same terms and conditions as if it
alone were servicing and administering the Home Equity Loans. The Servicer shall
be entitled to enter into any agreement with a Sub-Servicer for indemnification
of the Servicer by the Sub-Servicer and nothing contained in the Sub-Servicing
Agreement shall be deemed to limit or modify the Agreement.
The Servicer has agreed to indemnify and hold the Trustee and the
Certificate Insurer harmless against any and all claims, losses, penalties,
fines, forfeitures, legal fees and related costs, judgments, and any other
costs, fees and expenses that the Trustee and the Certificate Insurer may
sustain in any way related to the failure of the Servicer to perform its duties
and service the Home Equity Loans in compliance with the terms of the Agreement
except as may be limited in the Agreement. The Servicer shall immediately notify
the Trustee and the Certificate Insurer if a claim is made by a third party
arising out of or based upon the alleged actions or alleged failure of the
Servicer to perform its duties and service the Home Equity Loans in compliance
with the terms of the Agreement, and the Servicer shall assume the defense of
any claim and pay all expenses in connection with any claim, including
reasonable counsel fees, and promptly pay, discharge and satisfy any judgment or
decree which may be entered against the Servicer, the Trustee and/or the
Certificate Insurer in respect of the claim. The Trustee shall reimburse the
Servicer from amounts otherwise distributable on the Nonoffered Certificates for
all amounts advanced by it pursuant to the preceding sentence, except when a
final nonappealable adjudication determines that the claim relates directly to
the failure of the Servicer to perform its duties in compliance with the
Agreement. The indemnification provisions shall survive the termination of the
Agreement and the payment of the outstanding Certificates.
The Servicer will be required to deliver to the Trustee, the Certificate
Insurer, and the Rating Agencies on or before April 15 of each year, commencing
in ____:
(1) an officers' certificate stating, as to each signer of the certificate,
that
(x) a review of the activities of the Servicer during the preceding
calendar year and of performance under the Agreement has been made under the
officers' supervision, and
(y) to the best of the officers' knowledge, based on this review, the
Servicer has fulfilled all its obligations under the Agreement for the year, or,
if there has been a default in the fulfillment of any obligation, specifying
each default known to the officers and the nature and status of the default
including the steps being taken by the Servicer to remedy the default and
(2) a letter or letters of a firm of independent, nationally recognized
certified public accountants reasonably acceptable to the Certificate Insurer
stating that the firm has examined the Servicer's overall servicing operations
in accordance with the requirements of the Uniform Single Attestation Program
for Mortgage Bankers, and stating the firm's conclusions relating to the
examination.
REMOVAL AND RESIGNATION OF SERVICER
The Certificate Insurer, or, the Owners, with the consent of the
Certificate Insurer, will have the right, pursuant to the Agreement, to remove
the Servicer upon the occurrence of particular events (collectively, the
"Servicer Termination Events") including, without limitation:
o specific acts of bankruptcy or insolvency on the part of the Servicer;
o specific failures on the part of the Servicer to perform its
obligations under the Agreement, including particular performance
tests related to the delinquency rate and cumulative losses of the
Home Equity Loans;
o the failure to cure material breaches of the Servicer's
representations in the Agreement; or
o other events specified in the Agreement. In addition, under some
circumstances, the Certificate Insurer may remove the Servicer,
without cause.
The holder of the related Class X Certificate, with the prior written
consent of the Certificate Insurer will have the right, pursuant to the
Agreement to appoint a special servicer for any Home Equity Loans that are 90 or
more days delinquent.
The Servicer is not permitted to resign from the obligations and duties
imposed on it under the Agreement except upon (a) determination that its duties
under the Agreement are no longer permissible under applicable law or are in
material conflict by reason of applicable law with any other activities carried
on by it, the other activities of the Servicer so causing the conflict being of
a type and nature carried on by the Servicer on the date of the Agreement or (b)
with the Trustee's and the Certificate Insurer's, so long as no Certificate
Insurer Default exists, prior written consent. Any determination permitting the
resignation of the Servicer due to conflicts with applicable law is required to
be evidenced by an opinion of counsel which shall be delivered, and reasonably
acceptable, to the Trustee and the Certificate Insurer.
Upon removal or resignation of the Servicer, the Trustee (A) if the
Certificate Insurer removes the Servicer as described above, shall solicit bids
for a successor servicer as described in the Agreement and (B) until the time a
successor servicer is appointed pursuant to the terms of the Agreement, shall
serve in the capacity of successor Servicer. The Certificate Insurer may appoint
a successor Servicer other than the Trustee. If the Certificate Insurer does not
appoint a successor Servicer, the Trustee, if it is unable to obtain a
qualifying bid and is prevented by law from acting as servicer, will be required
to appoint, or petition a court of competent jurisdiction to appoint, any
housing and home finance institution, bank or mortgage servicing institution
designated as an approved seller-servicer by Freddie Mac or Fannie Mae, having
net equity of not less than $5,000,000, and acceptable to the Certificate
Insurer, as the successor to the Servicer in the assumption of all or any part
of the responsibilities, duties or liabilities of the Servicer. Any net proceeds
from the sale of the servicing rights after expenses of the sale and the
transfer of servicing, shall belong to the predecessor servicer.
No removal or resignation of the Servicer will become effective until the
Trustee or another successor Servicer, acceptable to the Certificate Insurer,
shall have assumed the Servicer's responsibilities and obligations in accordance
with the Agreement.
REPORTING REQUIREMENTS
On each Distribution Date the Trustee will be required to report in
writing, based on information provided to the Trustee by the Servicer, to each
Owner, the Rating Agencies and the Certificate Insurer:
o the amount of the principal and interest distribution with respect to
each class of Offered Certificates, based on a Certificate in the
original principal amount or notional amount of $1,000;
o the amount of the distributions allocable to principal on each of the
Group Ia Home Equity Loans, Group Ib Home Equity Loans, Group IIa Home
Equity Loans and Group IIb Home Equity Loans, separately identifying
the aggregate amount of any Prepayments in full or other recoveries of
principal included, based on a Certificate in the original principal
amount of $1,000, and any Subordination Increase Amount;
o the amount of the distribution allocable to interest on each of the
Group Ia Home Equity Loans, Group Ib Home Equity Loans, Group IIa Home
Equity Loans and Group IIb Home Equity Loans, based on a Certificate
in the original principal amount of $1,000;
o if the distribution, net of any Insured Payment, to the Owners of any
Class of the Offered Certificates on the Distribution Date was less
than the related Class A or Class B Distribution Amounts on the
Distribution Date, the related Carry-Forward Amount resulting;
o the amount of any Insured Payment included in the amounts distributed
to the Owners of Class A Certificates and Class A-IO Certificates on
the Distribution Date;
o the Certificate Principal Balance or Notional Amount of each class of
Offered Certificate, based on a Certificate in the original principal
amount or notional amount of $1,000, which will be outstanding after
giving effect to any payment of principal on the Distribution Date;
o the Subordinated Amount, Class B Subordinated Amount, Specified
Subordinated Amount and Subordination Deficit of each Home Equity Loan
Group, if any, remaining after giving effect to all distributions and
transfers on the Distribution Date;
o the aggregate Loan Balance of all Home Equity Loans and the aggregate
Loan Balance of the Home Equity Loans in each Home Equity Loan Group,
in each case with respect to the Distribution Date;
o the total of any Substitution Amounts or Loan Purchase Price amounts
included in the distribution;
o the weighted average Coupon Rate of the Home Equity Loans in each Home
Equity Loan Group and in the aggregate;
o other information reasonably requested by the Certificate Insurer or
any Owner with respect to delinquent Home Equity Loans;
o the three largest Loan Balances in each Home Equity Loan Group;
o the Certificate Rate on the Class A-3A, Class A-4A, Class A-5A, Class
B-1F Component and Class B-1A Component Certificates; and
o the Loan Balance of the 2/28 Adjustable Rate Loans and the 3/27
Adjustable Rate Loans in each Home Equity Loan Group (the "Aggregate
Hybrid Loan Balance").
Some obligations of the Trustee to provide information to the Owners are
conditioned upon the information being received from the Servicer.
In addition, on each Distribution Date the Trustee will be required to
distribute to each Owner, the Certificate Insurer and the Rating Agencies,
together with the information described above, the following information
prepared by the Servicer and furnished to the Trustee:
(1) the number and aggregate principal balances of Home Equity Loans,
(a) 30-59 days delinquent,
(b) 60-89 days delinquent,
(c) 90 or more days delinquent, as of the close of business on the
last Business Day of the calendar month immediately preceding the
Distribution Date,
(d) the number and aggregate principal balances of all Home Equity
Loans, as of the close of business on the last day of the Due Period
immediately preceding the Distribution Date, and
(e) the percentage that each of the amounts represented by clauses
(a), (b) and (c) represent as a percentage of the respective amounts
in clause (d);
(2) the status and the number and dollar amounts of all Home Equity Loans
in foreclosure proceedings as of the close of business on the last
Business Day of the calendar month immediately preceding the
Distribution Date;
(3) the number of Mortgagors and the Loan Balances of,
(a) the related Mortgages involved in bankruptcy proceedings as of the
close of business on the last Business Day of the calendar month
immediately preceding the Distribution Date and
(b) Home Equity Loans that are "balloon" loans;
(4) the existence and status of any Mortgaged Properties as to which title
has been taken in the name of, or on behalf of the Trustee, as of the
close of business of the last Business Day of the calendar month
immediately preceding the Distribution Date;
(5) the book value of any real estate acquired through foreclosure or
grant of a deed in lieu of foreclosure as of the close of business on
the last Business Day of the calendar month immediately preceding the
Distribution Date;
(6) the cumulative Realized Losses incurred on the Home Equity Loans from
the Closing Date to and including the Prepayment Period immediately
preceding the Distribution Date; and
(7) the amount of Net Liquidation Proceeds realized on the Home Equity
Loans during the Prepayment Period immediately preceding the
Distribution Date.
REMOVAL OF TRUSTEE FOR CAUSE
The Trustee may be removed upon the occurrence of any one of the following
events, whatever the reason for the event and whether it shall be voluntary or
involuntary or be effected by operation of law or pursuant to any judgment,
decree or order of any court or any order, rule or regulation of any
administrative or governmental body, on the part of the Trustee:
o failure to make distributions of available amounts;
o breaches of covenants and representations by the Trustee;
o specific acts of bankruptcy or insolvency on the part of the Trustee;
or
o failure to meet the standards of Trustee eligibility as set forth in
the Agreement.
If any of these events occurs and is continuing, then and in every case (1)
the Certificate Insurer or (2) with the prior written consent of the Certificate
Insurer, the Depositor and the Owners of a majority of the Percentage Interests
represented by the Offered Certificates or, if there are no Offered Certificates
then outstanding, by a majority of the Percentage Interests represented by the
Class X Certificates, may appoint a successor trustee.
GOVERNING LAW
The Agreement and each Certificate will be construed in accordance with and
governed by the laws of the State of New York applicable to agreements made and
to be performed.
AMENDMENTS
The Trustee, the Depositor, and the Servicer with the consent of the
Certificate Insurer may, at any time and from time to time and without notice to
or the consent of the Owners, amend the Agreement, and the Trustee will be
required to consent to the amendment, for the purposes of
(1) if accompanied by an approving REMIC Opinion of counsel experienced in
federal income tax matters, removing the restriction against the
transfer of a Class R Certificate to a Disqualified Organization (as
the term is defined in the Code),
(2) complying with the requirements of the Code including any amendments
necessary to maintain REMIC status,
(3) curing any ambiguity,
(4) correcting or supplementing any provisions in the Agreement which are
inconsistent with any other provisions in the Agreement, or
(5) for any other purpose, provided that in the case of this clause (5),
(A) the party requesting the amendment delivers an opinion of counsel
acceptable to the Trustee that the amendment will not adversely
affect in any material respect the interest of the Owners and
(B) the amendment will not result in a withdrawal or reduction of the
rating of the Offered Certificates without regard to the
Policies.
Notwithstanding anything to the contrary, no amendment shall (a) change in
any manner the amount of, or delay the timing of, payments which are required to
be distributed to any Owner without the consent of the Owner of the Certificate
or (b) change the percentages of Percentage Interest which are required to
consent to any amendments, without the consent of the Owners of all Certificates
of the Class or Classes affected then Outstanding; provided that the Trustee
will not be required to consent to any amendment which would adversely affect
its interests under the Agreement.
The Trustee will be required to furnish written notification of the
substance of any amendment to each Owner in the manner set forth in the
Agreement.
The Certificate Insurer may change the required level of subordination for
any Home Equity Loan Group without the consent of any Owners.
CERTAIN LEGAL ASPECTS OF THE HOME EQUITY LOANS
The following discussion contains summaries of some legal aspects of
mortgage loans which are general in nature. Because the legal aspects are
governed by applicable state law, which laws may differ substantially, the
summaries do not purport to be complete nor to reflect the laws of any
particular state, nor to encompass the laws of all states in which the security
for the Home Equity Loans is situated. The summaries are qualified in their
entirety by reference to the applicable federal and state laws governing the
Home Equity Loans and to information in the prospectus under the heading
"CERTAIN LEGAL ASPECTS OF THE MORTGAGE LOANS AND CONTRACTS."
LIENS ON MORTGAGED PROPERTIES
The Home Equity Loans will be secured by either first mortgages or deeds of
trust, depending upon the prevailing practice in the state in which the
underlying property is located. In California, for example, mortgage loans are
secured by deeds of trust. The filing of a mortgage, deed of trust or deed to
secure debt creates a lien or title interest upon the real property covered by
the instrument and represents the security for the repayment of an obligation
that is customarily evidenced by a promissory note.
WE REFER YOU TO "CERTAIN LEGAL ASPECTS OF THE MORTGAGE LOANS AND
CONTRACTS--THE MORTGAGE LOANS" IN THE PROSPECTUS FOR MORE DETAIL.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
Some states (including California) have imposed statutory restrictions that
limit the remedies of a beneficiary under a deed of trust or a mortgagee under a
mortgage. In some states (including California), statutes limit the right of the
beneficiary or mortgagee to obtain a deficiency judgment against the borrower
following foreclosure or a non-judicial sale under a deed of trust. A deficiency
judgment is a personal judgment against the former borrower equal in most cases
to the difference between the amount due to the lender and the net amount
realized upon the foreclosure sale. Other statutes prohibit a deficiency
judgment where the loan proceeds were used to purchase a dwelling occupied by
the borrower.
WE REFER YOU TO "CERTAIN LEGAL ASPECTS OF THE MORTGAGE LOANS AND
CONTRACTS--THE MORTGAGE LOANS--ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS
ON LENDERS " IN THE PROSPECTUS FOR MORE DETAIL.
ENFORCEABILITY OF CERTAIN PROVISIONS
Courts (including California courts) have imposed general equitable
principles upon foreclosure. These equitable principles are generally designed
to relieve the borrower from the legal effect of defaults under the loan
documents. Examples of judicial remedies that may be fashioned include judicial
requirements that the lender undertake affirmative and sometimes expensive
actions to determine the causes for the borrower's default and the likelihood
that the borrower will be able to reinstate the loan. In some cases, including
cases in California, courts have substituted their judgment for the lender's
judgment and have required lenders to reinstate loans or recast payment
schedules to accommodate borrowers who are suffering from temporary financial
disability.
WE REFER YOU TO "CERTAIN LEGAL ASPECTS OF THE MORTGAGE LOANS AND
CONTRACTS--THE MORTGAGE LOANS--ENFORCEABILITY OF CERTAIN PROVISIONS" IN THE
PROSPECTUS FOR MORE DETAIL.
FEDERAL INCOME TAX CONSEQUENCES
The following section in conjunction with the section in the prospectus
captioned "FEDERAL INCOME TAX CONSEQUENCES" discusses the material federal
income tax consequences of the purchase, ownership and disposition of the
Offered Certificates. This section must be considered only in connection with
"FEDERAL INCOME TAX CONSEQUENCES" in the prospectus. The discussion in this
prospectus supplement and in the prospectus is based upon laws, regulations,
rulings and decisions now in effect, all of which are subject to change. The
discussion below and in the prospectus does not purport to deal with all federal
tax consequences applicable to all categories of investors, some of which may be
subject to special rules. Investors should consult their own tax advisors in
determining the federal, state, local and any other tax consequences to them of
the purchase, ownership and disposition of the Offered Certificates. No portion
of the "FEDERAL INCOME TAX CONSEQUENCES" section of the prospectus or prospectus
supplement constitutes an opinion of counsel, other than the opinion set forth
in the second paragraph of "--REMIC ELECTIONS" below and in clause (2) of
"FEDERAL INCOME TAX CONSEQUENCES--OPINIONS" in the prospectus.
REMIC ELECTIONS
An election will be made to treat specific assets of the Trust, exclusive
of the LIBOR Carryover Funds and the Cap Reserve Fund, as "real estate mortgage
investment conduits" ("REMICs") for federal income tax purposes, creating a
four-tiered REMIC structure. The Offered Certificates will be designated as
regular interests in a REMIC (the "Regular Certificates" or the "REMIC Regular
Certificates"), and the Class R Certificates will be designated as the residual
interest in each REMIC (the "Residual Certificates" or the "REMIC Residual
Certificates").
Qualification as a REMIC requires ongoing compliance with particular
conditions. Stroock & Stroock & Lavan LLP, special tax counsel to the Seller and
the Depositor, is of the opinion that, for federal income tax purposes, assuming
(1) the appropriate REMIC elections are made, and (2) compliance with all of the
provisions of the Agreement, the REMICs formed pursuant to the Agreement will
each constitute a REMIC, the Offered Certificates will be considered "regular
interests" in a REMIC, and the Class R Certificates will be considered the sole
class of "residual interests" in each REMIC.
Because the REMIC Regular Certificates will be considered REMIC regular
interests, they generally will be taxable as debt obligations under the Internal
Revenue Code of 1986, as amended (the "Code"), and interest paid or accrued on
the Regular Certificates, including original issue discount with respect to any
Regular Certificates issued with original issue discount, will be taxable to
Certificateholders in accordance with the accrual method of accounting. Some or
all of the Classes of Regular Certificates may be subject to the original issue
discount provisions.
WE REFER YOU TO "FEDERAL INCOME TAX CONSEQUENCES" IN THE PROSPECTUS FOR
MORE DETAIL.
In addition, some Classes of Regular Certificates may be treated as issued
with a premium.
WE REFER YOU TO "FEDERAL INCOME TAX CONSEQUENCES" IN THE PROSPECTUS FOR
MORE DETAIL.
The prepayment assumption that will be used in determining the rate of
accrual of original issue discount is 100% of the Prepayment Assumption with
respect to the Group I Home Equity Loans, 30% CPR with respect to the Group II
Home Equity Loans. See "Prepayment and Yield Considerations" in this prospectus
supplement for a description of the prepayment assumption model. However, no
representation is made as to the rate at which prepayments actually will occur.
The Offered Certificates will be treated as assets described in Section
7701(a)(19)(C) of the Code for domestic building and loan associations, and
"real estate assets" for real estate investment trusts (REITs), subject to the
limitations described in "Federal Income Tax Consequences" in the prospectus.
Similarly, interest on the Offered Certificates will be considered "interest on
obligations secured by mortgages on real property" for REITs, subject to the
limitations described in "Federal Income Tax Consequences" in the prospectus.
CERTIFICATEHOLDERS' INTEREST INDEX CARRYOVER AND CAP RESERVE FUND
The beneficial owners of the Certificates will be treated for tax purposes
as owning two separate assets: (a) the respective Certificates without the
rights to receive funds from the Cap Reserve Fund and Certificateholders'
Interest Index Carryover, which constitute regular interests in a REMIC, and (b)
the rights to receive funds from the Cap Reserve Fund and in the case of
adjustable rate Certificates, Certificateholders' Interest Index Carryover.
Accordingly, a purchaser of a Certificate must allocate its purchase price
between the assets comprising the related Certificate. In general, the
allocation would be based on the relative fair market values of the assets on
the date of purchase of the Certificates. No representation is or will be made
as to the relative fair market values. We recommend that all holders of
adjustable rate Certificates consult their tax advisors regarding the taxation
of funds from the Cap Reserve Fund and Certificateholders' Interest Index
Carryover, which is generally governed by the provisions of the Code and
Treasury regulations relating to notional principal contracts and possibly those
relating to straddles. The rights to receive funds from the Cap Reserve Fund and
Certificateholders' Interest Index Carryover will not constitute:
(a) a "real estate asset" within the meaning of section 856(c)(4)(A) of the
Code for a real estate investment trust;
(b) a "qualified mortgage" or a "permitted investment" within the meaning
of section 860G(a)(3) and section 860G(a)(5), respectively, of the Code if held
by a REMIC; or
(c) an asset described in section 7701(a)(19)(C)(xi) of the Code if held by
a domestic building and loan association.
Further, funds from the Cap Reserve Fund and the Certificateholders' Interest
Index Carryover will not constitute income described in section 856(c)(3)(B) of
the Code for a real estate investment trust. Moreover, other special rules may
apply to particular investors, including dealers in securities and dealers in
notional principal contracts.
CERTAIN STATE TAX CONSIDERATIONS
Because the income tax laws of the states vary, it is impractical to
predict the income tax consequences to the Certificateholders in all of the
state taxing jurisdictions in which they are subject to tax. Certificateholders
are urged to consult their own tax advisors with respect to state and local
income and franchise taxes.
ERISA CONSIDERATIONS
A fiduciary of a pension, profit-sharing, retirement or other employee
benefit plan subject to Title I of the Employee Retirement Income Security Act
of 1974, as amended ("ERISA"), should consider the fiduciary standards under
ERISA in the context of the plan's particular circumstances before authorizing
an investment of a portion of the plan's assets in the Class A or Class A-IO
Certificates. Accordingly, pursuant to Section 404 of ERISA, the fiduciary
should consider among other factors:
o whether the investment is for the exclusive benefit of plan
participants and their beneficiaries;
o whether the investment satisfies the applicable diversification
requirements;
o whether the investment is in accordance with the documents and
instruments governing the plan; and
o whether the investment is prudent, considering the nature of the
investment.
Fiduciaries of plans also should consider ERISA's prohibition on improper
delegation of control over, or responsibility for, plan assets.
In addition, benefit plans subject to ERISA, as well as individual
retirement accounts or specific types of Keogh plans not subject to ERISA but
subject to Section 4975 of the Code and any entity whose source of funds for the
purchase of Class A or Class A-IO Certificates includes plan assets by reason of
a plan or account investing in the entity (each, a "Plan"), are prohibited from
engaging in a broad range of transactions involving Plan assets and persons
having specified relationships to a Plan ("parties in interest" and
"disqualified persons"). The transactions are treated as "prohibited
transactions" under Sections 406 and 407 of ERISA and excise taxes are imposed
upon the persons by Section 4975 of the Code.
An investment in Class A or Class A-IO Certificates by a Plan might result
in the assets of the Trust being deemed to constitute Plan assets, which in turn
might mean that some aspects of the investment, including the operation of the
Trust, might be prohibited transactions under ERISA and the Code. Neither ERISA
nor the Code defines the term "plan assets." Under Section 2510.3- 101 of the
United States Department of Labor ("DOL") regulations (the "Regulation"), a
Plan's assets may include an interest in the underlying assets of an entity,
including the trust, for particular purposes, including the prohibited
transaction provisions of ERISA and the Code, if the Plan acquires an "equity
interest" in the entity, unless particular exceptions apply. The Depositor
believes that the Class A Certificates and Class A-IO Certificates will give
Certificateholders an equity interest in the Trust for purposes of the
Regulation and can give no assurance that the Class A Certificates and Class
A-IO Certificates will qualify for any of the exceptions under the Regulation.
As a result, the assets of the Trust may be considered the assets of any Plan
which acquires a Class A or Class A-IO Certificate.
The DOL has granted to Credit Suisse First Boston Corporation an
administrative exemption (Prohibited Transaction Exemption ("PTE") 89-90; 54
Fed. Reg. 42,597 (Oct. 17, 1989)(as amended by PTE 97-34; 62 Fed. Reg. 39,021
(July 21, 1997) (the "Exemption") from some of the prohibited transaction rules
of ERISA which may be applicable to the initial purchase, the holding and the
subsequent resale in the secondary market by Plans of pass-through certificates
representing a beneficial undivided ownership interest in the assets of a trust
that consist of specific receivables, loans and other obligations that meet the
conditions and requirements of the Exemption which may be applicable to the
Class A Certificates and Class A-IO Certificates if Credit Suisse First Boston
Corporation or any of its affiliates is either the sole underwriter or manager
or co-manager of the underwriting syndicate, or a selling or placement agent.
The conditions which must be satisfied for the Exemption to apply to the
purchase, holding and transfer of the Class A Certificates and Class A-IO
Certificates are set forth under "ERISA CONSIDERATIONS" in the prospectus.
The Exemption does not apply to Plans sponsored by the Originators, the
Depositor, the Certificate Insurer, the Underwriters, the Trustee, the Servicer
or any Mortgagor with respect to Home Equity Loans included in the Trust
constituting more than 5% of the aggregate unamortized principal balance of the
assets in the Trust or any affiliate of the parties (the "Restricted Group"). No
exemption is provided from the restrictions of ERISA for the acquisition or
holding of Class A Certificates and Class A-IO Certificates on behalf of an
"Excluded Plan" by any person who is a fiduciary with respect to the assets of
the Excluded Plan. For purposes of the Class A Certificates and Class A-IO
Certificates, an Excluded Plan is a Plan sponsored by any member of the
Restricted Group. In addition, no Plan's investment in any class of Class A or
Class A-IO Certificates may exceed 25% of all of the Certificates of the Class
outstanding at the time of the Plan's acquisition and after the Plan's
acquisition of the class of Class A or Class A-IO Certificates, no more than 25%
of the assets over which the fiduciary has investment authority may be invested
in securities of a trust containing assets which are sold or serviced by the
same entity. Finally, in the case of initial issuance, but not secondary market
transactions, at least 50% of each class of Class A Certificates and Class A-IO
Certificates, and at least 50% of the aggregate interest in the Trust, must be
acquired by persons independent of the Restricted Group.
The Depositor believes that the Exemption will apply to the acquisition,
holding and resale of the Class A Certificates and Class A-IO Certificates by a
Plan and that all conditions of the Exemption other than those within the
control of the investors have been or will be met.
WE REFER YOU TO "ERISA CONSIDERATIONS" IN THE PROSPECTUS FOR MORE DETAIL.
Before purchasing a Class A or Class A-IO Certificate, a fiduciary of a
Plan should itself confirm (a) that the Class A Certificates and Class A-IO
Certificates constitute "certificates" for purposes of the Exemption and (b)
that the specific conditions set forth in the Exemption and the other
requirements set forth in the Exemption will be satisfied.
As the Class B-1 Certificates are subordinate, the Exemption will not be
applicable to the sale, purchase or holding of the Class B-1 Certificates.
However, the Class B-1 Certificates may be purchased by an "insurance company
general account" within the meaning of Section V(e) of Prohibited Transaction
Class Exemption 95-60, 60 Fed. Reg. 35925 (July 12, 1995) but may not otherwise
be purchased by or on behalf of other plans.
Any Plan fiduciary considering whether to purchase a Class A, Class A-IO or
Class B-1 Certificate on behalf of a Plan should consult with its counsel
regarding the applicability of the fiduciary responsibility and prohibited
transaction provisions of ERISA and the Code to the investment.
LEGAL INVESTMENT CONSIDERATIONS
The Class A Certificates and Class A-IO Certificates will constitute
"mortgage related securities" for purposes of the Secondary Mortgage Market
Enhancement Act of 1984 ("SMMEA") so long as they are rated in one of the two
highest rating categories by at least one nationally recognized statistical
rating organization. See "LEGAL INVESTMENT" in the prospectus.
UNDERWRITING
Subject to the terms and conditions set forth in the underwriting
agreement, dated ____ (the "Underwriting Agreement"), between the Depositor and
Credit Suisse First Boston Corporation (the "Underwriter") the Depositor has
agreed to sell to the Underwriter and the Underwriter has agreed to purchase
from the Depositor the Offered Certificates.
The Depositor has been advised that the Underwriter proposes initially to
offer the Offered Certificates to the public from time to time in negotiated
transactions, at prices determined at the time of sale. The Underwriter may
effect the transactions by selling Offered Certificates to or through dealers
and the dealers may receive compensation in the form of underwriting discounts,
concessions or commissions from the Underwriter and any purchasers of Offered
Certificates for whom they may act as agents. The Underwriter and any dealers
that participate with the Underwriter in the distribution of the Offered
Certificates may be deemed to be underwriters, and any discounts or commissions
received by them and any profit on the resale of Offered Certificates by them
may be deemed to be underwriting discounts or commissions received by them and
any profit on the resale of Offered Certificates by them may be deemed to be
underwriting discounts or commissions under the Securities Act of 1933, as
amended (the "Securities Act").
The Offered Certificates are a new issue of securities with no established
trading market. The Trust has been advised by the Underwriter that it intends to
make a market in the Offered Certificates, but the Underwriter is not obligated
to make a market and may discontinue market making at any time without notice.
No assurance can be given as to the liquidity of the trading market for the
Offered Certificates.
The Underwriting Agreement provides that the Depositor will indemnify the
Underwriter against some civil liabilities, including liabilities under the
Securities Act.
Each of the Seller and the Depositor is an affiliate of the Underwriter.
EXPERTS
The consolidated balance sheets of [_________________________] dated as of
____ and ____ 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 ____, incorporated by reference in this prospectus supplement, have been
incorporated in this prospectus supplement in reliance on the report of ____,
independent accountants, given on the authority of that firm as experts in
accounting and auditing.
LEGAL MATTERS
Some legal matters with respect to the Offered Certificates will be passed
upon for the Depositor and the Underwriter by Stroock & Stroock & Lavan LLP, New
York, New York.
RATINGS
It is a condition to the issuance of the Class A Certificates that they
receive ratings of "AAA" by Standard & Poor's Ratings Services, a division of
The McGraw-Hill Companies, Inc. ("S&P") and Duff & Phelps Credit Rating Co.
("Duff") and "Aaa" by Moody's Investors Service, Inc. ("Moody's"). It is a
condition to the issuance of the Class A-IO Certificates that they receive
ratings of "AAAr" by S&P, "Aaa" by Moody's and "AAA" by Duff. It is a condition
to the issuance of the Class B-1 Certificates that they receive ratings of "BBB"
by Duff and "Baa3" by Moody's. S&P, Moody's and Duff are together referred to as
the "Rating Agencies."
A securities rating addresses the likelihood of the receipt by Offered
Certificateholders of distributions on the Home Equity Loans. The rating takes
into consideration the characteristics of the Home Equity Loans and the
structural, legal and tax aspects associated with the Offered Certificates. The
ratings on the Offered Certificates do not, however, constitute statements
regarding the likelihood or frequency of prepayments on the Home Equity Loans,
the likelihood of payment of any Certificateholders' Interest Index Carryovers
or the possibility that Offered Certificateholders might realize a lower than
anticipated yield.
The ratings assigned to the Class A Certificates and Class A-IO
Certificates will depend primarily upon the creditworthiness of the Certificate
Insurer. Any reduction in a rating assigned to the claims-paying ability of the
Certificate Insurer below the ratings initially assigned to the Class A
Certificates and Class A-IO Certificates may result in a reduction of one or
more of the ratings assigned to the Class A Certificates and Class A-IO
Certificates.
A securities rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning rating
organization. Each securities rating should be evaluated independently of
similar ratings on different securities.
<PAGE>
INDEX OF DEFINED TERMS
TERMS PAGE
______....................................................................S-15
______ Underwriting Guidelines............................................S-17
2/28 Adjustable Rate Loans................................................S-33
270-Day Delinquency Amount................................................S-78
3/27 Adjustable Rate Loans................................................S-33
Aggregate Hybrid Loan Balance.............................................S-98
Aggregate Principal Balance...............................................S-63
Agreement.................................................................S-61
Appraised Values..........................................................S-18
Available Funds...........................................................S-71
Available Funds Cap.......................................................S-80
Available LIBOR Carryover Amount..........................................S-71
Balloon Loans.............................................................S-54
Book-Entry Certificates...................................................S-63
Business Day..............................................................S-67
Cap Agreement.............................................................S-92
Cap Reserve Fund..........................................................S-92
Cap Reserve Fund Release Date.............................................S-93
Carry-Forward Amount......................................................S-72
Cede......................................................................S-64
Clearstream, Luxembourg Participants......................................S-64
Certificate Account.......................................................S-67
Certificate Insurer.......................................................S-63
Certificate Insurer Default...............................................S-72
Certificate Principal Balance.............................................S-63
Certificate Rate..........................................................S-79
Certificate Register......................................................S-67
Certificate Registrar.....................................................S-67
Certificateholder.........................................................S-63
Certificateholders' Interest Index Carryover..............................S-80
Certificateowners.........................................................S-63
Certificates..............................................................S-62
Civil Relief Interest Shortfalls..........................................S-76
Class A Distribution Amount...............................................S-72
Class A Principal Distribution Amount.....................................S-72
Class A Subordination Increase Amount.....................................S-73
Class A-1F Certificates...................................................S-62
Class A-1F Principal Distribution Amount..................................S-73
Class A-2F Certificates...................................................S-62
Class A-2F Principal Distribution Amount..................................S-74
Class A-3A Certificates...................................................S-62
Class A-3A Formula Rate...................................................S-79
Class A-3A Principal Distribution Amount..................................S-74
Class A-4A Certificates...................................................S-62
Class A-4A Formula Rate...................................................S-79
Class A-4A Principal Distribution Amount..................................S-75
Class A-5A Certificates...................................................S-62
Class A-5A Formula Rate...................................................S-79
Class A-5A Principal Distribution Amount..................................S-75
Class AI Certificates.....................................................S-62
Class AII Certificates....................................................S-62
Class A-IO Certificates...................................................S-62
Class A-IOA Component Certificate.........................................S-62
Class A-IOF Component Certificate.........................................S-62
Class B Component Distribution Amount.....................................S-75
Class B Component Principal Distribution Amount...........................S-76
Class B Subordinated Amount...............................................S-52
Class B-1 Certificates....................................................S-62
Class B-1A Component Certificate..........................................S-62
Class B-1A Component Formula Rate.........................................S-80
Class B-1F Component Certificate..........................................S-62
Class B-1F Component Formula Rate.........................................S-79
Class B-IOA Certificates..................................................S-62
Class B-IOF Certificates..................................................S-62
Class P-A Certificates....................................................S-62
Class P-F Certificates....................................................S-62
Class R Certificates......................................................S-62
Class X Certificates......................................................S-62
Class X-A Certificates....................................................S-62
Class X-F Certificates....................................................S-62
Closing Date Deposits.....................................................S-52
Compensating Interest.....................................................S-95
Compensating Interest Default Amount......................................S-76
Cooperative...............................................................S-66
Coupon Rate...............................................................S-19
CPR.......................................................................S-54
Current Interest..........................................................S-76
Custodian.................................................................S-90
Cut-Off Date Loan Balance.................................................S-18
Daily Collections.........................................................S-94
Deficiency Amount.........................................................S-87
Definitive Certificate....................................................S-63
Delinquency Advances......................................................S-94
Delinquency Amount........................................................S-76
Delinquency Percentage....................................................S-76
Depositary Services.......................................................S-67
Depositor.................................................................S-61
disqualified persons.....................................................S-103
Distribution Date.........................................................S-67
DOL......................................................................S-103
DTC.......................................................................S-64
DTC Participants..........................................................S-64
Due Period................................................................S-76
Duff.....................................................................S-105
equity interest..........................................................S-103
ERISA....................................................................S-103
Euroclear.................................................................S-63
Euroclear Operator........................................................S-65
Euroclear Participants....................................................S-64
Excess Subordinated Amount................................................S-82
Exemption................................................................S-103
Expense Fee...............................................................S-68
Final Certification.......................................................S-92
Final Scheduled Distribution Date.........................................S-84
Fiscal Agent..............................................................S-87
Group I...................................................................S-63
Group I Certificates......................................................S-62
Group I Home Equity Loans.................................................S-19
Group Ia Home Equity Loans................................................S-19
Group Ib Home Equity Loans................................................S-26
Group II..................................................................S-63
Group II Certificates.....................................................S-62
Group II Home Equity Loans................................................S-33
Group IIa Home Equity Loans...............................................S-33
Group IIb Home Equity Loans...............................................S-43
Group Principal Distribution Amount.......................................S-77
Guaranteed Principal Amount...............................................S-88
Home Equity Loan Group....................................................S-18
Home Equity Loans.........................................................S-18
Indirect DTC Participants.................................................S-64
Insured Payment...........................................................S-88
Interest Period...........................................................S-81
LIBOR Carryover Fund......................................................S-92
LIBOR Carryover Fund Deposit..............................................S-77
LIBOR Determination Date..................................................S-81
Liquidated Loan...........................................................S-83
Loan Balance..............................................................S-18
Loan Purchase Agreement...................................................S-61
Loan Purchase Price.......................................................S-90
London business day.......................................................S-81
Maximum Rates.............................................................S-33
Minimum Rates.............................................................S-33
Minimum Spread............................................................S-80
Monthly Remittance Date...................................................S-77
Moody's..................................................................S-105
Mortgaged Properties......................................................S-18
Net Coupon Rate...........................................................S-80
Net Liquidation Proceeds..................................................S-94
Net Monthly Excess Cashflow...............................................S-77
Notes.....................................................................S-18
Notice....................................................................S-88
Notional Amount...........................................................S-63
Notional Amount Certificates..............................................S-62
Offered Certificates......................................................S-62
One-Month LIBOR...........................................................S-81
Original Loan-to-Value Ratio..............................................S-18
Owner.....................................................................S-64
Participants..............................................................S-63
parties in interest......................................................S-103
Percentage Interest.......................................................S-68
Plan.....................................................................S-103
plan assets..............................................................S-103
Policies..................................................................S-63
Preference Amount.........................................................S-88
Premium Amount............................................................S-68
Prepayment Assumption.....................................................S-54
Prepayment Period.........................................................S-78
Prepayments...............................................................S-52
Preservation Expenses.....................................................S-95
Principal and Interest Account............................................S-93
Principal Carryover Shortfall.............................................S-78
prohibited transactions..................................................S-103
PTE......................................................................S-103
Qualified Replacement Mortgage............................................S-89
Rating Agencies..........................................................S-105
Realized Loss.............................................................S-83
Record Date...............................................................S-67
Reference Banks...........................................................S-81
Regular Certificates.....................................................S-101
Regulation...............................................................S-103
Related Principal Carryover Shortfall.....................................S-78
REMIC Opinion.............................................................S-90
REMIC Regular Certificates...............................................S-101
REMICs...................................................................S-101
Residual Certificates....................................................S-101
Responsible Party.........................................................S-89
S&P......................................................................S-105
Senior Enhancement Percentage.............................................S-78
Servicer..................................................................S-15
Servicer Termination Events...............................................S-97
Servicing Advances........................................................S-95
Six-Month Adjustable Rate Loans...........................................S-33
Six-Month LIBOR...........................................................S-55
SMMEA....................................................................S-104
Specified Subordinated Amount.............................................S-82
Stepdown Date.............................................................S-78
Structuring Assumptions...................................................S-55
Subordinated Amount.......................................................S-82
Subordinated Offered Certificates.........................................S-62
Subordination Deficit.....................................................S-83
Subordination Increase Amount.............................................S-82
Subordination Reduction Amount............................................S-83
Sub-Servicers.............................................................S-96
Sub-Servicing Agreements..................................................S-96
Substitution Amount.......................................................S-89
Systems...................................................................S-67
Telerate Page 3750........................................................S-81
Termination Price.........................................................S-85
Terms and Conditions......................................................S-66
Total Available Funds.....................................................S-78
Total Monthly Excess Cashflow.............................................S-68
Total Monthly Excess Spread...............................................S-78
Trigger Event.............................................................S-78
Trust.....................................................................S-61
Trust Estate..............................................................S-61
Trustee...................................................................S-61
Trustee Fee...............................................................S-85
Underwriter..............................................................S-104
Underwriting Agreement...................................................S-104
Unrelated Principal Carryover Shortfall...................................S-79
<PAGE>
ANNEX 1
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in limited circumstances, the globally offered Offered Certificates
(the "Global Securities") will be available only in book-entry form. Investors
in the Global Securities may hold the Global Securities through any of DTC,
Clearstream, Luxembourg or Euroclear. The Global Securities will be tradeable as
home market instruments in both the European and U.S. domestic markets. Initial
settlement and all secondary trades will settle in same-day funds.
Secondary market trading between investors holding Global Securities
through Clearstream, Luxembourg and Euroclear will be conducted in the ordinary
way in accordance with their normal rules and operating procedures and in
accordance with conventional eurobond practice (i.e., seven calendar day
settlement).
Secondary market trading between investors holding Global Securities
through DTC will be conducted according to the rules and procedures applicable
to U.S. corporate debt obligations.
Secondary cross-market trading between Clearstream, Luxembourg or Euroclear
and DTC Participants holding Notes will be effected on a
delivery-against-payment basis through the respective Depositaries of
Clearstream, Luxembourg and Euroclear, in this capacity, and as DTC
Participants.
Non-U.S. holders (as described below) of Global Securities will be subject
to U.S. withholding taxes unless the holders meet particular requirements and
deliver appropriate U.S. tax documents to the securities clearing organizations
or their participants.
INITIAL SETTLEMENT
All Global Securities will be held in book-entry form by DTC in the name of
Cede, as nominee of DTC. Investors' interests in the Global Securities will be
represented through financial institutions acting on their behalf as direct and
indirect Participants in DTC. As a result, Clearstream, Luxembourg and Euroclear
will hold positions on behalf of their participants through their respective
Depositaries, which in turn will hold the positions in accounts as DTC
Participants.
Investors electing to hold their Global Securities through DTC will follow
the settlement practices applicable to U.S. corporate debt obligations. Investor
securities custody accounts will be credited with their holdings against payment
in same-day funds on the settlement date.
Investors electing to hold their Global Securities through Clearstream,
Luxembourg or Euroclear accounts will follow the settlement procedures
applicable to conventional eurobonds, except that there will be no temporary
global security and no "lock-up" or restricted period. Global Securities will be
credited to the securities custody accounts on the settlement date against
payment in the same-day funds.
SECONDARY MARKET TRADING
Since the purchaser determines the place of delivery, it is important to
establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
TRADING BETWEEN DTC PARTICIPANTS. Secondary market trading between DTC
Participants will be settled using the procedures applicable to U.S. corporate
debt obligations in same-day funds.
TRADING BETWEEN CLEARSTREAM, LUXEMBOURG AND/OR EUROCLEAR PARTICIPANTS.
Secondary market trading between Clearstream, Luxembourg Participants or
Euroclear Participants will be settled using the procedures applicable to
conventional eurobonds in same-day funds.
TRADING BETWEEN DTC SELLER AND CLEARSTREAM, LUXEMBOURG OR EUROCLEAR
PURCHASER. When Global Securities are to be transferred from the account of a
DTC Participant to the account of a Clearstream, Luxembourg Participant or a
Euroclear Participant, the purchaser will send instructions to Clearstream,
Luxembourg or Euroclear through a Clearstream, Luxembourg Participant or
Euroclear Participant at least one business day prior to settlement.
Clearstream, Luxembourg or Euroclear will instruct the respective Depositary, as
the case may be, to receive the Global Securities against payment. Payment will
include interest accrued on the Global Securities from and including the last
coupon payment date to and excluding the settlement date, on the basis of actual
days elapsed and a 360 day year. Payment will then be made by the respective
Depositary to the DTC Participant's account against delivery of the Global
Securities. After settlement has been completed, the Global Securities will be
credited to the respective clearing system and by the clearing system, in
accordance with its usual procedures, to the Clearstream, Luxembourg
Participant's or Euroclear Participant's account. The Global Securities credit
will appear the next day (European time) and the cash debit will be back-valued
to, and the interest on the Global Securities will accrue from, the value date
(which would be the preceding day when settlement occurred in New York). If
settlement is not completed on the intended value date (i.e., the trade fails),
the Clearstream, Luxembourg or Euroclear cash debit will be valued instead as of
the actual settlement date.
Clearstream, Luxembourg Participants and Euroclear Participants will need
to make available to the respective clearing systems the funds necessary to
process same-day funds settlement. The most direct means of doing so is to
pre-position funds for settlement, either from cash on hand or existing lines of
credit, as they would for any settlement occurring within Clearstream,
Luxembourg or Euroclear. Under this approach, they may take on credit exposure
to Clearstream, Luxembourg or Euroclear until the Global Securities are credited
to their accounts one day later.
As an alternative, if Clearstream, Luxembourg or Euroclear has extended a
line of credit to them, Clearstream, Luxembourg Participants or Euroclear
Participants can elect not to pre-position funds and allow that credit line to
be drawn upon the finance settlement. Under this procedure, Clearstream,
Luxembourg Participants or Euroclear Participants purchasing Global Securities
would incur overdraft charges for one day, assuming they cleared the overdraft
when the Global Securities were credited to their accounts. However, interest on
the Global Securities would accrue from the value date. Therefore, in many cases
the investment income on the Global Securities earned during that one-day period
may substantially reduce or offset the amount of the overdraft charges, although
this result will depend on each Clearstream, Luxembourg Participant's or
Euroclear Participant's particular cost of funds.
Since the settlement is taking place during New York business hours, DTC
Participants can employ their usual procedures for sending Global Securities to
the respective Depositary for the benefit of Clearstream, Luxembourg
Participants or Euroclear Participants. The sale proceeds will be available to
the DTC seller on the settlement date. Thus, to the DTC Participant a
cross-market transaction will settle no differently than a trade between two DTC
Participants.
TRADING BETWEEN CLEARSTREAM, LUXEMBOURG OR EUROCLEAR SELLER AND DTC
PURCHASER. Due to time zone differences in their favor, Clearstream, Luxembourg
Participants and Euroclear Participants may employ their customary procedures
for transactions in which Global Securities are to be transferred by the
respective clearing systems, through the respective Depositaries, to a DTC
Participant. The seller will send instructions to Clearstream, Luxembourg or
Euroclear through a Clearstream, Luxembourg Participant or Euroclear Participant
at least one business day prior to settlement. In these cases, Clearstream,
Luxembourg or Euroclear will instruct the respective Depositaries, as
appropriate, to deliver the bonds to the DTC Participant's account against
payment. Payment will include interest accrued on the Global Securities from and
including the last coupon payment date to and excluding the settlement date on
the basis of actual days elapsed and a 360 day year. The payment will then be
reflected in the account of the Clearstream, Luxembourg Participant or Euroclear
Participant the following day, and receipt of the cash proceeds in the
Clearstream, Luxembourg Participant's or Euroclear Participant's account would
be back-valued to the value date (which would be the preceding day, when
settlement occurred in New York). Should the Clearstream, Luxembourg Participant
or Euroclear Participant have a line of credit with its respective clearing
system and elect to be in debit in anticipation of receipt of the sale proceeds
in its account, the back-valuation will extinguish any overdraft charges
incurred over that one-day period. If settlement is not completed on the
intended value date (i.e., the trade fails), receipt of the cash proceeds in the
Clearstream, Luxembourg Participant's or Euroclear Participant's account would
instead be value as of the actual settlement date.
Finally, day traders that use Clearstream, Luxembourg or Euroclear and that
purchase Global Securities from DTC Participants for delivery to Clearstream,
Luxembourg Participants or Euroclear Participants should note that these trades
would automatically fail on the sale side unless affirmative action were taken.
At least three techniques should be readily available to eliminate this
potential problem:
(a) borrowing through Clearstream, Luxembourg or Euroclear for one
day, until the purchase side of the day trade is reflected in their
Clearstream, Luxembourg or Euroclear accounts, in accordance with the
clearing system's customary procedures;
(b) borrowing the Global Securities in the U.S. from a DTC Participant
no later than one day prior to settlement, which would give the Global
Securities sufficient time to be reflected in their Clearstream, Luxembourg
or Euroclear account in order to settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of the trade
so that the value date for the purchase from the DTC Participant is at
least one day prior to the value date for the sale to the Clearstream,
Luxembourg Participant or Euroclear Participant.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of Global Securities holding through Clearstream,
Luxembourg or Euroclear, or through DTC if the holder has an address outside the
U.S., will be subject to the 30% U.S. withholding tax that generally applies to
payments of interest, including original issue discount, on registered debt
issued by U.S. Persons, unless (1) each clearing system, bank or other financial
institution that holds customers' securities in the ordinary course of its trade
or business in the chain of intermediaries between the beneficial owner and the
U.S. entity required to withhold tax complies with applicable certification
requirements and (2) the beneficial owner takes one of the following steps to
obtain an exemption or reduced tax rate:
EXEMPTION FOR NON-U.S. PERSONS (FORM W-8). Beneficial owners of Global
Securities that are non-U.S. Persons can obtain a complete exemption from
the withholding tax by filing a signed Form W-8 (Certificate of Foreign
Status). If the information shown on Form W-8 or the Tax Certificate
changes, a new Form W-8 or Tax Certificate, as the case may be, must be
filed within 30 days of the change.
EXEMPTION FOR NON-U.S. PERSON WITH EFFECTIVELY CONNECTED INCOME (FORM
4224). A non-U.S. Person, including a non-U.S. corporation or bank with a
U.S. branch, for which the interest income is effectively connected with
its conduct of a trade or business in the United States, can obtain an
exemption from the withholding tax by filing Form 4224 (Exemption from
Withholding of Tax on Income Effectively Connected with the Conduct of a
Trade or Business in the United States).
EXEMPTION OR REDUCED RATE FOR NON-U.S. PERSONS RESIDENT IN TREATY
COUNTRIES (FORM 1001). Non-U.S. Persons that are beneficial owners of
Global Securities residing in a country that has a tax treaty with the
United States can obtain an exemption or reduced tax rate, depending on the
treaty terms, by filing Form 1001 (Ownership, Exemption or Reduced Rate
Certificate). If the treaty provides only for a reduced rate, withholding
tax will be imposed at that rate unless the filer alternatively files Form
W-8. Form 1001 may be filed by the Note Owner or his agent.
EXEMPTION FOR U.S. PERSONS (FORM W-9). U.S. Persons can obtain a
complete exemption from the withholding tax by filing Form W-9 (Payer's
Request for Taxpayer Identification Number and Certification).
U.S. FEDERAL INCOME TAX REPORTING PROCEDURE. The beneficial owner of a
Global Security or, in the case of a Form 1001 or a Form 4224 filer, his
agent, files by submitting the appropriate form to the person through whom
it holds (the clearing agency, in the case of persons holding directly on
the books of the clearing agency). Form W-8 and form 1001 are effective for
three calendar years and Form 4224 is effective for one calendar year.
The term "U.S. Person" means
o a citizen or resident of the United States,
o a corporation, partnership or other entity organized in or under the
laws of the United States or any state or political subdivision of the
United States, other than a partnership that is not treated as a
United States person under any applicable Treasury regulations,
o an estate whose income is subject to United States federal income tax,
regardless of its source or
o (iv) a trust whose administration is subject to the primary
supervision of a United States court and which has one or more United
States persons who have authority to control all substantial decisions
of the trust. Notwithstanding the preceding sentence, to the extent
provided in regulations, some trusts in existence on August 20, 1996
and treated as United States persons prior to this date that elect to
continue to be so treated also shall be considered U.S. Persons.
This summary does not deal with all aspects of U.S. Federal income tax
withholding that may be relevant to foreign holders of the Global Securities.
Investors are advised to consult their own tax advisors for specific tax advice
concerning their holding and disposing of the Global Securities.
<PAGE>
ANNEX II
SCHEDULED NOTIONAL AMOUNTS
WITH RESPECT TO THE SCHEDULED NOTIONAL
DISTRIBUTION DATE IN: AMOUNT ($)
-----, -----
-------, -----
-----, -----
-------, -----
-----, -----
-------, -----
-----, -----
-------, -----
-----, -----
-------, -----
-----, -----
-------, -----
-----, -----
-------, -----
-----, -----
-------, -----
-----, -----
-------, -----
<PAGE>
CREDIT FIRST
SUISSE BOSTON
<PAGE>
PROSPECTUS
ASSET BACKED SECURITIES CORPORATION
DEPOSITOR
ABS MORTGAGE AND MANUFACTURED HOUSING CONTRACT
ASSET-BACKED CERTIFICATES AND ASSET-BACKED NOTES (ISSUABLE IN SERIES)
--------------------
Asset Backed Securities Corporation, as depositor, may offer from time to time
under this prospectus and related prospectus supplements securities that are
either asset-backed notes or asset-backed certificates which may be sold from
time to time in one or more series. Each series of securities will be issued in
one or more classes.
The related prospectus supplement will set forth the specific assets of the
trust fund and the seller or sellers from whom the assets are acquired. The
assets may include:
1. One or more pools of
o closed-end and/or revolving home equity loans or manufactured housing
contracts or specified balances of these loans or contracts and/or
loans of which the proceeds have been applied to the purchase of the
related mortgaged property, secured by mortgages primarily on one- to
four-family residential properties, mortgages on multifamily
residential rental properties consisting of five or more dwelling
units or apartment buildings owned by cooperative housing
corporations,
o loans made to finance the purchase of rights relating to cooperatively
owned properties secured by a pledge of shares of a cooperative
corporation and an assignment of a proprietary lease or occupancy
agreement on a cooperative dwelling,
o loans made to finance the origination of the loans and contracts
described above and secured by the related loans or contracts,
o mortgage participation certificates evidencing participation interests
in loans that are acceptable to the nationally recognized statistical
rating agencies rating a series of securities,
o private securities evidencing ownership interests in or secured by
loans similar to the types of loans described above;
2. All monies due under the above assets, which may be net of amounts
payable to the servicer; and
3. Funds or accounts established for the related trust fund, or one or more
forms of enhancement.
The related prospectus supplement will state if the trust fund will make a REMIC
election for federal income tax purposes.
FOR A DISCUSSION OF RISKS ASSOCIATED WITH AN INVESTMENT IN THE SECURITIES, SEE
RISK FACTORS ON PAGE 2.
NEITHER THE SEC NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED
THE OFFERED SECURITIES OR DETERMINED IF THIS PROSPECTUS IS ACCURATE OR COMPLETE.
MAKING ANY CONTRARY REPRESENTATION IS A CRIMINAL OFFENSE.
------------------
CREDIT SUISSE FIRST BOSTON
The date of this Prospectus is _________, 2000
<PAGE>
TABLE OF CONTENTS
Page
Risk Factors.................................................................2
The Trust Fund...............................................................5
The Depositor................................................................19
Use Of Proceeds..............................................................20
Maturity, Prepayment and Yield Considerations................................20
Description of the Securities................................................24
Credit Support...............................................................59
Description of Insurance.....................................................65
Certain Legal Aspects of the Mortgage Loans and Contracts....................73
Federal Income Tax Consequences..............................................84
Legal Investment.............................................................131
Plan of Distribution.........................................................132
Prospectus Supplement........................................................133
Additional Information.......................................................133
Incorporation of Certain Information By Reference............................134
<PAGE>
RISK FACTORS
You should carefully consider the following risk factors prior to any
purchase of the securities.
LIMITED LIQUIDITY MAY RESULT IN
DELAYS IN YOUR ABILITY TO SELL
SECURITIES OR
LOWER RETURNS......................... There will be no market for the
securities of any series prior to their
issuance, and there can be no assurance
that a secondary market will develop. If
a secondary market does develop, there
can be no assurance that it will provide
holders with liquidity of investment or
that the market will continue for the
life of the securities of the related
series. Credit Suisse First Boston
Corporation presently expects to make a
secondary market in the securities, but
has no obligation to do so. Absent a
secondary market for the securities you
may experience a delay if you choose to
sell your securities or the price you
receive may be less than you would
receive for a comparable liquid
security.
LIMITED ASSETS FOR PAYMENTS - NO
RECOURSE TO DEPOSITOR, UNAFFILIATED
SELLER, MASTER SERVICER OR SERVICER... The depositor does not have, nor is it
expected to have, any significant
assets. The securities of a series will
be payable solely from the assets of the
trust fund for that series. Except for
any related insurance policies or credit
support, there will be no recourse to
the depositor or any other person for
any default on the notes or any failure
to receive distributions on the
certificates with respect to any series.
Consequently, holders of securities of
each series must rely solely upon
payments with respect to the assets
constituting the trust fund for a series
of securities, including, if applicable,
any amounts available pursuant to any
enhancement for that series, for the
payment of principal of and interest on
the securities of that series.
The only obligations, if any, of the
depositor with respect to the securities
of any series will be with respect to
its breach of specific representations
and warranties. The depositor does not
have, and is not expected in the future
to have, any significant assets with
which to meet any obligation to
repurchase assets with respect to which
there has been a breach of any
representation or warranty. If, for
example, the depositor were required to
repurchase a mortgage loan, its only
sources of funds to make the repurchase
would be from funds obtained from the
enforcement of a corresponding
obligation, if any, on the part of the
originator of the mortgage loan, the
master servicer, the servicer or the
unaffiliated seller, as the case may be,
or from a reserve fund established to
provide funds for repurchases. If the
depositor does not have sufficient
assets and no other party is obligated
to repurchase defective assets, you may
experience a loss.
LIMITS ON ENHANCEMENT MAY RESULT IN
LOSSES TO YOU......................... Although we intend the enhancement for
the securities to reduce the risk of
delinquent payments or losses to holders
of a series of securities entitled to
the benefit of the securities, the
amount of the enhancement will be
limited, as set forth in the related
prospectus supplement. In addition, the
amount available will decline and could
be depleted prior to the payment in full
of the related series of securities, and
losses on the primary assets could
result in losses to holders of those
securities.
DECREASE IN VALUE OF MORTGAGED
PROPERTY--RISK OF LOSS................ There are several factors that could
adversely affect the value of mortgaged
properties and cause the outstanding
balance of the related mortgage loan,
contract, loan secured by a mortage loan
or contract or of an underlying loan
relating to the private securities,
together with any senior financing, to
equal or exceed the value of the
mortgaged properties. Among the factors
that could adversely affect the value of
the mortgaged properties are
o an overall decline in the residential
real estate market in the areas in
which the mortgaged properties are
located;
o a decline in the general condition of
the mortgaged properties as a result
of failure of borrowers to maintain
adequately the mortgaged properties;
or
o natural disasters that are not
necessarily covered by insurance,
including earthquakes and floods.
Any decline in the value of a mortgaged
property could extinguish the value of a
junior interest in that mortgaged
property before having any effect on the
related senior interest. If a decline in
the value of the related mortgaged
properties occurs, the actual rates of
delinquencies, foreclosure and losses on
the mortgage loans could be higher than
those currently experienced in the
mortgage lending industry in general and
you could suffer a loss.
TIMING AND RATE OF PREPAYMENTS MAY
RESULT IN LOWER YIELD................. The yield to maturity experienced by a
holder of securities may be affected by
the rate and timing of payments of
principal of the mortgage loans,
contracts, loans secured by mortgage
loans or contracts or of the underlying
loans relating to the private
securities. The rate and timing of
principal payments of the securities of
a series will be affected by a number of
factors, including the following:
o the extent of prepayments, which may
be influenced by a variety of
factors,
o the manner of allocating principal
payments among the classes of
securities of a series as specified
in the related prospectus supplement,
and
o the exercise of any right of optional
termination.
Prepayments may also result from
repurchases of mortgage loans or
underlying loans, as applicable, due to
material breaches of the unaffiliated
seller's or the depositor's
representations or warranties.
Interest payable on the securities of a
series on a distribution date will
include all interest accrued during the
period specified in the related
prospectus supplement. In the event
interest accrues during the calendar
month prior to a distribution date, the
effective yield to holders will be
reduced from the yield that would
otherwise be obtainable if interest
payable on the security were to accrue
through the day immediately preceding
each distribution date, and the
effective yield at par to holders will
be less than the indicated coupon rate.
RISKS OF SUBORDINATED SECURITIES...... To the extent specified in the
applicable prospectus supplement,
distributions of interest on and
principal of one or more classes of
securities of a series may be
subordinated in priority of payment to
interest and principal due on one or
more other classes of securities of the
related series. Any subordinated
securities will be affected to a greater
degree by any losses on the mortgage
loans, contracts, loans secured by
mortgage loans or contracts or of the
underlying loans relating to the private
securities.
BOOK-ENTRY REGISTRATION--BENEFICIAL
OWNERS NOT RECOGNIZED BY TRUST........ Issuance of the securities in book-entry
form may reduce the liquidity of these
securities in the secondary trading
market since investors may be unwilling
to purchase securities for which they
cannot obtain physical certificates.
Since transactions in the securities can
be effected only through The Depository
Trust Company and any other entities set
forth in the related prospectus
supplement, your ability to pledge a
security to persons or entities that do
not participate in The Depository Trust
Company or any other entities or
otherwise to take actions in respect of
the related securities may be limited
due to lack of a physical certificate
representing the securities.
You may experience some delay in the
receipt of distributions of interest and
principal on the securities since the
distributions will be forwarded by the
trustee to The Depository Trust Company
and The Depository Trust Company will
credit the distributions to the accounts
of its participants which will then
credit them to your account either
directly or indirectly through indirect
participants.
THE TRUST FUND
The Depositor may offer from time to time the ABS Mortgage and Manufactured
Housing Contract Asset-Backed Certificates (the "Certificates") and the ABS
Mortgage and Manufactured Housing Contract Asset-Backed Notes (the "Notes" and,
together with the Certificates, the "Securities") offered by this prospectus and
by the related prospectus supplements which may be sold from time to time in one
or more series (each, a "Series") in amounts, at prices and on terms to be
determined at the time of sale and to be set forth in the related prospectus
supplement. Each Series of Securities may include one or more separate classes
(each, a "Class") of Notes and/or Certificates, which may be divided into one or
more subclasses (each, a "Subclass"). The Certificates will be issued by a trust
(the "Trust") to be formed by the Depositor with respect to a Series pursuant to
either a Trust Agreement (each, a "Trust Agreement") to be entered into between
the Depositor and the trustee specified in the related Prospectus Supplement
(the "Trustee") or a Pooling and Servicing Agreement (each, a "Pooling and
Servicing Agreement") among the Depositor, the Master Servicer and the Trustee.
If a Series of Securities includes Notes, the Notes will be issued and secured
pursuant to an Indenture (each, an "Indenture") to be entered into between any
of (1) the Trust or (2) a partnership, corporation, limited liability company or
other entity formed by the Depositor solely for the purpose of issuing Notes of
a related Series and incidental matters, as issuer (the "Issuer"), and the
indenture trustee specified in the related Prospectus Supplement (the "Indenture
Trustee"). The related Trust Fund will be serviced by the Master Servicer
pursuant to a Sale and Servicing Agreement (the "Sale and Servicing Agreement")
among the Depositor, the Master Servicer and the Indenture Trustee. The
Certificates represent interests in specified percentages of principal and
interest (a "Percentage Interest") with respect to the related Mortgage Pool,
Warehouse Loan Pool or Contract Pool, or have been assigned a Stated Principal
Balance and an Interest Rate, as more fully set forth in this prospectus, and
will evidence the undivided interest, beneficial interest or notional amount
specified in the related Prospectus Supplement in one of a number of Trusts,
each to be created by the Depositor from time to time. If a Series of Securities
includes Notes, the Notes will represent indebtedness of the related Trust Fund.
The trust property of each Trust (the "Trust Fund") will consist of the assets
described below.
Ownership of the Mortgage, Warehouse Loan or Contract Pool or Pools
included in the Trust Fund for a Series of Securities may be evidenced by one or
more Classes of Certificates, which may consist of one or more Subclasses, as
specified in the prospectus supplement for the Series. Each Certificate will
evidence the undivided interest, beneficial interest or notional amount
specified in the related prospectus supplement in one or more Mortgage Pools
containing one or more Mortgage Loans or Mortgage Certificates, Warehouse Loan
Pools or Contract Pools containing Contracts, having an aggregate principal
balance of not less than approximately $50,000,000 as of the first day of the
month of its creation (the "Cut-off Date"), unless otherwise specified in the
applicable prospectus supplement. If so specified in the related prospectus
supplement, each Class or Subclass of the Certificates of a Series will evidence
the percentage interest specified in the prospectus supplement in the payments
of principal of and interest on the Mortgage Loans or Mortgage Certificates in
the related Mortgage Pool or Pools, Warehouse Loans in the related Warehouse
Loan Pool or Pools or on the Contracts in the related Contract Pool or Pools (a
"Percentage Interest"). To the extent specified in the related prospectus
supplement, each Mortgage Pool, Warehouse Loan Pool or Contract Pool with
respect to a Series will be covered by one or more irrevocable letters of credit
(a "Letter of Credit"), a policy of mortgage pool insurance (a "Pool Insurance
Policy"), a bond or similar form of insurance coverage against particular losses
in the event of the bankruptcy of a Mortgagor (a "Mortgagor Bankruptcy Bond"),
an insurance policy (the "Special Hazard Insurance Policy") covering losses that
result from other physical risks that are not otherwise insured against,
including earthquakes and mudflows, by the subordination of the rights of the
holders of the one or more subordinate Classes or Subclasses (the "Subordinate
Securities") to the rights of the holders of one or more senior Classes or
Subclasses (the "Senior Securities") to the extent specified in the related
prospectus supplement (the "Subordinated Amount which, if so specified in the
related prospectus supplement, may include Subordinate Securities of one or more
Class or Subclass (a "Subordinated Class" or "Subordinated Subclass,"
respectively) and the establishment of a reserve fund (a "Reserve Fund"), by the
right of one or more Classes or Subclasses of Securities to receive a
disproportionate amount of particular distributions of principal, by an
insurance policy (the "Security Guarantee Insurance") issued by one or more
insurance companies or another form or forms of additional or alternative forms
of credit support, including a guarantee or surety bond ("Alternative Credit
Support") acceptable to the Rating Agency rating the Securities of a Series or
by any combination of the foregoing. See "Description of Insurance" and "Credit
Support."
THE MORTGAGE POOLS
If so specified in the prospectus supplement with respect to a Series, the
Trust Fund for each Series may include
1. one or more pools ("Mortgage Pools") containing
o conventional one-to four-family residential, first and/or second
mortgage loans,
o closed-end loans (the "Closed-End Loans") and/or revolving home equity
loans or specific balances of those loans (the "Revolving Credit Line
Loans" and, together with the Closed-End Loans, the "Home Equity
Loans") secured by mortgages or deeds of trust on residential
one-to-four family properties, including townhouses and individual
units in condominiums and planned unit developments,
o loans ("Cooperative Loans") made to finance the purchase of particular
rights relating to cooperatively owned properties secured by the
pledge of shares issued by a cooperative corporation (the
"Cooperative") and the assignment of a proprietary lease or occupancy
agreement providing the exclusive right to occupy a particular
dwelling unit (a "Cooperative Dwelling" and, together with one- to
four-family residential properties, "Single Family Property,
o mortgage loans secured by multifamily residential rental properties
consisting of five or more dwelling units or apartment buildings owned
by cooperative housing corporations ("Multifamily Property"),
o mortgage participation securities evidencing participation interests
in loans that are acceptable to the nationally recognized statistical
rating agency or agencies rating the related Series of Securities
(collectively, the "Rating Agency") in one of the four highest rating
categories of each Rating Agency (all the loans described above and
participation certificates being referred to collectively in this
prospectus as the "Mortgage Loans"), acceptable to the nationally
recognized Rating Agency rating the Securities of the Series for a
rating in one of the four highest rating categories of the Rating
Agency; or
o conventional mortgage pass-through certificates, collateralized
mortgage bonds or other indebtedness secured by mortgage loans or
manufactured housing contracts (the "Mortgage Certificates"), in each
case together with specific and related property issued by one or more
trusts established by one or more private entities,
2. one or more Contract Pools containing Contracts or participation Securities
representing participation interests in the Contracts purchased by the
Depositor either directly or through one or more affiliates or Unaffiliated
Sellers, and related property conveyed to the trust by the Depositor or
3. one or more Warehouse Loan Pools containing Warehouse Loans or
participation Securities representing participation interests in the
Warehouse Loans purchased by the Depositor either directly or through one
or more affiliates or Unaffiliated Sellers, and related property conveyed
to the trust by the Depositor or
A Mortgage Pool may include Mortgage Loans insured by the FHA ("FHA Loans")
and/or Mortgage Loans partially guaranteed by the Veterans Administration (the
"VA", and mortgage loans are referred to in this prospectus as "VA Loans"). All
Mortgage Loans will be evidenced by promissory notes or other evidence of
indebtedness (the "Mortgage Notes") secured by first mortgages or first or
second deeds of trust or other similar security instruments creating a first
lien or second lien, as applicable, on the Mortgaged Properties. Single Family
Property and Multifamily Property will consist of single family detached homes,
attached homes, single family units having a common wall, individual units
located in condominiums, townhouses, planned unit developments, multifamily
residential rental properties, apartment buildings owned by cooperative housing
corporations and the other types of homes or units as are set forth in the
related prospectus supplement. Unless otherwise specified in the applicable
prospectus supplement, each detached or attached home or multifamily property
will be constructed on land owned in fee simple by the borrower (the
"Mortgagor"). or on land leased by the Mortgagor for a term at least two years
greater than the term of the applicable Mortgage Loan. Attached homes may
consist of duplexes, triplexes and fourplexes, multifamily structures where each
Mortgagor owns the land upon which the unit is built with the remaining adjacent
land owned in common. Multifamily Property may include mixed commercial and
residential buildings. The Mortgaged Properties may include investment
properties and vacation and second homes. Mortgage Loans secured by Multifamily
Property may also be secured by an assignment of leases and rents and operating
or other cash flow guarantees relating to the Mortgaged Properties to the extent
specified in the related prospectus supplement.
Unless otherwise specified below or in the applicable prospectus
supplement, each Mortgage Loan in a Mortgage Pool will
o have an individual principal balance at origination of not less than
$25,000 nor more than $500,000,
o have monthly payments due on the first day of each month (the "Due Date"),
o be secured by Mortgaged Properties or relate to Cooperative Loans located
in any of the 50 states or the District of Columbia, and
o consist of fully-amortizing Mortgage Loans, each with a 10 to 40 year term
at origination, a fixed or variable rate of interest and level or variable
monthly payments over the term of the Mortgage Loan.
Unless otherwise specified in the related prospectus supplement, the
Loan-to-Value Ratio of the Mortgage Loans at origination will not exceed the
percentages set forth below.
o 95% on any Mortgage Loan with an original principal balance of $150,000 or
less,
o 90% on any Mortgage Loan with an original principal balance of $150,001
through $200,000,
o 85% on any Mortgage Loan with an original principal balance of $200,001
through $300,000 and
o 80% on any Mortgage Loan with an original principal balance exceeding
$300,000.
If so specified in the related prospectus supplement, a Mortgage Pool may
also include fully amortizing, adjustable rate Mortgage Loans ("ARM Loans")
with, unless otherwise specified in the related prospectus supplement, 30-year
terms at origination and mortgage interest rates adjusted periodically, with
corresponding adjustments in the amount of monthly payments, to equal the sum,
which may be rounded, of a fixed margin and an index described in the related
prospectus supplement, subject to any applicable restrictions on adjustments.
The Mortgage Pools may also include other types of Mortgage Loans to the extent
set forth in the applicable prospectus supplement.
Unless otherwise specified in the applicable prospectus supplement, no
Mortgage Loan will have a Loan-to-Value Ratio at origination in excess of 95%,
regardless of its original principal balance. Except as otherwise provided in
the related prospectus supplement, the Loan-to-Value Ratio will be the ratio,
expressed as a percentage, of the principal amount of the Mortgage Loan at the
date of determination to the lesser of (1) the appraised value determined in an
appraisal obtained by the originator and (2) the sales price for the property
(the "Original Value"). Unless otherwise specified in the related prospectus
supplement, with respect to a Mortgage Loan secured by a mortgage on a vacation
or second home or an investment property, other than Multifamily Property, no
income derived from the property will be considered for underwriting purposes,
the Loan-to-Value Ratio, taking into account any secondary financing, may not
exceed 80% and the original principal balance may not exceed $250,000.
If so specified in the related prospectus supplement, a Mortgage Pool may
contain Mortgage Loans with fluctuating interest rates (the "Mortgage Rates").
These Mortgage Loan may provide that on the day on which the Mortgage Rate
adjusts, the amount of the monthly payments on the Mortgage Loan will be
adjusted to provide for the payment of the remaining principal amount of the
Mortgage Loan with level monthly payments of principal and interest at the new
Mortgage Rate to the maturity date of the Mortgage Loan. Alternatively, the
Mortgage Loan may provide that the Mortgage Rate adjusts more frequently than
the monthly payment. As a result, a greater or lesser portion of the monthly
payment will be applied to the payment of principal of the Mortgage Loan, thus
increasing or decreasing the rate at which the Mortgage Loan is repaid. See
"Maturity, Prepayment and Yield Considerations." In the event that an adjustment
to the Mortgage Rate causes the amount of interest accrued in any month to
exceed the amount of the monthly payment on the Mortgage Loan, the excess (the
"Deferred Interest") will be added to the principal balance of the Mortgage
Loan, unless otherwise paid by the Mortgagor, and will bear interest at the
Mortgage Rate in effect from time to time. The amount by which the Mortgage Rate
or monthly payment may increase or decrease and the aggregate amount of Deferred
Interest on any Mortgage Loan may be subject to limitations, as described in the
related prospectus supplement.
If so specified in the prospectus supplement for the related Series, the
Mortgage Rate on some of the ARM Loans will be convertible from an adjustable
rate to a fixed rate at the option of the Mortgagor under some circumstances.
Unless otherwise specified in the related prospectus supplement, the Agreement
will provide that the Unaffiliated Seller from which convertible ARM Loans were
acquired will be obligated to repurchase from the Trust Fund any ARM Loan as to
which the conversion option has been exercised (a "Converted Mortgage Loan"), at
a purchase price set forth in the related prospectus supplement. The amount of
the purchase price will be required to be deposited in the Certificate Account
and will be distributed to the Securityholders on the Distribution Date in the
month following the month of the exercise of the conversion option. The
obligation of the Unaffiliated Seller to repurchase Converted Mortgage Loans may
or may not be supported by cash, letters of credit, third party guarantees or
other similar arrangements.
If provided for in the applicable prospectus supplement, a Mortgage Pool
may contain Mortgage Loans pursuant to which the monthly payments made by the
Mortgagor during the early years of the Mortgage Loan will be less than the
scheduled monthly payments on the Mortgage Loan ("Buy-Down Loans"). The
resulting difference in payment shall be compensated for from an amount
contributed by the Depositor, the seller of the related Mortgaged Property, the
Servicer or another source and placed in a custodial account (the "Buy-Down
Fund") by the Servicer, or if so specified in the related prospectus supplement,
with the Trustee. In lieu of a cash deposit, if so specified in the related
prospectus supplement, a letter of credit or guaranteed investment contract may
be delivered to the Trustee to fund the Buy-Down Fund. See "Description of the
Securities -- Payments on Mortgage Loans." Buy-Down Loans included in a Mortgage
Pool will provide for a reduction in monthly interest payments by the Mortgagor
for a period of up to the first four years of the term of the Mortgage Loans.
If provided for in the applicable prospectus supplement, a Mortgage Pool
may contain Mortgage Loans pursuant to which the monthly payments by the
Mortgagor during the early years of the related Mortgage Note are less than the
amount of interest that would otherwise be payable on the Mortgage Note, with
the interest not so paid added to the outstanding principal balance of the
Mortgage Loan ("GPM Loans"). If so specified in the related prospectus
supplement, the resulting difference in payment shall be compensated for from an
amount contributed by the Depositor or another source and delivered to the
Trustee (the "GPM Fund"). In lieu of a cash deposit, the Depositor may deliver
to the Trustee a letter of credit, guaranteed investment contract or another
instrument acceptable to the Rating Agency rating the related Series to fund the
GPM Fund.
If provided for in the applicable prospectus supplement, a Mortgage Pool
may contain Mortgage Loans which are Home Equity Loans pursuant to which the
full principal amount of the Mortgage Loan is advanced at origination of the
loan and generally is repayable in equal, or substantially equal, installments
of an amount sufficient to fully amortize the loan at its stated maturity.
Interest on each Home Equity Loan may be calculated on the basis of the
outstanding principal balance of the loan multiplied by the Mortgage Rate on
each Home Equity Loan and further multiplied by a fraction, the numerator of
which is the number of days in the period elapsed since the preceding payment of
interest was made and the denominator is the number of days in the annual period
for which interest accrues on the loan. Under some circumstances, under a Home
Equity Loan, a borrower may choose an interest only payment option and is
obligated to pay only the amount of interest which accrues on the loan during
the billing cycle. Generally, an interest only payment option may be available
for a specified period before the borrower must begin paying at least the
minimum monthly payment of a specified percentage of the average outstanding
balance of the loan.
FHA Loans will be insured by the Federal Housing Administration (the "FHA")
as authorized under the National Housing Act, as amended, and the United States
Housing Act of 1937, as amended. FHA loans will be insured under various FHA
programs including the standard FHA 203-b programs to finance the acquisition of
one- to four-family housing units, the FHA 245 graduated payment mortgage
program and the FHA 221 and 223 programs to finance particular multifamily
residential rental properties. FHA Loans generally require a minimum down
payment of approximately 5% of the original principal amount of the FHA Loan. No
FHA Loan may have an interest rate or original principal amount exceeding the
applicable FHA limits at the time of origination of FHA Loan.
VA Loans will be partially guaranteed by the VA under the Servicemen's
Readjustment Act of 1944, as amended (the "Servicemen's Readjustment Act"). The
Servicemen's Readjustment Act permits a veteran, or in some instances the spouse
of a veteran, to obtain a mortgage loan guarantee by the VA covering mortgage
financing of the purchase of a one- to four-family dwelling unit at interest
rates permitted by the VA. The program has no mortgage loan limits, requires no
down payment from the purchasers and permits the guarantee of mortgage loans of
up to 30 years' duration. However, no VA Loan will have an original principal
amount greater than five times the partial VA guarantee for the VA Loan. The
maximum guarantee that may be issued by VA under this program is
o 50% of the principal amount of the Mortgage Loan if the principal amount of
the Mortgage Loan is $45,000 or less,
o the lesser of $36,000 and 40% of the principal amount of the Mortgage Loan
if the principal amount of the Mortgage Loan is greater than $45,000 but
less than or equal to $144,000,
o and the lesser of $46,000 and 25% of the principal amount of the Mortgage
Loan if the principal amount of the Mortgage Loan is greater than $144,000.
Unless otherwise specified in the related prospectus supplement, interest
on each Revolving Credit Line Loan, excluding introduction rates offered from
time to time during promotional periods, is computed and payable monthly on the
average daily outstanding principal balance of the Loan. Principal amounts on a
Revolving Credit Line Loan may be drawn down, up to a maximum amount as set
forth in the related prospectus supplement, or repaid under each Revolving
Credit Line Loan from time to time, but may be subject to a minimum periodic
payment. To the extent and accordingly under the terms provided in the related
prospectus supplement, the Trust Fund may include amounts borrowed under a
Revolving Credit Line Loan after the Cut-off Date. The full amount of a
Closed-End Loan is advanced at the inception of the Loan and generally is
repayable in equal, or substantially equal, installments of an amount to fully
amortize the Loan at its stated maturity. Except to the extent provided in the
related prospectus supplement, the original terms to stated maturity of
Closed-End Loans will not exceed 360 months. Under some circumstances, under
either a Revolving Credit Line Loan or a Closed-End Loan, a borrower may choose
an interest only payment option and is obligated to pay only the amount of
interest which accrues on the Loan during the billing cycle. An interest only
payment option may be available for a specified period before the borrower must
begin paying at least the minimum monthly payment of a specified percentage of
the average outstanding balance of the Loan.
The prospectus supplement, or, if information is not available in advance
of the date of the related prospectus supplement, a Current Report on Form 8-K
to be filed with the Commission, for each Series of Securities the Trust Fund
with respect to which contains Mortgage Loans will contain information as to the
type of Mortgage Loans that will comprise the related Mortgage Pool or Pools and
information as to
o the aggregate principal balance of the Mortgage Loans as of the applicable
Cut-off Date,
o the type of Mortgaged Properties securing the Mortgage Loans,
o the original terms to maturity of the Mortgage Loans,
o the largest in principal balance of the Mortgage Loans,
o the earliest origination date and latest maturity date of the Mortgage
Loans,
o the aggregate principal balance of Mortgage Loans having Loan-to-Value
Ratios at origination exceeding 80%,
o the interest rate or range of interest rates borne by the Mortgage Loans,
o the average outstanding principal balance of the Mortgage Loans,
o the geographical distribution of the Mortgage Loans,
o the number and aggregate principal balance of Buy-Down Loans or GPM Loans,
if applicable,
o with respect to ARM Loans, the adjustment dates, the highest, lowest and
weighted average margin, and the maximum Mortgage Rate variation at the
time of any periodic adjustment and over the life of ARM Loans, and o with
respect to Mortgage Loans secured by Multifamily Property or the other
Mortgage Loans as are specified in the prospectus supplement, whether the
Mortgage Loan provides for an interest only period and whether the
principal amount of the Mortgage Loan is amortized on the basis of a period
of time that extends beyond the maturity date of the Mortgage Loan.
No assurance can be given that values of the Mortgaged Properties in a
Mortgage Pool have remained or will remain at their levels on the dates of
origination of the related Mortgage Loans. If the real estate market should
experience an overall decline in property values causing the outstanding
balances of the Mortgage Loans and any secondary financing on the Mortgaged
Properties in a particular Mortgage Pool to 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 now generally experienced in
the mortgage lending industry. In addition, the value of property securing
Cooperative Loans and the delinquency rate with respect to Cooperative Loans
could be adversely affected if the current favorable tax treatment of
cooperative stockholders were to become less favorable. See "Certain Legal
Aspects of the Mortgage Loans and Contracts -- The Mortgage Loans." To the
extent that any of these losses are not covered by the methods of credit support
or the insurance policies described in this prospectus or by Alternative Credit
Support, they will be borne by holders of the Securities of the Series
evidencing interests in, or secured by, the Mortgage Pool.
Multifamily lending is generally viewed as exposing the lender to a greater
risk of loss than one- to four-family residential lending. Multifamily lending
typically involves larger loans to single borrowers or groups of related
borrowers than residential one- to four-family mortgage loans. Furthermore, the
repayment of loans secured by income producing properties is typically dependent
upon the successful operation of the related real estate project. If the cash
flow from the project is reduced, for example, if leases are not obtained or
renewed, the borrower's ability to repay the loan may be impaired. Multifamily
real estate can be affected significantly by supply and demand in the market for
the type of property securing the loan and, therefore, may be subject to adverse
economic conditions. Market values may vary as a result of economic events or
governmental regulations outside the control of the borrower or lender,
including rent control laws, which impact the future cash flow of the property.
Corresponding to the greater lending risk is a generally higher interest rate
applicable to multifamily mortgage loans.
The Depositor will cause the Mortgage Loans constituting each Mortgage Pool
to be assigned to the Trustee named in the applicable prospectus supplement, for
the benefit of the holders of the Certificates of the related Series (the
"Certificateholders") and, if a Series of Securities includes Notes, the
Depositor will cause the Mortgage Loans constituting the Mortgage Pool to be
pledged to the Indenture Trustee, for the benefit of the holders of the Notes of
the related Series (the "Noteholders" and, together with the Certificateholders,
the "Securityholders"). The Master Servicer, if any, named in the related
prospectus supplement will service the Mortgage Loans, either by itself or
through other mortgage servicing institutions, if any (each, a "Servicer"),
pursuant to a Pooling and Servicing Agreement or a Sale and Servicing Agreement,
as described in this prospectus, and will receive a fee as compensation. See "
-- Mortgage Loan Program" and "Description of the Securities." As used in this
prospectus, "Agreement" means, with respect to a Series that only includes
Certificates, the Pooling and Servicing Agreement, and with respect to a Series
that includes Notes, the Indenture, the Trust Agreement and the Sale and
Servicing Agreement, as the context requires. Unless otherwise specified in the
applicable prospectus supplement, with respect to those Mortgage Loans serviced
by a Servicer, the Servicer will be required to service the related Mortgage
Loans in accordance with the Pooling and Servicing Agreement, Sale and Servicing
Agreement or Seller's Warranty and Servicing Agreement between the Servicer and
the Depositor (each, a "Servicing Agreement"), as applicable, and will receive
as compensation, the fee specified in the related Servicing Agreement; however,
any Master Servicer will remain liable for its servicing obligations under the
applicable Agreement as if the Master Servicer alone were servicing the Mortgage
Loans.
The Depositor will make representations and warranties regarding the
Mortgage Loans, but its assignment of the Mortgage Loans to the Trustee will be
without recourse. See "Description of the Securities -- Assignment of Mortgage
Loans." The Master Servicer's obligations with respect to the Mortgage Loans
will consist principally of its contractual servicing obligations under the
Servicing Agreement, including its obligation to enforce particular types of
purchase and other obligations of Servicers and/or Unaffiliated Sellers, as more
fully described in this prospectus under " -- Mortgage Loan Program" and " --
Representations by Unaffiliated Sellers; Repurchases" and "Description of the
Securities -- Assignment of Mortgage Loans" and " -- Servicing by Unaffiliated
Sellers", and its obligations to make Advances in the event of delinquencies in
payments on or with respect to the Mortgage Loans or in connection with
prepayments and liquidations of the Mortgage Loans, in amounts described in this
prospectus under "Description of the Securities -- Advances." Unless otherwise
specified in the related prospectus supplement, Advances with respect to
delinquencies will be limited to amounts that the Master Servicer believes
ultimately would be reimbursable under any applicable Letter of Credit, Pool
Insurance Policy, Special Hazard Insurance Policy, Mortgagor Bankruptcy Bond or
other policy of insurance, from amounts in the Reserve Fund, under any
Alternative Credit Support or out of the proceeds of liquidation of the Mortgage
Loans, cash in the Certificate Account or otherwise. See "Description of the
Securities -- Advances," "Credit Support" and "Description of Insurance."
MORTGAGE LOAN PROGRAM
The Mortgage Loans will have been purchased by the Depositor either
directly or through affiliates or by the Trust formed by the Depositor, from one
or more affiliates or from sellers unaffiliated with the Depositor
("Unaffiliated Sellers"). Mortgage Loans acquired by the Depositor will have
been originated in accordance with the underwriting criteria specified below
under "Underwriting Standards" or as otherwise described in a related prospectus
supplement.
UNDERWRITING STANDARDS
Except in the case of particular Mortgage Loans originated by Unaffiliated
Sellers in accordance with their own underwriting criteria ("Closed Loans") or
other standards as may be described in the applicable prospectus supplement, all
prospective Mortgage Loans will be subject to the underwriting standards adopted
by the Depositor. See " -- Closed Loan Program" below for a description of
underwriting standards applicable to Closed Loans. Unaffiliated Sellers will
represent and warrant that Mortgage Loans originated by them and purchased by
the Depositor have been originated in accordance with the applicable
underwriting standards established by the Depositor or other standards as may be
described in the applicable prospectus supplement. The following discussion
describes the underwriting standards of the Depositor with respect to any
Mortgage Loan that it purchases.
The mortgage credit approval process for one- to four-family residential
loans follows a standard procedure that generally complies with FHLMC and FNMA
regulations and guidelines, except that some Mortgage Loans may have higher loan
amount and qualifying ratios, and applicable federal and state laws and
regulations. The credit approval process for Cooperative Loans follows a
procedure that generally complies with applicable FNMA regulations and
guidelines, except for the loan amounts and qualifying ratios, and applicable
federal and state laws and regulations. The originator of a Mortgage Loan (the
"Originator") generally will review a detailed credit application by the
prospective mortgagor designed to provide pertinent credit information,
including a current balance sheet describing assets and liabilities and a
statement of income and expenses, as well as an authorization to apply for a
credit report that summarizes the prospective mortgagor's credit history with
local merchants and lenders and any record of bankruptcy. In addition, an
employment verification is obtained from the prospective mortgagor's employer in
which the employer reports the length of employment with that organization, the
current salary, and gives an indication as to whether it is expected that the
prospective mortgagor will continue the employment in the future. If the
prospective mortgagor is self-employed, he or she is required to submit copies
of signed tax returns. The prospective mortgagor may also be required to
authorize verification of deposits at financial institutions. In some
circumstances, other credit considerations may cause the Originator or Depositor
not to require some of the above documents, statements or proofs in connection
with the origination or purchase of particular Mortgage Loans.
Unless otherwise specified in the applicable prospectus supplement, an
appraisal generally will be required to be made on each residence to be
financed. The appraisal generally will be made by an appraiser who meets FNMA
requirements as an appraiser of one- to four-family residential properties. The
appraiser is required to inspect the property and verify that it is in good
condition and that, if new, construction has been completed. The appraisal
generally will be based on the appraiser's judgment of value, giving appropriate
weight to both the market value of comparable homes and the cost of replacing
the residence. These underwriting standards also require a search of the public
records relating to a mortgaged property for any liens and judgments.
Based on the data provided, particular verifications and the appraisal, a
determination is made by the Originator as to whether the prospective mortgagor
has sufficient monthly income available to meet the prospective mortgagor's
monthly obligations on the proposed loan and other expenses related to the
residence, including property taxes, hazard and primary mortgage insurance and,
if applicable, maintenance, and other financial obligations and monthly living
expenses. Each Originator's lending guidelines for conventional mortgage loans
generally will specify that mortgage payments plus taxes and insurance and all
monthly payments extending beyond one year, including those mentioned above and
other fixed obligations, or car payments, would equal no more than specified
percentages of the prospective mortgagor's gross income. These guidelines will
be applied only to the payments to be made during the first year of the loan.
For FHA and VA Loans, the Originator's lending guidelines will follow HUD and VA
guidelines, respectively. Other credit considerations may cause an Originator to
depart from these guidelines. For example, when two individuals co-sign the loan
documents, the incomes and expenses of both individuals may be included in the
computation.
The Mortgaged Properties may be located in states where, in general, a
lender providing credit on a single-family property may not seek a deficiency
judgment against the Mortgagor but rather must look solely to the property for
repayment in the event of foreclosure. The Depositor's underwriting standards
applicable to all states, including anti-deficiency states, require that the
value of the property being financed, as indicated by the appraisal, currently
supports and is anticipated to support in the future the outstanding loan
balance. Some of the types of Mortgage Loans that may be included in the
Mortgage Pools or Trust Funds may involve additional uncertainties not present
in traditional types of loans. For example, Buy-Down Loans and GPM Loans provide
for escalating or variable payments by the Mortgagor. These types of Mortgage
Loans are underwritten on the basis of a judgment that the Mortgagor will have
the ability to make larger monthly payments in subsequent years. In some
instances the Mortgagor's income may not be sufficient to enable it to continue
to make scheduled loan payments as the payments increase.
To the extent specified in the related prospectus supplement, the Depositor
may purchase or cause the Trust to purchase Mortgage Loans for inclusion in a
Trust Fund that are underwritten under standards and procedures which vary from
and are less stringent than those described in this prospectus. For instance,
Mortgage Loans may be underwritten under a "limited documentation" program if so
specified in the related prospectus supplement. For limited documentation
Mortgage Loans, minimal investigation into the borrowers' credit history and
income profile is undertaken by the originator and the Mortgage Loans may be
underwritten primarily on the basis of an appraisal of the Mortgaged Property or
Cooperative Dwelling and the Loan-to-Value Ratio at origination. Thus, if the
Loan-to-Value Ratio is less than a percentage specified in the related
prospectus supplement, the originator may forego some aspects of the review
relating to monthly income, and traditional ratios of monthly or total expenses
to gross income may not be considered.
The underwriting standards for Mortgage Loans secured by Multifamily
Property will be described in the related prospectus supplement.
QUALIFICATIONS OF UNAFFILIATED SELLERS
Unless otherwise specified in the applicable prospectus supplement with
respect to an Unaffiliated Seller of Closed Loans secured by residential
properties, each Unaffiliated Seller must be an institution experienced in
originating conventional mortgage loans and/or FHA Loans or VA Loans in
accordance with accepted practices and prudent guidelines, and must maintain
satisfactory facilities to originate those loans. In addition, except as
otherwise specified, the Depositor requires adequate financial stability and
adequate servicing experience, where appropriate, as well as satisfaction of
other criteria.
REPRESENTATIONS BY UNAFFILIATED SELLERS; REPURCHASES
Unless otherwise specified in the related prospectus supplement, each
Unaffiliated Seller, or the Master Servicer, if the Unaffiliated Seller is also
the Master Servicer under the Agreement, will have made representations and
warranties in respect of the Mortgage Loans sold by the Unaffiliated Seller to
the Depositor. These representations and warranties will generally include,
among other things:
o with respect to each Mortgaged Property, that title insurance, or in the
case of Mortgaged Properties located in areas where policies are generally
not available, an attorney's certificate of title, and any required hazard
and primary mortgage insurance was effective at the origination of each
Mortgage Loan, and that each policy, or certificate of title, remained in
effect on the date of purchase of the Mortgage Loan from the Unaffiliated
Seller;
o that the Unaffiliated Seller had good and marketable title to each Mortgage
Loan it sold;
o with respect to each Mortgaged Property, that each mortgage constituted a
valid first lien on the Mortgaged Property, subject only to permissible
title insurance exceptions;
o that there were no delinquent tax or assessment liens against the Mortgaged
Property; and
o that each Mortgage Loan was current as to all required payments, unless
otherwise specified in the related prospectus supplement.
With respect to a Cooperative Loan, the Unaffiliated Seller will represent
and warrant that (1) the security interest created by the cooperative security
agreements constituted a valid first lien on the collateral securing the
Cooperative Loan, subject to the right of the related Cooperative to cancel
shares and terminate the proprietary lease for unpaid assessments and to the
lien of the related Cooperative for unpaid assessments representing the
Mortgagor's pro rata share of the Cooperative's payments for its mortgage,
current and future real property taxes, maintenance charges and other
assessments to which like collateral is commonly subject, and (2) the related
cooperative apartment was free from damage and was in good repair.
All of the representations and warranties of an Unaffiliated Seller in
respect of a Mortgage Loan will have been made as of the date on which the
related Unaffiliated Seller sold the Mortgage Loan to the Depositor or its
affiliate. A substantial period of time may have elapsed between the date of
sale and the date of initial issuance of the Series of Securities evidencing an
interest in, or secured by, the related Mortgage Loan. Since the representations
and warranties of an Unaffiliated Seller do not address events that may occur
following the sale of a Mortgage Loan by an Unaffiliated Seller, the repurchase
obligation described below will not arise if, during the period commencing on
the date of sale of a Mortgage Loan by the Unaffiliated Seller to or on behalf
of the Depositor, the relevant event occurs that would have given rise to the
obligation had the event occurred prior to sale of the affected Mortgage Loan.
However, the Depositor will not include any Mortgage Loan in the Trust Fund for
any Series of Securities if anything has come to the Depositor's attention that
would cause it to believe that the representations and warranties of an
Unaffiliated Seller will not be accurate and complete in all material respects
in respect of the related Mortgage Loan as of the related Cut-off Date.
The only representations and warranties to be made for the benefit of
holders of Securities of a Series in respect of any Mortgage Loan relating to
the period commencing on the date of sale of the Mortgage Loan to the Depositor
or its affiliates will be limited representations of the Depositor and of the
Master Servicer described below under "Description of the Securities --
Assignment of Mortgage Loans." If the Master Servicer is also an Unaffiliated
Seller of Mortgage Loans with respect to a particular Series, the
representations will be in addition to the representations and warranties made
in its capacity as an Unaffiliated Seller.
Upon the discovery of the breach of any representation or warranty made by
an Unaffiliated Seller in respect of a Mortgage Loan that materially and
adversely affects the interests of the Securityholders of the related Series,
the related Unaffiliated Seller or the Servicer of the Mortgage Loan will be
obligated to repurchase the Mortgage Loan at a purchase price equal to 100% of
the unpaid principal balance of the Mortgage Loan at the date of repurchase or,
in the case of a Series of Securities as to which the Depositor has elected to
treat the related Trust Fund as a REMIC, at a price as may be necessary to avoid
a tax on a prohibited transaction, as described in Section 860F(a) of the Code,
in each case together with accrued interest at the Mortgage Rate for the related
Mortgage Loan to the first day of the month following the repurchase and the
amount of any unreimbursed Advances made by the Master Servicer or the Servicer,
as applicable, in respect of the Mortgage Loan. The Master Servicer will be
required to enforce this obligation for the benefit of the Trustee and the
Securityholders, following the practices it would employ in its good faith
business judgment were it the owner of the Mortgage Loan. Unless otherwise
specified in the applicable prospectus supplement, and subject to the ability of
the Depositor, the Unaffiliated Seller or the Servicer to substitute for some of
the Mortgage Loans as described below, this repurchase obligation constitutes
the sole remedy available to the Securityholders of the related Series for a
breach of representation or warranty by an Unaffiliated Seller.
The obligation of the Master Servicer to purchase a Mortgage Loan if an
Unaffiliated Seller or a Servicer defaults on its obligation to do so is subject
to limitations, and no assurance can be given that Unaffiliated Sellers will
carry out their respective repurchase obligations with respect to Mortgage
Loans. However, to the extent that a breach of the representations and
warranties of an Unaffiliated Seller may also constitute a breach of the
representations and warranties made by the Depositor or by the Master Servicer
with respect to the insurability of the Mortgage Loans, the Depositor may have a
repurchase obligation, and the Master Servicer may have the limited purchase
obligation, in each case as described below under "Description of the Securities
-- Assignment of Mortgage Loans."
CLOSED LOAN PROGRAM
The Depositor may also acquire Closed Loans that have been originated by
Unaffiliated Sellers in accordance with underwriting standards acceptable to the
Depositor. Unless otherwise specified in the applicable prospectus supplement,
Closed Loans for which 11 or fewer monthly payments have been received will be
further subject to the Depositor's customary underwriting standards. Unless
otherwise specified in the applicable prospectus supplement, Closed Loans for
which 12 to 60 monthly payments have been received will be subject to a review
of payment history and will conform to the Depositor's guidelines for the
related mortgage program. In the event one or two payments were over 30 days
delinquent, a letter explaining the delinquencies will be required of the
Mortgagor. Unless otherwise specified in the applicable prospectus supplement,
the Depositor will not purchase for inclusion in a Mortgage Pool a Closed Loan
for which
(1) more than two monthly payments were over 30 days delinquent,
(2) one payment was over 60 days delinquent or
(3) more than 60 monthly payments were received.
MORTGAGE CERTIFICATES
If so specified in the prospectus supplement with respect to a Series, the
Trust Fund for the Series may include conventional mortgage pass-through
certificates, collateralized mortgage bonds or other indebtedness secured by
mortgage loans or manufactured housing contracts (the "Mortgage Certificates")
issued by one or more trusts established by one or more private entities and
evidencing, unless otherwise specified in the related prospectus supplement, the
entire interest in a pool of mortgage loans. A description of the mortgage loans
and/or manufactured housing contracts underlying the Mortgage Certificates, the
related pooling and servicing arrangements and the insurance arrangements in
respect of the mortgage loans will be set forth in the applicable prospectus
supplement or in the Current Report on Form 8-K referred to below. That
prospectus supplement, or, if the applicable information is not available in
advance of the date of the prospectus supplement, a Current Report on Form 8-K
to be filed by the Depositor with the Commission within 15 days of the issuance
of the Securities of the related Series, will also set forth information with
respect to the entity or entities forming the related mortgage pool, the issuer
of any credit support with respect to the Mortgage Certificates and the
aggregate outstanding principal balance and the pass-through rate borne by each
Mortgage Certificate included in the Trust Fund, together with some additional
information with respect to the Mortgage Certificates. The inclusion of Mortgage
Certificates in a Trust Fund with respect to a Series of Securities is
conditioned upon their characteristics being in form and substance satisfactory
to the Rating Agency rating the related Series of Securities. Mortgage
Certificates, together with the Mortgage Loans, Warehouse Loans and Contracts,
are referred to in this prospectus as the "Trust Assets."
THE CONTRACT POOLS
If so specified in the prospectus supplement with respect to a Series, the
Trust Fund for the Series may include a pool of manufactured housing installment
or conditional sales contracts and installment loan agreements (the "Contracts")
or participation certificates representing participation interests in the
Contracts and related property (the "Contract Pool") conveyed to the Trust by
the Depositor, evidencing interests in manufactured housing installment or
conditional sales contracts and installment loan agreements originated by a
manufactured housing dealer in the ordinary course of business and purchased by
the Depositor. The Contracts may be conventional manufactured housing contracts
or contracts insured by the FHA or partially guaranteed by the VA. Each Contract
will be secured by a new or used unit of manufactured housing (a "Manufactured
Home"). Unless otherwise specified in the related prospectus supplement, the
Contracts will be fully amortizing and will bear interest at the fixed annual
percentage rates ("APRs") specified in the related prospectus supplement.
The Manufactured Homes securing the Contracts consist of manufactured homes
within the meaning of 42 United States Code, Section 5402(6), which defines a
"manufactured home" as "a structure, transportable in one or more sections,
which in the traveling mode, is eight body feet or more in width or forty body
feet or more in length, or, when erected on site, is three hundred twenty or
more square feet, and which is built on a permanent chassis and designed to be
used as a dwelling with or without a permanent foundation when connected to the
required utilities, and includes the plumbing, heating, air conditioning, and
electrical systems contained therein; except that the term shall include any
structure which meets all the requirements of [this] paragraph except the size
requirements and with respect to which the manufacturer voluntarily files a
certification required by the Secretary of Housing and Urban Development and
complies with the standards established under [this] chapter."
The Depositor will cause the Contracts constituting each Contract Pool to
be assigned and/or pledged to the related Trustee named in the related
prospectus supplement for the benefit of the related Securityholders. The Master
Servicer specified in the related prospectus supplement will service the
Contracts, either by itself or through other Servicers, pursuant to the
Agreement. See "Description of the Securities -- Servicing by Unaffiliated
Sellers." With respect to those Contracts serviced by the Master Servicer
through a Servicer, the Master Servicer will remain liable for its servicing
obligations under the Agreement as if the Master Servicer alone were servicing
the Contracts. The Contract documents, if so specified in the related prospectus
supplement, may be held for the benefit of the Trustee by a Custodian (the
"Custodian") appointed pursuant to the related Pooling and Servicing Agreement
or a Custodial Agreement (the "Custodial Agreement") among the Depositor, the
Trustee and the Custodian.
Unless otherwise specified in the related prospectus supplement, each
registered holder of a Security will be entitled to receive periodic
distributions, which will be monthly unless otherwise specified in the related
prospectus supplement, of all or a portion of principal of the underlying
Contracts or interest on the principal balance of the Security at the Interest
Rate, or both. See "Description of the Securities -- Payments on Contracts."
Except as otherwise specified in the related prospectus supplement, the
related prospectus supplement, or, if the information is not available in
advance of the date of the related prospectus supplement, a Current Report on
Form 8-K to be filed with the Commission, will specify, for the Contracts
contained in the related Contract Pool, among other things:
o the dates of origination of the Contracts;
o the weighted average APR on the Contracts;
o the range of outstanding principal balances as of the Cut-off Date;
o the average outstanding principal balance of the Contracts as of the
Cut-off Date;
o the weighted average term to maturity as of the Cut-off Date; and
o the range of original maturities of the Contracts.
With respect to the Contracts included in the Contract Pool, the Depositor,
the Master Servicer or any other party specified in the related prospectus
supplement, will make or cause to be made representations and warranties as to
the types and geographical distribution of the Contracts and as to the accuracy
in all material respects of information furnished to the Trustee in respect of
each Contract. In addition, the Master Servicer or the Unaffiliated Seller of
the Contracts will represent and warrant that, as of the Cut-off Date, unless
otherwise specified in the related prospectus supplement, no Contract was more
than 30 days delinquent as to payment of principal and interest. Upon a breach
of any representation that materially and adversely affects the interest of the
related Securityholders in a Contract, the Master Servicer, the Unaffiliated
Seller or another party, as appropriate, will be obligated either to cure the
breach in all material respects or to purchase the Contract or, if so specified
in the related prospectus supplement, to substitute another Contract as
described below. This repurchase or substitution obligation constitutes the sole
remedy available to the Securityholders or the Trustee for a breach of a
representation by the Master Servicer, the Unaffiliated Seller or another party.
If so specified in the related prospectus supplement, in addition to making
particular representations and warranties regarding its authority to enter into,
and its ability to perform its obligations under, the Agreement, the Master
Servicer will make other representations and warranties, except to the extent
that another party specified in the prospectus supplement makes any
representations, to the Trustee with respect to the enforceability of coverage
under any applicable insurance policy or hazard insurance policy. See
"Description of Insurance" for information regarding the extent of coverage
under the insurance policies. Upon a breach of the insurability representation
that materially and adversely affects the interests of the Securityholders in a
Contract, the Master Servicer, the Unaffiliated Seller or any other party, as
appropriate, will be obligated either to cure the breach in all material
respects or, unless otherwise specified in the related prospectus supplement, to
purchase the Contract at a price equal to the principal balance of the Contract
as of the date of purchase plus accrued interest at the related Pass-Through
Rate to the first day of the month following the month of purchase. The Master
Servicer, if required by the Rating Agency rating the Securities, will procure a
surety bond, guaranty, letter of credit or other instrument (the "Performance
Bond") acceptable to the Rating Agency to support this purchase obligation. See
"Credit Support -- Performance Bond." The purchase obligation will constitute
the sole remedy available to the Securityholders or the Trustee for a breach of
the Master Servicer's or seller's insurability representation.
If provided in the related prospectus supplement, if the Depositor
discovers or receives notice of any breach of its representations and warranties
relating to a Contract within two years or another period specified in the
related prospectus supplement of the date of the initial issuance of the
Securities, the Depositor may remove the Contract from the Trust Fund (each, a
"Deleted Contract"), rather than repurchase the Contract as provided above, and
substitute in its place another Contract (each, a "Substitute Contract"). Any
Substitute Contract, on the date of substitution, will
o have an outstanding principal balance, after deduction of all scheduled
payments due in the month of substitution, not in excess of the outstanding
principal balance of the Deleted Contract, the amount of any shortfall to
be distributed to Securityholders in the month of substitution,
o have an APR not less than, and not more than 1% greater than, the APR of
the Deleted Contract,
o have a remaining term to maturity not greater than, and not more than one
year less than, that of the Deleted Contract and
o comply with all the representations and warranties set forth in the
Agreement as of the date of substitution.
This repurchase or substitution obligation constitutes the sole remedy available
to the Securityholders or the Trustee for any breach.
UNDERWRITING POLICIES
Conventional Contracts will comply with the underwriting policies of the
Originator or Unaffiliated Seller of the Contracts described in the related
prospectus supplement. Except as described below or in the related prospectus
supplement, the Depositor believes that these policies were consistent with
those utilized by mortgage lenders or manufactured home lenders generally during
the period of origination.
With respect to a Contract made in connection with the Obligor's purchase
of a Manufactured Home, the "appraised value" is the amount determined by a
professional appraiser. The appraiser must personally inspect the Manufactured
Home and prepare a report which includes market data based on recent sales of
comparable Manufactured Homes and, when deemed applicable, a replacement cost
analysis based on the current cost of a similar Manufactured Home. Unless
otherwise specified in the related prospectus supplement, the "Contract
Loan-to-Value Ratio" will be equal to the original principal amount of the
Contract divided by the lesser of the "appraised value" or the sales price for
the Manufactured Home.
THE FINANCING LOAN POOLS
If so specified in the prospectus supplement with respect to a Series, the
Trust Fund for the Series may include a pool of loans made to finance the
origination of Home Equity Loans or Contracts (the "Warehouse Loans") and
secured by Home Equity Loans or Contracts or participation certificates
representing participation interests in the Warehouse Loans and related property
(the "Warehouse Loan Pool") conveyed to the Trust by the Depositor, evidencing
interests in Warehouse Loans originated in the ordinary course of business and
purchased by the Depositor. Unless otherwise specified in the related prospectus
supplement, the Warehouse Loans will be fully amortizing and will bear interest
at the interest rates specified in the related prospectus supplement.
The Depositor will cause the Warehouse Loans constituting each Warehouse
Loan Pool to be assigned and/or pledged to the related Trustee named in the
related prospectus supplement for the benefit of the related Securityholders.
The Master Servicer specified in the related prospectus supplement will service
the Warehouse Loans, either by itself or through other Servicers, pursuant to
the Agreement. See "Description of the Securities -- Servicing by Unaffiliated
Sellers." With respect to those Warehouse Loans serviced by the Master Servicer
through a Servicer, the Master Servicer will remain liable for its servicing
obligations under the Agreement as if the Master Servicer alone were servicing
the Warehouse Loans. The Warehouse Loan documents, if so specified in the
related prospectus supplement, may be held for the benefit of the Trustee by a
Custodian appointed pursuant to the related Pooling and Servicing Agreement or a
Custodial Agreement.
Except as otherwise specified in the related prospectus supplement, the
related prospectus supplement, or, if the information is not available in
advance of the date of the related prospectus supplement, a Current Report on
Form 8-K to be filed with the Commission, will specify, for the Warehouse Loans
contained in the related Warehouse Loan Pool, among other things:
o the dates of origination of the Warehouse Loans;
o the weighted average APR on the Warehouse Loans;
o the range of outstanding principal balances as of the Cut-off Date;
o the average outstanding principal balance of the Warehouse Loans as of the
Cut-off Date;
o the weighted average term to maturity as of the Cut-off Date; and
o the range of original maturities of the Warehouse Loans.
With respect to the Warehouse Loans included in the Warehouse Loan Pool,
the Depositor, the Master Servicer or any other party specified in the related
prospectus supplement, will make or cause to be made representations and
warranties as to the types and geographical distribution of the Warehouse Loans
and as to the accuracy in all material respects of information furnished to the
Trustee in respect of each Warehouse Loan. In addition, the Master Servicer or
the Unaffiliated Seller of the Warehouse Loans will represent and warrant that,
as of the Cut-off Date, unless otherwise specified in the related prospectus
supplement, no Warehouse Loan was more than 30 days delinquent as to payment of
principal and interest. Upon a breach of any representation that materially and
adversely affects the interest of the related Securityholders in a Warehouse
Loan, the Master Servicer, the Unaffiliated Seller or another party, as
appropriate, will be obligated either to cure the breach in all material
respects or to purchase the Warehouse Loan or, if so specified in the related
prospectus supplement, to substitute another Warehouse Loan. This repurchase or
substitution obligation constitutes the sole remedy available to the
Securityholders or the Trustee for a breach of a representation by the Master
Servicer, the Unaffiliated Seller or another party.
If provided in the related prospectus supplement, if the Depositor
discovers or receives notice of any breach of its representations and warranties
relating to a Warehouse Loan within two years or another period specified in the
related prospectus supplement of the date of the initial issuance of the
Securities, the Depositor may remove the Warehouse Loan from the Trust Fund
(each, a "Deleted Warehouse Loan"), rather than repurchase the Warehouse Loan as
provided above, and substitute in its place another Warehouse Loan (each, a
"Substitute Warehouse Loan"). Any Substitute Warehouse Loan, on the date of
substitution, will
o have an outstanding principal balance, after deduction of all scheduled
payments due in the month of substitution, not in excess of the outstanding
principal balance of the Deleted Warehouse Loan, the amount of any
shortfall to be distributed to Securityholders in the month of
substitution,
o have an APR not less than, and not more than 1% greater than, the APR of
the Deleted Warehouse Loan,
o have a remaining term to maturity not greater than, and not more than one
year less than, that of the Deleted Warehouse Loan and
o comply with all the representations and warranties set forth in the
Agreement as of the date of substitution.
This repurchase or substitution obligation constitutes the sole remedy available
to the Securityholders or the Trustee for any breach.
UNDERWRITING POLICIES
Warehouse Loans will comply with the underwriting policies of the
Originator or Unaffiliated Seller of the Warehouse Loans described in the
related prospectus supplement. Except as described below or in the related
prospectus supplement.
THE DEPOSITOR
Asset Backed Securities Corporation (the "Depositor") was incorporated in
the State of Delaware on December 31, 1985, and is an indirect, wholly owned
subsidiary of Credit Suisse First Boston, Inc. Credit Suisse First Boston
Corporation, which may act as an underwriter in offerings made by this
Prospectus, as described in "Plan of Distribution" below, is also a wholly owned
subsidiary of Credit Suisse First Boston, Inc. The principal executive offices
of the Depositor are located at Eleven Madison Avenue, New York, NY 10010. Its
telephone number is (212) 325-2000.
The Depositor was organized, among other things, for the purposes of
establishing trusts, selling beneficial interests in those trusts and acquiring
and selling mortgage assets to trusts. Neither the Depositor, its parent nor any
of the Depositor's affiliates will ensure or guarantee distributions on the
Securities of any Series.
Trust Assets will be acquired by the Depositor directly or through one or
more affiliates.
USE OF PROCEEDS
Except as otherwise provided in the related prospectus supplement, the
Depositor will apply all or substantially all of the net proceeds from the sale
of each Series offered by this Prospectus and by the related prospectus
supplement to purchase the Trust Assets, to repay indebtedness which has been
incurred to obtain funds to acquire the Trust Assets, to establish the Reserve
Funds or Pre-Funding Accounts, if any, for the Series and to pay costs of
structuring and issuing the Securities. If so specified in the related
prospectus supplement, Securities may be exchanged by the Depositor for Trust
Assets. Unless otherwise specified in the related prospectus supplement, the
Trust Assets for each Series of Securities will be acquired by the Depositor
either directly, or through one or more affiliates which will have acquired
Trust Assets from time to time either in the open market or in privately
negotiated transactions.
MATURITY, PREPAYMENT AND YIELD CONSIDERATIONS
Unless otherwise specified in the related prospectus supplement, the
scheduled maturities of all of the Mortgage Loans, or the mortgage loans
underlying the Mortgage Certificates, at origination will not be less than
approximately 10 years or exceed 40 years and all the Contracts will have
maturities at origination of not more than 20 years, but the Mortgage Loans, or
the underlying mortgage loans, or Contracts may be prepaid in full or in part at
any time. Unless otherwise specified in the applicable prospectus supplement, no
Mortgage Loan, or mortgage loan, or Contract will provide for a prepayment
penalty and each will contain, except in the case of FHA and VA Loans,
due-on-sale clauses permitting the mortgagee or obligee to accelerate maturity
upon conveyance of the related Mortgaged Property, Cooperative Dwelling or
Manufactured Home.
The FHA has compiled statistics relating to one- to four-family, level
payment mortgage loans insured by the FHA under the National Housing Act of
1934, as amended, at various interest rates, all of which permit assumption by
the new buyer if the home is sold. The statistics indicate that while some
mortgage loans remain outstanding until their scheduled maturities, a
substantial number are paid prior to their respective stated maturities. The
Actuarial Division of HUD has prepared tables which, assuming full mortgage
prepayments at the rates experienced by FHA, set forth the percentages of the
original number of FHA Loans in pools of level payment mortgage loans of varying
maturities that will remain outstanding on each anniversary of the original date
of the mortgage loans, assuming they all have the same origination date, ("FHA
Experience"). Published information with respect to conventional residential
mortgage loans indicates that the mortgage loans have historically been prepaid
at higher rates than government-insured loans because, unlike government insured
mortgage loans, conventional mortgage loans may contain due-on-sale clauses that
allow the holder of the loans to demand payment in full of the remaining
principal balance of the mortgage loans upon sales or particular transfers of
the mortgaged property. There are no similar statistics with respect to the
prepayment rates of cooperative loans or loans secured by multifamily
properties.
It is customary in the residential mortgage industry in quoting yields on a
pool of (1) 30-year fixed-rate, level payment mortgages, to compute the yield as
if the pool were a single loan that is amortized according to a 30-year schedule
and is then prepaid in full at the end of the twelfth year and (2) 15-year
fixed-rate, level payment mortgages, to compute the yield as if the pool were a
single loan that is amortized according to a 15-year schedule and then is
prepaid in full at the end of the seventh year.
Prepayments on residential mortgage loans are also commonly measured
relative to a prepayment standard or model. If so specified in the prospectus
supplement relating to a Series of Securities, the model used in a prospectus
supplement will be the Standard Prepayment Assumption ("SPA"). SPA represents an
assumed rate of prepayment relative to the then outstanding principal balance of
a pool of mortgages. A prepayment assumption of 100% of SPA assumes prepayment
rates of 0.2% per annum of the then outstanding principal balance of the
mortgages in the first month of the life of the mortgages and an additional 0.2%
per annum in each subsequent month until the thirtieth month and in each
subsequent month during the life of the mortgages, 100% of SPA assumes a
constant prepayment rate of 6% per annum each month.
Information regarding FHA Experience, other published information, SPA or
any other rate of assumed prepayments, as applicable, will be set forth in the
prospectus supplement with respect to a Series of Securities. There is, however,
no assurance that prepayment of the Mortgage Loans underlying a Series of
Securities will conform to FHA Experience, mortgage industry custom, any level
of SPA, or any other rate specified in the related prospectus supplement. A
number of factors, including homeowner mobility, economic conditions,
enforceability of due-on-sale clauses, mortgage market interest rates, mortgage
recording taxes and the availability of mortgage funds, may affect prepayment
experience on residential mortgage loans.
The terms of the Servicing Agreement will require the Servicer or the
Master Servicer to enforce any due-on-sale clause to the extent it has knowledge
of the conveyance or the proposed conveyance of the underlying Mortgaged
Property or Cooperative Dwelling; provided, however, that any enforcement action
that would impair or threaten to impair any recovery under any related Insurance
Policy will not be required or permitted. See "Description of the Securities --
Enforcement of `Due-On-Sale' Clauses; Realization Upon Defaulted Mortgage Loans"
and "Certain Legal Aspects of the Mortgage Loans and Contracts -- The Mortgage
Loans -- `Due-On-Sale' Clauses" for a description of particular provisions of
each Agreement and related legal developments that may affect the prepayment
experience on the Mortgage Loans.
At the request of the Mortgagor, the Servicer may refinance the Mortgage
Loans in any Mortgage Pool by accepting prepayments on the Mortgage Loans and
making new loans secured by a mortgage on the same property. Upon any
refinancing, the new loans will not be included in the Mortgage Pool and the
related Servicer will be required to repurchase the affected Mortgage Loan. A
Mortgagor may be legally entitled to require the Servicer to allow a
refinancing. Any repurchase will have the same effect as a prepayment in full of
the related Mortgage Loan.
There are no uniform statistics compiled for prepayments of contracts
relating to Manufactured Homes. Prepayments on the Contracts may be influenced
by a variety of economic, geographic, social and other factors, including
repossessions, aging, seasonality and interest rate fluctuations. Other factors
affecting prepayment of mortgage loans or Contracts include changes in housing
needs, job transfers, unemployment and servicing decisions. An investment in
Securities evidencing interests in, or secured by, Contracts may be affected by,
among other things, a downturn in regional or local economic conditions. These
regional or local economic conditions are often volatile, and historically have
affected the delinquency, loan loss and repossession experience of the
Contracts. To the extent that losses on the Contracts are not covered by the
Subordinated Amount, if any, Letters of Credit, applicable Insurance Policies,
if any, or by any Alternative Credit Support, holders of the Securities of a
Series evidencing interests in, or secured by, Contracts will bear all risk of
loss resulting from default by Obligors and will have to look primarily to the
value of the Manufactured Homes, which generally depreciate in value, for
recovery of the outstanding principal of and unpaid interest on the defaulted
Contracts. See "The Trust Fund -- The Contract Pools."
While most Contracts will contain "due-on-sale" provisions permitting the
holder of the Contract to accelerate the maturity of the Contract upon
conveyance by the borrower, to the extent provided in the related prospectus
supplement, the Master Servicer may permit proposed assumptions of Contracts
where the proposed buyer meets the underwriting standards described above. Any
assumption would have the effect of extending the average life of the Contracts.
FHA Mortgage Loans and Contracts and VA Mortgage Loans and Contracts are not
permitted to contain "due-on-sale" clauses, and are freely assumable.
Mortgage Loans made with respect to Multifamily Property may have
provisions that prevent prepayment for a number of years and may provide for
payments of interest only during a specific period followed by amortization of
principal on the basis of a schedule extending beyond the maturity of the
related Mortgage Loans. Prepayments of Mortgage Loans secured by Multifamily
Property may be affected by these and other factors, including changes in
interest rates and the relative tax benefits associated with ownership of
Multifamily Property.
If set forth in the applicable prospectus supplement, the Depositor or
other specified entity will have the option to repurchase the Trust Assets
included in the related Trust Fund under the conditions stated in the related
prospectus supplement. For any Series of Securities for which the Depositor has
elected to treat the Trust Fund or particular assets of the Trust Fund as a
REMIC pursuant to the provisions or the Code, any repurchase will be effected in
compliance with the requirements of Section 860F(a)(4) of the Code so as to
constitute a "qualifying liquidation" under the Code. In addition, the Depositor
will be obligated, under some circumstances, to repurchase some of the Trust
Assets. The Master Servicer and Unaffiliated Sellers will also have repurchase
obligations, as more fully described in this prospectus and in the related
prospectus supplement. In addition, the mortgage loans underlying the Mortgage
Certificates may be subject to repurchase under circumstances similar to those
described above. Repurchases will have the same effect as prepayments in full.
See "The Trust Fund -- Mortgage Loan Program" and " -- Representations by
Unaffiliated Sellers; Repurchases," "Description of the Securities -- Assignment
of Mortgage Loans," "-- Assignment of Mortgage Certificates," "-- Assignment of
Contracts" and " -- Termination."
If so specified in the related prospectus supplement, a Mortgage Pool may
contain Mortgage Loans with fluctuating Mortgage Rates that adjust more
frequently than the monthly payment with respect to the Mortgage Loans. As a
result, the portion of each monthly payment allocated to principal may vary from
month to month. Negative amortization with respect to a Mortgage Loan will occur
if an adjustment to the Mortgage Rate causes the amount of interest accrued in
any month, calculated at the new Mortgage Rate for the period, to exceed the
amount of the monthly payment or if the allowable increase in any monthly
payment is limited to an amount that is less than the amount of interest accrued
in any month. The amount of any resulting Deferred Interest will be added to the
principal balance of the Mortgage Loan and will bear interest at the Mortgage
Rate in effect from time to time. To the extent that, as a result of the
addition of any Deferred Interest, the Mortgage Loan negatively amortizes over
its term, the weighted average life of the Securities of the related Series will
be greater than would otherwise be the case. As a result, the yield on any
Mortgage Loan at any time may be less than the yields on similar adjustable rate
mortgage loans, and the rate of prepayment may be lower or higher than would
otherwise be anticipated.
Generally, when a full prepayment is made on a Mortgage Loan , Warehouse
Loan or Contract, the Mortgagor or the borrower under a Contract (the
"Obligor"), is charged interest for the number of days actually elapsed from the
due date of the preceding monthly payment up to the date of prepayment, at a
daily interest rate determined by dividing the Mortgage Rate or APR by 365. Full
prepayments will reduce the amount of interest paid by the Mortgagor or the
Obligor because interest on the principal amount of any Mortgage Loan, Warehouse
Loan or Contract so prepaid will be paid only to the date of prepayment instead
of for a full month; however, unless otherwise provided in the applicable
prospectus supplement, the Master Servicer with respect to a Series will be
required to advance from its own funds the portion of any interest at the
related Mortgage Rate that is not so received. Partial prepayments generally are
applied on the first day of the month following receipt, with no resulting
reduction in interest payable for the period in which the partial prepayment is
made. Unless otherwise specified in the related prospectus supplement, full and
partial prepayments, together with interest on the full and partial prepayments
at the Mortgage Rate or APR for the related Mortgage Loan, Warehouse Loan or
Contract to the last day of the month in which the prepayments occur, will be
deposited in the Certificate Account and will be available for distribution to
Securityholders on the next succeeding Distribution Date in the manner specified
in the related prospectus supplement.
Generally, the effective yield to holders of Securities having a monthly
Distribution Date will be lower than the yield otherwise produced because, while
interest will accrue on each Mortgage Loan, Warehouse Loan or Contract, or
mortgage loan underlying a Mortgage Certificate, to the first day of the month,
the distribution of interest to holders of Securities will be made no earlier
than the 25th day of the month following the month of the accrual, unless
otherwise provided in the applicable prospectus supplement. The adverse effect
on yield will intensify with any increase in the period of time by which the
Distribution Date with respect to a Series of Securities succeeds the 25th day.
If so specified in the related prospectus supplement, one or more Classes or
Subclasses of Certificates within a Series (the "Multi-Class Securities") may be
assigned a principal balance (a "Stated Principal Balance" or a "Certificate
Principal Balance") based on the cash flow from the Mortgage Loans, Mortgage
Certificates, the Warehouse Loans, the Contracts and/or the other assets in the
Trust Fund if specified in the related prospectus supplement and a stated annual
interest rate, determined in the manner set forth in the related Prospectus
Supplement, which may be fixed or variable (an "Interest Rate"). With respect to
the Multi-Class Securities of a Series having other than monthly Distribution
Dates, the yield to holders of the Certificates will also be adversely affected
by any increase in the period of time from the date to which interest accrues on
the Certificate to the Distribution Date on which interest is distributed.
If so specified in the related prospectus supplement, one or more Classes
or Subclasses of Notes and/or Certificates may receive unequal amounts of the
distributions of principal of and interest on the Mortgage Loans, the Warehouse
Loans, the Contracts and the Mortgage Certificates included in the related Trust
Fund, as specified in the related prospectus supplement (any Class or Subclass
receiving the higher proportion of principal distributions being referred to in
this prospectus after as a "Principal Weighted Class" or "Principal Weighted
Subclass," respectively, and any Class or Subclass receiving the higher
proportion of interest distributions being referred to in this prospectus as an
"Interest Weighted Class" or an "Interest Weighted Subclass," respectively). If
so specified in the related prospectus supplement, the allocation of the
principal and interest distributions may involve as much as 100% of each
distribution of principal or interest being allocated to one or more Classes or
Subclasses and 0% to another. If so specified in the related prospectus
supplement, one or more Classes or Subclasses may receive disproportionate
amounts of distributions of principal, which proportions may change over time
subject to specific conditions. Payments may be applied to any one or more
Classes or Subclasses on a sequential or pro rata basis, or otherwise, as
specified in the related prospectus supplement.
In the event that the Securities of a Series are divided into two or more
Classes or Subclasses and that a Class or Subclass is an Interest Weighted
Class, in the event that a Series includes Classes or Subclasses of Certificates
of a Series which evidence a residual interest in the related Trust Fund (the
"Residual Certificates"), the prospectus supplement for the Series will indicate
the manner in which the yield to Securityholders will be affected by different
rates of prepayments on the Mortgage Loans, on the Warehouse Loans, on the
Contracts or on the mortgage loans underlying the Mortgage Certificates. In
general, the yield on Securities that are offered at a premium to their
principal or notional amount ("Premium Securities") is likely to be adversely
affected by a higher than anticipated level of principal prepayments on the
Mortgage Loans, on the Warehouse Loans, on the Contracts or on the mortgage
loans underlying the Mortgage Certificates. This relationship will become more
sensitive as the amount by which the Percentage Interest of the Class in each
Interest Distribution is greater than the corresponding Percentage Interest of
the Class in each Principal Distribution. If the differential is particularly
wide, e.g., the Interest Distribution is allocated primarily or exclusively to
one Class or Subclass and the Principal Distribution primarily or exclusively to
another, and a high level of prepayments occurs, there is a possibility that
Securityholders of Premium Securities will not only suffer a lower than
anticipated yield but, in extreme cases, will fail to recoup fully their initial
investment. Conversely, a lower than anticipated level of principal prepayments,
which can be anticipated to increase the expected yield to holders of Securities
that are Premium Securities, will likely result in a lower than anticipated
yield to holders of Securities that are offered at a discount to their principal
amount ("Discount Securities"). If so specified in the applicable prospectus
supplement, a disproportionately large amount of principal prepayments or other
recoveries of principal specified in the related prospectus supplement on a
Mortgage Loan , Warehouse Loan or Contract that are received in advance of their
scheduled Due Dates and are not accompanied by an amount as to interest
representing scheduled interest due on any date or dates in any month or months
subsequent to the month of prepayment (the "Principal Prepayments") may be
distributed to the holders of the Senior Securities at the times and under the
circumstances described in the prospectus supplement.
In the event that the Securities of a Series include one or more Classes or
Subclasses of Multi-Class Securities, the prospectus supplement for the Series
will set forth information, measured relative to a prepayment standard or model
specified in the prospectus supplement, with respect to the projected weighted
average life of each the Class or Subclass and the percentage of the initial
Stated Principal Balance of each Subclass that would be outstanding on special
Distribution Dates for the related Series based on the assumptions stated in the
prospectus supplement, including assumptions that prepayments on the Mortgage
Loans, Warehouse Loans or Contracts or on the mortgage loans underlying the
Mortgage Certificates in the related Trust Fund are made at rates corresponding
to the various percentages of the prepayment standard or model.
DESCRIPTION OF THE SECURITIES
Each Series of Securities will be issued pursuant to either:
(a) an agreement consisting of either,
(1) a Pooling and Servicing Agreement or
(2) a Reference Agreement (the "Reference Agreement") and the Standard
Terms and Provisions of Pooling and Servicing Agreement (the "Standard Terms"),
(either the Standard Terms together with the Reference Agreement or the Pooling
and Servicing Agreement referred to in this prospectus as the "Pooling and
Servicing Agreement") among the Depositor, the Master Servicer, if any, and the
Trustee or
(b) if a Series of Securities includes Notes, a Trust Agreement.
Forms of the Pooling and Servicing Agreement and the Trust Agreement have been
filed as exhibits to the Registration Statement of which this Prospectus is a
part. If a Series of Securities includes Notes, the Notes will be issued and
secured pursuant to an Indenture to be entered into between the related Issuer
and the Indenture Trustee, and the related Trust Fund will be serviced by the
Master Servicer pursuant to a Sale and Servicing Agreement. Forms of the
Indenture and the Sale and Servicing Agreement have been filed as exhibits to
the Registration Statement of which this Prospectus is a part. In addition, a
Series of Securities may include a Warranty and Servicing Agreement between the
Master Servicer and the Servicer (the "Warranty and Servicing Agreement"). As
used in this prospectus, "Agreement" means, with respect to a Series that only
includes Certificates, the Pooling and Servicing Agreement and, if applicable,
the Warranty and Servicing Agreement, and with respect to a Series that includes
Notes, the Indenture, the Trust Agreement and the Sale and Servicing Agreement
and, if applicable, the Warranty and Servicing Agreement, as the context
requires.
The following summaries describe provisions common to each Agreement. The
summaries do not purport to be complete and are subject to, and are qualified in
their entirety by reference to, all of the provisions of the Agreement for the
applicable Series and the related prospectus supplement. Wherever defined terms
of the Agreement are referred to, the defined terms are incorporated in this
prospectus by reference.
Unless otherwise specified in the prospectus supplement with respect to a
Series, each Security offered by the prospectus supplement and by means of the
related prospectus supplement will be issued in fully registered form.
Securities will represent the undivided interest or beneficial interest
attributable to a Class or Subclass in, and Notes will be secured by, the Trust
Fund. The Trust Fund with respect to a Series will consist of:
o the Mortgage Loans, Warehouse Loans, Contracts and Mortgage Certificates
and distributions on the Mortgage Loans, Warehouse Loans, Contracts and
Mortgage Certificates as from time to time are subject to the applicable
Agreement;
o the assets as from time to time are identified as deposited in the
Certificate Account referred to below;
o property acquired by foreclosure of Mortgage Loans or deed in lieu of
foreclosure, or Manufactured Homes acquired by repossession;
o the Letter of Credit, if any, with respect to the related Series;
o the Pool Insurance Policy, if any, with respect to the related Series
(described below under "Description of Insurance");
o the Special Hazard Insurance Policy, if any, with respect to the related
Series (described below under "Description of Insurance");
o the Mortgagor Bankruptcy Bond and proceeds of the Mortgagor Bankruptcy
Bond, if any, with respect to the related Series (as described below under
"Description of Insurance");
o the Performance Bond and proceeds of the Performance Bond, if any, with
respect to the related Series;
o the Primary Mortgage Insurance Policies, if any, with respect to the
related Series (as described below under "Description of Insurance");
o the Security Guarantee Insurance, if any, with respect to the related
Series;
o the Depositor's rights under the Servicing Agreement with respect to the
Mortgage Loans, Warehouse Loans or Contracts, if any, with respect to the
related Series; and
o the GPM and Buy-Down Funds, if any, with respect to the related Series; or,
in lieu of some or all of the foregoing, the Alternative Credit Support
described in the applicable prospectus supplement.
Upon the original issuance of a Series of Securities, Certificates
representing the minimum undivided interest or beneficial ownership interest in
the related Trust Fund or the minimum notional amount allocable to each Class
will evidence the undivided interest, beneficial ownership interest or
percentage ownership interest specified in the related prospectus supplement.
If so specified in the related prospectus supplement, one or more Servicers
or the Depositor may directly perform some or all of the duties of a Master
Servicer with respect to a Series.
If so specified in the prospectus supplement for a Series with respect to
which the Depositor has elected to treat the Trust Fund as a REMIC under the
Code, ownership of the Trust Fund for a Series may be evidenced by Multi-Class
Certificates and/or Notes and Residual Certificates. Distributions of principal
and interest with respect to Multi-Class Securities may be made on a sequential
or concurrent basis, as specified in the related prospectus supplement. If so
specified in the related prospectus supplement, one or more Classes or
Subclasses may be Compound Interest Securities.
The Residual Certificates, if any, included in a Series will be designated
by the Depositor as the "residual interest" in the related REMIC for purposes of
Section 860G(a)(2) of the Code, and will represent the right to receive
distributions as specified in the prospectus supplement for the Series. All
other Classes of Securities of the Series will constitute "regular interests" in
the related REMIC. If so specified in the related prospectus supplement, the
Residual Certificates may be offered by this prospectus and by means of the
related prospectus supplement. See "Federal Income Tax Consequences."
If so specified in the prospectus supplement for a Series which includes
Multi-Class Securities, each Trust Asset in the related Trust Fund will be
assigned an initial "Asset Value." Unless otherwise specified in the related
prospectus supplement, the Asset Value of each Trust Asset in the related Trust
Fund will be the Stated Principal Balance of each Class or Classes of Securities
of the Series that, based upon specific assumptions, can be supported by
distributions on the Trust Assets allocable to a Class or Subclass, together
with reinvestment income on the Trust Assets, to the extent specified in the
related prospectus supplement, and amounts available to be withdrawn from any
Buy-Down, GPM Fund or Reserve Fund for the Series. The method of determining the
Asset Value of the Trust Assets in the Trust Fund for a Series that includes
Multi-Class Securities will be specified in the related prospectus supplement.
If so specified in the prospectus supplement with respect to a Series,
ownership of the Trust Fund for a Series may be evidenced by one or more Classes
or Subclasses of Certificates that are Senior Certificates and one or more
Classes or Subclasses of Certificates that are Subordinated Certificates, each
representing the undivided interests in the Trust Fund specified in the related
prospectus supplement. If so specified in the related prospectus supplement, one
or more Classes or Subclasses or Subordinated Securities of a Series may be
subordinated to the right of the holders of Securities of one or more Classes or
Subclasses within a Series to receive distributions with respect to the Mortgage
Loans, Warehouse Loans, Mortgage Certificates or Contracts in the related Trust
Fund, in the manner and to the extent specified in the related prospectus
supplement. If so specified in the related prospectus supplement, the holders of
each Subclass of Senior Securities will be entitled to the Percentage Interests
in the principal and/or interest payments on the underlying Mortgage Loans,
Warehouse Loans or Contracts specified in the related prospectus supplement. If
so specified in the related prospectus supplement, the Subordinated Securities
of a Series will evidence the right to receive distributions with respect to a
specific pool of Mortgage Loans, Warehouse Loans, Mortgage Certificates or
Contracts, which right will be subordinated to the right of the holders of the
Senior Securities of the Series to receive distributions with respect to a
specific pool of Mortgage Loans, Warehouse Loans, Mortgage Certificates or
Contracts, as more fully set forth in the related prospectus supplement. If so
specified in the related prospectus supplement, the holders of the Senior
Securities may have the right to receive a greater than pro rata percentage of
Principal Prepayments in the manner and under the circumstances described in the
prospectus supplement. If so specified in the related prospectus supplement, if
a Series of Securities includes Notes, one more Classes or Subclasses of Notes
may be subordinated to another Class or Subclasses of Notes in the manner and
under the circumstances described in the prospectus supplement.
If so specified in the related prospectus supplement, the Depositor may
sell some Classes or Subclasses of the Securities of a Series, including one or
more Classes or Subclasses of Subordinated or Residual Certificates, in
privately negotiated transactions exempt from registration under the Securities
Act of 1933, as amended (the "Securities Act"). These Securities will be
transferable only pursuant to an effective registration statement or an
applicable exemption under the Securities Act and pursuant to any applicable
state law. Alternatively, if so specified in the related prospectus supplement,
the Depositor may offer one or more Classes or Subclasses of the Subordinated or
Residual Certificates of a Series by means of this Prospectus and the related
prospectus supplement.
The Securities of a Series offered by this prospectus and by means of the
related prospectus supplements will be transferable and exchangeable at the
office or agency maintained by the Trustee for the purpose set forth in the
related prospectus supplement, unless the related prospectus supplement provides
otherwise. No service charge will be made for any transfer or exchange of
Securities, but the Trustee may require payment of a sum sufficient to cover any
tax or other governmental charge in connection with a transfer or exchange.
DISTRIBUTIONS OF PRINCIPAL AND INTEREST
Beginning on the date specified in the related prospectus supplement,
distributions of principal of and interest on the Securities of a Series will be
made by the Master Servicer or Trustee, if so specified in the prospectus
supplement, on each Distribution Date to persons in whose name the Securities
are registered at the close of business on the day specified in the related
prospectus supplement (the "Record Date"). The "Distribution Date" will be the
day specified in the prospectus supplement with respect to each Class or
Subclass of Securities of a Series, or if the day specified is not a business
day, the next succeeding business day. Distributions of interest will be made
periodically at the intervals, in the manner and at the per annum rate specified
in the related prospectus supplement, which rate may be fixed or variable.
Interest on the Securities will be calculated on the basis of a 360-day year
consisting of twelve 30-day months, unless otherwise specified in the related
prospectus supplement. Distributions of principal of the Securities will be made
in the priority and manner and in the amounts specified in the related
prospectus supplement.
If so specified in the prospectus supplement with respect to a Series of
Securities, distributions of interest and principal to a Certificateholder will
be equal to the product of the undivided interest evidenced by a Certificate and
the payments of principal and interest, adjusted as set forth in the prospectus
supplement, on or with respect to the Mortgage Loans, Warehouse Loans or
Contracts, including any Advances, or the Mortgage Certificates included in the
Trust Fund with respect to a Series.
If so specified in the related prospectus supplement, distributions on a
Class or Subclass of Securities of a Series may be based on the Percentage
Interest evidenced by a Security of a Class or Subclass in the distributions,
including any Advances, of principal (the "Principal Distribution") and
interest, adjusted as set forth in the prospectus supplement, (the "Interest
Distribution") on or with respect to the Mortgage Loans, Warehouse Loans, the
Contracts or the Mortgage Certificates in the related Trust Fund. Unless
otherwise specified in the related prospectus supplement, on each Distribution
Date, the Trustee will distribute to each holder of a Security of a Class or
Subclass an amount equal to the product of the Percentage Interest evidenced by
the Security and the interest of a Class or Subclass in the Principal
Distribution and the Interest Distribution. A Security of a Class or Subclass
may represent a right to receive a percentage of both the Principal Distribution
and the Interest Distribution or a percentage of either the Principal
Distribution or the Interest Distribution, as specified in the related
prospectus supplement.
If so specified in the related prospectus supplement, the holders of the
Senior Securities may have the right to receive a percentage of Principal
Prepayments that is greater than the percentage of regularly scheduled payments
of principal the holder is entitled to receive. The percentages may vary from
time to time, subject to the terms and conditions specified in the prospectus
supplement.
Unless otherwise specified in the prospectus supplement relating to a
Series of Securities that includes Multi-Class Securities, distributions of
interest on each Class or Subclass will be made on the Distribution Dates, and
at the Interest Rates, specified in the related prospectus supplement. Unless
otherwise specified in the prospectus supplement relating to a Series of
Securities, distributions of interest on each Class or Subclass of Compound
Interest Securities of the Series will be made on each Distribution Date after
the Stated Principal Balance of all Certificates and/or Notes of the Series
having a Final Scheduled Distribution Date prior to that of a Class or Subclass
of Compound Interest Securities has been reduced to zero. Prior to that time,
interest on each Class or Subclass of Compound Interest Securities will be added
to the Stated Principal Balance of each Class or Subclass on each Distribution
Date for the Series.
Unless otherwise specified in the prospectus supplement relating to a
Series of Securities that includes Multi-Class Securities, distributions in
reduction of the Stated Principal Balance of the Securities will be made as
described in this prospectus. Distributions in reduction of the Stated Principal
Balance of the Securities will be made on each Distribution Date for the Series
to the holders of the Securities of the Class or Subclass then entitled to
receive distributions until the aggregate amount of distributions have reduced
the Stated Principal Balance of the Securities to zero. Allocation of
distributions in reduction of Stated Principal Balance will be made to each
Class or Subclass of the Securities in the order specified in the related
prospectus supplement, which, if so specified in the related prospectus
supplement, may be concurrently. Unless otherwise specified in the related
prospectus supplement, distributions in reduction of the Stated Principal
Balance of each Security of a Class or Subclass then entitled to receive
distributions will be made pro rata among the Securities of the Class or
Subclass.
Unless otherwise specified in the prospectus supplement relating to a
Series of Securities that includes Multi-Class Securities, the maximum amount
which will be distributed in reduction of Stated Principal Balance to holders of
Securities of a Class or Subclass then entitled to distribution on any
Distribution Date will equal, to the extent funds are available in the
Certificate Account, the sum of
(1) the amount of the interest, if any, that has accrued but is not yet payable
on the Compound Interest Securities of a Series since the prior
Distribution Date, or since the date specified in the related prospectus
supplement in the case of the first Distribution Date, (the "Accrual
Distribution Amount");
(2) the Stated Principal Distribution Amount; and
(3) to the extent specified in the related prospectus supplement, the
applicable percentage of the Excess Cash Flow specified in the related
prospectus supplement.
Unless otherwise specified in the prospectus supplement relating to a
Series of Securities that includes Multi-Class Securities, the "Stated Principal
Distribution Amount" with respect to a Distribution Date will equal the sum of
the Accrual Distribution Amount, if any, and the amount, if any, by which the
then outstanding Stated Principal Balance of the Multi-Class Securities of a
Series, before taking into account the amount of interest accrued on any Class
of Compound Interest Securities of the Series to be added to the Stated
Principal Balance of the Class on each Distribution Date, exceeds the Asset
Value of the Trust Assets in the Trust Fund underlying the Series as of the end
of a period (a "Due Period") specified in the related prospectus supplement. For
purposes of determining the Stated Principal Distribution Amount with respect to
a Distribution Date, the Asset Value of the Trust Assets will be reduced to take
into account the interest evidenced by Classes or Subclasses of Securities in
the principal distributions on or with respect of Trust Assets received by the
Trustee during the preceding Due Period.
Unless otherwise specified in the prospectus supplement relating to a
Series of Securities that includes Multi-Class Securities, Excess Cash Flow
represents the excess of
(1) the interest evidenced by Multi-Class Securities in the distributions
received on the Mortgage Loans, Warehouse Loans or Contracts underlying a
Series in the Due Period preceding a Distribution Date for the Series, and,
in the case of the first Due Period, the amount deposited in the
Certificate Account on the closing day for the sale of the Securities,
together with income from its reinvestment, and, to the extent specified in
the related prospectus supplement, the amount of cash withdrawn from any
Reserve, GPM or Buy-Down Fund for the Series in the Due Period preceding
the Distribution Date, over
(2) the sum of all interest accrued, whether or not then distributable, on the
Multi-Class Securities since the preceding Distribution Date, or since the
date specified in the related prospectus supplement in the case of the
first Distribution Date, the Stated Principal Distribution Amount for the
then current Distribution Date and, if applicable, any payments made on any
Securities of a Class or Subclass pursuant to any special distributions in
reduction of Stated Principal Balance during the related Due Period.
The Stated Principal Balance of a Multi-Class Certificate of a Series at
any time represents the maximum specified dollar amount, exclusive of interest
at the related Interest Rate, to which the holder is entitled from the cash flow
on the Trust Assets in the Trust Fund for the Series, and will decline to the
extent distributions in reduction of Stated Principal Balance are received by
the holder. The Initial Stated Principal Balance of each Class or Subclass
within a Series that has been assigned a Stated Principal Balance will be
specified in the related prospectus supplement.
Distributions, other than the final distribution in retirement of the
Securities, will be made by check mailed to the address of the person entitled
to the distribution as it appears on the registers maintained for holders of
Notes (the "Note Register") or holders of Certificates (the "Certificate
Register"), as applicable, except that, with respect to any holder of a Security
meeting the requirements specified in the applicable prospectus supplement,
except as otherwise provided in the related prospectus supplement, distributions
shall be made by wire transfer in immediately available funds, provided that the
Trustee shall have been furnished with appropriate wiring instructions not less
than two Business Days prior to the related Distribution Date. The final
distribution in retirement of Securities will be made only upon presentation and
surrender of the Securities at the office or agency designated by the Master
Servicer, as specified in the final distribution notice to Securityholders.
If specified in the related Prospectus Supplement, the Trust may issue
securities from time to time and use the proceeds of this issuance to make
principal payments with respect to a Series.
ASSIGNMENT OF MORTGAGE CERTIFICATES
Pursuant to the applicable Agreement for a Series of Securities that
includes Mortgage Certificates in the related Trust Fund, the Depositor will
cause the Mortgage Certificates to be transferred to the Trustee together with
all principal and interest distributed on the Mortgage Certificates after the
Cut-off Date. Each Mortgage Certificate included in a Trust Fund will be
identified in a schedule appearing as an exhibit to the applicable Agreement.
The schedule will include information as to the principal balance of each
Mortgage Certificate as of the date of issuance of the Securities and its coupon
rate, maturity and original principal balance. In addition, necessary steps will
be taken by the Depositor to cause the Trustee to become the registered owner of
each Mortgage Certificate which is included in a Trust Fund and to provide for
all distributions on each Mortgage Certificate to be made directly to the
Trustee.
In connection with each assignment, the Depositor will make particular
representations and warranties in the Agreement as to, among other things, its
ownership of the Mortgage Certificates. In the event that these representations
and warranties are breached, and the breach or breaches adversely affect the
interests of the Securityholders in the Mortgage Certificates, the Depositor
will be required to repurchase the affected Mortgage Certificates at a price
equal to the principal balance of the Mortgage Certificates as of the date of
purchase together with accrued and unpaid interest on the Mortgage Certificates
at the related pass-through rate to the distribution date for the Mortgage
Certificates or, in the case of a Series in which an election has been made to
treat the related Trust Fund as a REMIC, at the lesser of the price set forth
above, or the adjusted tax basis, as defined in the Code, of the Mortgage
Certificates. The Mortgage Certificates with respect to a Series may also be
subject to repurchase, in whole but not in part, under the circumstances and in
the manner described in the related prospectus supplement. Any amounts received
in respect of any repurchases will be distributed to Securityholders on the
immediately succeeding Distribution Date.
If so specified in the related prospectus supplement, within the specified
period following the date of issuance of a Series of Securities, the Depositor
may, in lieu of the repurchase obligation set forth above, and in other
circumstances, deliver to the Trustee Mortgage Certificates ("Substitute
Mortgage Certificates") in substitution for any one or more of the Mortgage
Certificates ("Deleted Mortgage Certificates") initially included in the Trust
Fund. The required characteristics of any Substitute Mortgage Certificates and
any additional restrictions relating to the substitution of Mortgage
Certificates will be set forth in the related prospectus supplement.
ASSIGNMENT OF MORTGAGE LOANS
The Depositor will cause the Mortgage Loans constituting a Mortgage Pool to
be assigned to the Trustee, together with all principal and interest received on
or with respect to the Mortgage Loans after the Cut-off Date, but not including
principal and interest due on or before the Cut-off Date. The Trustee will,
concurrently with each assignment, either deliver the Securities to the
Depositor in exchange for the Mortgage Loans or apply the proceeds from the sale
of the Securities to the purchase price for the Mortgage Loans. If a Series of
Securities includes Notes, the Trust Fund will be pledged by the Issuer to the
Indenture Trustee as security for the Notes. Each Mortgage Loan will be
identified in a schedule appearing as an exhibit to the related Agreement. The
schedule will include information as to the adjusted principal balance of each
Mortgage Loan as of the Cut-off Date, as well as information respecting the
Mortgage Rate, the currently scheduled monthly payment of principal and
interest, the maturity of the Mortgage Note and the Loan-to-Value Ratio at
origination.
In addition, the Depositor will, as to each Mortgage Loan that is not a
Cooperative Loan, deliver or cause to be delivered to the Trustee, or to the
custodian in this prospectusafter referred to, the Mortgage Note endorsed to the
order of the Trustee, the Mortgage with evidence of recording indicated on it,
except for any Mortgage not returned from the public recording office, in which
case the Depositor will deliver a copy of the Mortgage together with its
certificate that the original of the Mortgage was delivered to the recording
office, and, unless otherwise specified in the related prospectus supplement, an
assignment of the Mortgage in recordable form. Assignments of the Mortgage Loans
to the Trustee will be recorded in the appropriate public office for real
property records, except in states where, in the opinion of counsel acceptable
to the Trustee, the recording is not required to protect the Trustee's interest
in the Mortgage Loan against the claim of any subsequent transferee or any
successor to or creditor of the Depositor or the Originator of the Mortgage
Loan.
The Depositor will cause to be delivered to the Trustee, its agent, or a
custodian, with respect to any Cooperative Loan, the related original security
agreement, the proprietary lease or occupancy agreement, the recognition
agreement, an executed financing statement and the relevant stock certificate
and related blank stock powers. The Master Servicer will file in the appropriate
office a financing statement evidencing the Trustee's security interest in each
Cooperative Loan.
The Trustee, or the custodian in this prospectus referred to, will,
generally within 60 days after receipt of the documents, review and hold the
documents in trust for the benefit of the Securityholders. Unless otherwise
specified in the applicable prospectus supplement, if any document is found to
be defective in any material respect, the Trustee will promptly notify the
Master Servicer and the Depositor, and the Master Servicer will notify the
related Servicer. If the Servicer cannot cure the defect within 60 days after
notice is given to the Master Servicer, the Servicer will be obligated either to
substitute for the related Mortgage Loan a Replacement Mortgage Loan or Loans,
or to purchase within 90 days of notice the related Mortgage Loan from the
Trustee at a price equal to the principal balance of the related Mortgage Loan
as of the date of purchase or, in the case of a Series as to which an election
has been made to treat the related Trust Fund as a REMIC, at another price
necessary to avoid a tax on a prohibited transaction, as described in Section
860F(a) of the Code, in each case together with accrued interest at the
applicable Mortgage Rate to the first day of the month following the repurchase,
plus the amount of any unreimbursed Advances made by the Master Servicer or the
Servicer, as applicable, in respect of the Mortgage Loan. The Master Servicer is
obligated to enforce the repurchase obligation of the Servicer, to the extent
described above under "The Trust Fund -- Mortgage Loan Program" and " --
Representations by Unaffiliated Sellers; Repurchases." Unless otherwise
specified in the applicable prospectus supplement, this purchase obligation
constitutes the sole remedy available to the Securityholders or the Trustee for
a material defect in a constituent document.
Unless otherwise specified in the applicable prospectus supplement, with
respect to the Mortgage Loans in a Mortgage Pool, the Depositor will make
representations and warranties as to the types and geographical distribution of
the Mortgage Loans and as to the accuracy in all material respects of particular
information furnished to the Trustee in respect of each Mortgage Loan. In
addition, unless otherwise specified in the related prospectus supplement, the
Depositor will represent and warrant that, as of the Cut-off Date for the
related Series of Securities, no Mortgage Loan is more than 30 days delinquent
as to payment of principal and interest. Upon a breach of any representation or
warranty by the Depositor that materially and adversely affects the interest of
the Securityholders, the Depositor will be obligated either to cure the breach
in all material respects or to purchase the Mortgage Loan at the purchase price
set forth above. Unless otherwise specified in the applicable prospectus
supplement and subject to the ability of the Depositor, if so specified in the
applicable prospectus supplement, to substitute for specific Mortgage Loans as
described below, this repurchase obligation constitutes the sole remedy
available to the Securityholders or the Trustee for a breach of a representation
or warranty by the Depositor.
Within the period specified in the related prospectus supplement, following
the date of issuance of a Series of Securities, the Depositor, the Master
Servicer or the related Servicer, as the case may be, may deliver to the Trustee
Mortgage Loans ("Substitute Mortgage Loans") in substitution for any one or more
of the Mortgage Loans ("Deleted Mortgage Loans") initially included in the Trust
Fund but which do not conform in one or more respects to the description of the
Mortgage Loans contained in the related prospectus supplement, or as to which a
breach of a representation or warranty is discovered, which breach materially
and adversely affects the interests of the Securityholders. The required
characteristics of any Substitute Mortgage Loan and any additional restrictions
relating to the substitution of Mortgage Loans will generally be as described
under "The Trust Fund -- The Contract Pools" with respect to the substitution of
Contracts.
In addition to making specific representations and warranties regarding its
authority to enter into, and its ability to perform its obligations under the
Agreement relating to a Series of Securities, the Master Servicer may make
representations and warranties to the Trustee in the Agreement with respect to
the enforceability of coverage under any applicable Primary Insurance Policy,
Pool Insurance Policy, Special Hazard Insurance Policy or Mortgagor Bankruptcy
Bond. See "Description of Insurance" for information regarding the extent of
coverage under some of the aforementioned insurance policies. Unless otherwise
specified in the applicable prospectus supplement, upon a breach of any
representation or warranty that materially and adversely affects the interests
of the Securityholders of a Series in a Mortgage Loan, the Master Servicer will
be obligated either to cure the breach in all material respects or to purchase
the Mortgage Loan at the price calculated as set forth above.
To the extent described in the related prospectus supplement, the Master
Servicer will procure a surety bond, corporate guaranty or another similar form
of insurance coverage acceptable to the Rating Agency rating the related Series
of Securities to support, among other things, this purchase obligation. Unless
otherwise stated in the applicable prospectus supplement, the aforementioned
purchase obligation constitutes the sole remedy available to the Securityholders
or the Trustee for a breach of the Master Servicer's insurability
representation. The Master Servicer's obligation to purchase Mortgage Loans upon
a breach is subject to limitations.
The Trustee will be authorized, with the consent of the Depositor and the
Master Servicer, to appoint a custodian pursuant to a custodial agreement to
maintain possession of documents relating to the Mortgage Loans as the agent of
the Trustee.
Pursuant to each Agreement, the Master Servicer, either directly or through
Servicers, will service and administer the Mortgage Loans assigned to the
Trustee as more fully set forth below.
ASSIGNMENT OF CONTRACTS
The Depositor will cause the Contracts constituting the Contract Pool to be
assigned to the Trustee, together with principal and interest due on or with
respect to the Contracts after the Cut-off Date, but not including principal and
interest due on or before the Cut-off Date. If the Depositor is unable to obtain
a perfected security interest in a Contract prior to transfer and assignment to
the Trustee, the Unaffiliated Seller will be obligated to repurchase the
Contract. The Trustee, concurrently with each assignment, will authenticate and
deliver the Securities. If a Series of Securities includes Notes, the Trust fund
will be pledged by the Issuer to the Indenture Trustee as security for the
Notes. Each Contract will be identified in a schedule appearing as an exhibit to
the Agreement (the "Contract Schedule"). The Contract Schedule will specify,
with respect to each Contract, among other things: the original principal amount
and the adjusted principal balance as of the close of business on the Cut-off
Date, the APR, the current scheduled monthly level payment of principal and
interest and the maturity of the Contract.
In addition, the Depositor, as to each Contract, will deliver or cause to
be delivered to the Trustee, or, as specified in the related prospectus
supplement, the Custodian, the original Contract and copies of documents and
instruments related to each Contract and the security interest in the
Manufactured Home securing each Contract. In order to give notice of the right,
title and interest of the Certificateholders to the Contracts, the Depositor
will cause a UCC-1 financing statement to be executed by the Depositor
identifying the Trustee as the secured party and identifying all Contracts as
collateral. Unless otherwise specified in the related prospectus supplement, the
Contracts will not be stamped or otherwise marked to reflect their assignment
from the Depositor to the Trust Fund. Therefore, if a subsequent purchaser were
able to take physical possession of the Contracts without notice of an
assignment, the interest of the Certificateholders in the Contracts could be
defeated. See "Certain Legal Aspects of Mortgage Loans and Contracts -- The
Contracts."
The Trustee, or the Custodian, will review and hold the documents in trust
for the benefit of the Securityholders. Unless otherwise provided in the related
prospectus supplement, if any document is found to be defective in any material
respect, the Unaffiliated Seller must cure the defect within 60 days, or within
another period specified in the related prospectus supplement, the Unaffiliated
Seller, not later than 90 days or within another period specified in the related
prospectus supplement, after the Trustee's notice to the Unaffiliated Seller of
the defect. If the defect is not cured, the Unaffiliated Seller will repurchase
the related Contract or any property acquired in respect of the Contract from
the Trustee at a price equal to the remaining unpaid principal balance of the
Contract, or, in the case of a repossessed Manufactured Home, the unpaid
principal balance of the Contract immediately prior to the repossession, or, in
the case of a Series as to which an election has been made to treat the related
Trust Fund as a REMIC, at another price necessary to avoid a tax on a prohibited
transaction, as described in Section 860F(a) of the Code, in each case together
with accrued but unpaid interest to the first day of the month following
repurchase at the related APR, plus any unreimbursed Advances with respect to
the Contract. Unless otherwise specified in the related prospectus supplement,
the repurchase obligation will constitute the sole remedy available to the
Securityholders or the Trustee for a material defect in a Contract document.
Unless otherwise specified in the related prospectus supplement, each
Unaffiliated Seller of Contracts will have represented, among other things, that
o immediately prior to the transfer and assignment of the Contracts, the
Unaffiliated Seller had good title to, and was the sole owner of each
Contract and there had been no other sale or assignment of the relevant
Contract,
o as of the date of transfer, the Contracts are subject to no offsets,
defenses or counterclaims,
o each Contract at the time it was made complied in all material respects
with applicable state and federal laws, including usury, equal credit
opportunity and disclosure laws,
o as of the date of transfer, each Contract is a valid first lien on the
related Manufactured Home and the Manufactured Home is free of material
damage and is in good repair,
o as of the date of transfer, no Contract is more than 30 days delinquent in
payment and there are no delinquent tax or assessment liens against the
related Manufactured Home and
o with respect to each Contract, the Manufactured Home securing the Contract
is covered by a Standard Hazard Insurance Policy in the amount required in
the Agreement and that all premiums now due on insurance have been paid in
full.
All of the representations and warranties of an Unaffiliated Seller in
respect of a Contract will have been made as of the date on which the
Unaffiliated Seller sold the Contract to the Depositor or its affiliate; the
date the representations and warranties were made may be a date prior to the
date of initial issuance of the related series of Securities. A substantial
period of time may have elapsed between the date as of which the representations
and warranties were made and the date of initial issuance of the related Series
of Securities. Since the representations and warranties referred to in the
preceding paragraph are the only representations and warranties that will be
made by an Unaffiliated Seller, the Unaffiliated Seller's repurchase obligation
described below will not arise if, during the period commencing on the date of
sale of a Contract by the Unaffiliated Seller to the Depositor or its affiliate,
the relevant event occurs that would have given rise to the obligation had the
event occurred prior to sale of the affected Contract. Nothing, however, has
come to the Depositor's attention that would cause it to believe that the
representations and warranties referred to in the preceding paragraph will not
be accurate and complete in all material respects in respect of Contracts as of
the date of initial issuance of the related Series of Securities.
The only representations and warranties to be made for the benefit of
Securityholders in respect of any Contract relating to the period commencing on
the date of sale of the Contract to the Depositor or its affiliate will be
limited representations of the Depositor and of the Master Servicer described
above under "The Trust Fund -- The Contract Pools."
If an Unaffiliated Seller cannot cure a breach of any representation or
warranty made by it in respect of a Contract that materially and adversely
affects the interest of the Securityholders in the Contract within 90 days, or
another period specified in the related prospectus supplement, after notice from
the Master Servicer, the Unaffiliated Seller will be obligated to repurchase the
Contract at a price equal to, unless otherwise specified in the related
prospectus supplement, the principal balance of the Contract as of the date of
the repurchase or, in the case of a Series as to which an election has been made
to treat the related Trust Fund as a REMIC, at another price necessary to avoid
a tax on a prohibited transaction, as described in Section 860F(a) of the Code,
in each case together with accrued and unpaid interest to the first day of the
month following repurchase at the related APR, plus the amount of any
unreimbursed Advances in respect of the Contract (the "Purchase Price"). The
Master Servicer will be required under the applicable Agreement to enforce this
obligation for the benefit of the Trustee and the Securityholders, following the
practices it would employ in its good faith business judgment were it the owner
of the Contract. Except as otherwise set forth in the related prospectus
supplement, this repurchase obligation will constitute the sole remedy available
to Securityholders or the Trustee for a breach of representation by an
Unaffiliated Seller.
Neither the Depositor nor the Master Servicer will be obligated to purchase
a Contract if an Unaffiliated Seller defaults on its obligation to do so, and no
assurance can be given that sellers will carry out their respective repurchase
obligations with respect to Contracts. However, to the extent that a breach of
the representations and warranties of an Unaffiliated Seller may also constitute
a breach of a representation made by the Depositor or the Master Servicer, the
Depositor or the Master Servicer may have a purchase obligation as described
above under "The Trust Fund -- The Contract Pools."
PRE-FUNDING
If so specified in the related prospectus supplement, a portion of the
issuance proceeds of the Securities of a particular Series (the "Pre-Funded
Amount") will be deposited in an account (the "Pre-Funding Account") to be
established with the Trustee, which will be used to acquire additional Mortgage
Loans, Warehouse Loans, Contracts or Mortgage Certificates from time to time
during the time period specified in the related prospectus supplement (the
"Pre-Funding Period"). Prior to the investment of the Pre-Funded Amount in
additional Mortgage Loans, Warehouse Loans, Contracts or Mortgage Certificates,
the Pre-Funded Amount may be invested in one or more Eligible Investments.
Except as otherwise provided in the applicable Agreement, an "Eligible
Investment" will be any of the following, in each case as determined at the time
of the investment or contractual commitment to invest, to the extent the
investments would not require registration of the Trust Fund as an investment
company pursuant to the Investment Company Act of 1940:
(a) negotiable instruments or securities represented by instruments in bearer
or registered or book-entry form which evidence:
(1) obligations which have the benefit of the full faith and credit of the
United States of America, including depository receipts issued by a
bank as custodian with respect to any instrument or security held by
the custodian for the benefit of the holder of the depository receipt,
(2) demand deposits or time deposits in, or bankers' acceptances issued
by, any depositary institution or trust company incorporated under the
laws of the United States of America or any state of the United States
of America and subject to supervision and examination by Federal or
state banking or depositary institution authorities; provided that at
the time of the Trustee's investment or contractual commitment to
invest, the certificates of deposit or short-term deposits, if any, or
long-term unsecured debt obligations, other than obligations the
rating of which is based on collateral or on the credit of a Person
other than any depositary institution or trust company, of the
depositary institution or trust company has a credit rating in the
highest rating category from the Rating Agency rating the Securities,
(3) certificates of deposit having a rating in the highest rating category
from the Rating Agency, or
(4) investments in money market funds which are, or which are composed of
instruments or other investments which are, rated in the highest
category from the Rating Agency;
(b) demand deposits in the name of the Trustee in any depositary institution or
trust company referred to in clause (a)(2) above;
(c) commercial paper, having original or remaining maturities of no more than
270 days, having a credit rating in the highest rating category from the
Rating Agency;
(d) Eurodollar time deposits that are obligations of institutions the time
deposits of which carry a credit rating in the highest rating category from
the Rating Agency;
(e) repurchase agreements involving any Eligible Investment described in any of
clauses (a)(1), (a)(3) or (d) above, so long as the other party to the
repurchase agreement has its long-term unsecured debt obligations rated in
the highest rating category from the Rating Agency; and
(f) any other investment with respect to which the Rating Agency indicates will
not result in the reduction or withdrawal of its then existing rating of
the Securities.
Except as otherwise provided in the applicable Agreement, any Eligible
Investment must mature no later than the Business Day prior to the next
Distribution Date.
During any Pre-Funding Period, the Depositor will be obligated, subject
only to their availability, to transfer to the related Trust Fund additional
Mortgage Loans, Warehouse Loans, Contracts and/or Mortgage Certificates from
time to time during the Pre-Funding Period. The additional Mortgage Loans,
Warehouse Loans or Contracts will be required to satisfy particular eligibility
criteria more fully set forth in the related prospectus supplement which
eligibility criteria will be consistent with the eligibility criteria of the
Mortgage Loans, Warehouse Loans or Contracts included in the Trust Fund as of
the Closing Date subject to exceptions as are expressly stated in the related
prospectus supplement.
Although the specific parameters of the Pre-Funding Account with respect to
any issuance of Securities will be specified in the related prospectus
supplement, it is anticipated that:
o the Pre-Funding Period will not exceed 120 days from the related Closing
Date,
o that the additional loans to be acquired during the Pre-Funding Period will
be subject to the same representations and warranties as the Mortgage
Loans, Warehouse Loans, Contracts and/or Mortgage Certificates included in
the related Trust Fund on the Closing Date, although additional criteria
may also be required to be satisfied, as described in the related
prospectus supplement, and
o that the Pre-Funded Amount will not exceed 25% of the principal amount of
Securities issued pursuant to a particular offering.
SERVICING BY UNAFFILIATED SELLERS
Each Unaffiliated Seller of a Mortgage Loan, Warehouse Loan or a Contract
may have the option to act as the Servicer, or Master Servicer, for a Mortgage
Loan, Warehouse Loan or Contract pursuant to a Servicing Agreement. A
representative form of Servicing Agreement has been filed as an exhibit to the
Registration Statement of which this Prospectus is a part. The following
description does not purport to be complete and is qualified in its entirety by
reference to the form of Servicing Agreement and by the discretion of the Master
Servicer or Depositor to modify the Servicing Agreement and to enter into
different Servicing Agreements. The Agreement provides that, if for any reason
the Master Servicer for a Series of Securities is no longer the Master Servicer
of the related Mortgage Loans, Warehouse Loans or Contracts, the Trustee or any
successor master servicer must recognize the Servicer's rights and obligations
under the Servicing Agreement.
A Servicer may delegate its servicing obligations to third-party servicers,
but continue to act as Servicer under the related Servicing Agreement. The
Servicer will be required to perform the customary functions of a servicer,
including collection of payments from Mortgagors and Obligors and remittance of
collections to the Master Servicer, maintenance of primary mortgage, hazard
insurance, FHA insurance and VA guarantees and filing and settlement of claims
under the FHA insurance and VA guarantees, subject in some cases to
o the right of the Master Servicer to approve in advance any settlement;
o maintenance of escrow accounts of Mortgagors and Obligors for payment of
taxes, insurance and other items required to be paid by the Mortgagor
pursuant to the terms of the related Mortgage Loan or the Obligor pursuant
to the related Warehouse Loan or Contract;
o processing of assumptions or substitutions;
o attempting to cure delinquencies;
o supervising foreclosures or repossessions;
o inspection and management of Mortgaged Properties, Cooperative Dwellings or
Manufactured Homes under some circumstances; and
o maintaining accounting records relating to the Mortgage Loans, Warehouse
Loans and Contracts.
Except as otherwise provided in the related prospectus supplement, the Servicer
will also be obligated to make Advances in respect of delinquent installments of
principal and interest on Mortgage Loans, Warehouse Loans and Contracts (as
described more fully below under " -- Payments on Mortgage Loans" and " --
Payments on Contracts"), and in respect of particular taxes and insurance
premiums not paid on a timely basis by Mortgagors and Obligors.
As compensation for its servicing duties, a Servicer will be entitled to
amounts from payments with respect to the Mortgage Loans, Warehouse Loans and
Contracts serviced by it. The Servicer will also be entitled to collect and
retain, as part of its servicing compensation, specific fees and late charges
provided in the Mortgage Notes or related instruments. The Servicer will be
reimbursed by the Master Servicer for some of the expenditures that it makes,
generally to the same extent that the Master Servicer would be reimbursed under
the applicable Agreement.
Each Servicer will be required to agree to indemnify the Master Servicer
for any liability or obligation sustained by the Master Servicer in connection
with any act or failure to act by the Servicer in its servicing capacity.
Each Servicer will be required to service each Mortgage Loan, Warehouse
Loan or Contract pursuant to the terms of the Servicing Agreement for the entire
term of the Mortgage Loan, Warehouse Loan or Contract, unless the Servicing
Agreement is earlier terminated by the Master Servicer or unless servicing is
released to the Master Servicer. Unless otherwise set forth in the prospectus
supplement, the Master Servicer may terminate a Servicing Agreement upon 30
days' written notice to the Servicer, without cause, upon payment of an amount
equal to the fair market value of the right to service the Mortgage Loans,
Warehouse Loans or Contracts serviced by any the Servicer under the Servicing
Agreement, or if the fair market value cannot be determined, a specified
percentage of the aggregate outstanding principal balance of all the Mortgage
Loans, , Warehouse Loans or Contracts, or immediately upon the giving of notice
upon particular stated events, including the violation of the Servicing
Agreement by the Servicer.
The Master Servicer may agree with a Servicer to amend a Servicing
Agreement. The Master Servicer may also, at any time and from time to time,
release servicing to third-party servicers, but continue to act as Master
Servicer under the related Agreement. Upon termination of a Servicing Agreement,
the Master Servicer or Trustee may act as servicer of the related Mortgage
Loans, Warehouse Loans or Contracts or the Master Servicer may enter into one or
more new Servicing Agreements. If the Master Servicer acts as servicer, it will
not assume liability for the representations and warranties of the Servicer that
it replaces. If the Master Servicer enters into a new Servicing Agreement, each
new Servicer must be an Unaffiliated Seller or meet the standards for becoming
an Unaffiliated Seller or have servicing experience that is otherwise
satisfactory to the Master Servicer. The Master Servicer will make reasonable
efforts to have the new Servicer assume liability for the representations and
warranties of the terminated Servicer, but no assurance can be given that an
assumption will occur. In the event of an assumption, the Master Servicer may,
in the exercise of its business judgment, release the terminated Servicer from
liability in respect of the representations and warranties. Any amendments to a
Servicing Agreement or new Servicing Agreements may contain provisions different
from those described above that are in effect in the original Servicing
Agreements. However, the related Agreement will provide that any amendment or
new agreement may not be inconsistent with or violate the Agreement.
PAYMENTS ON MORTGAGE LOANS
The Master Servicer will, unless otherwise specified in the prospectus
supplement with respect to a Series of Securities, establish and maintain a
separate account or accounts in the name of the applicable Trustee (the
"Certificate Account"), which must be maintained with a depository institution
and in a manner acceptable to the Rating Agency rating the Securities of a
Series. If a Series of Securities includes Notes, the Master Servicer may
establish and maintain a separate account or accounts in the name of the
applicable Trustee (the "Collection Account") into which amounts received in
respect of the Trust Assets are required to be deposited and a separate account
or accounts in the name of the applicable Trustee from which distributions in
respect of the Notes (the "Note Distribution Account") and/or the Certificates
(the "Certificate Distribution Account") may be made. The Collection Account,
Note Distribution Account and Certificate Distribution Account must be
established with a depositary institution and in a manner acceptable to the
Rating Agencies rating the Securities of a Series. For ease of reference,
references in this Prospectus to the Certificate Account shall be deemed to
refer to the Collection Account, Note Distribution Account and Certificate
Distribution Account, as applicable.
If so specified in the applicable prospectus supplement, the Master
Servicer, in lieu of establishing a Certificate Account, may establish a
separate account or accounts in the name of the Trustee (the "Custodial
Account") meeting the requirements set forth in this prospectus for the
Certificate Account. Amounts in the Custodial Account, after making the required
deposits and withdrawals specified below, shall be remitted to the Certificate
Account maintained by the Trustee for distribution to Securityholders in the
manner set forth in this prospectus and in the related prospectus supplement.
In those cases where a Servicer is servicing a Mortgage Loan pursuant to a
Servicing Agreement, the Servicer will establish and maintain an account (the
"Servicing Account") that will comply with either the standards set forth above
or, subject to the conditions set forth in the Servicing Agreement, be
maintained with a depository, meeting the requirements of the Rating Agency
rating the Securities of the related Series, and that is otherwise acceptable to
the Master Servicer. Unless otherwise specified in the related prospectus
supplement, the Servicer will be required to deposit into the Servicing Account
on a daily basis all amounts enumerated in the following paragraph in respect of
the Mortgage Loans received by the Servicer, less its servicing compensation. On
the date specified in the Servicing Agreement, the Servicer shall remit to the
Master Servicer all funds held in the Servicing Account with respect to each
Mortgage Loan. Except as otherwise provided in the related prospectus
supplement, the Servicer will also be required to advance any monthly
installment of principal and interest that was not timely received, less its
servicing fee, provided that, unless otherwise specified in the related
prospectus supplement, the requirement shall only apply to the extent the
Servicer determines in good faith any advance will be recoverable out of
Insurance Proceeds, proceeds of the liquidation of the related Mortgage Loans or
otherwise.
The Certificate Account may be maintained with a depository institution
that is an affiliate of the Master Servicer. Unless otherwise specified in the
related prospectus supplement, the Master Servicer will deposit in the
Certificate Account for each Series of Securities on a daily basis the following
payments and collections received or made by it subsequent to the Cut-off Date,
other than payments due on or before the Cut-off Date, in the manner set forth
in the related prospectus supplement:
(1) all payments on account of principal, including principal
prepayments, of the Mortgage Loans, net of any portion of the payments that
represent unreimbursed or unrecoverable Advances made by the related
Servicer;
(2) all payments on account of interest on the Mortgage Loans, net of
any portion retained by the Servicer, if any, as its servicing fee;
(3) all proceeds of,
(A) any Special Hazard Insurance Policy, Primary Mortgage
Insurance Policy, FHA Insurance, VA Guarantee, Mortgagor Bankruptcy
Bond or Pool Insurance Policy with respect to a Series of Securities
and any title, hazard or other insurance policy covering any of the
Mortgage Loans included in the related Mortgage Pool, to the extent
the proceeds are not applied to the restoration of the related
property or released to the Mortgagor in accordance with customary
servicing procedures, (collectively, "Insurance Proceeds") or any
Alternative Credit Support established in lieu of the insurance and
described in the applicable prospectus supplement; and
(B) all other cash amounts received and retained in connection
with the liquidation of defaulted Mortgage Loans, by foreclosure or
otherwise, other than Insurance Proceeds, payments under the Letter of
Credit or proceeds of any Alternative Credit Support, if any, with
respect to the Series ("Liquidation Proceeds"), net of expenses of
liquidation, unpaid servicing compensation with respect to the
Mortgage Loans and unreimbursed or unrecoverable Advances made by the
Servicers of the related Mortgage Loans;
(4) all payments under the Letter of Credit, if any, with respect to
the Series;
(5) all amounts required to be deposited in the Certificate Account
from the Reserve Fund, if any, for the Series;
(6) any Advances made by a Servicer or the Master Servicer (as
described in this prospectus under " -- Advances");
(7) any Buy-Down Funds, and, if applicable, investment earnings on the
Buy-Down Funds, required to be deposited in the Certificate Account, as
described below; and
(8) all proceeds of any Mortgage Loan repurchased by the Master
Servicer, the Depositor, any Servicer or any Unaffiliated Seller (as
described under "The Trust Fund -- Mortgage Loan Program," "--
Representations by Unaffiliated Sellers; Repurchases" or " -- Assignment of
Mortgage Loans" above) or repurchased by the Depositor (as described under
" -- Termination" below).
With respect to each Buy-Down Loan, if so specified in the related
prospectus supplement, the Master Servicer or the related Servicer will deposit
the Buy-Down Funds with respect to each Buy-Down Loan in a custodial account
complying with the requirements set forth above for the Certificate Account,
which, unless otherwise specified in the related prospectus supplement, may be
an interest-bearing account. The amount of required deposits, together with
investment earnings on the deposits at the rate specified in the applicable
prospectus supplement, will provide sufficient funds to support the full monthly
payments due on each Buy-Down Loan on a level debt service basis. Neither the
Master Servicer nor the Depositor will be obligated to add to the Buy-Down Fund
should investment earnings prove insufficient to maintain the scheduled level of
payments on the Buy-Down Loans. To the extent that any insufficiency is not
recoverable from the Mortgagor under the terms of the related Mortgage Note,
distributions to Securityholders will be affected. With respect to each Buy-Down
Loan, the Master Servicer will withdraw from the Buy-Down Fund and deposit in
the Certificate Account on or before each Distribution Date the amount, if any,
for each Buy-Down Loan that, when added to the amount due on that date from the
Mortgagor on the Buy-Down Loan, equals the full monthly payment that would be
due on the Buy-Down Loan if it were not subject to the buy-down plan.
If the Mortgagor on a Buy-Down Loan prepays the loan in its entirety, or
defaults on the loan and the Mortgaged Property is sold in liquidation of the
Mortgaged Property, during the period when the Mortgagor is not obligated, on
account of the buy-down plan, to pay the full monthly payment otherwise due on
the loan, the related Servicer will withdraw from the Buy-Down Fund and deposit
in the Certificate Account the amounts remaining in the Buy-Down Fund with
respect to the Buy-Down Loan. In the event of a default with respect to which a
claim, including accrued interest supplemented by amounts in the Buy-Down Fund
with respect to the related Buy-Down Loan, has been made, the Master Servicer or
the related Servicer will pay an amount equal to the remaining amounts in the
Buy-Down Fund with respect to the related Buy-Down Loan, to the extent the claim
includes accrued interest supplemented by amounts in the Buy-Down Fund, to the
related Pool Insurer or the insurer under the related Primary Insurance Policy
(the "Primary Insurer") if the Mortgaged Property is transferred to the Pool
Insurer or the Primary Insurer, as the case may be, which pays 100% of the
related claim, including accrued interest and expenses, in respect of a default,
to the L/C Bank in consideration of the payment under the related Letter of
Credit, or to the guarantor or other person which pays the same pursuant to
Alternative Credit Support described in the applicable prospectus supplement. In
the case of any prepaid or defaulted Buy-Down Loan the amounts in the Buy-Down
Fund in respect of which were supplemented by investment earnings, the Master
Servicer will withdraw from the Buy-Down Fund and remit to the Depositor or the
Mortgagor, depending on the terms of the related buy-down plan, any investment
earnings remaining in the related Buy-Down Fund.
If so specified in the prospectus supplement with respect to a Series, in
lieu of, or in addition to the foregoing, the Depositor may deliver cash, a
letter of credit or a guaranteed investment contract to the Trustee to fund the
Buy-Down Fund for the Series, which shall be drawn upon by the Trustee in the
manner and at the times specified in the related prospectus supplement.
PAYMENTS ON CONTRACTS
A Certificate Account meeting the requirements set forth under " --
Description of the Securities -- Payments on Mortgage Loans" will be established
in the name of the Trustee.
Except as otherwise provided in the related prospectus supplement, there
will be deposited in the Certificate Account on a daily basis the following
payments and collections received or made by it on or after the Cut-off Date:
(1) all Obligor payments on account of principal, including principal
prepayments, of the Contracts;
(2) all Obligor payments on account of interest on the Contracts;
(3) all Liquidation Proceeds received with respect to Contracts or
property acquired in respect of the Contracts by foreclosure or otherwise;
(4) all Insurance Proceeds received with respect to any Contract,
other than proceeds to be applied to the restoration or repair of the
Manufactured Home or released to the Obligor;
(5) any Advances made as described under " -- Advances" and other
amounts required under the related Agreement to be deposited in the
Certificate Account;
(6) all amounts received from Credit Support provided with respect to
a Series of Securities;
(7) all proceeds of any Contract or property acquired in respect of
the Contract repurchased by the Master Servicer, the Depositor or otherwise
as described above or under " -- Termination" below; and
(8) all amounts, if any, required to be transferred to the Certificate
Account from the Reserve Fund.
COLLECTION OF PAYMENTS ON MORTGAGE CERTIFICATES
The Mortgage Certificates included in the Trust Fund with respect to a
Series of Securities will be registered in the name of the Trustee so that all
distributions on the Mortgage Certificates will be made directly to the Trustee.
The related Agreement will require the Trustee, if it has not received a
distribution with respect to any Mortgage Certificate by the second business day
after the date on which a distribution was due and payable pursuant to the terms
of the Mortgage Certificate, to request the issuer or guarantor, if any, of the
Mortgage Certificate to make the payment as promptly as possible and legally
permitted and to take the legal action against the issuer or guarantor as the
Trustee deems appropriate under the circumstances, including the prosecution of
any related claims. The reasonable legal fees and expenses incurred by the
Trustee in connection with the prosecution of any the legal action will be
reimbursable to the Trustee out of the proceeds of any action and will be
retained by the Trustee prior to the deposit of any remaining proceeds in the
Certificate Account pending distribution of the proceeds to Securityholders of
the affected Series. In the event that the Trustee has reason to believe that
the proceeds of any legal action may be insufficient to reimburse it for its
projected legal fees and expenses, the Trustee will notify the Securityholders
that it is not obligated to pursue any available remedies unless adequate
indemnity for its legal fees and expenses is provided by the Securityholders.
DISTRIBUTIONS ON SECURITIES
On each Distribution Date with respect to a Series of Securities as to
which credit support is provided by means other than the creation of a
Subordinated Class or Subclasses and the establishment of a Reserve Fund, the
Master Servicer will withdraw from the applicable Certificate Account funds on
deposit in the Certificate Account and distribute, or, if so specified in the
applicable prospectus supplement, will withdraw from the Custodial Account,
funds on deposit in the Custodial Account and remit to the Trustee, who will
distribute the funds to Securityholders of record on the applicable Record Date.
The distributions shall occur in the manner described in this prospectus under "
-- Description of the Securities -- Distributions of Principal and Interest" and
in the related prospectus supplement. If so specified in the applicable
prospectus supplement, the Master Servicer will withdraw from the applicable
Certificate Account funds on deposit in the Certificate Account and distribute
them to the Trustee. The funds shall consist of the aggregate of all previously
undistributed payments on account of principal, including principal prepayments,
if any, and interest received after the Cut-off Date and on or prior to the 20th
day, or if the 20th day is not a business day, the next preceding business day,
of the month of the distribution or another day specified in the related
prospectus supplement (in either case, the "Determination Date"), except:
(1) all payments that were due on or before the Cut-off Date;
(2) all principal prepayments received during the month of
distribution and all payments of interest representing interest for the
month of distribution or any portion of the these payments;
(3) all payments which represent early receipt, other than
prepayments, of scheduled payments of principal and interest due on a date
or dates subsequent to the first day of the month of distribution;
(4) amounts received on particular Mortgage Loans, Warehouse Loans or
Contracts as late payments of principal or interest and respecting which
the Master Servicer has made an unreimbursed Advance;
(5) amounts representing reimbursement for other Advances which the
Master Servicer has determined to be otherwise nonrecoverable and amounts
representing reimbursement for particular losses and expenses incurred or
Advances made by the Master Servicer and discussed below; and
(6) that portion of each collection of interest on a particular
Mortgage Loan in the Mortgage Pool, a particular Warehouse Loan in the
Warehouse Loan Pool or on a particular Contract in the Contract Pool that
represents
(A) servicing compensation to the Master Servicer,
(B) amounts payable to the entity or entities specified in the
applicable prospectus supplement or permitted withdrawals from the
Certificate Account out of payments under the Letter of Credit, if
any, with respect to the Series,
(C) related Insurance Proceeds or Liquidation Proceeds,
(D) amounts in the Reserve Fund, if any, with respect to the
Series or
(E) proceeds of any Alternative Credit Support, each deposited in
the Certificate Account to the extent described under "Description of
the Securities -- Maintenance of Insurance Policies," "-- Presentation
of Claims," "-- Enforcement of `Due-on-Sale' Clauses; Realization Upon
Defaulted Mortgage Loans" and " -- Enforcement of `Due-on-Sale'
Clauses; Realization Upon Defaulted Contracts" or in the applicable
prospectus supplement.
Except as otherwise specified in the related prospectus supplement, no
later than the Business Day immediately preceding the Distribution Date for a
Series of Securities, the Master Servicer will furnish a statement to the
Trustee setting forth the amount to be distributed on the next succeeding
Distribution Date on account of principal of and interest on the Mortgage Loans,
Warehouse Loans or Contracts, stated separately or the information enabling the
Trustee to determine the amount of distribution to be made on the Securities and
a statement setting forth information with respect to the Mortgage Loans,
Warehouse Loans or Contracts.
If so specified in the applicable prospectus supplement, the Trustee will
establish and maintain the Certificate Account for the benefit of the holders of
the Securities of the related Series in which the Trustee shall deposit, as soon
as practicable after receipt, each distribution made to the Trustee by the
Master Servicer, as set forth above, with respect to the Mortgage Loans,
Warehouse Loans or Contracts, any distribution received by the Trustee with
respect to the Mortgage Certificates, if any, included in the Trust Fund and
deposits from any Reserve Fund or GPM Fund. If so specified in the applicable
prospectus supplement, prior to making any distributions to Securityholders, any
portion of the distribution on the Mortgage Certificates that represents
servicing compensation, if any, payable to the Trustee shall be deducted and
paid to the Trustee.
Funds on deposit in the Certificate Account may be invested in Eligible
Investments maturing in general not later than the Business Day preceding the
next Distribution Date. Unless otherwise provided in the prospectus supplement,
all income and gain realized from this investment will be for the benefit of the
Master Servicer. The Master Servicer will be required to deposit the amount of
any losses incurred with respect to these investments out of its own funds, when
realized. Unless otherwise provided in the prospectus supplement, the
Certificate Account established pursuant to the Trust Agreement shall be a
non-interest bearing account or accounts.
The timing and method of distribution of funds in the Certificate Account
to Classes or Subclasses of Securities having differing terms, whether
subordinated or not, to the extent not described in this prospectus, shall be
set forth in the related prospectus supplement.
REVOLVING PERIOD
The applicable prospectus supplement may provide that all or a portion of
the principal collections may be applied by the Trustee to the acquisition of
subsequent Mortgage Pools, Mortgage Certificates, Warehouse Loan Pools or
Contract Pools during a specified period rather than used to distribute payments
of principal to Securityholders during that period. These Securities would then
possess an interest only period, also commonly referred to as a "Revolving
Period", which will be followed by an "Amortization Period", during which
principal will be paid. Any interest only or revolving period may terminate
prior to the end of the specified period and result in the earlier than expected
principal repayment of the Securities.
SPECIAL DISTRIBUTIONS
To the extent specified in the prospectus supplement relating to a Series
of Securities, one or more Classes of Multi-Class Securities that do not provide
for monthly Distribution Dates may receive Special Distributions in reduction of
Stated Principal Balance ("Special Distributions") in any month, other than a
month in which a Distribution Date occurs, if, as a result of principal
prepayments on the Trust Assets in the related Trust Fund and/or low
reinvestment yields, the Trustee determines, based on assumptions specified in
the related Agreement, that the amount of cash anticipated to be on deposit in
the Certificate Account on the next Distribution Date for the Series and
available to be distributed to the holders of the Securities of a Classes or
Subclasses may be less than the sum of (1) the interest scheduled to be
distributed to holders of the Securities of the Classes or Subclasses and (2)
the amount to be distributed in reduction of Stated Principal Balance or the
Securities on the Distribution Date. Any Special Distributions will be made in
the same priority and manner as distributions in reduction of Stated Principal
Balance would be made on the next Distribution Date.
REPORTS TO SECURITYHOLDERS
Unless otherwise specified or modified in the related prospectus supplement
for each Series, the Master Servicer or the Trustee will include with each
distribution to Securityholders of record of the Series, or within a reasonable
time afterward, a statement generally setting forth, among other things, the
following information, if applicable, per each Security, as to (1) through (3)
or (4) through (6) below, as applicable:
(1) to each holder of a Security, other than a Multi-Class Certificate
or Residual Certificate, the amount of the distribution allocable to
principal of the Trust Assets, separately identifying the aggregate amount
of any Principal Prepayments included in the amount, and the portion, if
any, advanced by a Servicer or the Master Servicer;
(2) to each holder of a Security, other than a Multi-Class Certificate
or Residual Certificate, the amount of the distribution allocable to
interest on the related Trust Assets and the portion, if any, advanced by a
Servicer or the Master Servicer;
(3) to each holder of a Security, the amount of servicing compensation
with respect to the related Trust Assets and other customary information as
the Master Servicer deems necessary or desirable to enable Securityholders
to prepare their tax returns;
(4) to each holder of a Multi-Class Certificate on which an interest
distribution and a distribution in reduction of Stated Principal Balance
are then being made, the amount of the interest distribution and
distribution in reduction of Stated Principal Balance, and the Stated
Principal Balance of each Class after giving effect to the distribution in
reduction of Stated Principal Balance made on the Distribution Date or on
any Special Distribution Date occurring subsequent to the last report;
(5) to each holder of a Multi-Class Certificate on which a
distribution of interest only is then being made, the aggregate Stated
Principal Balance of Securities outstanding of each Class or Subclass after
giving effect to the distribution in reduction of Stated Principal Balance
made on the Distribution Date and on any Special Distribution Date
occurring subsequent to the last report and after including in the
aggregate Stated Principal Balance the Stated Principal Balance of the
Compound Interest Securities, if any, outstanding and the amount of any
accrued interest added to the Compound Value of the Compound Interest
Securities on the Distribution Date;
(6) to each holder of a Compound Interest Security, but only if the
holder shall not have received a distribution of interest on the
Distribution Date equal to the entire amount of interest accrued on the
Certificate with respect to the Distribution Date:
(a) the information contained in the report delivered pursuant to
clause (5) above;
(b) the interest accrued on the Class or Subclass of Compound
Interest Securities with respect to the Distribution Date and added to
the Compound Value of the Compound Interest Security; and
(c) the Stated Principal Balance of the Class or Subclass of
Compound Interest Securities after giving effect to the addition of
all interest accrued;
(7) in the case of a series of Securities with a variable Interest
Rate, the Interest Rate applicable to the distribution in question;
(8) the amount or the remaining obligations of an L/C Bank with
respect to a Letter of Credit, after giving effect to the declining amount
available and any payments and other amounts charged on the applicable
Distribution Date, expressed as a percentage of the amount reported
pursuant to (x) below, and the amount of coverage remaining under the Pool
Insurance Policy, Special Hazard Insurance Policy, Mortgagor Bankruptcy
Bond or Reserve Fund, as applicable, in each case as of the applicable
Determination Date, after giving effect to any amounts with respect to them
to be distributed to Securityholders on the Distribution Date;
(9) in the case of a Series of Securities benefiting from the
Alternative Credit Support described in the related prospectus supplement,
the amount of coverage under the Alternative Credit Support as of the close
of business on the applicable Determination Date, after giving effect to
any amounts with respect to the Alternative Credit Support distributed to
Securityholders on the Distribution Date;
(10) the aggregate scheduled principal balance of the Trust Assets as
of a date not earlier than the Distribution Date after giving effect to
payments of principal distributed to Securityholders on the Distribution
Date;
(11) the book value of any collateral acquired by the Mortgage Pool,
Warehouse Loan Pool or Contract Pool through foreclosure, repossession or
otherwise; and
(12) the number and aggregate principal amount of Mortgage Loans,
Warehouse Loans or Contracts one month and two months delinquent.
In addition, within a reasonable period of time after the end of each
calendar year, the Master Servicer, or the Trustee, if specified in the
applicable prospectus supplement, will cause to be furnished to each
Securityholder of record at any time during the calendar year a report as to the
aggregate of amounts reported pursuant to (1) through (3) or (4) through (6)
above and other information as in the judgment of the Master Servicer or the
Trustee, as the case may be, is needed for the Securityholder to prepare its tax
return, as applicable, for the calendar year or, in the event the person was a
Securityholder of record during a portion of the calendar year, for the
applicable portion of the year.
ADVANCES
Unless otherwise stated in the related prospectus supplement, each Servicer
and the Master Servicer, with respect to Mortgage Loans, Warehouse Loans or
Contracts serviced by it and with respect to advance delinquent installments of
principal of and interest on the Mortgage Loans, Warehouse Loans and Contracts
(the "Advances") required to be made by the Servicers that were not so made,
will be obligated to advance funds in an amount equal to the aggregate scheduled
installments of payments of principal and interest that were due on the Due Date
with respect to a Mortgage Loan, Warehouse Loan or Contract and that were
delinquent, including any payments that have been deferred by the Servicer or
the Master Servicer, as of the close of business on the date specified in the
related Servicing Agreement, to be remitted no later than the close of business
on the business day immediately preceding the Distribution Date, subject to,
unless otherwise provided in the applicable prospectus supplement, their
respective determinations that the advances are reimbursable under any Letter of
Credit, Pool Insurance Policy, Primary Mortgage Insurance Policy, Mortgagor
Bankruptcy Bond, from the proceeds of Alternative Credit Support, from cash in
the Reserve Fund, the Servicing or Certificate Accounts or otherwise. In making
the Advances, the Servicers and Master Servicer will endeavor to maintain a
regular flow of scheduled interest and principal payments to the
Securityholders, rather than to guarantee or insure against losses. Any of these
Advances are reimbursable to the Servicer or Master Servicer out of related
recoveries on the Mortgage Loans with respect to which amounts were advanced. In
addition, Advances are reimbursable from cash in the Reserve Fund, the Servicing
or Certificate Accounts to the extent that the Servicer or the Master Servicer,
as the case may be, shall determine that any Advances previously made are not
ultimately recoverable. The Servicers and the Master Servicer generally will
also be obligated to make advances in respect of particular taxes and insurance
premiums not paid by Mortgagors or Obligors on a timely basis and, to the extent
deemed recoverable, foreclosure costs, including reasonable attorney's fees.
These funds so advanced are reimbursable out of recoveries on the related
Mortgage Loans. This right of reimbursement for any Advance will be prior to the
rights of the Securityholders to receive any amounts recovered with respect to
Mortgage Loans, Warehouse Loans or Contracts. Unless otherwise provided in the
applicable prospectus supplement, the Servicers and the Master Servicer will
also be required to advance an amount necessary to provide a full month's
interest in connection with full or partial prepayments, liquidations, defaults
and repurchases of the Mortgage Loans, Warehouse Loans or Contracts. Any of
these Advances will not be reimbursable to the Servicers or the Master Servicer.
COLLECTION AND OTHER SERVICING PROCEDURES
The Master Servicer, directly or through the Servicers, as the case may be,
will make reasonable efforts to collect all payments called for under the
Mortgage Loans or Contracts and will, consistent with the applicable Servicing
Agreement and any applicable Letter of Credit, Pool Insurance Policy, Special
Hazard Insurance Policy, Primary Mortgage Insurance Policy, Mortgagor Bankruptcy
Bond or Alternative Credit Support, follow collection procedures as it follows
with respect to mortgage loans or contracts serviced by it that are comparable
to the Mortgage Loans or Contracts, except when, in the case of FHA or VA Loans,
applicable regulations require otherwise. Consistent with the above, if so
provided in the related prospectus supplement, the Master Servicer may, in its
discretion, waive any late payment charge or any prepayment charge or penalty
interest in connection with the prepayment of a Mortgage Loan or Contract or
extend the due dates for payments due on a Mortgage Note or Contract for a
period of not greater than 270 days, provided that the insurance coverage for
the Mortgage Loan or Contract or the coverage provided by any Letter of Credit
or any Alternative Credit Support, will not be adversely affected.
If specified in the related prospectus supplement, under the applicable
Servicing Agreement, the Master Servicer, either directly or through Servicers,
to the extent permitted by law, may establish and maintain an escrow account
(the "Escrow Account") in which Mortgages or Obligors will be required to
deposit amounts sufficient to pay taxes, assessments, mortgage and hazard
insurance premiums and other comparable items. This obligation may be satisfied
by the provision of insurance coverage against loss occasioned by the failure to
escrow insurance premiums rather than causing escrows to be made. Withdrawals
from the Escrow Account may be made to effect timely payment of taxes,
assessments, mortgage and hazard insurance, to refund to Mortgagors or Obligors
amounts determined to be overages, to pay interest to Mortgagors or Obligors on
balances in the Escrow Account, if required, and to clear and terminate the
account. The Master Servicer will be responsible for the administration of each
Escrow Account and will be obliged to make advances to the accounts when a
deficiency exists in the Escrow Account. Alternatively, in lieu of establishing
an Escrow Account, the Servicer may procure a performance bond or other form of
insurance coverage, in an amount acceptable to the Rating Agency rating the
related Series of Securities, covering loss occasioned by the failure to escrow
required amounts.
MAINTENANCE OF INSURANCE POLICIES
To the extent that the applicable prospectus supplement does not expressly
provide for a method of credit support described below under "Credit Support" or
for Alternative Credit Support in lieu of some or all of the insurance coverage
set forth below, the following paragraphs on insurance shall apply.
STANDARD HAZARD INSURANCE
To the extent specified in a related prospectus supplement, the terms of
each Servicing Agreement will require the Servicer to cause to be maintained for
each Mortgage Loan or Contract that it services, and the Master Servicer will be
required to maintain for each Mortgage Loan or Contract serviced by it directly,
a policy of standard hazard insurance (a "Standard Hazard Insurance Policy")
covering the Mortgaged Property underlying the Mortgage Loan or Manufactured
Home underlying the Contract in an amount equal to the lesser of the maximum
insurable value of the improvements securing the Mortgage Loan or Contract or
the principal balance of the Mortgage Loan or Contract. Each Servicer or the
Master Servicer, as the case may be, shall also maintain on property acquired
upon foreclosure, or deed in lieu of foreclosure, of any Mortgage Loan or
Contract, a Standard Hazard Insurance Policy in an amount that is at least equal
to the maximum insurable value of the improvements that are a part of the
Mortgaged Property or Manufactured Home. Any amounts collected by the Servicer
or the Master Servicer under any the policies, other than amounts to be applied
to the restoration or repair of the Mortgaged Property or Manufactured Home or
released to the borrower in accordance with normal servicing procedures, shall
be deposited in the related Servicing Account for deposit in the Certificate
Account or, in the case of the Master Servicer, shall be deposited directly into
the Certificate Account. Any cost incurred in maintaining any insurance shall
not, for the purpose of calculating monthly distributions to Securityholders, be
added to the amount owing under the Mortgage Loan or Contract, notwithstanding
that the terms of the Mortgage Loan or Contract may so permit. The cost shall be
recoverable by the Servicer only by withdrawal of funds from the Servicing
Account or by the Master Servicer only by withdrawal from the Certificate
Account, as described in the applicable Servicing Agreement. No earthquake or
other additional insurance is to be required of any borrower or maintained on
property acquired in respect of a Mortgage Loan or Contract, other than pursuant
to applicable laws and regulations as shall at any time be in force and as shall
require additional insurance. When the Mortgaged Property or Manufactured Home
is located at the time of origination of the Mortgage Loan or Contract in a
federally designated flood area, the related Servicer, or the Master Servicer,
in the case of each Mortgage Loan or Contract serviced by it directly, will
cause flood insurance to be maintained, to the extent available, in those areas
where flood insurance is required under the National Flood Insurance Act of
1968, as amended.
The Depositor will not require that a standard hazard or flood insurance
policy be maintained on the Cooperative Dwelling relating to any Cooperative
Loan. Generally, the cooperative corporation itself is responsible for
maintenance of hazard insurance for the property owned by the cooperative and
the tenant-stockholders of that cooperative do not maintain individual hazard
insurance policies. To the extent, however, that a Cooperative and the related
borrower on a Cooperative Loan do not maintain insurance or do not maintain
adequate coverage or any insurance proceeds are not applied to the restoration
of damaged property, any damage to the borrower's Cooperative Dwelling or the
Cooperative's building could significantly reduce the value of the collateral
securing the Cooperative Loan to the extent not covered by other credit support.
The applicable Servicing Agreement will require the Master Servicer to
perform the aforementioned obligations of the Servicer in the event the Servicer
fails to do so. In the event that the Master Servicer obtains and maintains a
blanket policy insuring against hazard losses on all of the related Mortgage
Loans or Contracts, it will conclusively be deemed to have satisfied its
obligations to cause to be maintained a Standard Hazard Insurance Policy for
each Mortgage Loan or Contract that it services. This blanket policy may contain
a deductible clause, in which case the Master Servicer will, in the event that
there has been a loss that would have been covered by the policy absent the
deductible, deposit in the Certificate Account the amount not otherwise payable
under the blanket policy because of the application of the deductible clause.
Since the amount of hazard insurance to be maintained on the improvements
securing the Mortgage Loans or Contracts may decline as the principal balances
owing on the Mortgage Loans or Contracts decrease, and since residential
properties have historically appreciated in value over time, in the event of
partial loss, hazard insurance proceeds may be insufficient to fully restore the
damaged Mortgaged Property or Manufactured Home. See "Description of Insurance
-- Special Hazard Insurance Policies" for a description of the limited
protection afforded by a Special Hazard Insurance Policy against losses
occasioned by specific hazards that are otherwise uninsured against as well as
against losses caused by the application of the coinsurance provisions contained
in the Standard Hazard Insurance Policies.
SPECIAL HAZARD INSURANCE
If so specified in the related prospectus supplement, the Master Servicer
will be required to exercise its best reasonable efforts to maintain the Special
Hazard Insurance Policy, if any, with respect to a Series of Securities in full
force and effect, unless coverage under the policy has been exhausted through
payment of claims, and will pay the premium for the Special Hazard Insurance
Policy on a timely basis; provided, however, that the Master Servicer shall be
under no obligation if coverage under the Pool Insurance Policy with respect to
the Series has been exhausted. In the event that the Special Hazard Insurance
Policy is cancelled or terminated for any reason, other than the exhaustion of
total policy coverage, the Master Servicer will exercise its best reasonable
efforts to obtain from another insurer a replacement policy comparable to the
Special Hazard Insurance Policy with a total coverage that is equal to the then
existing coverage of the Special Hazard Insurance Policy; provided that if the
cost of any replacement policy is greater than the cost of the terminated
Special Hazard Insurance Policy, the amount of coverage under the replacement
Special Hazard Insurance Policy may be reduced to a level so that the applicable
premium will not exceed the cost of the Special Hazard Insurance Policy that was
replaced. Some of the characteristics of the Special Hazard Insurance Policy are
described under "Description of Insurance -- Special Hazard Insurance Policies."
POOL INSURANCE
To the extent specified in a related prospectus supplement, the Master
Servicer will exercise its best reasonable efforts to maintain a Pool Insurance
Policy with respect to a Series of Securities in effect throughout the term of
the applicable Agreement, unless coverage under the policy has been exhausted
through payment of claims, and will pay the premiums for the Pool Insurance
Policy on a timely basis. In the event that the Pool Insurer ceases to be a
qualified insurer because it is not qualified to transact a mortgage guaranty
insurance business under the laws of the state of its principal place of
business or any other state which has jurisdiction over the Pool Insurer in
connection with the Pool Insurance Policy, or if the Pool Insurance Policy is
cancelled or terminated for any reason, other than the exhaustion of total
policy coverage, the Master Servicer will exercise its best reasonable efforts
to obtain a replacement policy of pool insurance comparable to the Pool
Insurance Policy and may obtain, under the circumstances described above with
respect to the Special Hazard Insurance Policy, a replacement policy with
reduced coverage. In the event the Pool Insurer ceases to be a qualified insurer
because it is not approved as an insurer by FHLMC, FNMA or any successors to
FNMA, the Master Servicer will agree to review, not less often than monthly, the
financial condition of the Pool Insurer with a view towards determining whether
recoveries under the Pool Insurance Policy are jeopardized and, if so, will
exercise its best reasonable efforts to obtain from another qualified insurer a
replacement insurance policy under the above-stated limitations. Some of the
characteristics of the Pool Insurance Policy are described under "Description of
Insurance -- Pool Insurance Policies."
PRIMARY MORTGAGE INSURANCE
To the extent specified in the related prospectus supplement, the Master
Servicer will be required to keep in force and effect for each Mortgage Loan
secured by Single Family Property serviced by it directly, and each Servicer of
a Mortgage Loan secured by Single Family Property will be required to keep in
full force and effect with respect to each Mortgage Loan serviced by it, in each
case to the extent required by the underwriting standards of the Depositor, a
Pool Insurance Policy to cover any loss, subject to the limitations described
below, by reason of default by the Mortgagors on the related Mortgage Loans to
the extent not covered by any policy of primary mortgage insurance (a "Primary
Mortgage Insurance Policy") issued by a qualified insurer (the "Primary Mortgage
Insurer") with regard to each Mortgage Loan for which coverage is required
pursuant to the applicable Servicing Agreement and Agreement and to act on
behalf of the Trustee (the "Insured") under each Primary Mortgage Insurance
Policy. Neither the Servicer nor the Master Servicer will cancel or refuse to
renew any Primary Mortgage Insurance Policy in effect at the date of the initial
issuance of a Series of Securities that is required to be kept in force under
the applicable Agreement or Servicing Agreement unless the replacement Primary
Mortgage Insurance Policy for the cancelled or non-renewed policy is maintained
with an insurer whose claims-paying ability is acceptable to the Rating Agency
rating the Securities. See "Description of Insurance -- Primary Mortgage
Insurance Policies." The Master Servicer, if any, or the Depositor or the
applicable Servicer will be required to use its best reasonable efforts to
maintain the Pool Insurance Policy for each related Mortgage Pool and to present
claims under the policy to the issuer of the Pool Insurance Policy (the "Pool
Insurer") on behalf of the Trustee and the Securityholders. See "Description of
the Securities -- Presentation of Claims."
MORTGAGOR BANKRUPTCY BOND
If so specified in the related prospectus supplement, the Master Servicer
will exercise its best reasonable efforts to maintain a Mortgagor Bankruptcy
Bond for a Series of Securities in full force and effect throughout the term of
the applicable Agreement, unless coverage under the Mortgagor Bankruptcy Bond
has been exhausted through payment of claims, and will pay the premiums for the
Mortgagor Bankruptcy Bond on a timely basis. At the request of the Depositor,
coverage under a Mortgagor Bankruptcy Bond will be cancelled or reduced by the
Master Servicer to the extent permitted by the Rating Agency rating the related
Series of Securities, provided that the cancellation or reduction does not
adversely affect the then current rating of the Series. See "Description of
Insurance -- Mortgagor Bankruptcy Bond."
PRESENTATION OF CLAIMS
The Master Servicer, on behalf of itself, the Trustee and the
Securityholders, will present claims to HUD, the VA, the Pool Insurer, the
Special Hazard Insurer, the issuer of the Mortgagor Bankruptcy Bond, and each
Primary Mortgage Insurer, as applicable, and take reasonable steps necessary to
permit recovery under the insurance policies or Mortgagor Bankruptcy Bond, if
any, with respect to a Series concerning defaulted Mortgage Loans or Contracts
or Mortgage Loans or Contracts that are the subject of a bankruptcy proceeding.
All collections by the Master Servicer under any FHA insurance or VA guarantee,
any Pool Insurance Policy, any Primary Mortgage Insurance Policy or any
Mortgagor Bankruptcy Bond and, where the related property has not been restored,
any Special Hazard Insurance Policy, are to be deposited in the Certificate
Account, subject to withdrawal as previously described. In those cases in which
a Mortgage Loan or Contract is serviced by a Servicer, the Servicer, on behalf
of itself, the Trustee and the Securityholders, will present claims to the
applicable Primary Mortgage Insurer and to the FHA and the VA, as applicable,
and all collections shall be deposited in the Servicing Account, subject to
withdrawal, as set forth above, for deposit in the Certificate Account.
If any property securing a defaulted Mortgage Loan or Contract is damaged
and proceeds, if any, from the related Standard Hazard Insurance Policy or the
applicable Special Hazard Insurance Policy are insufficient to restore the
damaged property to a condition sufficient to permit recovery under any Pool
Insurance Policy or any Primary Mortgage Insurance Policy, neither the related
Servicer nor the Master Servicer, as the case may be, will be required to expend
its own funds to restore the damaged property unless it determines, and, in the
case of a determination by a Servicer, the Master Servicer agrees, (1) that the
restoration will increase the proceeds to Securityholders on liquidation of the
Mortgage Loan or Contract after reimbursement of the expenses incurred by the
Servicer or the Master Servicer, as the case may be, and (2) that the expenses
will be recoverable through proceeds of the sale of the Mortgaged Property or
proceeds of any related Pool Insurance Policy, any related Primary Mortgage
Insurance Policy or otherwise.
If recovery under a Pool Insurance Policy or any related Primary Mortgage
Insurance Policy is not available because the related Servicer or the Master
Servicer has been unable to make the above determinations or otherwise, the
Servicer or the Master Servicer is nevertheless obligated to follow the normal
practices and procedures deemed necessary or advisable to realize upon the
defaulted Mortgage Loan. If the proceeds of any liquidation of the Mortgaged
Property or Manufactured Home are less than the principal balance of the
defaulted Mortgage Loan or Contract, respectively, plus interest accrued on the
proceeds at the Mortgage Rate, and if coverage under any other method of credit
support with respect to the Series is exhausted, the related Trust Fund will
realize a loss in the amount of the difference plus the aggregate of expenses
incurred by the Servicer or the Master Servicer in connection with the
proceedings and which are reimbursable under the related Servicing Agreement or
Agreement. In the event that any proceedings result in a total recovery that is,
after reimbursement to the Servicer or the Master Servicer of its expenses, in
excess of the principal balance of the related Mortgage Loan or Contract,
together with accrued and unpaid interest at the applicable Mortgage Rate or
APR, as the case may be, the Servicer and the Master Servicer will be entitled
to withdraw amounts representing normal servicing compensation on the Mortgage
Loan or Contract from the Servicing Account or the Certificate Account, as the
case may be.
ENFORCEMENT OF "DUE-ON-SALE" CLAUSES; REALIZATION UPON DEFAULTED MORTGAGE LOANS
Each Servicing Agreement and the applicable Agreement with respect to
Securities representing interests in or secured by a Mortgage Pool will provide
that, when any Mortgaged Property has been conveyed by the borrower, the
Servicer or the Master Servicer, as the case may be, will, to the extent it has
knowledge of the conveyance, exercise its rights to accelerate the maturity of
the Mortgage Loan under any applicable "due-on-sale" clause , if any, unless it
reasonably believes that the enforcement is not exercisable under applicable law
or regulations or if the exercise would result in loss of insurance coverage
with respect to the Mortgage Loan. In either case, where the due-on-sale clause
will not be exercised, the Servicer or the Master Servicer is authorized to take
or enter into an assumption and modification agreement from or with the person
to whom the Mortgaged Property has been or is about to be conveyed, pursuant to
which the person becomes liable under the Mortgage Note and, unless prohibited
by applicable state law, the Mortgagor remains liable on the Mortgage Note,
provided that the Mortgage Loan will continue to be covered by any Pool
Insurance Policy and any related Primary Mortgage Insurance Policy. In the case
of an FHA Loan, an assumption can occur only with HUD approval of the substitute
Mortgagor. Each Servicer and the Master Servicer will also be authorized, with
the prior approval of the Insurer under any required insurance policies, to
enter into a substitution of liability agreement with the person, pursuant to
which the original Mortgagor is released from liability and the person is
substituted as Mortgagor and becomes liable under the Mortgage Note.
Under the Servicing Agreements and the applicable Agreement, the Servicer
or the Master Servicer, as the case may be, will foreclose upon or otherwise
comparably convert the ownership of properties securing the related Mortgage
Loans that come into and continue in default and as to which no satisfactory
arrangements can be made for collection of delinquent payments. In connection
with foreclosure or other conversion, the Servicer or the Master Servicer will
follow practices and procedures deemed necessary or advisable and as shall be
normal and usual in its general mortgage servicing activities and in accordance
with FNMA guidelines, except when, in the case of FHA or VA Loans, applicable
regulations require otherwise. However, neither the Servicer nor the Master
Servicer will be required to expend its own funds in connection with any
foreclosure or towards the restoration of any property unless it determines and,
in the case of a determination by a Servicer, the Master Servicer agrees (1)
that restoration and/or foreclosure will increase the proceeds of liquidation of
the related Mortgage Loan to Securityholders after reimbursement to itself for
expenses and (2) that expenses will be recoverable to it either through
Liquidation Proceeds, Insurance Proceeds, payments under the Letter of Credit,
or amounts in the Reserve Fund, if any, with respect to the related Series, or
otherwise.
Any prospective purchaser of a Cooperative Dwelling will generally be
required to obtain the approval of the board of directors of the related
Cooperative before purchasing the shares and acquiring rights under the
proprietary lease or occupancy agreement securing the Cooperative Loan. See
"Certain Legal Aspects of the Mortgage Loans and Contracts -- The Mortgage Loans
-- Foreclosure" in this prospectus. This approval is usually based on the
purchaser's income and net worth and numerous other factors. Although the
Cooperative's approval is unlikely to be unreasonably withheld or delayed, the
necessity of acquiring approval could limit the number of potential purchasers
for those shares and otherwise limit the Trust Fund's ability to sell and
realize the value of those shares.
The market value of any Multifamily Property obtained in foreclosure or by
deed in lieu of foreclosure will be based substantially on the operating income
obtained from renting the dwelling units. Since a default on a Mortgage Loan
secured by Multifamily Property is likely to have occurred because operating
income, net of expenses, is insufficient to make debt service payments on the
related Mortgage Loan, it can be anticipated that the market value of the
property will be less than was anticipated when the Mortgage Loan was
originated. To the extent that the equity in the property does not absorb the
loss in market value and the loss is not covered by other credit support, a loss
may be experienced by the related Trust Fund. With respect to Multifamily
Property consisting of an apartment building owned by a Cooperative, the
Cooperative's ability to meet debt service obligations on the Mortgage Loan, as
well as all other operating expenses, will be dependent in large part on the
receipt of maintenance payments from the tenant-stockholders, as well as any
rental income from units or commercial areas the Cooperative might control.
Unanticipated expenditures may in some cases have to be paid by special
assessments of the tenant-stockholders. The Cooperative's ability to pay the
principal amount of the Mortgage Loan at maturity may depend on its ability to
refinance the Mortgage Loan. The Depositor, the Unaffiliated Seller and the
Master Servicer will have no obligation to provide refinancing for any Mortgage
Loan.
ENFORCEMENT OF `DUE-ON-SALE' CLAUSES; REALIZATION UPON DEFAULTED CONTRACTS
Each applicable Agreement and Servicing Agreement with respect to
Securities representing interests in or secured by a Contract Pool will provide
that, when any Manufactured Home securing a Contract is about to be conveyed by
the Obligor, the Master Servicer, to the extent it has knowledge of a
prospective conveyance and prior to the time of the consummation of the
conveyance, may exercise its rights to accelerate the maturity of the Contract
under the applicable "due-on-sale" clause, if any, unless it is not exercisable
under applicable law. In that case, the Master Servicer is authorized to take or
enter into an assumption agreement from or with the person to whom the
Manufactured Home has been or is about to be conveyed, pursuant to which the
person becomes liable under the Contract and, unless determined to be materially
adverse to the interests of Securityholders, with the prior approval of the Pool
Insurer, if any, to enter into a substitution of liability agreement with the
person, pursuant to which the original Obligor is released from liability and
the person is substituted as Obligor and becomes liable under the Contract.
Where authorized by the Contract, the APR may be increased, upon assumption, to
the then-prevailing market rate, but shall not be decreased.
Under the Servicing Agreement or the applicable Agreement, the Master
Servicer will repossess or otherwise comparably convert the ownership of
properties securing the related Manufactured Homes that come into and continue
in default and as to which no satisfactory arrangements can be made for
collection of delinquent payments. In connection with repossession or other
conversion, the Servicer or Master Servicer will follow practices and procedures
it deems necessary or advisable and as are normal and usual in its general
Contract servicing activities. The Servicer or Master Servicer, however, will
not be required to expend its own funds in connection with any repossession or
towards the restoration of any property unless it determines (1) that the
restoration or repossession will increase the proceeds of liquidation of the
related Contract to the Certificateholders after reimbursement to itself for the
expenses and (2) that the expenses will be recoverable to it either through
liquidation proceeds or through insurance proceeds.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
Under the applicable Agreement for a Series of Securities, the Depositor or
the person or entity specified in the related prospectus supplement and any
Master Servicer will be entitled to receive an amount described in the related
prospectus supplement. As compensation for its servicing duties, a Servicer will
be entitled to receive a monthly servicing fee in the amount specified in the
related Servicing Agreement. The servicing compensation shall be payable by
withdrawal from the related Servicing Account prior to deposit in the
Certificate Account. Each Servicer, with respect to the Mortgage Loans or
Contracts serviced by it, and the Master Servicer will be entitled to servicing
compensation out of Insurance Proceeds, Liquidation Proceeds, or Letter of
Credit payments. Additional servicing compensation in the form of prepayment
charges, assumption fees, late payment charges or otherwise shall be retained by
the Servicers and the Master Servicer to the extent not required to be deposited
in the Certificate Account.
The Servicers and the Master Servicer, unless otherwise specified in the
related prospectus supplement, will pay from their servicing compensation some
of the expenses incurred in connection with the servicing of the Mortgage Loans
or Contracts, including, without limitation, payment of the Insurance Policy
premiums and, in the case of the Master Servicer, fees or other amounts payable
for any Alternative Credit Support, payment of the fees and disbursements of the
Trustee, and any custodian selected by the Trustee, the Note Register, the
Certificate Register and independent accountants and payment of expenses
incurred in enforcing the obligations of Servicers and Unaffiliated Sellers.
Some of these expenses may be reimbursable by the Depositor pursuant to the
terms of the applicable Agreement. In addition, the Master Servicer will be
entitled to reimbursement of expenses incurred in enforcing the obligations of
Servicers and Unaffiliated Sellers under limited circumstances.
As set forth in the preceding section, the Servicers and the Master
Servicer will be entitled to reimbursement for some of the expenses incurred by
them in connection with the liquidation of defaulted Mortgage Loans or
Contracts. The related Trust Fund will suffer no loss by reason of these
expenses to the extent claims are fully paid under the Letter of Credit, if any,
the related insurance policies, from amounts in the Reserve Fund or under any
applicable Alternative Credit Support described in a prospectus supplement. In
the event, however, that claims are either not made or fully paid under the
Letter of Credit, Insurance Policies or Alternative Credit Support, or if
coverage has ceased, or if amounts in the Reserve Fund are not sufficient to
fully pay the losses, the related Trust Fund will suffer a loss to the extent
that the proceeds of the liquidation proceedings, after reimbursement of the
expenses of the Servicers or the Master Servicer, as the case may be, are less
than the principal balance of the related Mortgage Loan or Contract. In
addition, the Servicers and the Master Servicer will be entitled to
reimbursement of expenditures incurred by them in connection with the
restoration of a Mortgaged Property, Cooperative Dwelling or Manufactured Home,
the right of reimbursement being prior to the rights of the Securityholders to
receive any payments under the Letter of Credit, or from any related Insurance
Proceeds, Liquidation Proceeds, amounts in the Reserve Fund or any proceeds of
Alternative Credit Support.
Under the Trust Agreement, the Trustee will be entitled to deduct, from
distributions of interest with respect to the Mortgage Certificates, a specified
percentage of the unpaid principal balance of each Mortgage Certificate as
servicing compensation. The Trustee shall be required to pay all expenses,
except as expressly provided in the Trust Agreement, subject to limited
reimbursement as provided in the Trust Agreement.
EVIDENCE AS TO COMPLIANCE
The Master Servicer will deliver to the Depositor and the Trustee, on or
before the date specified in the applicable Agreement or Servicing Agreement, an
Officer's Certificate stating that (1) a review of the activities of the Master
Servicer and the Servicers during the preceding calendar year and of its
performance under the Agreement or Servicing Agreement has been made under the
supervision of the officer, and (2) to the best of the officer's knowledge,
based on the review, the Master Servicer and each Servicer has fulfilled all its
obligations under the Agreement or Servicing Agreement and the applicable
Servicing Agreement throughout the year, or, if there has been a default in the
fulfillment of any obligation, specifying each default known to the officer and
the nature and status of the default. The Officer's Certificate shall be
accompanied by a statement of a firm of independent public accountants to the
effect that, on the basis of an examination of particular documents and records
relating to servicing of the Mortgage Loans or Contract, conducted in accordance
with generally accepted accounting principles in the mortgage banking industry,
the servicing of the Mortgage Loans or Contract was conducted in compliance with
the provisions of the Agreement and/or the Servicing Agreements, except for any
exceptions as the firm believes it is required to report.
CERTAIN MATTERS REGARDING THE MASTER SERVICER, THE DEPOSITOR AND THE TRUSTEE AND
THE INDENTURE TRUSTEE
The Master Servicer under each Agreement will be named in the applicable
prospectus supplement. The entity acting as Master Servicer may be an
Unaffiliated Seller and have other normal business relationships with the
Depositor and/or affiliates of the Depositor and may be an affiliate of the
Depositor. In the event there is no Master Servicer under an Agreement, all
servicing of Mortgage Loans or Contracts will be performed by a Servicer
pursuant to a Servicing Agreement.
The Master Servicer may not resign from its obligations and duties under
the applicable Agreement except upon a determination that its duties under the
relevant Agreement are no longer permissible under applicable law. No the
resignation will become effective until the Trustee or a successor servicer has
assumed the Master Servicer's obligations and duties under the Agreement.
The Trustee under each Pooling and Servicing Agreement or Trust Agreement
will be named in the applicable prospectus supplement. The commercial bank or
trust company serving as Trustee may have normal banking relationships with the
Depositor and/or its affiliates and with the Master Servicer and/or its
affiliates.
The Trustee may resign from its obligations under the Pooling and Servicing
Agreement at any time, in which event a successor trustee will be appointed. In
addition, the Depositor may remove the Trustee if the Trustee ceases to be
eligible to act as Trustee under the Pooling and Servicing Agreement or if the
Trustee becomes insolvent, at which time the Depositor will become obligated to
appoint a successor Trustee. The Trustee may also be removed at any time by the
holders of Certificates evidencing voting rights aggregating not less than 50%
of the voting rights evidenced by the Certificates of the Series. Any
resignation and removal of the Trustee, and the appointment of a successor
trustee, will not become effective until acceptance of the appointment by the
successor Trustee.
The Trustee may resign at any time from its obligations and duties under
the Trust Agreement by executing an instrument in writing resigning as Trustee,
filing the same with the Depositor, mailing a copy of a notice of resignation to
all Certificateholders then of record, and appointing a qualified successor
trustee. No resignation will become effective until the successor trustee has
assumed the Trustee's obligations and duties under the Trust Agreement.
The Indenture Trustee under the Indenture will be named in the applicable
prospectus supplement. The commercial bank or trust company serving as Indenture
Trustee may have normal banking relationships with the Depositor and/or its
affiliates and with the Master Servicer and/or its affiliates.
The Indenture Trustee may resign from its obligations under the Indenture
at any time, in which event a successor trustee will be appointed. In addition,
the Depositor may remove the Indenture Trustee if the Indenture Trustee ceases
to be eligible to act as Indenture Trustee under the Indenture or if the
Indenture Trustee becomes insolvent, at which time the Depositor will become
obligated to appoint a successor Indenture Trustee. Unless otherwise specified
in the related prospectus supplement, the Indenture Trustee may also be removed
at any time by the holders of Notes evidencing voting rights aggregating not
less than 50% of the voting rights evidenced by the Notes of the Series. Any
resignation and removal of the Trustee, and the appointment of a successor
trustee, will not become effective until acceptance of the appointment by the
successor Trustee.
Each Pooling and Servicing Agreement and Trust Agreement will also provide
that neither the Depositor nor any director, officer, employee or agent of the
Depositor or the Trustee, or any responsible officers of the Trustee will be
under any liability to the Certificateholders, for the taking of any action or
for refraining from the taking of any action in good faith pursuant to the
Pooling and Servicing Agreement, or for errors in judgment; provided, however,
that none of the Depositor or the Trustee nor any other person will be protected
against, in the case of the Depositor, any breach of representations or
warranties made by them, and in the case of the Depositor and the Trustee,
against any liability that would otherwise be imposed by reason of willful
misfeasance, bad faith or negligence in the performance of its duties or by
reason of reckless disregard of its obligations and duties under the related
Agreement. Each Pooling and Servicing Agreement and Trust Agreement will further
provide that the Depositor and the Trustee and any director, officer and
employee or agent of the Depositor or the Trustee shall be entitled to
indemnification, by the Trust Fund in the case of the Depositor and by the
Master Servicer in the case of the Trustee and will be held harmless against any
loss, liability or expense incurred in connection with any legal action relating
to the applicable Agreement or the Certificates and in the case of the Trustee,
resulting from any error in any tax or information return prepared by the Master
Servicer or from the exercise of any power of attorney granted pursuant to the
Pooling and Servicing Agreement, other than any loss, liability or expense
related to any specific Mortgage Loan, Contract or Mortgage Certificate, except
any loss, liability or expense otherwise reimbursable pursuant to the applicable
Agreement, and any loss, liability or expense incurred by reason of willful
misfeasance, bad faith or negligence in the performance of their duties under
the related Agreement or by reason of reckless disregard of their obligations
and duties under the related Agreement. In addition, each Agreement will provide
that neither the Depositor nor the Master Servicer, as the case may be, will be
under any obligation to appear in, prosecute or defend any legal action that is
not incidental to its duties under the Agreement and that in its opinion may
involve it in any expense or liability. The Depositor or the Master Servicer
may, however, in their discretion, undertake any action deemed by them necessary
or desirable with respect to the applicable Agreement and the rights and duties
of the parties to the applicable Agreement and the interests of the
Securityholders under the applicable Agreement. In this event, the legal
expenses and costs of the action and any liability resulting from the action
will be expenses, costs and liabilities of the Trust Fund, and the Master
Servicer or the Depositor, as the case may be, will be entitled to be reimbursed
for the action out of the Certificate Account.
DEFICIENCY EVENT
To the extent a deficiency event is specified in the prospectus supplement,
a deficiency event (a "Deficiency Event") with respect to the Securities of each
Series may be defined in the applicable Agreement as being the inability of the
Trustee to distribute to holders of one or more Classes of Securities of the
Series, in accordance with the terms of the Securitites and the Agreement, any
distribution of principal or interest on the Securitites when and as
distributable, in each case because of the insufficiency for the purpose of the
funds then held in the related Trust Fund.
Except as otherwise provided in the related prospectus supplement, to the
extent a deficiency event is specified in the related prospectus supplement,
upon the occurrence of a Deficiency Event, the Trustee is required to determine
whether or not the application on a monthly basis, regardless of the frequency
of regular Distribution Dates, of all future scheduled payments on the Mortgage
Loans, Contracts and Mortgage Certificates included in the related Trust Fund
and other amount receivable with respect to the Trust Fund towards payments on
the Securities in accordance with the priorities as to distributions of
principal and interest set forth in the Securities will be sufficient to make
distributions of interest at the applicable Interest Rates and to distribute in
full the principal balance of each Security on or before the latest Final
Distribution Date of any outstanding Securities of the Series.
Except as otherwise provided in the related prospectus supplement, to the
extent a deficiency event is specified in the related prospectus supplement, the
Trustee will obtain and rely upon an opinion or report of a firm of independent
accountants of recognized national reputation as to the sufficiency of the
amounts receivable with respect to the Trust Fund to make distributions on the
Securities, which opinion or report will be conclusive evidence as to the
sufficiency. Pending the making of any determination, distributions on the
Securities shall continue to be made in accordance with their terms.
Except as otherwise provided in the related prospectus supplement, to the
extent a deficiency event is specified in the related prospectus supplement, in
the event that the Trustee makes a positive determination, the Trustee will
apply all amounts received in respect of the related Trust Fund, after payment
of fees and expenses of the Trustee and accountants for the Trust Fund, to
distributions on the Securities of the Series in accordance with their terms,
except that the distributions shall be made on each Distribution Date or on more
frequent dates as specified in the related prospectus supplement and without
regard to the amount of principal that would otherwise be distributable on the
related Distribution Date. Under some circumstances following any positive
determination, the Trustee may resume making distributions on the Securities
expressly in accordance with their terms.
Except as otherwise provided in the related prospectus supplement, to the
extent a deficiency event is specified in the related prospectus supplement, if
the Trustee is unable to make the positive determination described above, the
applicable Trustee will apply all amounts received in respect of the related
Trust Fund, after payment of Trustee and accountants' fees and expenses, to
monthly distributions on Securities of the Series or on all Senior Securities of
the Series pro rata, without regard to the priorities as to distribution of
principal set forth in the Securities, and the Securities will, to the extent
permitted by applicable law and specified in the related Prospectus Statement,
accrue interest at the highest Interest Rate borne by any Security or Securities
with the same credit rating by the Rating Agencies of the Series, or in the
event any Class of the Series shall accrue interest at a floating rate, at the
weighted average Interest Rate, calculated on the basis of the maximum interest
rate applicable to the Class having a floating interest rate and on the original
principal amount of the Securities of that Class. In this event, the holders of
a majority in outstanding principal balance of the Securities may direct the
Trustee to sell the related Trust Fund, any direction being irrevocable and
binding upon the holders of all Securities of the Series and upon the owners of
the residual interests in the Trust Fund. In the absence of a direction, the
Trustee may not sell all or any portion of the Trust Fund.
EVENTS OF DEFAULT
Except as otherwise provided in the related prospectus supplement, Events
of Default under the related Pooling and Servicing Agreement or Sale and
Servicing will consist of:
o any failure to make a specified payment which continues unremedied, in most
cases, for five business days after the giving of written notice;
o any failure by the Trustee, the Servicer or the Master Servicer, as
applicable, duly to observe or perform in any material respect any other of
its covenants or agreements in the applicable Agreement which failure shall
continue for the number of days specified in the related prospectus
supplement or any breach of any representation and warranty made by the
Master Servicer or the Servicer, if applicable, which continues unremedied
for the number of days specified in the related prospectus supplement after
the giving of written notice of the failure or breach;
o particular events of insolvency, readjustment of debt, marshalling of
assets and liabilities or similar proceedings regarding the Master Servicer
or a Servicer, as applicable; and
o any lowering, withdrawal or notice of an intended or potential lowering, of
the outstanding rating of the Securities by the Rating Agency rating the
Securities because the existing or prospective financial condition or
mortgage loan servicing capability of the Master Servicer is insufficient
to maintain the rating.
Unless otherwise specified in the related prospectus supplement, Events
of Default under the Indenture for each Series of Notes include:
o a default of five days or more in the payment of any principal of or
interest on any Note of the Series;
o failure to perform any other covenant of the Depositor or the Trust Fund in
the Indenture which continues for a period of thirty days after notice is
given in accordance with the procedures described in the related prospectus
supplement;
o any representation or warranty made by the Depositor or the Trust Fund in
the Indenture or in any certificate or other writing delivered or in
connection with the Indenture with respect to or affecting the Series
having been incorrect in a material respect as of the time made, and the
breach is not cured within thirty days after notice is given in accordance
with the procedures described in the related prospectus supplement;
o particular events of bankruptcy, insolvency, receivership or liquidation of
the Depositor or the Trust Fund; or
o any other Event of Default provided with respect to Notes of that Series.
RIGHTS UPON EVENT OF DEFAULT
If an Event of Default with respect to the Notes of any Series at the time
outstanding occurs and is continuing, either the Indenture Trustee or the
Noteholders of a majority of the then aggregate outstanding amount of the Notes
of the Series may declare the principal amount of all the Notes of the Series to
be due and payable immediately. The declaration may, under some circumstances,
be rescinded and annulled by the Noteholders of a majority in aggregate
outstanding amount of the Notes of the Series.
If, following an Event of Default with respect to any Series of Notes, the
Notes of the Series have been declared to be due and payable, the Indenture
Trustee may, in its discretion, notwithstanding the acceleration, elect to
maintain possession of the collateral securing the Notes of the Series and to
continue to apply distributions on the collateral as if there had been no
declaration of acceleration if the collateral continues to provide sufficient
funds for the payment of principal of and interest on the Notes of the Series as
they would have become due if there had not been a declaration. In addition, the
Indenture Trustee may not sell or otherwise liquidate the collateral securing
the Notes of a Series following an Event of Default other than a default in the
payment of any principal of or interest on any Note of the Series for thirty
days or more, unless
o the Noteholders of 100% of the then aggregate outstanding amount of the
Notes of the Series consent to the sale,
o the proceeds of the sale or liquidation are sufficient to pay in full the
principal of and accrued interest due and unpaid on the outstanding Notes
of the Series at the date of the sale or
o the Indenture Trustee determines that the collateral would not be
sufficient on an ongoing basis to make all payments on the Notes as the
payments would have become due if the Notes had not been declared due and
payable, and the Indenture Trustee obtains the consent of the Holders of 66
2/3% of the then aggregate outstanding amount of the Notes of the Series.
In the event that the Indenture Trustee liquidates the collateral in
connection with an Event of Default involving a default for thirty days or more
in the payment of principal of or interest on the Notes of a Series, the
Indenture provides that the Indenture Trustee will have a prior lien on the
proceeds of any liquidation for unpaid fees and expenses. As a result, upon the
occurrence of this Event of Default, the amount available for distribution to
the Noteholders may be less than would otherwise be the case. However, the
Indenture Trustee may not institute a proceeding for the enforcement of its lien
except in connection with a proceeding for the enforcement of the lien of the
Indenture for the benefit of the Noteholders after the occurrence of this Event
of Default.
Unless otherwise specified in the related prospectus supplement, in the
event the principal of the Notes of a Series is declared due and payable, as
described above, the Noteholders of these Notes issued at a discount from par
may be entitled to receive no more than an amount equal to the unpaid principal
amount of the Notes less the amount of the discount which is unamortized.
Except as otherwise provided in the related prospectus supplement, so long
as an Event of Default with respect to a Series of Securities remains
unremedied, the Depositor, the Trustee or the holders of Notes of the Series,
or, if no Notes are issued as part of the Series, Certificate, evidencing not
less than 25% of the principal amount of the Securities of the Series may
terminate all of the rights and obligations of the Master Servicer under the
applicable Agreement and/or Servicing Agreement and in and to the Mortgage Loans
and Contracts and their proceeds, whereupon, subject to applicable law regarding
the Trustee's ability to make advances, the Trustee or, if the Depositor so
notifies the Trustee and the Master Servicer, the Depositor or its designee,
will succeed to all the responsibilities, duties and liabilities of the Master
Servicer under the Agreement and will be entitled to similar compensation
arrangements. In the event that the Trustee would be obligated to succeed the
Master Servicer but is unwilling or unable so to act, it may appoint, or
petition to a court of competent jurisdiction for the appointment of, a
successor master servicer. Pending an appointment, the Trustee, unless
prohibited by law from so acting, shall be obligated to act in this capacity.
The Trustee and the successor master servicer may agree upon the servicing
compensation to be paid to the successor, which in no event may be greater than
the compensation to the Master Servicer under the applicable Agreement.
AMENDMENT
Except as otherwise provided in the related prospectus supplement, the
Pooling and Servicing Agreement or Sale and Servicing Agreement, as applicable,
for each Series of Securities may be amended by the Depositor, the Master
Servicer and the Trustee, without the consent of the Securityholders,
o to cure any ambiguity,
o to correct or supplement any provision in the Pooling and Servicing
Agreement or Sale and Servicing Agreement, as applicable, that may be
inconsistent with any other provision in these agreements or
o to make any other provisions with respect to matters or questions arising
under the Agreement that are not inconsistent with the provisions of these
Agreements, provided that the action will not adversely affect in any
material respect the interests of any Securityholder of the related Series.
Except as otherwise provided in the related prospectus supplement, the
Pooling and Servicing Agreement or Sale and Servicing Agreement, as applicable,
for each Series of Securities may also be amended by the Depositor, the Master
Servicer and the Trustee with the consent of holders of Securities evidencing
not less than 66 2/3% of the aggregate outstanding principal amount of the
Securities of the Series, for the purpose of adding any provisions to or
changing in any manner or eliminating any of the provisions of the Agreement or
of modifying in any manner the rights of the Securityholders; provided, however,
that no the amendment may
(1) reduce in any manner the amount of, delay the timing of or change the
manner in which payments received on or with respect to Mortgage Loans and
Contracts are required to be distributed with respect to any Security
without the consent of the holder of the Security,
(2) adversely affect in any material respect the interests of the holders of a
Class or Subclass of the Senior Securities, if any, of a Series in a manner
other than that set forth in (1) above without the consent of the holders
of the Senior Securities of the Subclass evidencing not less than 66 2/3%
of the Class or Subclass,
(3) adversely affect in any material respect the interests of the holders of
the Subordinated Securities of a Series in a manner other than that set
forth in (1) above without the consent of the holders of Subordinated
Securities evidencing not less than 66 2/3% of the Class or Subclass or
(4) reduce the aforesaid percentage of the Securities, the holders of which are
required to consent to the amendment, without the consent of the holders of
the Class affected by the amendment.
The Trust Agreement for a Series may be amended by the Trustee and the
Depositor without Certificateholder consent, to cure any ambiguity, to correct
or supplement any provision in the Trust Agreement that may be inconsistent with
any other provision in the Trust Agreement, or to make any other provisions with
respect to matters or questions arising under the Trust Agreement that are not
inconsistent with any other provisions of the Trust Agreement, provided that the
action will not, as evidenced by an opinion of counsel, adversely affect the
interests of any Certificateholders of that Series in any material respect. The
Trust Agreement for each Series may also be amended by the Trustee and the
Depositor with the consent of the Holders of Securities evidencing Percentage
Interests aggregating not less than 66 2/3% of each Class of the Securities of
the Series affected by the amendment for the purpose of adding any provisions to
or changing in any manner or eliminating any of the provisions of the Agreement
or modifying in any manner the rights of Certificateholders of that Series;
provided, however, that no amendment may (1) reduce in any manner the amount of,
or delay the timing of, or change the manner in which payments received on
Mortgage Certificates are required to be distributed in respect of any
Certificate, without the consent of the Holder of the Certificate or (2) reduce
the aforesaid percentage of Securities the Holders of which are required to
consent to any amendment, without the consent of the Holders of all Securities
of the Series then outstanding.
TERMINATION
Except as otherwise provided in the related prospectus supplement, the
obligations created by the Pooling and Servicing Agreement or Sale and Servicing
Agreement, as applicable, for a Series of Securities will terminate upon the
earlier of
(a) the repurchase of all Mortgage Loans or Contracts and all property
acquired by foreclosure of the Mortgage Loan or Contract and
(b) the later of
(1) the maturity or other liquidation of the last Mortgage Loan or
Contract subject to the obligations and the disposition of all property acquired
upon foreclosure of the Mortgage Loan or Contract and
(2) the payment to the Securityholders of all amounts held by the
Master Servicer and required to be paid to them pursuant to the applicable
Agreement.
The obligations created by the Trust Agreement for a Series of Certificates will
terminate upon the distribution to Certificateholders of all amounts required to
be distributed to them pursuant to the Trust Agreement. In no event, however,
will the Trust created by either the Agreement continue beyond the expiration of
21 years from the death of the last survivor of specific persons identified in
it. For each Series of Securities, the Master Servicer will give written notice
of termination of the applicable Agreement of each Securityholder, and the final
distribution will be made only upon surrender and cancellation of the Securities
at an office or agency specified in the notice of termination.
If so provided in the related prospectus supplement, the Pooling and
Servicing Agreement or Sale and Servicing Agreement for each Series of
Securities will permit, but not require, the Depositor or another person
specified in the prospectus supplement to repurchase from the Trust Fund for the
Series all remaining Mortgage Loans or Contracts subject to the applicable
Agreement at a price specified in the related prospectus supplement. In the
event that the Depositor elects to treat the related Trust Fund as a REMIC under
the Code, the repurchase will be effected in compliance with the requirements of
Section 860F(a)(4) of the Code, in order to constitute a "qualifying
liquidation" under the Code. The exercise of the right will effect early
retirement of the Securities of that Series, but the right so to repurchase may
be effected only on or after the aggregate principal balance of the Mortgage
Loans or Contracts for the Series at the time of repurchase is less than a
specified percentage of the aggregate principal balance at the Cut-off Date for
the Series, or on or after the date set forth in the related prospectus
supplement.
The Indenture will be discharged with respect to a Series of Notes, except
with respect to the continuing rights specified in the Indenture, upon the
delivery to the Indenture Trustee for cancellation of all the Notes of the
Series or, with some limitations, upon deposit with the Indenture Trustee of
funds sufficient for the payment in full of all the Notes of the Series.
CERTAIN INFORMATION REGARDING THE SECURITIES
BOOK-ENTRY REGISTRATION
If so specified in the related prospectus supplement, DTC will act as
securities company for each class of securities offered by this prospectus. Each
class of securities initially will be represented by one or more certificates
registered in the name of Cede, the nominee of DTC. As the nominee of DTC, it is
anticipated that the only "noteholder" and/or "certificateholder" with respect
to a series of securities will be Cede. Beneficial owners of the securities
("Security Owners") will not be recognized as "noteholders" by the related
indenture trustee, as the term is used in each Indenture, or as
"certificateholders" by the related trustee, as the term is used in each Trust
Agreement or Pooling and Servicing Agreement, as applicable, and Security Owners
will be permitted to exercise the rights of noteholders or certificateholders
only indirectly through DTC and its participating members ("Participants").
DTC is a limited purpose trust company organized under the laws of the
State of New York, a "banking organization" within the meaning of the New York
Banking Law, a member of the Federal Reserve System, a "clearing corporation"
within the meaning of the Uniform Commercial Code (the "UCC") in effect in the
State of New York, and a "clearing agency" registered pursuant to the provisions
of Section 17A of the Exchange Act. DTC was created to hold securities for the
Participants and to facilitate the clearance and settlement of securities
transactions between Participants through electronic book-entries, thus
eliminating the need for physical movement of certificates. Participants include
securities brokers and dealers, banks, trust companies and clearing
corporations. Indirect access to the DTC system also is available to banks,
brokers, dealers and trust companies that clear through or maintain a custodial
relationship with a Participant, either directly or indirectly (the "Indirect
Participants").
Security Owners that are not Participants or Indirect Participants but
desire to purchase, sell or otherwise transfer ownership of, or an interest in,
the securities may do so only through Participants and Indirect Participants. In
addition, all Security Owners will receive all distributions of principal and
interest from the related indenture trustee or the related trustee, as
applicable, through Participants or Indirect Participants. Under a book-entry
format, Security Owners may experience some delay in their receipt of payments,
since these payments will be forwarded by the applicable trustee or indenture
trustee to DTC's nominee. DTC will then forward the payments to the
Participants, which will then forward them to Indirect Participants or Security
Owners.
Under the rules, regulations and procedures creating and affecting DTC and
its operations (the "Rules"), DTC is required to make book-entry transfers among
Participants on whose behalf it acts with respect to the securities and to
receive and transmit distributions of principal of and interest on the
securities. Participants and Indirect Participants with which Security Owners
have accounts with respect to the securities similarly are required to make
book-entry transfers and to receive and transmit the payments on behalf of their
respective Security Owners. Accordingly, although Security Owners will not
possess physical certificates representing the securities, the Rules provide a
mechanism by which Participants and Indirect Participants will receive payments
and transfer or exchange interests, directly or indirectly, on behalf of
Security Owners.
Because DTC can act only on behalf of Participants, who in turn may act on
behalf of Indirect Participants, the ability of a Security Owner to pledge
securities to persons or entities that do not participate in the DTC system, or
otherwise take actions with respect to the securities, may be limited due to the
lack of a physical certificate representing the securities.
DTC has advised the company that it will take any action permitted to be
taken by a Security Owner under the Indenture, Trust Agreement or Pooling and
Servicing Agreement, as applicable, only at the direction of one or more
Participants to whose account with DTC the securities are credited. DTC may take
conflicting actions with respect to other undivided interests to the extent that
these actions are taken on behalf of Participants whose holdings include the
undivided interests.
Clearstream Banking, societe anonyme, 67 Bd Grande-Duchesse Charlotte,
L-2967 Luxembourg ("Clearstream, Luxembourg"), was incorporated in 1970 as
"Cedel S.A.", a company with limited liability under Luxembourg law (a societe
anonyme). Cedel S.A. subsequently changed its name to Cedelbank. On January 10,
2000, Cedelbank's parent company, Cedel International, societe anonyme ("CI")
merged its clearing, settlement and custody business with that of Deutsche Borse
Clearing AG ("DBC"). The merger involved the transfer by CI of substantially all
of its assets and liabilities (including its shares in CB) to a new Luxembourg
company, New Cedel International, societe anonyme ("New CI"), which is 50% owned
by CI and 50% owned by DBC's parent company Deutsche Borse AG. The shareholders
of these two entities are banks, securities dealers and financial institutions.
Cedel International currently has 92 shareholders, including U.S. financial
institutions or their subsidiaries. No single entity may own more than 5 percent
of Cedel International's stock.
Further to the merger, the Board of Directors of New Cedel International
decided to rename the companies in the group in order to give them a cohesive
brand name. The new brand name that was chosen is "Clearstream". With effect
from January 14, 2000 New CI has been renamed "Clearstream International,
societe anonyme". On January 18, 2000, Cedelbank was renamed "Clearstream
Banking, societe anonyme", and Cedel Global Services was renamed "Clearstream
Services, societe anonyme".
On January 17, 2000 DBC was renamed "Clearstream Banking AG". This means
that there are now two entities in the corporate group headed by Clearstream
International which share the name "Clearstream Banking", the entity previously
named "Cedelbank" and the entity previously named "Deutsche Brse Clearing AG".
Clearstream, Luxembourg holds securities for its customers ("Clearstream,
Luxembourg Participants") and facilitates the clearance and settlement of
securities transactions between Clearstream, Luxembourg customers through
electronic book-entry changes in accounts of Clearstream, Luxembourg customers,
thereby eliminating the need for physical movement of certificates. Transactions
may be settled by Clearstream, Luxembourg in any of 36 currencies, including
United States Dollars. Clearstream, Luxembourg provides to its customers, among
other things, services for safekeeping, administration, clearance and settlement
of internationally traded securities and securities lending and borrowing.
Clearstream, Luxembourg also deals with domestic securities markets in over 30
countries through established depository and custodial relationships.
Clearstream, Luxembourg is registered as a bank in Luxembourg, and as such is
subject to regulation by the Commission de Surveillance du Secteur Financier,
"CSSF", which supervises Luxembourg banks. Clearstream, Luxembourg's customers
are world-wide financial institutions including underwriters, securities brokers
and dealers, banks, trust companies and clearing corporations. Clearstream,
Luxembourg's U.S. customers are limited to securities brokers and dealers, and
banks. Currently, Clearstream, Luxembourg has approximately 2,000 customers
located in over 80 countries, including all major European countries, Canada,
and the United States. Indirect access to Clearstream, Luxembourg is available
to other institutions that clear through or maintain a custodial relationship
with an account holder of Clearstream, Luxembourg. Clearstream, Luxembourg has
established an electronic bridge with Morgan Guaranty Trust Company of New York
as the Operator of the Euroclear System (MGT/EOC) in Brussels to facilitate
settlement of trades between Clearstream, Luxembourg and MGT/EOC.
Except as required by law, none of Credit Suisse First Boston Corporation,
the company, the related seller, the related servicer, or related indenture
trustee, if any, or the related trustee will have any liability for any aspect
of the records relating to or payments made on account of beneficial ownership
interests of securities of any series held by DTC's nominee, or for maintaining,
supervising or reviewing any records relating to the beneficial ownership
interests.
CREDIT SUPPORT
Credit support for a Series of Securities may be provided by one or more
Letters of Credit, the issuance of Subordinated Classes or Subclasses of
Securities, which may, if so specified in the related prospectus supplement, be
issued in notional amounts, the issuance of subordinated Classes or Subclasses
of Notes, the provision for shifting interest credit enhancement, the
establishment of a Reserve Fund, the method of Alternative Credit Support
specified in the applicable prospectus supplement, or any combination of the
foregoing, in addition to, or in lieu of, the insurance arrangements set forth
below under "Description of Insurance." The amount and method of credit support
will be set forth in the prospectus supplement with respect to a Series of
Securities.
LETTERS OF CREDIT
The Letters of Credit, if any, with respect to a Series of Securities will
be issued by the bank or financial institution specified in the related
prospectus supplement (the "L/C Bank"). The maximum obligation of the L/C Bank
under the Letter of Credit will be to honor requests for payment in an aggregate
fixed dollar amount, net of unreimbursed payments, equal to the percentage of
the aggregate principal balance on the related Cut-off Date of the Mortgage
Loans or Contracts evidenced by each Series (the "L/C Percentage") specified in
the prospectus supplement for the Series. The duration of coverage and the
amount and frequency of any reduction in coverage provided by the Letter of
Credit with respect to a Series of Securities will be in compliance with the
requirements established by the Rating Agency rating the Series and will be set
forth in the prospectus supplement relating to the Series of Securities. The
amount available under the Letter of Credit in all cases shall be reduced to the
extent of the unreimbursed payments under the Letter of Credit. The obligations
of the L/C Bank under the Letter of Credit for each Series of Securities will
expire a specified number of days after the latest of the scheduled final
maturity dates of the Mortgage Loans or Contracts in the related Mortgage Pool
or Contract Pool or the repurchase of all Mortgage Loans or Contracts in the
Mortgage Pool or Contract Pool in the circumstances specified above. See
"Description of the Securities -- Termination."
Unless otherwise specified in the applicable prospectus supplement, under
the applicable Agreement and/or Servicing Agreement, the Master Servicer will be
required not later than three business days prior to each Distribution Date to
determine whether a payment under the Letter of Credit will be necessary on the
Distribution Date and will, no later than the third business day prior to the
Distribution Date, advise the L/C Bank and the Trustee of its determination,
setting forth the amount of any required payment. On the Distribution Date, the
L/C Bank will be required to honor the Trustee's request for payment in an
amount equal to the lesser of (A) the remaining amount available under the
Letter of Credit and (B) the outstanding principal balances of any Liquidating
Loans to be assigned on the Distribution Date, together with accrued and unpaid
interest on the Liquidating Loans at the related Mortgage Rate or APR to the
related Due Date. The proceeds of payments under the Letter of Credit will be
deposited into the Certificate Account and will be distributed to
Securityholders, in the manner specified in the related prospectus supplement,
on the Distribution Date, except to the extent of any unreimbursed Advances,
servicing compensation due to the Servicers and the Master Servicer and other
amounts payable to the Depositor or the person or entity named in the applicable
prospectus supplement. Unless otherwise provided in the related prospectus
supplement, the term "Liquidating Loan" means:
(a) each Mortgage Loan with respect to which foreclosure proceedings have
been commenced, and the Mortgagor's right of reinstatement has expired,
(b) each Mortgage Loan with respect to which the Servicer or the Master
Servicer has agreed to accept a deed to the property in lieu of
foreclosure,
(c) each Cooperative Loan as to which the shares of the related Cooperative
and the related proprietary lease or occupancy agreement have been sold or
offered for sale or
(d) each Contract with respect to which repossession proceedings have been
commenced.
If at any time the L/C Bank makes a payment in the amount of the full
outstanding principal balance and accrued interest on a Liquidating Loan, it
will be entitled to receive an assignment by the Trustee of the Liquidating
Loan, and the L/C Bank will then own the Liquidating Loan free of any further
obligation to the Trustee or the Securityholders with respect to the Liquidating
Loan. Payments made to the Certificate Account by the L/C Bank under the Letter
of Credit with respect to a Liquidating Loan will be reimbursed to the L/C Bank
only from the proceeds, net of liquidation costs, of the Liquidating Loan. The
amount available under the Letter of Credit will be increased to the extent it
is reimbursed for the payments.
To the extent the proceeds of liquidation of a Liquidating Loan acquired by
the L/C Bank in the manner described in the preceding paragraph exceed the
amount of payments made with respect to the Liquidating Loan, the L/C Bank will
be entitled to retain the proceeds as additional compensation for issuance of
the Letter of Credit.
Prospective purchasers of Securities of a Series with respect to which
credit support is provided by a Letter of Credit must look to the credit of the
L/C Bank, to the extent of its obligations under the Letter of Credit, in the
event of default by Mortgagors or Obligors. If the amount available under the
Letter of Credit is exhausted, or the L/C Bank becomes insolvent, and amounts in
the Reserve Fund, if any, with respect to the Series are insufficient to pay the
entire amount of the loss and still be maintained at the Required Reserve, the
Securityholders, in the priority specified in the related prospectus supplement,
will subsequently bear all risks of loss resulting from default by Mortgagors or
Obligors, including losses not covered by insurance or Alternative Credit
Support, and must look primarily to the value of the properties securing
defaulted Mortgage Loans or Contracts for recovery of the outstanding principal
and unpaid interest.
If so specified in the related prospectus supplement, the Reserve Fund may
be created by the deposit, in escrow, by the Depositor, of a separate pool of
Mortgage Loans or Contracts (the "Subordinated Pool"), with the aggregate
principal balance specified in the related prospectus supplement, or by the
deposit of cash in the amount specified in the related prospectus supplement
(the "Initial Deposit"). The Reserve Fund will be funded by the retention of
specified distributions on the Trust Assets of the related Mortgage Pool or
Contract Pool, and/or on the mortgage loans, cooperative loans or Contracts in
the Subordinated Pool, until the Reserve Fund, without taking into account the
amount of any Initial Deposit, except as otherwise provided in the related
prospectus supplement, reaches an amount (the "Required Reserve") set forth in
the related prospectus supplement. Subsequently, specified distributions on the
Trust Assets of the related Mortgage Pool or Contract Pool, and/or on the
Mortgage Loans or Contracts in the Subordinated Pool, will be retained to the
extent necessary to maintain the Reserve Fund, without, except as otherwise
provided in the related prospectus supplement, taking into account the amount of
any Initial Deposit, at the related Required Reserve.
In the event that a Subordinated Class or Subclass of a Series of
Securities is issued with a notional amount, the coverage provided by the Letter
of Credit with respect to the Series, and the terms and conditions of the
coverage, will be set forth in the related prospectus supplement.
SUBORDINATED SECURITIES
To the extent specified in the prospectus supplement with respect to a
Series of Securities, credit support may be provided by the subordination of the
rights of the holders of one or more Classes or Subclasses of Securities to
receive distributions with respect to the Mortgage Loans or Mortgage
Certificates in the Mortgage Pool or Contracts in the Contract Pool underlying
the Series, or with respect to a Subordinated Pool of mortgage loans or
contracts, to the rights of the Senior Securityholders or holders of one or more
Classes or Subclasses of Subordinated Securities of the Series to receive
distributions, to the extent of the applicable Subordinated Amount or as
otherwise specified in the related prospectus supplement. In this case, credit
support may also be provided by the establishment of a Reserve Fund, as
described below. Except as otherwise provided in the related prospectus
supplement, the Subordinated Amount, as described below, will be reduced by an
amount equal to Aggregate Losses. Aggregate Losses will be defined in the
related Agreement for any given period as the aggregate amount of delinquencies,
losses and other deficiencies in the amounts due to the holders of the
Securities of one or more Classes or Subclasses of the Series paid or borne by
the holders of one or more Classes or Subclasses of Subordinated Securities of
the Series ("payment deficiencies"), but excluding any payments of interest on
any amounts originally due to the holders of the Securities of a Class or
Subclass to which the applicable Class or Subclass of Subordinated Securities
are subordinated on a previous Distribution Date, but not paid as due, whether
by way of withdrawal from the Reserve Fund, including, prior to the time that
the Subordinated Amount is reduced to zero, any withdrawal of amounts
attributable to the Initial Deposit, if any, reduction in amounts otherwise
distributable to the Subordinated Securityholders on any Distribution Date or
otherwise, less the aggregate amount of previous payment deficiencies recovered
by the related Trust Fund during any period in respect of the Mortgage Loans or
Contracts giving rise to previous payment deficiencies, including, without
limitation, recoveries resulting from the receipt of delinquent principal and/or
interest payments, Liquidation Proceeds or Insurance Proceeds, net, in each
case, of servicing compensation, foreclosure costs and other servicing costs,
expenses and unreimbursed Advances relating to the Mortgage Loans or Contracts.
The prospectus supplement for each Series of Securities with respect to which
credit support will be provided by one or more Classes or Subclasses of
Subordinated Securities will set forth the Subordinated Amount for the Series
and/or the manner by which one or more Classes or Subclasses of Securities may
be subordinated to other Classes or Subclasses or Securities. If specified in
the related prospectus supplement, the Subordinated Amount will decline over
time in accordance with a schedule which will also be set forth in the related
prospectus supplement.
In addition, if so specified in the related prospectus supplement, if a
Series of Securities includes Notes, one more Classes or Subclasses of Notes may
be subordinated to another Class or Subclasses of Notes and may be entitled to
receive disproportionate amounts of distributions in respect of principal and
all the Certificates of the Series will be subordinated to all the Notes.
SHIFTING INTEREST
If specified in the prospectus supplement for a Series of Securities for
which credit enhancement is provided by shifting interest as described in this
prospectus, the rights of the holders of the Subordinated Securities of a Series
to receive distributions with respect to the Mortgage Loans, Mortgage
Certificates or Contracts in the related Trust Fund or Subsidiary Trust will be
subordinated to the right of the holders of the Senior Securities of the same
Series to the extent described in the related prospectus supplement. This
subordination feature is intended to enhance the likelihood of regular receipt
by holders of Senior Securities of the full amount of scheduled monthly payments
of principal and interest due them and to provide limited protection to the
holders of the Senior Securities against losses due to mortgagor defaults.
The protection afforded to the holders of Senior Securities of a Series by
the shifting interest subordination feature will be effected by distributing to
the holders of the Senior Securities a disproportionately greater percentage
(the "Senior Prepayment Percentage") of Principal Prepayments. The initial
Senior Prepayment Percentage will be the percentage specified in the related
prospectus supplement and will decrease in accordance with the schedule and
subject to the conditions set forth in the prospectus supplement. This
disproportionate distribution of Principal Prepayments will have the effect of
accelerating the amortization of the Senior Securities while increasing the
respective interest of the Subordinated Securities in the Mortgage Pool or
Contract Pool. Increasing the respective interest of the Subordinated Securities
relative to that of the Senior Securities is intended to preserve the
availability of the benefits of the subordination provided by the Subordinated
Securities.
SWAP AGREEMENT
If so specified in the prospectus supplement relating to a Series of
Securities, the related Trust will enter into or obtain an assignment of a swap
agreement or other similar agreement pursuant to which the trust will have the
right to receive particular payments of interest, or other payments, as set
forth or determined as described in the agreement or agreements. The prospectus
supplement relating to a Series of Securities having the benefit of an interest
rate or currency rate swap, cap or floor agreement will describe the material
terms of the agreement and the particular risks associated with the interest
rate swap feature, including market and credit risk, the effect of counterparty
defaults and other risks, if any, addressed by the rating. The prospectus
supplement relating to the Series of Securities also will set forth information
relating to the corporate status, ownership and credit quality of the
counterparty or counterparties to the swap agreement in accordance with
applicable rules and regulations of the Commission.
RESERVE FUND
If so specified in the related prospectus supplement, credit support with
respect to one or more Classes or Subclasses of Securities of a Series may be
provided by the establishment and maintenance with the Trustee for the Series of
Securities, in trust, of a Reserve Fund for the Series. Unless otherwise
specified in the applicable prospectus supplement, the Reserve Fund for a Series
will not be included in the Trust Fund for the Series. The Reserve Fund for each
Series will be created by the Depositor and shall be funded by the retention by
the Master Servicer of particular payments on the Mortgage Loans or Contracts,
by the deposit with the Trustee, in escrow, by the Depositor of a Subordinated
Pool of mortgage loans or Contracts with the aggregate principal balance, as of
the related Cut-off Date, set forth in the related prospectus supplement, by any
combination of the foregoing, or in another manner specified in the related
prospectus supplement. Except as otherwise provided in the related prospectus
supplement, following the initial issuance of the Securities of a Series and
until the balance of the Reserve Fund first equals or exceeds the Required
Reserve, the Master Servicer will retain specified distributions on the related
Mortgage Loans or Contracts and/or on the Contracts in the Subordinated Pool
otherwise distributable to the holders of the applicable Class or Subclasses of
Subordinated Securities and deposit the amounts in the Reserve Fund. After the
amounts in the Reserve Fund for a Series first equal or exceed the applicable
Required Reserve, the Master Servicer will retain the distributions and deposit
so much of the amounts in the Reserve Fund as may be necessary, after the
application of distributions to amounts due and unpaid on the Securities or on
the Securities of the Series to which the applicable Class or Subclass of
Subordinated Securities are subordinated and the reimbursement of unreimbursed
Advances and liquidation expenses, to maintain the Reserve Fund at the Required
Reserve. Except as otherwise provided in the related prospectus supplement, the
balance in the Reserve Fund in excess of the Required Reserve shall be paid to
the applicable Class or Subclass of Subordinated Securities, or to another
specified person or entity, as set forth in the related prospectus supplement,
and shall subsequently be unavailable for future distribution to
Certificateholders of either Class. The prospectus supplement for each Series
will set forth the amount of the Required Reserve applicable from time to time.
The Required Reserve may decline over time in accordance with a schedule which
will also be set forth in the related prospectus supplement.
Except as otherwise provided in the related prospectus supplement, amounts
held in the Reserve Fund for a Series from time to time will continue to be the
property of the Subordinated Securityholders of the Classes or Subclasses
specified in the related prospectus supplement until withdrawn from the Reserve
Fund and transferred to the Certificate Account as described below. Except as
otherwise provided in the related prospectus supplement, if on any Distribution
Date the amount in the Certificate Account available to be applied to
distributions on the applicable Senior Securities of the Series, after giving
effect to any Advances made by the Servicers or the Master Servicer on the
Distribution Date, is less than the amount required to be distributed to the
Senior Securityholders (the "Required Distribution") on the Distribution Date,
the Master Servicer will withdraw from the Reserve Fund and deposit into the
Certificate Account the lesser of (1) the entire amount on deposit in the
Reserve Fund available for distribution to the Senior Securityholders, which
amount will not in any event exceed the Required Reserve, or (2) the amount
necessary to increase the funds in the Certificate Account eligible for
distribution to the Senior Securityholders on the Distribution Date to the
Required Distribution; provided, however, that unless specified in the related
prospectus supplement no amount representing investment earnings on amounts held
in the Reserve Fund be transferred into the Certificate Account or otherwise
used in any manner for the benefit of the Senior Securityholders. If so
specified in the applicable prospectus supplement, the balance, if any, in the
Reserve Fund in excess of the Required Reserve shall be released to the
applicable Subordinated Securityholders. Unless otherwise specified in the
related prospectus supplement, whenever the Reserve Fund is less than the
Required Reserve, holders of the Subordinated Securities of the applicable Class
or Subclass will not receive any distributions with respect to the Mortgage
Loans, Mortgage Certificates or Contracts other than amounts attributable to
interest on the Mortgage Loans, Mortgage Certificates or Contracts after the
initial Required Reserve has been attained and amounts attributable to any
income resulting from investment of the Reserve Fund as described below. Except
as otherwise provided in the related prospectus supplement, whether or not the
amount of the Reserve Fund exceeds the Required Reserve on any Distribution
Date, the holders of the Subordinated Securities of the applicable Class or
Subclass are entitled to receive from the Certificate Account their share of the
proceeds of any Mortgage Loan, Mortgage Certificates or Contract, or any
property acquired for them, repurchased by reason of defective documentation or
the breach of a representation or warranty pursuant to the Pooling and Servicing
Agreement. Except as otherwise provided in the related prospectus supplement,
amounts in the Reserve Fund shall be applied in the following order:
(1) to the reimbursement of Advances determined by the Master Servicer
and the Servicers to be otherwise unrecoverable, other than Advances of
interest in connection with prepayments in full, repurchases and
liquidations, and the reimbursement of liquidation expenses incurred by the
Servicers and the Master Servicer if sufficient funds for reimbursement are
not otherwise available in the related Servicing Accounts and Certificate
Account;
(2) to the payment to the holders of the applicable Senior Securities
of the Series of amounts distributable to them on the related Distribution
Date in respect of scheduled payments of principal and interest due on the
related Due Date to the extent that sufficient funds in the Certificate
Account are not available; and
(3) to the payment to the holders of the Senior Securities of the
Series of the principal balance or purchase price, as applicable, of
Mortgage Loans or Contracts repurchased, liquidated or foreclosed during
the period ending on the day prior to the Due Date to which the
distribution relates and interest on these Mortgage Loans or Contracts at
the related Mortgage Rate or APR, as applicable, to the extent that
sufficient funds in the Certificate Account are not available.
Except as otherwise provided in the related prospectus supplement, amounts
in the Reserve Fund in excess of the Required Reserve, including any investment
income on amounts in the Reserve Fund, as set forth below, shall then be
released to the holders of the Subordinated Securities, or to another person
specified in the applicable prospectus supplement, as set forth above.
Funds in the Reserve Fund for a Series shall be invested as provided in the
related Agreement and/or Indenture in specific types of eligible investments.
The earnings on these investments will be withdrawn and paid to the holders of
the applicable Class or Subclass of Subordinated Securities in accordance with
their respective interests in the Reserve Fund in the priority specified in the
related prospectus supplement. Unless otherwise specified in the related
prospectus supplement, investment income in the Reserve Fund is not available
for distribution to the holders of the Senior Securities of the Series or
otherwise subject to any claims or rights of the holders of the applicable Class
or Subclass of Senior Securities. Eligible investments for monies deposited in
the Reserve Fund will be specified in the applicable Agreement and/or Indenture
for a Series of Securities for which a Reserve Fund is established and in some
instances will be limited to investments acceptable to the Rating Agency rating
the Securities of the Series from time to time as being consistent with its
outstanding rating of the Securities. These eligible investments will be
limited, however, to obligations or securities that mature at various time
periods up to 30 days according to a schedule in the applicable Agreement based
on the current balance of the Reserve Fund at the time of the investment or the
contractual commitment providing for the investment.
The time necessary for the Reserve Fund of a Series to reach and maintain
the applicable Required Reserve at any time after the initial issuance of the
Securities of the Series and the availability of amounts in the Reserve Fund for
distributions on the Securities will be affected by the delinquency, foreclosure
and prepayment experience of the Mortgage Loans or Contracts in the related
Trust Fund and/or in the Subordinated Pool and therefore cannot be accurately
predicted.
SECURITY GUARANTEE INSURANCE
If so specified in the related prospectus supplement, Security Guarantee
Insurance, if any, with respect to a Series of Securities may be provided by one
or more insurance companies. The Security Guarantee Insurance will guarantee,
with respect to one or more Classes of Securities of the related Series, timely
distributions of interest and full distributions of principal on the basis of a
schedule of principal distributions set forth in or determined in the manner
specified in the related prospectus supplement. If so specified, in the related
prospectus supplement, the Security Guarantee Insurance will also guarantee
against any payment made to a Series of Securities which is subsequently
recovered as a "voidable preference" payment under the Bankruptcy Code. A copy
of the Security Guarantee Insurance for a Series, if any, will be filed with the
Commission as an exhibit to a Current Report on Form 8-K to be filed with the
Commission within 15 days of issuance of the Securities of the related Series.
PERFORMANCE BOND
If so specified in the related prospectus supplement, the Master Servicer
may be required to obtain a Performance Bond that would provide a guarantee of
the performance by the Master Servicer of one or more of its obligations under
the applicable Agreement and/or Servicing Agreement, including its obligation to
make Advances and its obligation to repurchase Mortgage Loans or Contracts in
the event of a breach by the Master Servicer of a representation or warranty
contained in the applicable Agreement. In the event that the outstanding credit
rating of the obligor of the Performance Bond is lowered by the Rating Agency,
with the result that the outstanding rating on any Class or Subclass of
Securities would be reduced by the Rating Agency, the Master Servicer will be
required to secure a substitute Performance Bond issued by an entity with a
rating sufficient to maintain the outstanding rating on the Securities or to
deposit and maintain with the Trustee cash in the amount specified in the
applicable prospectus supplement.
DESCRIPTION OF INSURANCE
To the extent that the applicable prospectus supplement does not expressly
provide for a form of credit support specified above or for Alternative Credit
Support in lieu of some or all of the insurance mentioned below, the following
paragraphs on insurance shall apply with respect to the Mortgage Loans included
in the related Trust Fund. To the extent specified in the related prospectus
supplement, each Manufactured Home that secures a Contract will be covered by a
standard hazard insurance policy and other insurance policies to the extent
described in the related prospectus supplement. Any material changes in the
insurance from the description that follows or the description of any
Alternative Credit Support will be set forth in the applicable prospectus
supplement.
PRIMARY MORTGAGE INSURANCE POLICIES
To the extent specified in the related prospectus supplement, each
Servicing Agreement will require the Servicer to cause a Primary Mortgage
Insurance Policy to be maintained in full force and effect with respect to each
Mortgage Loan that is secured by a Single Family Property covered by the
Servicing Agreement requiring the insurance and to act on behalf of the Insured
with respect to all actions required to be taken by the Insured under each
Primary Mortgage Insurance Policy. Any primary mortgage insurance or primary
credit insurance policies relating to the Contracts underlying a Series of
Securities will be described in the related prospectus supplement.
Unless otherwise specified in the related prospectus supplement, the amount
of a claim for benefits under a Primary Mortgage Insurance Policy covering a
Mortgage Loan in the related Mortgage Pool (referred to in this prospectus as
the "Loss") will consist of the insured portion of the unpaid principal amount
of the covered Mortgage Loan, as described in this prospectus, and accrued and
unpaid interest on the Mortgage Loan and reimbursement of particular types of
expenses, less
o all rents or other payments collected or received by the Insured, other
than the proceeds of hazard insurance, that are derived from or in any way
related to the Mortgaged Property,
o hazard insurance proceeds in excess of the amount required to restore the
Mortgaged Property and which have not been applied to the payment of the
Mortgage Loan,
o amounts expended but not approved by the Primary Mortgage Insurer,
o claim payments previously made by the Primary Mortgage Insurer, and
o unpaid premiums.
Unless otherwise specified in the related prospectus supplement, as
conditions precedent to the filing of or payment of a claim under a Primary
Mortgage Insurance Policy covering a Mortgage Loan in the related Mortgage Pool,
the Insured will be required to, in the event of default by the Mortgagor:
(1) advance or discharge
(A) all hazard insurance premiums and
(B) as necessary and approved in advance by the Primary Mortgage Insurer,
o real estate property taxes,
o all expenses required to preserve, repair and prevent waste to the
Mortgaged Property so as to maintain the Mortgaged Property in at
least as good a condition as existed at the effective date of the
Primary Mortgage Insurance Policy, ordinary wear and tear excepted,
o property sales expenses,
o any outstanding liens (as defined in the Primary Mortgage Insurance
Policy) on the Mortgaged Property and
o foreclosure costs, including court costs and reasonable attorneys'
fees;
(2) in the event of a physical loss or damage to the Mortgaged Property, have
restored and repaired the Mortgaged Property to at least as good a
condition as existed at the effective date of the Primary Mortgage
Insurance Policy, ordinary wear and tear excepted; and
(3) tender to the Primary Mortgage Insurer good and merchantable title to and
possession of the mortgaged property.
Unless otherwise specified in the related prospectus supplement, other
provisions and conditions of each Primary Mortgage Insurance Policy covering a
Mortgage Loan in the related Mortgage Pool generally will provide that:
(1) no change may be made in the terms of the Mortgage Loan without the consent
of the Primary Mortgage Insurer;
(2) written notice must be given to the Primary Mortgage Insurer within 10 days
after the Insured becomes aware that a Mortgagor is delinquent in the
payment of a sum equal to the aggregate of two scheduled monthly payments
due under the Mortgage Loan or that any proceedings affecting the
Mortgagor's interest in the Mortgaged Property securing the Mortgage Loan
have commenced, and afterward the Insured must report monthly to the
Primary Mortgage Insurer the status of any the Mortgage Loan until the
Mortgage Loan is brought current, the proceedings are terminated or a claim
is filed;
(3) the Primary Mortgage Insurer will have the right to purchase the Mortgage
Loan, at any time subsequent to the 10 days' notice described in (2) above
and prior to the commencement of foreclosure proceedings, at a price equal
to the unpaid principal amount of the Mortgage Loan, plus accrued and
unpaid interest on the Mortgage Loan and reimbursable amounts expended by
the Insured for the real estate taxes and fire and extended coverage
insurance on the Mortgaged Property for a period not exceeding 12 months,
and less the sum of any claim previously paid under the Primary Mortgage
Insurance Policy and any due and unpaid premiums with respect to the
policy;
(4) the Insured must commence proceedings at the times specified in the Primary
Mortgage Insurance Policy and diligently proceed to obtain good and
merchantable title to and possession of the Mortgaged Property;
(5) the Insured must notify the Primary Mortgage Insurer of the price specified
in (3) above at least 15 days prior to the sale of the Mortgaged Property
by foreclosure, and bid the amount unless the Mortgage Insurer specifies a
lower or higher amount; and
(6) the Insured may accept a conveyance of the Mortgaged Property in lieu of
foreclosure with written approval of the Mortgage Insurer provided the
ability of the Insured to assign specified rights to the Primary Mortgage
Insurer are not impaired by a conveyance or the specified rights of the
Primary Mortgage Insurer are not adversely affected by a conveyance.
Unless otherwise specified in the related prospectus supplement, the
Primary Mortgage Insurer will be required to pay to the Insured either: (1) the
insured percentage of the Loss; or (2) at its option under some of the Primary
Mortgage Insurance Policies, the sum of the delinquent monthly payments plus any
advances made by the Insured, both to the date of the claim payment, and
afterward, monthly payments in the amount that would have become due under the
Mortgage Loan if it had not been discharged plus any advances made by the
Insured until the earlier of (A) the date the Mortgage Loan would have been
discharged in full if the default had not occurred or (B) an approved sale. Any
rents or other payments collected or received by the Insured which are derived
from or are in any way related to the Mortgaged Property will be deducted from
any claim payment.
FHA INSURANCE AND VA GUARANTEES
The FHA is responsible for administering various federal programs,
including mortgage insurance, authorized under the National Housing Act, as
amended, and the United States Housing Act of 1937, as amended. Any FHA
Insurance or VA Guarantees relating to Contracts underlying a Series of
Securities will be described in the related prospectus supplement.
The insurance premiums for FHA Loans are collected by HUD approved lenders
or by the Servicers of FHA Loans and are paid to the FHA. The regulations
governing FHA single-family mortgage insurance programs provide that insurance
benefits are payable either upon foreclosure, or other acquisition of
possession, and conveyance of the mortgaged premises to HUD or upon assignment
of the defaulted FHA Loan to HUD. With respect to a defaulted FHA Loan, the
Servicer of the FHA Loan will be limited in its ability to initiate foreclosure
proceedings. When it is determined, either by the Servicer or HUD, that default
was caused by circumstances beyond the Mortgagor's control, the Servicer will be
expected to make an effort to avoid foreclosure by entering, if feasible, into
one of a number of available forms of forbearance plans with the Mortgagor. The
plans may involve the reduction or suspension of scheduled mortgage payments for
a specified period, with the payments to be made upon or before the maturity
date of the mortgage, or the recasting of payments due under the mortgage up to
or beyond the scheduled maturity date. In addition, when a default caused by
this circumstance is accompanied by other criteria, HUD may provide relief by
making payments to the Servicer of the Mortgage Loan in partial or full
satisfaction of amounts due, which payments are to be repaid by the Mortgagor to
HUD, or by accepting assignment of the Mortgage Loan from the Servicer. With
some exceptions, at least three full monthly installments must be due and unpaid
under the Mortgage Loan, and HUD must have rejected any request for relief from
the Mortgagor before the Servicer may initiate foreclosure proceedings.
HUD has the option, in most cases, to pay insurance claims in cash or in
debentures issued by HUD. Presently, claims are being paid in cash, and claims
have not been paid in debentures since 1965. HUD debentures issued in
satisfaction of FHA insurance claims bear interest at the applicable HUD
debenture interest rate. The Servicer of each FHA Loan in a Mortgage Pool will
be obligated to purchase any debenture issued in satisfaction of a defaulted FHA
Loan serviced by it for an amount equal to the principal amount of the FHA Loan.
The amount of insurance benefits generally paid by the FHA is equal to the
entire unpaid principal balance of the defaulted FHA Loan, adjusted to reimburse
the Servicer of the FHA Loan for particular costs and expenses and to deduct
specific amounts received or retained by the Servicer after default. When
entitlement to insurance benefits results from foreclosure, or other acquisition
of possession, and conveyance to HUD, the Servicer is compensated for no more
than two-thirds of its foreclosure costs, and is compensated for interest
accrued and unpaid prior to this date in general only to the extent it was
allowed pursuant to a forbearance plan approved by HUD. When entitlement to
insurance benefits results from assignment of the FHA Loan to HUD, the insurance
payment includes full compensation for interest accrued and unpaid to the
assignment date. The insurance payment itself, upon foreclosure of an FHA Loan,
bears interest from a date 30 days after the mortgagor's first uncorrected
failure to perform any obligation or make any payment due under the Mortgage
Loan and, upon assignment, from the date of assignment, to the date of payment
of the claim, in each case at the same interest rate as the applicable HUD
debenture interest rate as described above.
The maximum guarantee that may be issued by the VA under a VA Loan is
o 50% of the principal amount of the VA Loan if the principal amount of the
Mortgage Loan is $45,000 or less,
o the lesser of $36,000 and 40% if the principal amount of the VA Loan if the
principal amount of the VA Loan is greater than $45,000 but less than or
equal to $144,000, and
o the lesser of $46,000 and 25% of the principal amount of the Mortgage Loan
if the principal amount of the Mortgage Loan is greater than $144,000.
The liability on the guarantee is reduced or increased pro rata with any
reduction or increase in the amount of indebtedness, but in no event will the
amount payable on the guarantee exceed the amount of the original guarantee. The
VA may, at its option and without regard to the guarantee, make full payment to
a mortgage holder of unsatisfied indebtedness on a Mortgage upon its assignment
to the VA.
With respect to a defaulted VA Loan, the Servicer is, absent exceptional
circumstances, authorized to announce its intention to foreclose only when the
default has continued for three months. Generally, a claim for the guarantee is
submitted after liquidation of the Mortgaged Property.
The amount payable under the guarantee will be the percentage of the VA
Loan originally guaranteed applied to indebtedness outstanding as of the
applicable date of computation specified in the VA regulations. Payments under
the guarantee will be equal to the unpaid principal amount of the VA Loan,
interest accrued on the unpaid balance of the VA Loan to the appropriate date of
computation and limited expenses of the mortgagee, but in each case only to the
extent that the amounts have not been recovered through liquidation of the
Mortgaged Property. The amount payable under the guarantee may in no event
exceed the amount of the original guarantee.
STANDARD HAZARD INSURANCE POLICIES ON MORTGAGE LOANS
Unless otherwise specified in the related prospectus supplement, any
Standard Hazard Insurance Policies covering the Mortgage Loans in a Mortgage
Pool will provide for coverage at least equal to the applicable state standard
form of fire insurance policy with extended coverage. In general, the standard
form of fire and extended coverage policy will cover physical damage to, or
destruction of, the improvements on the Mortgaged Property caused by fire,
lightning, explosion, smoke, windstorm, hail, riot, strike and civil commotion,
subject to the conditions and exclusions particularized in each policy. Because
the Standard Hazard Insurance Policies relating to the Mortgage Loans will be
underwritten by different insurers and will cover Mortgaged Properties located
in various states, the policies will not contain identical terms and conditions.
The most significant terms of the policies, however, generally will be
determined by state law and generally will be similar. Most policies typically
will not cover any physical damage resulting from the following: war,
revolution, governmental actions, floods and other water-related causes, earth
movement, including earthquakes, landslides and mudflows, nuclear reaction, wet
or dry rot, vermin, rodents, insects or domestic animals, theft and, in some
cases, vandalism. The foregoing list is merely indicative of specific kinds of
uninsured risks and is not intended to be all-inclusive.
The Standard Hazard Insurance Policies covering Mortgaged Properties
securing Mortgage Loans typically will contain a "coinsurance" clause which, in
effect, will require the insured at all times to carry insurance of a specified
percentage, generally 80% to 90%, of the full replacement value of the
dwellings, structures and other improvements on the Mortgaged Property in order
to recover the full amount of any partial loss. If the insured's coverage falls
below this specified percentage, the clause will provide that the insurer's
liability in the event of partial loss will not exceed the greater of (1) the
actual cash value, the replacement cost less physical depreciation, of the
dwellings, structures and other improvements damaged or destroyed or (2) the
proportion of the loss, without deduction for depreciation, as the amount of
insurance carried bears to the specified percentage of the full replacement cost
of the dwellings, structures and other improvements.
The Depositor will not require that a standard hazard or flood insurance
policy be maintained on the Cooperative Dwelling relating to any Cooperative
Loan. Generally, the cooperative corporation itself is responsible for
maintenance of hazard insurance for the property owned by the cooperative and
the tenant-stockholders of that cooperative do not maintain individual hazard
insurance policies. To the extent, however, that a Cooperative and the related
borrower on a Cooperative Loan do not maintain the insurance or do not maintain
adequate coverage or any insurance proceeds are not applied to the restoration
of damaged property, any damage to the borrower's Cooperative Dwelling or the
Cooperative's building could significantly reduce the value of the collateral
securing the Cooperative Loan to the extent not covered by other credit support.
Any losses incurred with respect to Mortgage Loans due to uninsured risks,
including earthquakes, mudflows and, with respect to Mortgaged Properties
located other than in HUD designated flood areas, floods, or insufficient hazard
insurance proceeds and any hazard losses incurred with respect to Cooperative
Loans could affect distributions to the Certificateholders.
With respect to Mortgage Loans secured by Multifamily Property, additional
insurance policies may be required with respect to the Multifamily Property; for
example, general liability insurance for bodily injury and property damage,
steam boiler coverage where a steam boiler or other pressure vessel is in
operation, and rent loss insurance to cover income losses following damage or
destruction of the Mortgaged Property. The related prospectus supplement will
specify the required types and amounts of additional insurance that may be
required in connection with Mortgage Loans secured by Multifamily Property and
will describe the general terms of the insurance and conditions to payment.
STANDARD HAZARD INSURANCE POLICIES ON THE MANUFACTURED HOMES
The applicable Pooling and Servicing Agreement or Sale and Servicing
Agreement for each Series will require the Master Servicer to cause to be
maintained with respect to each Contract one or more Standard Hazard Insurance
Policies which provide, at a minimum, the same coverage as a standard form file
and extended coverage insurance policy that is customary for manufactured
housing, issued by a company authorized to issue policies in the state in which
the Manufactured Home is located, and in an amount which is not less than the
lesser of the maximum insurable value of the Manufactured Home or the principal
balance due from the Obligor on the related Contract; provided, however, that
the amount of coverage provided by each Standard Hazard Insurance Policy shall
be sufficient to avoid the application of any co-insurance clause contained in
the policy. When a Manufactured Home's location was, at the time of origination
of the related Contract, within a federally designated flood area, the Master
Servicer also shall cause flood insurance to be maintained, which coverage shall
be at least equal to the minimum amount specified in the preceding sentence or a
lesser amount as may be available under the federal flood insurance program.
Each Standard Hazard Insurance Policy caused to be maintained by the Master
Servicer shall contain a standard loss payee clause in favor of the Master
Servicer and its successors and assigns. If any Obligor is in default in the
payment of premiums on its Standard Hazard Insurance Policy or Policies, the
Master Servicer shall pay the premiums out of its own funds, and may add
separately the premium to the Obligor's obligation as provided by the Contract,
but may not add the premium to the remaining principal balance of the Contract.
The Master Servicer may maintain, in lieu of causing individual Standard
Hazard Insurance Policies to be maintained with respect to each Manufactured
Home, and shall maintain, to the extent that the related Contract does not
require the Obligor to maintain a Standard Hazard Insurance Policy with respect
to the related Manufactured Home, one or more blanket insurance policies
covering losses on the Obligor's interest in the Contracts resulting from the
absence or insufficiency of individual Standard Hazard Insurance Policies. Any
blanket policy shall be substantially in the form and in the amount carried by
the Master Servicer as of the date of the Pooling and Servicing Agreement. The
Master Servicer shall pay the premium for the policy on the basis described in
the policy and shall pay any deductible amount with respect to claims under the
policy relating to the Contracts. If the insurer shall cease to be acceptable to
the Master Servicer, the Master Servicer shall use its best reasonable efforts
to obtain from another insurer a replacement policy comparable to the policy.
If the Master Servicer shall have repossessed a Manufactured Home on behalf
of the Trustee, the Master Servicer shall either (1) maintain at its expense
hazard insurance with respect to the Manufactured Home or (2) indemnify the
Trustee against any damage to the Manufactured Home prior to resale or other
disposition.
POOL INSURANCE POLICIES
If so specified in the related prospectus supplement, the Master Servicer
will obtain a Pool Insurance Policy for a Mortgage Pool underlying Securities of
the Series. The Pool Insurance Policy will be issued by the Pool Insurer named
in the applicable prospectus supplement. Any Pool Insurance Policy for a
Contract Pool underlying a Series of Securities will be described in the related
prospectus supplement. Each Pool Insurance Policy will cover any loss, subject
to the limitations described below, by reason of default to the extent the
related Mortgage Loan is not covered by any Primary Mortgage Insurance Policy,
FHA insurance or VA guarantee. The amount of the Pool Insurance Policy, if any,
with respect to a Series will be specified in the related prospectus supplement.
A Pool Insurance Policy, however, will not be a blanket policy against loss,
because claims under a Pool Insurance Policy may only be made for particular
defaulted Mortgage Loans and only upon satisfaction of particular conditions
precedent described below. The prospectus supplement will contain the financial
information regarding the Pool Insurer required by the rules and regulations of
the Commission.
Unless otherwise specified in the related prospectus supplement, the Pool
Insurance Policy will provide that as a condition precedent to the payment of
any claim the Insured will be required
(1) to advance hazard insurance premiums on the Mortgaged Property securing the
defaulted Mortgage Loan;
(2) to advance, as necessary and approved in advance by the Pool Insurer,
o real estate property taxes,
o all expenses required to preserve and repair the Mortgaged Property,
to protect the Mortgaged Property from waste, so that the Mortgaged
Property is in at least as good a condition as existed on the date
upon which coverage under the Pool Insurance Policy with respect to
the Mortgaged Property first became effective, ordinary wear and tear
excepted,
o property sales expenses,
o any outstanding liens on the Mortgaged Property and
o foreclosure costs including court costs and reasonable attorneys'
fees; and
(3) if there has been physical loss or damage to the Mortgaged Property, to
restore the Mortgaged Property to its condition, reasonable wear and tear
excepted, as of the issue date of the Pool Insurance Policy.
It also will be a condition precedent to the payment of any claim under the Pool
Insurance Policy that the Insured maintain a Primary Mortgage Insurance Policy
that is acceptable to the Pool Insurer on all Mortgage Loans that have
Loan-to-Value Ratios at the time of origination in excess of 80%. FHA insurance
and VA guarantees will be deemed to be an acceptable Primary Mortgage Insurance
Policy under the Pool Insurance Policy. Assuming satisfaction of these
conditions, the Pool Insurer will pay to the Insured the amount of loss,
determined as follows:
(1) the amount of the unpaid principal balance of the Mortgage Loan immediately
prior to the Approved Sale (as described below) of the Mortgaged Property,
(2) the amount of the accumulated unpaid interest on the Mortgage Loan to the
date of claim settlement at the applicable Mortgage Rate and
(3) advances as described above, less
o all rents or other payments, excluding proceeds of fire and extended
coverage insurance, collected or received by the Insured, which are
derived from or in any way related to the Mortgaged Property,
o amounts paid under applicable fire and extended coverage policies
which are in excess of the cost of restoring and repairing the
Mortgaged Property and which have not been applied to the payment of
the Mortgage Loan,
o any claims payments previously made by the Pool Insurer on the
Mortgage Loan,
o due and unpaid premiums payable with respect to the Pool Insurance
Policy and
o all claim payments received by the Insured pursuant to any Primary
Mortgage Insurance Policy.
An "Approved Sale" is
(1) a sale of the Mortgaged Property acquired because of a default by the
Mortgagor to which the Pool Insurer has given prior approval,
(2) a foreclosure or trustee's sale of the Mortgaged Property at a price
exceeding the maximum amount specified by the Pool Insurer,
(3) the acquisition of the Mortgaged Property under the Primary Insurance
Policy by the Primary Mortgage Insurer or
(4) the acquisition of the Mortgaged Property by the Pool Insurer.
The Pool Insurer must be provided with good and merchantable title to the
Mortgaged Property as a condition precedent to the payment of any Loss. If any
Mortgaged Property securing a defaulted Mortgage Loan is damaged and the
proceeds, if any, from the related Standard Hazard Insurance Policy or the
applicable Special Hazard Insurance Policy are insufficient to restore the
Mortgaged Property to a condition sufficient to permit recovery under the Pool
Insurance Policy, the Master Servicer or the Servicer of the related Mortgage
Loan will not be required to expend its own funds to restore the damaged
Mortgaged Property unless it is determined (1) that the restoration will
increase the proceeds to the Securityholders of the related Series on
liquidation of the Mortgage Loan, after reimbursement of the expenses of the
Master Servicer or the Servicer, as the case may be, and (2) that the expenses
will be recoverable by it through payments under the Letter of Credit, if any,
with respect to the Series, Liquidation Proceeds, Insurance Proceeds, amounts in
the Reserve Fund, if any, or payments under any Alternative Credit Support, if
any, with respect to the Series.
No Pool Insurance Policy will insure, and many Primary Mortgage
Insurance Policies may not insure, against loss sustained by reason of a default
arising from, among other things,
(1) fraud or negligence in the origination or servicing of a Mortgage Loan,
including misrepresentation by the Mortgagor, the Unaffiliated Seller, the
Originator or other persons involved in the origination of the Mortgage
Loan,
(2) the exercise by the Insured of its right to call the Mortgage Loan, or the
term of the Mortgage Loan is shorter than the amortization period and the
defaulted payment is for an amount more than twice the regular periodic
payments of principal and interest for the Mortgage Loan, or
(3) the exercise by the Insured of a "due-on-sale" clause or other similar
provision in the Mortgage Loan; provided, in either case of clause (2) or
(3), the exclusion shall not apply if the Insured offers a renewal or
extension of the Mortgage Loan or a new Mortgage Loan at the market rate in
an amount not less than the then outstanding principal balance with no
decrease in the amortization period.
A failure of coverage attributable to one of the foregoing events might result
in a breach of the Master Servicer's insurability representation described under
"Description of the Securities -- Assignment of Mortgage Loans," and in this
event, subject to the limitations described, might give rise to an obligation on
the part of the Master Servicer to purchase the defaulted Mortgage Loan if the
breach materially and adversely affects the interests of the Securityholders of
the related Series and cannot be cured by the Master Servicer. Depending upon
the nature of the event, a breach of representation made by the Depositor or an
Unaffiliated Seller may also have occurred. The breach, if it materially and
adversely affects the interests of the Securityholders of the Series and cannot
be cured, would give rise to a repurchase obligation on the part of the
Unaffiliated Seller as more fully described under "The Trust Fund -- Mortgage
Loan Program" and " -- Representations by Unaffiliated Sellers; Repurchases" and
"Description of the Securities -- Assignment of Mortgage Loans."
The original amount of coverage under the Pool Insurance Policy will be
reduced over the life of the Securities of the related Series by the aggregate
dollar amount of claims paid less the aggregate of the net amounts realized by
the Pool Insurer upon disposition of all foreclosed Mortgaged Properties covered
by the policy. The amount of claims paid will include some of the expenses
incurred by the Master Servicer or by the Servicer of the defaulted Mortgage
Loan as well as accrued interest on delinquent Mortgage Loans to the date of
payment of the claim. Accordingly, if aggregate net claims paid under a Pool
Insurance Policy reach the original policy limit, coverage under the Pool
Insurance Policy will lapse and any further losses will be borne by the holders
of the Securities of the Series. In addition, unless the Master Servicer or the
related Servicer could determine that an Advance in respect of a delinquent
Mortgage Loan would be recoverable to it from the proceeds of the liquidation of
the Mortgage Loan or otherwise, neither the Servicer nor the Master Servicer
would be obligated to make an Advance respecting any this delinquency, since the
Advance would not be ultimately recoverable to it from either the Pool Insurance
Policy or from any other related source. See "Description of the Securities --
Advances."
SPECIAL HAZARD INSURANCE POLICIES
If so specified in the related prospectus supplement, the Master Servicer
shall obtain a Special Hazard Insurance Policy for the Mortgage Pool underlying
a Series of Securities. Any Special Hazard Insurance Policies for a Contract
Pool underlying a Series of Securities will be described in the related
prospectus supplement. The Special Hazard Insurance Policy for the Mortgage Pool
underlying the Securities of a Series will be issued by the Special Hazard
Insurer named in the applicable prospectus supplement. Each Special Hazard
Insurance Policy will, subject to the limitations described below, protect
against loss by reason of damage to Mortgaged Properties caused by particular
types of hazards, including vandalism and earthquakes and, except where the
Mortgagor is required to obtain flood insurance, floods and mudflows, not
insured against under the standard form of hazard insurance policy for the
respective states in which the Mortgaged Properties are located. See
"Description of the Securities -- Maintenance of Insurance Policies" and " --
Standard Hazard Insurance." The Special Hazard Insurance Policy will not cover
losses occasioned by war, particular types of governmental actions, nuclear
reaction and other perils. Coverage under a Special Hazard Insurance Policy will
be at least equal to the amount set forth in the related prospectus supplement.
Subject to the foregoing limitations, each Special Hazard Insurance Policy
will provide that, when there has been damage to the Mortgaged Property securing
a defaulted Mortgage Loan and to the extent the damage is not covered by the
Standard Hazard Insurance Policy, if any, maintained by the Mortgagor, the
Master Servicer or the Servicer, the Special Hazard Insurer will pay the lesser
of (1) the cost of repair or replacement of the Mortgaged Property or (2) upon
transfer of the Mortgaged Property to the Special Hazard Insurer, the unpaid
balance of the Mortgage Loan at the time of acquisition of the Mortgaged
Property by foreclosure or deed in lieu of foreclosure, plus accrued interest to
the date of claim settlement, excluding late charges and penalty interest, and
particular expenses incurred in respect of the Mortgaged Property. No claim may
be validly presented under a Special Hazard Insurance Policy unless (1) hazard
insurance on the Mortgaged Property has been kept in force and other
reimbursable protection, preservation and foreclosure expenses have been paid,
all of which must be approved in advance as necessary by the insurer, and (2)
the insured has acquired title to the Mortgaged Property as a result of default
by the Mortgagor. If the sum of the unpaid principal balance plus accrued
interest and particular expenses is paid by the Special Hazard Insurer, the
amount of further coverage under the related Special Hazard Insurance Policy
will be reduced by the amount paid less any net proceeds from the sale of the
Mortgaged Property. Any amount paid as the cost of repair of the Mortgaged
Property will further reduce coverage.
The terms of the applicable Agreement and/or Servicing Agreement will
require the Master Servicer to maintain the Special Hazard Insurance Policy in
full force and effect throughout the term of the Agreement. If a Pool Insurance
Policy is required to be maintained pursuant to the Agreement, the Special
Hazard Insurance Policy will be designed to permit full recoveries under the
Pool Insurance Policy in circumstances where recoveries would otherwise be
unavailable because Mortgaged Property has been damaged by a cause not insured
against by a Standard Hazard Insurance Policy. In this event, the Agreement
and/or Servicing Agreement will provide that, if the related Pool Insurance
Policy shall have terminated or been exhausted through payment of claims, the
Master Servicer will be under no further obligation to maintain the Special
Hazard Insurance Policy.
MORTGAGOR BANKRUPTCY BOND
In the event of a personal bankruptcy of a Mortgagor, a bankruptcy court
may establish the value of the related Mortgaged Property or Cooperative
Dwelling at an amount less than the then outstanding principal balance of the
related Mortgage Loan. The amount of the secured debt could be reduced to this
value, and the holder of the Mortgage Loan thus would become an unsecured
creditor to the extent the outstanding principal balance of the Mortgage Loan
exceeds the value so assigned to the Mortgaged Property or Cooperative Dwelling
by the bankruptcy court. In addition, other modifications of the terms of a
Mortgage Loan can result from a bankruptcy proceeding. If so specified in the
related prospectus supplement, losses resulting from a bankruptcy proceeding
affecting the Mortgage Loans in a Mortgage Pool with respect to a Series of
Securities will be covered under a Mortgagor Bankruptcy Bond, or any other
instrument that will not result in a downgrading of the rating of the Securities
of a Series by the Rating Agency that rated the Series. Any Mortgagor Bankruptcy
Bond will provide for coverage in an amount acceptable to the Rating Agency
rating the Securities of the related Series, which will be set forth in the
related prospectus supplement. Subject to the terms of the Mortgagor Bankruptcy
Bond, the issuer of the Mortgagor Bankruptcy Bond may have the right to purchase
any Mortgage Loan with respect to which a payment or drawing has been made or
may be made for an amount equal to the outstanding principal amount of the
Mortgage Loan plus accrued and unpaid interest on the Mortgage Loan. The
coverage of the Mortgagor Bankruptcy Bond with respect to a Series of Securities
may be reduced as long as any reduction will not result in a reduction of the
outstanding rating of the Securities of the Series by the Rating Agency rating
the Series.
CERTAIN LEGAL ASPECTS OF THE MORTGAGE LOANS AND CONTRACTS
The following discussion contains summaries of some of the legal aspects of
mortgage loans and manufactured housing installment or conditional sales
contracts and installment loan agreements which are general in nature. Because
these legal aspects are governed by applicable state law, which laws may differ
substantially, the summaries do not purport to be complete nor to reflect the
laws of any particular state, nor to encompass the laws of all states in which
the security for the Mortgage Loans or Contracts is situated. The summaries are
qualified in their entirety by reference to the applicable federal and state
laws governing the Mortgage Loans and Contracts.
THE MORTGAGE LOANS
The Mortgage Loans, other than the Cooperative Loans, comprising or
underlying the Trust Assets for a Series will be secured by either first
mortgages or deeds of trust, depending upon the prevailing practice in the state
in which the underlying property is located. The filing of a mortgage, deed of
trust or deed to secure debt creates a lien or title interest upon the real
property covered by the instrument and represents the security for the repayment
of an obligation that is customarily evidenced by a promissory note. It is not
prior to the lien for real estate taxes and assessments or other charges imposed
under governmental police powers. Priority with respect to the instruments
depends on their terms, the knowledge of the parties to the mortgage and
generally on the order of recording with the applicable state, county or
municipal office. There are two parties to a mortgage: the mortgagor, who is the
borrower and homeowner, and the mortgagee, who is the lender. In a mortgage
state, the mortgagor delivers to the mortgagee a note or bond evidencing the
loan and the mortgage. Although a deed of trust is similar to a mortgage, a deed
of trust has three parties: the borrower-homeowner called the trustor, similar
to a mortgagor, a lender called the beneficiary, similar to a mortgagee, and a
third-party grantee called the trustee. Under a deed of trust, the borrower
grants the property, irrevocably until the debt is paid, in trust, generally
with a power of sale, to the trustee to secure payment of the loan. The
trustee's authority under a deed of trust and the mortgagee's authority under a
mortgage are governed by the express provisions of the deed of trust or
mortgage, applicable law and, in some cases, with respect to the deed of trust,
the directions of the beneficiary.
FORECLOSURE
Foreclosure of a mortgage is generally accomplished by judicial action.
Generally, the action is initiated by the service of legal pleadings upon all
parties having an interest of record in the real property. Delays in completion
of the foreclosure occasionally may result from difficulties in locating
necessary parties defendant. When the mortgagee's right to foreclosure is
contested, the legal proceedings necessary to resolve the issue can be
time-consuming. After the completion of a judicial foreclosure proceeding, the
court may issue a judgment of foreclosure and appoint a receiver or other
officer to conduct the sale of the property. In some states, mortgages may also
be foreclosed by advertisement, pursuant to a power of sale provided in the
mortgage. Foreclosure of a mortgage by advertisement is essentially similar to
foreclosure of a deed of trust by non-judicial power of sale.
Though a deed of trust may also be foreclosed by judicial action,
foreclosure of a deed of trust is generally accomplished by a non-judicial
trustee's sale under a specific provision in the deed of trust that authorizes
the trustee to sell the property upon a default by the borrower under the terms
of the note or deed of trust. In some states, the trustee must record a notice
of default and send a copy to the borrower-trustor and to any person who has
recorded a request for a copy of a notice of default and notice of sale. In
addition, the trustee must provide notice in some states to any other individual
having an interest in the real property, including any junior lienholders. If
the loan is not reinstated within any applicable cure period, a notice of sale
must be posted in a public place and, in most states, published for a specified
period of time in one or more newspapers. In addition, some state laws require
that a copy of the notice of sale be posted on the property and sent to all
parties having an interest of record in the property.
In some states, the borrower-trustor has the right to reinstate the loan at
any time following default until shortly before the trustee's sale. In general,
the borrower, or any other person having a junior encumbrance on the real
estate, may, during a reinstatement period, cure the default by paying the
entire amount in arrears plus the costs and expenses incurred in enforcing the
obligation. Particular state laws control the amount of foreclosure expenses and
costs, including attorneys' fees, which may be recovered by a lender.
In case of foreclosure under either a mortgage or a deed of trust, the sale
by the receiver or other designated officer, or by the trustee, is a public
sale. However, because of a number of factors, including the difficulty a
potential buyer at the sale would have in determining the exact status of title
and the fact that the physical condition of the property may have deteriorated
during the foreclosure proceedings, it is uncommon for a third party to purchase
the property at the foreclosure sale. Rather, it is common for the lender to
purchase the property from the trustee or receiver for a credit bid less than or
equal to the unpaid principal amount of the note, accrued and unpaid interest
and the expenses of foreclosure. Subsequently, subject to the right of the
borrower in some states to remain in possession during the redemption period,
the lender will assume the burdens of ownership, including obtaining hazard
insurance and making the repairs at its own expense as are necessary to render
the property suitable for sale. The lender commonly will obtain the services of
a real estate broker and pay the broker a commission in connection with the sale
of the property. Depending upon market conditions, the ultimate proceeds of the
sale of the property may not equal the lender's investment in the property. Any
loss may be reduced by the receipt of mortgage insurance proceeds.
COOPERATIVE LOANS
If specified in the prospectus supplement relating to a Series of
Securities, the Mortgage Loans may also contain Cooperative Loans evidenced by
promissory notes secured by security interests in shares issued by private
corporations which are entitled to be treated as housing cooperatives under the
Code and in the related proprietary leases or occupancy agreements granting
exclusive rights to occupy specific dwelling units in the corporations'
buildings. The security agreement will create a lien upon, or grant a title
interest in, the property that it covers, the priority of which will depend on
the terms of the particular security agreement as well as the order of
recordation of the agreement in the appropriate recording office. This lien or
title interest is not prior to the lien for real estate taxes and assessments
and other charges imposed under governmental police powers.
A corporation that is entitled to be treated as a housing cooperative under
the Code owns all the real property or some interest sufficient to permit it to
own the building and all separate dwelling units in the real property. The
cooperative is directly responsible for property management and, in most cases,
payment of real estate taxes and hazard and liability insurance. If there is a
blanket mortgage or mortgages on the cooperative apartment building and/or
underlying land, as is generally the case, or an underlying lease of the land,
as is the case in some instances, the cooperative, as property mortgagor, is
also responsible for meeting these mortgage or rental obligations. The interest
of the occupancy under proprietary leases or occupancy agreements as to which
that cooperative is the landlord are generally subordinate to the interest of
the holder of a blanket mortgage and to the interest of the holder of a land
lease. If the cooperative is unable to meet the payment obligations (1) arising
under a blanket mortgage, the mortgagee holding a blanket mortgage could
foreclose on that mortgage and terminate all subordinate proprietary leases and
occupancy agreements or (2) arising under its land lease, the holder of the land
lease could terminate it and all subordinate proprietary leases and occupancy
agreements. Also, a blanket mortgage on a cooperative may provide financing in
the form of a mortgage that does not fully amortize, with a significant portion
of principal being due in one final payment at maturity. The inability of the
cooperative to refinance a mortgage and its consequent inability to make the
final payment could lead to foreclosure by the mortgagee. Similarly, a land
lease has an expiration date and the inability of the cooperative to extend its
term or, in the alternative, to purchase the land could lead to termination of
the cooperative's interest in the property and termination of all proprietary
leases and occupancy agreements. A foreclosure by the holder of a blanket
mortgage could eliminate or significantly diminish the value of any collateral
held by the lender who financed an individual tenant-stockholder of cooperative
shares including, in the case of the Cooperative Loans, the collateral securing
the Cooperative Loans. Similarly, the termination of the land lease by its
holder could eliminate or significantly diminish the value of any collateral
held by the lender who financed an individual tenant-stockholder of the
cooperative shares or, in the case of the Cooperative Loans, the collateral
securing the Cooperative Loans.
Each cooperative is owned by tenant-stockholders who, through ownership of
stock or shares in the corporation, receive proprietary leases or occupancy
agreements which confer exclusive rights to occupy specific units. Generally, a
tenant-stockholder of a cooperative must make a monthly payment to the
cooperative representing the tenant-stockholder's pro rata share of the
cooperative's payments for its blanket mortgage, real property taxes,
maintenance expenses and other capital or ordinary expenses. An ownership
interest in a cooperative and accompanying occupancy rights are financed through
a cooperative share loan evidenced by a promissory note and secured by a
security interest in the occupancy agreement or proprietary lease and in the
related cooperative shares. The lender takes possession of the share certificate
and a counterpart of the proprietary lease or occupancy agreement, and a
financing statement covering the proprietary lease or occupancy agreement and
the cooperative shares is filed in the appropriate state and local offices to
perfect the lender's interest in its collateral. Subject to the limitations
discussed below, upon default of the tenant-stockholder, the lender may sue for
judgment on the promissory note, dispose of the collateral at a public or
private sale or otherwise proceed against the collateral or tenant-stockholder
as an individual as provided in the security agreement covering the assignment
of the proprietary lease or occupancy agreement and the pledge of cooperative
shares. See " -- Realizing upon Cooperative Loan Security" below.
TAX ASPECTS OF COOPERATIVE LOANS
In general, a "tenant-stockholder" (as defined in Section 216(b)(2) of the
Code) of a corporation that qualifies as a "cooperative housing corporation"
within the meaning of Section 216(b)(1) of the Code is allowed a deduction for
amounts paid or accrued within his taxable year to the corporation representing
his proportionate share of particular interest expenses and real estate taxes
allowable as a deduction under Section 216(a) of the Code to the corporation
under Sections 163 and 164 of the Code. In order for a corporation to qualify
under Section 216(b)(1) of the Code for its taxable year in which the items are
allowable as a deduction to the corporation, the section requires, among other
things, that at least 80% of the gross income of the corporation be derived from
its tenant-stockholder. By virtue of this requirement the status of a
corporation for purposes of Section 216(b)(1) of the Code must be determined on
a year-to-year basis. Consequently, there can be no assurance that cooperatives
relating to the Cooperative Loans will qualify under the section for any
particular year. In the event that a cooperative fails to qualify for one or
more years, the value of the collateral securing any related Cooperative Loans
could be significantly impaired because no deduction would be allowable to
tenant-stockholders under Section 216(a) of the Code with respect to those
years. In view of the significance of the tax benefits accorded
tenant-stockholders of a corporation that qualifies under Section 216(b)(1) of
the Code, the likelihood that a failure would be permitted to continue over a
period of years appears remote.
REALIZING UPON COOPERATIVE LOAN SECURITY
The cooperative shares and proprietary lease or occupancy agreement owned
by the tenant-stockholder and pledged to the lender are, in almost all cases,
subject to restrictions on transfer as set forth in the cooperative's
certificate of incorporation and by-laws, as well as in the proprietary lease or
occupancy agreement. The proprietary lease or occupancy agreement, even while
pledged, may be cancelled by the cooperative for failure by the
tenant-stockholder to pay rent or other obligations or charges owed by the
tenant-stockholder, including mechanics' liens against the cooperative apartment
building incurred by the tenant-stockholder. Commonly, rent and other
obligations and charges arising under a proprietary lease or occupancy agreement
which are owed to the cooperative are made liens upon the shares to which the
proprietary lease or occupancy agreement relates. In addition, the proprietary
lease or occupancy agreement generally permits the cooperative to terminate the
lease or agreement in the event the borrower defaults in the performance of
covenants under the lease or agreement. The lender and the cooperative will
typically enter into a recognition agreement which establishes the rights and
obligations of both parties in the event of a default by the tenant-stockholder
on its obligations under the proprietary lease or occupancy agreement. A default
by the tenant-stockholder under the proprietary lease or occupancy agreement
will usually constitute a default under the security agreement between the
lender and the tenant-stockholder.
The recognition agreement generally provides that, in the event that the
tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the cooperative will take no action to terminate the lease or
agreement until the lender has been provided with an opportunity to cure the
default. The recognition agreement typically provides that if the proprietary
lease or occupancy agreement is terminated, the cooperative will recognize the
lender's lien against proceeds from a sale of the cooperative apartment subject,
however, to the cooperative's right to sums due under the proprietary lease or
occupancy agreement or that have become liens on the shares relating to the
proprietary lease or occupancy agreement. The total amount owed to the
cooperative by the tenant-stockholder, which the lender generally cannot
restrict and does not monitor, could reduce the value of the collateral below
the outstanding principal balance of the cooperative loan and accrued and unpaid
interest on the cooperative loan.
Recognition agreements also provide that in the event the lender succeeds
to the tenant-shareholder's shares and proprietary lease or occupancy agreement
as the result of realizing upon the collateral for a cooperative loan, the
lender must obtain the approval or consent of the cooperative as required by the
proprietary lease before transferring the cooperative shares or assigning the
proprietary lease. The approval or consent is usually based on the prospective
purchaser's income and net worth, among other factors, and may significantly
reduce the number of potential purchasers, which could limit the ability of the
lender to sell and realize upon the value of the collateral. Generally, the
lender is not limited in any rights it may have to dispossess the tenant-
shareholders.
The terms of the Cooperative Loans do not require either the Mortgagor or
the Cooperative to obtain title insurance of any type. Consequently, the
existence of any prior liens or other imperfections of title also may adversely
affect the marketability of the Cooperative Dwelling in the event of
foreclosure.
In New York, lenders generally realize upon the pledged shares and
proprietary lease or occupancy agreement given to secure a cooperative loan by
public sale in accordance with the provisions of Article 9 of the Uniform
Commercial Code (the "UCC") and the security agreement relating to those shares.
Article 9 of the UCC requires that a sale be conducted in a "commercially
reasonable" manner. Whether a sale has been conducted in a "commercially
reasonable" manner will depend on the facts in each case. In determining
commercial reasonableness, a court will look to the notice given the debtor and
the method, manner, time, place and terms of the sale. Generally, a sale
conducted according to the usual practice of banks selling similar collateral
will be considered reasonably conducted.
Article 9 of the UCC provides that the proceeds of the sale will be applied
first to pay the costs and expenses of the sale and then to satisfy the
indebtedness secured by the lender's security interest. The recognition
agreement, however, generally provides that the lender's right to reimbursement
is subject to the right of the cooperative corporation to receive sums due under
the proprietary lease or occupancy agreement. If there are proceeds remaining,
the lender must account to the tenant-stockholder for the surplus. Conversely,
if a portion of the indebtedness remains unpaid, the tenant-stockholder is
generally responsible for the deficiency. See " -- Anti-Deficiency Legislation
and Other Limitations on Lenders" below.
In the case of foreclosure on a Multifamily Property that was converted
from a rental building to a building owned by a cooperative housing corporation
under a non-eviction plan, some states require that a purchaser at a foreclosure
sale take the property subject to rent control and rent stabilization laws which
apply to particular tenants who elected to remain in the building but not to
purchase shares in the cooperative when the building was so converted. Any
restrictions could adversely affect the number of potential purchasers for and
the value of the property.
RIGHTS OF REDEMPTION
In some states, after a sale pursuant to a deed of trust or foreclosure of
a mortgage, the borrower and particular foreclosed junior lienors are given a
statutory period in which to redeem the property from the foreclosure sale. In
other states, this right of redemption applies only to a sale following judicial
foreclosure, and not a sale pursuant to a non-judicial power of sale. In most
states where the right of redemption is available, statutory redemption may
occur upon payment of the foreclosure purchase price, accrued interest and
taxes. In some states, the right to redeem is an equitable right. The effect of
a statutory right of redemption is to diminish the ability of the lender to sell
the foreclosed property. The exercise of a right of redemption would defeat the
title of any purchaser from the lender subsequent to foreclosure or sale under a
deed of trust. Consequently, the practical effect of the redemption right is to
force the lender to retain the property and pay the expenses of ownership until
the redemption period has run.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
Some states have imposed statutory restrictions that limit the remedies of
a beneficiary under a deed of trust or a mortgagee under a mortgage. In some
states, statutes limit the right of the beneficiary or mortgagee to obtain a
deficiency judgment against the borrower following foreclosure or a non-judicial
sale under a deed of trust. A deficiency judgment is a personal judgment against
the former borrower equal in most cases to the difference between the amount due
to the lender and the net amount realized upon the foreclosure sale. Other
statutes prohibit a deficiency judgment where the loan proceeds were used to
purchase a dwelling occupied by the borrower.
Some state statutes may require the beneficiary or mortgagee to exhaust the
security afforded under a deed of trust or mortgage by foreclosure in an attempt
to satisfy the full debt before bringing a personal action against the borrower.
In other states, the lender has the option of bringing a personal action against
the borrower on the debt without first exhausting the security; however, in some
of these states, the lender, following judgment on the personal action, may be
deemed to have elected a remedy and may be precluded from exercising remedies
with respect to the security. Consequently, the practical effect of the election
requirement, when applicable, is that lenders will usually proceed first against
the security rather than bringing a personal action against the borrower.
Other statutory provisions may limit any deficiency judgment against the
former borrower following a foreclosure sale to the excess of the outstanding
debt over the fair market value of the property at the time of the sale. The
purpose of these statutes is to prevent a beneficiary or a mortgagee from
obtaining a large deficiency judgment against the former borrower as a result of
low or no bids at the foreclosure sale.
In some states, exceptions to the anti-deficiency statutes are provided for
in some instances where the value of the lender's security has been impaired by
acts or omissions of the borrower, for example, in the event of waste of the
property.
In the case of cooperative loans, lenders generally realize on cooperative
shares and the accompanying proprietary lease or occupancy agreement given to
secure a cooperative loan under Article 9 of the UCC. Some courts have
interpreted Section 9-504 of the UCC to prohibit a deficiency award unless the
creditor establishes that the sale of the collateral, which, in the case of a
Cooperative Loan, would be the shares of the Cooperative and the related
proprietary lease or occupancy agreement, was conducted in a commercially
reasonable manner.
In addition to anti-deficiency and related legislation, numerous other
federal and state statutory provisions, including the federal bankruptcy laws,
the federal Soldiers' and Sailors' Civil Relief Act of 1940 and state laws
affording relief to debtors, may interfere with or affect the ability of a
secured mortgage lender to realize upon its security. For example, in a Chapter
13 proceeding under the federal Bankruptcy Code, when a court determines that
the value of a home is less than the principal balance of the loan, the court
may prevent a lender from foreclosing on the home, and, as part of the
rehabilitation plan, reduce the amount of the secured indebtedness to the value
of the home as it exists at the time of the proceeding, leaving the lender as a
general unsecured creditor for the difference between that value and the amount
of outstanding indebtedness. A bankruptcy court may grant the debtor a
reasonable time to cure a payment default, and in the case of a mortgage loan
not secured by the debtor's principal residence, also may reduce the monthly
payments due under the mortgage loan, change the rate of interest and alter the
mortgage loan repayment schedule. Particular court decisions have applied the
relief to claims secured by the debtor's principal residence.
The Code provides priority to particular tax liens over the lien of the
mortgage or deed of trust. The laws of some states provide priority to
particular tax liens over the lien of the mortgage or deed of trust. Numerous
federal and some state consumer protection laws impose substantive requirements
upon mortgage lenders in connection with the origination, servicing and the
enforcement of mortgage loans. These laws include the federal Truth in Lending
Act, Real Estate Settlement Procedures Act, Equal Credit Opportunity Act, Fair
Credit Billing Act, Fair Credit Reporting Act, and related statutes and
regulations. These federal laws and state laws impose specific statutory
liabilities upon lenders who originate or service mortgage loans and who fail to
comply with the provisions of the law. In some cases, this liability may affect
assignees of the mortgage loans.
Unless otherwise specified in the related prospectus supplement, each
Mortgage Loan secured by Multifamily Property will be a non-recourse loan to the
Mortgagor. As a result, the Mortgagor's obligation to repay the Mortgage Loan
can be enforced only against the Mortgaged Property regardless of whether the
Mortgagor has other assets from which it could repay the loan.
Unless otherwise specified in the related prospectus supplement, the
mortgage securing each Mortgage Loan relating to Multifamily Property will
contain an assignment of rents and an assignment of leases, pursuant to which
the borrower assigns its right, title and interest as landlord under each lease
and the income derived from each lease to the Depositor, while retaining a
license to collect the rents so long as there is no default. In the event the
borrower defaults, the license terminates and the Trustee, as the assignee of
the assignment, is entitled to collect the rents. The Trustee may enforce its
right to the rents by seeking the appointment of a receiver to collect the rents
immediately after giving notice to the borrower of the default.
"DUE-ON-SALE" CLAUSES
The forms of note, mortgage and deed of trust relating to conventional
Mortgage Loans may contain a "due-on-sale" clause permitting acceleration of the
maturity of a loan if the borrower transfers its interest in the property. The
enforceability of these clauses has been subject of legislation or litigation in
many states, and in some cases the enforceability of these clauses was limited
or denied. However, the Garn-St Germain Depository Institutions Act of 1982 (the
"Garn-St Germain Act") preempts state constitutional, statutory and case law
that prohibits the enforcement of due-on-sale clauses and permits lenders to
enforce these clauses in accordance with their terms, subject to limited
exceptions. The Garn-St Germain Act does "encourage" lenders to permit
assumption of loans at the original rate of interest or at some other rate less
than the average of the original rate and the market rate.
The Garn-St Germain Act also sets forth nine specific instances in which a
mortgage lender covered by the Garn-St Germain Act may not exercise a
due-on-sale clause, notwithstanding the fact that a transfer of the property may
have occurred. These include intra-family transfers, particular transfers by
operation of law, leases of fewer than three years and the creation of a junior
encumbrance. Regulations promulgated under the Garn-St Germain Act also prohibit
the imposition of prepayment penalty upon the acceleration of a loan pursuant to
a due-on-sale clause.
The inability to enforce a due-on-sale clause may result in a mortgage loan
bearing an interest rate below the current market rate being assumed by a new
home buyer rather than being paid off, which may have an impact upon the average
life of the Mortgage Loans and the number of Mortgage Loans which may be
outstanding until maturity.
ENFORCEABILITY OF CERTAIN PROVISIONS
Standard forms of note, mortgage and deed of trust generally contain
provisions obligating the borrower to pay a late charge if payments are not
timely made and in some circumstances may provide for prepayment fees or
penalties if the obligation is paid prior to maturity. In some states, there are
or may be specific limitations upon late charges which a lender may collect from
a borrower for delinquent payments. State and federal statutes or regulations
may also limit a lender's right to collect a prepayment penalty when the
prepayment is caused by the lender's acceleration of the loan pursuant to a
due-on-sale clause. Some states also limit the amounts that a lender may collect
from a borrower as an additional charge if the loan is prepaid. Under the
Servicing Agreements and the applicable Agreement, late charges and prepayment
fees, to the extent permitted by law and not waived by the Servicers, will be
retained by the Servicers or Master Servicer as additional servicing
compensation.
Courts have imposed general equitable principles upon foreclosure. These
equitable principles are generally designed to relieve the borrower from the
legal effect of defaults under the loan documents. Examples of judicial remedies
that may be fashioned include judicial requirements that the lender undertake
affirmative and sometimes expensive actions to determine the causes for the
borrower's default and the likelihood that the borrower will be able to
reinstate the loan. In some cases, courts have substituted their judgment for
the lender's judgment and have required lenders to reinstate loans or recast
payment schedules to accommodate borrowers who are suffering from temporary
financial disability. In some cases, courts have limited the right of lenders to
foreclose if the default under the mortgage instrument is not monetary, for
example, the borrower failing to adequately maintain or insure the property or
the borrower executing a second mortgage or deed of trust affecting the
property. In other cases, some courts have been faced with the issue whether
federal or state constitutional provisions reflecting due process concerns for
adequate notice require that borrowers under the deeds of trust receive notices
in addition to the statutorily-prescribed minimum requirements. For the most
part, these cases have upheld the notice provisions as being reasonable or have
found that the sale by a trustee under a deed of trust or under a mortgage
having a power of sale does not involve sufficient state action to afford
constitutional protections to the borrower.
ENVIRONMENTAL CONSIDERATIONS
Under the federal Comprehensive Environmental Response Compensation and
Liability Act, as amended, a secured party which takes a deed in lieu of
foreclosure or purchases a mortgaged property at a foreclosure sale may become
liable in some circumstances for the costs of remedial action ("Cleanup Costs")
if hazardous wastes or hazardous substances have been released or disposed of on
the property. The Cleanup Costs may be substantial. It is possible that the
costs could become a liability of the Trust Fund and reduce the amounts
otherwise distributable to the Securityholders if a Mortgaged Property securing
a Mortgage Loan became the property of the Trust Fund in some circumstances and
if the Cleanup Costs were incurred.
Except as otherwise specified in the related prospectus supplement, each
Unaffiliated Seller will represent, as of the date of delivery of the related
Series of Securities, that to the best of its knowledge no Mortgaged Property
secured by Multifamily Property is subject to an environmental hazard that would
have to be eliminated under applicable law before the sale of, or which could
otherwise affect the marketability of, the Mortgaged Property or which would
subject the owner or operator of the Mortgaged Property or a lender secured by
the Mortgaged Property to liability under law, and that there are no liens which
relate to the existence of any clean-up of a hazardous substance, and to the
best of its knowledge no circumstances are existing that under law would give
rise to any lien, affecting the Mortgaged Property which are or may be liens
prior to or on a parity with the lien of the related mortgage. The applicable
Agreement and/or Servicing Agreement will further provide that the Master
Servicer, acting on behalf of the Trust Fund, may not acquire title to a
Mortgaged Property or take over its operation unless the Master Servicer has
received a report from a qualified independent person selected by the Master
Servicer setting forth whether the Mortgaged Property is subject to or presents
any toxic wastes or environmental hazards and an estimate of the cost of curing
or cleaning up the hazard.
THE CONTRACTS
As a result of the Depositor's assignment of the Contract to the Trustee,
the Certificateholders will succeed collectively to all of the rights, including
the right to receive payment on the Contracts, and will assume particular
obligations of the Depositor. Each Contract evidences both (1) the obligation of
the Obligor to repay the loan and (2) the grant of a security interest in the
Manufactured Home to secure repayment of the loan. Some of the aspects of both
features of the Contracts are described more fully below.
The Contracts generally are "chattel paper" as defined in the Uniform
Commercial Code in effect in the states in which the Manufactured Homes
initially were registered. Pursuant to the UCC, the sale of chattel paper is
treated in a manner similar to perfection of a security interest in chattel
paper. Under the applicable Agreement and/or Servicing Agreement, the Master
Servicer or the Depositor, as the case may be, will transfer physical possession
of the Contracts to the Trustee or Indenture Trustee, or their respective
custodian, as the case may be. In addition, the Master Servicer will make an
appropriate filing of a UCC-1 financing statement in the appropriate states to
give notice of the Trustee's ownership of the Contracts or the Indenture
Trustee's security interest in the Contracts, as the case may be. Unless
otherwise specified in the related prospectus supplement, the Contracts will not
be stamped or marked otherwise to reflect their assignment from the Depositor to
the Trustee or their pledge to the Indenture Trustee. Therefore, if a subsequent
purchaser were able to take physical possession of the Contracts without notice
of the assignment or pledge, the respective Trustees' interest in the Contracts
could be defeated.
SECURITY INTERESTS IN THE MANUFACTURED HOMES
The law governing perfection of a security interest in a Manufactured Home
varies from state to state. Security interests in manufactured homes may be
perfected either by notation of the secured party's lien on the certificate of
title or by delivery of the required documents and payment of a fee to the state
motor vehicle authority, depending on state law. In some nontitle states,
perfection pursuant to the provisions of the UCC is required. The lender or
Master Servicer may effect the notation or delivery of the required documents
and fees, and obtain possession of the certificate of title, as appropriate
under the laws of the state in which any manufactured home securing a
manufactured housing conditional sales contract is registered. In the event the
Master Servicer or the lender fails, due to clerical errors, to effect the
notation or delivery, or files the security interest under the wrong law, for
example, under a motor vehicle title statute rather than under the UCC, in a few
states, the Securityholders may not have a first priority security interest in
the Manufactured Home securing a Contract. As manufactured homes have become
larger and often have been attached their sites without any apparent intention
to move them, courts in many states have held that manufactured homes, under
some circumstances, may become subject to real estate title and recording laws.
As a result, a security interest in a manufactured home could be rendered
subordinate to the interests of other parties claiming an interest in the home
under applicable state real estate law. In order to perfect a security interest
in a manufactured home under real estate laws, the holder of the security
interest must file either a "fixture filing" under the provisions of the UCC or
a real estate mortgage under the real estate laws of the state where the
manufactured home is located. These filings must be made in the real estate
records office of the county where the manufactured home is located.
Substantially all of the Contracts will contain provisions prohibiting the
borrower from permanently attaching the Manufactured Home to its site. So long
as the Obligor does not violate this agreement, a security interest in the
Manufactured Home will be governed by the certificate of title laws or the UCC,
and the notation of the security interest on the certificate of title or the
filing of a UCC financing statement will be effective to maintain the priority
of the seller's security interest in the Manufactured Home. If, however, a
Manufactured Home is permanently attached to its site, other parties could
obtain an interest in the Manufactured Home which is prior to the security
interest originally retained by the Unaffiliated Seller and transferred to the
Depositor. With respect to a Series of Securities and as described in the
related prospectus supplement, the Master Servicer may be required to perfect a
security interest in the Manufactured Home under applicable real estate laws. If
the real estate filings are not required and if any of the foregoing events were
to occur, the only recourse of the Securityholders would be against the
Unaffiliated Seller pursuant to its repurchase obligation for breach of
warranties. Based on the representations of the Unaffiliated Seller, the
Depositor, however, believes that it has obtained a perfected first priority
security interest by proper notation or delivery of the required documents and
fees with respect to substantially all of the Manufactured Homes securing the
Contracts.
The Depositor will assign its security interests in the Manufactured Homes
to the Trustee on behalf of the Certificateholders and, if a Series of
Securities includes Notes, the security interest will be pledged to the
Indenture Trustee on behalf of the Noteholders. Unless otherwise specified in
the related prospectus supplement, neither the Depositor nor the Trustee or
Indenture Trustee will amend the certificates of title to identify the Trustee
or the Indenture Trustee, as applicable, as the new secured party. Accordingly,
the Depositor or another entity specified in the prospectus supplement will
continue to be named as the secured party on the certificates of title relating
to the Manufactured Homes. In most states, the assignment is an effective
conveyance of the security interest without amendment of any lien noted on the
related certificate of title and the new secured party succeeds to the
assignor's rights as the secured party. However, in some states there exists a
risk that, in the absence of an amendment to the certificate of title, the
assignment of the security interest might not be held effective against
creditors of the assignor.
In the absence of fraud, forgery or permanent affixation of the
Manufactured Home to its site by the Manufactured Home owner, or administrative
error by state recording officials, the notation of the lien of the Depositor on
the certificate of title or delivery of the required documents and fees will be
sufficient to protect the Securityholders against the rights of subsequent
purchasers of a Manufactured Home or subsequent lenders who take a security
interest in the Manufactured Home. If there are any Manufactured Homes as to
which the security interest assigned to the Depositor and the Certificateholders
and pledged to the Noteholders, if any, is not perfected, the security interest
would be subordinate to, among others, subsequent purchasers for value of
Manufactured Homes and holders of perfected security interests. There also
exists a risk in not identifying the applicable Securityholders as the new
secured party on the certificate of title that, through fraud or negligence, the
security interest of the Securityholders could be released.
In the event that the owner of a Manufactured Home moves it to a state
other than the state in which the Manufactured Home initially is registered,
under the laws of most states the perfected security interest in the
Manufactured Home would continue for four months after the relocation and after
that time only if and after the owner re-registers the Manufactured Home in the
state. If the owner were to relocate a Manufactured Home to another state and
not re-register the Manufactured Home in the state, and if steps are not taken
to re-perfect the Trustee's security interest in the state, the security
interest in the Manufactured Home would cease to be perfected. A majority of
states generally require surrender of a certificate of title to re-register a
Manufactured Home; accordingly, the Trustee or the Indenture Trustee, or the
Master Servicer as custodian for the Trustee and/or Indenture Trustee, must
surrender possession if it holds the certificate of title to the Manufactured
Home or, in the case of Manufactured Homes registered in states which provide
for notation of lien on the certificate of title, the applicable Trustee would
receive notice of surrender if the security interest in the Manufactured Home is
noted on the certificate of title. Accordingly, the Trustee and Indenture
Trustee would have the opportunity to re-perfect its security interest in the
Manufactured Home in the state of relocation. In states which do not require a
certificate of title for registration of a Manufactured Home, re-registration
could defeat perfection. In the ordinary course of servicing manufactured
housing installment or conditional sales contracts and installment loan
agreements, the Master Servicer takes steps to effect the re-perfection upon
receipt of notice of re-registration or information from the Obligor as to
relocation. Similarly, when an Obligor under a Contract sells a Manufactured
Home, the Trustee or the Indenture Trustee, or the Master Servicer as custodian
for the Trustee or Indenture Trustee, must surrender possession of the
certificate of title or will receive notice as a result of its lien noted on the
certificate of title and accordingly will have an opportunity to require
satisfaction of the related Contract before release of the lien. Under the
applicable Agreement, the Master Servicer, on behalf of the Depositor, will be
obligated to take the steps, at the Master Servicer's expense, as are necessary
to maintain perfection of security interests in the Manufactured Homes.
Under the laws of most states, liens for repairs performed on a
Manufactured Home take priority even over a perfected security interest. The
Depositor will represent in the applicable Agreement that it has no knowledge of
any liens with respect to any Manufactured Home securing payment on any
Contract. However, liens could arise at any time during the term of a Contract.
No notice will be given to the Trustee, Indenture Trustee or Securityholders in
the event a lien arises and the lien would not give rise to a repurchase
obligation on the part of the party specified in the applicable Agreement.
ENFORCEMENT OF SECURITY INTERESTS IN MANUFACTURED HOMES
The Master Servicer on behalf of the Trustee or the Indenture Trustee, to
the extent required by the related Agreement and/or Indenture, may take action
to enforce the applicable Trustee's security interest with respect to Contracts
in default by repossession and resale of the Manufactured Homes securing the
Defaulted Contracts. Except in Louisiana, so long as the Manufactured Home has
not become subject to the real estate law, a creditor can repossess a
Manufactured Home securing a Contract by voluntary surrender, by "self-help"
repossession that is "peaceful" (i.e., without breach of the peace) or, in the
absence of voluntary surrender and the ability to repossess without breach of
the peace, by judicial process. The holder of a Contract must give the debtor a
number of days notice, which varies from 10 to 30 days depending on the state,
prior to commencement of any repossession. The UCC and consumer protection laws
in most states place restrictions on repossession sales, including requiring
prior notice to the debtor and commercial reasonableness in effecting a sale.
The law in most states also requires that the debtor be given notice of any sale
prior to resale of the unit so that the debtor may redeem at or before a resale.
In the event of a repossession and resale of a Manufactured Home, the Trustee
and/or Indenture Trustee would be entitled to be paid out of the sale proceeds
before the proceeds could be applied to the payment of the claims of unsecured
creditors or the holders of subsequently perfected security interests or,
afterward, to the debtor.
Under the laws applicable in most states, a creditor is entitled to obtain
a deficiency judgment from a debtor for any deficiency on repossession and
resale of the Manufactured Home securing the debtor's loan. However, some states
impose prohibitions or limitations on deficiency judgments.
Under other statutory provisions, including federal and state bankruptcy
and insolvency laws and general equitable principles, may limit or delay the
ability of a lender to repossess and resell collateral or enforce a deficiency
judgment.
CONSUMER PROTECTION LAWS
The so-called "Holder-in-Due-Course" rule of the Federal Trade Commission
is intended to defeat the ability of the transferor of a consumer credit
contract which is the seller of goods which gave rise to the transaction, and
particular related lenders and assignees, to transfer the contract free of
notice of claims by the debtor under the contract. The effect of this rule is to
subject the assignee of a contract to all claims and defenses which the debtor
could assert against the seller of goods. Liability under this rule is limited
to amounts paid under a Contract; however, the Obligor also may be able to
assert the rule to set off remaining amounts due as a defense against a claim
brought against the Obligor. Numerous other federal and state consumer
protection laws impose requirements applicable to the origination and lending
pursuant to the Contracts, including the Truth in Lending Act, the Federal Trade
Commission Act, the Fair Credit Billing Act, the Fair Credit Reporting Act, the
Equal Credit Opportunity Act, the Fair Debt Collection Practices Act and the
Uniform Consumer Credit Code. In the case of some of these laws, the failure to
comply with their provisions may affect the enforceability of the related
Contract.
TRANSFERS OF MANUFACTURED HOMES; ENFORCEABILITY OF "DUE-ON-SALE" CLAUSES
The Contracts, in general, prohibit the sale or transfer of the related
Manufactured Homes without the consent of the Depositor or the Master Servicer
and permit the acceleration of the maturity of the Contracts by the Depositor or
the Master Servicer upon any sale or transfer that is not consented to. Unless
otherwise specified in the related prospectus supplement, the Depositor or the
Master Servicer expects that it will permit most transfers of Manufactured Homes
and not accelerate the maturity of the related Contracts. In some cases, the
transfer may be made by a delinquent Obligor in order to avoid a repossession
proceeding with respect to a Manufactured Home.
In the case of a transfer of a Manufactured Home after which the Depositor
desires to accelerate the maturity of the related Contract, the Depositor's
ability to do so will depend on the enforceability under state law of the
"due-on-sale" clause. The Garn-St Germain Act preempts, subject to exceptions
and conditions, state laws prohibiting enforcement of "due-on-sale" clauses
applicable to the Manufactured Homes. In some states the Depositor or the Master
Servicer may be prohibited from enforcing a "due-on-sale" clause in respect of
particular Manufactured Homes.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980, as amended ("Title V"), provides that, subject to the following
conditions, state usury limitations shall not apply to any loan that is secured
by a first lien on some kinds of manufactured housing. The Contracts would be
covered if they satisfy particular conditions, among other things, governing the
terms of any prepayments, late charges and deferral fees and requiring a 30-day
notice period prior to instituting any action leading to repossession of or
foreclosure with respect to the related unit.
Title V authorized any state to reimpose limitations on interest rates and
finance charges by adopting before April 1, 1983 a law or constitutional
provision that expressly rejects application of the federal law. Fifteen states
adopted a law prior to the April 1, 1983 deadline. In addition, even where Title
V was not so rejected, any state is authorized by the law to adopt a provision
limiting discount points or other charges on loans covered by Title V. In any
state in which application of Title V was expressly rejected or a provision
limiting discount points or other charges has been adopted, no Contract which
imposes finance charges or provides for discount points or charges in excess of
permitted levels has been included in the Trust Assets or Fund. The Depositor,
or the party specified in the related Agreement will represent that all of the
Contracts comply with applicable usury laws.
FEDERAL INCOME TAX CONSEQUENCES
The following is a general discussion of the anticipated material federal
income tax consequences of the purchase, ownership and disposition of
Securities. Where appropriate, additional consequences will be discussed in the
prospectus supplement relating to a particular Series. Stroock & Stroock & Lavan
LLP, New York, New York, or other counsel to the Depositor specified in the
related prospectus supplement (each, "Special Tax Counsel"), is delivering its
opinion regarding related federal income tax matters discussed below. The
opinion addresses only those issues specifically identified below as being
covered by the opinion; however, the opinion also states that the additional
discussion set forth below accurately sets forth Special Tax Counsel's advice
with respect to material federal income tax issues. As used in this prospectus
in "Federal Income Tax Consequences," "Mortgage Loans" shall include Mortgage
Certificates and Contracts and "Mortgage Pool" shall include "Contract Pool."
The following discussion does not purport to discuss all federal income tax
consequences that may be applicable to particular categories of investors, some
of which may be subject to special rules. Further, the authorities on which this
discussion are based are subject to change and differing interpretation, which
change or differing interpretation could apply retroactively. This discussion
does not address the state or local tax consequences of the purchase, ownership
and disposition of the Securities. It is recommended that investors consult
their own tax advisers in determining the federal, state, local or other tax
consequences to them of the purchase, ownership and disposition of the
Securities offered under this Prospectus.
The following discussion addresses securities of two general types: (1)
certificates and/or notes ("REMIC Certificates") representing interests in a
Mortgage Pool ("REMIC Mortgage Pool") which the Master Servicer elects to have
treated as a real estate mortgage investment conduit ("REMIC") under Code
Sections 860A through 860G ("REMIC Provisions") and (2) certificates and/or
notes ("Trust Certificates") representing particular interests in a Trust Fund
which the Master Servicer does not elect to have treated as a REMIC. REMIC
Certificates and Trust Certificates will be referred to collectively as
"Certificates."
Under the REMIC Provisions, REMICs may issue one or more classes of
"regular" interests and must issue one and only one class of "residual"
interests. A REMIC Certificate representing a regular interest in a REMIC
Mortgage Pool will be referred to as a "REMIC Regular Certificate" and a REMIC
Certificate representing a residual interest in a REMIC Mortgage Pool will be
referred to as a "REMIC Residual Certificate."
A Trust Certificate representing an undivided equitable ownership interest
in the principal of the Mortgage Loans constituting the related Trust Fund,
together with interest on the Mortgage Loans at a remittance rate, which may be
less than, greater than or equal to the related pass-through interest rate, will
be referred to as a "Trust Fractional Certificate" and a Trust Certificate
representing an equitable ownership of all or a portion of the interest paid on
each Mortgage Loan constituting the related Trust Fund, net of normal servicing
fees, will be referred to as a "Trust Interest Certificate."
The following discussion is based in part upon the rules governing original
issue discount that are set forth in Code Sections 1271 through 1275 and in
Treasury regulations issued under the original issue discount provisions of the
Code (the "OID Regulations"), and the Treasury regulations issued under the
provisions of the Code relating to REMICs (the "REMIC Regulations").
I. REMIC TRUST FUNDS
A. CLASSIFICATION OF REMIC TRUST FUNDS
With respect to each Series of REMIC Certificates relating to a REMIC
Mortgage Pool, Special Tax Counsel will deliver its opinion generally to the
effect that, assuming that:
(1) a REMIC election is made timely in the required form,
(2) there is ongoing compliance with all provisions of the related Pooling
and Servicing Agreement,
(3) representations set forth in the Pooling and Servicing Agreement are
true and
(4) there is continued compliance with applicable provisions of the Code
and applicable Treasury regulations issued under the Code,
the REMIC Mortgage Pool will qualify as a REMIC and the classes of interests
offered will be considered to be "regular interests" or "residual interests" in
that REMIC Mortgage Pool within the meaning of the REMIC Provisions.
Holders of REMIC Certificates ("REMIC Certificateholders") should be aware
that, if an entity electing to be treated as a REMIC fails to comply with one or
more of the ongoing requirements of the Code for REMIC status during any taxable
year, the Code provides that the entity will not be treated as a REMIC for the
year and after. In this event, an entity electing to be treated as a REMIC may
be taxable as a separate corporation under Treasury regulations, and the REMIC
Certificates issued by the entity may not be accorded the status described below
under " -- Characterization of Investments in REMIC Certificates." In the case
of an inadvertent termination of REMIC status, the Code provides the Treasury
Department with authority to issue regulations providing relief. Any relief,
however, may be accompanied by sanctions, including the imposition of a
corporate tax on all or a portion of the REMIC's income for the period of time
in which the requirements for REMIC status are not satisfied.
Among the ongoing requirements in order to qualify for REMIC treatment is
that substantially all of the assets of the Trust Fund, as of the close of the
third calendar month beginning after the creation of the REMIC and continually
afterward, must consist of only "qualified mortgages" and "permitted
investments." In order to be a "qualified mortgage" or to support treatment of a
certificate of participation in a "qualified mortgage" as a "qualified
mortgage," an obligation must be principally secured by an interest in real
property. The REMIC Regulations treat an obligation secured by manufactured
housing qualifying as a single family residence under Code Section 25(e)(10) as
an obligation secured by real property, without regard to the treatment of the
obligation or the property under state law. Under Code Section 25(e)(10), a
single family residence includes any manufactured home that has a minimum of 400
square feet of living space and a minimum width in excess of 102 inches and that
is of a kind customarily used at a fixed location.
B. CHARACTERIZATION OF INVESTMENTS IN REMIC CERTIFICATES
In general, REMIC Certificates are not treated for federal income tax
purposes as ownership interests in the assets of a REMIC Mortgage Pool. However,
(1) REMIC Certificates held by a domestic building and loan association will
constitute a "regular or residual interest in a REMIC" within the meaning of
Code Section 7701(a)(19)(C)(xi) in the same proportion that the assets of the
REMIC Mortgage Pool underlying the Certificates ("Assets") would be treated as
"loans secured by an interest in real property" within the meaning of Code
Section 7701(a)(19)(C)(v) or as other assets described in Code Section
7701(a)(19)(C)(i) through (x); and (2) REMIC Certificates held by a real estate
investment trust ("REIT") will constitute "real estate assets" within the
meaning of Code Section 856(c)(4)(A), and any amount includible in gross income
on the REMIC Certificates will be considered "interest on obligations secured by
mortgages on real property or on interests in real property" within the meaning
of Code Section 856(c)(3)(B) in the same proportion that, for both purposes, the
Assets of the REMIC would be treated as "interests in real property" as defined
in Code Section 856(c)(5)(C) (or, as provided in the Committee Report, as "real
estate assets" as defined in Code Section 856(c)(5)(B)). See " -- Non-REMIC
Trust Funds -- Characterization of Investments in Trust Certificates -- Buydown
Mortgage Loans." Moreover, if 95% or more of the Assets qualify for any of the
foregoing treatments, the REMIC Certificates (and income on the REMIC
Certificates) will qualify for the corresponding status in their entirety.
Investors should be aware that the investment of amounts in any Reserve Fund or
GPM Fund in non-qualifying assets would, and holding property acquired by
foreclosure pending sale might, reduce the amount of the REMIC Certificates that
would qualify for the foregoing treatment. The REMIC Regulations provide that
payments on Mortgage Loans held pending distribution are considered part of the
Mortgage Loans for purposes of Code Section 856(c)(4)(A); it is unclear whether
the collected payments would be so treated for purposes of Code Section
7701(a)(19)(C)(v), but there appears to be no reason why analogous treatment
should not be given to the collected payments under that provision. The
determination as to the percentage of the REMIC's assets (or income) that will
constitute assets (or income) described in the foregoing Sections of the Code
will be made with respect to each calendar quarter based on the average adjusted
basis (or average amount of income) of each category of the assets held (or
income accrued) by the REMIC during the calendar quarter. The REMIC will report
those determinations to Certificateholders in the manner and at the times
required by applicable Treasury regulations. The prospectus supplement or the
related Current Report on Form 8-K for each Series of REMIC Certificates will
describe the Assets as of the Cut-off Date. REMIC Certificates held by
particular financial institutions will constitute an "evidence of indebtedness"
within the meaning of Code Section 582(c)(1); in addition, regular interests in
any other REMIC acquired by a REMIC in accordance with the requirements of Code
Section 860G(a)(3) or Section 860G(a)(4) will be treated as "qualified
mortgages" within the meaning of Code Section 860D(a)(4).
For purposes of characterizing an investment in REMIC Certificates, a
Contract secured by a Manufactured Home qualifying as a "single family
residence" under Code Section 25(e)(10) will constitute (1) a "real estate
asset" within the meaning of Code Section 856 and (2) an asset described in Code
Section 7701(a)(19)(C). With respect to the Contracts included in a Trust Fund
that makes an election to be treated as a REMIC, each Unaffiliated Seller will
represent and warrant that each of the Manufactured Homes securing the Contracts
meets the definition of a "single family residence."
C. TIERED REMIC STRUCTURES
For some Series of Certificates, two or more separate elections may be made
to treat designated portions of the related Trust Fund as REMICs ("Tiered
REMICs") for federal income tax purposes. Upon the issuance of a Series of this
type of Certificates, Special Tax Counsel will deliver its opinion generally to
the effect that, assuming compliance with all provisions of the related Pooling
and Servicing Agreement, the Tiered REMICs will each qualify as a REMIC and the
REMIC Certificates issued by the Tiered REMICs will be considered to evidence
ownership of REMIC Regular Certificates or REMIC Residual Certificates in the
related REMIC within the meaning of the REMIC Provisions.
Solely for purposes of determining whether the REMIC Certificates will be
"real estate assets" within the meaning of Code Section 856(c)(4)(A), and assets
described in Code Section 7701(a)(19)(C), and whether the income on the
Certificates is interest described in Code Section 856(c)(3)(B), the Tiered
REMICs will be treated as one REMIC.
D. TAXATION OF OWNERS OF REMIC REGULAR CERTIFICATES
Except as otherwise stated in this discussion, the REMIC Regular
Certificates will be treated for federal income tax purposes as debt instruments
issued by the REMIC Mortgage Pool and not as ownership interests in the REMIC
Mortgage Pool or its Assets. In general, interest, original issue discount and
market discount paid or accrued on a REMIC Regular Certificate will be treated
as ordinary income to the holder of the REMIC Regular Certificate. Distributions
in reduction of the stated redemption price at maturity of the REMIC Regular
Certificate will be treated as a return of capital to the extent of the holder's
basis in the REMIC Regular Certificate. Holders of REMIC Regular Certificates
that otherwise report income under a cash method of accounting will be required
to report income with respect to REMIC Regular Certificates under an accrual
method.
1. ORIGINAL ISSUE DISCOUNT
Particular REMIC Regular Certificates may be issued with "original issue
discount" within the meaning of Code Section 1273(a). Any holders of REMIC
Regular Certificates issued with original issue discount generally will be
required to include original issue discount in income as it accrues, in
accordance with a constant yield method that takes into account the compounding
of interest, in advance of the receipt of the cash attributable to the income.
The Master Servicer will report annually, or more frequently if required, to the
Internal Revenue Service (the "IRS") and to Certificateholders the information
with respect to the original issue discount accruing on the REMIC Regular
Certificates as may be required under Code Section 6049 and the regulations
under the Code. See " -- Reporting and Other Administrative Matters of REMICs"
below.
Rules governing original issue discount are set forth in Code Sections 1271
through 1275 and in the OID Regulations. Code Section 1272(a)(6) provides
special original issue discount rules applicable to REMIC Regular Certificates.
Code Section 1272(a)(6) requires that a mortgage prepayment assumption
("Prepayment Assumption") be used in computing the accrual of original issue
discount on REMIC Regular Certificates, and for other federal income tax
purposes. The Prepayment Assumption is to be determined in the manner prescribed
in Treasury regulations. To date, no regulations in this regard have been
promulgated. The Committee Report indicates that the regulations will provide
that the Prepayment Assumption, if any, used with respect to a particular
transaction must be the same as that used by the parties in pricing the
transaction. The Master Servicer will use a Prepayment Assumption in reporting
original issue discount that is consistent with this standard. However, neither
the Depositor nor the Master Servicer makes any representation that the Mortgage
Loans will in fact prepay at the rate reflected in the Prepayment Assumption or
at any other rate. Each investor must make its own decision as to the
appropriate prepayment assumption to be used in deciding whether or not to
purchase any of the REMIC Regular Certificates. The prospectus supplement with
respect to a Series of REMIC Certificates will disclose the Prepayment
Assumption to be used in reporting original issue discount, if any, and for
other federal income tax purposes.
The total amount of original issue discount on a REMIC Regular Certificate
is the excess of the "stated redemption price at maturity" of the REMIC Regular
Certificate over its "issue price." Except as discussed in the following two
paragraphs, in general, the issue price of a particular class of REMIC Regular
Certificates offered under this prospectus will be the price at which a
substantial amount of REMIC Regular Certificates of that class is first sold to
the public, excluding bond houses and brokers, and the stated redemption price
at maturity of a REMIC Regular Certificate will be its Stated Principal Balance.
If a REMIC Regular Certificate is sold with accrued interest that relates
to a period prior to the issue date of the REMIC Regular Certificate, the amount
paid for the accrued interest will be treated instead as increasing the issue
price of the REMIC Regular Certificate. In addition, that portion of the first
interest payment in excess of interest accrued from the date of initial issuance
of the REMIC Regular Certificates (the "Closing Date") to the first Distribution
Date will be treated for federal income tax reporting purposes as includible in
the stated redemption price at maturity of the REMIC Regular Certificates, and
as excludible from income when received as a payment of interest on the first
Distribution Date, except to the extent of any accrued market discount as of
that date. The OID Regulations suggest, however, that some or all of this
pre-issuance accrued interest "may" be treated as a separate asset, and hence
not includible in a REMIC Regular Certificate's issue price or stated redemption
price at maturity, whose cost is recovered entirely out of interest paid on the
first Distribution Date.
The stated redemption price at maturity of a REMIC Regular Certificate is
equal to the total of all payments to be made on the Certificate other than
"qualified stated interest." Under the OID Regulations, "qualified stated
interest" is interest that is unconditionally payable at least annually during
the entire term of the Certificate at either (1) a single fixed rate that
appropriately takes into account the length of the interval between payments or
(2) a current value of a single "qualified floating rate" or "objective rate"
(each, a "Single Variable Rate"). A "current value" is the value of a variable
rate on any day that is no earlier than three months prior to the first day on
which that value is in effect and no later than one year following that day. A
"qualified floating rate" is a rate whose variations can reasonably be expected
to measure contemporaneous variations in the cost of newly borrowed funds in the
currency in which the Certificate is denominated. This rate remains qualified
even though it is multiplied by a fixed, positive multiple greater than 0.65 but
not exceeding 1.35, increased or decreased by a fixed rate, or both. Some
combinations of rates constitute a single qualified floating rate, including (1)
interest stated at a fixed rate for an initial period of less than one year
followed by a qualified floating rate if the value of the floating rate at the
Closing Date is intended to approximate the fixed rate, and (2) two or more
qualified floating rates that can reasonably be expected to have approximately
the same values throughout the term of the Certificate. A combination of these
rates is conclusively presumed to be a single floating rate if the values of all
rates on the Closing Date are within 0.25 percentage points of each other. A
variable rate that is subject to an interest rate cap, floor, governor or
similar restriction on rate adjustment may be a qualified floating rate only if
the restriction is fixed throughout the term of the instrument, or is not
reasonably expected as of the Closing Date to cause the yield on the debt
instrument to differ significantly from the expected yield absent the
restriction. Final regulations issued on June 11, 1996 define an "objective
rate" as a rate determined using a single fixed formula and based on objective
financial information or economic information. However, an objective rate does
not include a rate based on information that is within the control of or unique
to the circumstances of the issuer or a party related to the issuer. A
combination of interest stated at a fixed rate for an initial period of less
than one year followed by an objective rate is treated as a single objective
rate if the value of the objective rate at the Closing Date is intended to
approximate the fixed rate; this combination of rates is conclusively presumed
to be a single objective rate if the objective rate on the Closing Date does not
differ from the fixed rate by more than 0.25 percentage points. For a REMIC
Regular Certificate with a Single Variable Rate the qualified stated interest
allocable to an accrual period is increased (or decreased) if the interest
actually paid during an accrual period exceeds (or is less than) the interest
assumed to be paid under the Single Variable Rate. The qualified stated interest
payable with respect to particular variable rate debt instruments not bearing
stated interest at a Single Variable Rate is discussed below under " -- Variable
Rate Certificates." Under the foregoing rules, some of the payments of interest
on a Certificate bearing a fixed rate of interest for an initial period followed
by a qualified floating rate of interest in subsequent periods could be treated
as included in the stated redemption price at maturity if the initial fixed rate
were to differ sufficiently from the rate that would have been set using the
formula applicable to subsequent periods. See " -- Variable Rate Certificates."
Under a DE MINIMIS rule in the Code, as interpreted in the OID Regulations,
original issue discount on a REMIC Regular Certificate will be considered to be
zero if the original issue discount is less than 0.25% of the stated redemption
price at maturity of the REMIC Regular Certificate multiplied by the weighted
average life of the REMIC Regular Certificate. For this purpose, the weighted
average life of the REMIC Regular Certificate is computed as the sum of the
amounts determined by multiplying the amount of each payment under the
instrument, other than a payment of qualified stated interest, by a fraction,
whose numerator is the number of complete years from the issue date until the
payment is made and whose denominator is the stated redemption price at maturity
of the REMIC Regular Certificate. The IRS may take the position that this rule
should be applied taking into account the Prepayment Assumption and the effect
of any anticipated investment income. Under the OID Regulations, REMIC Regular
Certificates bearing only qualified stated interest except for any "teaser"
rate, interest holiday or similar provision are treated as subject to the de
minimis rule if the greater of the foregone interest or any excess of the
Certificates' stated principal amount over their issue price is less than the de
minimis amount.
The OID Regulations generally treat de minimis original issue discount as
includible in income as each principal payment is made, based on the product of
the total amount of the de minimis original issue discount and a fraction, whose
numerator is the amount of the principal payment and whose denominator is the
outstanding principal balance of the REMIC Regular Certificate. The OID
Regulations also permit a Certificateholder to elect to accrue de minimis
original issue discount, together with stated interest, market discount and
original issue discount, into income currently based on a constant yield method.
See " -- Market Discount and Premium."
Each holder of a REMIC Regular Certificate must include in gross income the
sum of the "daily portions" of original issue discount on its REMIC Regular
Certificate for each day during its taxable year on which it held the REMIC
Regular Certificate. For this purpose, in the case of an original holder of a
REMIC Regular Certificate, the daily portions of original issue discount will be
determined as follows. A calculation will first be made of the portion of the
original issue discount that accrued during each accrual period, that is
generally each period that ends on a date that corresponds to a Distribution
Date on the REMIC Regular Certificate and begins on the first day following the
immediately preceding accrual period, or in the case of the first period, begins
on the Closing Date. For any accrual period the portion will equal the excess,
if any, of:
(1) the sum of
(a) the present value of all of the distributions remaining to be made
on the REMIC Regular Certificate, if any, as of the end of the accrual period
and
(b) distributions made on the REMIC Regular Certificate during the
accrual period of amounts included in the stated redemption price at maturity,
over
(2) the adjusted issue price of the REMIC Regular Certificate at the
beginning of the accrual period.
The present value of the remaining payments referred to in the preceding
sentence will be calculated based on:
(1) the yield to maturity of the REMIC Regular Certificate, calculated as
of the settlement date, giving effect to the Prepayment Assumption,
(2) events, including actual prepayments, that have occurred prior to the
end of the accrual period and
(3) the Prepayment Assumption.
The adjusted issue price of a REMIC Regular Certificate at the beginning of any
accrual period will equal the issue price of the Certificate, increased by the
aggregate amount of original issue discount with respect to the REMIC Regular
Certificate that accrued in prior accrual periods, and reduced by the amount of
any distributions made on the REMIC Regular Certificate in prior accrual periods
of amounts included in the stated redemption price at maturity. The original
issue discount accruing during any accrual period will then be allocated ratably
to each day during the period to determine the daily portion of original issue
discount for each day. With respect to an accrual period between the settlement
date and the first Distribution Date on a REMIC Regular Certificate that is
shorter than a full accrual period, the OID Regulations permit the daily
portions of original issue discount to be determined according to any reasonable
method.
A subsequent purchaser of a REMIC Regular Certificate that purchases the
REMIC Regular Certificate at a cost, not including payment for accrued qualified
stated interest, less than its remaining stated redemption price at maturity
will also be required to include in gross income, for each day on which it holds
the REMIC Regular Certificate, the daily portions of original issue discount
with respect to the REMIC Regular Certificate, but reduced, if the cost exceeds
the "adjusted issue price," by an amount equal to the product of (1) the daily
portions and (2) a constant fraction, whose numerator is the excess and whose
denominator is the sum of the daily portions of original issue discount on the
REMIC Regular Certificate for all days on or after the day of purchase. The
adjusted issued price of a REMIC Regular Certificate on any given day is equal
to the sum of the adjusted issue price, or, in the case of the first accrual
period, the issue price, of the REMIC Regular Certificate at the beginning of
the accrual period during which this day occurs and the daily portions of
original issue discount for all days during the accrual period prior to this
day, reduced by the aggregate amount of distributions made during the accrual
period prior to this day other than distributions of qualified stated interest.
VARIABLE RATE CERTIFICATES. REMIC Regular Certificates bearing interest at
one or more variable rates are subject to special rules. The qualified stated
interest payable with respect to particular variable rate debt instruments not
bearing interest at a Single Variable Rate generally is determined under the OID
Regulations by converting the instruments into fixed rate debt instruments.
Instruments qualifying for this treatment generally include those providing for
stated interest at (1) more than one qualified floating rate or (2) a single
fixed rate and (a) one or more qualified floating rates or (b) a single
"qualified inverse floating rate" (each, a "Multiple Variable Rate"). A
qualified inverse floating rate is an objective rate equal to a fixed rate
reduced by a qualified floating rate, the variations in which can reasonably be
expected to inversely reflect contemporaneous variations in the qualified
floating rate, disregarding permissible rate caps, floors, governors and similar
restrictions including those described above.
Purchasers of REMIC Regular Certificates bearing a variable rate of
interest should be aware that there is uncertainty concerning the application of
Code Section 1272(a)(6) and the OID Regulations to the Certificates. In the
absence of other authority, the Master Servicer intends to be guided by the
provisions of the OID Regulations governing variable rate debt instruments in
adapting the provisions of Code Section 1272(a)(6) to the Certificates for the
purpose of preparing reports furnished to Certificateholders. The effect of the
application of the provisions generally will be to cause Certificateholders
holding Certificates bearing interest at a Single Variable Rate to take into
account for each period an amount corresponding approximately to the sum of (1)
the qualified stated interest accruing on the outstanding face amount of the
REMIC Regular Certificate as the stated interest rate for that Certificate
varies from time to time and (2) the amount of original issue discount that
would have been attributable to that period on the basis of a constant yield to
maturity for a bond issued at the same time and issue price as the REMIC Regular
Certificate, having the same face amount and schedule of payments of principal
as the Certificate, subject to the same Prepayment Assumption, and bearing
interest at a fixed rate equal to the value of the applicable qualified floating
rate or qualified inverse floating rate in the case of a Certificate providing
for either the rate, or equal to the fixed rate that reflects the reasonably
expected yield on the Certificate in the case of a Certificate providing for an
objective rate other than an inverse floating rate, in each case as of the issue
date. Certificateholders holding REMIC Regular Certificates bearing interest at
a Multiple Variable Rate generally will take into account interest and original
issue discount under a similar methodology, except that the amounts of qualified
stated interest and original issue discount attributable to these Certificates
first will be determined for an "equivalent" debt instrument bearing fixed
rates, the assumed fixed rates for which are:
(a) for each qualified floating rate, the value of each rate as of the
Closing Date, with appropriate adjustment for any differences in intervals
between interest adjustment dates,
(b) for a qualified inverse floating rate, the value of the rate as of the
Closing Date and
(c) for any other objective rate, the fixed rate that reflects the yield
that is reasonably expected for the Certificate.
If the interest paid or accrued with respect to a Multiple Variable Rate
Certificate during an accrual period differs from the assumed fixed interest
rate, the difference will be an adjustment, to interest or original issue
discount, as applicable, to the Certificateholder's taxable income for the
taxable period or periods to which the difference relates.
In the case of a Certificate that provides for stated interest at a fixed
rate in one or more accrual periods and either one or more qualified floating
rates or a qualified inverse floating rate in other accrual periods, the fixed
rate is first converted into an assumed variable rate. The assumed variable rate
will be a qualified floating rate or a qualified inverse floating rate according
to the type of actual variable rates provided by the Certificate, and must be a
rate so that the fair market value of the REMIC Regular Certificate as of
issuance is approximately the same as the fair market value of an otherwise
identical debt instrument that provides for the assumed variable rate in lieu of
the fixed rate. The REMIC Regular Certificate is then subject to the
determination of the amount and accrual of original issue discount as described
above, by reference to the hypothetical variable rate instrument.
Purchasers of variable rate REMIC Regular Certificates further should be
aware that the provisions of the OID Regulations applicable to variable rate
debt instruments have been limited and may not apply to some REMIC Regular
Certificates having variable rates. Since the Treasury regulations, issued in
final form on June 11, 1996, applicable to instruments having contingent
payments (the "1996 Contingent Debt Regulations") are not applicable to
instruments that are subject to Code Section 1272(a)(6), prospective purchasers
of variable rate REMIC Regular Certificates are advised to consult their tax
advisers concerning the tax treatment of the Certificates.
2. MARKET DISCOUNT AND PREMIUM
A Certificateholder that purchases a REMIC Regular Certificate at a market
discount, that is, at a purchase price less than the REMIC Regular Certificate's
stated redemption price at maturity, or, in the case of a REMIC Regular
Certificate issued with original issue discount, the REMIC Regular Certificate's
adjusted issue price (as defined under " -- Original Issue Discount"), will
recognize market discount upon receipt of each payment of principal. In
particular, this holder will generally be required to allocate each payment of
principal on a REMIC Regular Certificate first to accrued market discount, and
to recognize ordinary income to the extent the principal payment does not exceed
the aggregate amount of accrued market discount on the REMIC Regular Certificate
not previously included in income. The market discount must be included in
income in addition to any original issue discount includible in income with
respect to the REMIC Regular Certificate.
A Certificateholder may elect to include market discount in income
currently as it accrues, rather than including it on a deferred basis in
accordance with the foregoing. If made, the election will apply to all market
discount bonds acquired by the Certificateholder on or after the first day of
the first taxable year to which the election applies. In addition, the OID
Regulations permit a Certificateholder to elect to accrue all interest,
discount, including de minimis market or original issue discount, reduced by any
premium, in income as interest, based on a constant yield method. If this
election were made for a REMIC Regular Certificate with market discount, the
Certificateholder is deemed to have made an election to currently include market
discount in income with respect to all other debt instruments having market
discount that the Certificateholder acquires during the year of the election or
afterward. Similarly, a Certificateholder that makes this election for a
Certificate that is acquired at a premium is deemed to have made an election to
amortize bond premium, as described below, with respect to all debt instruments
having amortizable bond premium that the Certificateholder owns at the beginning
of the first taxable year to which the election applies or acquires afterward.
The election to accrue interest, discount and premium on a constant yield method
with respect to a Certificate is irrevocable, unless the IRS consents to a
revocation.
Under a statutory de minimis exception, market discount with respect to a
REMIC Regular Certificate will be considered to be zero for purposes of Code
Sections 1276 through 1278 if the market discount is less than 0.25% of the
stated redemption price at maturity of the REMIC Regular Certificate multiplied
by the number of complete years to maturity remaining after the date of its
purchase. In interpreting a similar de minimis rule with respect to original
issue discount on obligations payable in installments, the OID Regulations refer
to the weighted average maturity of obligations, and it is likely that the same
rule will be applied in determining whether market discount is de minimis. It
appears that de minimis market discount on a REMIC Regular Certificate would be
treated in a manner similar to original issue discount of a de minimis amount.
See "Taxation of Holders of REMIC Regular Certificates -- Original Issue
Discount." This treatment would result in discount being included in income at a
slower rate than discount would be required to be included using the method
described above. However, Treasury regulations implementing the market discount
de minimis exception have not been issued in proposed, temporary or final form,
and the precise treatment of de minimis market discount on obligations payable
in more than one installment therefore remains uncertain.
The Tax Reform Act of 1986 (the "1986 Act") grants authority to the
Treasury Department to issue regulations providing for the method for accruing
market discount of more than a de minimis amount on debt instruments, the
principal of which is payable in more than one installment. Until the time
regulations are issued by the Treasury Department, some of the rules described
in the Committee Report might apply. Under those rules, the holder of a bond
purchased with more than de minimis market discount may elect to accrue the
market discount either on the basis of a constant yield method or on the basis
of the appropriate proportionate method described below. Under the proportionate
method for obligations issued with original issue discount, the amount of market
discount that accrues during a period is equal to the product of (1) the total
remaining market discount, multiplied by (2) a fraction, the numerator of which
is the original issue discount accruing during the period and the denominator of
which is the total remaining original issue discount at the beginning of the
period. Under the proportionate method for obligations issued without original
issue discount, the amount of market discount that accrues during a period is
equal to the product of (1) the total remaining market discount, multiplied by
(2) a fraction, the numerator of which is the amount of stated interest paid
during the accrual period and the denominator of which is the total amount of
stated interest remaining to be paid at the beginning of the period. The
Prepayment Assumption, if any, used in calculating the accrual of original issue
discount is to be used in calculating the accrual of market discount under any
of the above methods. Because the regulations referred to in this paragraph have
not been issued, it is not possible to predict what effect the regulations might
have on the tax treatment of a REMIC Regular Certificate purchased at a discount
in the secondary market.
Further, a purchaser generally will be required to treat a portion of any
gain on sale or exchange of a REMIC Regular Certificate as ordinary income to
the extent of the market discount accrued to the date of disposition under one
of the foregoing methods, less any accrued market discount previously reported
as ordinary income. The purchaser also may be required to defer a portion of its
interest deductions for the taxable year attributable to any indebtedness
incurred or continued to purchase or carry the REMIC Regular Certificate. Any
deferred interest expense is, in general, allowed as a deduction not later than
the year in which the related market discount income is recognized. If the
holder elects to include market discount in income currently as it accrues on
all market discount instruments acquired by the holder in that taxable year or
afterward, the interest deferral rule described above will not apply.
A REMIC Regular Certificate purchased at a cost, not including payment for
accrued qualified stated interest, greater than its remaining stated redemption
price at maturity will be considered to be purchased at a premium. The holder of
a REMIC Regular Certificate may elect to amortize the premium under the constant
yield method. The OID Regulations also permit Certificateholders to elect to
include all interest, discount and premium in income based on a constant yield
method, further treating the Certificateholder as having made the election to
amortize premium generally, as described above. The Committee Report indicates a
Congressional intent that the same rules that will apply to accrual of market
discount on installment obligations will also apply in amortizing bond premium
under Code Section 171 on installment obligations like the REMIC Regular
Certificates.
Treasury regulations under Code Section 171 were issued on December 30,
1997 ("Bond Premium Amortization Regulations") which generally provide that
amortizable bond premium is amortized over the term of a note by offsetting the
qualified stated interest allocable to an accrual period with the amortizable
bond premium allocable to the period using a specified constant yield method. To
the extent that the amortizable bond premium allocated to an accrual period
exceeds the qualified stated interest allocable to the period, the excess is
deductible under Code Section 171 to the extent the excess does not exceed the
difference between (1) prior interest inclusions over (2) prior amortizable bond
premium deductions on the bond ("Bond Premium Amortization Limit"), with the
excess over the Bond Premium Amortization Limit carried forward to the next
accrual period and treated as amortizable bond premium allocable to that period.
The Bond Premium Amortization Regulations are effective for notes acquired on or
after March 2, 1998. However, if a holder makes the election to amortize bond
premium for the taxable year containing March 2, 1998, or any subsequent taxable
year, the Treasury regulations would apply to debt instruments held on or after
the first day for the taxable year in which the election is made. The Bond
Premium Amortization Regulations specifically do not apply to debt instruments
described in Code Section 1272(a)(6) like the REMIC Regular Certificates.
However, it is possible that by analogy to these Regulations, any premium on a
REMIC Regular Certificate in excess of interest income may be deductible to the
extent of prior accruals of interests.
3. TREATMENT OF SUBORDINATED SECURITIES
As described above under "Credit Support -- Subordinated Certificates,"
some Series of Securities may contain one or more Classes or Subclasses of
Subordinated Securities. Holders of Subordinated Securities will be required to
report income with respect to the Securities on the accrual method without
giving effect to delays and reductions in distributions attributable to defaults
or delinquencies on any Mortgage Loans or Contracts, except possibly, in the
case of income that constitutes qualified stated interest, to the extent that it
can be established that the amounts are uncollectible. As a result, the amount
of income reported by a Securityholder of a Subordinated Security in any period
could significantly exceed the amount of cash distributed to the Securityholder
in that period.
Although not entirely clear, it appears that a corporate holder or a holder
who holds a Regular Certificate in the course of a trade or business generally
should be allowed to deduct as an ordinary loss any loss sustained on account of
partial or complete worthlessness of a Subordinated Security. Although similarly
unclear, a noncorporate holder who does not hold a Regular Certificate in the
course of a trade or business generally should be allowed to deduct as a
short-term capital loss any loss sustained on account of complete worthlessness
of a Subordinated Security. Special rules are applicable to banks and thrift
institutions, including rules regarding reserves for bad debts. Holders of
Subordinated Securities should consult their own tax advisers regarding the
appropriate timing, character and amount of any loss sustained with respect to
Subordinated Securities.
E. TAXATION OF OWNERS OF REMIC RESIDUAL CERTIFICATES
An owner of a REMIC Residual Certificate ("Residual Owner") generally will
be required to report its daily portion of the taxable income or, subject to the
limitation described below in " -- Basis Rules and Distributions," the net loss
of the REMIC Mortgage Pool for each day during a calendar quarter that the
Residual Owner owned the REMIC Residual Certificate. For this purpose, the daily
portion will be determined by allocating to each day in the calendar quarter,
using a 30 days per month/90 days per quarter/360 days per year counting
convention, its ratable portion of the taxable income or net loss of the REMIC
Mortgage Pool for the quarter, and by allocating the daily portions among the
Residual Owners, on the day, in accordance with their percentage of ownership
interests on the day. Any amount included in the gross income of, or allowed as
a loss to, any Residual Owner by virtue of the rule referred to in this
paragraph will be treated as ordinary income or loss. Purchasers of REMIC
Residual Certificates should be aware that taxable income from the Certificates
may exceed cash distributions with respect to the Certificates in any taxable
year. For example, if the Mortgage Loans are acquired by a REMIC at a discount,
then the holder of a residual interest may recognize income without
corresponding cash distributions. This result could occur because a payment
produces recognition by the REMIC of discount on the Mortgage Loan while all or
a portion of the payment could be used in whole or in part to make principal
payments on REMIC Regular Certificates issued without substantial discount.
Taxable income may also be greater in earlier years as a result of the fact that
interest expense deductions, expressed as a percentage of the outstanding
principal amount of the REMIC Regular Certificates, will increase over time as
the lower yielding sequences of Certificates are paid, whereas interest income
with respect to any given fixed rate Mortgage Loan will remain constant over
time as a percentage of the outstanding principal amount of that loan.
Any payments received by a holder of a REMIC Residual Certificate in
connection with the acquisition of the Certificate will be taken into account in
determining the income of the holder for federal income tax purposes. Although
it appears likely that any payment would be includible in income immediately
upon its receipt, the IRS might assert that the payment should be included in
income over time according to an amortization schedule or according to some
other method. Because of the uncertainty concerning the treatment of the
payments, holders of REMIC Residual Certificates should consult their tax
advisers concerning the treatment of the payments for income tax purposes.
1. TAXABLE INCOME OR NET LOSS OF THE REMIC TRUST FUND
The taxable income or net loss of the REMIC Mortgage Pool will reflect a
netting of income from the Mortgage Loans, any cancellation of indebtedness
income due to the allocation of Realized Losses to REMIC Regular Certificates,
and the deductions and losses allowed to the REMIC Mortgage Pool. The taxable
income or net loss for a given calendar quarter will be determined in the same
manner as for an individual having the calendar year as his taxable year and
using the accrual method of accounting, with modifications. The first
modification is that a deduction will be allowed for accruals of interest,
including original issue discount, on the REMIC Regular Certificates. Second,
market discount equal to the excess of any Mortgage Loan's adjusted issue price
(as determined above under " -- Taxation of Owners of REMIC Regular Certificates
-- Market Discount and Premium") over its fair market value at the time of its
transfer to the REMIC Mortgage Pool generally will be included in income as it
accrues, based on a constant yield method and on the Prepayment Assumption. For
this purpose, the Master Servicer intends to treat the fair market value of the
Mortgage Loans as being equal to the aggregate issue prices of the REMIC Regular
Certificates and REMIC Residual Certificates; if one or more classes of REMIC
Regular Certificates or REMIC Residual Certificates are retained by the
Depositor, the Master Servicer will estimate the value of the retained interests
in order to determine the fair market value of the Mortgage Loans for this
purpose. Third, no item of income, gain, loss or deduction allocable to a
prohibited transaction (see " -- Prohibited Transactions and Other Possible
REMIC Taxes" below) will be taken into account. Fourth, the REMIC Mortgage Pool
generally may not deduct any item that would not be allowed in calculating the
taxable income of a partnership by virtue of Code Section 703(a)(2). Fifth, the
REMIC Regulations provide that the limitation on miscellaneous itemized
deductions imposed on individuals by Code Section 67 will not be applied at the
Mortgage Pool level to the servicing fees paid to the Master Servicer or
sub-servicers if any. See, however, "-- Pass-Through of Servicing Fees" below.
Sixth, net income from foreclosure property is reduced by the amount of tax on
net income from foreclosure property. If the deductions allowed to the REMIC
Mortgage Pool exceed its gross income for a calendar quarter, the excess will be
the net loss for the REMIC Mortgage Pool for that calendar quarter.
2. BASIS RULES AND DISTRIBUTIONS
Any distribution by a REMIC Mortgage Pool to a Residual Owner will not be
included in the gross income of the Residual Owner to the extent it does not
exceed the adjusted basis of the Residual Owner's interest in a REMIC Residual
Certificate. The distribution will reduce the adjusted basis of this interest,
but not below zero. To the extent a distribution exceeds the adjusted basis of
the REMIC Residual Certificate, it will be treated as gain from the sale of the
REMIC Residual Certificate. See " -- Sales of REMIC Certificates" below. The
adjusted basis of a REMIC Residual Certificate is equal to the amount paid for
the REMIC Residual Certificate, increased by amounts included in the income of
the Residual Owner and decreased by distributions and by net losses taken into
account with respect to this interest.
A Residual Owner is not allowed to take into account any net loss for any
calendar quarter to the extent the net loss exceeds the Residual Owner's
adjusted basis in its REMIC Residual Certificate as of the close of the calendar
quarter, determined without regard to the net loss. Any loss disallowed by
reason of this limitation may be carried forward indefinitely to future calendar
quarters and, subject to the same limitation, may be used only to offset income
from the REMIC Residual Certificate.
The effect of these basis and distribution rules is that a Residual Owner
may not amortize its basis in a REMIC Residual Certificate, but may only recover
its basis through distributions, through the deduction of any net losses of the
REMIC Mortgage Pool or upon the sale of its REMIC Residual Certificate. See " --
Sales of REMIC Certificates" below.
3. EXCESS INCLUSIONS
Any "excess inclusions" with respect to a REMIC Residual Certificate are
subject to special tax rules. With respect to a Residual Owner, the excess
inclusion for any calendar quarter is defined as the excess, if any, of the
daily portions of taxable income over the sum of the "daily accruals" for each
day during the quarter that the REMIC Residual Certificate was held by the
Residual Owner. The daily accruals are determined by allocating to each day
during a calendar quarter its ratable portion of the product of the "adjusted
issue price" of the REMIC Residual Certificate at the beginning of the calendar
quarter and 120% of the long-term "applicable federal rate" (generally, an
average of current yields on Treasury securities of comparable maturity, and
hereafter the "AFR") in effect at the time of issuance of the REMIC Residual
Certificate. For this purpose, the adjusted issue price of a REMIC Residual
Certificate as of the beginning of any calendar quarter is the issue price of
the REMIC Residual Certificate, increased by the amount of daily accruals for
all prior quarters and decreased by any distributions made with respect to the
REMIC Residual Certificate before the beginning of the quarter. The issue price
of a REMIC Residual Certificate is the initial offering price to the public,
excluding bond houses and brokers, at which a substantial amount of the REMIC
Residual Certificates were sold.
For Residual Owners, an excess inclusion cannot be offset by deductions,
losses or loss carryovers from other activities. However, net operating loss
carryovers are determined without regard to excess inclusion income. For
Residual Owners that are subject to tax on unrelated business taxable income (as
defined in Code Section 511), an excess inclusion is treated as unrelated
business taxable income. For Residual Owners that are nonresident alien
individuals or foreign corporations generally subject to United States 30%
withholding tax, even if interest paid to the Residual Owners is generally
eligible for exemptions from the tax, an excess inclusion will be subject to the
tax and no tax treaty rate reduction or exemption may be claimed with respect to
an excess inclusion. See " -- Foreign Investors in REMIC Certificates" below.
The Small Business Job Protection Act of 1996 ("SBJPA of 1996") eliminated the
special rule permitting Section 593 institutions ("thrift institutions") to use
net operating losses and other allowable deductions to offset their excess
inclusion income from REMIC Residual Certificates that have "significant value"
within the meaning of the REMIC Regulations, effective for taxable years
beginning after December 31, 1995, except with respect to REMIC Residual
Certificates continuously held by thrift institutions since November 1, 1995.
In addition, the SBJPA of 1996 provides three rules for determining the
effect of excess inclusions on the alternative minimum taxable income of a
Residual Owner. First, alternative minimum taxable income for a Residual Owner
is determined without regard to the special rule, discussed above, that taxable
income cannot be less than excess inclusions. Second, a Residual Owner's
alternative minimum taxable income for a taxable year cannot be less than the
excess inclusions for the year. Third, the amount of any alternative minimum tax
net operating loss deduction must be computed without regard to any excess
inclusions. These rules are effective for taxable years beginning after December
31, 1986, unless a Residual Owner elects to have the rules apply only to taxable
years beginning after August 20, 1996.
In the case of any REMIC Residual Certificates held by a REIT, the
aggregate excess inclusions with respect to the REMIC Residual Certificates,
reduced, but not below zero, by the real estate investment trust taxable income
(within the meaning of Code Section 857(b)(2), excluding any net capital gain),
will be allocated among the shareholders of the trust in proportion to the
dividends received by the shareholders from the trust, and any amount so
allocated will be treated as an excess inclusion with respect to a REMIC
Residual Certificate as if held directly by the shareholder.
4. NONECONOMIC REMIC RESIDUAL CERTIFICATES
Under the REMIC Regulations, transfers of "noneconomic" REMIC Residual
Certificates will be disregarded for all federal income tax purposes if "a
significant purpose of the transfer was to enable the transferor to impede the
assessment or collection of tax." If the transfer is disregarded, the purported
transferor will continue to remain liable for any taxes due with respect to the
income on the "noneconomic" REMIC Residual Certificate. The REMIC Regulations
provide that a REMIC Residual Certificate is noneconomic unless, at the time of
its transfer and based on the Prepayment Assumption and any required or
permitted clean up calls or required liquidation provided for in the REMIC's
organizational documents, (1) the present value of the expected future
distributions, discounted using the AFR, on the REMIC Residual Certificate
equals at least the product of the present value of the anticipated excess
inclusions and the highest tax rate applicable to corporations for the year of
the transfer and (2) the transferor reasonably expects that the transferee will
receive distributions with respect to the REMIC Residual Certificate at or after
the time the taxes accrue on the anticipated excess inclusions in an amount
sufficient to satisfy the accrued taxes. Accordingly, all transfers of REMIC
Residual Certificates that may constitute noneconomic residual interests will be
subject to restrictions under the terms of the related Pooling and Servicing
Agreement that are intended to reduce the possibility of this transfer being
disregarded. The restrictions will require each party to a transfer to provide
an affidavit that no purpose of the transfer is to impede the assessment or
collection of tax, including particular representations as to the financial
condition of the prospective transferee. Prior to purchasing a REMIC Residual
Certificate, prospective purchasers should consider the possibility that a
purported transfer of the REMIC Residual Certificate by a purchaser to another
purchaser at some future date may be disregarded in accordance with the
above-described rules, which would result in the retention of tax liability by
the purchaser. The applicable prospectus supplement will disclose whether
offered REMIC Residual Certificates may be considered "noneconomic" residual
interests under the REMIC Regulations; provided, however, that any disclosure
that a REMIC Residual Certificate will or will not be considered "noneconomic"
will be based upon particular assumptions, and the Depositor will make no
representation that a REMIC Residual Certificate will not be considered
"noneconomic" for purposes of the above-described rules or that a REMIC Residual
Owner will receive distributions calculated pursuant to the assumptions. See "
-- Foreign Investors in REMIC Certificates" below for additional restrictions
applicable to transfers of specific REMIC Residual Certificates to foreign
persons.
5. TAX-EXEMPT INVESTORS
Tax-exempt organizations, including employee benefit plans, that are
subject to tax on unrelated business taxable income (as defined in Code Section
511) will be subject to tax on any excess inclusions attributed to them as
owners of Residual Certificates. Excess inclusion income associated with a
Residual Certificate may significantly exceed cash distributions with respect to
a Residual Certificate. See " -- Excess Inclusions" above.
Generally, tax-exempt organizations that are not subject to federal income
taxation on "unrelated business taxable income" pursuant to Code Section 511 are
treated as "disqualified organizations" under provisions of the "Technical and
Miscellaneous Revenue Act of 1988" (the "1988 Act"). Under provisions of the
applicable Agreement, the organizations generally are prohibited from owning
Residual Certificates. See " -- Sales of REMIC Certificates" below.
6. REAL ESTATE INVESTMENT TRUSTS
If the applicable prospectus supplement so provides, a Mortgage Pool may
hold Mortgage Loans bearing interest based wholly or partially on Mortgagor
profits, Mortgaged Property appreciation, or similar contingencies. The
interest, if earned directly by a REIT, would be subject to the limitations of
Code Sections 856(f) and 856(j). Treasury regulations treat a REIT holding a
REMIC Residual Certificate for a principal purpose of avoiding the Code
provisions as receiving directly the income of the REMIC Mortgage Pool, hence
potentially jeopardizing its qualification for taxation as a REIT and exposing
the income to taxation as a prohibited transaction at a 100% rate.
7. MARK-TO-MARKET RULES
Code Section 475 generally requires that securities dealers include
securities in inventory at their fair market value, recognizing gain or loss as
if the securities were sold at the end of each tax year. Treasury regulations
provide that, for purposes of this mark-to-market requirement, a REMIC Residual
Certificate acquired on or after January 4, 1995 is not treated as a security
and thus may not be marked to market.
8. PARTNERSHIP HOLDERS
Special rules for electing partnerships with at least 100 members were
adopted in the Taxpayer Relief Act of 1997 (the "1997 Act"). There are special
rules relating to the electing partnerships that hold REMIC Residual
Certificates. Large partnerships which have or are considering making this
election should consult with their tax advisors concerning the consequences of
holding a REMIC Residual Certificate.
F. SALES OF REMIC CERTIFICATES
If a REMIC Certificate is sold, the seller will recognize gain or loss
equal to the difference between the amount realized on the sale and its adjusted
basis in the REMIC Certificate. The adjusted basis of a REMIC Regular
Certificate generally will equal the cost of the REMIC Regular Certificate to
the seller, increased by any original issue discount or market discount included
in the seller's gross income with respect to the REMIC Regular Certificate and
reduced by premium amortization deductions and distributions previously received
by the seller of amounts included in the stated redemption price at maturity of
the REMIC Regular Certificate. The adjusted basis of a REMIC Residual
Certificate will be determined as described under " -- Taxation of Owners of
REMIC Residual Certificates -- Basis Rules and Distributions." Gain from the
disposition of a REMIC Regular Certificate that might otherwise be treated as a
capital gain will be treated as ordinary income to the extent that the gain does
not exceed the excess, if any, of (1) the amount that would have been includible
in the holder's income had income accrued at a rate equal to 110% of the AFR as
of the date of purchase over (2) the amount actually includible in the holder's
income. Except as otherwise provided under " -- Taxation of Owners of REMIC
Regular Certificates -- Market Discount and Premium" and under Code Section
582(c), any additional gain or any loss on the sale or exchange of a REMIC
Certificate will be capital gain or loss, provided the REMIC Certificate is held
as a capital asset, generally, property held for investment, within the meaning
of Code Section 1221.
All or a portion of any gain from the sale of a REMIC Certificate that
might otherwise be capital gain may be treated as ordinary income (1) if the
Certificate is held as part of a "conversion transaction" as defined in Code
Section 1258(c), up to the amount of interest that would have accrued on the
holder's net investment in the conversion transaction at 120% of the appropriate
applicable Federal rate under Code Section 1274(d) in effect at the time the
taxpayer entered into the transaction reduced by any amount treated as ordinary
income with respect to any prior disposition or other termination of a position
that was held as part of the transaction, or (2) in the case of a noncorporate
taxpayer that has made an election under Code Section 163(d)(4) to have net
capital gains taxed as investment income at ordinary income rates.
If a Residual Owner sells a REMIC Residual Certificate at a loss, the loss
will not be recognized if, within six months before or after the sale of the
REMIC Residual Certificate, the Residual Owner purchases another residual in any
REMIC or any interest in a taxable mortgage pool (as defined in Code Section
7701(i)) comparable to a residual interest in a REMIC. The disallowed loss will
be allowed upon the sale of the other residual interest, or comparable interest,
if the rule referred to in the preceding sentence does not apply to that sale.
While the Committee Report states that this rule may be modified by Treasury
regulations, the REMIC Regulations do not address this issue and it is not clear
whether any modification will in fact be implemented or, if implemented, what
its precise nature or effective date would be.
The 1988 Act makes transfers of a REMIC Residual Certificate to specific
"disqualified organizations" subject to an additional tax on the transferor in
an amount equal to the maximum corporate tax rate applied to the present value,
using a discount rate equal to the AFR, of the total anticipated excess
inclusions with respect to the residual interest for the periods after the
transfer. For this purpose, "disqualified organizations" include:
(1) the United States, any state or political subdivision of a state, any
foreign government or international organization or any agency or
instrumentality of any of the foregoing,
(2) any tax-exempt entity (other than a Code Section 521 cooperative) which
is not subject to the tax on unrelated business income and
(3) any rural electrical or telephone cooperative.
The anticipated excess inclusions must be determined as of the date that the
REMIC Residual Certificate is transferred and must be based on events that have
occurred up to the time of the transfer, the Prepayment Assumption and any
required or permitted clean up calls or required liquidation provided for in the
REMIC's organizational documents. The tax generally is imposed on the transferor
of the REMIC Residual Certificate, except that it is imposed on an agent for a
disqualified organization if the transfer occurs through the agent. The
applicable Agreement requires, as a prerequisite to any transfer of a Residual
Certificate, the delivery to the Trustee of an affidavit of the transferee to
the effect that it is not a disqualified organization and contains other
provisions designed to render any attempted transfer of a Residual Certificate
to a disqualified organization void.
In addition, if a "pass-through entity" includes in income excess
inclusions with respect to a REMIC Residual Certificate, and a disqualified
organization is the record holder of an interest in the entity at any time
during any taxable year of the entity, then a tax will be imposed on the entity
equal to the product of (1) the amount of excess inclusions on the REMIC
Residual Certificate for the taxable year that are allocable to the interest in
the pass-through entity held by the disqualified organization and (2) the
highest marginal federal income tax rate imposed on corporations. A pass-through
entity will not be subject to this tax for any period with respect to any
holder, however, if the record holder of the interest in the entity furnishes to
the entity (1) the holder's social security number and a statement under penalty
of perjury that the social security number is that of the record holder or (2) a
statement under penalty of perjury that the record holder is not a disqualified
organization. For these purposes, a "pass-through entity" means any regulated
investment company, REIT, trust, partnership or other entities described in Code
Section 860E(e)(6). In addition, a person holding an interest in a pass-through
entity as a nominee for another person shall, with respect to the interest, be
treated as a pass-through entity.
The 1997 Act provides that for taxable years beginning after December 31,
1997, all partners of electing partnerships having 100 or more partners
("electing large partnerships") will be treated as disqualified organizations
for purposes of the tax imposed on pass-through entities if the electing large
partnerships hold residual interests in a REMIC. However, the electing large
partnership would be entitled to exclude the excess inclusion income from gross
income for purposes of determining the taxable income of the partners. When
applicable, the provisions would also disallow 70% of an electing large
partnership's miscellaneous itemized deductions, including deductions for
servicing and guaranty fees and any expenses of the REMIC, although the
remaining deductions would generally be allowed at the partnership level and
would not be subject to the 2% floor applicable to individual partners. See "G.
Pass-Through of Servicing Fees" below.
G. PASS-THROUGH OF SERVICING FEES
The general rule is that Residual Owners take into account taxable income
or net loss of the related REMIC Mortgage Pool. Under that rule, servicing
compensation of the Master Servicer and the subservicers, if any, will be
allocated to the holders of the REMIC Residual Certificates, and therefore will
not affect the income or deductions of holders of REMIC Regular Certificates.
However, in the case of a "single-class REMIC," the expenses and an equivalent
amount of additional gross income will be allocated among all holders of REMIC
Regular Certificates and REMIC Residual Certificates for purposes of the
limitations on the deductibility of particular miscellaneous itemized deductions
by individuals contained in Code Sections 56(b)(1) and 67. Generally, any holder
of a REMIC Residual Certificate and any holder of a REMIC Residual Certificate
issued by a "single-class REMIC" who is an individual, estate or trust,
including a person that holds an interest in a pass-through entity holding a
REMIC Certificate, will be able to deduct the expenses in determining regular
taxable income only to the extent that the expenses together with other
miscellaneous itemized deductions of the individual, estate or trust exceed 2%
of adjusted gross income; this holder may not deduct the expenses to any extent
in determining liability for alternative minimum tax. Accordingly, REMIC
Residual Certificates, and REMIC Regular Certificates receiving an allocation of
servicing compensation, may not be appropriate investments for individuals,
estates or trusts, and the persons should carefully consult with their own tax
advisers regarding the advisability of an investment in the Certificates.
A "single-class REMIC" is a REMIC that either (1) would be treated as an
investment trust under the provisions of Treasury Regulation Section
301.7701-4(c) in the absence of a REMIC election, or (2) is substantially
similar to an investment trust and is structured with the principal purpose of
avoiding the allocation of investment expenses to holders of REMIC Regular
Certificates. The Depositor intends, subject to some exceptions which, if
applicable, will be stated in the applicable prospectus supplement, to treat
each REMIC Mortgage Pool as other than a "single-class REMIC," consequently
allocating servicing compensation expenses and related income amounts entirely
to REMIC Residual Certificates and in no part to REMIC Regular Certificates.
H. PROHIBITED TRANSACTIONS AND OTHER POSSIBLE REMIC TAXES
The Code imposes a tax on REMIC Mortgage Pools equal to 100% of the net
income derived from "prohibited transactions." In general, a prohibited
transaction means the disposition of a Mortgage Loan other than pursuant to
specified exceptions, the receipt of income from a source other than a Mortgage
Loan or other permitted investments, the receipt of compensation for services,
or gain from the disposition of an asset purchased with the payments on the
Mortgage Loans for temporary investment pending distribution on the REMIC
Certificates. The Code also imposes a 100% tax on the value of any contribution
of assets to the REMIC after the "startup day", generally the day on which the
regular and residual interests are issued, other than pursuant to specified
exceptions, and subjects "net income from foreclosure property" to tax at the
highest corporate rate. It is not anticipated that a REMIC Mortgage Pool will
engage in any of these transactions or receive any of this income.
I. TERMINATION OF A REMIC TRUST FUND
In general, no special tax consequences will apply to a holder of a REMIC
Regular Certificate upon the termination of the REMIC Mortgage Pool by virtue of
the final payment or liquidation of the last Mortgage Loan remaining in the
REMIC Mortgage Pool. If a Residual Owner's adjusted basis in its REMIC Residual
Certificate at the time a termination occurs exceeds the amount of cash
distributed to the Residual Owner in liquidation of its interest, then, although
the matter is not entirely free from doubt, it appears that the Residual Owner
would be entitled to a loss, which could be a capital loss, equal to the amount
of the excess.
J. REPORTING AND OTHER ADMINISTRATIVE MATTERS OF REMICS
Reporting of interest income, including any original issue discount, with
respect to REMIC Regular Certificates is required annually, and may be required
more frequently under Treasury regulations. Some of the holders of REMIC Regular
Certificates who are generally exempt from information reporting on debt
instruments, including corporations, banks, registered securities or commodities
brokers, real estate investment trusts, registered investment companies, common
trust funds, charitable remainder annuity trusts and unitrusts, will be provided
interest and original issue discount income information and the information set
forth in the following paragraph upon request in accordance with the
requirements of the Treasury regulations. The information must be provided by
the later of 30 days after the end of the quarter for which the information was
requested, or two weeks after the receipt of the request. The REMIC Mortgage
Pool must also comply with rules requiring the face of a REMIC Certificate
issued at more than a de minimis discount to disclose the amount of original
issue discount and the issue date and requiring the information to be reported
to the Treasury Department.
The REMIC Regular Certificate information reports must include a statement
of the "adjusted issue price" of the REMIC Regular Certificate at the beginning
of each accrual period. In addition, the reports must include information
necessary to compute the accrual of any market discount that may arise upon
secondary trading of REMIC Regular Certificates. Because exact computation of
the accrual of market discount on a constant yield method would require
information relating to the holder's purchase price which the REMIC Mortgage
Pool may not have, it appears that this provision will only require information
pertaining to the appropriate proportionate method of accruing market discount.
The responsibility for complying with the foregoing reporting rules will be
borne by the Master Servicer.
For purposes of the administrative provisions of the Code, REMIC Pools will
be treated as partnerships, or disregarded as an entity separate from its
owners, and the holders of Residual Certificates will be treated as partners.
The Master Servicer will file federal income tax information returns on behalf
of the related REMIC Pool, and will be designated as agent for and will act on
behalf of the "tax matters person" with respect to the REMIC Pool in all
respects.
As agent for the tax matters person, the Master Servicer will, subject to
particular notice requirements and various restrictions and limitations,
generally have the authority to act on behalf of the REMIC and the Residual
Owners in connection with the administrative and judicial review of items of
income, deduction, gain or loss of the REMIC Mortgage Pool, as well as the REMIC
Mortgage Pool's classification. Residual Owners will generally be required to
report the REMIC Mortgage Pool items consistently with their treatment on the
REMIC Mortgage Pool's federal income tax information return and may in some
circumstances be bound by a settlement agreement between the Master Servicer, as
agent for the tax matters person, and the IRS concerning any REMIC Mortgage Pool
item. Adjustments made to the REMIC Mortgage Pool tax return may require a
Residual Owner to make corresponding adjustments on its return, and an audit of
the REMIC Mortgage Pool's tax return, or the adjustments resulting from an
audit, could result in an audit of a Residual Owner's return.
K. BACKUP WITHHOLDING WITH RESPECT TO REMIC CERTIFICATES
Payments of interest and principal on REMIC Regular Certificates, as well
as payment of proceeds from the sale of REMIC Certificates, may be subject to
the "backup withholding tax" under Code Section 3406 at a rate of 31% if
recipients of the payments fail to furnish to the payor particular information,
including their taxpayer identification numbers, or otherwise fail to establish
an exemption from the tax. Any amounts deducted and withheld from a distribution
to a recipient would be allowed as a credit against the recipient's federal
income tax. Furthermore, penalties may be imposed by the IRS on a recipient of
payments that is required to supply information but that does not do so in the
manner required.
L. FOREIGN INVESTORS IN REMIC CERTIFICATES
1. REMIC REGULAR CERTIFICATES
Except as qualified below, payments made on a REMIC Regular Certificate to
a REMIC Regular Certificateholder that is not a U.S. Person (a "non-U.S.
Person"), or to a person acting on behalf of a Certificateholder, generally will
be exempt from U.S. federal income and withholding taxes, provided that:
(1) the holder of the Certificate is not subject to U.S. tax as a result of
a connection to the United States other than ownership of the Certificate,
(2) the holder of the Certificate signs a statement under penalty of
perjury that certifies that the holder is a non-U.S. Person and the
beneficial owner, and provides the name and address of the holder and
(3) the last U.S. Person in the chain of payment to the holder receives the
statement from the holder or a financial institution holding on its behalf
and does not have actual knowledge that the statement is false.
If the holder does not qualify for exemption, distributions of interest,
including distributions in respect of accrued original issue discount, to the
holder may be subject to a withholding tax rate of 30%, subject to reduction
under an applicable tax treaty.
"U.S. Person" means a citizen or resident of the United States, a
corporation, partnership or other entity treated as a corporation or partnership
for United States federal income tax purposes, created or organized in or under
the laws of the United States or any political subdivision of the United States,
unless, in the case of a partnership, future Treasury regulations provide
otherwise, an estate that is subject to U.S. federal income tax regardless of
the source of its income, or a trust other than a "foreign trust," as defined in
Code Section 7701(a)(31).
Holders of REMIC Regular Certificates should be aware that the IRS may take
the position that exemption from U.S. withholding taxes does not apply to a
holder that also directly or indirectly owns 10% or more of the REMIC Residual
Certificates.
2. REMIC RESIDUAL CERTIFICATES
Amounts paid to a Residual Owner that is a non-U.S. Person generally will
be treated as interest for purposes of applying the withholding tax on non-U.S.
Persons with respect to income on its REMIC Residual Certificate. However, it is
unclear whether distributions on REMIC Residual Certificates will be eligible
for the general exemption from withholding tax that applies to REMIC Regular
Certificates as described above. Treasury regulations provide that, for purposes
of the portfolio interest exception, payments to the foreign owner of a REMIC
Residual Certificate are to be considered paid on the obligations held by the
REMIC, rather than on the Certificate itself. These payments will thus only
qualify for the portfolio interest exception if the underlying obligations held
by the REMIC would so qualify. The withholding tax generally is imposed at a
rate of 30% but is subject to reduction under any tax treaty applicable to the
Residual Owner. However, there is no exemption from withholding tax nor may the
rate of the tax be reduced, under a tax treaty or otherwise, with respect to any
distribution of income that is an excess inclusion. Although no regulations have
been proposed or adopted addressing withholding on residual interests held by
non-U.S. Persons, the provisions of the REMIC Regulations, described below,
relating to the transfer of residual interests to non-U.S. Persons can be read
as implying that withholding with respect to excess inclusion income is to be
determined by reference to the amount of the accrued excess inclusion income
rather than to the amount of cash distributions. If the IRS were successfully to
assert this position, cash distributions on Residual Certificates held by
non-U.S. Persons could be subject to withholding at rates as high as 100%,
depending on the relationship of accrued excess inclusion income to cash
distributions with respect to the Residual Certificates. See " -- Taxation of
Owners of REMIC Residual Certificates -- Excess Inclusions."
Some restrictions relating to transfers of REMIC Residual Certificates to
and by investors who are non-U.S. Persons are also imposed by the REMIC
Regulations. First, transfers of REMIC Residual Certificates to a non-U.S.
Person that have "tax avoidance potential" are disregarded for all federal
income tax purposes. If the transfer is disregarded, the purported transferor of
a REMIC Residual Certificate to a non-U.S. Person continues to remain liable for
any taxes due with respect to the income on the REMIC Residual Certificate as if
held by the U.S. Person. A transfer of a REMIC Residual Certificate has tax
avoidance potential unless, at the time of the transfer, the transferor
reasonably expects (1) that the REMIC will distribute to the transferee Residual
Certificateholder amounts that will equal at least 30% of each excess inclusion
and (2) that the amounts will be distributed at or after the time at which the
excess inclusion accrues and not later than the close of the calendar year
following the calendar year of accrual. This rule does not apply to transfers if
the income from the REMIC Residual Certificate is taxed in the hands of the
transferee as income effectively connected with the conduct of a U.S. trade or
business. Second, if a non-U.S. Person transfers a REMIC Residual Certificate to
a U.S. Person, or to a non-U.S. Person in whose hands income from the REMIC
Residual Certificate would be effectively connected, and the transfer has the
effect of allowing the transferor to avoid tax on accrued excess inclusions,
that transfer is disregarded for all federal income tax purposes and the
purported non-U.S. Person transferor continues to be treated as the owner of the
REMIC Residual Certificate. Thus, the REMIC's liability to withhold 30% of the
accrued excess inclusions is not terminated even though the REMIC Residual
Certificate is no longer held by a non-U.S. Person.
Recently issued Treasury regulations (the "Final Withholding Regulations"),
which are generally effective with respect to payments made after December 31,
2000, consolidate and modify the current certification requirements and means by
which a holder may claim exemption from United States federal income tax
withholding and provide particular presumptions regarding the status of holders
when payments to the holders cannot be reliably associated with appropriate
documentation provided to the payor. All holders of REMIC Regular Certificates
and REMIC Residual Certificates should consult their tax advisers regarding the
application of the Final Withholding Regulations.
M. STATE AND LOCAL TAXATION
Many states do not automatically conform to changes in the federal income
tax laws. Consequently, a REMIC Mortgage Pool that would not qualify as a fixed
investment trust for federal income tax purposes may be characterized as a
corporation, a partnership or some other entity for purposes of state income tax
law. The characterization could result in entity level income or franchise
taxation of the REMIC Mortgage Pool formed in, owning mortgages or property in,
or having servicing activity performed in a state without conforming REMIC
provisions in its income or franchise tax law. Further, REMIC Regular
Certificateholders resident in non-conforming states may have their ownership of
REMIC Regular Certificates characterized as an interest other than debt of the
REMIC, for example, stock or a partnership interest. Investors are advised to
consult their tax advisers concerning the state and local income tax
consequences of their purchase and ownership of REMIC Regular Certificates.
II. NON-REMIC TRUST FUNDS
The discussion that follows relates only to Non-REMIC Trust Funds that have
not issued Trust Certificates structured as debt for federal income tax purposes
and that are not intended to be treated as partnerships for federal income tax
purposes. For a discussion of Trust Certificates in a Non-REMIC Trust Fund which
have been structured as debt for federal income tax purposes, see "IV.
Characterization of the Trust Certificates as Indebtedness." For a discussion of
Trust Certificates and Notes in a Non-REMIC Trust Fund which is intended to be
treated as a partnership for federal income tax purposes, see "V. Tax
Characterization as a Partnership."
A. CLASSIFICATION OF TRUST FUNDS
With respect to each series of Trust Certificates, Special Tax Counsel will
deliver their opinion to the effect that the arrangements pursuant to which the
Trust Fund will be administered and the Trust Certificates will be issued will
not be classified as an association taxable as a corporation and that each Trust
Fund will be classified as a grantor trust whose taxation will be governed by
the provisions of Subpart E, Part I of Subchapter J of Chapter 1 of Subtitle A
of the Code.
B. CHARACTERIZATION OF INVESTMENTS IN TRUST CERTIFICATES
1. TRUST FRACTIONAL CERTIFICATES
In the case of Trust Fractional Certificates, counsel to the Depositor will
deliver an opinion that, in general (and subject to the discussion below of
Contracts and under " -- Buydown Mortgage Loans"), (1) Trust Fractional
Certificates held by a thrift institution taxed as a "domestic building and loan
association" will represent "loans . . . secured by an interest in real
property" within the meaning of Code Section 7701 (a)(19)(C)(v), (2) Trust
Fractional Certificates held by a REIT will represent "real estate assets"
within the meaning of Code Section 856(c)(4)(A) and interest on Trust Fractional
Certificates will be considered "interest on obligations secured by mortgages on
real property or on interests in real property" within the meaning of Code
Section 856(c)(3)(B) and (3) Trust Fractional Certificates acquired by a REMIC
in accordance with the requirements of Code Section 860G(a)(3)(A)(i) and (ii) or
Section 860G(a)(4)(B) will be treated as "qualified mortgages" within the
meaning of Code Section 860D(a)(4). In the case of a Trust Fractional
Certificate evidencing interests in Contracts, the Certificates will qualify for
the treatment described in (1) through (3) of the preceding sentence only to the
extent of the fraction of the Certificate corresponding to the fraction of the
Contract Pool that consists of Contracts that would receive the treatment if
held directly by the Trust Fractional Certificateholder.
2. TRUST INTEREST CERTIFICATES
With respect to each Series of Certificates, Special Tax Counsel will
advise the Depositor that in their opinion, based on the legislative history, a
REMIC that acquires a Trust Interest Certificate in accordance with the
requirements of Code Section 860G(a)(3) or Section 860G(a)(4) will be treated as
owning a "Qualified Mortgage" within the meaning of Code Section 860(G)(a)(3).
Although there appears to be no policy reason not to accord to Trust
Interest Certificates the treatment described above for Trust Fractional
Certificates, there is no authority addressing the characterization for
instruments similar to Trust Interest Certificates. Consequently, it is unclear
to what extent, if any, (1) a Trust Interest Certificate owned by a "domestic
building and loan association" within the meaning of Code Section 7701(a)(19)
would be considered to represent "loans . . . secured by an interest in real
property" within the meaning of Code Section 7701(a)(19)(C)(v) or (2) a REIT
which owns a Trust Interest Certificate would be considered to own "real estate
assets" within the meaning of Code Section 856(c)(4)(A), and interest income on
the assets would be considered "interest on obligations secured by mortgages on
real property" within the meaning of Code Section 856(c)(3)(B). Prospective
purchasers to which characterization of an investment in Trust Interest
Certificates is material should consult their own tax advisers regarding whether
the Trust Interest Certificates, and the income from the Trust Interest
Certificates, will be so characterized.
3. BUYDOWN MORTGAGE LOANS
It is contemplated that the assets of particular Trust Funds may include
Buydown Mortgage Loans. The characterization of an investment in Buydown
Mortgage Loans will depend upon the precise terms of the related Buydown
Agreement. There are no directly applicable precedents with respect to the
federal income tax treatment or the characterization of investments in Buydown
Mortgage Loans. Accordingly, holders of Trust Certificates should consult their
own tax advisers with respect to characterization of investments in Trust Funds
that include Buydown Mortgage Loans.
Although the matter is not entirely free from doubt, the portion of a Trust
Certificate representing an interest in Buydown Mortgage Loans may be considered
to represent an investment in "loans . . . secured by an interest in real
property" within the meaning of Code Section 7701(a)(19)(C)(v) to the extent the
outstanding principal balance of the Buydown Mortgage Loans exceeds the amount
held from time to time in the Buydown Fund. It is also possible that the entire
interest in Buydown Mortgage Loans may be so considered, because the fair market
value of the real property securing each Buydown Mortgage Loan will exceed the
amount of the loan at the time it is made.
For similar reasons, the portion of the Trust Certificate representing an
interest in Buydown Mortgage Loans may be considered to represent "real estate
assets" within the meaning of Code Section 856(c)(4)(A). Purchasers and their
tax advisers are advised to review Section 1.856-5(c)(1)(i) of the Treasury
regulations, which specifies that if a mortgage loan is secured by both real
property and by other property and the value of the real property alone equals
or exceeds the amount of the loan, then all interest income will be treated as
"interest on obligations secured by mortgages on real property" within the
meaning of Code Section 856(c)(3)(B).
C. TAXATION OF OWNERS OF TRUST FRACTIONAL CERTIFICATES
Each holder of a Trust Fractional Certificate (a "Trust Fractional
Certificateholder") will be treated as the owner of an undivided percentage
interest in the principal of, and possibly a different undivided percentage
interest in the interest portion of, each of the Trust Funds included in a
Mortgage Pool. Accordingly, each Trust Fractional Certificateholder must report
on its federal income tax return its allocable share of income from its
interests, as described below, at the same time and in the same manner as if it
had held directly interests in the Mortgage Loans and received directly its
share of the payments on the Mortgage Loans. Because those fractional interests
having differing undivided percentage interests in principal and interest
represent interests in "stripped bonds" or "stripped coupons" within the meaning
of Code Section 1286, the interests would be considered to be newly issued debt
instruments, and thus to have no market discount or premium, and the amount of
original issue discount may differ from the amount of original issue discount on
the Mortgage Loans and the amount includible in income on account of a Trust
Fractional Certificate may differ significantly from the amount payable on a
Trust Fractional Certificate from payments of interest on the Mortgage Loans.
Each Trust Fractional Certificateholder may report and deduct its allocable
share of the servicing and related fees and expenses paid to or retained by the
Depositor at the same time, to the same extent, and in the same manner as the
items would have been reported and deducted had it held directly interests in
the Mortgage Loans and paid directly its share of the servicing and related fees
and expenses. A holder of a Trust Fractional Certificate who is an individual,
estate or trust will be allowed a deduction for servicing fees in determining
its regular tax liability only to the extent that the aggregate of the holder's
miscellaneous itemized deductions exceeds two percent of the holder's adjusted
gross income. In addition, the amount of itemized deductions otherwise allowable
for the taxable year for an individual whose adjusted gross income exceeds the
"applicable amount", $100,000 (or $50,000 in the case of a separate return by a
married individual) adjusted for changes in the cost of living subsequent to
1990, will be reduced by the lesser of (1) 3 percent of the excess of adjusted
gross income over the applicable amount, or (2) 80 percent of the amount of
itemized deductions allowable for the taxable year. For taxable years beginning
after December 31, 1997, in the case of a partnership that has 100 or more
partners and elects to be treated as an "electing large partnership," 70 percent
of the partnership's miscellaneous itemized deductions will be disallowed,
although the remaining deductions will generally be allowed at the partnership
level and will not be subject to the 2 percent flood that would otherwise be
applicable to individual partners. Moreover, a holder of a Trust Fractional
Certificate that is not a corporation cannot deduct the fees for purposes of the
alternative minimum tax, if applicable. Amounts received by Trust Fractional
Certificateholders in lieu of amounts due with respect to any Mortgage Loan but
not received by the Depositor from the Mortgagor will be treated for federal
income tax purposes as having the same character as the payments which they
replace.
Purchasers of Trust Fractional Certificates identified in the applicable
prospectus supplement as representing interests in Stripped Mortgage Loans
should read the material under the headings " -- Application of Stripped Bond
Rules," "-- Market Discount and Premium" and " -- Allocation of Purchase Price"
for a discussion of particular rules applicable to their Certificates. A
"Stripped Mortgage Loan" means a Mortgage Loan having a Retained Yield (as that
term is defined below) or a Mortgage Loan included in a Trust Fund having either
Trust Interest Certificates or more than one class of Trust Fractional
Certificates or identified in the prospectus supplement as related to a Class of
Trust Certificates identified as representing interests in Stripped Mortgage
Loans.
Purchasers of Trust Fractional Certificates identified in the applicable
prospectus supplement as representing interests in Unstripped Mortgage Loans
should read the material under the headings " -- Treatment of Unstripped
Certificates," "-- Market Discount and Premium," and " -- Allocation of Purchase
Price" for a discussion of particular rules applicable to their Certificates.
However, the IRS has indicated that under some circumstances it will view a
portion of servicing and related fees and expenses paid to or retained by the
Master Servicer or sub-servicers as an interest in the Mortgage Loans,
("Retained Yield"). If this view were sustained with respect to a particular
Trust Fund, the purchasers would be subject to the rules set forth under " --
Application of Stripped Bond Rules" rather than those under " -- Treatment of
Unstripped Certificates." The Depositor does not expect any servicing
compensation payable to the Master Servicer, as described under "Description of
the Securities -- Servicing Compensation and Payment of Expenses," to constitute
a retained interest in the Mortgage Loans; nevertheless, this expectation
generally will be a matter of uncertainty, and prospective purchasers are
advised to consult their own tax advisers with respect to the existence of a
retained interest and any effects on investment in Trust Fractional
Certificates.
1. APPLICATION OF STRIPPED BOND RULES
Each Trust Fund will consist of an interest in each of the Mortgage Loans
relating to the Trust Fund, exclusive of the Depositor's Retained Yield, if any.
With respect to each Series of Certificates, Special Tax Counsel will advise the
Depositor that, in their opinion, any Retained Yield will be treated for federal
income tax purposes as an ownership interest retained by the Depositor in a
portion of each interest payment on the underlying Mortgage Loans. The sale of
the Trust Certificates associated with any Trust Fund for which there is a class
of Trust Interest Certificates or two or more Classes of Trust Fractional
Certificates bearing different interest rates or of Trust Certificates
identified in the prospectus supplement as representing interests in Stripped
Mortgage Loans, subject to some exceptions which, if applicable, will be stated
in the applicable prospectus supplement, will be treated for federal income tax
purposes as having effected a separation in ownership between the principal of
each Mortgage Loan and some or all of the interest payable on the Mortgage Loan.
As a consequence, each Stripped Mortgage Loan will become subject to the
"stripped bond" rules of the Code (the "Stripped Bond Rules"). The effect of
applying those rules will generally be to require each Trust Fractional
Certificateholder to accrue and report income attributable to its share of the
principal and interest on each of the Stripped Mortgage Loans as original issue
discount on the basis of the yield to maturity of the Stripped Mortgage Loans,
as determined in accordance with the provisions of the Code dealing with
original issue discount. For a description of the general method of calculating
original issue discount, see " -- REMIC Trust Funds -- Taxation of Owners of
REMIC Regular Certificates -- Original Issue Discount." The yield to maturity of
a Trust Fractional Certificateholder's interest in the Stripped Mortgage Loans
will be calculated taking account of the price at which the holder purchased the
Certificate and the holder's share of the payments of principal and interest to
be made on the Certificate. Although the provisions of the Code and the OID
Regulations do not directly address the treatment of instruments similar to
Trust Fractional Certificates, in reporting to Trust Fractional
Certificateholders the Trustee intends to treat the Certificates as a single
obligation with payments corresponding to the aggregate of the payments
allocable to the Certificates from each of the Mortgage Loans, and to determine
the amount of original issue discount on the Certificates accordingly. See " --
Aggregate Reporting."
Under Treasury regulations, original issue discount so determined with
respect to a particular Stripped Mortgage Loan may be considered to be zero
under the de minimis rule described above, in which case it is treated as market
discount. See " -- REMIC Trust Funds -- Taxation of Owners of REMIC Regular
Certificates -- Original Issue Discount." Those regulations also provide that
original issue discount so determined with respect to a particular Stripped
Mortgage Loan will be treated as market discount if the rate of interest on the
Stripped Mortgage Loan, including a reasonable Servicing Fee, is no more than
one percentage point less than the unstripped rate of interest. See " -- Market
Discount and Premium." The Trustee intends to apply the foregoing de minimis and
market discount rules on an aggregate poolwide basis, although it is possible
that investors may be required to apply them on a loan by loan basis. The loan
by loan information required for the application of those rules may not be
available. See " -- Aggregate Reporting." Unless the market discount rules
apply, subsequent purchasers of the Certificates may be required to include
"original issue discount" in an amount computed using the price at which the
subsequent purchaser purchased the Certificates.
VARIABLE RATE CERTIFICATES. Purchasers of Trust Fractional Certificates
bearing a variable rate of interest should be aware that there is considerable
uncertainty concerning the application of the OID Regulations to Mortgage Loans
bearing a variable rate of interest. Although the regulations are subject to a
different interpretation, as discussed below, in the absence of other contrary
authority in preparing reports furnished to Certificateholders the Trustee
intends to treat Stripped Mortgage Loans bearing a variable rate of interest,
other than those treated as having market discount pursuant to the regulations
described above, as subject to the provisions in the regulations governing
variable rate debt instruments. The effect of the application of the provisions
generally will be to cause Certificateholders holding Trust Fractional
Certificates bearing interest at a Single Variable Rate or at a Multiple
Variable Rate (as defined above under " -- REMIC Trust Funds -- Taxation of
Owners of REMIC Regular Certificates -- Original Issue Discount") to accrue
original issue discount and interest as though the value of each variable rate
were a fixed rate, which is:
(a) for each qualified floating rate, the value of each rate as of the
Closing Date, with appropriate adjustment for any differences in intervals
between interest adjustment dates,
(b) for a qualified inverse floating rate, the value of the rate as of
Closing Date and
(c) for any other objective rate, the fixed rate that reflects the yield
that is reasonably expected for the Trust Fractional Certificate.
If the interest paid or accrued with respect to the Variable Rate Trust
Fractional Certificate during an accrual period differs from the assumed fixed
interest rate, the difference will be an adjustment, to interest or original
issue discount, as applicable, to the Certificateholder's taxable income for the
taxable period or periods to which the difference relates.
Prospective purchasers of Trust Fractional Certificates bearing a variable
rate of interest should be aware that the provisions in the OID Regulations
applicable to variable rate debt instruments may not apply to particular
adjustable and variable rate mortgage loans, possibly including the Mortgage
Loans, or to Stripped Certificates representing interests in the Mortgage Loans.
If variable rate Trust Fractional Certificates are not governed by the
provisions of the OID Regulations applicable to variable rate debt instruments,
the Certificates may be subject to the provisions of the 1996 Contingent Debt
Regulations. The application of those provisions to instruments including the
Trust Fractional Certificates is subject to differing interpretations.
Prospective purchasers of variable rate Trust Fractional Certificates are
advised to consult their tax advisers concerning the tax treatment of the
Certificates.
AGGREGATE REPORTING. The Trustee intends in reporting information relating
to original issue discount to Certificateholders to provide the information on
an aggregate poolwide basis. Applicable law is unclear, however, and it is
possible that investors may be required to compute original issue discount on a
Mortgage Loan by Mortgage Loan basis, or on the basis of the rights to
individual payments, taking account of an allocation of their basis in the
Certificates among the interests in the various Mortgage Loans represented by
the Certificates according to their respective fair market values. Investors
should be aware that it may not be possible to reconstruct after the fact
sufficient mortgage by mortgage information should a computation on that basis
be required by the IRS.
Because the treatment of the Certificates under the OID Regulations is both
complicated and uncertain, Certificateholders should consult their tax advisers
to determine the proper method of reporting amounts received or accrued on
Certificates.
2. TREATMENT OF UNSTRIPPED CERTIFICATES
Mortgage Loans in a Trust Fund for which there is neither any Class of
Trust Interest Certificates, nor more than one Class of Trust Fractional
Certificates, nor any Retained Yield and which are not otherwise identified in
the prospectus supplement as being stripped mortgage loans ("Unstripped Mortgage
Loans") will be treated as wholly owned by the Trust Fractional
Certificateholders of a Trust Fund. Trust Fractional Certificateholders using
the cash method of accounting must take into account their pro rata share of
original issue discount as it accrues and qualified stated interest (as
described in " -- REMIC Trust Funds -- Taxation of Owners of REMIC Regular
Certificates -- Original Issue Discount") from Unstripped Mortgage Loans as and
when collected by the Trustee. Trust Fractional Certificateholders using an
accrual method of accounting must take into account their pro rata shares of
qualified stated interest from Unstripped Mortgage Loans as it accrues or is
received by the Trustee, whichever is earlier. Under the 1997 Act, gain or loss
from the termination of a newly originated mortgage will be treated as capital
gain or loss.
Code Sections 1272 through 1275 provide rules for the current inclusion in
income of original issue discount on obligations issued by natural persons on or
after March 2, 1984. Generally those sections provide that original issue
discount should be included in income on the basis of a constant yield to
maturity. However, the application of the original issue discount rules to
mortgages is unclear in some respects. The Treasury Department has issued the
OID Regulations relating to original issue discount, which generally address the
treatment of mortgages issued on or after April 4, 1994. The OID Regulations
provide a new de minimis rule for determining whether particular self-amortizing
installment obligations, including the Mortgage Loans, are to be treated as
having original issue discount. These obligations have original issue discount
if the points charged at origination, or other loan discount, exceed the greater
of approximately one-sixth of one percent times the number of full years to
final maturity or one-fourth of one percent times weighted average maturity. For
a description of the general method of calculating the amount of original issue
discount see " -- REMIC Trust Funds -- Taxation of Owners of REMIC Regular
Certificates -- Original Issue Discount" and " -- Application of Stripped Bond
Rules -- Variable Rate Certificates."
A subsequent purchaser of a Trust Fractional Certificate that purchases the
Certificate at a cost, not including payment for accrued qualified stated
interest, less than its allocable portion of the aggregate of the remaining
stated redemption prices at maturity of the Unstripped Mortgage Loans will also
be required to include in gross income, for each day on which it holds the Trust
Fractional Certificate, its allocable share of the daily portion of original
issue discount with respect to each Unstripped Mortgage Loan, but reduced, if
the cost of the subsequent purchaser's interest in the Unstripped Mortgage Loan
exceeds its "adjusted issue price," by an amount equal to the product of (1) the
daily portion and (2) a constant fraction, whose numerator is the excess and
whose denominator is the sum of the daily portions of original issue discount
allocable to the subsequent purchaser's interest for all days on or after the
day of purchase. The adjusted issue price of an Unstripped Mortgage Loan on any
given day is equal to the sum of the adjusted issue price, or, in the case of
the first accrual period, the issue price, of the Unstripped Mortgage Loan at
the beginning of the accrual period during which the day occurs and the daily
portions of original issue discount for all days during the accrual period prior
to the day, reduced by the aggregate amount of payments made during the accrual
period prior to the day other than payments of qualified stated interest.
3. MARKET DISCOUNT AND PREMIUM
In general, if the Stripped Bond Rules do not apply to a Trust Fractional
Certificate, a purchaser of a Trust Fractional Certificate will be treated as
acquiring market discount bonds to the extent that the share of the purchaser's
purchase price allocable to any Unstripped Mortgage Loan is less than its
allocable share of the "adjusted issue price" of the Mortgage Loan. See " --
Treatment of Unstripped Certificates" and " -- Application of Stripped Bond
Rules." Thus, with respect to the Mortgage Loans, a holder will be required,
under Code Section 1276, to include as ordinary income the previously
unrecognized accrued market discount in an amount not exceeding each principal
payment on any the Mortgage Loans at the time each principal payment is received
or due, in accordance with the purchaser's method of accounting, or upon a sale
or other disposition of the Certificate. In general, the amount of market
discount that has accrued is determined on a ratable basis. A Trust Fractional
Certificateholder may, however, elect to determine the amount of accrued market
discount on a constant yield to maturity basis. This election is made on a
bond-by-bond basis and is irrevocable. In addition, the description of the
market discount rules in " -- REMIC Trust Funds -- Taxation of Owners of REMIC
Regular Certificates -- Market Discount and Premium" with respect to:
(1) conversion to ordinary income of a portion of any gain recognized on
sale or exchange of a market discount bond,
(2) deferral of interest expense deductions,
(3) the de minimis exception from the market discount rules and
(4) the elections to include in income either market discount or all
interest, discount and premium as they accrue,
is also generally applicable to Trust Fractional Certificates. Treasury
regulations implementing the market discount rules, including the 1986 Act
amendments to the regulations, have not yet been issued and investors therefore
should consult their own tax advisers regarding the application of these rules.
If a Trust Fractional Certificate is purchased at a premium, under existing
law the premium must be allocated among each of the Mortgage Loans, on the basis
of their relative fair market values. The portion of any premium allocated to
Unstripped Mortgage Loans originated after September 27, 1985 can be amortized
and deducted under the provisions of the Code relating to amortizable bond
premium.
The Bond Premium Amortization Regulations generally provide that
amortizable bond premium is amortized over the term of a note by offsetting the
qualified stated interest allocable to an accrual period with the amortizable
bond premium allocable to the period using a specified constant yield method. To
the extent that the amortizable bond premium allocated to an accrual period
exceeds the qualified stated interest allocable to the period, the excess is
deductible under Code Section 171 to the extent the excess does not exceed the
difference between (1) prior interest inclusions over (2) the Bond Premium
Amortization Limit, with the excess over the Bond Premium Amortization Limit
carried forward to the next accrual period and treated as amortizable bond
premium allocable to that period. The Bond Premium Amortization Regulations are
effective for notes acquired on or after March 2, 1998. However, if a holder
makes the election to amortize bond premium for the taxable year containing
March 2, 1998, or any subsequent taxable year, the Treasury regulations would
apply to debt instruments held on or after the first day for the taxable year in
which the election is made. The Bond Premium Amortization Regulations
specifically do not apply to a pool of prepayable debt instruments subject to
Code Section 1272(a)(6). However, by analogy to these regulations, it may be
possible to deduct any premium in excess of interest income to the extent of
prior accrual of interest.
4. ALLOCATION OF PURCHASE PRICE
As noted above, a purchaser of a Trust Fractional Certificate relating to
Unstripped Mortgage Loans will be required to allocate the purchase price of the
Trust Fractional Certificate to the undivided interest it acquires in each of
the Mortgage Loans, in proportion to the respective fair market values of the
portions of the Mortgage Loans included in the Trust Fund at the time the
Certificate is purchased. The Depositor believes that it may be reasonable to
make the allocation in proportion to the respective principal balances of the
Mortgage Loans, where the interests in the Mortgage Loans represented by a Trust
Fractional Certificate have a common remittance rate and other common
characteristics, and otherwise so as to produce a common yield for each interest
in a Mortgage Loan, provided the Mortgage Loans are not so diverse as to evoke
differing prepayment expectations. However, if there is any significant
variation in interest rates among the Mortgage Loans, a disproportionate
allocation of the purchase price taking account of prepayment expectations may
be required.
D. TAXATION OF OWNERS OF TRUST INTEREST CERTIFICATES
With respect to each Series of Certificates, Special Tax Counsel will
advise the Depositor that, in their opinion, each holder of a Trust Interest
Certificate (a "Trust Interest Certificateholder") will be treated as the owner
of an undivided interest in the interest portion ("Interest Coupon") of each of
the Mortgage Loans. Accordingly, and subject to the discussion under
"Application of Stripped Bond Rules," each Trust Interest Certificateholder is
treated as owning its allocable share of the entire Interest Coupon from the
Mortgage Loans, will report income as described below, and may deduct its
allocable share of the servicing and related fees and expenses paid to or
retained by the Depositor at the same time and in the same manner as the items
would have been reported under the Trust Interest Certificateholder's tax
accounting method had it held directly an interest in the Interest Coupon from
the Mortgage Loans, received directly its share of the amounts received with
respect to the Mortgage Loans and paid directly its share of the servicing and
related fees and expenses. An individual, estate or trust holder of a Trust
Interest Certificate will be allowed a deduction for servicing fees in
determining its regular tax liability only to the extent that the aggregate of
the holder's miscellaneous itemized deductions exceeds two percent of the
holder's adjusted gross income. In addition, the amount of itemized deductions
otherwise allowable for the taxable year for an individual whose adjusted gross
income exceeds the "applicable amount", $100,000 (or $50,000 in the case of a
separate return by a married individual), adjusted for changes in the cost of
living subsequent to 1990, will be reduced by the lesser of (1) 3 percent of the
excess of adjusted gross income over the applicable amount, or (2) 80 percent of
the amount of itemized deductions allowable for the taxable year. For taxable
years beginning after December 31, 1997, in the case of a partnership that has
100 or more partners and elects to be treated as an "electing large
partnership," 70 percent of the partnership's miscellaneous itemized deductions
will be disallowed, although the remaining deductions will generally be allowed
at the partnership level and will not be subject to the 20 percent flood that
would otherwise be applicable to individual partners. Moreover, a holder of a
Trust Fractional Certificate that is not a corporation cannot deduct the fees
for purposes of the alternative minimum tax, if applicable. Amounts, if any,
received by Trust Interest Certificateholders in lieu of amounts due with
respect to any Mortgage Loan but not received by the Master Servicer from the
Mortgagor will be treated for federal income tax purposes as having the same
character as the payment which they replace.
1. APPLICATION OF STRIPPED BOND RULES
A Trust Interest Certificate will consist of an undivided interest in the
Interest Coupon of each of the Mortgage Loans. With respect to each Series of
Certificates, Special Tax Counsel will advise the Depositor that, in their
opinion a Trust Interest Certificate will be treated for federal income tax
purposes as comprised of an ownership interest in a portion of the Interest
Coupon of each of the Mortgage Loans (a "Stripped Interest") separated by the
Depositor from the right to receive principal payments and the remainder, if
any, of each interest payment on the underlying Mortgage Loan. As a consequence,
the Trust Interest Certificates will become subject to the Stripped Bond Rules.
Each Trust Interest Certificateholder will be required to apply the Stripped
Bond Rules to its interest in the Interest Coupon under the method prescribed by
the Code, taking account of the price at which the holder purchased the Trust
Interest Certificate and the Trust Interest Certificateholder's share of the
scheduled payment to be made on the Trust Interest Certificate. The Stripped
Bond Rules generally require a holder of Stripped Coupons to accrue and report
income from the Stripped Coupons daily on the basis of the yield to maturity of
the stripped bonds or coupons, as determined in accordance with the provisions
of the Code dealing with original issue discount. For a discussion of the
general method of calculating original issue discount, see "REMIC Trust Funds --
Taxation of Owners of REMIC Regular Certificates -- Original Issue Discount."
The provisions of the Code and the OID Regulations do not directly address the
treatment of instruments similar to Trust Interest Certificates. In reporting to
Trust Interest Certificateholders the Certificates will be treated as a single
obligation with payment corresponding to the aggregate of the payments allocable
to the Certificates from each of the Mortgage Loans. See "Aggregate Reporting."
Alternatively, Trust Interest Certificateholders may be required by the IRS
to treat each scheduled payment on each Stripped Interest, or their interests in
all scheduled payments from each of the Stripped Interests, as a separate
obligation for purposes of allocating purchase price and computing original
issue discount.
The tax treatment of the Trust Interest Certificates with respect to the
application of the original issue discount provisions of the Code is currently
unclear. However, the Trustee intends to treat each Trust Interest Certificate
as a single debt instrument issued on the day it is purchased for purposes of
calculating any original issue discount. Original issue discount with respect to
a Trust Interest Certificate must be included in ordinary gross income for
federal income tax purposes as it accrues in accordance with a constant yield
method that takes into account the compounding of interest and the accrual of
income may be in advance of the receipt of any cash attributable to the income.
In general, the rules for accruing original issue discount set forth under " --
REMIC Trust Funds -- Taxation of Owners of REMIC Regular Certificates --
Original Issue Discount" apply. For purposes of applying the original issue
discount provisions of the Code, the issue price used in reporting original
issue discount with respect to a Trust Interest Certificate will be the purchase
price paid by each holder of a Trust Interest Certificate and the stated
redemption price at maturity may include the aggregate amount of all payments to
be made with respect to the Trust Interest Certificate whether or not
denominated as interest.
AGGREGATE REPORTING. The Trustee intends in reporting information relating
to original issue discount to Certificateholders to provide the information on
an aggregate poolwide basis. Applicable law is unclear, however, and it is
possible that investors may be required to compute original issue discount
either on a Mortgage Loan by Mortgage Loan basis or on a payment by payment
basis taking account of an allocation of their basis in the Certificates among
the interests in the various Mortgage Loans represented by the Certificates
according to their respective fair market values. Investors should be aware that
it may not be possible to reconstruct after the fact sufficient mortgage by
mortgage information should a computation on that basis be required by the IRS.
Because the treatment of the Trust Interest Certificates under current law
and the potential application of the 1996 Contingent Debt Regulations are both
complicated and uncertain, Trust Interest Certificateholders should consult
their tax advisers to determine the proper method of reporting amounts received
or accrued on Trust Interest Certificates.
E. PREPAYMENTS
The 1986 Act contains a provision requiring original issue discount on
particular obligations issued after December 31, 1986 to be calculated taking
into account a prepayment assumption and requiring the discount to be taken into
income on the basis of a constant yield to assumed maturity taking account of
actual prepayments. The 1997 Act provides that the prepayment rules of Code
Section 1272(a)(6), discussed above, will also apply to pools of debt
instruments the yield on which may be affected by reason of prepayments. Trust
Fractional Certificateholders and Trust Interest Certificateholders should
consult their tax advisers as to the proper reporting of income from Trust
Fractional Certificates and Trust Interest Certificates, as the case may be, in
the light of the possibility of prepayment and, as to the possible application
of the 1996 Contingent Debt Regulations.
F. SALES OF TRUST CERTIFICATES
If a Certificate is sold, gain or loss will be recognized by the holder of
the Certificate in an amount equal to the difference between the amount realized
on the sale and the Certificateholder's adjusted tax basis in the Certificate.
The tax basis will equal the Certificateholder's cost for the Certificate,
increased by any original issue or market discount with respect to the interest
in the Mortgage Loans represented by the Certificate previously included in
income, and decreased by any deduction previously allowed for premium and by the
amount of payments, other than payments of qualified stated interest, previously
received with respect to the Certificate. The portion of any gain attributable
to accrued market discount not previously included in income will be ordinary
income, as will gain attributable to a Certificate which is part of a
"conversion transaction" or which the holder elects to treat as ordinary. See "
-- REMIC Trust Funds -- Sales of REMIC Certificates" above. Any remaining gain
or any loss will be capital gain or loss if the Certificate was held as a
capital asset except to the extent that code Section 582(c) applies to the gain
or loss. Any gain or loss would be long-term capital gain or loss if the
Certificateholder's holding period exceeded one year.
G. TRUST REPORTING
The Master Servicer will furnish to each holder of a Trust Fractional
Certificate with each distribution a statement setting forth the amount of the
distribution allocable to principal on the underlying Mortgage Loans and to
interest on the underlying Mortgage Loans at the Interest Rate. In addition, the
Master Servicer will furnish, within a reasonable time after the end of each
calendar year, to each holder of a Trust Certificate who was a holder at any
time during the year, information regarding the amount of servicing compensation
received by the Master Servicer and sub-servicer, if any, and other customary
factual information as the Master Servicer deems necessary or desirable to
enable holders of Trust Certificates to prepare their tax returns.
H. BACK-UP WITHHOLDING
In general, the rules described in "REMIC Trust Funds -- Back-up
Withholding with respect to REMIC Certificates" will also apply to Trust
Certificates.
I. FOREIGN CERTIFICATEHOLDERS
Payments in respect of interest or original issue discount, including
amounts attributable to servicing fees, on the Mortgage Loans to a
Certificateholder who is not a citizen or resident of the United States, a
corporation or other entity organized in or under the laws of the United States
or of any State of the United States, unless, in the case of a partnership,
future Treasury regulations provide otherwise, or a United States estate or
trust, will not generally be subject to 30% United States withholding tax,
provided that the Certificateholder (1) does not own, directly or indirectly,
10% or more of, and is not a controlled foreign corporation (within the meaning
of Code Section 957) related to, an issuer of Mortgage Loan and (2) provides
required certification as to its non-United States status under penalty of
perjury and then will be free of the tax only to the extent that the underlying
Mortgage Loans were issued after July 18, 1984. Notwithstanding the foregoing,
if any the payments are effectively connected with a United States trade or
business conducted by the Certificateholder, they will be subject to regular
United States income tax and, in the case of a corporation, to a possible branch
profits tax, but will ordinarily be exempt from United States withholding tax
provided that applicable documentation requirements are met. This withholding
tax may be reduced or eliminated by an applicable tax treaty.
J. STATE AND LOCAL TAXATION
In addition to the federal income tax consequences described above,
potential investors should consider the state income tax consequences of the
acquisition, ownership, and disposition of the Securities. State income tax law
may differ substantially from the corresponding federal law, and this discussion
does not purport to describe any aspect of the income tax laws of any state.
Therefore, potential investors should consult their own tax advisers with
respect to the various state tax consequences of an investment in the
Securities.
III. CHARACTERIZATION OF THE TRUST CERTIFICATES AS INDEBTEDNESS
A. CHARACTERIZATION OF INVESTMENTS IN TRUST CERTIFICATES
With respect to each Series of Trust Certificates that have been structured
as debt for federal income tax purposes, Special Tax Counsel will deliver their
opinion to the effect that the Trust Certificates will be treated as debt
instruments for federal income tax purposes as of the date rather than as
ownership interests in the Trust Fund.
The Depositor, each Unaffiliated Seller and the Certificateholders will
express in the Agreement their intent that, for applicable tax purposes, the
Trust Certificates will be indebtedness secured by the Mortgage Loans. The
Depositor, each Unaffiliated Seller and each Certificateholder, by its
acceptance and acquisition of a beneficial interest in a Trust Certificate, will
have agreed to treat the Trust Certificates as indebtedness for federal income
tax purposes. However, because different criteria are used to determine the
non-tax accounting characterization of a securitization transaction, the
transaction may be treated as a sale of an interest in the Mortgage Loans for
financial accounting purposes.
In general, whether for federal income tax purposes a transaction
constitutes a sale of property or a loan, the repayment of which is secured by
property, is a question of fact, the resolution of which is based upon the
economic substance of the transaction rather than its form or the manner in
which it is labeled. While the IRS and the courts have set forth several factors
to be taken into account in determining whether the substance of a transaction
is a sale of property or a secured loan, the primary factor in making this
determination is whether the transferee has assumed the risk of loss or other
economic burdens relating to the property and has obtained the benefits of
ownership of the property or secured loan. Special Tax Counsel has analyzed and
relied on several factors in reaching its opinion that the weight of the
benefits and burdens of ownership of the Mortgage Loans has been retained by the
Depositor or an Unaffiliated Seller and has not been transferred to the
Certificateholders.
In some instances, courts have held that a taxpayer is bound by the
particular form it has chosen for a transaction, even if the substance of the
transaction does not accord with its form. Special Tax Counsel has advised that
the rationale of those cases will not apply to this transaction, because the
form of the transaction as reflected in the operative provisions of the
documents either accords with the characterization of the Trust Certificates as
debt or otherwise makes the rationale of those cases inapplicable to this
situation.
B. TAXATION OF INTEREST INCOME OF CERTIFICATEHOLDERS
Assuming that the Certificateholders are holders of debt obligations for
federal income tax purposes, the Trust Certificates generally will be taxable as
debt. The stated interest on the Trust Certificates will be taxable to a
Certificateholder as ordinary interest income when received or accrued in
accordance with the Certificateholder's method of tax accounting. Under the OID
Regulations, a holder of a debt instrument issued with a de minimis amount of
original issue discount must include the original issue discount in income, on a
pro rata basis, as principal payments are made on the debt instrument. A
subsequent purchaser who buys a Trust Certificate for more or less than its
principal amount will generally be subject, respectively, to the premium
amortization or market discount rules of the Code.
A holder of a Trust Certificate that has a fixed maturity date of not more
than one year from the issue date of the Trust Certificate (a "Short-Term
Certificate") may be subject to special rules. An accrual basis holder of a
Short-Term Certificate, and some cash method holders, including regulated
investment companies, as set forth in Code Section 1281, generally would be
required to report interest income as interest accrues on a straight-line basis
over the term of each interest period, unless an election is made to accrue
interest income pursuant to a constant yield method, compared on a daily basis.
Other cash basis holders of a Short-Term Certificate would, in general, be
required to report interest income as interest is paid, or, if earlier, upon the
taxable disposition of the Short-Term Certificate. However, a cash basis holder
of a Short-Term Certificate reporting interest income as it is paid may be
required to defer a portion of any interest expense otherwise deductible on
indebtedness incurred to purchase or carry the Short-Term Certificate until the
taxable disposition of the Short-Term Certificate. A cash basis taxpayer may
elect under Code Section 1281 to accrue interest income on all nongovernment
debt obligations with a term of one year or less, in which case the taxpayer
would include interest on a Short-Term Certificate in income as it accrues, and
would not be subject to the interest expense deferral rule referred to in the
preceding sentence. Some special rules apply if a Short-Term Certificate is
purchased for more or less than its principal amount.
While it is not anticipated that the Trust Certificates will be issued at a
greater than de minimis discount, it is possible that the Trust Certificates
could nevertheless be deemed to have been issued with original issue discount if
interest with respect to the Trust Certificates were not treated as
"unconditionally payable" under the OID Regulations. In this event, all of the
taxable income to be recognized with respect to the Trust Certificates would be
includible in income of Certificateholders as original issue discount, but would
not be includible again when the interest is actually received.
C. POSSIBLE CLASSIFICATION AS A PARTNERSHIP OR ASSOCIATION TAXABLE AS A
CORPORATION
The opinion of Special Tax Counsel is not binding on the courts or the IRS.
It is possible that the IRS could assert that, for federal income tax purposes,
the transaction contemplated with respect to the Certificates constitutes a sale
of the Mortgage Loans, or an interest in the Mortgage Loans, to the
Certificateholders and that the proper classification of the legal relationship
between the Depositor, any Unaffiliated Seller and the Certificateholders
resulting from this transaction is that of a partnership, or a publicly traded
partnership taxable as a corporation. Since Special Tax Counsel has advised that
the Trust Certificates will be treated as indebtedness in the hands of the
Certificateholders for federal income tax purposes, neither the Depositor nor
any Unaffiliated Seller will attempt to comply with federal income tax reporting
requirements applicable to partnerships or corporations.
If it were determined that this transaction created an entity classified as
a corporation (i.e. a publicly traded partnership taxable as a corporation), the
Trust Fund would be subject to federal income tax at corporate income tax rates
on the income it derives from the Mortgage Loans, which would reduce the amounts
available for distribution to the Certificateholders. Cash distributions to the
Certificateholders generally would be treated as dividends for federal income
tax purposes to the extent of the corporation's earnings and profits.
If the transaction were treated as creating a partnership, the partnership
itself would not be subject to federal income tax, unless it were to be
characterized as a publicly traded partnership taxable as a corporation; rather,
each partner, including each Certificateholder, would be taxed individually on
its respective distributive shares of the partnership's income, gain, loss,
deductions and credits. The amount and timing of items of income and deductions
of the Certificateholders could differ if the Certificates were held to
constitute partnership interests rather than indebtedness. Assuming that all of
the provisions of the Agreement, as in effect on the date of the issuance, are
complied with, it is the opinion of Special Tax Counsel that the Trust Fund will
not be treated as a corporation.
D. POSSIBLE CLASSIFICATION AS A TAXABLE MORTGAGE POOL
In relevant part, Section 7701(i) of the Code provides that any entity, or
a portion of an entity, that is a "taxable mortgage pool" will be classified as
a taxable corporation and will not be permitted to file a consolidated federal
income tax return with another corporation. Any entity, or a portion of any
entity, will be a taxable mortgage pool if:
(1) it is not a REMIC, or, after September 1, 1997, a FASIT,
(2) substantially all of its assets consist of debt instruments, more than
50% of which are real estate mortgages,
(3) the entity is the obligor under debt obligations with two or more
maturities, and
(4) under the terms of the entity's debt obligations, or an underlying
arrangement, payments on the debt obligations bear a relationship to the debt
instruments held by the entity.
Assuming that all of the provisions of the Agreement, as in effect on the
date of issuance, are complied with, Special Tax Counsel is of the opinion that
the arrangement created by the Agreement will not be a taxable mortgage pool
under Section 7701(i) of the Code because only one class of indebtedness secured
by the Mortgage Loans is being issued.
The opinion of Special Tax Counsel is not binding on the courts or the IRS.
If the IRS were to contend successfully, or future regulations were to provide,
that the arrangement created by the Agreement is a taxable mortgage pool, the
arrangement would be subject to federal corporate income tax on its taxable
income generated by ownership of the Mortgage Loans. This tax might reduce
amounts available for distributions to Certificateholders. The amount of this
tax would depend upon whether distributions to Certificateholders would be
deductible as interest expense in computing the taxable income of the
arrangement as a taxable mortgage pool.
E. FOREIGN INVESTORS
In general, subject to some exceptions, interest, including original issue
discount, paid on a Trust Certificate to a nonresident alien individual, foreign
corporation or other non-United States person is not subject to United States
federal income tax, provided that the interest is not effectively connected with
a trade or business of the recipient in the United States and the
Certificateholder provides the required certification of foreign status.
If the interests of the Certificateholders were deemed to be partnership
interests, the partnership would be required, on a quarterly basis, to pay
withholding tax equal to the product, for each foreign partner, of the foreign
partner's distributive share of "effectively connected" income of the
partnership multiplied by the highest United States rate of tax applicable to
that foreign partner. In addition, the foreign partner, if a corporation or
association taxable as a corporation, could be subject to branch profits tax.
Each non-foreign partner would be required to certify to the partnership that it
is not a foreign person. The tax withheld from each foreign partner would be
credited against the foreign partner's United States federal income tax
liability.
If the Trust Fund were taxable as a corporation, distributions to foreign
persons, to the extent treated as dividends, would generally be subject to
withholding at the rate of 30%, unless the rate were reduced by an applicable
tax treaty.
F. BACKUP WITHHOLDING
Some Certificateholders may be subject to backup withholding at the rate of
31% with respect to interest paid on the Trust Certificates if the
Certificateholder, upon issuance, fails to supply the Trustee or his broker with
his taxpayer identification number, furnishes an incorrect taxpayer
identification number, fails to report interest, dividends, or other "reportable
payments" (as defined in the Code) properly, or, under some circumstances, fails
to provide the Trustee or his broker with a statement, certified under penalties
of perjury, that he is not subject to backup withholding.
The Trustee will be required to report annually to the IRS, and to each
Certificateholder of record, the amount of interest paid, and original issue
discount accrued, if any, on the Trust Certificates, and the amount of interest
withheld for federal income taxes, if any, for each calendar year, except as to
exempt holders, generally, holders that are corporations, particular tax-exempt
organizations or nonresident aliens who provide certification as to their status
as nonresidents. As long as the only "Certificateholder" of record is Cede & Co.
("Cede"), as nominee for The Depository Trust Company ("DTC"),
Certificateholders and the IRS will receive tax and other information including
the amount of interest paid on the Trust Certificates from other persons holding
Trust Certificates directly or indirectly through DTC, rather than from the
Trustee. The Trustee, however, will respond to requests for necessary
information to enable the other persons to complete their reports. Each
non-exempt Certificateholder will be required to provide, under penalties of
perjury, a certificate on IRS Form W-9 containing his or her name, address,
correct federal taxpayer identification number and a statement that he or she is
not subject to backup withholding. Should a non-exempt Certificateholder fail to
provide the required certification, 31% of the interest, and principal,
otherwise payable to the Certificateholder will be required to be withheld and
remitted to the IRS as a credit against the Certificateholder's federal income
tax liability.
G. SALE OR OTHER DISPOSITION
If a Certificateholder sells a Trust Certificate, the holder will recognize
gain or loss in an amount equal to the difference between the amount realized on
the sale and the Certificateholder's adjusted tax basis in the Trust
Certificate. The adjusted tax basis of a Trust Certificate to a particular
Certificateholder will equal the holder's cost for the Trust Certificate,
increased by any market discount, acquisition discount, original issue discount
and gain previously included by the Certificateholder in income with respect to
the Trust Certificate and decreased by the amount of bond premium, if any,
previously amortized and by the amount of principal payments previously received
by the Certificateholder with respect to the Trust Certificate. Any gain or loss
will generally be capital gain or loss if the Trust Certificate was held as a
capital asset, except for gain representing accrued interest and accrued market
discount not previously included in income. Any capital gain or loss would be
long-term capital gain or loss if the Certificateholder's holding period
exceeded one year. Capital losses generally may be used only to offset capital
gains.
H. STATE AND LOCAL TAXATION
In addition to the federal income tax consequences described above,
potential investors should consider the state income tax consequences of the
acquisition. ownership, and disposition of the Trust Certificates. State income
tax law may differ substantially from the corresponding federal law and this
discussion does not purport to describe any aspect of the income tax laws of any
state. Therefore, potential investors should consult their own tax advisers with
respect to the various state tax consequences of an investment in the Trust
Certificates.
IV. TAX CHARACTERIZATION AS A PARTNERSHIP OR DIVISION
Special Tax Counsel will deliver its opinion for an Issuer which is
intended to be a partnership for federal income tax purposes, as specified in
the related prospectus supplement, generally to the effect that the Issuer will
not be an association, or publicly traded partnership, taxable as a corporation
for federal income tax purposes. This opinion will be based on the assumption
that the terms of the Trust Agreement and related documents will be complied
with, and on counsel's conclusion that the nature of the income of the Issuer
will exempt it from the rule that some publicly traded partnerships are taxable
as corporations or the rule is otherwise inapplicable to the Issuer, so that the
Issuer will not be characterized as a publicly traded partnership taxable as a
corporation, and that no action will be taken that is inconsistent with the
treatment of the Issuer as a partnership, including an election to treat the
Issuer as a corporation for federal income tax purposes. If, however, the Issuer
has a single owner for federal income tax purposes, it will be treated as a
division of its owner and will be disregarded as an entity separate from its
owner for federal income tax purposes, assuming no election will be made to
treat the Issuer as a corporation for federal income tax purposes.
Some entities classified as "taxable mortgage pools" are subject to
corporate level tax on their net income. A "taxable mortgage pool" is generally
defined as an entity that meets the following requirements:
(1) the entity is not a REMIC, or, after September 1, 1997, a FASIT,
(2) substantially all of the assets of the entity are debt obligations, and
more than 50 percent of the debt obligations consists of real estate mortgages,
or interests in real estate mortgages,
(3) the entity is the obligor under debt obligations with two or more
maturities, and
(4) payments on the debt obligations on which the entity is the obligor
bear a relationship to the payments on the debt obligations which the entity
holds as assets.
With respect to requirement (3), the Code authorizes the Internal Revenue
Service to provide by regulations that equity interests may be treated as debt
for purposes of determining whether there are two or more maturities. If the
Issuer were treated as a taxable mortgage pool, it would be ineligible to file
consolidated returns with any other corporation and could be liable for
corporate tax. Treasury regulations do not provide for the recharacterization of
equity as debt for purposes of determining whether an entity has issued debt
with two maturities, except in the case of transactions structured to avoid the
taxable mortgage pool rules. Special Tax Counsel will deliver its opinion for an
Issuer which is intended to be a partnership for federal income tax purposes, as
specified in the related prospectus supplement, generally to the effect that the
Issuer will not be a taxable mortgage pool. This opinion will be based on the
assumption that the terms of the Trust Agreement and related documents will be
complied with, and on counsel's conclusion that either the number of classes of
debt obligations issued by the Issuer, or the nature of the assets held by the
Issuer, will exempt the Issuer from treatment as a taxable mortgage pool.
If the Issuer were taxable as a corporation for federal income tax
purposes, the Issuer would be subject to corporate income tax on its taxable
income. The Issuer's taxable income would include all its income, possibly
reduced by its interest expense on the Notes. Any corporate income tax could
materially reduce cash available to make payments on the Notes and distributions
on the Certificates, and Certificateholders could be liable for any tax that is
unpaid by the Issuer. In addition, distributions to the Certificateholders
generally would be taxable as dividends.
A. TAX CONSEQUENCES TO HOLDERS OF THE NOTES ISSUED BY A PARTNERSHIP OR DIVISION
1. TREATMENT OF THE NOTES AS INDEBTEDNESS
The Issuer will agree, and the Noteholders will agree by their purchase of
Notes, to treat the Notes as debt for federal income tax purposes. Except as
otherwise provided in the related prospectus supplement, Special Tax Counsel
will advise the Depositor that in its opinion the Notes will be classified as
debt for federal income tax purposes.
2. POSSIBLE ALTERNATIVE TREATMENTS OF THE NOTES
If, contrary to the opinion of counsel, the IRS successfully asserted that
one or more of the Notes did not represent debt for federal income tax purposes,
the Notes might be treated as equity interests in the Issuer. If so treated, the
Issuer might be treated as a publicly traded partnership that would not be
taxable as a corporation because it would meet specific qualifying income tests.
Nonetheless, treatment of the Notes as equity interests in a publicly traded
partnership could have adverse tax consequences to some holders. For example,
income to foreign holders generally would be subject to United States federal
income tax and United States federal income tax return filing and withholding
requirements, and individual holders might be subject to particular limitations
on their ability to deduct their share of the Issuer's expenses.
3. INTEREST INCOME ON THE NOTES
The stated interest on the Notes will be taxable to a Noteholder as
ordinary income when received or accrued in accordance with the Noteholder's
method of tax accounting. It is not anticipated that the Notes will be issued
with original issue discount within the meaning of Section 1273 of the Code. A
subsequent holder who purchases a Note at a discount that exceeds a statutorily
defined de minimis amount will be subject to the "market discount" rules of the
Code, and a holder who purchases a Note at a premium will be subject to the
premium amortization rules of the Code.
4. SALE OR OTHER DISPOSITION
If a Noteholder sells a Note, the holder will recognize gain or loss in an
amount equal to the difference between the amount realized on the sale and the
holder's adjusted tax basis in the Note. The adjusted tax basis of a Note to a
particular Noteholder will equal the holder's cost for the Note, increased by
original issue discount, if any, and market discount previously included by the
Noteholder in income with respect to the Note and decreased by the amount of
bond premium, if any, previously amortized and by the amount of principal
payments previously received by the Noteholder with respect to the Note. Subject
to the rules of the Code concerning market discount on the Notes, any gain or
loss generally will be capital gain or loss if the Note was held as a capital
asset. Any gain or loss would be long-term capital gain or loss if the
Noteholder's holding period exceeded one year. Capital losses generally may be
deducted only to the extent the Noteholder has capital gains for the taxable
year, although under some circumstances non-corporate Noteholders can deduct
losses in excess of available capital gains.
5. FOREIGN HOLDERS
If interest paid, or accrued, to a Noteholder who is a nonresident alien,
foreign corporation or other non-United States person (a "foreign person") is
not effectively connected with the conduct of a trade or business within the
United States by the foreign person, the interest generally will be considered
"portfolio interest," and generally will not be subject to United States Federal
income tax and withholding tax, if the foreign person (1) is not actually or
constructively a "10 percent shareholder" of the Trust or the Depositor,
including a holder of 10% of the outstanding Certificates, or a "controlled
foreign corporation" with respect to which the Trust or the Depositor is a
"related person" within the meaning of the Code and (2) provides the person
otherwise required to withhold United States tax with an appropriate statement,
signed under penalties of perjury, certifying that the beneficial owner of the
Note is a foreign person and providing the foreign person's name and address. If
the information provided in the statement changes, the foreign person must so
inform the person otherwise required to withhold United States tax within 30
days of the change. The statement generally must be provided in the year a
payment occurs, prior to the payment, or in either of the two preceding years.
If a Note is held through a securities clearing organization or other financial
institutions, the organization or institution may provide a signed statement to
the withholding agent. However, in that case, the signed statement must be
accompanied by a Form W-8 or substitute form provided by the foreign person that
owns the Note. If the interest in not portfolio interest, then it will be
subject to United States federal income and withholding tax at a rate of 30%,
unless reduced or eliminated pursuant to an applicable tax treaty.
Any capital gain realized on the sale, redemption, retirement or other
taxable disposition of a Note by a foreign person will be exempt from United
States federal income and withholding tax, provided that (1) the gain is not
effectively connected with the conduct of a trade or business in the United
States by the foreign person and (2) in the case of an individual foreign
person, the foreign individual is not present in the United States for 183 days
or more in the taxable year.
If the interest, gain or income on a Note held by a foreign person is
effectively connected with the conduct of a trade or business in the United
States by the foreign person, although exempt from the withholding tax
previously discussed if the holder provides an appropriate statement, the holder
generally will be subject to United States federal income tax on the interest,
gain or income at regular federal income tax rates. In addition, if the foreign
person is a corporation or association taxable as a corporation, it may be
subject to a branch profits tax equal to 30% of its "effectively connected
earnings and profits" within the meaning of the Code for the taxable year, as
adjusted for particular items, unless it qualifies for a lower rate under an
applicable tax treaty, as modified by the branch profits tax rules. The Final
Withholding Regulations, which are generally effective with respect to payments
made after December 31, 1999, consolidate and modify the current certification
requirements and means by which a holder may claim exemption from United States
federal income tax withholding and provide particular presumptions regarding the
status of holders when payments to the holders cannot be reliably associated
with appropriate documentation provided to the payor. All Noteholders should
consult their own tax advisers regarding the application of these regulations.
6. INFORMATION REPORTING AND BACKUP WITHHOLDING
The Trust will be required to report annually to the IRS, and to each
Noteholder of record, the amount of interest paid on the Notes, and the amount
of interest withheld for federal income taxes, if any, for each calendar year,
except as to exempt holders, generally, holders that are corporations,
tax-exempt organizations, qualified pension and profit-sharing trusts,
individual retirement accounts, or nonresident aliens who provide certification
as to their status as nonresidents. Accordingly, each holder, other than exempt
holders who are not subject to the reporting requirements, will be required to
provide, under penalties of perjury, a certificate containing the holder's name,
address, correct federal taxpayer identification number and a statement that the
holder is not subject to backup withholding. Should a nonexempt Noteholder fail
to provide the required certification, the Trust will be required to withhold
31% of the amount otherwise payable to the holder, and remit the withheld amount
to the IRS, as a credit against the holder's federal income tax liability.
B. TAX CONSEQUENCES TO HOLDERS OF THE CERTIFICATES ISSUED BY A PARTNERSHIP OR
DIVISION
1. TREATMENT OF THE ISSUER AS A PARTNERSHIP
In the case of an Issuer intended to qualify as a partnership for federal
income tax purposes, the Issuer and the Depositor will agree, and the
Certificateholders will agree by their purchase of Certificates, to treat the
Issuer as a partnership for purposes of United States federal and state income
tax, franchise tax and any other tax measured in whole or in part by income,
with the assets of the partnership, or if there is a single Certificateholder
for federal income tax purposes, to disregard the Issuer as an entity separate
from the Certificateholder, being the assets held by the Issuer, the partners of
the partnership being the Certificateholders, and the Notes, if any, being debt
of the partnership. However, the proper characterization of the arrangement
involving the Certificates, the Notes, the Issuer and the Servicer is not clear
because there is no authority on transactions closely comparable to that
contemplated in this prospectus.
A variety of alternative characterizations are possible. For example,
because the Certificates have features characteristic of debt, the Certificates
might be considered debt of the Issuer. Generally, provided the Certificates are
issued at or close to face value, any characterization would not result in
materially adverse tax consequences to Certificateholders as compared to the
consequences from treatment of the Certificates as equity in a partnership,
described below. The following discussion assumes that the Certificates
represent equity interests in a partnership.
2. PARTNERSHIP TAXATION
As a partnership, the Issuer will not be subject to federal income tax.
Rather, each Certificateholder will be required to separately take into account
the holder's allocated share of income, gains, losses, deductions and credits of
the Issuer. The Issuer's income will consist primarily of interest and finance
charges earned on the Mortgage Loans, including appropriate adjustments for
market discount, original issue discount and bond premium, and any gain upon
collection or disposition of Mortgage Loans. The Issuer's deductions will
consist primarily of interest and original issue discount accruing with respect
to the Notes, servicing and other fees, and losses or deductions upon collection
or disposition of Mortgage Loans.
The tax items of a partnership are allocable to the partners in accordance
with the Code, Treasury regulations and the partnership agreement, here, the
Trust Agreement and related documents. The Trust Agreement will provide, in
general, that the Certificateholders will be allocated taxable income of the
Issuer for each month equal to the sum of:
(1) the interest that accrues on the Certificates in accordance with their
terms for the month, including interest accruing at the Interest Rate for the
month and interest on amounts previously due on the Certificates but not yet
distributed;
(2) any Issuer income attributable to discount on the Mortgage Loans that
corresponds to any excess of the principal amount of the Certificates over their
initial issue price;
(3) prepayment premium payable to the Certificateholders for the month; and
(4) any other amounts of income payable to the Certificateholders for the
month.
The allocation will be reduced by any amortization by the Issuer of premium on
Mortgage Loans that corresponds to any excess of the issue price of Certificates
over their principal amount. All remaining taxable income of the Issuer will be
allocated to the Depositor. Based on the economic arrangement of the parties,
this approach for allocating Issuer income should be permissible under
applicable Treasury regulations, although no assurance can be given that the IRS
would not require a greater amount of income to be allocated to
Certificateholders. Moreover, even under the foregoing method of allocation,
Certificateholders may be allocated income equal to the entire Interest Rate
plus the other items described above even though the Issuer might not have
sufficient cash to make current cash distributions of the amount. Thus, cash
basis holders will in effect be required to report income from the Certificates
on the accrual basis and Certificateholders may become liable for taxes on
Issuer income even if they have not received cash from the Issuer to pay the
taxes. In addition, because tax allocations and tax reporting will be done on a
uniform basis for all Certificateholders but Certificateholders may be
purchasing Certificates at different times and at different prices,
Certificateholders may be required to report on their tax returns taxable income
that is greater or less than the amount reported to them by the Issuer.
If Notes are also issued, some or all of the taxable income allocated to a
Certificateholder that is a pension, profit sharing or employee benefit plan or
other tax-exempt entity, including an individual retirement account, will
constitute "unrelated business taxable income" generally taxable to a holder
under the Code.
An individual taxpayer's share of expenses of the Issuer, including fees to
the Servicer but not interest expense, would be miscellaneous itemized
deductions. The deductions might be disallowed to the individual in whole or in
part and might result in the holder being taxed on an amount of income that
exceeds the amount of cash actually distributed to the holder over the life of
the Issuer. The deductions may also be subject to reduction under Section 68 of
the Code if the individual's adjusted gross income exceeds specified limits. See
" --Non-REMIC Trust Funds--Taxation of Owners of Trust Traction Certificates."
The Issuer intends to make all tax calculations relating to income and
allocations to Certificateholders on an aggregate basis. If the IRS were to
require that the calculations be made separately for each Mortgage Loan, the
Issuer might be required to incur additional expense but it is believed that
there would not be a material adverse effect on Certificateholders.
3. DISCOUNT AND PREMIUM
It is believed that the Mortgage Loans were not issued with original issue
discount and, therefore, the Trust should not have original issue discount
income. However, the purchase price paid by the Issuer for the Mortgage Loans
may be greater or less than the remaining principal balance of the Mortgage
Loans at the time of purchase. If so, the Mortgage Loan will have been acquired
at a premium or discount, as the case may be. As indicated above, the Issuer
will make this calculation on an aggregate basis, but might be required to
recompute it on a Mortgage Loan by Mortgage Loan basis.
If the Issuer acquires the Mortgage Loans at a market discount or premium,
the Issuer will elect to include any discount in income currently as it accrues
over the life of the Mortgage Loans or to offset any premium against interest
income on the Mortgage Loans. As indicated above, a portion of the market
discount income or premium deduction may be allocated to Certificateholders.
4. SECTION 708 TERMINATION
Under Section 708 of the Code, the Issuer will be deemed to terminate for
federal income tax purposes if 50% or more of the capital and profits interests
in the Issuer are sold or exchanged within a 12-month period. If a termination
occurs, the partnership will be considered to have transferred its assets and
liabilities to a new partnership in exchange for interests in that new
partnership, which it would then be treated as transferring to its partners.
5. DISPOSITION OF CERTIFICATES
Generally, capital gain or loss will be recognized on a sale of
Certificates in an amount equal to the difference between the amount realized
and the seller's tax basis in the Certificates sold. This gain or loss would be
long-term capital gain or loss if the Certificateholder's holding period
exceeded one year. A Certificateholder's tax basis in a Certificate will
generally equal the holder's cost increased by the holder's share of Issuer
income, includible in income, and decreased by any distributions received with
respect to the Certificate. In addition, both the tax basis in the Certificates
and the amount realized on a sale of a Certificate would include the holder's
share of the Notes and other liabilities of the Issuer. A holder acquiring
Certificates at different prices may be required to maintain a single aggregate
adjusted tax basis in the Certificates, and, upon sale or other disposition of
some of the Certificates, allocate a portion of the aggregate tax basis to the
Certificates sold, rather than maintaining a separate tax basis in each
Certificate for purposes of computing gain or loss on a sale of that
Certificate.
Any gain on the sale of a Certificate attributable to the holder's share of
unrecognized accrued market discount on the Mortgage Loans would generally be
treated as ordinary income to the holder and would give rise to special tax
reporting requirements. The Issuer does not expect to have any other assets that
would give rise to the special reporting requirements. Thus, to avoid those
special reporting requirements, the Issuer will elect to include market discount
in income as it accrues.
If a Certificateholder is required to recognize an aggregate amount of
income, not including income attributable to disallowed itemized deductions
described above, over the life of the Certificates that exceeds the aggregate
cash distributions with respect to the Certificates, the excess will generally
give rise to a capital loss upon the retirement of the Certificates.
6. ALLOCATIONS BETWEEN DEPOSITORS AND TRANSFEREES
In general, the Issuer's taxable income and losses will be determined
monthly and the tax items for a particular calendar month will be apportioned
among the Certificateholders in proportion to the principal amount of
Certificates owned by them as of the close of the last day of the month. As a
result, a holder purchasing Certificates may be allocated tax items, which will
affect its tax liability and tax basis, attributable to periods before the
actual transaction.
The use of this monthly convention may not be permitted by existing
regulations and federal tax counsel is unable to opine on the matter. If a
monthly convention is not allowed, or only applies to transfers of less than all
of the partner's interest, taxable income or losses of the Issuer might be
reallocated among the Certificateholders. The Issuer's method of allocation
between transferors and transferees may be revised to conform to a method
permitted by future regulations.
7. SECTION 754 ELECTION
In the event that a Certificateholder sells its Certificates at a profit
(or loss), the purchasing Certificateholder will have a higher (or lower) basis
in the Certificates than the selling Certificateholder had. The tax basis of the
Issuer's assets will not be adjusted to reflect that higher (or lower) basis
unless the Issuer were to file an election under Section 754 of the Code. In
order to avoid the administrative complexities that would be involved in keeping
accurate accounting records, as well as potentially onerous information
reporting requirements, the Issuer currently does not intend to make this
election. As a result, Certificateholders might be allocated a greater or lesser
amount of Issuer income than would be appropriate based on their own purchase
price for Certificates.
8. ADMINISTRATIVE MATTERS
The Trustee is required to keep or have kept complete and accurate books of
the Issuer. These books will be maintained for financial reporting and tax
purposes on an accrual basis and the fiscal year of the Issuer will be the
calendar year. The Trustee will file a partnership information return (IRS Form
1065) with the IRS for each taxable year of the Issuer and will report each
Certificateholder's allocable share of items of Issuer income and expense to
holders and the IRS on Schedule K-1. The Issuer will provide the Schedule K-1
information to nominees that fail to provide the Issuer with the information
statement described below and the nominees will be required to forward the
information to the beneficial owners of the Certificates. Generally, holders
must file tax returns that are consistent with the information return filed by
the Issuer or be subject to penalties unless the holder timely notifies the IRS
of all the inconsistencies.
Under Section 6031 of the Code, any person that holds Certificates as a
nominee at any time during a calendar year is required to furnish the Issuer
with a statement containing information on the nominee, the beneficial owners
and the Certificates so held. The information includes:
(1) the name, address and taxpayer identification number of the nominee and
(2) as to each beneficial owner,
(x) the name, address and identification number of the person,
(y) whether the person is a United States person, a tax-exempt entity
or a foreign government, an international organization, or any wholly
owned agency or instrumentality of either of the foregoing, and
(z) particular information on Certificates that were held, bought or
sold on behalf of the person throughout the year.
In addition, brokers and financial institutions that hold Certificates through a
nominee are required to furnish directly to the Issuer information as to
themselves and their ownership of Certificates. A clearing agency registered
under Section 17A of the Exchange Act is not required to furnish any the
information statement to the Issuer. The information referred to above for any
calendar year must be furnished to the Issuer on or before the following January
31. Nominees, brokers and financial institutions that fail to provide the Issuer
with the information described above may be subject to penalties.
The Depositor will be designated as the tax matters partner in the related
Trust Agreement and will be responsible for representing the Certificateholders
in particular disputes with the IRS. The Code provides for administrative
examination of a partnership as if the partnership were a separate and distinct
taxpayer. Generally, the statute of limitations for partnership items does not
expire before three years after the date on which the partnership information
return is filed. Any adverse determination following an audit of the return of
the Issuer by the appropriate taxing authorities could result in an adjustment
of the returns of the Certificateholders, and, under some circumstances, a
Certificateholder may be precluded from separately litigating a proposed
adjustment to the items of the Issuer. An adjustment could also result in an
audit of a Certificateholder's returns and adjustments of items not related to
the income and losses of the Issuer.
9. TAX CONSEQUENCES TO FOREIGN CERTIFICATEHOLDERS
It is not clear and federal tax counsel is unable to opine whether the
Issuer would be considered to be engaged in a trade or business in the United
States for purposes of federal withholding taxes with respect to non-United
States persons because there is no clear authority dealing with that issue under
facts substantially similar to those described in this prospectus. Although it
is not expected that the Issuer would be engaged in a trade or business in the
United States for these purposes, the Issuer will withhold as if it were so
engaged in order to protect the Issuer from possible adverse consequences of a
failure to withhold. The Issuer expects to withhold on the portion of its
taxable income that is allocable to foreign Certificateholders pursuant to
Section 1446 of the Code, as if the income were effectively connected to a
United States trade or business, at a rate of 35% for foreign holders that are
taxable as corporations and 39.6% for all other foreign holders. Subsequent
adoption of Treasury regulations or the issuance of other administrative
pronouncements may require the Issuer to change its withholding procedures.
If the trust is engaged in a United States trade or business, each foreign
holder might be required to file a United States individual or corporate income
tax return, including, in the case of a corporation, the branch profits tax, on
its share of the Issuer's income. A foreign holder generally would be entitled
to file with the IRS a claim for refund with respect to taxes withheld by the
Issuer taking the position that no taxes were due because the Issuer was not
engaged in a United States trade or business. However, interest payments made,
or accrued, to a Certificateholder who is a foreign person generally will be
considered guaranteed payments to the extent the payments are determined without
regard to the income of the Issuer, and for that reason or because of the nature
of the assets of the Issuer probably will not be considered "portfolio
interest." As a result, even if the Issuer was not considered to be engaged in a
United States trade or business, Certificateholders will be subject to United
States federal income tax which must be withheld at a rate of 30%, unless
reduced or eliminated pursuant to an applicable treaty. A foreign holder would
be entitled to claim a refund for withheld tax, taking the position that the
interest was portfolio interest and therefore not subject to United States tax.
However, the IRS may disagree and no assurance can be given as to the
appropriate amount of tax liability. As a result, each potential foreign
Certificateholder should consult its tax advisor as to whether an interest in a
Certificate is an unsuitable investment.
10. BACKUP WITHHOLDING
Distributions made on the Certificates and proceeds from the sale of the
Certificates will be subject to a "backup" withholding tax of 31% if, in
general, the Certificateholder fails to comply with particular identification
procedures, unless the holder is an exempt recipient under applicable provisions
of the Code.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
imposes restrictions on employee benefit plans subject to ERISA ("ERISA Plans")
and on those persons who are ERISA fiduciaries with respect to the assets of the
ERISA Plans. In accordance with the general fiduciary standards of ERISA, an
ERISA Plan fiduciary should consider whether an investment in the Securities is
permitted by the documents and instruments governing the Plan, consistent with
the Plan's overall investment policy and appropriate in view of the composition
of its investment portfolio. Fiduciaries should also consider ERISA's
prohibition on improper delegation of control over, or responsibility for, plan
assets.
Employee benefit plans which are governmental plans and particular church
plans, if no election has been made under Section 410(d) of the Code, are not
subject to ERISA requirements. Accordingly, assets of the plans may be invested
in the Securities subject to the provisions of applicable federal and state law
and, in the case of any plan which is qualified under Section 401(a) of the Code
and exempt from taxation under Section 501(a) of the Code, the restrictions
imposed under Section 503 of the Code.
In addition to imposing general fiduciary standards, ERISA and Section 4975
of the Code prohibit a broad range of transactions involving assets of ERISA
Plans and other plans subject to Section 4975 of the Code or any entity whose
underlying assets include plan assets by reason of a plan or account investing
in the entity, including an insurance company general account (together with
ERISA Plans, "Plans") and particular persons ("Parties in Interest") who have
specified relationships to the Plans and taxes and/or imposes other penalties on
any transaction under ERISA and/or Section 4975 of the Code, unless an exemption
applies. If the assets of a Trust Fund are treated for ERISA purposes as the
assets of the Plans that purchase or hold Securities of the applicable Series,
an investment in Securities of that Series by or with "plan assets" of a Plan
might constitute or give rise to a prohibited transaction under ERISA or Section
4975 of the Code, unless a statutory or administrative exemption applies.
Violation of the prohibited transaction rules could result in the imposition of
excise taxes and/or other penalties under ERISA and/or Section 4975 of the Code.
FINAL PLAN ASSETS REGULATION
The United States Department of Labor ("DOL") has issued a regulation (the
"Plan Assets Regulation") under which assets of an entity in which a Plan makes
an equity investment will be treated as assets of the investing Plan in some
circumstances. Unless the Plan Assets Regulation provides an exemption from this
"plan asset" treatment, and if the exemption is not otherwise available under
ERISA, an undivided portion of the assets of a Trust Fund will be treated, for
purposes of applying the fiduciary standards and prohibited transaction rules of
ERISA and Section 4975 of the Code, as an asset of each Plan which becomes a
Securityholder of the applicable Series.
The Plan Assets Regulation provides an exemption from "plan asset"
treatment for securities issued by an entity if, immediately after the most
recent acquisition of any equity interest in the entity, less than 25% of the
value of each class of equity interests in the entity, excluding interests held
by a person who has discretionary authority or control with respect to the
assets of the entity, or any affiliate of the person, are held by "benefit plan
investors", e.g., Plans, governmental and other benefit plans not subject to
ERISA and entities holding assets deemed to be "plan assets". Because the
availability of this exemption to any Trust Fund depends upon the identity of
the Securityholders of the applicable Series at any time, there can be no
assurance that any Series or Class of Securities will qualify for this
exemption.
PROHIBITED TRANSACTION CLASS EXEMPTION APPLICABLE TO CERTIFICATES
Prohibited Transaction Class Exemption 83-1 (Class Exemption for Certain
Transactions Involving Mortgage Pool Investment Trusts) ("PTCE 83-1") permits,
subject to some conditions, specific transactions involving the creation,
maintenance and termination of particular residential mortgage pools and the
acquisition and holding of particular residential mortgage pool pass-through
Certificates by Plans, regardless of whether (a) the mortgage pool is exempt
from "plan asset" treatment or (b) the transactions would otherwise be
prohibited under ERISA or Section 4975 of the Code. A Series of Certificates
will be eligible for prohibited transaction relief if the general conditions
(described below) of PTCE 83-1 are satisfied, and if the applicable Series of
Certificates evidences ownership interests in Trust Assets which do not include
Mortgage Certificates, Cooperative Loans, Mortgage Loans secured by cooperative
buildings, Mortgage Loans secured by Multifamily Property, or Contracts
(collectively "Nonexempt Assets"). An investment by a Plan in Certificates of a
Series qualifying for relief under PTCE 83-1:
(1) will be exempt from the prohibitions of Section 406(a) of ERISA
(relating generally to Plan transactions involving Parties in Interest who are
not fiduciaries) if the Plan purchases the Certificates at no more than fair
market value, and
(2) will be exempt from the prohibitions of Sections 406(b) (1) and (2) of
ERISA (relating generally to Plan transactions with fiduciaries) if, in
addition,
(a) the purchase is approved by an independent fiduciary,
(b) no sales commission is paid to the Depositor as Mortgage Pool
sponsor,
(c) the Plan does not purchase more than 25% of the Certificates of
that Series and
(d) at least 50% of the Certificates of that Series is purchased by
persons independent of the Depositor, the Trustee and the Insurer, as
applicable.
PTCE 83-1 will not apply to a Series of Securities with respect to which the
Trust Assets include Nonexempt Assets.
PTCE 83-1 sets forth three general conditions that must be satisfied for
any transaction to be eligible for exemption:
(1) the existence of a pool trustee who is not an affiliate of the pool
sponsor;
(2) the maintenance of a system of insurance or other protection for the
pooled mortgage loans and property securing the loans, and for indemnifying
certificateholders against reductions in pass-through payment due to property
damage or defaults in loan payments; and
(3) a limitation on the amount of the payment retained by the pool sponsor,
together with other benefits inuring to it, to not more than adequate
consideration for selling the mortgage loans and reasonable compensation for
services provided by the pool sponsor to the mortgage pool.
The Trustee for all Series will be unaffiliated with the Depositor, and,
accordingly, the first general condition will be satisfied. With respect to the
second general condition of PTCE 83-1, the credit support method represented by
the issuance of a Subordinated Class or Subclasses of Certificates and/or the
establishment of a Reserve Fund, with respect to any Series intending to meet
the conditions of PTCE 83-1 for which this method of Credit Support is provided
(see "Credit Support -- Subordinated Securities" and " -- Reserve Fund"), is
substantially similar to a system for protecting Certificateholders against
reductions in pass-through payments which has been reviewed and accepted by the
DOL as an alternative to pool insurance or a letter of credit indemnification
system. This may support a Plan fiduciary's conclusion that the second general
condition is satisfied with respect to the Series although, in the absence of a
ruling to this effect, there can be no assurance that these features will be so
viewed by the DOL. In addition, the Depositor intends to use its best efforts to
establish, for the Series for which credit support is provided by a Letter of
Credit (see "Credit Support -- Letters of Credit") and/or the insurance
arrangements set forth above under "Description of Insurance" (an "Insured
Series"), a system that will adequately protect the Mortgage Pools and indemnify
Certificateholders of the applicable Series against pass-through payment
reductions resulting from property damage or defaults in loan payments. With
respect to the third general condition of PTCE 83-1, the Depositor intends to
use its best efforts to establish a compensation system which will produce for
the Depositor total compensation that will not exceed adequate consideration for
forming the Mortgage Pool and selling the Certificates. However, the Depositor
does not guarantee that its systems will be sufficient to meet the second and
third general conditions (described above) with respect to the Series.
If a Series of Certificates is subdivided into two or more Classes or
Subclasses which are entitled to disproportionate allocations of the principal
and interest payments on the Mortgage Loans held by the applicable Trust Fund,
the availability of the exemption afforded by PTCE 83-1 may be adversely
affected, as described in the applicable prospectus supplement. Moreover, if the
Certificateholders of any Class or Subclass of Certificates are entitled to
pass-through payment of principal, but no or only nominal interest, or interest,
but no or only nominal principal, it appears that PTCE 83-1 will not exempt
Plans which acquire Certificates of that Class or Subclass from the prohibited
transaction rules of ERISA and Section 4975 of the Code.
If a Series of Certificates includes a Class of Subordinated Certificates,
PTCE 83-1 will not provide an exemption from the prohibited transaction rules of
ERISA for Plans that acquire the Subordinated Certificates.
UNDERWRITER'S PROHIBITED TRANSACTION EXEMPTION APPLICABLE TO CERTIFICATES
Credit Suisse First Boston Corporation ("CSFB") is the recipient of
a final prohibited transaction exemption, 54 Fed. Reg. 42597 (Oct. 17, 1989)
(the "Underwriter's PTE" or "Credit Suisse First Boston Corporation's PTE" if
specified in the applicable prospectus supplement), which may accord protection
from violations under Sections 406 and 407 of ERISA and Section 4975 of the Code
for Plans that acquire Certificates. The Underwriter's PTE applies to
Certificates:
(a) which represent,
(1) a beneficial ownership interest in the assets of a trust and
entitle the holder to pass-through payments of principal, interest
and/or other payments made with respect to the assets of the trust, or
(2) an interest in a REMIC if the Certificates are issued by and are
obligations of a trust; and
(b) with respect to which CSFB or any of its affiliates is either
the sole underwriter, the manager or co-manager of the underwriting
syndicate or a selling or placement agent.
The corpus of a trust to which the Underwriter's PTE applies include:
(1) obligations which bear interest or are purchased at a discount and
which are secured by
(A) single-family residential, multifamily residential or commercial
real property, including obligations secured by leasehold interests on
commercial real property, or
(B) shares issued by a cooperative housing association;
(2) "guaranteed governmental mortgage pool certificates" (as defined in the
Plan Assets Regulation) and
(3) undivided fractional interests in the above.
Plans acquiring Certificates may be eligible for protection under the
Underwriter's PTE if:
(a) assets of the type included as Trust Assets have been included in
other investment pools ("Other Pools");
(b) Certificates evidencing interests in Other Pools have been both,
(1) rated in one of the three highest generic rating categories
by Standard & Poor's Ratings Services, a division of The
McGraw-Hill Companies, Inc., Moody's Investors Service, Inc.,
Duff & Phelps Credit Rating Co. or Fitch IBCA, Inc. and
(2) purchased by investors, other than Plans, for at least one
year prior to a Plan's acquisition of Certificates in reliance
upon the Underwriter's PTE;
(c) at the time of the acquisition, the Class of Certificates acquired
by the Plan has received a rating in one of the rating categories
referred to in condition (b) above;
(d) the Trustee is not an affiliate of any member of the Restricted
Group (as defined below);
(e) the Class of Certificates acquired by the Plan are not
subordinated to other Classes of Certificates of that Series with
respect to the right to receive payment in the event of defaults or
delinquencies on the underlying Trust Assets;
(f) the Plan is an "accredited investor" (as defined in Rule 501(a)(1)
of Regulation D under the Securities Act);
(g) the acquisition of the Certificates by a Plan is on terms,
including the price for the Securities, that are at least as favorable
to the Plan as they would be in an arm's length transaction with an
unrelated party; and
(h) the sum of all payments made to and retained by the Underwriter or
members of any underwriting syndicate in connection with the
distribution of the Certificates represents not more than reasonable
compensation for underwriting the Certificates; the sum of all
payments made to and retained by the Seller pursuant to the sale of
the Trust Assets to the Trust represents not more than the fair market
value of the Trust Assets; and the sum of all payments made to and
retained by the Master Servicer and all Servicers represents not more
than reasonable compensation for the Servicers' services under the
Pooling and Servicing Agreement and reimbursement of the Servicers'
reasonable expenses in connection with this prospectus.
In addition, the Underwriter's PTE will not apply to a Plan's investment in
Certificates if the Plan fiduciary responsible for the decision to invest in a
Class of Certificates is a Mortgagor or Obligor with respect to more than 5% of
the fair market value of the obligations constituting the Trust Assets or an
affiliate of the person and will not apply, unless:
(1) in the case of an acquisition in connection with the initial
issuance of any Series of Certificates, at least 50% of each Class of
Certificates in which Plans have invested is acquired by persons
independent of the Restricted Group and at least 50% of the aggregate
interest in the Trust is acquired by persons independent of the Restricted
Group;
(2) the Plan's investment in any Class of Certificates does not exceed
25% of the outstanding Certificates of that Class at the time of
acquisition;
(3) immediately after the acquisition, no more than 25% of the Plan
assets with respect to which the investing fiduciary has discretionary
authority or renders investment advice are invested in Certificates
evidencing interest in trusts sponsored or containing assets sold or
serviced by the same entity; and
(4) the Plan is not sponsored by the Depositor, any Underwriter, the
Trustee, any Servicer, any Pool, Special Hazard or Primary Mortgage Insurer
or the obligor under any other credit support mechanism, a Mortgagor or
Obligor with respect to obligations constituting more than 5% of the
aggregate unamortized principal balance of the Trust Assets on the date of
the initial issuance of Certificates, or any of their affiliates (the
"Restricted Group").
On July 21, 1997, the DOL published in the Federal Register a final
amendment to the Underwriter's PTE which extends exemptive relief to particular
mortgage-backed and asset-backed securities transactions using pre-funding
accounts for trusts issuing pass-through certificates. With respect to the
Certificates, the amendment generally allows a portion of the mortgages or
receivables ("Loans") supporting payments to Certificateholders and having a
principal amount equal to no more than 25% of the total principal amount of the
Certificates to be transferred to the Trust within a 90-day or three-month
period following the Closing Date ("ERISA Pre-Funding Period"), instead of
requiring that all the Loans be either identified or transferred on or before
the Closing Date. The relief, is effective for transactions occurring on or
after May 23, 1997, provided that the following 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") must not exceed 25%;
(2) all Loans transferred after the Closing Date ("Additional Loans")
must meet the same terms and conditions for eligibility as the original
Loans used to create the Trust, which terms and conditions have been
approved by the Rating Agency;
(3) the transfer of the Additional Loans to the Trust during the ERISA
Pre-Funding Period must not result in the Certificates receiving a lower
credit rating from the Rating Agency upon termination of the ERISA
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 Loans in the Trust at the end of the ERISA Pre-Funding Period must not
be more than 100 basis points lower than the average interest rate for the
Loans which were transferred to the Trust on the Closing Date;
(5) in order to ensure that the characteristics of the Additional
Loans are substantially similar to the original obligations which were
transferred to the Trust, either:
o the characteristics of the Additional Loans must be monitored by
an insurer or other credit support provider which is independent
of the Depositor or
o an independent accountant retained by the Depositor must provide
the Depositor with a letter, with copies provided to the Rating
Agency, the Underwriter and the Trustee, stating whether or not
the characteristics of the Additional Loans conform to the
characteristics described in the prospectus, prospectus
supplement, Private Placement Memorandum ("Offering Documents")
and/or Pooling and Servicing Agreement ("Pooling Agreement"); in
preparing the letter, the independent accountant must use the
same type of procedures as were applicable to the Loans which
were transferred as of the Closing Date;
(6) the ERISA Pre-Funding Period must end no later than three months
or 90 days after the Closing Date or earlier, in some circumstances, if the
amount on deposit in the Pre-Funding Account is reduced below the minimum
level specified in the Pooling Agreement or an event of default occurs
under the Pooling Agreement;
(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 specific permitted investments;
(8) the Offering Documents must describe:
(a) any Pre-Funding Account and/or Capitalized Interest Account
used in connection with a Pre-Funding Account;
(b) the duration of the ERISA Pre-Funding Period;
(c) the percentage and/or dollar amount of the Pre-Funding Limit
for the Trust; and
(d) that the amounts remaining in the Pre-Funding Account at the
end of the ERISA Pre-Funding Period will be remitted to
Certificateholders as repayments of principal; and
(9) the Pooling and Servicing Agreement must describe the permitted
investments for the Pre-Funding Account and Capitalized Interest Account
and, if not disclosed in the Offering Documents, the terms and conditions
for eligibility of the Additional Loans.
Whether the conditions in the Underwriter's PTE, in addition to, and
including those, relating to pre-funding, will be satisfied as to Certificates
or any particular Class will depend upon the relevant facts and circumstances
existing at the time the Plan acquires Certificates of that Class. Any Plan
investor who proposes to use "plan assets" of a Plan to acquire Certificates in
reliance upon the Underwriter's PTE should determine whether the Plan satisfies
all of the applicable conditions and consult with its counsel regarding other
factors that may affect the applicability of the Underwriter's PTE.
GENERAL ERISA CONSIDERATIONS RELATING TO CERTIFICATES
Any member of the Restricted Group, a Mortgagor or Obligor, or any of their
affiliates might be considered or might become a Party in Interest with respect
to a Plan. In that event, the acquisition or holding of Certificates of the
applicable Series or Class by, on behalf of or with "plan assets" of the Plan
might be viewed as giving rise to a prohibited transaction under ERISA and
Section 4975 of the Code, unless PTCE 83-1, the Underwriter's PTE or another
exemption is available. Accordingly, before a Plan investor makes the investment
decision to purchase, to commit to purchase or to hold Certificates of any
Series or Class, the Plan investor should determine:
(a) whether the conditions (described briefly above) of PTCE 83-1 have been
satisfied;
(b) whether the Underwriter's PTE is applicable;
(c) whether any other prohibited transaction exemption, if required, is
available under ERISA and Section 4975 of the Code; or
(d) whether an exemption from "plan asset" treatment is available to the
applicable Trust Fund.
The Plan investor should also consult the ERISA discussion, if any, in the
applicable prospectus supplement for further information regarding the
application of ERISA to any Series or Class of Certificates.
If for any reason neither PTCE 83-1 nor the Underwriter's PTE provides an
exemption for a particular Plan investor, one of five other prohibited
transaction class exemptions issued by the DOL might apply, i.e., PTCE 91-38
(Class Exemption for Certain Transactions Involving Bank Collective Investment
Funds), PTCE 90-1 (Class Exemption for Certain Transactions Involving Insurance
Company Pooled Separate Accounts), PTCE 84-14 (Class Exemption for Plan Asset
Transactions Determined by Independent Qualified Professional Asset Managers),
PTCE 95-60 (Class Exemption for Certain Transactions Involving Insurance Company
General Accounts) or PTCE 96-23 (Class Exemption for Plan Asset Transactions
Performed by In-house Asset Managers) (collectively, the "Investor Based
Exemptions"). There can be no assurance that any of these Investor Based
Exemptions will apply with respect to any particular Plan investor or, even if
it were to apply, that the exemption would apply to all transactions involving
the applicable Trust Fund. Any person who is a fiduciary by reason of his or her
authority to invest "plan assets" of any Plan and who is considering the use of
"plan assets" of any Plan to purchase the offered Certificates should consult
with its counsel with respect to the potential applicability of ERISA and the
Code to the investments, and should determine on its own whether PTCE 83-1, the
Underwriter's PTE or another exemption would be applicable, and whether all
conditions have been satisfied with respect to this exemptions, and whether the
offered Certificates are an appropriate investment for a Plan. Moreover, each
Plan fiduciary should determine whether, under the general fiduciary standards
of investment prudence and diversification, an investment in the offered
Certificates is appropriate for the Plan, taking into account the overall
investment policy of the Plan and the composition of the Plan's investment
portfolio.
ERISA CONSIDERATIONS RELATING TO THE NOTES
Under the Plan Assets Regulation, the assets of the Trust would be treated
as plan assets of a Plan for the purposes of ERISA and the Code only if the Plan
acquires an "Equity Interest" in the Trust and none of the exceptions contained
in the Plan Assets Regulation is applicable. An equity interest is defined under
the Plan Assets Regulation as an interest other than an instrument which is
treated as indebtedness under applicable local law and which has no substantial
equity features. Assuming that a Class of Notes is treated as indebtedness
without substantial equity features for purposes of the Plan Assets Regulation,
then the Class of Notes will be eligible for purchase by Plans. However, without
regard to whether a Class of Notes is treated as an "equity interest" for these
purposes, the acquisition or holding of Notes by or on behalf of a Plan could be
considered to give rise to a prohibited transaction if the Trust or any of its
affiliates is or becomes a party in interest or disqualified person with respect
to the Plan, or in the event that a Note is purchased in the secondary market
and the purchase constitutes a sale or exchange between a Plan and a party in
interest or disqualified person with respect to the Plan. There can be no
assurance that the Trust or any of its affiliates will not be or become a party
in interest or a disqualified person with respect to a Plan that acquires Notes.
However, one or more of the Investor Based Exemptions described above may apply
to any potential prohibited transactions arising as a consequence of the
acquisition, holding and transfer of the Notes.
ANY PLAN INVESTOR WHO PROPOSES TO USE "PLAN ASSETS" OF ANY PLAN TO
PURCHASE SECURITIES OF ANY SERIES OR CLASS SHOULD CONSULT WITH ITS
COUNSEL WITH RESPECT TO THE POTENTIAL CONSEQUENCES UNDER ERISA AND
SECTION 4975 OF THE CODE OF THE ACQUISITION AND OWNERSHIP OF THE
SECURITIES.
LEGAL INVESTMENT
The applicable prospectus supplement for a Series of Securities will
specify whether a Class or Subclass of the Securities, as long as it is rated in
one of the two highest rating categories by one or more nationally recognized
statistical rating organizations, will constitute a "mortgage related security"
for purposes of the Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA").
The Class or Subclass, if any, constituting a "mortgage related security" will
be a legal investment for persons, trusts, corporations, partnerships,
associations, business trusts and business entities, including depository
institutions, insurance companies, trustees and state government employee
retirement systems, created pursuant to or existing under the laws of the United
States or of any state (including the District of Columbia and Puerto Rico)
whose authorized investments are subject to state regulation to the same extent
that, under applicable law, obligations issued by or guaranteed as to principal
and interest by the United States or any agency or instrumentality of the United
States constitute legal investments for the entities.
Pursuant to SMMEA, a number of states enacted legislation, on or prior to
the October 3, 1991 cutoff for the enactments, limiting to varying extents the
ability of specific entities, in particular, insurance companies, to invest in
"mortgage related securities," in most cases by requiring the affected investors
to rely solely upon existing state law, and not SMMEA. Accordingly, the
investors affected by the legislation will be authorized to invest in Securities
qualifying as "mortgage related securities" only to the extent provided in the
legislation.
SMMEA also amended the legal investment authority of federally-chartered
depository institutions as follows: federal savings and loan associations and
federal savings banks may invest in, sell or otherwise deal in mortgage related
securities without limitation as to the percentage of their assets represented
thereby, federal credit unions may invest in the securities, and national banks
may purchase the securities for their own account without regard to the
limitations generally applicable to investment securities set forth in 12 U.S.C.
24 (Seventh), subject in each case to the regulations as the applicable federal
regulatory authority may prescribe. In this connection, federal credit unions
should review NCUA Letter to Credit Unions No. 96, as modified by Letter to
Credit Unions No. 108, which includes guidelines to assist federal credit unions
in making investment decisions for mortgage related securities. The NCUA has
adopted rules, codified as 12 C.F.R. Section 703.5(f)-(k), which prohibit
federal credit unions from investing in particular mortgage related securities,
including the securities of particular Series, Classes or Subclasses of
Securities, except under limited circumstances.
All depository institutions considering an investment in the Securities
should review the "Supervisory Policy Statement on Securities Activities" dated
January 28, 1992, as revised April 15, 1994 (the "Policy Statement") of the
Federal Financial Institutions Examination Council.
The Policy Statement which has been adopted by the Board of Governors of
the Federal Reserve System, the Office of the Comptroller of the Currency, the
FDIC and the Office of Thrift Supervision and by the NCUA, with some
modifications, prohibits depository institutions from investing in particular
"high-risk Mortgage Certificates", including the securities of particular
Series, Classes or Subclasses of the Securities, except under limited
circumstances, and sets forth investment practices deemed to be unsuitable for
regulated institutions.
Institutions whose investment activities are subject to regulation by
federal or state authorities should review rules, policies and guidelines
adopted from time to time by the authorities before purchasing any Securities,
as some Series, Classes or Subclasses may be deemed unsuitable investments, or
may otherwise be restricted, under the rules, policies or guidelines, in some
instances irrespective of SMMEA.
The foregoing does not take into consideration the applicability of
statutes, rules, regulations, orders, guidelines or agreements generally
governing investments made by a particular investor, including, but not limited
to, "prudent investor" provisions, percentage-of-assets limits, provisions which
may restrict or prohibit investment in securities which are not "interest
bearing" or "income paying," and, with regard to any Securities issued in
book-entry form, provisions which may restrict or prohibit investments in
securities which are issued in book-entry form.
Except as to the status of some of the Classes of Securities as "mortgage
related securities," no representation is made as to the proper characterization
of the Securities for legal investment purposes, financial institution
regulatory purposes, or other purposes, or as to the ability of particular
investors to purchase Securities under applicable legal investment restrictions.
The uncertainties described above, and any unfavorable future determinations
concerning legal investment or financial institution regulatory characteristics
of the Securities, may adversely affect the liquidity of the Securities.
Investors should consult their own legal advisers in determining whether
and to what extent the Securities constitute legal investments for the
investors.
PLAN OF DISTRIBUTION
Each Series of Securities offered by this prospectus and by means of the
related prospectus supplements may be sold directly by the Depositor or may be
offered through Credit Suisse First Boston Corporation, an affiliate of the
Depositor, or underwriting syndicates represented by Credit Suisse First Boston
Corporation (the "Underwriters"). The prospectus supplement with respect to each
Series of Securities will set forth the terms of the offering of the Series or
Class of Securities and each Subclass within the Series, including the name or
names of the Underwriters, the proceeds to the Depositor, and either the initial
public offering price, the discounts and commissions to the Underwriters and any
discounts or concessions allowed or reallowed to particular dealers, or the
method by which the price at which the Underwriters will sell the Securities
will be determined.
Unless otherwise specified in the prospectus supplement, the Underwriters
will be obligated to purchase all of the Securities of a Series described in the
prospectus supplement with respect to the Series if any Securities are
purchased. The Securities may be acquired by the Underwriters for their own
account and may be resold from time to time in one or more transactions,
including negotiated transactions, at a fixed public offering price or at
varying prices determined at the time of sale.
If so indicated in the prospectus supplement, the Depositor will authorize
the Underwriters or other persons acting as the Depositor's agents to solicit
offers by specific institutions to purchase the Securities from the Depositor
pursuant to contracts providing for payment and delivery on a future date.
Institutions with which the contracts may be made include commercial and savings
banks, insurance companies, pension funds, investment companies, educational and
charitable institutions and others, but in all cases the institutions must be
approved by the Depositor. The obligation of any purchaser under any contract
will be subject to the condition that the purchase of the offered Securities
shall not at the time of delivery be prohibited under the laws of the
jurisdiction to which the purchaser is subject. The Underwriters and other
agents will not have any responsibility in respect of the validity or
performance of the contracts.
The Depositor may also sell the Securities offered by this prospectus and
by means of the related prospectus supplements from time to time in negotiated
transactions or otherwise, at prices determined at the time of sale. The
Depositor may effect the transactions by selling Securities to or through
dealers, and the dealers may receive compensation in the form of underwriting
discounts, concessions or commissions from the Depositor and any purchasers of
Securities for whom they may act as agents.
The place and time of delivery for each Series of Securities offered by
this prospectus and by means of the related prospectus supplement will be set
forth in the prospectus supplement with respect to the Series.
If and to the extent required by applicable law or regulation, this
prospectus and the attached prospectus supplement will also be used by the
Underwriters after the completion of the offering in connection with offers and
sales related to market-making transactions in the offered Securities in which
the Underwriters act as principal. Sales will be made at negotiated prices
determined at the time of sales.
LEGAL MATTERS
Some legal matters in connection with the Securities offered by this
prospectus, including material federal income tax consequences, will be passed
upon for the Depositor and for the Underwriters by Stroock & Stroock & Lavan
LLP, New York, New York, or other counsel specified in the related prospectus
supplement.
PROSPECTUS SUPPLEMENT
The prospectus supplement with respect to each Series of Securities will,
among other things, set forth with respect to the Series of Securities:
o the identity of each Class or Subclass of Securities within the Series;
o the undivided interest, Percentage Interest, Stated Principal Balance,
principal balance or notional amount of each Class or Subclass of
Securities;
o the Interest Rate borne, or manner in which interest is paid, if any, by
each Class or Subclass of Securities within the Series;
o particular information concerning the Mortgage Loans, the Mortgage
Certificates, the Contracts, if any, and the other assets comprising the
Trust Fund for the Series;
o the final Distribution Date of each Class or Subclass of Securities within
the Series;
o the identity of each Class or Subclass of Compound Interest Securities, if
any, within the Series;
o the method used to calculate the amount to be distributed with respect to
each Class or Subclass of Securities within the Series;
o the order of application of distributions to each of the Classes or
Subclasses of Securities within the Series, whether sequential, pro rata or
otherwise;
o the Distribution Dates with respect to the Series;
o information with respect to the terms of the Residual Certificates or
Subordinated Securities offered by this prospectus, if any, are offered;
o information with respect to the method of credit support, if any, with
respect to the Series; and
o additional information with respect to the plan of distribution of the
Series of Certificates.
ADDITIONAL INFORMATION
This prospectus contains, and the prospectus supplement for each Series of
Securities will contain, a summary of the material terms of the documents
referred to in this prospectus and in the prospectus supplement, but neither
contains nor will contain all of the information set forth in the Registration
Statement of which this prospectus and the related prospectus supplement is a
part. For further information, reference is made to the Registration Statement
and the exhibits to the Registration Statement which the Depositor has filed
with the Securities and Exchange Commission (the "Commission") under the
Securities Act of 1933, as amended. Statements contained in this prospectus and
any prospectus supplement as to the contents of any contract or other document
referred to are summaries and in each instance reference is made to the copy of
the contract or other document filed as an exhibit to the Registration
Statement, each statement being qualified in all respects by the reference.
Copies of the Registration Statement may be obtained from the Commission, upon
payment of the prescribed charges, or may be examined free of charge at the
Commission's offices. Reports and other information filed with the Commission
can be inspected and copied at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
Regional Offices of the Commission at Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661, and Seven World Trade Center, Suite 1300,
New York, New York 10048. Copies of this information can be obtained from the
Public Reference Section of the Commission at Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549, at prescribed rates.
The Commission maintains a Web site that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission. The address of the site is
(http://www.sec.gov).
Copies of the Pooling and Servicing Agreement or of the Trust Agreement,
Indenture and Sale and Servicing Agreement pursuant to which a Series of
Securities is issued, as applicable, will be provided to each person to whom a
prospectus and the related prospectus supplement are delivered, upon written or
oral request directed to: Treasurer, Asset Backed Securities Corporation, Eleven
Madison Avenue, New York, New York 10010, (212) 325-2000.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
There are incorporated in this prospectus by reference all documents and
reports filed or caused to be filed by the Depositor with respect to a Trust
Fund pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act prior to
the termination of the offering of Securities offered by this prospectus. The
Depositor will provide or cause to be provided without charge to each person to
whom this prospectus is delivered in connection with the offering of one or more
Classes or Subclasses of Securities, upon request, a copy of any or all the
documents or reports incorporated in this prospectus by reference, in each case
to the extent the documents or reports relate to one or more of the Classes of
the Securities, other than the exhibits to the documents, unless the exhibits
are specifically incorporated by reference in the documents. Requests to the
Depositor should be directed to: Asset Backed Securities Corporation, Eleven
Madison Avenue, New York, New York 10010, (212) 325-2000.
IF AND TO THE EXTENT REQUIRED BY APPLICABLE LAW OR REGULATIONS, THIS
PROSPECTUS AND THE ATTACHED PROSPECTUS SUPPLEMENT WILL ALSO BE USED BY THE
UNDERWRITER AFTER THE COMPLETION OF THE OFFERING IN CONNECTION WITH OFFERS AND
SALES RELATED TO MARKET-MAKING TRANSACTIONS IN THE OFFERED SECURITIES IN WHICH
THE UNDERWRITER ACTS AS PRINCIPAL. SALES WILL BE MADE AT NEGOTIATED PRICES
DETERMINED AT THE TIME OF SALE.
<PAGE>
INDEX OF TERMS
10 percent shareholder.....................................................115
1986 Act....................................................................89
1988 Act....................................................................94
1996 Contingent Debt Regulations............................................88
1997 Act....................................................................94
accredited investor........................................................124
Accrual Distribution Amount.................................................27
Additional Loans...........................................................125
adjusted issue price........................................................87
Advances....................................................................42
AFR.........................................................................92
Agreement...................................................................11
Alternative Credit Support...................................................6
applicable amount..........................................................102
applicable federal rate.....................................................92
appraised value.............................................................17
Approved Sale...............................................................67
APRs........................................................................15
ARM Loans....................................................................7
Asset Value.................................................................25
Assets......................................................................82
average interest rate......................................................125
backup.....................................................................120
backup withholding tax......................................................98
benefit plan investors.....................................................121
Bond Premium Amortization Limit.............................................90
Bond Premium Amortization Regulations.......................................89
Buy-Down Fund................................................................8
Buy-Down Loans...............................................................8
Cede.......................................................................112
Certificate Account.........................................................35
Certificate Distribution Account............................................36
Certificate Principal Balance...............................................22
Certificate Register........................................................28
Certificateholder..........................................................112
Certificateholders..........................................................10
Certificates.................................................................5
chattel paper...............................................................77
Class........................................................................5
Cleanup Costs...............................................................77
Closed Loans................................................................11
Closed-End Loans.............................................................6
Closing Date................................................................84
coinsurance.................................................................65
Collection Account..........................................................35
commercially reasonable.....................................................73
Commission.................................................................130
Contract Loan-to-Value Ratio................................................17
Contract Pool...............................................................15
Contract Schedule...........................................................31
Contracts...................................................................15
controlled foreign corporation.............................................115
conversion transaction......................................................95
Converted Mortgage Loan......................................................8
Cooperative..................................................................6
Cooperative Dwelling.........................................................6
cooperative housing corporation.............................................72
Cooperative Loans............................................................6
Credit Suisse First Boston Corporation's PTE...............................123
Credit Support..............................................................43
current value...............................................................85
Custodial Account...........................................................36
Custodial Agreement.........................................................16
Custodian...................................................................16
Cut-off Date.................................................................5
daily accruals..............................................................92
daily portions..............................................................86
Deferred Interest............................................................8
Deficiency Event............................................................51
Deleted Contract............................................................17
Deleted Mortgage Certificates...............................................29
Deleted Mortgage Loans......................................................30
Deleted Warehouse Loan......................................................18
Depositor...................................................................19
Description of Insurance....................................................24
Determination Date..........................................................39
Discount Securities.........................................................23
disqualified organizations..................................................94
Distribution Date...........................................................26
DOL........................................................................121
domestic building and loan association.....................................100
DTC........................................................................112
Due Date.....................................................................7
Due Period..................................................................27
due-on-sale.................................................................21
effectively connected......................................................112
effectively connected earnings and profits.................................115
Eligible Investment.........................................................33
Equity Interest............................................................127
equivalent..................................................................87
ERISA......................................................................120
ERISA Plans................................................................120
ERISA Pre-Funding Period...................................................125
Escrow Account..............................................................43
evidence of indebtedness....................................................83
excess inclusions...........................................................92
FHA..........................................................................9
FHA Experience..............................................................20
FHA Loans....................................................................6
Final Withholding Regulations...............................................99
First Boston...............................................................123
fixture filing..............................................................78
foreign person.............................................................115
foreign trust...............................................................99
Garn-St Germain Act.........................................................76
GPM Fund.....................................................................8
GPM Loans....................................................................8
guaranteed governmental mortgage pool certificates.........................123
Holder-in-Due-Course........................................................80
Home Equity Loans............................................................6
Indenture....................................................................5
Indenture Trustee............................................................5
Initial Deposit.............................................................57
Insurance Proceeds..........................................................36
Insured.....................................................................46
Insured Series.............................................................122
interest bearing...........................................................128
Interest Coupon............................................................106
Interest Distribution.......................................................26
Interest Rate...............................................................22
Interest Weighted Class.....................................................23
Interest Weighted Subclass..................................................23
Investor Based Exemptions..................................................126
IRS.........................................................................84
Issuer.......................................................................5
L/C Bank....................................................................56
L/C Percentage..............................................................56
Letter of Credit.............................................................5
limited documentation.......................................................13
Liquidating Loan............................................................57
Liquidation Proceeds........................................................37
Loans......................................................................125
Loss........................................................................62
Manufactured Home...........................................................15
market discount............................................................114
Mortgage Certificates........................................................6
Mortgage Loans...............................................................6
Mortgage Notes...............................................................7
Mortgage Pools...............................................................6
Mortgage Rates...............................................................8
mortgage related securities................................................128
mortgage related security..................................................127
Mortgagor....................................................................7
Mortgagor Bankruptcy Bond....................................................5
Multi-Class Securities......................................................22
Multifamily Property.........................................................6
Multiple Variable Rate......................................................87
net income from foreclosure property........................................97
noneconomic.................................................................93
Nonexempt Assets...........................................................121
non-U.S. Person.............................................................98
Note Distribution Account...................................................35
Note Register...............................................................28
Noteholders.................................................................11
Notes........................................................................5
objective rate..............................................................85
Obligor.....................................................................22
Offering Documents.........................................................125
OID Regulations.............................................................81
original issue discount.....................................................84
Original Value...............................................................7
Originator..................................................................12
Other Pools................................................................123
Parties in Interest........................................................121
pass-through entity.........................................................95
payment deficiencies........................................................58
peaceful....................................................................79
Percentage Interest..........................................................5
Performance Bond............................................................17
permitted investments.......................................................82
plan assets................................................................121
Plan Assets Regulation.....................................................121
Plans......................................................................121
Policy Statement...........................................................128
Pool Insurance Policy........................................................5
Pool Insurer................................................................46
Pooling Agreement..........................................................125
Pooling and Servicing Agreement..............................................5
portfolio interest.........................................................115
Pre-Funded Amount...........................................................33
Pre-Funding Account.........................................................33
Pre-Funding Limit..........................................................125
Pre-Funding Period..........................................................33
Premium Securities..........................................................23
Prepayment Assumption.......................................................84
Primary Insurer.............................................................37
Primary Mortgage Insurance Policy...........................................46
Primary Mortgage Insurer....................................................46
Principal Distribution......................................................26
Principal Prepayments.......................................................23
Principal Weighted Class....................................................23
Principal Weighted Subclass.................................................23
prohibited transactions.....................................................97
prudent investor...........................................................128
PTCE 83-1..................................................................121
Purchase Price..............................................................32
qualified floating rate.....................................................85
qualified inverse floating rate.............................................87
Qualified Mortgage.........................................................101
qualified mortgages.........................................................82
qualified stated interest...................................................85
qualifying liquidation......................................................21
Rating Agency................................................................6
real estate assets..........................................................82
Record Date.................................................................26
Reference Agreement.........................................................24
regular interests...........................................................25
REIT........................................................................82
related person.............................................................115
REMIC.......................................................................81
REMIC Certificateholders....................................................82
REMIC Certificates..........................................................81
REMIC Mortgage Pool.........................................................81
REMIC Provisions............................................................81
REMIC Regular Certificate...................................................81
REMIC Regulations...........................................................81
REMIC Residual Certificate..................................................81
reportable payments........................................................112
Required Distribution.......................................................60
Required Reserve............................................................57
Reserve Fund.................................................................6
Residual Certificates.......................................................23
residual interest...........................................................25
Residual Owner..............................................................91
Restricted Group...........................................................124
Retained Yield.............................................................102
Revolving Credit Line Loans..................................................6
Sale and Servicing Agreement.................................................5
SBJPA of 1996...............................................................93
Securities...................................................................5
Securities Act..............................................................26
Security Guarantee Insurance.................................................6
Securityholders.............................................................11
self-help...................................................................79
Senior Prepayment Percentage................................................59
Senior Securities............................................................5
Series.......................................................................5
Servicemen's Readjustment Act................................................9
Servicer....................................................................11
Servicing Account...........................................................36
Servicing Agreement.........................................................11
Short-Term Certificate.....................................................110
significant value...........................................................93
Single Family Property.......................................................6
single family residence.....................................................83
Single Variable Rate........................................................85
single-class REMIC..........................................................96
SMMEA......................................................................127
SPA.........................................................................20
Special Distributions.......................................................40
Special Hazard Insurance Policy..............................................5
Special Tax Counsel.........................................................81
Standard Hazard Insurance Policy............................................44
Standard Terms..............................................................24
startup day.................................................................97
Stated Principal Balance....................................................22
Stated Principal Distribution Amount........................................27
stripped bond..............................................................103
Stripped Bond Rules........................................................103
stripped bonds.............................................................102
stripped coupons...........................................................102
Stripped Interest..........................................................107
Stripped Mortgage Loan.....................................................102
Subclass.....................................................................5
Subordinate Securities.......................................................5
Subordinated Amount..........................................................5
Subordinated Class...........................................................6
Subordinated Pool...........................................................57
Subordinated Subclass........................................................6
Substitute Contract.........................................................17
Substitute Mortgage Certificates............................................29
Substitute Mortgage Loans...................................................30
Substitute Warehouse Loan...................................................19
Supervisory Policy Statement on Securities Activities......................128
tax avoidance potential.....................................................99
tax matters person..........................................................98
taxable mortgage pool......................................................111
teaser......................................................................85
Technical and Miscellaneous Revenue Act of 1988.............................94
tenant-stockholder..........................................................72
thrift institutions.........................................................93
Tiered REMICs...............................................................83
Title V.....................................................................80
Trust........................................................................5
Trust Agreement..............................................................5
Trust Assets................................................................15
Trust Certificates..........................................................81
Trust Fractional Certificate................................................81
Trust Fractional Certificateholder.........................................101
Trust Fund...................................................................5
Trust Interest Certificate..................................................81
Trust Interest Certificateholder...........................................106
Trustee......................................................................5
U.S. Person.................................................................98
UCC.........................................................................73
Unaffiliated Sellers........................................................11
Underwriter's PTE..........................................................123
Underwriters...............................................................129
unrelated business taxable income...........................................94
Unstripped Mortgage Loans..................................................104
VA...........................................................................6
VA Loans.....................................................................6
voidable preference.........................................................61
Warehouse Loan Pool.........................................................18
Warehouse Loans.............................................................18
Warranty and Servicing Agreement............................................24
<PAGE>
____________ CREDIT CARD MASTER NOTE TRUST ____-___
Issuer
ASSET BACKED SECURITIES CORPORATION
Transferor
--------------------
Servicer
Series 200_-__
$
Class A Floating Rate Asset Backed Notes
$s
Class B Floating Rate Asset Backed Notes
$
Class C Floating Rate Asset Backed Notes
--------------------
PROSPECTUS SUPPLEMENT
--------------------
SUBJECT TO COMPLETION, DATED ________, 2000
PROSPECTUS SUPPLEMENT TO PROSPECTUS DATED _______, 2000
__________ CREDIT CARD MASTER NOTE TRUST 200_-_
ASSET BACKED SECURITIES CORPORATION
Transferor
----------------------
Servicer
The trust will issue the following classes of asset backed notes:
<TABLE>
<CAPTION>
CLASS A NOTES CLASS B NOTES CLASS C NOTES
<S> <C> <C> <C>
PRINCIPAL AMOUNT: $ $ $
INTEREST RATE: [Libor plus] __% per year [Libor plus] __% per year [Libor plus] __% per year
Monthly on the 17th, Monthly on the 17th, Monthly on the 17th,
INTEREST PAYMENT DATES: beginning, _______, 200_ beginning, _______, 200_ beginning, _______, 200_
EXPECTED PRINCIPAL PAYMENT
DATE: ______, 200_ ______, 200_ ______, 200_
LEGAL MATURITY DATE: ______, 200_ ______, 200_ ______, 200_
PRICE TO PUBLIC: $ (or %) $ (or %) $ (or %)
UNDERWRITING DISCOUNT: $ (or %) $ (or %) $ (or %)
PROCEEDS TO ISSUER: $ (or %) $ (or %) $ (or %)
</TABLE>
The Class B notes are subordinated to the Class A notes. The Class C notes are
subordinated to the Class A and Class B notes.
We expect to issue your series of notes on or about, _____ 200_. We will deliver
your series of notes in book-entry form.
YOU SHOULD CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE S-_ IN THIS
PROSPECTUS SUPPLEMENT AND ON PAGE _ IN THE PROSPECTUS.
The notes are obligations of __________ Credit Card Master Note Trust 200_-_
only and are not obligations of Asset Backed Securities Corporation,
_____________, _____________ or any other person.
Neither the Securities and Exchange Commission nor any state securities
commission has approved these notes or determined that this prospectus
supplement or the prospectus is accurate or complete. Any representation to the
contrary is a criminal offense.
CREDIT SUISSE FIRST BOSTON
____________, 2000
<PAGE>
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS PROSPECTUS SUPPLEMENT AND
THE ACCOMPANYING PROSPECTUS
We provide information to you about the notes in two separate documents:
o the accompanying prospectus, which provides general information,
some of which may not apply to your series of notes, and
o this prospectus supplement, which describes the specific terms of
your series of notes.
If the terms of your series of notes vary between this prospectus
supplement and the accompanying prospectus, you should rely on the information
in this prospectus supplement.
You should rely only on the information provided in this prospectus
supplement and the accompanying prospectus, including the information
incorporated by reference. We have not authorized anyone to provide you with
different information. We are not offering the notes in any state where the
offer is not permitted.
We include cross references in this prospectus supplement and the
accompanying prospectus to captions in these materials where you can find
further related discussions. The following Table of Contents and the Table of
Contents in the accompanying prospectus provide the pages on which these
captions are located.
This prospectus supplement uses defined terms. You can find a listing of
the pages where definitions can be found under the caption "Index of Terms for
Prospectus Supplement" beginning on page S-__ in this prospectus supplement and
under the caption "Index of Terms for Prospectus" beginning on page __ in the
accompanying prospectus.
TABLE OF CONTENTS
PAGE
Transaction Summary.........................................................S-
Summary of Terms............................................................S-
Risk Factors................................................................S-
_________'s Credit Card Portfolio...........................................S-
The Trust Portfolio.........................................................S-
Maturity Considerations.....................................................S-
The Originator..............................................................S-
The Servicer ...............................................................S-
The Transferor..............................................................S-
Description of Series Provisions............................................S-
ERISA Considerations........................................................S-
Underwriting................................................................S-
Legal Matters...............................................................S-
Index of Terms for Prospectus Supplement....................................S-
Annex I: Other Series Issued and Outstanding................................S-
<PAGE>
TRANSACTION SUMMARY
Trust: __________ Credit Card Master Note Trust 200_-_
Transferor: Asset Backed Securities Corporation
Originator: ___________
Servicer: ___________
Indenture Trustee: ___________
Owner Trustee: ___________
Closing Date: _______, 200_
Clearance and Settlement: DTC/Clearstream, Luxembourg/Euroclear
Primary Trust Assets: Receivables originated in [MasterCard(R) and
VISA(R)] accounts
Servicing Fee Rate: ___%
<TABLE>
<CAPTION>
CLASS A NOTES CLASS B NOTES CLASS C NOTES
Anticipated Ratings
(Moody's/Standard &
Poor's/Fitch IBCA):*
<S> <C> <C> <C>
Aaa/AAA/AAA A2/A/A Baa2/BBB/BBB
Credit Enhancement: subordination of Class B subordination of Class C spread account
and Class C
Interest Rate: [One-Month LIBOR] plus [ [One-Month LIBOR] plus [ [One-Month LIBOR] plus [
]% per year ]% per year ]% per year
Interest Accrual Method:
[actual/360] [actual/360] [actual/360]
Interest Payment Dates:
monthly (17th) monthly (17th) monthly (17th)
[Interest Rate Index Reset [2 London business days [2 London business days [2 London business days
Date:] before each interest before each interest before each interest
payment date] payment date] payment date]
First Interest Payment Date:
_____, 200_ _____, 200_ _____, 200_
Expected Principal Payment
Date: _____, 200_ _____, 200_ _____, 200_
Commencement of Accumulation
Period
(subject to adjustment):
_____, 200_ _____, 200_ _____, 200_
Legal Final Maturity Date:
_____, 200_ _____, 200_ _____, 200_
---------------
* It is a condition to issuance that one of these ratings be obtained.
</TABLE>
<PAGE>
SUMMARY OF TERMS
This summary highlights selected information and does not contain all of
the information that you need to consider in making your investment decision.
You should carefully read this entire document and the accompanying prospectus
before you purchase any notes.
THE ISSUER
The notes will be issued by __________ Credit Card Master Note Trust 200_-_, a
Delaware statutory business trust, pursuant to an indenture supplement to an
indenture, each between the trust and the indenture trustee.
The indenture trustee is _______________.
THE SERIES 200_-_ NOTES
INTEREST
The Class A notes will bear interest at [one-month LIBOR as determined each
month] plus __% per annum.
The Class B notes will bear interest at [one-month LIBOR as determined each
month] plus __% per annum.
The Class C notes will bear interest at [one-month LIBOR as determined each
month] plus __% per annum.
For each class of the Series 200_-__ notes, interest will be calculated as
follows:
o Principal balance, multiplied by
o Number of days in prior monthly interest period, multiplied by
o applicable interest rate, divided by
o 360.
Each interest period begins on and includes a distribution date and ends on but
excludes the next distribution date. However, the first interest period will
begin on and include the closing date.
Interest on the Series 200_-__ notes will be paid on each distribution date,
which will be _____ [17], 200_ and the 17th day of each following month if the
17th is a business day and, if not, the following business day.
See "Description of Series Provisions -- Interest Payments" in this prospectus
supplement for a description of how and when LIBOR will be determined.
PRINCIPAL
Principal of the Class A notes, the Class B notes and the Class C notes is
expected to be paid in full on the _____ 200_ distribution date. However:
o no principal will be paid on the Class B notes until the Class A notes are
paid in full; and
o no principal will be paid on the Class C notes until the Class A and Class
B notes are paid in full.
We are scheduled to begin accumulating collections of principal receivables
starting on, _____ 200_ for payment to the Series 200_-__ noteholders on the
expected principal payment date, but we may begin accumulating at a later date.
Principal of the Series 200_-__ notes may be paid earlier or later than the
expected principal payment date. You will not be entitled to any premium for
early or late payment of principal. If specified adverse events known as pay out
events occur, principal may be paid earlier than expected. If collections of the
credit card receivables are less than expected or are collected more slowly than
expected, then principal payments may be delayed. If the Series 200_-__ notes
are not paid on the expected principal payment date, collections of principal
receivables will continue to be used to pay principal on the Series 200_-__
notes until the notes are paid or until ______, 200_, whichever occurs first.
_______, 200_ is the legal maturity date for Series 200_-__ .
For more information about principal payments, see "Maturity Considerations,"
"Description of Series Provisions -- Principal Payments" and "-- Allocation
Percentages" in this prospectus supplement.
CREDIT ENHANCEMENT
SUBORDINATION
Credit enhancement for the Class A notes is provided by the subordination of the
Class B notes and the Class C notes.
Credit enhancement for the Class B notes is provided by the subordination of the
Class C notes.
SPREAD ACCOUNT
A spread account will provide credit enhancement for the Class C notes. The
spread account initially will not be funded. After the Series 200_-__ notes are
issued, deposits into the spread account will be made each month from available
finance charge collections and, if necessary and available, excess finance
charge collections from other series in group one up to the required spread
account amount as described in this prospectus supplement under "Description of
Series Provisions -- Spread Account." The spread account will be used to make
payments on the Class C notes if collections of receivables allocated to the
Class C notes are insufficient to make required payments.
Credit enhancement for your series is for your series' benefit only, and you are
not entitled to the benefits of credit enhancement available to other series.
For more information about credit enhancement, see "Description of Series
Provisions -- Reallocated Principal Collections," "-- Application of
Collections" and "-- Defaulted Receivables; Investor Charge-Offs" in this
prospectus supplement.
EVENTS OF DEFAULT
The Series 200_-__ notes are subject to specified events of default described
under "Description of Series Provisions -- Events of Default" in this prospectus
supplement and "The Indenture -- Events of Default; Rights upon Event of
Default" in the accompanying prospectus. These include, among other things, the
failure to pay interest for __ days after it is due or to pay principal on the
legal maturity date.
In case any event of default occurs and continues with respect to the Series
200_-__ notes, the indenture trustee or holders of more than 50% of the
then-outstanding principal balance of the Series 200_-__ notes may declare the
principal amount of the notes to be immediately due and payable. That
declaration may, be rescinded by holders of more than 50% of the
then-outstanding principal balance of the Series 200_-__ notes.
After an event of default and the acceleration of the Series 200_-__ notes,
funds on deposit in the collection account, the principal funding account, the
reserve account and, with respect to the Class C notes, the spread account will
be applied to pay principal of and interest on the Series 200_-__ notes to the
extent permitted by law. Principal collections and finance charge collections
allocated to Series 200_-__ will be applied to make monthly principal and
interest payments on the Series 200_-__ notes until the earlier of the date
those notes are paid in full or the legal final maturity of those notes.
If the Series 200_-__ notes are accelerated or the issuer fails to pay the
principal of the Series 200_-__ notes on the legal maturity, once conditions
described in the prospectus under "The Indenture -- Events of Default; Rights
upon Event of Default" are satisfied, the indenture trustee may, if legally
permitted, or will at the direction of holders of at least 66 2/3% of the
principal amount of each class of Series 200_-__ notes:
o institute proceedings in its own name for the collection of all amounts
then payable on the Series 200_-__ notes;
o take any other appropriate action to protect and enforce the rights and
remedies of the indenture trustee and the Series 200_-__ noteholders; or
o foreclose on a portion of the trust's assets by causing the trust to sell
an interest in the assets of the trust by issuing a foreclosure certificate
to the holders of the notes or to a third party selected by the indenture
trustee or by holders of more than 50% of the then-outstanding principal
balance of the Series 200_-__ notes.
A foreclosure certificate is an investor certificate issued by the trust
representing ownership of the interest in the assets of the trust securing the
Series 200_-__ notes. A foreclosure certificate held by a noteholder or a third
party will be subject to restrictions on transfer described under "The Indenture
-- Events of Default; Rights upon Event of Default" in the accompanying
prospectus.
OTHER INTERESTS IN THE TRUST
OTHER SERIES OF NOTES
The trust will issue other series of notes secured by the assets of the trust
from time to time in the future. A summary of the outstanding series is in
"Annex I: Other Series Issued and Outstanding" included at the end of this
prospectus supplement. The issuance of future series will occur without prior
review or consent by you or any other noteholder.
THE TRANSFEROR INTEREST
The interest in the trust not securing your series or any other series is the
transferor interest. The transferor interest is owned by the transferor. The
transferor may, however, sell all or a portion of its interest in the transferor
interest. The transferor interest does not provide credit enhancement for your
series or any other series.
THE RECEIVABLES
The primary assets of the trust are receivables in [MasterCard(R) and VISA(R)]*
revolving credit card accounts. The receivables consist of principal receivables
and finance charge receivables.
____________
* MasterCard(R) and VISA(R) are federally registered service marks of
MasterCardInternational Inc. and VISA U.S.A., Inc., respectively.
The following information is as of _______ 200_:
o Receivables in the trust: $
o Accounts designated to the trust: ________
For more information, see "The Trust Portfolio" in this prospectus supplement.
ALLOCATIONS OF COLLECTIONS
The servicer will collect payments on the receivables and will deposit those
collections in an account. It will keep track of those collections that are
finance charge receivables and those that are principal receivables.
Each month, the servicer will allocate collections received among:
o your series;
o other series outstanding; and
o the transferor interest in the trust.
The amount allocated to your series will be determined based mainly upon the
size of the invested amount of your series compared to the total amount of
principal receivables in the trust. At the time of issuance of the Series
200_-__ notes, the invested amount for Series 200_-__ will be $______. You are
entitled to receive payments of interest and principal only from collections of
receivables and other trust assets allocated to your series. If the invested
amount of your series declines, amounts allocated and available for payment to
your series and to you may be reduced. For a description of the allocation
calculations and the events which may lead to these reductions, see "Description
of Series Provisions -- Allocation Percentages" and "-- Reallocated Principal
Collections" in this prospectus supplement.
APPLICATION OF COLLECTIONS
FINANCE CHARGE COLLECTIONS
The trust will apply your series' share of collections of finance charge
receivables each month in the following order of priority:
o to pay interest on the Class A notes;
o to pay interest on the Class B notes;
o to pay the servicing fee;
o to pay interest on the Class C notes;
o to cover your series' allocation of defaulted receivables;
o to cover reductions in your series' invested amount resulting from investor
charge-offs allocated to your series and from reallocated principal
collections, in each case that have not been reimbursed;
o to fund, in limited circumstances, a reserve account to cover interest
payment shortfalls for Class A and Class B during the accumulation period;
o to make a deposit, if needed, to the spread account for Class C up to the
required spread account amount; and
o to other series in group one or to the holders of the transferor
certificates.
For a more detailed description of these applications, see "Description of
Series Provisions -- Application of Collections" in this prospectus supplement.
PRINCIPAL COLLECTIONS
The trust will apply your series' share of principal collections each month as
follows:
o During the revolving period, no principal will be paid to you or
accumulated in a trust account. Instead, your series' share of principal
collections will be treated as shared principal collections and may be
available to make principal payments for other series in group one.
o The accumulation period is scheduled to begin on, ______ 200 , but may
begin at a later date. During the accumulation period, your series' share
of principal collections will be deposited in a trust account, up to a
controlled deposit amount. On the expected principal payment date, amounts
on deposit in that account will be paid first to the Class A noteholders,
then to the Class B noteholders and then to the Class C noteholders.
o If a pay out event (described below) that applies to Series 200_-__ or to
all series occurs, the early amortization period will begin. During the
early amortization period, your series' share of principal collections will
be paid first to the Class A noteholders, then to the Class B noteholders
and then to the Class C noteholders.
o During any of the above periods, principal collections allocated to your
series, may be reallocated, if necessary, to make required interest
payments on the Class A notes and the Class B notes not made from available
finance charge collections, excess finance charge collections available
from other series in group one or funds in the reserve account. However,
for any monthly period, the sum of these reallocated principal collections
cannot exceed __% of the initial invested amount of your series, as reduced
due to the writing off of receivables or for previously reallocated
principal collections, in each case that have not been reimbursed.
o Any remaining principal collections will first be made available to other
series in group one and then be paid to the holders of the transferor
certificates or deposited in the special funding account.
For a more detailed description of these applications, see "Description of
Series Provisions -- Application of Collections" in this prospectus supplement.
PAY OUT EVENTS
The documents under which the Series 200_-__ notes will be issued include a list
of adverse events known as pay out events. If a pay out event that applies to
Series 200_-__ or to all series occurs, the trust will use collections of
principal receivables allocated to Series 200_-__ each month to pay principal on
the Series 200_-__ notes.
Pay out events may occur if the transferor fails to make required payments or
deposits, violates other covenants and agreements or makes representations and
warranties that are materially incorrect.
The following also are pay out events:
o The yield on the trust portfolio less the amount of receivables that are
written off as uncollectible allocated to Series 200_-__ , averaged over
three months is less than the weighted average interest rate for Series
200_-__ , calculated by taking into account the interest rate for the Class
A notes, the Class B notes and the Class C notes, plus the servicing fee
rate for Series 200_-__ ;
o The Class A notes, the Class B notes or the Class C notes are not paid in
full on their expected principal payment dates;
o Bankruptcy, insolvency or similar events relating to the transferor
(including any additional transferor) or the servicer;
o The transferor (including any additional transferor) is unable to transfer
receivables to the trust as required under the transfer and servicing
agreement;
o The transferor does not transfer receivables in additional accounts to the
trust within 5 business days of when required under the transfer and
servicing agreement;
o Specified defaults of the servicer;
o The trust becomes subject to regulation as an "investment company" under
the Investment Company Act of 1940; or
o An event of default occurs for the Series 200_-__ notes.
For a more detailed discussion of the pay out events, see "Description of Series
Provisions -- Pay Out Events" in this prospectus supplement and "Description of
the Notes -- Pay Out Events" in the accompanying prospectus.
OPTIONAL REDEMPTION
The trust has the option to repurchase your notes when the outstanding principal
amount for your series has been reduced to 10% or less of the initial principal
amount (as increased by the principal amount of any notes of your series issued
after the closing date). See "Description of the Notes -- Final Payment of
Principal; Termination" in the accompanying prospectus.
DENOMINATIONS
Beneficial interests in the Series 200_-___ notes may be purchased in minimum
denominations of $1,000 and multiples of $1,000 in excess of that amount.
REGISTRATION, CLEARANCE AND SETTLEMENT
The Series 200_-__ notes will be in book-entry form and will be registered in
the name of Cede & Co., as the nominee of The Depository Trust Company. Except
in limited circumstances, you will not receive a definitive instrument
representing your notes. See "Description of the Notes -- Definitive Notes" in
the accompanying prospectus.
You may elect to hold your Series 200_-__ notes through The Depository Trust
Company, in the United States, or Clearstream, Luxembourg or the Euroclear
System, in Europe.
Transfers will be made in accordance with the rules and operating procedures of
those clearing systems. See "Description of the Notes -- Book-Entry
Registration" in the accompanying prospectus.
TAX STATUS
Subject to important considerations described under "Federal Income Tax
Consequences" in the accompanying prospectus, Stroock & Stroock Lavan LLP, as
special tax counsel to the trust, is of the opinion that under existing law your
Series 200_-__ notes will be characterized as debt for federal income tax
purposes. By your acceptance of a Series 200_-__ note, you will agree to treat
your Series 200_-__ notes as debt for federal, state and local income and
franchise tax purposes. See "Federal Income Tax Consequences" in the
accompanying prospectus for additional information concerning the application of
federal income tax laws.
ERISA CONSIDERATIONS
Subject to important considerations described under "ERISA Considerations" in
this prospectus supplement and in the accompanying prospectus, the Series
200_-__ notes are eligible for purchase by persons investing assets of employee
benefit plans or individual retirement accounts. A fiduciary or other person
contemplating purchasing the Series 200_-__ notes on behalf of or with plan
assets of any plan or account should consult with its counsel regarding whether
the purchase or holding of the Series 200_-__ notes could give rise to a
transaction prohibited or not otherwise permissible under ERISA or Section 4975
of the Internal Revenue Code.
<PAGE>
RISK FACTORS
You should carefully consider the following risk factors prior to any
purchase of certificates. You should also consider the information set forth
under "Risk Factors" in the prospectus.
YOU MAY HAVE DIFFICULTY SELLING YOUR
NOTES................................. The notes will not be listed on any
securities exchange. As a result, if you
wish to sell your notes, you will have
to find a purchaser that is willing to
purchase your notes. The underwriter
intends to make a secondary market for
the offered notes. The underwriter may
do so by offering to buy the notes from
investors that wish to sell. However,
the underwriter will not be obligated to
make offers to buy the notes and may
stop making offers at any time. In
addition, the prices offered, if any,
may not reflect prices that other
potential purchasers, were they to be
given the opportunity, would be willing
to pay. There have been times in the
past where there have been very few
buyers of similar asset backed
securities, and there may be times again
in the future. As a result, you may not
be able to sell your notes when you wish
to do so or you may not be able to
obtain the price you wish to receive.
[GEOGRAPHIC CONCENTRATION MAY AFFECT
PERFORMANCE.......................... Discuss any geographic risks, if
applicable]
[CONCENTRATION OF CREDIT RISK.......... Discuss impact on noteholders of
material concentration of credit risk,
if applicable.]
THE SUBORDINATED NOTES HAVE A
GREATER RISK OF LOSS THAN
THE OTHER NOTES...................... The class C notes will not be paid any
distributions of interest until the
class B notes receive their interest
distributions and will not receive any
distributions of principal until the
class B notes receive their principal
distributions. The class B notes will
not be paid any distributions of
interest until the class A notes receive
their interest distributions and will
not receive any distributions of
principal until the class A notes
receive their principal distributions.
If the available funds are insufficient
to make all of the required
distributions on the class A, class B
and class C notes, the class C notes
will not and class B notes may not
receive all of their distributions. In
addition, losses due to defaults will be
allocated first to the class C notes and
second to the class B notes to the
extent not covered by excess interest at
that time. Any allocation of a loss to
class B notes or class C notes will
reduce the amount of interest and, to
the extent not reimbursed from future
excess interest, principal they will
receive. As a result of the foregoing,
the class C notes and the class B notes
will be affected to a larger degree by
any losses on the receivables.
THE TRUST ASSETS ARE THE ONLY SOURCE
OF PAYMENTS ON THE NOTES.............. All distributions on the notes will be
made from payments by borrowers under
the receivables. The trust has no other
assets [other than ______] to make
distributions on the notes. The
receivables are NOT insured or
guaranteed by any person. The Notes
represent obligations of the trust and
will not be insured or guaranteed by any
enity. The trust is the only person that
is obligated to make distributions on
the notes. The notes are NOT insured by
any governmental agency.
NOTE RATING........................... The rating of the notes will depend on
an assessment by the rating agencies of
the receivables. The rating by the
rating agencies of the notes is not a
recommendation for you to purchase, hold
or sell the notes, and the rating does
not comment as to the market price or
suitability for a particular investor.
There is no assurance that the ratings
will remain in place for any given
period of time or that the ratings will
not be lowered or withdrawn by the
rating agencies. The ratings do not
address the possibility that offered
noteholders might realize a lower than
anticipated yield. The ratings of the
offered notes do not address the
possibility of the imposition of United
States withholding tax with respect to
non-U.S. persons. No rating of the
originator, the servicer or the company
is required to maintain the rating of
the offered notes.
THE NOTES ARE NOT SUITABLE
INVESTMENTS FOR ALL
INVESTORS............................. The notes are not suitable investments
for any investor that requires a regular
or predictable schedule of payments or
payment on any specific date. The notes
are complex investments that should be
considered only by investors who, either
alone or with their financial, tax and
legal advisors, have the expertise to
analyze the prepayment, reinvestment,
default and market risk, the tax
consequences of an investment, and the
interaction of these factors.
<PAGE>
_____________'S CREDIT CARD PORTFOLIO
The following discussion describes terms and characteristics that generally
apply to the accounts in the portfolio from which the accounts in the trust
portfolio were selected. The accounts selected for the trust portfolio do not
represent _______'s entire portfolio. Additional accounts consist of eligible
accounts which may or may not currently be in existence and which may be
selected using different criteria from those used in selecting the accounts
already included in the trust portfolio. See "Description of the Notes --
Addition of Trust Assets" in the accompanying prospectus. Consequently, actual
loss and delinquency, revenue and monthly payment rate experience with respect
to the initial accounts and the additional accounts may be different from the
experience for the trust portfolio described in this prospectus supplement.
BILLING AND PAYMENTS
Each credit card account may have different billing and payment structures,
including different periodic finance charges and fees. The following information
reflects the typical billing and payment characteristics of the accounts.
[To be inserted]
DELINQUENCY AND LOSS EXPERIENCE
An account is contractually delinquent if the minimum payment is not
received by the appropriate due date indicated on the customer's statement.
[To be inserted]
The following tables set forth the aggregate delinquency and loss
experience for cardholder payments on the credit card accounts in ______'s
portfolio for each of the three calendar years in the period ended __________,
and in the trust portfolio for the period ended __________. Any particular
segment of ______'s portfolio may have delinquency and gross charge-off
characteristics different from those of ______'s portfolio.
As of the beginning of the day on _______, 200_, the receivables in the
trust portfolio represented approximately __% of ______'s portfolio. Because the
trust portfolio is only a portion of ______'s portfolio, actual delinquency and
loss experience with respect to the receivables may be different from that set
forth below for ______'s portfolio. We cannot assure you that the future
delinquency and loss experience for the receivables in either ______'s portfolio
or trust portfolio will be similar to the historical experience set forth below.
DELINQUENCY AS PERCENTAGE OF _______'S PORTFOLIO
(Dollars in Thousands)
<TABLE>
<CAPTION>
Year Ended
Number of At Month End
DELINQUENT DAYS _____ 31, ____
--------------- -------------------------- --------------------------- -------------------------- ------------------------
PERCENTAGE AMOUNT PERCENTAGE AMOUNT PERCENTAGE AMOUNT PERCENTAGE AMOUNT
---------- ------ ---------- ------ ---------- ------ ---------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
30 to 59 Days.....
60 to 80 days.....
90 Days or Greater
Totals............
</TABLE>
LOSS EXPERIENCE FOR _______'S PORTFOLIO
(Dollars in Thousands)
<TABLE>
<CAPTION>
[Three] Months Ended [Three] Months Ended Year Ended
--------------, -- --------------,-- --------- -------- --------
<S> <C> <C> <C> <C> <C>
Average Receivables
Outstanding............
Gross Losses.............
Gross Losses as a
Percentage of Average
Receivables
Outstanding............
Recoveries...............
Net Losses...............
Net Losses as a
Percentage of Average
Receivables
Outstanding............
</TABLE>
<PAGE>
REVENUE EXPERIENCE
The following table sets forth the revenues from the cardholder payments on
the credit card accounts in ______'s portfolio for each of the periods shown.
REVENUE EXPERIENCE FOR ______'S PORTFOLIO
(Dollars in Thousands)
<TABLE>
<CAPTION>
[Three] Months Ended [Three] Months Ended Year Ended
--------------, -- --------------,-- --------- -------- --------
<S> <C> <C> <C> <C> <C>
Average Receivables
Outstanding Finance
Charges and Fees.......
Yield from Finance
Charges and Fees.......
Interchange..............
Yield from Interchange...
Yield from Finance
Charges Fees and
Interchange............
</TABLE>
There can be no assurance that the yield experience with respect to the
trust portfolio will be comparable to that set forth above for the ______'s
portfolio. In addition, revenue from the trust portfolio will depend on the
types of fees and charges assessed on the accounts, and could be adversely
affected by future changes made by _______ in fees and charges or by other
factors.
INTERCHANGE
Creditors participating in the VISA(R) and MasterCard(R) associations
receive fees ("Interchange") as partial compensation for taking credit risk,
absorbing fraud losses and funding receivables for a limited period prior to
initial billing. Under the VISA(R) and MasterCard(R) systems, a portion of
Interchange in connection with cardholder charges for goods and services is
collected by banks that issue credit cards by applying a discount to the amount
paid by these banks to the banks that clear the related transactions for
merchants. Interchange will be allocated to the trust on a monthly basis based
on an equivalent percentage that the transferor receives each month ______'s
portfolio.
RECOVERIES
Pursuant to the terms of the transfer and servicing agreement, the
transferor will be required to transfer to the trust all of the recoveries that
are reasonably estimated by the servicer on receivables in charged-off accounts
of the trust, including amounts received by the transferor or the servicer from
the purchaser or transferee with respect to the sale or other disposition of
receivables in defaulted accounts ("Recoveries"). Collections of recoveries will
be treated as collections of finance charge receivables and included as part of
the Portfolio Yield.
PAYMENT RATES
The following table sets forth the highest and lowest cardholder monthly
payment rates on the credit card accounts during any month in the periods shown
and the average cardholder monthly payment rates for all months in the periods
shown, in each case calculated as a percentage of total opening monthly account
balances during the periods shown. Payment rates shown in the table are based on
amounts which would be deemed payments of principal receivables and finance
charge receivables with respect to the accounts.
CARDHOLDER MONTHLY PAYMENT RATES(1)
YEAR ENDED DECEMBER 31,
--------- --------- ---------
Lowest Month % % %
Highest Month % % %
Monthly Average % % %
---------------
(1) For each of the three calendar years in the period ended _________,
information is presented for credit card accounts in the originator's
portfolio. For the _________, this information is presented for credit card
accounts in the trust portfolio.
Generally, cardholders must make a monthly minimum payment equal to 2.0% of
the statement balance plus any past due amounts. However, the cardholder is
usually required to make at least a monthly minimum payment of $15 plus any past
due amounts. The minimum monthly payment typically will be increased to 3.0% of
the statement balance plus any past due amounts if the account becomes greater
than 60 days delinquent. In the case of delinquency, however, the cardholder is
usually required to make at least a monthly payment of $25 plus any past due
amounts. We cannot assure you that the cardholder monthly payment rates in the
future will be similar to the historical experience set forth above. In
addition, the amount of collections of receivables may vary from month to month
due to seasonal variations, general economic conditions and payment habits of
individual cardholders.
THE TRUST PORTFOLIO
The receivables conveyed to the trust arise in accounts selected from
_______'s portfolio at the time the trust was established, and in additional
accounts selected since that time, on the basis of criteria set forth in the
transfer and servicing agreement (the "Trust Portfolio"). The transferor has the
right to designate additional accounts for the trust portfolio and to transfer
to the trust all receivables of those additional accounts, whether the
receivables already exist or arise after the designation, if conditions are
satisfied. For a discussion of these conditions, see "Description of the Notes
-- Addition of Trust Assets" in the accompanying prospectus. In addition, the
transferor will be required to designate additional accounts, to the extent
available, (a) to maintain the Transferor Interest so that, during any period of
30 consecutive days, the Transferor Interest averaged over that period equals or
exceeds the Required Transferor Interest for the same period and (b) to
maintain, for so long as notes of any series remain outstanding, an aggregate
amount of principal receivables in the trust portfolio equal to or greater than
the Required Minimum Principal Balance (as adjusted for any series having a
paired series as described in the related indenture supplement).
The "Transferor Interest" on any date is equal to the difference between:
(a) the sum of
(1) the product of (x) total amount of principal receivables in the
trust portfolio on immediately prior day and (x) 1 minus the
Discount Percentage and
(2) the special funding account balance, minus
(b) the total adjusted invested amounts of all series of notes then
outstanding.
The "Required Transferor Interest" is the product of :
o Required Transferor Percentage;
o Total amount of principal receivables in the trust portfolio; and
o 1 minus the Discount Percentage.
The "Required Transferor Percentage" initially is _%, but may be reduced if
conditions set forth in the transfer and servicing agreement are satisfied,
including receipt of written confirmation that reducing the Required Transferor
Percentage will not result in the reduction or withdrawal by any rating agency
of its rating of any outstanding series or class.
The "Discount Percentage" on the closing date is _%.
The "Required Minimum Principal Balance" on any date is, for all
outstanding series, unless otherwise provided in the related indenture
supplement for a series having a paired series, the sum of the initial invested
amounts for each series outstanding on that date plus the Required Transferor
Interest on that date minus the amounts on deposit in the special funding
account.
The transferor also has the right to designate removed accounts and to
require the indenture trustee to transfer all receivables in the removed
accounts back to the transferor, whether the receivables already exist or arise
after the designation, if conditions are satisfied. For a discussion of these
conditions, see "Description of the Notes -- Removal of Accounts" in the
accompanying prospectus.
Throughout the term of the trust, the accounts from which the receivables
arise will be the accounts designated by the transferor at the time the trust is
established plus any additional accounts minus any removed accounts. As a
result, the composition of the trust assets is expected to change over time. For
a general description of the receivables in the trust, see "The Trust Portfolio"
in the accompanying prospectus.
The following is selected information about the receivables:
o The receivables in the trust portfolio, as of the beginning of the day
on ________, included $____ of principal receivables and $_________ of
finance charge receivables.
o The accounts designated for the trust portfolio had an average
principal receivable balance of $__________ and an average credit
limit of $________.
o The percentage of the aggregate total receivable balance to the
aggregate total credit limit was __%. The average age of the accounts
was approximately months.
o As of the beginning of the day on, __________, cardholders whose
accounts are designated for the trust portfolio had billing addresses
in all 50 states and the District of Columbia.
The following tables summarize the trust portfolio by various criteria as
of the beginning of the day on, ____________. Because the future composition of
the trust portfolio may change over time, these tables are not necessarily
indicative of the composition of the trust portfolio at any subsequent time.
COMPOSITION BY ACCOUNT BALANCE
TRUST PORTFOLIO
(as of _________, ____)
(Dollars in Thousands)
Receivables Account
BALANCE RANGE OUTSTANDING
Credit Balance................
No Balance....................
More than $0 and less than or
equal to $1,500.............
$1,500.01 - $5,000............
$5,000 - $10,000..............
Over $10,000..................
COMPOSITION BY CREDIT LIMIT
TRUST PORTFOLIO
(as of ________, ____)
(Dollars in Thousands)
Receivables Account
BALANCE RANGE OUTSTANDING
Less than or equal to
$1,500......................
$1,500.01 - $5,000............
$5,000 - $10,000..............
Over $10,000..................
COMPOSITION BY PAYMENT STATUS
TRUST PORTFOLIO
(as of _________, 19__)
(Dollars in Thousands)
Receivables Account
BALANCE RANGE OUTSTANDING
Current to 29 days............
Past due 30 - 59 days.........
Past due 60 - 89 days.........
Past due 90+ days.............
Total.........................
COMPOSITION BY ACCOUNT AGE
TRUST PORTFOLIO
(as of _________, 19__)
(Dollars in Thousands)
Receivables Account
BALANCE RANGE OUTSTANDING
Not more than 6 months........
Over 6 months to 12 months....
Over 1 year to 2 years........
Over 2 years to 3 years.......
Over 3 years to 4 years.......
Over 4 years..................
Total.........................
COMPOSITION BY ACCOUNTHOLDER BILLING ADDRESS
TRUST PORTFOLIO
(as of ________, 19__)
(Dollars in Thousands)
LOCATION
Alaska.........................
Arizona........................
Arkansas.......................
California.....................
Colorado.......................
Connecticut....................
Delaware.......................
District of Columbia...........
Florida........................
Georgia........................
Hawaii.........................
Idaho..........................
Illinois.......................
Indiana........................
Iowa...........................
Kansas.........................
Kentucky.......................
Louisiana......................
Maine..........................
Maryland.......................
Massachusetts..................
Michigan.......................
Minnesota......................
Mississippi....................
Missouri.......................
Montana........................
Nebraska.......................
Nevada.........................
New Hampshire..................
New Jersey.....................
New Mexico.....................
New York.......................
North Carolina.................
North Dakota...................
Ohio...........................
Oklahoma.......................
Oregon.........................
Pennsylvania...................
Rhode Island...................
South Carolina.................
South Dakota...................
Tennessee......................
Texas..........................
Utah...........................
Vermont........................
Virginia.......................
Washington.....................
West Virginia..................
Alabama........................
Wyoming........................
Other..........................
MATURITY CONSIDERATIONS
You are expected to receive payment of principal in full on ______, 200_,
the "Expected Principal Payment Date." You may, however, receive payments of
principal earlier than the expected principal payment date if a pay out event
occurs and the early amortization period begins. The holders of the Class B
notes will not begin to receive payments of principal until the final principal
payment on the Class A notes has been made. The holders of the Class C notes
will not begin to receive payments of principal until the final principal
payments on the Class A notes and Class B notes have been made.
CONTROLLED ACCUMULATION PERIOD
Principal for payment to the Series 200_-___ noteholders will accumulate
during the controlled accumulation period in the principal funding account
established by the indenture trustee. The controlled accumulation period is
scheduled to begin at the close of business on _____, 200_ , but may be delayed
based on recent payment rate experience, as discussed under "Description of
Series Provisions -- Postponement of the Controlled Accumulation Period" in this
prospectus supplement. On each distribution date during the controlled
accumulation period, an amount will be deposited into the principal funding
account equal to, for each monthly period, the least of:
o Available Principal Collections;
o the Controlled Deposit Amount; and
o the Adjusted Invested Amount prior to any deposits on that day.
We expect, but cannot assure you, that the amounts available in the
principal funding account on the expected principal payment date will be
sufficient to pay in full the outstanding principal balance of the Class A
notes, the Class B notes and the Class C notes. If these amounts are not
available on the expected principal payment date, a pay out event will occur and
the early amortization period will begin.
EARLY AMORTIZATION PERIOD
If a pay out event occurs during either the revolving period or the
controlled accumulation period, the early amortization period will begin. If a
pay out event occurs during the controlled accumulation period, on the next
distribution date any amount on deposit in the principal funding account will be
paid to the Class A noteholders and, after the outstanding principal balance of
the Class A notes has been paid in full, any remaining amount will be paid to
the Class B noteholders and, after the outstanding principal balance of the
Class B notes has been paid in full, any remaining amount will be paid to the
Class C noteholders, up to the outstanding principal balance of the Class C
notes.
In addition, if the outstanding principal balance of the Class A notes has
not been paid in full, Available Principal Collections will be paid to the Class
A noteholders on each distribution date until the earlier of:
o the date the Class A notes are paid in full; and
o _______, 200 , called the "Series 200_-__ Termination Date".
After the Class A notes have been paid in full, and if the Series 200_-__
termination date or the trust termination date has not occurred, Available
Principal Collections will be paid to the Class B noteholders on each
distribution date until the earlier of:
o the date the Class B notes are paid in full; and
o the Series 200_-__ termination date.
After the Class B notes have been paid in full, and if the Series 200_-__
termination date or the trust termination date has not occurred, Available
Principal Collections will be paid to the Class C noteholders on each
distribution date until the earlier of:
o the date the Class C notes are paid in full; and
o the Series 200_-__ termination date.
THE ORIGINATOR
The "Originator" is _______________. [Insert description of the
Originator.]
THE SERVICER
The "Servicer" is _______________. [Insert description of the Servicer.]
THE TRANSFEROR
Asset Backed Securities Corporation (the "Transferor") is a special-purpose
Delaware corporation organized for the purpose of issuing the notes and other
securities issued under the Registration Statement backed by accounts or
underlying securities of various types and acting as sponsor, settlor or
transferor or depositor with respect to trusts, custody accounts or similar
arrangements. It is not expected that the Transferor will have any significant
assets. The Transferor is an indirect, wholly owned subsidiary of Credit Suisse
First Boston, Inc. Neither Credit Suisse First Boston, Inc. nor any of its
affiliates has guaranteed, will guarantee or is or will be otherwise obligated
with respect to any notes.
The Transferor's principal executive office is located at 11 Madison
Avenue, New York, New York 10010, and its telephone number is (212) 325-2000.
DESCRIPTION OF SERIES PROVISIONS
The following is a summary of the material provisions of the Series 200_-__
notes. This summary is not a complete description of the terms of the Series
200_-__ notes. You should refer to "Description of the Notes" in the
accompanying prospectus as well as to the transfer and servicing agreement, the
indenture and the Series 200_-__ indenture supplement for a complete
description. The form of each of the transfer and servicing agreement, the
indenture and an indenture supplement has been filed with the SEC as an exhibit
to the registration statement relating to the notes.
The Class A notes, Class B notes and Class C notes comprise the "Series
200_-__ Notes" and will be issued under the indenture, as supplemented by the
indenture supplement relating to the Series 200_-__ notes (the "Series 200_-__
Indenture Supplement"), in each case between the trust and the indenture
trustee. As described under "Description of the Notes--New Issuances" in the
accompanying prospectus, the transferor may cause the owner trustee, on behalf
of the trust, and the indenture trustee to execute further indenture supplements
in order to issue additional series.
The "Closing Date" for Series 200_-__ is _____, 200_. The Series 200_-__
notes will be issued in denominations of $1,000 and integral multiples of $1,000
and will be available only in book-entry form, registered in the name of Cede,
as nominee of DTC. As described under "Description of the Notes--General," "--
Book-Entry Registration" and "-- Definitive Notes" in the accompanying
prospectus, unless and until definitive notes are issued, you will be able to
transfer your notes only through the facilities of DTC. You will receive
payments and notices through DTC and its participants. Payments of interest and
principal will be made on each distribution date on which those amounts are due
to the noteholders in whose names Series 200_-__ notes were registered on the
last day of the calendar month preceding that distribution date (each, a "Record
Date").
INTEREST PAYMENTS
The Class A notes will accrue interest from and including the closing date
through but excluding ______, 200_, and for each following interest period, at a
rate of __% per annum above LIBOR for the related LIBOR determination date with
respect to each interest period (the "Class A Note Interest Rate").
The Class B notes will accrue interest from and including the closing date
through but excluding ______, 200_, and for each following interest period, at a
rate of __% per annum above LIBOR for the related LIBOR determination date with
respect to each interest period (the "Class B Note Interest Rate").
The Class C notes will accrue interest from and including the closing date
through but excluding ______, 200_, and for each following interest period, at a
rate of __% per annum above LIBOR for the related LIBOR determination date with
respect to each interest period (the "Class C Note Interest Rate").
The indenture trustee will determine LIBOR for each interest period two
London business days before the related interest period commences. We refer to
each of these determination dates as a "LIBOR Determination Date." For purposes
of calculating LIBOR, a "London Business Day" is any business day on which
dealings in deposits in United States dollars are transacted in the London
interbank market.
An "Interest Period" begins on and includes a distribution date and ends on
but excludes the next distribution date. However, the first interest period will
begin on and include the closing date.
"LIBOR" means, for any LIBOR determination date, the rate for deposits in
United States dollars for a one-month period which appears on Telerate Page 3750
as of 11:00 a.m., London time, on that date. If that rate does not appear on
Telerate Page 3750, the rate for that LIBOR determination date will be
determined based on the rates at which deposits in United States dollars are
offered by four major banks selected by the servicer at approximately 11:00
a.m., London time, on that day to prime banks in the London interbank market for
a one-month period. The indenture trustee will request the principal London
office of each of those banks to provide a quotation of its rate. If at least
two quotations are provided, the rate for that LIBOR determination date will be
the arithmetic mean of the quotations. If fewer than two quotations are
provided, the rate for that LIBOR determination date will be the arithmetic mean
of the rates quoted by major banks in New York City, selected by the servicer,
at approximately 11:00 a.m., New York City time, on that day for loans in United
States dollars to leading European banks for a one-month period.
"Telerate Page 3750" means the display page currently so designated on the
Bridge Telerate Capital Markets Report (or any other page as may replace that
page on that service for the purpose of displaying comparable rates or prices).
The Class A note interest rate, the Class B note interest rate and the
Class C note interest rate applicable to the then current and immediately
preceding interest period may be obtained by telephoning the indenture trustee
at its corporate trust office at (212) ______________.
Interest on the notes will be calculated on the basis of the actual number
of days in the related interest period and a 360-day year.
Interest will be paid on each "Distribution Date," which will be ______,
200_ and the 17th day of each following month (or, if the 17th day is not a
business day, the following business day). For purposes of this prospectus
supplement and the accompanying prospectus, a "Business Day" is, unless
otherwise indicated, any day other than a Saturday, a Sunday or a day on which
banking institutions in New York, New York, Delaware or any other state in which
the principal executive offices of the bank, the owner trustee, the indenture
trustee or other account owner, as the case may be, are located, are authorized
or obligated by law, executive order or governmental decree to be closed.
Interest payments on the Class A notes, the Class B notes and the Class C
notes on any distribution date will be calculated on the outstanding principal
balance of the Class A notes, the Class B notes and the Class C notes, as
applicable, as of the preceding record date, except that interest for the first
distribution date will accrue at the applicable note interest rate on the
initial outstanding principal balance of the Class A notes, the Class B notes
and the Class C notes, as applicable, from the closing date.
Interest due on the Class A notes, the Class B notes and the Class C notes
but not paid on any distribution date will be payable on the following
distribution date, together with additional interest on that amount at the
applicable note interest rate. We refer to this additional interest as "Class A
Additional Interest," "Class B Additional Interest" and "Class C Additional
Interest," as applicable. Additional interest will accrue on the same basis as
interest on the Series 200_-__ notes, and will accrue from the distribution date
on which the overdue interest became due, to but excluding the distribution date
on which the additional interest is paid.
Interest payments on the Series 200_-__ notes on any distribution date will
be paid from Available Finance Charge Collections for the related monthly period
and, to the extent Available Finance Charge Collections are insufficient to pay
the interest, from Excess Finance Charge Collections and Reallocated Principal
Collections (to the extent available) for the related monthly period. Interest
payments on the Class C notes on any distribution date will also be paid from
available amounts on deposit in the spread account to the extent needed.
"Available Finance Charge Collections" means, with respect to any monthly
period, an amount equal to the sum of:
(a) the Investor Percentage of collections of finance charge
receivables deposited in the collection account for that monthly
period;
(b) an amount equal to the Principal Funding Investment Proceeds, if
any, for the related distribution date; and
(c) amounts, if any, to be withdrawn from the reserve account which
are required to be included in Available Finance Charge
Collections pursuant to the Series 200_-__ indenture supplement
for the related distribution date.
Each "Monthly Period" will be the period from and including the first day
of a calendar month to and including the last day of that calendar month (other
than the initial monthly period, which will commence on and include the closing
date and end on and include, 200_).
PRINCIPAL PAYMENTS
Principal payments on the Series 200_-__ notes will be paid from "Available
Principal Collections" which, for any monthly period, equal:
(a) the Investor Percentage of collections of principal receivables
deposited in the collection account for that monthly period;
minus
(b) the amount of Reallocated Principal Collections for that monthly
period; plus
(c) any Shared Principal Collections from other series in group one
and any Shared Transferor Principal Collections allocated to your
series.
REVOLVING PERIOD
The "Revolving Period" for the Series 200_-__ notes begins on the closing
date and ends on the earlier of the date the controlled accumulation period or
the early amortization period begins. During the revolving period, the Investor
Percentage of collections of principal receivables will, subject to limitations,
including the allocation of any Reallocated Principal Collections for that
monthly period, be treated as Shared Principal Collections and used to pay
principal to other series in group one or will be paid to the holders of the
transferor certificates.
CONTROLLED ACCUMULATION PERIOD
The "Controlled Accumulation Period" for the Series 200_-__ notes is
scheduled to begin on ______, 200_, but may be postponed, as discussed under
"Description of Series Provisions -- Postponement of the Controlled Accumulation
Period" in this prospectus supplement, and ends on the earliest of:
o the beginning of the early amortization period;
o the payment in full of the Invested Amount; and
o the Series 200_-__ termination date.
If a pay out event occurs before the controlled accumulation period begins,
there will be no controlled accumulation period and the early amortization
period will begin.
On each distribution date relating to the controlled accumulation period,
the indenture trustee will deposit in the principal funding account an amount
equal to the least of
(a) Available Principal Collections with respect to that distribution
date,
(b) the applicable Controlled Deposit Amount and
(c) the Adjusted Invested Amount prior to any deposits on that date.
Amounts in the principal funding account will be paid:
o first to Class A noteholders, up to the outstanding principal balance
of the Class A notes;
o then to Class B noteholders, up to the outstanding principal balance
of the Class B notes; and
o then to Class C noteholders, up to the outstanding principal balance
of the Class C notes;
in each case, on the expected principal payment date unless paid earlier due to
the commencement of the early amortization period.
During the controlled accumulation period, the portion of Available
Principal Collections not applied for the payment of principal on the Class A
notes, the Class B notes or the Class C notes on a distribution date generally
will be treated as Shared Principal Collections.
EARLY AMORTIZATION PERIOD
The "Early Amortization Period" for the Series 200_-__ notes will begin on
the day on which a pay out event with respect to Series 200_-__ occurs and ends
on the earlier of:
o the payment in full of the Invested Amount; and
o the Series 200_-__ termination date.
On each distribution date relating to the early amortization period, the
Class A noteholders will be entitled to receive Available Principal Collections
for the related monthly period in an amount up to the outstanding principal
balance of the Class A notes.
After payment in full of the outstanding principal balance of the Class A
notes, the Class B noteholders will be entitled to receive, on each distribution
date relating to the early amortization period, Available Principal Collections
for the related monthly period in an amount up to the outstanding principal
balance of the Class B notes.
After payment in full of the outstanding principal balance of the Class B
notes, the Class C noteholders will be entitled to receive on each distribution
date relating to the early amortization period, Available Principal Collections
for the related monthly period in an amount up to the outstanding principal
balance of the Class C notes.
See "-- Pay Out Events" below for a discussion of events that might lead to
the commencement of the early amortization period.
POSTPONEMENT OF CONTROLLED ACCUMULATION PERIOD
The controlled accumulation period is scheduled to last __ months. However,
the servicer may elect to extend the revolving period and postpone the
controlled accumulation period by providing a notice to the indenture trustee.
The servicer can make this election only if the number of months needed to fund
the principal funding account based on expected principal collections needed to
pay principal on the Series 200_-__ notes is less than __ months.
On each determination date beginning in ______ 200_ and ending when the
controlled accumulation period begins, the servicer will review the amount of
expected principal collections and determine the number of months expected to be
required to fully fund the principal funding account by the expected principal
payment date and may elect to postpone the controlled accumulation period. In
making its decision, the servicer is required to assume that the principal
payment rate will be no greater than the lowest monthly payment rate for the
prior 12 months and will consider the amount of principal expected to be
allocable to noteholders of all other series which are expected to be amortizing
or accumulating principal during the controlled accumulation period for Series
200_-__ . In no case will the controlled accumulation period be reduced to less
than one month.
The method for determining the number of months required to fully fund the
principal funding account may be changed upon receipt of written confirmation
that the change will not result in the reduction or withdrawal by any rating
agency of its rating of any outstanding series or class.
SUBORDINATION
The Class B notes and the Class C notes are subordinated to the Class A
notes. Interest payments will be made on the Class A notes prior to being made
on the Class B notes and the Class C notes. Interest payments will be made on
the Class B notes prior to being made on the Class C notes. Principal payments
on the Class B notes will not begin until the Class A notes have been paid in
full. Principal payments on the Class C notes will not begin until the Class A
notes and the Class B notes have been paid in full. If principal collections
allocated to your series are reallocated to pay the interest on the Class A
notes, the principal amount of the Class B notes and the Class C notes may not
be repaid. If principal collections allocated to your series are reallocated to
pay interest on the Class B notes, the principal amount of the Class C notes may
not be repaid. If a foreclosure certificate is sold after an event of default,
the net proceeds of that sale which are available to pay principal on the Series
200_-__ notes would be paid first to the Class A notes before any remaining net
proceeds would be available for payments due to the Class B notes or the Class C
notes.
ALLOCATION PERCENTAGES
Pursuant to the indenture, with respect to each monthly period, the
servicer will allocate among the Invested Amount, the invested amount for all
other series issued and outstanding and the Transferor Interest, all amounts
collected on finance charge receivables, all amounts collected on principal
receivables and all Defaulted Amounts with respect to that monthly period. These
amounts will be allocated based on the Investor Percentage.
"INVESTOR PERCENTAGE," for any monthly period, means (a) for Defaulted
Amounts at anytime and for collections of finance charge receivables and
principal receivables during the revolving period, the Floating Investor
Percentage and (b) for collections of finance charge receivables and principal
receivables during the controlled accumulation period and early amortization
period, the Fixed Investor Percentage.
FLOATING ALLOCATION DEFINITIONS
Defaulted Amounts at any time and collections of finance charge receivables
and principal receivables during the revolving period will be allocated to the
Invested Amount based on the Floating Investor Percentage. The "Floating
Investor Percentage" means, with respect to any monthly period, the percentage
equivalent of a fraction:
(a) the numerator of which is the Adjusted Invested Amount as of the close
of business on the last day of the preceding monthly period (or with
respect to the first monthly period, the initial Invested Amount); and
(b) the denominator of which is the greater of:
(1) the sum of (A) the product of (x) the aggregate amount of
principal receivables in the trust as of the close of business on
the last day of the preceding monthly period (or with respect to
the first monthly period, the aggregate amount of principal
receivables in the trust as of the close of business on the
closing date) and (y) one minus the Discount Percentage and (B)
the principal amount on deposit in the special funding account as
of the close of business on the last day of the preceding monthly
period (or with respect to the first monthly period, as of the
closing date) and
(2) the sum of the numerators used to calculate the investor
percentages for allocations with respect to finance charge
receivables, Defaulted Amounts or principal receivables, as
applicable, for all outstanding series on the date of
determination.
The denominator used in the calculation of Floating Investor Percentage,
however, will be adjusted as follows, with respect to any monthly period in
which an addition date occurs or in which a removal date occurs on which, if any
series has been paid in full, principal receivables in an aggregate amount
approximately equal to the initial invested amount of that series are removed
from the trust, the amount in clause (b)(1)(A) above shall be:
(1) the product of (x) the aggregate amount of principal receivables
in the trust as of the close of business on the last day of the
prior monthly period and (y) one minus the Discount Percentage,
for the period from and including the first day of the prior
monthly period to but excluding the related addition date or
removal date; and
(2) the product of (x) the aggregate amount of principal receivables
in the trust as of the close of business on the related addition
date or removal date after adjusting for the aggregate amount of
principal receivables added to or removed from the trust on the
related addition date or removal date, as the case may be, and
(y) one minus the Discount Percentage, for the period from and
including the related addition date or removal date to and
including the last day of that monthly period.
FIXED ALLOCATION DEFINITIONS
Collections of finance charge receivables and principal receivables during
the controlled accumulation period and early amortization period will be
allocated to the Invested Amount based on the Fixed Investor Percentage. The
"Fixed Investor Percentage" means, with respect to any monthly period, the
percentage equivalent of a fraction:
(a) the numerator of which is the Invested Amount as of the close of
business on the last day of the revolving period; and
(b) the denominator of which is the greater of:
(1) the sum of (A) the product of (x) the aggregate amount of
principal receivables in the trust as of the close of business on
the last day of the prior monthly period (or with respect to the
first monthly period, the aggregate amount of principal
receivables in the trust as of the closing date) and (y) one
minus the Discount Percentage and (B) the principal amount on
deposit in the special funding account as of the close of
business on the last day of the preceding monthly period (or with
respect to the first monthly period, as of the closing date) and
(2) the sum of the numerators used to calculate the investor
percentages for allocations with respect to principal receivables
or finance charge receivables, as applicable, for all outstanding
series on the date of determination.
The denominator used in the calculation of Fixed Investor Percentage,
however, will be adjusted as follows, with respect to any monthly period in
which an addition date occurs or in which a removal date occurs on which, if any
series has been paid in full, principal receivables in an aggregate amount
approximately equal to the initial invested amount of that series are removed
from the trust, the amount in clause (b)(1)(A) above shall be:
(1) the product of (x) the aggregate amount of principal receivables in
the trust as of the close of business on the last day of the prior
monthly period and (y) one minus the Discount Percentage, for the
period from and including the first day of the prior monthly period to
but excluding the related addition date or removal date; and
(2) the product of (x) the aggregate amount of principal receivables in
the trust as of the close of business on the related addition date or
removal date after adjusting for the aggregate amount of principal
receivables added to or removed from the trust on the related addition
date or removal date, as the case may be, and (y) one minus the
Discount Percentage, for the period from and including the related
addition date or removal date to and including the last day of that
monthly period.
INVESTED AMOUNT DEFINITIONS
"Invested Amount," for any date of determination, means an amount equal to
(a) the initial outstanding principal amount of the Series 200_-__ notes
(as increased by the principal balance of any Series 200_-__ notes
issued after the closing date), minus
(b) the amount of principal previously paid to the Series 200_-__
noteholders, minus
(c) the amount of unreimbursed Investor Charge-Offs and Reallocated
Principal Collections.
"Adjusted Invested Amount," for any date of determination, means the (a)
the Invested Amount as of that date, minus (b) the amount on deposit in the
principal funding account for that date.
REALLOCATED PRINCIPAL COLLECTIONS
On each distribution date, if the sum of Class A interest, Class B interest
and the monthly servicing fee cannot be paid from Available Finance Charge
Collections and Excess Finance Charge Collections as described below under
"--Application of Collections," then collections of principal receivables
allocated to the Invested Amount will be treated as collections of finance
charge receivables and will be available to pay these amounts, in an amount
equal to the Reallocated Principal Collections, and the Invested Amount will be
reduced accordingly. A reduction in the Invested Amount will reduce the
allocation of finance charge and principal collections to your series.
"Reallocated Principal Collections" means, for any monthly period,
Available Principal Collections used to pay interest on the Class A notes and
the Class B notes or used to pay the monthly servicing fee in an amount equal to
the lesser of:
o the Monthly Principal Reallocation Amount for that monthly period; and
o the Invested Amount after giving effect to any Investor Charge-Offs
for that distribution date.
"Monthly Principal Reallocation Amount" means, for any monthly period, the
sum of:
o the lower of:
o the excess of the amounts needed to pay current and past due
Class A Monthly Interest and Class A Additional Interest as
described under " --Application of Collections -- Payment of
Interest, Fees and Other Items" below over the Available Finance
Charge Collections allocated to cover these amounts; and
o ___% of the initial Invested Amount minus the amount of
unreimbursed Investor Charge-Offs and unreimbursed Reallocated
Principal Collections; plus
the lower of:
o the sum of (A) the excess of the amounts needed to pay current
and past due Class B Monthly Interest and Class B Additional
Interest as described under "--Application of Collections --
Payments of Interest, Fees and Other Items" below over the
Available Finance Charge Collections allocated to cover these
amounts and (B) the excess of the monthly servicing fee over the
Available Finance Charge Collections allocated to cover these
amounts; and
o ___% of the initial Invested Amount minus the amount of
unreimbursed Investor Charge-Offs and unreimbursed Reallocated
Principal Collections.
APPLICATION OF COLLECTIONS
PAYMENT OF INTEREST, FEES AND OTHER ITEMS
On each distribution date, the servicer will direct the indenture trustee
to apply Available Finance Charge Collections and Excess Finance Charge
Collections on deposit in the collection account in the following order:
o an amount equal to the Class A Monthly Interest plus Class A
Additional Interest due for the related distribution date, and past
due for any prior distribution dates, will be paid to the Class A
noteholders on that distribution date;
o an amount equal to the Class B Monthly Interest plus Class B
Additional Interest due for the related distribution date, and past
due for any prior distribution dates, will be paid to the Class B
noteholders on that distribution date;
o an amount equal to the monthly servicing fee due for the related
distribution date, and past due for any prior distribution date, will
be paid to the servicer;
o an amount equal to the Class C Monthly Interest plus Class C
Additional Interest due for the related distribution date, and past
due for any prior distribution dates, will be paid to the Class C
noteholders on that distribution date;
o an amount equal to the Investor Default Amount, if any, for the
related monthly period, will be treated as Available Principal
Collections;
o an amount equal to the sum of the Investor Charge-Offs and the amount
of unreimbursed Reallocated Principal Collections will be treated as
Available Principal Collections;
o on and after the reserve account funding date, an amount equal to the
excess, if any, of the Required Reserve Account Amount over the amount
then on deposit in the reserve account will be deposited into the
reserve account;
o an amount equal to the excess, if any, of the Required Spread Account
Amount over the amount then on deposit in the spread account will be
deposited into the spread account;
o all remaining amounts will be treated as Excess Finance Charge
Collections and will be available to cover any shortfalls in finance
charge collections for other outstanding series in group one and,
after payment of these shortfalls, the remaining amount will be paid
to the holders of the transferor certificates.
In the event that Available Finance Charge Collections and Excess Finance
Charge Collections for any monthly period are insufficient to pay Class C
Monthly Interest when due, a draw will be made from amounts available in the
spread account and will be paid to the Class C noteholders on the related
distribution date.
"Class A Monthly Interest" with respect to any distribution date will equal
the product of
(a) the Class A note interest rate for the related interest period,
(b) the actual number of days in that interest period divided by 360 and
(c) the outstanding principal balance of the Class A notes as of the close
of business on the last day of the prior monthly period or, with
respect to the first distribution date, the outstanding principal
balance of the Class A notes as of the closing date.
"Class B Monthly Interest" with respect to any distribution date will equal
the product of
(a) the Class B note interest rate for the related interest period,
(b) the actual number of days in that interest period divided by 360 and
(c) the outstanding principal balance of the Class B notes as of the close
of business on the last day of the prior monthly period or, with
respect to the first distribution date, the outstanding principal
balance of the Class B notes as of the closing date.
"Class C Monthly Interest" with respect to any distribution date will equal
the product of
(a) the Class C note interest rate for the related interest period,
(b) the actual number of days in that interest period divided by 360 and
(c) the outstanding principal balance of the Class C notes as of the close
of business on the last day of the prior monthly period or, with
respect to the first distribution date, the outstanding principal
balance of the Class C notes as of the closing date.
"Monthly Interest" with respect to any distribution date will equal the sum
of the Class A Monthly Interest, the Class B Monthly Interest and the Class C
Monthly Interest for that distribution date.
"Payments of Principal"
On each distribution date, the servicer will direct the indenture trustee
to apply Available Principal Collections on deposit in the collection account in
the following priority:
(a) on each distribution date with respect to the revolving period, all
Available Principal Collections will be treated as Shared Principal Collections
and applied as described under "Description of Series Provisions -Shared
Principal Collections and Transferor Principal Collections" in this prospectus
supplement and "Description of the Notes -Shared Principal Collections and
Transferor Principal Collections" in the accompanying prospectus;
(b) on each distribution date with respect to the controlled accumulation
period and the early amortization period, all Available Principal Collections
will be distributed or deposited in the following priority:
(1) during the controlled accumulation period, an amount equal to
Monthly Principal will be deposited in the principal funding
account;
(2) during the early amortization period, an amount equal to the
Monthly Principal will be distributed to the paying agent for
payment to the Class A noteholders until the outstanding
principal balance of the Class A notes has been paid in full;
(3) during the early amortization period, an amount equal to Monthly
Principal will, after the outstanding principal balance of the
Class A notes has been paid in full, be distributed to the paying
agent for payment to the Class B noteholders until the
outstanding principal balance of the Class B notes has been paid
in full; and
(4) during the early amortization period, an amount equal to Monthly
Principal will, after the outstanding principal balances of the
Class A notes and the Class B notes have been paid in full, be
distributed to the paying agent for payment to the Class C
noteholders until the outstanding principal balance of the Class
C notes has been paid in full;
(c) on each distribution date with respect to the controlled accumulation
period and the early amortization period, the balance of Available Principal
Collections not applied pursuant to (b) above, if any, will be treated as Shared
Principal Collections and applied as described under "Description of Series
Provisions -Shared Principal Collections and Transferor Principal Collections"
in this prospectus supplement and "Description of the Notes -Shared Principal
Collections and Transferor Principal Collections" in the accompanying
prospectus.
"Monthly Principal" with respect to any distribution date will equal the
least of
o the Available Principal Collections on deposit in the collection
account with respect to that distribution date,
o for each distribution date with respect to the controlled accumulation
period, the Controlled Deposit Amount for that distribution date and
o the Adjusted Invested Amount (as adjusted for any Investor Charge-Offs
and Reallocated Principal Collections on that distribution date) prior
to any deposits into the principal funding account on that
distribution date.
"Controlled Deposit Amount" means, for any distribution date, the sum of
(1) the Controlled Accumulation Amount for that distribution date, plus (2) the
Accumulation Shortfall, if any.
"Controlled Accumulation Amount" means for any distribution date with
respect to the controlled accumulation period, $________. However, if the
commencement of the controlled accumulation period is postponed as described
above under "--Postponement of Controlled Accumulation Period," the Controlled
Accumulation Amount may be higher than the amount stated above for each
distribution date with respect to the controlled accumulation period and will be
determined by the servicer in accordance with the Series 200_-__ indenture
supplement based on the principal payment rates for the accounts and on the
invested amounts of other series (other than excluded series) which are
scheduled to be in their revolving periods and then scheduled to create Shared
Principal Collections during the controlled accumulation period.
"Accumulation Shortfall" means:
(a) on the first distribution date during the controlled accumulation
period, the excess, if any, of the Controlled Accumulation Amount for that
distribution date over the amount deposited in the principal funding account on
that distribution date; and
(b) on each subsequent distribution date during the controlled accumulation
period, the excess, if any, of the applicable Controlled Accumulation Amount for
that subsequent distribution date plus any Accumulation Shortfall for the prior
distribution date over the amount deposited in the principal funding account on
that subsequent distribution date.
SHARED EXCESS FINANCE CHARGE COLLECTIONS
Finance charge collections -and other amounts treated like finance charge
collections -in excess of the amount required to make payments or deposits for
your series will be made available to other series included in group one whose
allocation of finance charge collections is not sufficient to make its required
payments or deposits. We call these collections "Excess Finance Charge
Collections." If your series requires more finance charge collections than
allocated through the Investor Percentage, it will have access to finance charge
collections -and other amounts treated like finance charge collections -from
other series in group one. Each series that is part of group one and has a
shortfall will receive a share of the total amount of Excess Finance Charge
Collections available for that month based on the amount of shortfall for that
series divided by the total shortfall for all series for that same month.
SHARED PRINCIPAL COLLECTIONS AND TRANSFEROR PRINCIPAL COLLECTIONS
Collections of principal receivables for any monthly period allocated to
the Invested Amount will first be used to cover, during the controlled
accumulation period, deposits of the applicable Controlled Deposit Amount to the
principal funding account, and during the early amortization period, payments to
the noteholders. The servicer will determine the amount of collections of
principal receivables for any monthly period allocated to the Invested Amount
remaining after covering required payments to the noteholders and any similar
amount remaining for any other series in group one ("Shared Principal
Collections"). The servicer will allocate the Shared Principal Collections to
cover any scheduled or permitted principal distributions to noteholders and
deposits to principal funding accounts, if any, for any series in group one
which have not been covered out of the collections of principal receivables
allocable to the other series in group one and other amounts for those series
("Principal Shortfalls"). Shared Principal Collections will not be used to cover
investor charge-offs for any series. If Principal Shortfalls exceed Shared
Principal Collections for any monthly period, Shared Principal Collections will
be allocated pro rata among the applicable series in group one based on the
relative amounts of Principal Shortfalls. To the extent that Shared Principal
Collections exceed Principal Shortfalls, the balance will, subject to
limitations, be paid to the holders of the transferor certificates.
In addition, the servicer will, under the terms of the indenture, determine
the amount of collections of principal receivables for any monthly period
allocated to the Transferor Interest but not due to the holder of any
supplemental certificate and other amounts payable to the transferor with
respect to collections of principal receivables ("Shared Transferor Principal
Collections"). Shared Transferor Principal Collections will be applied, if
necessary, to cover payments of principal due to noteholders during the
controlled accumulation period and the early amortization period that have not
been covered out of collections of principal receivables allocated to Series
200_-__ and other amounts and Shared Principal Collections. To the extent
Principal Shortfalls for series designated to receive Shared Transferor
Principal Collections exceed Shared Principal Collections allocable to each of
these series and Shared Transferor Principal Collections, for any monthly
period, Shared Transferor Principal Collections will be allocated pro rata among
the applicable series in group one based on the remaining Principal Shortfalls
for each of these series.
DEFAULTED RECEIVABLES; INVESTOR CHARGE-OFFS
The Investor Default Amount represents the series' share of losses from the
trust portfolio. On each distribution date, the servicer will calculate the
"Investor Default Amount" by multiplying:
o the Floating Investor Percentage for that month, by
o the "Defaulted Amount," which is the total amount of principal
receivables (other than ineligible receivables) in the trust that were
charged-off for that month.
If the Investor Default Amount exceeds the amount of finance charge collections
allocated to fund this amount for the prior month, then the Invested Amount will
be reduced by the excess. The Invested Amount will also be reduced by the amount
of any Reallocated Principal Collections used to cover any Investor Default
Amounts. In no event, however, will the Invested Amount be reduced below zero.
Reductions in the Invested Amount from both of these items may be reimbursed
from subsequent finance charge collections allocated for reimbursement, if
available. If the Invested Amount is reduced to zero, your series will not
receive any further allocations of finance charge and principal collections.
PRINCIPAL FUNDING ACCOUNT
The indenture trustee will establish and maintain with an eligible
institution a segregated trust account held for the benefit of the noteholders
to serve as the "Principal Funding Account." During the controlled accumulation
period, the indenture trustee at the direction of the servicer will transfer
Available Principal Collections from the collection account to the principal
funding account as described under "-Application of Collections" in this
prospectus supplement.
Funds on deposit in the principal funding account will be invested to the
following distribution date by the indenture trustee at the direction of the
servicer in eligible investments. Investment earnings (net of investment losses
and expenses) on funds on deposit in the principal funding account (the
"Principal Funding Investment Proceeds") will be deposited in the collection
account and included in Available Finance Charge Collections for the related
interest period. If, for any distribution date, the Principal Funding Investment
Proceeds are less than the sum of:
(a) the product of
o the balance of the principal funding account, up to the
outstanding principal balance of the Class A notes, on the record
date immediately preceding that distribution date,
o the Class A note interest rate for the related interest period
and
o the number of days in the related interest period divided by 360,
plus
(b) the product of
o the balance of the principal funding account in excess of the
outstanding principal balance of the Class A notes on the record
date immediately preceding that distribution date,
o the Class B note interest rate for the related interest period
and
o the number of days in the related interest period divided by 360,
then the indenture trustee will withdraw the shortfall, called the "Reserve Draw
Amount," to the extent required and available, from the reserve account and
deposit it in the collection account for use as Available Finance Charge
Collections.
RESERVE ACCOUNT
The indenture trustee will establish and maintain with an eligible
institution a segregated trust account held for the benefit of the noteholders
to serve as the "Reserve Account." The reserve account is established to assist
with the subsequent distribution of interest on the notes during the controlled
accumulation period and on the first distribution date with respect to the early
amortization period. On each distribution date from and after the reserve
account funding date, but prior to the termination of the reserve account, the
indenture trustee, acting pursuant to the servicer's instructions, will apply
Available Finance Charge Collections and Excess Finance Charge Collections
allocated to the Series 200_-__ notes (to the extent described above under
"-Application of Collections -Payment of Interest, Fees and Other Items") to
increase the amount on deposit in the reserve account (to the extent that amount
is less than the Required Reserve Account Amount).
The "Reserve Account Funding Date" will be the distribution date with
respect to the monthly period which commences no later than three months prior
to the commencement of the controlled accumulation period, or an earlier date as
the servicer may determine.
The "Required Reserve Account Amount" for any distribution date on or after
the reserve account funding date will be equal to (a) 0.__% of the outstanding
principal balance of the Class A notes or (b) any other amount designated by the
transferor; except that if the designation is of a lesser amount, the transferor
will provide the servicer and the indenture trustee with written confirmation
that the designation will not result in the reduction or withdrawal by any
rating agency of its rating of any outstanding series or class and the
transferor will deliver to the indenture trustee a certificate of an authorized
officer of the transferor to the effect that, based on the facts known to that
officer at the time, in the reasonable belief of the transferor, the designation
will not cause a pay out event or an event that, after the giving of notice or
the lapse of time, would cause a pay out event to occur with respect to Series
200_-__ .
On each distribution date, after giving effect to any deposit to be made
to, and any withdrawal to be made from, the reserve account on that distribution
date, the indenture trustee will withdraw from the reserve account an amount
equal to the excess, if any, of the amount on deposit in the reserve account
over the Required Reserve Account Amount, will deposit the excess in the spread
account to the extent that funds available in the spread account are less than
the Required Spread Account Amount and will distribute any remaining excess to
the holders of the transferor certificates. Any amounts withdrawn from the
reserve account and deposited in the spread account as described above will be
available for distribution only to the holders of the Class C notes. Any amounts
withdrawn from the reserve account and distributed to the holders of the
transferor certificates as described above will not be available for
distribution to the noteholders.
So long as the reserve account is not terminated as described below, all
amounts on deposit in the reserve account on any distribution date (after giving
effect to any deposits to, or withdrawals from, the reserve account to be made
on that distribution date) will be invested to the following distribution date
by the indenture trustee at the direction of the servicer in eligible
investments. The interest and other investment income (net of investment
expenses and losses) earned on these investments will be retained in the reserve
account (to the extent the amount on deposit is less than the Required Reserve
Account Amount) or deposited in the collection account and treated as Available
Finance Charge Collections.
On or before each distribution date with respect to the controlled
accumulation period and on the first distribution date with respect to the early
amortization period, a withdrawal will be made from the reserve account, and the
amount of this withdrawal will be deposited in the collection account and
included as Available Finance Charge Collections, as provided in the Series
200_-__ indenture supplement, for that distribution date in an aggregate amount
equal to the least of (a) the amount then on deposit in the reserve account with
respect to that distribution date, (b) the Required Reserve Account Amount and
(c) the reserve draw amount with respect to that distribution date. However, the
amount of the withdrawal will be reduced to the extent that funds otherwise
would be available to be deposited in the reserve account on that distribution
date.
The reserve account will be terminated upon the earliest to occur of:
o the first distribution date for the early amortization period;
o the expected principal payment date; and
o the termination of the trust.
Upon the termination of the reserve account, all amounts on deposit in the
reserve account (after giving effect to any withdrawal from the reserve account
on that date as described above) will be deposited in the spread account to the
extent that funds available in the spread account are less than the Required
Spread Account Amount and any remaining amounts will be distributed to the
holders of the transferor certificates. Any amounts withdrawn from the reserve
account and deposited in the spread account as described above will be available
for distribution only to the holders of the Class C notes. Any amounts withdrawn
from the reserve account and distributed to the holders of the transferor
certificates as described above will not be available for distribution to the
noteholders.
SPREAD ACCOUNT
The servicer will establish and maintain with an eligible institution the
spread account as a segregated account held as security for the benefit of the
Class C noteholders (the "Spread Account"). Amounts on deposit in the spread
account will be used (a) to fund shortfalls in interest payments on the Class C
notes and (b) on the Series 200_-__ termination date, to fund any shortfall in
payment of the outstanding principal balance of the Class C notes.
The spread account initially will not be funded, but will be funded by (a)
Available Finance Charge Collections and Excess Finance Charge Collections, as
described above under "-Application of Collections -Payment of Interest, Fees
and Other Items," and (b) amounts, if any, withdrawn from the reserve account to
be treated as Available Finance Charge Collections, as described above under
"-Reserve Account," and deposited into the spread account on any distribution
date to the extent that the funds available in the spread account are less than
the Required Spread Account Amount on that distribution date.
The "Required Spread Account Amount" will be determined on each
distribution date, and, in general, for any date of determination, will be equal
to the product of (a) the Spread Account Percentage in effect on the date of
determination and (b) the initial Invested Amount. However, as long as no event
of default for your series has occurred and is continuing, the Required Spread
Account Amount will not exceed the outstanding principal balance of the Class C
Notes minus the excess, if any, of the principal funding account balance over
the sum of the outstanding principal balances of the Class A notes and the Class
B notes on the date of determination.
Once an event of default for your series occurs and is continuing, the
Required Spread Account Amount for any distribution date will automatically
increase to the sum of
(a) the amount on deposit in the spread account on that distribution date
plus
(b) Available Finance Charge Collections and Excess Finance Charge
Collections for that distribution date available immediately after
funding the reserve account plus
(c) amounts withdrawn from the reserve account to be treated as Available
Finance Charge Collections, as described above under "-Reserve
Account." However, following an event of default for your series, if
the maturity of your notes is not accelerated, the increase in the
Required Spread Account Amount will be limited to an amount equal to
the outstanding principal amount of your series of notes.
"Spread Account Percentage" will be determined as follows:
IF THE QUARTERLY EXCESS SPREAD
PERCENTAGE IS GREATER THAN OR THEN, THE SPREAD ACCOUNT
EQUAL TO: AND LESS THAN: PERCENTAGE WILL EQUAL:
---% ---% ---%
---% ---% ---%
---% ---% ---%
However, if a pay out event (other than a pay out event resulting from the
occurrence of an event of default) for Series 200_-__ has occurred, the Spread
Account Percentage will be [--]%.
After the Spread Account Percentage has been increased above zero as
specified in the table above, it will remain at the specified percentage until:
(a) further increased to a higher required percentage as specified above,
or
(b) the distribution date on which the Quarterly Excess Spread Percentage
has increased to a level above that for the then current Spread Account
Percentage, in which case the Spread Account Percentage will be decreased to the
appropriate percentage as specified above (or, if the Quarterly Excess Spread
Percentage is greater than or equal to [--]%, the Spread Account Percentage will
be zero and the Required Spread Account Amount will be zero).
However, if a pay out event (other than a pay out event resulting from the
occurrence of an event of default) with respect to Series 200_-__ has occurred,
the Spread Account Percentage will equal [--]% (as provided in the definition of
Spread Account Percentage above) and may not be subsequently reduced.
The "Quarterly Excess Spread Percentage" will be determined as follows:
<TABLE>
<CAPTION>
<S> <C>
For the [Month 1] 200_ distribution date: The Modified Excess Spread Percentage.
For the [Month 2] 200_ distribution date: The Modified Excess Spread Percentage for the first monthly period,
plus the Excess Spread Percentage for the [Month 1] 200_ monthly period.
For the [Month 3] 200_ distribution date: The Modified Excess Spread Percentage for the first monthly period,
plus the Excess Spread Percentage for the [Month 1] 200_ monthly
period, plus the Excess Spread Percentage for the [Month 2] 200_
monthly period .
For each following distribution date: The sum of the Excess Spread Percentages for the 3 prior monthly
periods.
</TABLE>
The "Excess Spread Percentage" for any monthly period will be determined as
follows:
o during the controlled accumulation period, but only if the amount on
deposit in the reserve account is greater than or equal to the
Required Reserve Account Amount:
o Available Finance Charge Collections for that monthly period
available immediately after covering Class A's portion of the
Investor Default Amount times 12, divided by
o The Adjusted Invested Amount on the first day of that monthly
period
o in all other cases:
o Available Finance Charge Collections for that monthly period
available immediately after covering Class A's portion of the
Investor Default Amount times 12, divided by
o The Invested Amount on the first day of that monthly period.
The "Modified Excess Spread Percentage" will be calculated for the first
monthly period in accordance with the Series 200_-__ indenture supplement based
on collections of finance charge receivables for that monthly period in relation
to the amount of interest and servicing fee accrued for the first distribution
date.
Funds on deposit in the spread account will be invested at the direction of
the servicer in eligible investments. For purposes of the spread account, the
reference in the definition of eligible investments to a rating in the "highest
rating category" refers to a rating of at least A-2 by Standard & Poor's, P-2 by
Moody's or F2 by Fitch. Investment earnings (net of losses and investment
expenses) will, except as otherwise indicated in this prospectus supplement, not
be deposited into the spread account and will be paid to the holders of the
transferor certificates. However, after an event of default relating to your
series of notes, these investment earnings will be available for payment to
holders of the Class C notes.
SPREAD ACCOUNT DISTRIBUTIONS
If on any distribution date, the interest to be paid on the Class C notes
exceeds the amount allocated to pay that interest, the indenture trustee, at the
instruction of the servicer, will withdraw from the spread account the lesser of
(1) the amount on deposit in the spread account (including investment earnings
to the extent necessary to fund that excess) and (2) the amount of the excess,
and will deposit that amount into the collection account for payment of interest
on the Class C notes.
On the Series 200_-__ termination date, funds available in the spread
account (after giving effect to any withdrawals to be made as discussed in the
preceding paragraph) will be used to fund any shortfall in the payment of the
outstanding principal balance of the Class C notes.
Funds on deposit in the spread account on any distribution date in excess
of the Required Spread Account Amount on that date will be paid to the holders
of the transferor certificates. On the date on which all amounts due to the
Class C noteholders from the spread account have been paid in full, all amounts,
if any, then remaining in the spread account will be distributed to the holders
of the transferor certificates.
ISSUANCE OF ADDITIONAL NOTES
The Series 200_-__ indenture supplement provides that, from time to time
during the revolving period, the transferor may, subject to conditions described
below, cause the trust to issue additional notes of Series 200_-__ (each
issuance, an "Additional Issuance"). When issued, the additional notes of each
class will be identical in all respects to the other outstanding notes of that
class and will be equally and ratably entitled to the benefits of the transfer
and servicing agreement, the indenture and the Series 200_-__ indenture
supplement without preference, priority or distinction.
In connection with each additional issuance, the outstanding principal
amounts of each class of notes and the series enhancement will be increased
proportionately. The additional series enhancement provided in connection with
an additional issuance may take the form of a letter of credit, the
establishment of a cash collateral account, the purchase of interest rate caps
or swaps and/or another form of series enhancement, provided that the form and
amount of additional series enhancement will not cause a reduction or withdrawal
by any rating agency of its rating of any outstanding series or class.
Following an additional issuance, the respective portions of the series
enhancement that are for the benefit of the noteholders will remain the same, as
a percentage of the total series enhancement, as the respective proportions in
effect on the closing date. The Controlled Accumulation Amount also will be
increased proportionately to reflect the principal amount of additional notes.
In order to issue additional notes, several conditions must be satisfied,
including:
o notice to the indenture trustee, the owner trustee, the servicer and
any series enhancer of the issuance and the date upon which it is to
occur;
o after giving effect to the additional issuance, the total amount of
principal receivables must at least equal the Required Minimum
Principal Balance, and the Transferor Interest must equal or exceed
the Required Transferor Interest;
o delivery to the indenture trustee of any additional series enhancement
agreement related to the additional issuance, executed by each of the
parties to the series enhancement agreement;
o delivery to the indenture trustee of written confirmation that the
additional issuance will not result in the reduction or withdrawal by
any rating agency of its rating of any outstanding series or class;
o delivery to the indenture trustee of a certificate of an authorized
officer of the transferor to the effect that, in the transferor's
reasonable belief, the issuance will not have a material adverse
effect on the interests of the noteholders at the date of issuance or
at any future date;
o as of the date of the additional issuance, all amounts due to the
Series 200_-_ noteholders must have been paid, and there must not be
any unreimbursed Investor Charge-Offs;
o the excess of the principal amount of the additional notes over their
issue price shall not exceed the maximum amount permitted under the
Code without the creation of original issue discount; and
o delivery by the transferor to the indenture trustee of an opinion of
counsel acceptable to the indenture trustee that, for federal income
tax purposes,
(1) the issuance will not adversely affect the tax characterization
as debt of notes of any outstanding series or class that were
characterized as debt at the time of their issuance;
(2) the new issuance will not cause the trust to be deemed to be an
association (or publicly traded partnership) taxable as a
corporation; and
(3) the new issuance will not cause or constitute an event in which
gain or loss would be recognized by any noteholder.
There are no restrictions on the timing or amount of any additional
issuance, provided that the conditions described above are met. As of the date
of any additional issuance, the Invested Amount will be increased to reflect the
initial principal balance of the additional notes of each class.
PAIRED SERIES
Your series of notes may be paired with one or more series of notes issued
at a later time once the controlled accumulation period or the early
amortization period for your series begins. We call each of these later issued
series a "Paired Series." All or a portion of a paired series may be pre-funded
with an initial deposit to a funding account that is for the sole benefit of the
paired series; in the alternative, a paired series may have a principal amount
that can be increased. Once your series is paid in full, if there have been no
unreimbursed investor charge-offs for any paired series, the invested amount of
the paired series will be increased by an amount up to the full Invested Amount
of your series. The issuance of the paired series will be subject to the
conditions described under "Description of the Notes -New Issuances" in the
accompanying prospectus.
We cannot assure you that the terms of any paired series will not have an
impact on the calculation of the Investor Percentage or the timing or amount of
payments received by you as a Series 200_-__ noteholder. The extent to which the
timing or amount of payments received by you may be affected will depend on many
factors, only one of which is a change in the calculation of the Investor
Percentage.
PAY OUT EVENTS
As described above, the revolving period will continue through _______, 200
(unless that date is postponed as described under "-Postponement of Controlled
Accumulation Period" in this prospectus supplement), unless a pay out event
occurs prior to that date.
A "Pay Out Event" refers to any of the following events:
(a) failure by the transferor (1) to make any payment or deposit on the
date required under the transfer and servicing agreement, the indenture or the
Series 200_-__ indenture supplement (or within the applicable grace period which
shall not exceed five days) or (2) to observe or perform in any material respect
any other covenants or agreements of the transferor set forth in the transfer
and servicing agreement, the indenture or the Series 200_-__ indenture
supplement, which failure has a material adverse effect on the Series 200_-__
noteholders and which continues unremedied for a period of 60 days after written
notice of the failure, requiring the same to be remedied, and continues to
materially and adversely affect the interests of the noteholders for the
designated period;
(b) any representation or warranty made by the transferor in the transfer
and servicing agreement, the indenture or the Series 200_-__ indenture
supplement, or any information required to be given by the transferor to the
indenture trustee to identify the accounts proves to have been incorrect in any
material respect when made or delivered and which continues to be incorrect in
any material respect for a period of 60 days after written notice of the
failure, requiring the same to be remedied, and as a result of which the
interests of the noteholders are materially and adversely affected and continue
to be materially and adversely affected for the designated period; except that a
pay out event pursuant to this subparagraph (b) will not occur if the transferor
has accepted reassignment of the related receivable or all related receivables,
if applicable, during the designated period in accordance with the provisions of
the transfer and servicing agreement;
(c) a failure by the transferor to convey receivables in additional
accounts or participations to the trust within 5 business days after the date
required by the transfer and servicing agreement;
(d) any servicer default occurs which would have a material adverse effect
on the Series 200_-__ noteholders;
(e) the average of the Portfolio Yields for any three consecutive monthly
periods is less than the average of the Base Rates for the same monthly periods;
(f) insufficient moneys are available to pay in full the outstanding
principal balances of all the Series 200_-__ notes on the expected principal
payment date;
(g) bankruptcy, insolvency, liquidation, conservatorship, receivership or
similar events relating to the transferor (including any additional transferor)
or the originator;
(h) the transferor is unable for any reason to transfer receivables to the
trust in accordance with the provisions of the transfer and servicing agreement;
(i) the trust becomes subject to regulation as an "investment company"
within the meaning of the Investment Company Act of 1940, as amended; or
(j) an event of default for Series 200_-__ occurs under the indenture.
In the case of any event described in clause (a), (b), (d) or (f) above, a
pay out event will be deemed to have occurred with respect to the notes only if,
after any applicable grace period, either the indenture trustee or the Series
200_-__ noteholders evidencing interests aggregating not less than 50% of the
aggregate unpaid principal amount of the Series 200_-__ notes, by written notice
to the transferor and the servicer (and to the indenture trustee if given by the
Series 200_-__ noteholders), declare that a pay out event has occurred with
respect to the Series 200_-__ notes as of the date of the notice.
In the case of any event described in clause (g), (h) or (i), a pay out
event with respect to all series then outstanding, and in the case of any event
described in clause (c), (e) or (j), a pay out event with respect to only the
Series 200_-__ notes, will occur without any notice or other action on the part
of the indenture trustee or the Series 200_-__ noteholders immediately upon the
occurrence of the event.
On the date on which a pay out event is deemed to have occurred, the early
amortization period will begin.
See "Description of the Notes -Pay Out Events" in the accompanying
prospectus for an additional discussion of the consequences of an insolvency,
conservatorship or receivership of the transferor.
The term "Base Rate" means, with respect to any monthly period, the
annualized percentage equivalent of a fraction:
o the numerator of which is the sum of the Monthly Interest and the
Monthly Servicing Fee, each for the related distribution date; and
o the denominator of which is the Invested Amount as of the close of
business on the last day of that monthly period.
The term "Portfolio Yield" means, with respect to any monthly period, the
annualized percentage equivalent of a fraction:
o the numerator of which is the sum of collections of finance charge
receivables, Excess Finance Charge Collections, Principal Funding
Investment Proceeds and amounts withdrawn from the reserve account, if
any, deposited in the collection account and allocable to the Series
200_-__ notes for that monthly period, calculated on a cash basis
after subtracting the Investor Default Amount for that monthly period;
and
o the denominator of which is the Invested Amount as of the close of
business on the last day of that monthly period.
EVENTS OF DEFAULT
The events of default for Series 200_-__ , as well as the rights and
remedies available to the indenture trustee and the Series 200_-__ noteholders
when an event of default occurs, are described under "The Indenture -Events of
Default; Rights Upon Event of Default" in the accompanying prospectus.
If an event of default for Series 200_-__ occurs, the indenture trustee or
the holders of a majority of the then-outstanding principal balance of the
Series 200_-__ notes may declare the Series 200_-__ notes to be immediately due
and payable. If the Series 200_-__ notes are accelerated, you may receive
principal prior to the expected principal payment date for your notes.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
The share of the servicing fee allocable to the Invested Amount with
respect to any distribution date (the "Monthly Servicing Fee") will be equal to
one-twelfth of the product of (a) ___% and (b) (1) the Adjusted Invested Amount
as of the last day of the monthly period preceding that distribution date, minus
(2) the product of the amount, if any, on deposit in the special funding account
as of the last day of the monthly period preceding that distribution date and
the Investor Percentage of collections of finance charge receivables with
respect to that monthly period. However, with respect to the first distribution
date, the monthly servicing fee will equal $___.
The servicer will pay from its servicing compensation expenses incurred in
connection with servicing the receivables including, without limitation, payment
of the fees and disbursements of the indenture trustee and independent certified
public accountants and other fees which are not expressly stated in the transfer
and servicing agreement, the indenture or the Series 200_-__ indenture
supplement to be payable by the trust or the noteholders other than federal,
state and local income and franchise taxes, if any, of the trust.
REPORTS TO NOTEHOLDERS
On each distribution date, the paying agent, on behalf of the indenture
trustee will forward to each noteholder of record, a statement prepared by the
servicer setting forth the items described in "Description of the Notes -Reports
to Noteholders" in the accompanying prospectus.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
and Section 4975 of the Code impose requirements on employee benefit plans and
other plans and arrangements, including individual retirement accounts and
annuities, Keogh plans and collective investment funds or insurance company
general or separate accounts in which the plans, accounts or arrangements are
invested, that are subject to the fiduciary responsibility provisions of ERISA
and/or Section 4975 of the Code (collectively, "Plans"), and on persons who are
fiduciaries with respect to Plans, in connection with the investment of "plan
assets" of any Plan ("Plan Assets"). ERISA generally imposes on Plan fiduciaries
general fiduciary requirements, including those of investment prudence and
diversification and the requirement that a Plan's investments be made in
accordance with the documents governing the Plan.
ERISA and Section 4975 of the Code prohibit a broad range of transactions
involving Plan Assets and persons ("parties in interest" under ERISA and
"disqualified persons" under the Code, collectively, "Parties In Interest") who
have specified relationships to a Plan or its Plan Assets, unless a statutory or
administrative exemption is available. Parties in Interest that participate in a
prohibited transaction may be subject to a penalty imposed under ERISA and/or an
excise tax imposed pursuant to Section 4975 of the Code, unless a statutory or
administrative exemption is available. These prohibited transactions generally
are set forth in Section 406 of ERISA and Section 4975 of the Code.
Subject to the considerations described below and in the accompanying
Prospectus, the notes are eligible for purchase with Plan Assets of any Plan.
Any fiduciary or other Plan investor considering whether to purchase the
notes with Plan Assets of any Plan should determine whether that purchase is
consistent with its fiduciary duties and whether that purchase would constitute
or result in a non-exempt prohibited transaction under ERISA and/or Section 4975
of the Code because any of the transferor, the servicer, the indenture trustee,
the owner trustee or any other party may be Parties in Interest with respect to
the investing Plan and may be deemed to be benefiting from the issuance of the
notes. If the transferor or the servicer is a Party in Interest with respect to
the prospective Plan investor, any fiduciary or other Plan investor considering
whether to purchase or hold the notes should consult with its counsel regarding
the availability of exemptive relief under U.S. Department of Labor ("DOL")
Prohibited Transaction Class Exemption ("PTCE") 96-23 (relating to transactions
determined by "in-house asset managers"), 95-60 (relating to transactions
involving insurance company general accounts), 91-38 (relating to transactions
involving bank collective investment funds), 90-1 (relating to transactions
involving insurance company pooled separate accounts) or 84-14 (relating to
transactions determined by independent "qualified professional asset managers")
or any other prohibited transaction exemption issued by the DOL. A purchaser of
the notes should be aware, however, that even if the conditions specified in one
or more of the above-referenced exemptions are met, the scope of the exemptive
relief provided by the exemption might not cover all acts which might be
construed as prohibited transactions.
In addition, under DOL Regulation Section 2510.3-101 (the "Plan Asset
Regulation"), the purchase with Plan Assets of equity interests in the issuer
could, in specified circumstances, cause the receivables and other assets of the
issuer to be deemed Plan Assets of the investing Plan which, in turn, would
subject the issuer and its assets to the fiduciary responsibility provisions of
ERISA and the prohibited transaction provisions of ERISA and Section 4975 of the
Code. Nevertheless, because the notes (a) are expected to be treated as
indebtedness under local law and will, in the opinion of Special Tax Counsel, be
treated as debt, rather than equity, for federal tax purposes (see "Federal
Income Tax Consequences -Tax Characterization of the Trust and the Notes
-Treatment of the Notes as Debt" in the accompanying prospectus), and (b) should
not be deemed to have any "substantial equity features," purchases of the notes
with Plan Assets should not be treated as equity investments and, therefore, the
receivables and other assets included as assets of the issuer should not be
deemed to be Plan Assets of the investing Plans. Those conclusions are based, in
part, upon the traditional debt features of the notes, including the reasonable
expectation of purchasers of the notes that the notes will be repaid when due,
as well as the absence of conversion rights, warrants and other typical equity
features.
The notes may not be purchased or held by any Plan, or any person investing
Plan Assets of any Plan, if any of the transferor, the servicer, the indenture
trustee, the owner trustee or any of their respective affiliates
(a) has investment or administrative discretion with respect to the Plan
Assets used to effect the purchase;
(b) has authority or responsibility to give, or regularly gives,
investment advice with respect to the Plan Assets, for a fee and
pursuant to an agreement or understanding that the advice (1) will
serve as a primary basis for investment decisions with respect to the
Plan Assets, and (2) will be based on the particular investment needs
of that Plan; or
(c) unless PTCE 95-60, 91-38 or 90-1 is applicable, is an employer
maintaining or contributing to that Plan. Each purchaser or holder of
the notes or any interest in the notes will be deemed to have
represented by its purchase and holding that it is not subject to the
foregoing limitation.
Any fiduciary or other Plan investor considering whether to purchase any
notes on behalf of or with Plan Assets of any Plan should consult with its
counsel and refer to this prospectus supplement for guidance regarding the ERISA
considerations applicable to the notes offered by this prospectus supplement and
the accompanying prospectus.
UNDERWRITING
Subject to the terms and conditions set forth in an underwriting agreement
as supplemented by a terms agreement relating to the Class A notes (together,
the "Class A Underwriting Agreement") between the transferor and the Class A
underwriters named below (the "Class A Underwriters"), the terms and conditions
set forth in an underwriting agreement as supplemented by a terms agreement
relating to the Class B notes (together, the "Class B Underwriting Agreement")
between the transferor and the Class B underwriters named below (the "Class B
Underwriters") and the terms and conditions set forth in an underwriting
agreement as supplemented by a terms agreement relating the Class C notes
(together, the "Class C Underwriting Agreement" and, together with the Class A
underwriting agreement and the Class B underwriting agreement, the "Underwriting
Agreement") between the transferor and the Class C underwriters named below (the
"Class C Underwriters" and, together with the Class A underwriters and the Class
B underwriters, the "UNDERWRITERS"), the transferor has agreed to sell to the
underwriters, and each of the underwriters has severally agreed to purchase, the
principal amount of the notes set forth opposite its name:
PRINCIPAL PRINCIPAL PRINCIPAL
AMOUNT OF AMOUNT OF AMOUNT OF
UNDERWRITERS CLASS A NOTES CLASS B NOTES CLASS C NOTES
Total...................... $
In the Class A underwriting agreement, the Class A underwriters have
agreed, subject to the terms and conditions set forth in that agreement, to
purchase all of the Class A notes offered hereby if any of the Class A notes are
purchased. In the Class B underwriting agreement, the Class B underwriters have
agreed, subject to the terms and conditions set forth in that agreement, to
purchase all of the Class B notes offered hereby if any of the Class B notes are
purchased. In the Class C underwriting agreement, the Class C underwriters have
agreed, subject to the terms and conditions set forth in that agreement, to
purchase all of the Class C notes offered hereby if any of the Class C notes are
purchased.
The Class A underwriters propose initially to offer the Class A notes to
the public at [ ]% of their principal amount and to dealers at that price less
concessions not in excess of [ ]% of the principal amount of the Class A notes.
The Class A underwriters may allow, and the dealers may reallow, concessions not
in excess of [ ]% of the principal amount of the Class A notes to brokers and
dealers. After the initial public offering, the public offering price and other
selling terms may be changed by the Class A underwriters.
The Class B underwriters propose initially to offer the Class B notes to
the public at [ ]% of their principal amount and to dealers at that price less
concessions not in excess of [ ]% of the principal amount of the Class B notes.
The Class B underwriters may allow, and the dealers may reallow, concessions not
in excess of [ ]% of the principal amount of the Class B notes to brokers and
dealers. After the initial public offering, the public offering price and other
selling terms may be changed by the Class B underwriters.
The Class C underwriters propose initially to offer the Class C notes to
the public at [ ]% of their principal amount and to dealers at that price less
concessions not in excess of [ ]% of the principal amount of the Class C notes.
The Class C underwriters may allow, and the dealers may reallow, concessions not
in excess of [ ]% of the principal amount of the Class C notes to brokers and
dealers. After the initial public offering, the public offering price and other
selling terms may be changed by the Class C underwriters.
We will receive proceeds of approximately $[] from the sale of the notes
(representing [ ]% of the principal amount of each Class A note, [ ]% of the
principal amount of each Class B note and [ ]% of the principal amount of each
Class C note) after paying the underwriting discount of $[] (representing [ ]%
of the principal amount of each Class A note, [ ]% of the principal amount of
each Class B note and [ ]% of the principal amount of each Class C note).
Additional offering expenses are estimated to be $[].
The transferor will indemnify the underwriters against liabilities,
including liabilities under the Securities Act, or contribute to payments the
underwriters may be required to make.
The underwriters may engage in over-allotment transactions, stabilizing
transactions, syndicate covering transactions and penalty bids with respect to
the notes in accordance with Regulation M under the Exchange Act. Over-allotment
transactions involve syndicate sales in excess of the offering size, which
creates a syndicate short position. Stabilizing transactions permit bids to
purchase the notes so long as the stabilizing bids do not exceed a specified
maximum. Syndicate covering transactions involve purchases of the notes in the
open market after the distribution has been completed in order to cover
syndicate short positions. Penalty bids permit the underwriters to reclaim a
selling concession from a syndicate member when the notes originally sold by
that syndicate member are purchased in a syndicate covering transaction.
Over-allotment transactions, stabilizing transactions, syndicate covering
transactions and penalty bids may cause the prices of the notes to be higher
than they would otherwise be in the absence of those transactions. Neither the
transferor nor the underwriters represent that the underwriters will engage in
any of these transactions or that those transactions, once commenced, will not
be discontinued without notice at any time.
The transferor is an affiliate of the underwriters.
LEGAL MATTERS
Certain legal matters relating to the issuance of the notes will be passed
upon for the transferor and the underwriters by Stroock & Stroock Lavan LLP, New
York, New York, special counsel to the transferor.
<PAGE>
INDEX OF TERMS FOR PROSPECTUS SUPPLEMENT
Terms Page
Accumulation Shortfall.....................................................33
Additional Issuance........................................................40
Adjusted Invested Amount...................................................29
Available Finance Charge Collections.......................................24
Available Principal Collections............................................24
Base Rate..................................................................43
Business Day...............................................................23
Class A Additional Interest................................................23
Class A Monthly Interest...................................................31
Class A Note Interest Rate.................................................22
Class A Underwriters.......................................................46
Class A Underwriting Agreement.............................................46
Class B Additional Interest................................................23
Class B Monthly Interest...................................................31
Class B Note Interest Rate.................................................22
Class B Underwriters.......................................................46
Class B Underwriting Agreement.............................................46
Class C Additional Interest................................................23
Class C Monthly Interest...................................................31
Class C Note Interest Rate.................................................22
Class C Underwriters.......................................................46
Class C Underwriting Agreement.............................................46
Closing Date...............................................................22
Controlled Accumulation Amount.............................................33
Controlled Accumulation Period.............................................24
Controlled Deposit Amount..................................................33
Defaulted Amount...........................................................34
Discount Percentage........................................................16
Distribution Date..........................................................23
Early Amortization Period..................................................25
ERISA......................................................................44
Excess Finance Charge Collections..........................................33
Excess Spread Percentage...................................................39
Expected Principal Payment Date............................................19
Fixed Investor Percentage..................................................28
Floating Investor Percentage...............................................27
Interchange................................................................14
Interest Period............................................................22
Invested Amount............................................................29
Investor Default Amount....................................................34
LIBOR Determination Date...................................................22
London Business Day........................................................22
Modified Excess Spread Percentage..........................................39
Monthly Interest...........................................................32
Monthly Period.............................................................24
Monthly Principal..........................................................32
Monthly Principal Reallocation Amount......................................29
Monthly Servicing Fee......................................................44
Originator.................................................................21
Paired Series..............................................................41
Parties In Interest........................................................45
Pay Out Event..............................................................42
Payments of Principal......................................................32
Plan Asset Regulation......................................................45
Plan Assets................................................................45
Plans......................................................................44
Portfolio Yield............................................................43
Principal Funding Account..................................................35
Principal Funding Investment Proceeds......................................35
Principal Shortfalls.......................................................34
Quarterly Excess Spread Percentage.........................................38
Reallocated Principal Collections..........................................29
Record Date................................................................22
Recoveries.................................................................14
Required Minimum Principal Balance.........................................16
Required Reserve Account Amount............................................36
Required Spread Account Amount.............................................37
Required Transferor Interest...............................................16
Required Transferor Percentage.............................................16
Reserve Account............................................................35
Reserve Account Funding Date...............................................36
Reserve Draw Amount........................................................35
Revolving Period...........................................................24
Series 200_-__ Indenture Supplement........................................22
Series 200_-__ Notes.......................................................22
Series 200_-__ Termination Date............................................20
Servicer...................................................................21
Shared Principal Collections...............................................34
Shared Transferor Principal Collections....................................34
Spread Account.............................................................37
Spread Account Percentage..................................................38
Telerate Page 3750.........................................................23
Transferor.................................................................21
Transferor Interest........................................................16
Trust Portfolio............................................................15
Underwriting Agreement.....................................................46
<PAGE>
ANNEX I
OTHER SERIES ISSUED AND OUTSTANDING
The table below sets forth the principal characteristics of the other
series previously issued by the trust that are currently outstanding, all of
which are in group one. For more specific information with respect to any
series, any prospective investor should contact _______________ at
______________. ___________________ will provide, without charge, to any
prospective purchaser of the notes, a copy of the disclosure documents for any
previous publicly-issued series.
[1. Series 200_-__
Current Class A Invested Amount..........$
Class A note interest rate...............[one-month] LIBOR plus __% per annum
Initial Class B Invested Amount..........$
Current Class B Invested Amount..........$
Class B note interest rate...............[one-month] LIBOR plus __% per annum
Initial Class C Invested Amount..........$
Current Class C Invested Amount..........$
Class C note interest rate...............[one-month] LIBOR plus __% per annum
[Controlled Accumulation Amount..........$*]
[Expected principal payment date.........[] distribution date]
Annual servicing fee percentage..........___% per annum
[Enhancement for the Class A notes.......Subordination of Class B and Class
C notes]
[Enhancement for the Class B notes.......Subordination of Class C notes]
[Enhancement for the Class C notes.......spread account]
Series 200_-__ termination date............[] distribution date
Series Issuance Date..................... , 200_
Initial Class A Invested Amount..........$
--------------
* Subject to change if the commencement of the accumulation period or controlled
accumulation period, as applicable, is delayed.]
<PAGE>
PROSPECTUS
ASSET BACKED SECURITIES CORPORATION
Transferor or Sponsor
CREDIT CARD
ASSET BACKED NOTES
The trust may periodically issue asset backed notes in one or more series with
one or more classes and will own:
o receivables arising from time to time in the ordinary course of
business in one or more portfolios of credit card, charge card or
other types of accounts,
o participation certificates evidencing participation interests in loans
similar to the types of loans described above;
o payments due on those receivables; and
o other property described in this prospectus and in the accompanying
prospectus supplement.
The notes
o will be paid only from the trust assets;
o offered with this prospectus will be rated in one of the four highest
rating categories by at least one nationally recognized rating
organization;
o may have one or more forms of credit enhancement; and
o will be issued as part of a designated series which may include one or
more classes of notes and credit enhancement.
YOU SHOULD CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE __ IN THIS
PROSPECTUS.
The notes are obligations of the Credit Card Master Note Trust described in the
related prospectus supplement only and are not obligations of Asset Backed
Securities Corporation or any other person.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED THESE NOTES OR DETERMINED THAT THIS PROSPECTUS IS
ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
CREDIT SUISSE FIRST BOSTON
The date of this Prospectus is _________, 2000
<PAGE>
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS PROSPECTUS AND THE
ACCOMPANYING PROSPECTUS SUPPLEMENT
We provide information to you about the notes in two separate documents:
(a) this prospectus, which provides general information, some of which may not
apply to your series of notes, and (b) the accompanying prospectus supplement,
which describes the specific terms of your series of notes, including:
o the terms, including interest rates, for each class;
o the timing of interest and principal payments;
o information about the receivables;
o information about credit enhancement, if any, for each class;
o the ratings for each class being offered; and
o the method for selling the notes.
If the terms of your series of notes vary between this prospectus and the
accompanying prospectus supplement, you should rely on the information in the
prospectus supplement.
You should rely only on the information provided in this prospectus and the
accompanying prospectus supplement, including the information incorporated by
reference. We have not authorized anyone to provide you with different
information. We are not offering the notes in any state where the offer is not
permitted.
We include cross references in this prospectus and the accompanying
prospectus supplement to captions in these materials where you can find further
related discussions. The following Table of Contents and the Table of Contents
in the accompanying prospectus supplement provide the pages on which these
captions are located.
This prospectus uses defined terms. You can find a listing of the pages
where definitions can be found under the caption "Index of Terms for Prospectus"
beginning on page __ in this prospectus.
TABLE OF CONTENTS
PAGE
Risk Factors...............................................................
The Issuer ................................................................
The Trust Portfolio .......................................................
Maturity Considerations ...................................................
Use of Proceeds ...........................................................
Description of the Notes ..................................................
The Indenture..............................................................
Credit Enhancement ........................................................
Description of the Purchase Agreements ....................................
Note Ratings...............................................................
Certain Legal Aspects of the Receivables ..................................
Federal Income Tax Consequences. ..........................................
ERISA Considerations ......................................................
Plan of Distribution ......................................................
Reports to Noteholders ....................................................
Where You Can Find More Information .......................................
Index of Terms for Prospectus..............................................
Annex I: Global Clearance, Settlement and Tax Documentation Procedures ....
<PAGE>
RISK FACTORS
You should consider the following risk factors in deciding whether to
purchase the notes.
IT MAY NOT BE POSSIBLE TO FIND AN INVESTOR TO PURCHASE YOUR NOTES.
The underwriters may assist in resales of the notes but they are not
required to do so. A secondary market for any notes may not develop. If a
secondary market does develop, it might not continue or it might not be
sufficiently liquid to allow you to resell any of your notes.
SOME LIENS WOULD BE GIVEN PRIORITY OVER YOUR NOTES WHICH COULD CAUSE DELAYED OR
REDUCED PAYMENTS.
Each of the originator and the transferor will account for the transfer of
the receivables as a sale. Even so, a court could conclude that the originator
or the transferor owns the receivables and that the trust holds only a security
interest. Even if a court would reach that conclusion, however, the indenture
trustee will have a "first priority perfected security interest."
If a court were to conclude that the trust has only a security interest, a
tax or governmental lien (or other lien imposed under applicable state or
federal law without consent) on the property of the person that owns the
receivables arising before receivables come into existence may be senior to the
trust's interest in the receivables. Additionally, if a receiver or conservator
were appointed for the originator, the fees and expenses of the receiver or
conservator might be paid from the receivables before the trust receives any
payments on the receivables. If insolvency or bankruptcy proceedings were
commenced by or against the servicer or if specified time periods were to
elapse, moreover, the trust may not have a first-priority perfected security
interest in collections commingled and used for the benefit of the servicer. If
any of these events were to occur, payments to you could be delayed or reduced.
See "Certain Legal Aspects of the Receivables -Transfer of Receivables" and
"Description of the Notes -Representations and Warranties" in this prospectus.
IF A CONSERVATOR OR RECEIVER WERE APPOINTED FOR AN ORIGINATOR OR THE TRANSFEROR
OR THE ORIGINATOR OR TRANSFEROR BECAME A DEBTOR IN A BANKRUPTCY CASE, DELAYS OR
REDUCTIONS IN PAYMENT OF YOUR NOTES COULD OCCUR.
The Federal Deposit Insurance Act, as amended by the Financial Institutions
Reform, Recovery and Enforcement Act of 1989 (the "FDIA"), provides that a
security interest granted by an originator that is a bank in the receivables
would be respected to the extent that the receivables purchase agreement
complies with the regulatory requirements of the FDIA; the security interest
granted under the receivables purchase agreement was perfected before the
Federal Deposit Insurance Corporation (the "FDIC") is appointed as conservator
or receiver for the bank; and the security interest was not taken in
contemplation of the bank's insolvency or with the intent to hinder, delay or
defraud the bank or its creditors.
Opinions and policy statements issued by the FDIC suggest that, because of
the manner in which these transactions are structured, the FDIC would respect
the security interest granted by an originator that is a bank in the
receivables. If the FDIC were to assert a contrary position, however, payments
of principal and interest on your notes could be delayed and possibly reduced.
Furthermore, the FDIC could require the indenture trustee to go through the
administrative claims procedure established by the FDIC in order to obtain
payments on the notes; request a stay of any actions by the indenture trustee to
enforce the receivables purchase agreement or the notes against the bank; or
repudiate the receivables purchase agreement and limit the claims of the holders
of the notes to their "actual direct compensatory damages."
If the FDIC were to take any of these actions, the amount payable to you
could be lower than the outstanding principal and accrued interest on the notes,
thus resulting in losses to you.
If an originator became a debtor in a bankruptcy case, and if its transfer
of the receivables to the transferor were construed as the grant of a security
interest to secure a borrowing, your payments of outstanding principal and
interest could be delayed and possibly reduced.
If a conservator or receiver were appointed for an originator that is a
bank, or if an originator or the transferor became a debtor in a bankruptcy
case, an early payment of principal on all outstanding series could result.
Under the terms of the transfer and servicing agreement, new principal
receivables would not be transferred to the trust. However, the bankruptcy
court, the conservator or the receiver may have the power, regardless of the
terms of the transfer and servicing agreement, (a) to delay this procedure, (b)
to prevent the early payment of principal or (c) to require new principal
receivables to continue being transferred.
In addition, a court overseeing the servicer's bankruptcy case may have the
power to prevent either the indenture trustee or the noteholders from appointing
a new servicer. See "Certain Legal Aspects of the Receivables -Certain Matters
Relating to Conservatorship, Receivership and Bankruptcy" in this prospectus.
THE ACCOUNT OWNER MAY CHANGE THE TERMS AND CONDITIONS OF THE ACCOUNTS IN A WAY
THAT REDUCES COLLECTIONS.
As owner of the accounts, the originator retains the right to change
various account terms including finance charges, other fees and the required
monthly minimum payment. These changes may be voluntary on the part of the
originator or may be forced by law or market conditions. Changes in interest and
fees could decrease the effective yield on the accounts and this could result in
an early payment of principal of your notes. Changes could also cause a
reduction in the credit ratings on your notes.
CHANGES TO CONSUMER PROTECTION LAWS MAY IMPEDE COLLECTION EFFORTS OR REDUCE
COLLECTIONS.
Federal and state consumer protection laws regulate the creation and
enforcement of consumer loans, including credit card accounts and receivables.
Changes or additions to those regulations could make it more difficult for the
servicer of the receivables to collect payments on the receivables or reduce the
finance charges and other fees that the originator can charge on credit card
account balances, resulting in reduced collections. Receivables that do not
comply with consumer protection laws may not be valid or enforceable under their
terms against the obligors on those receivables.
If a cardholder sought protection under federal or state bankruptcy or
debtor relief laws, a court could reduce or discharge completely the
cardholder's obligations to repay amounts due on its account and, as a result,
the related receivables would be written off as uncollectible. See "Certain
Legal Aspects of the Receivables -Consumer Protection Laws" in this prospectus.
LIMITED REMEDIES FOR BREACHES OF REPRESENTATIONS COULD REDUCE OR DELAY PAYMENTS.
The originator and/or the transferor of the receivables will make
representations and warranties relating to the validity and enforceability of
the receivables arising under the accounts in the trust portfolio, and as to the
perfection and priority of the indenture trustee's interest in the receivables.
However, neither the owner trustee nor the indenture trustee will make any
examination of the receivables or the related assets to determine the presence
of defects, compliance with the representations and warranties or for any other
purpose.
If a representation or warranty relating to the receivables is violated,
the related obligors may have defenses to payment or offset rights, or creditors
of the originator or the transferor may claim rights to the trust assets. If a
representation or warranty is violated, the transferor may have an opportunity
to cure the violation. If it is unable to cure the violation within the
specified time period or if there is no right to cure the violation, the
transferor must accept reassignment of the receivables affected by the
violation. These reassignments are the only remedy for breaches of
representations and warranties, even if your damages exceed your share of the
reassignment price. See "Description of the Notes -Representations and
Warranties" in this prospectus.
PAYMENT PATTERNS OF RECEIVABLES COULD REDUCE COLLECTIONS.
The receivables transferred to the trust may be paid at any time. We cannot
assure the creation of additional receivables in the trust's accounts or that
any particular pattern of cardholder payments will occur. A significant decline
in the amount of new receivables generated could result in the occurrence of a
pay out event for one or more series and the commencement of the early
amortization period or, if applicable, the early accumulation period for each of
those series. If a pay out event occurs, you could receive payment of principal
sooner than expected. The originator's ability to compete in the current
industry environment will affect its ability to generate new receivables and
might also affect payment patterns on the receivables. In addition, changes in
finance charges can alter the monthly payment rates of cardholders. A
significant decrease in monthly payment rates could slow the return or
accumulation of principal during an amortization period or accumulation period.
See "Maturity Considerations" in this prospectus.
SUBORDINATED CLASSES BEAR LOSSES BEFORE SENIOR CLASSES.
One or more classes of notes in a series may be subordinated to one or more
senior classes of notes in the same series. Principal allocations to the
subordinated class or classes will not begin until each of the more senior
classes has been paid in full. Additionally, if collections of finance charge
receivables allocated to a series are insufficient to cover amounts due for that
series' senior notes, the Invested Amount for the series might be reduced. This
would reduce the amount of the collections of finance charge receivables
available to the subordinated notes in future periods and could cause a possible
delay or reduction in principal and interest payments on the subordinated notes.
ALLOCATIONS OF CHARGED-OFF RECEIVABLES COULD REDUCE PAYMENTS TO YOU.
The servicer will write off the receivables arising in accounts in the
trust portfolio if the receivables become uncollectible. Your series will be
allocated a portion of these charged-off receivables. See "Description of Series
Provisions -Allocation Percentages" in the accompanying prospectus supplement.
If the amount of charged-off receivables allocated to your series of notes
exceeds the amount of funds available to reimburse those charge-offs, you may
not receive the full amount of principal and interest due to you. See
"Description of Series Provisions -Reallocated Principal Collections,"
"-Application of Collections" and "-Defaulted Receivables; Investor Charge-Offs"
in the accompanying prospectus supplement.
RECHARACTERIZATION OF PRINCIPAL RECEIVABLES WOULD REDUCE PRINCIPAL RECEIVABLES
AND MAY REQUIRE ADDITION OF NEW RECEIVABLES.
The transferor may designate a percentage of the receivables that would
otherwise be treated as principal receivables to be treated as finance charge
receivables. This designation should decrease the likelihood of an early
amortization event occurring as a result of a reduction of the average net
portfolio yield for a given period. However, this designation will also reduce
the aggregate amount of principal receivables, which may increase the likelihood
that the transferor will be required to add receivables to the trust. If the
transferor were unable to add receivables and could not make a sufficient cash
deposit into the special funding account, one or more series of notes, including
your series, could go into early amortization.
THE NOTE INTEREST RATE AND THE RECEIVABLES INTEREST RATE MAY RE-SET AT DIFFERENT
TIMES, RESULTING IN REDUCED OR EARLY PAYMENTS TO YOU.
Some accounts may have finance charges set at a variable rate based on a
designated index (for example, the prime rate). A series of notes may bear
interest either at a fixed rate or at a floating rate based on a different
index. If the interest rate charged on the accounts declines, collections of
finance charge receivables may be reduced without a corresponding reduction in
the amounts of interest payable on your notes and other amounts required to be
paid out of collections of finance charge receivables. This could result in
delayed or reduced payments to you.
A decrease in the spread, or difference, between collections of finance
charge receivables and those collections allocated to make interest payments on
your notes could reduce the portfolio yield and increase the risk of early
repayment of your notes.
ISSUANCE OF ADDITIONAL SERIES BY THE TRUST MAY AFFECT THE TIMING OF PAYMENTS TO
YOU.
The trust expects to issue additional series from time to time. The trust
may issue additional series with terms that are different from your series
without your prior review or consent. It is a condition to the issuance of each
new series that each rating agency that has rated an outstanding series confirm
in writing that the issuance of the new series will not result in a reduction or
withdrawal of its rating of any class of any outstanding series. The rating
agency confirmation primarily will be based on the trust's ability to pay
principal by the legal maturity date and interest on each distribution date. The
rating agency confirmation will not consider how the terms of a new series could
affect the timing and amounts of payments on your series.
THE ISSUER
The Credit Card Master Note Trust specified in the related prospectus
supplement (the "Issuer" or the "Trust") will be a statutory business trust
created under the laws of the State of Delaware. It will operated under a trust
agreement among Asset Backed Securities Corporation, the transferor specified in
the related prospectus supplement (which may be Asset Backed Securities
Corporation) and the owner trustee specified in the related prospectus
supplement (the "Owner Trustee"). If Asset Backed Securities Corporation is not
the transferor for a Trust, it will be the sponsor of the Trust.
The activities of the issuer will be limited to:
o acquiring, owning and managing the trust assets and the proceeds of
those assets;
o issuing and making payments on the notes; and
o engaging in related activities.
The administrator specified in the related prospectus supplement (the
"Administrator") will provide the notices and perform on behalf of the issuer
and other administrative obligations required by the transfer and servicing
agreement, the indenture and the indenture supplement for each series, and will
be compensated for acting as the administrator.
The transferor will pay the fees of the owner trustee and will reimburse it
for liabilities and expenses.
THE TRUST PORTFOLIO
The assets of the trust will include receivables generated through accounts
designated as trust accounts, all of which are owned by the originator. These
designated accounts are referred to as the "Trust Portfolio." In addition to the
receivables in the trust portfolio, the trust assets include, to the extent
noted below:
o all monies due or to become due in payment of these receivables;
o all proceeds of these receivables;
o all proceeds of any credit insurance policies relating to these
receivables;
o Interchange, if the prospectus supplement for your series of notes so
indicates;
o any recoveries allocable to the trust because of these receivables;
o all monies on deposit in specified trust accounts or investments made
with these monies, including any earned investment proceeds if the
prospectus supplement for your series of notes so indicates;
o proceeds of any credit enhancement, as described in the prospectus
supplement for your series of notes; and
o proceeds of any derivative contracts between the trust and a
counterparty, as described in the prospectus supplement for your
series of notes.
Receivables in the trust will consist of:
"Principal Receivables," which are amounts charged by trust account
cardholders for goods and services, cash advances and consolidation or transfer
of balances from other credit cards; and
"Finance Charge Receivables," which are periodic finance charges and other
amounts charged to trust accounts, including cash advance fees, late fees and
annual membership fees.
The trust considers collections of Interchange and recoveries as
collections of finance charge receivables. If the originator exercises the
Discount Option, an amount of monthly collections of principal receivables will
be considered finance charge collections. See "Description of the Notes
-Discount Option" for a description of the manner of and the conditions to
exercise of the Discount Option.
A group of accounts will be selected as of the date specified in the
related prospectus supplement (the "Cut-Off Date") and designated as trust
accounts. Additional accounts may be designated for inclusion in the trust as
well as participations in lieu of, or in addition to, additional accounts.
Accounts designated as trust accounts must meet eligibility criteria set forth
in the transfer and servicing agreement. Receivables conveyed to the trust must
also meet eligibility criteria set forth in the transfer and servicing
agreement. If receivables conveyed to the trust are found to have been
ineligible when created or designated for inclusion, the transferor must accept
retransfer of these receivables.
The transferor has the right, and may be required to, designate additional
accounts for inclusion in the trust portfolio, as described under "Description
of the Notes -Addition of Trust Assets" in this prospectus.
The transferor also has the right to remove accounts from the trust
portfolio, as described under "Description of the Notes -Removal of Accounts" in
this prospectus. If the transferor does so, the trust will reconvey all
receivables in these removed accounts, whether existing or to be created, to the
transferor.
When the trust issues a new series of notes, the transferor will represent
and warrant to the trust that, as of the closing date for the new series, the
accounts designated as trust accounts met the eligibility criteria set forth in
the transfer and servicing agreement at their time of designation. See
"Description of the Notes -Representations and Warranties" in this prospectus
for more information on eligibility criteria for accounts and receivables.
The prospectus supplement relating to each series of notes will provide
information about the trust portfolio as of the date specified. This information
will include:
o the amount of principal receivables;
o the amount of finance charge receivables;
o the range and average of principal balances of the accounts;
o the range and average of credit limits of the accounts;
o the range and average of ages of the accounts;
o the geographic distribution of the accounts; and
o delinquency statistics relating to the accounts.
MATURITY CONSIDERATIONS
Following its revolving period, each series of notes is expected to begin
to accumulate principal or begin to distribute principal to noteholders. The
accompanying prospectus supplement describes the conditions under which an
accumulation or amortization period will begin for your class of notes.
Principal will accumulate in a principal funding account if your series
features controlled accumulation or early accumulation and one of these
accumulation periods begins. As described in the accompanying prospectus
supplement, during controlled accumulation on each distribution date an amount
of principal, up to the amount specified, will be set aside in the principal
funding account. If a pay out event occurs and your series features early
accumulation, the full amount of principal available to your series will be
deposited in the principal funding account, up to the amount specified in the
related prospectus supplement. This accumulated principal will be paid to you on
the expected principal payment date for your class of notes, or earlier if an
amortization period begins before your expected principal payment date. Note
that although your series may feature an accumulation period, your class of
notes might not make use of it.
Principal will be paid to you in increments, up to the amount specified in
the accompanying prospectus supplement, if your series features controlled
amortization and this period begins. Your class of notes might also begin to pay
principal to you if the accompanying prospectus supplement specifies that your
class will begin early amortization. Early amortization will begin for all
classes of your series when a pay out event occurs. During any amortization
period, principal will be paid to you only on a distribution date.
If the series described in the accompanying prospectus supplement features
multiple classes, different classes of your series may have differing priorities
for the accumulation or payment of principal. This means that noteholders of
other classes could begin to receive payments of principal before you do.
We can give you no assurance that principal will be available when
expected, either to accumulate or to pay to you. The expected principal payment
date for your class of notes is based upon assumptions about payment rates on
the receivables, as detailed in the accompanying prospectus supplement. We can
give you no assurance that these payment rate assumptions will be correct.
Payment rates depend on collections of receivables. Collections can vary
seasonally and are also affected by general economic conditions and the payment
habits of individual cardholders. The accompanying prospectus supplement will
provide historical payment rates, total charge-offs and other information
relating to the originator's portfolio. We cannot assure you that future events
will be consistent with this historical performance. The life of your notes
might be longer than expected if principal is collected more slowly. The
accompanying prospectus supplement may provide that if the principal payment
rate falls below a specified level, a pay out event will occur. The occurrence
of any pay out event may substantially shorten the average life of your notes.
USE OF PROCEEDS
The net proceeds from the sale of each series of notes offered by this
prospectus will be paid to the transferor. The transferor will use those
proceeds to pay the originator the purchase price of the receivables transferred
to the transferor by originator pursuant to the receivables purchase agreement.
The originator will use the proceeds received from the transferor for its
general corporate purposes.
DESCRIPTION OF THE NOTES
The notes will be issued in series. Each series will represent an
obligation of the trust. Each series of notes will be issued pursuant to the
indenture, as supplemented by an indenture supplement, in each case entered into
by the trust and the indenture trustee. The following summaries describe
provisions common to each series of notes. The accompanying prospectus
supplement gives you additional information specific to the notes of your
series. The summaries are not complete and are subject to, and are qualified by,
all of the provisions of the transfer and servicing agreement, the indenture and
the related indenture supplement.
GENERAL
The notes will be secured by and paid from the assets of the trust. Each
series will be allocated collections of principal receivables and finance charge
receivables based on a percentage called the "Investor Percentage." The Investor
Percentage will be based on the Invested Amount for a series. The "Invested
Amount" for a series on any date will be equal to:
o the initial outstanding principal amount of that series of notes as of
the related closing date for that series (increased by the principal
balance of any notes of that series issued after the closing date for
that series); minus
o the amount of principal paid to the related noteholders prior to that
date; minus
o the amount of unreimbursed Investor Charge-Offs with respect to those
notes prior to that date.
If so specified in the prospectus supplement relating to any series of notes,
under specified circumstances the Invested Amount may be further adjusted by the
amount of principal allocated to noteholders, the funds on deposit in any
specified account, and any other amount specified in the accompanying prospectus
supplement.
Each series of notes may consist of one or more classes, one or more of
which may be senior notes and one or more of which may be subordinated notes.
Each class of a series will evidence the right to receive a specified portion of
each distribution of principal or interest or both. Each class of a series may
differ from other classes in some aspects, including:
o amounts allocated to principal payments;
o maturity date;
o interest rate; and
o availability and amount of enhancement.
Payments and deposits of interest and principal will be made on
distribution dates to noteholders in whose names the notes were registered on
the record dates specified in the accompanying prospectus supplement. Interest
will be distributed to noteholders in the amounts, for the periods and on the
dates specified in the accompanying prospectus supplement.
The transferor initially will own the "Transferor Interest" which
represents the right to receive all cash flows from the trust assets not
required to make payments on the notes or to credit enhancement providers. The
holder of the Transferor Interest, subject to limitations, will have the right
to a percentage, called the "Transferor Percentage," of all cardholder payments
from the receivables in the trust. The Transferor Interest may be transferred,
in whole or in part, subject to limitations and conditions described in the
trust agreement, and, at the discretion of the transferor, the Transferor
Interest may be held either in an uncertificated form or in the form of a
certificate representing the Transferor Interest, called a "Transferor
Certificate." See "-Certain Matters Regarding the Transferor and the Servicer"
in this prospectus.
During the revolving period, the Invested Amount of a series will remain
constant except under limited circumstances. See "-Defaulted Receivables;
Rebates and Fraudulent Charges; Investor Charge-Offs" in this prospectus. The
amount of principal receivables in the trust, however, will vary each day as new
principal receivables are created and others are paid. The amount of the
Transferor Interest will fluctuate each day, therefore, to reflect the changes
in the amount of the principal receivables in the trust. When a series is
amortizing, the Invested Amount of that series will decline as customer payments
of principal receivables are collected and distributed, or accumulated for
distribution, to the noteholders. As a result, the Transferor Interest will
generally increase to reflect reductions in the Invested Amount for that series
and will also change to reflect the variations in the amount of principal
receivables in the trust. The Transferor Interest may also be reduced as the
result of new issuances. See "-New Issuances" in this prospectus.
Generally, notes offered through the prospectus and the accompanying
prospectus supplement:
o will be represented by notes registered in the name of a DTC nominee;
o will be available for purchase in minimum denominations of $1,000 and
multiples of $1,000 in excess of that amount; and
o will be available for purchase in book-entry form only.
The accompanying prospectus supplement will specify if your notes have
different characteristics from those listed above.
DTC has informed the transferor that its nominee will be Cede & Co.
Accordingly, Cede & Co. is expected to be the holder of record of each series of
notes. As an owner of beneficial interests in the notes, called a "NOTE OWNER,"
you will generally not be entitled to a definitive note representing your
interest in the issued notes because you will own notes through a book-entry
record maintained by DTC. References in this prospectus and the accompanying
prospectus supplement to distributions, reports, notices and statements to
noteholders refer to DTC or Cede & Co., as registered holder of the notes, for
distribution to you in accordance with DTC procedures. All references in this
prospectus and the accompanying prospectus supplement to actions by noteholders
shall refer to actions taken by DTC upon instructions from DTC Participants.
The accompanying prospectus supplement may state that application will be
made to list your series or class of notes on the Luxembourg Stock Exchange or
another exchange.
BOOK-ENTRY REGISTRATION
Following is a description of the form your notes will take. We also
describe how your notes may be transferred and how payments will be made to you.
The information in this section concerning DTC and DTC's book-entry system
has been provided by DTC. The transferor has not independently verified the
accuracy of this information.
You may hold your notes through DTC in the U.S., Clearstream, Luxembourg or
Euroclear in Europe or in any other manner described in the accompanying
prospectus supplement. You may hold your notes directly with one of these
systems if you are a participant in the system, or indirectly through
organizations which are participants.
Cede & Co., as nominee for DTC, will hold the global notes. Clearstream,
Luxembourg and Euroclear will hold omnibus positions on behalf of the
Clearstream, Luxembourg Customers and the Euroclear Participants, respectively,
through customers' securities accounts in Clearstream, Luxembourg's and
Euroclear's names on the books of their respective depositaries collectively
called the "DEPOSITARIES," which in turn will hold positions in customers'
securities accounts in the depositaries' names on the books of DTC.
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 Uniform Commercial Code, and a
"clearing agency" registered pursuant to the provisions of Section 17A of the
Securities Exchange Act of 1934. DTC was created to hold securities for its
participants and facilitate the clearance and settlement of securities
transactions between participants through electronic book-entry changes in
accounts of participants, thereby eliminating the need for physical movement of
certificates. Participants include securities brokers and dealers (who may
include the underwriters of any series), banks, trust companies and clearing
corporations and may include other organizations. Indirect access to the DTC
system also is available to others including banks, brokers, dealers and trust
companies, as indirect participants, that clear through or maintain a custodial
relationship with a participant, either directly or indirectly.
Transfers between DTC participants will occur in accordance with DTC rules.
Transfers between Clearstream, Luxembourg customers and Euroclear participants
will occur in the ordinary way in accordance with their applicable rules and
operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through Clearstream,
Luxembourg customers or Euroclear participants, on the other, will be effected
through DTC in accordance with DTC rules on behalf of the relevant European
international clearing system by its depositary; however, cross-market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in the system in accordance
with its rules and procedures and within its established deadlines (European
time). The relevant European international clearing system will, if the
transaction meets its settlement requirements, deliver instructions to its
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.
Clearstream, Luxembourg customers and Euroclear participants may not deliver
instructions directly to the depositaries.
Because of time-zone differences, credits of securities in Clearstream,
Luxembourg or Euroclear as a result of a transaction with a Participant will be
made during the subsequent securities settlement processing, dated the business
day following the DTC settlement date, and the credits or any transactions in
the securities settled during processing will be reported to the relevant
Clearstream, Luxembourg customer or Euroclear participant. Cash received in
Clearstream, Luxembourg or Euroclear as a result of sales of securities by or
through a Clearstream, Luxembourg customer or a Euroclear participant to a DTC
participant will be received with value on the DTC settlement date but will be
available in the relevant Clearstream, Luxembourg or Euroclear cash account only
as of the business day following settlement in DTC.
Note owners that are not participants or indirect participants but desire
to purchase, sell or otherwise transfer ownership of, or other interest in,
notes may do so only through participants and indirect participants. In
addition, note owners will receive all distributions of principal of and
interest on the notes from the indenture trustee through the participants who in
turn will receive them from DTC. Under a book-entry format, note owners may
experience some delay in their receipt of payments, since payments will be
forwarded by the indenture trustee to Cede & Co., as nominee for DTC. DTC will
forward payments to its participants, which thereafter will forward them to
indirect participants or note owners. It is anticipated that the only
"noteholder" will be Cede & Co., as nominee of DTC. Note owners will not be
recognized by the indenture trustee as noteholders, as it is used in the
indenture, and note owners will only be permitted to exercise the rights of
noteholders indirectly through the participants who in turn will exercise the
rights of noteholders through DTC.
Under the rules, regulations and procedures creating and affecting DTC and
its operations, DTC is required to make book-entry transfers among participants
on whose behalf it acts with respect to the notes and is required to receive and
transmit distributions of principal and interest on the notes. Participants and
indirect participants with which note owners have accounts with respect to the
notes similarly are required to make book-entry transfers and receive and
transmit payments on behalf of their respective note owners. Accordingly,
although note owners will not possess notes, note owners will receive payments
and will be able to transfer their interests.
Because DTC can only act on behalf of participants, who in turn act on
behalf of indirect participants and banks, the ability of a note owner to pledge
notes to persons or entities that do not participate in the DTC system, or
otherwise take actions in respect of those notes, may be limited due to the lack
of a physical certificate for those notes.
DTC has advised the transferor that it will take any action permitted to be
taken by a noteholder under the indenture only at the direction of one or more
participants to whose account with DTC the notes are credited. Additionally, DTC
has advised the transferor that it will take actions with respect to specified
percentages of the Invested Amount only at the direction of and on behalf of
participants whose holdings include interests that satisfy specified
percentages. DTC may take conflicting actions with respect to other interests to
the extent that actions are taken on behalf of participants whose holdings
include these interests.
Clearstream Banking, societe anonyme, 67 Bd Grande-Duchesse Charlotte,
L-2967 Luxembourg ("Clearstream, Luxembourg"), was incorporated in 1970 as
"Cedel S.A.", a company with limited liability under Luxembourg law (a societe
anonyme). Cedel S.A. subsequently changed its name to Cedelbank. On January 10,
2000, Cedelbank's parent company, Cedel International, societe anonyme ("CI")
merged its clearing, settlement and custody business with that of Deutsche Borse
Clearing AG ("DBC"). The merger involved the transfer by CI of substantially all
of its assets and liabilities (including its shares in CB) to a new Luxembourg
company, New Cedel International, societe anonyme ("New CI"), which is 50% owned
by CI and 50% owned by DBC's parent company Deutsche Borse AG. The shareholders
of these two entities are banks, securities dealers and financial institutions.
Cedel International currently has 92 shareholders, including U.S. financial
institutions or their subsidiaries. No single entity may own more than 5 percent
of Cedel International's stock.
Further to the merger, the Board of Directors of New Cedel International
decided to rename the companies in the group in order to give them a cohesive
brand name. The new brand name that was chosen is "Clearstream". With effect
from January 14, 2000 New CI has been renamed "Clearstream International,
societe anonyme". On January 18, 2000, Cedelbank was renamed "Clearstream
Banking, societe anonyme", and Cedel Global Services was renamed "Clearstream
Services, societe anonyme".
On January 17, 2000 DBC was renamed "Clearstream Banking AG". This means
that there are now two entities in the corporate group headed by Clearstream
International which share the name "Clearstream Banking", the entity previously
named "Cedelbank" and the entity previously named "Deutsche Brse Clearing AG".
Clearstream, Luxembourg holds securities for its customers ("Clearstream,
Luxembourg Participants") and facilitates the clearance and settlement of
securities transactions between Clearstream, Luxembourg customers through
electronic book-entry changes in accounts of Clearstream, Luxembourg customers,
thereby eliminating the need for physical movement of certificates. Transactions
may be settled by Clearstream, Luxembourg in any of 36 currencies, including
United States Dollars. Clearstream, Luxembourg provides to its customers, among
other things, services for safekeeping, administration, clearance and settlement
of internationally traded securities and securities lending and borrowing.
Clearstream, Luxembourg also deals with domestic securities markets in over 30
countries through established depository and custodial relationships.
Clearstream, Luxembourg is registered as a bank in Luxembourg, and as such is
subject to regulation by the Commission de Surveillance du Secteur Financier,
"CSSF", which supervises Luxembourg banks. Clearstream, Luxembourg's customers
are world-wide financial institutions including underwriters, securities brokers
and dealers, banks, trust companies and clearing corporations. Clearstream,
Luxembourg's U.S. customers are limited to securities brokers and dealers, and
banks. Currently, Clearstream, Luxembourg has approximately 2,000 customers
located in over 80 countries, including all major European countries, Canada,
and the United States. Indirect access to Clearstream, Luxembourg is available
to other institutions that clear through or maintain a custodial relationship
with an account holder of Clearstream, Luxembourg. Clearstream, Luxembourg has
established an electronic bridge with Morgan Guaranty Trust Company of New York
as the Operator of the Euroclear System (MGT/EOC) in Brussels to facilitate
settlement of trades between Clearstream, Luxembourg and MGT/EOC.
Euroclear was created in 1968 to hold securities for participants of the
Euroclear System 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 notes and any
risk from lack of simultaneous transfers of securities and cash. Transactions
may now be settled in any of 27 currencies, including United States dollars. The
Euroclear System 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. The Euroclear System is operated by Morgan Guaranty Trust
Company of New York, Brussels, Belgium office as the Euroclear operator, under
contract with Euro-clear Clearance System, S.C., a Belgian cooperative
corporation. 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 the Euroclear System on behalf of Euroclear participants. Euroclear
participants include banks (including central banks), securities brokers and
dealers and other professional financial intermediaries and may include the
underwriters of any series of notes. Indirect access to the Euroclear System is
also available to other firms that clear through or maintain a custodial
relationship with a Euroclear participant, either directly or indirectly.
The Euroclear operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. 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.
These rules and laws govern transfers of securities and cash within the
Euroclear System, withdrawal of securities and cash from the Euroclear System,
and receipts of payments with respect to securities in the Euroclear System. All
securities in the Euroclear System are held on a fungible basis without
attribution of specific certificates to specific securities clearance accounts.
The Euroclear Operator acts under these rules and laws only on behalf of
Euroclear participants and has no record of or relationship with persons holding
through Euroclear participants.
Distributions with respect to notes held through Clearstream, Luxembourg or
Euroclear will be credited to the cash accounts of Clearstream, Luxembourg
customers or Euroclear participants in accordance with the relevant system's
rules and procedures, to the extent received by its depositary. Distributions
will be subject to tax reporting in accordance with relevant United States tax
laws and regulations. See "Federal Income Tax Consequences" in this prospectus.
Clearstream, Luxembourg or the Euroclear operator, as the case may be, will take
any other action permitted to be taken by a noteholder under the indenture on
behalf of a Clearstream, Luxembourg customer or Euroclear participant only in
accordance with its relevant rules and procedures and subject to its
depositary's ability to effect actions on its behalf through DTC.
Although DTC, Clearstream, Luxembourg and Euroclear have agreed to the
foregoing procedures in order to facilitate transfers of notes among
participants of DTC, Clearstream, Luxembourg and Euroclear, they are under no
obligation to perform or continue to perform procedures and the procedures may
be discontinued at any time.
DEFINITIVE NOTES
We refer to notes issued in fully registered, certificated form as
"DEFINITIVE NOTES." The notes of each series will be issued as definitive notes
to note owners or their nominees, rather than to DTC or its nominee, only if:
o the transferor advises the indenture trustee for that series in
writing that DTC is no longer willing or able to discharge properly
its responsibilities as depository with respect to that series of
notes, and the indenture trustee or the transferor is unable to locate
a qualified successor;
o the transferor, at its option, advises the indenture trustee in
writing that it elects to terminate the book-entry system through DTC;
or
o after the occurrence of a Servicer Default, note owners representing
not less than 50% (or another percentage specified in the accompanying
prospectus supplement) of the Invested Amount advise the indenture
trustee and DTC through participants in writing that the continuation
of a book-entry system through DTC (or a successor thereto) is no
longer in the best interest of the note owners.
If any of these events occur, DTC must notify all participants of the
availability through DTC of definitive notes. Upon surrender by DTC of the
definitive instrument representing the notes and instructions for
re-registration, the indenture trustee will issue the notes as definitive notes,
and thereafter the indenture trustee will recognize the registered holders of
those definitive notes as noteholders under the indenture.
Distribution of principal and interest on the notes will be made by the
indenture trustee directly to holders of definitive notes in accordance with the
procedures set forth in this prospectus and in the indenture. Interest payments
and any principal payments on each distribution date will be made to holders in
whose names the definitive notes were registered at the close of business on the
related record date. Distributions will be made by check mailed to the address
of the noteholders as it appears on the register maintained by the indenture
trustee. The final payment on any note (whether definitive notes or the notes
registered in the name of Cede & Co. representing the notes), however, will be
made only upon presentation and surrender of that note at the office or agency
specified in the notice of final distribution to noteholders. The indenture
trustee will provide this notice to registered noteholders not later than the
fifth day of the month of the final distributions.
Definitive notes will be transferable and exchangeable at the offices of
the transfer agent and registrar, which will initially be the indenture trustee.
No service charge will be imposed for any registration of transfer or exchange,
but the transfer agent and registrar may require payment of a sum sufficient to
cover any tax or other governmental charge imposed in connection with the
transfer or exchange. The transfer agent and registrar will not be required to
register the transfer or exchange of definitive notes for a period of fifteen
days preceding the due date for any payment on those definitive notes.
INTEREST PAYMENTS
For each series of notes and each related class, interest will accrue from
the relevant closing date on the applicable outstanding principal balance at the
applicable interest rate. The interest rate on any note may be a fixed, floating
or any other type of rate as specified in the accompanying prospectus
supplement. Interest will be paid, or deposited for later payment, to
noteholders on the distribution dates.
Interest payments or deposits on any distribution date will be funded from:
o collections of finance charge receivables allocated to the Invested
Amount during the preceding monthly period or periods;
o investment earnings, if any, on any funds held in trust accounts;
o any credit enhancement, to the extent described in the accompanying
prospectus supplement; and
o any derivative counterparty, to the extent described in the
accompanying prospectus supplement.
If interest payments will be made less frequently than monthly, an interest
funding account may be established to accumulate the required interest amount.
If a series has more than one class of notes, that series may have more than one
interest funding account.
Your class of notes will pay interest on the dates and at the interest rate
specified in the accompanying prospectus supplement. If your notes bear interest
at a floating or variable rate, the accompanying prospectus supplement will
describe how that rate is calculated.
PRINCIPAL PAYMENTS
Generally, each series will begin with a revolving period, which begins on
the closing date relating to that series and ends on the day before an
amortization period or accumulation period begins, during which no principal
payments will be made to the noteholders of that series.
During the controlled amortization period, which will be scheduled to begin
on the date specified in, or determined in the manner specified in, the
accompanying prospectus supplement, and during the early amortization period,
which will begin upon the occurrence of a pay out event or, if specified in the
accompanying prospectus supplement, the early accumulation period, principal
will be paid to any class of the series in the amounts and on the dates
specified in the accompanying prospectus supplement.
During an accumulation period, principal will be accumulated in a trust
account, called a "Principal Funding Account," established for the benefit of
that class of noteholders for later distribution to noteholders on the expected
principal payment date in the amounts specified in the accompanying prospectus
supplement.
Principal payments for any series or the related class will typically be
funded from collections of principal receivables received during the related
monthly period or periods as specified in the accompanying prospectus supplement
and allocated to that series or class and from other sources specified in the
accompanying prospectus supplement. If specified in the related prospectus
supplement, the Trust may issue securities from time to time and use the
proceeds of this issuance to make principal payments with respect to the series.
In the case of a series with more than one class of notes, the noteholders of
one or more classes may receive payments of principal at different times. The
accompanying prospectus supplement will describe the manner, timing and priority
of payments of principal to noteholders of each class.
Funds on deposit in any principal funding account for a series may be
subject to a guaranteed rate agreement or guaranteed investment contract or
other arrangement specified in the accompanying prospectus supplement intended
to assure a minimum rate of return on the investment of these funds. In order to
enhance the likelihood of the payment in full of the principal amount of a
series or a related class of notes at the end of an accumulation period, that
series or class of notes may be subject to a principal guaranty or other similar
arrangement specified in the accompanying prospectus supplement.
TRANSFER AND ASSIGNMENT OF RECEIVABLES
The originator will transfer and assign to the transferor, for transfer and
assignment by the transferor to the trust, all of the originator's right, title
and interest in and to the receivables in the accounts designated as accounts of
the trust and future receivables created in these accounts.
Except as set forth in the related prospectus supplement, each of the
originator and the transferor will indicate in its computer files or books and
records that the receivables have been conveyed to the trust. In addition, each
of the originator and the transferor (including any additional transferor) will
provide or cause to be provided to the owner trustee computer files or
microfiche lists, containing a true and complete list showing each account,
identified by account number and by total outstanding balance on the date of
transfer. Except as stated above or as set forth in the related prospectus
supplement, the records and agreements relating to the accounts and the
receivables maintained by any of the originator and the transferor (including
any additional transferor) are not and will not be segregated from other
documents and agreements relating to other credit card accounts and receivables
and are not and will not be stamped or marked to reflect the transfers described
above, but the computer records of each of the originator and the transferor
(including any additional transferor) will be required to be marked to evidence
these transfers. Each of the originator and the transferor (including any
additional transferor) will file in all appropriate jurisdictions Uniform
Commercial Code financing statements with respect to the receivables meeting the
requirements of applicable law. See "Risk Factors -Some liens would be given
priority over your notes which could cause delayed or reduced payments" and
"Certain Legal Aspects of the Receivables" in this prospectus.
NEW ISSUANCES
The indenture provides that, pursuant to any one or more indenture
supplements, the transferor may cause the owner trustee, on behalf of the trust,
to issue one or more new series of notes and may define all principal terms of
those series. Each series issued may have different terms and enhancements than
any other series. Upon the issuance of an additional series of notes, none of
the transferor, the servicer, the indenture trustee or the trust will be
required or will intend to obtain the consent of any noteholder of any other
series previously issued by the trust. However, as a condition of a new
issuance, the indenture trustee must receive written confirmation that the new
issuance will not result in the reduction or withdrawal by any rating agency of
its rating of any outstanding series or class. The trust may offer any series
under a prospectus or other disclosure document in offerings pursuant to this
prospectus or in transactions either registered under the Securities Act of
1933, as amended (the "Securities Act"), or exempt from registration under the
Securities Act directly, through one or more other underwriters or placement
agents, in fixed-price offerings or in negotiated transactions or otherwise.
Unless otherwise specified in the accompanying prospectus supplement, a new
issuance may only occur upon the satisfaction of conditions provided in the
indenture. Under the indenture, the transferor may cause the owner trustee, on
behalf of the trust, to issue new series of notes by notifying the owner
trustee, the indenture trustee, the Servicer and each rating agency at least
five days in advance of the date upon which the new issuance is to occur. Under
the indenture, the notice will state the date upon which the new issuance is to
occur.
The owner trustee will execute, and the indenture trustee will
authenticate, the notes of any series only upon delivery to them of the
following items, or satisfaction of the following conditions, among others:
(1) an indenture supplement specifying the principal terms of the new
series;
(2)(a) an opinion of counsel to the effect that, except as otherwise
stated in the related indenture supplement, the notes of the new series
will be characterized as indebtedness for federal income tax purposes; and
(b) an opinion of counsel to the effect that, for federal income tax
purposes:
o the issuance will not adversely affect the tax characterization
as debt of notes of any outstanding series or class that were
characterized as debt at the time of their issuance;
o the new issuance will not cause the trust to be deemed to be an
association (or publicly traded partnership) taxable as a
corporation; and
o the new issuance will not cause or constitute an event in which
gain or loss would be recognized by any noteholder (an opinion of
counsel with respect to any matter to the effect referred to in
clause (b) with respect to any action is referred to in this
prospectus as a "Tax Opinion");
(3) if required by the related indenture supplement, the form of
credit enhancement and an appropriate credit enhancement agreement with
respect to that credit enhancement executed by the transferor and the
issuer of the credit enhancement;
(4) written confirmation from each rating agency that the new issuance
will not result in a reduction or withdrawal of its rating of any
outstanding series or class; and
(5)(a) the new issuance will not:
o cause a pay out event or an event of default; or
o materially and adversely affect the amount or timing of payments
to be made to the noteholders of any series or class (any effect
referred to in this clause on the prior clause with respect to
any action is referred to in this prospectus as an "Adverse
Effect"); and
(b) a certificate of an authorized officer of the transferor to the
effect that it reasonably believes the new issuance will not have an
adverse effect; and
(6) after giving effect to the new issuance, the total amount of
principal receivables plus the principal amount of any participation
interests previously transferred to the trust exceed a specified minimum
principal balance, called the "Required Minimum Principal Balance."
REPRESENTATIONS AND WARRANTIES
When the trust issues a new series of notes, the transferor will make
several representations and warranties to the trust in the transfer and
servicing agreement, including the following:
o the execution and delivery by the transferor of the transfer and
servicing agreement and each other document relating to the issuance
to which it is a party will not conflict with any law or any other
agreement to which the transferor is a party; and
o all required governmental approvals in connection with the execution
and delivery by the transferor of the transfer and servicing agreement
and each other document relating to the issuance have been obtained
and remain in force and effect.
If a representation or warranty made by the transferor is later found to be
materially incorrect when made, and:
o continues to be materially incorrect for 60 days after notice to the
transferor by the indenture trustee, or to the transferor and the
indenture trustee by any noteholder; and
o as a result, the interests of the noteholders are materially and
adversely affected, and continue to be materially and adversely
affected during the 60-day period,
then the indenture trustee or noteholders holding more than 50% of the
then-outstanding principal balance of the notes of the affected series may give
notice to the transferor and the servicer (and to the indenture trustee if given
by the noteholders) declaring that a pay out event has occurred. Declaring a pay
out event will automatically begin early amortization or, if specified in the
accompanying prospectus supplement, early accumulation of principal.
The transferor will make other representations and warranties to the trust
in the transfer and servicing agreement, including the following:
o as of the closing date, the transferor is duly incorporated and in
good standing and has the authority to consummate the issuance;
o the transfer and servicing agreement and each other document relating
to the issuance to which it is a party constitutes a legal, valid and
binding obligation enforceable against the transferor; and
o the trust has all right, title and interest in the receivables in the
trust portfolio or has a first priority perfected security interest in
these receivables.
In the event:
o any representation or warranty described immediately above is
breached; and
o as a result, the interests of noteholders in the receivables in the
trust portfolio are materially and adversely affected;
then any of the owner trustee, the indenture trustee or noteholders representing
50% or more of the then-outstanding principal amount of all of the trust's
outstanding series may give notice to the transferor and the servicer (and to
the owner trustee and indenture trustee if given by the noteholders) directing
the transferor to accept reassignment of the entire trust portfolio and to pay
into the trust's collection account a cash deposit equal to the sum of the
amounts specified with respect to each outstanding series in the related
indenture supplement. However, no reassignment will be required if:
o within 60 days, or up to 120 days if specified in the notice, the
transferor cures the breach and any material adverse effect caused by
the breach; or
o on any day within the applicable 60-day to 120-day period the relevant
representation and warranty is then true and correct in all material
respects and the transferor delivers to the owner trustee a
certificate of an authorized officer describing the nature of the
breach and the manner in which the relevant representation and
warranty became true and correct.
Reassignment of the trust portfolio and the transferor's obligation to make
the cash deposit in the trust's collection account are the only remedies to any
breach of the representations and warranties described above.
The transferor makes representations and warranties in the transfer and
servicing agreement concerning the accounts and the receivables in the trust
portfolio. Only eligible accounts can be designated as accounts for the trust
portfolio. We can give you no assurance that eligible accounts will remain
eligible once added to the trust.
The transferor also represents that each receivable in the trust portfolio
is an eligible receivable when created. If a receivable in the trust portfolio
is found to be ineligible when created, and, as a result, the interests of
noteholders in any receivable in the trust portfolio are materially and
adversely affected, the transferor must accept reassignment of the principal
amount of this ineligible receivable. However, the transferor will have 60 days,
or up to 120 days if agreed to by the indenture trustee and the servicer, from
the earlier to occur of discovery of the breach by the transferor or receipt by
the transferor of written notice of the breach given by the owner trustee, the
indenture trustee or the servicer, to cure the ineligibility before reassignment
is required.
The transferor will accept reassignment by directing the servicer to deduct
the principal amount of the ineligible receivable from the Transferor Interest.
If this would reduce the Transferor Interest below the Required Transferor
Interest, the transferor will make a cash deposit in the trust's special funding
account in the amount by which the Transferor Interest would have been reduced
below the Required Transferor Interest. Any deduction or deposit is considered a
repayment in full of the ineligible receivable. The transferor's obligation to
accept reassignment of any ineligible receivable is the only remedy for any
breach of a representation concerning eligibility of receivables.
The accompanying prospectus supplement may specify additional
representations and warranties made by the transferor when your notes are
issued. The indenture trustee is not required to make periodic examinations of
receivables in the trust portfolio or any records relating to them. However, the
servicer will deliver to the indenture trustee once each year an opinion of
counsel affirming, among other things, that no further action is necessary to
maintain the trust's perfected security interest in the receivables.
With respect to each series of notes, an "Eligible Account" means, as of
the cut-off date (or, with respect to additional accounts, as of their date of
designation for inclusion in the trust), each account owned by the originator or
other account owner:
o which was in existence and maintained by the originator or other
account owner, as applicable;
o which is payable in United States dollars;
o the cardholder of which has provided, as his or her most recent
billing address, an address located in the United States or its
territories, possessions or military bases;
o which, except as provided below, has a cardholder who has not been
identified by the servicer in its computer files as currently being
involved in a bankruptcy proceeding;
o which has not been classified as stolen or lost;
o which has not been sold or pledged to any other party except for any
sale (1) to another account owner that has either entered into a
receivables purchase agreement or is an additional transferor or (2)
pursuant to a receivables purchase agreement;
o which does not have receivables which have been sold or pledged by the
originator or any other account owner, as the case may be, to any
other party other than pursuant to a receivables purchase agreement;
o which, with respect to the initial accounts, is an account in
existence and maintained by the originator as of the cut-off date or
as of its date of designation for inclusion in the trust with respect
to additional accounts;
o which does not have any receivables that are defaulted receivables;
o which does not have any receivables that have been identified by the
servicer or the relevant cardholder as having been incurred as a
result of fraudulent use of any related credit card; and
o which, except as provided below, does not have any receivables that
are more than 180 days past due from the date of the initial billing
statement.
Eligible accounts may include accounts, the receivables of which have been
charged off, or with respect to which the servicer believes the related
cardholder is bankrupt, in each case as of the cut-off date or as of its date of
designation for inclusion in the trust, as applicable, if:
o the balance of all receivables included in those accounts is reflected
on the books and records of the transferor as "zero"; and
o charging privileges for these accounts have been canceled in
accordance with the customary policies and procedures, as amended from
time to time, of the originator other account owner, as applicable.
Under the transfer and servicing agreement, the definition of eligible
account may be changed by amendment to the agreement without the consent of the
noteholders if: (1) the transferor delivers to the owner trustee and the
indenture trustee a certificate of an authorized officer to the effect that, in
the reasonable belief of the transferor, the amendment will not as of the date
of the amendment adversely affect in any material respect the interest of the
noteholders, and (2) the amendment will not result in a withdrawal or reduction
of the rating of any outstanding series under the trust.
With respect to each series of notes, an "Eligible Receivable" means each
receivable:
o which has arisen in an eligible account;
o which was created in compliance, in all material respects, with all
requirements of law applicable to the institution that owned the
receivable at the time of its creation, and under the terms of a
credit card agreement which complies in all material respects with all
requirements of law applicable to the originator or other account
owner, as applicable;
o with respect to which all consents, licenses or authorizations of, or
registrations with, any governmental authority required to be obtained
or given in connection with the creation of the receivable or the
execution, delivery and performance by the originator or other account
owner, as applicable, of the related credit card agreement have been
duly obtained or given and are in full force and effect;
o as to which, at the time of its transfer to the trust, the transferor
or the trust has good title, free and clear of all liens and security
interests arising under or through the transferor, other than some tax
liens for taxes not then due or which the transferor is contesting;
o which has been the subject of either a valid transfer and assignment
from the transferor to the trust of all of the transferor's right,
title and interest in the receivable (including any proceeds of the
receivable), or the grant of a first priority perfected security
interest in the receivable (and in the proceeds of the receivable),
effective until the termination of the trust;
o which is the legal, valid and binding payment obligation of the
obligor under the receivable, legally enforceable against that obligor
in accordance with its terms, subject to some bankruptcy-related
exceptions;
o which, at the time of transfer to the trust, has not been waived or
modified except as permitted under the customary policies and
procedures, as amended from time to time, of the originator or other
account owner, as applicable, and then only if the waiver or
modification is reflected in the servicer's computer file of revolving
credit card accounts;
o which, at the time of transfer to the trust, is not subject to any
right of rescission, setoff, counterclaim or any other defense
(including defenses arising out of violations of usury laws) of the
obligor, other than defenses arising out of bankruptcy, insolvency or
other similar laws affecting the enforcement of creditors' rights in
general;
o which, at the time of transfer to the trust, the originator or other
account owner, as applicable, has satisfied all of its obligations
required to be satisfied by that time;
o which, at the time of transfer to the trust, none of the transferor,
the originator or any other account owner, as applicable, has taken
any action, or omitted to take any action, that would impair the
rights of the trust or the noteholders; and
o which constitutes an "account" or "general intangible" under Article 9
of the UCC as then in effect in the State of Delaware or any other
state where the filing of a financing statement is required to perfect
the trust's interest in the receivables and the proceeds of the
receivables.
ADDITION OF TRUST ASSETS
As described above under "The Trust Portfolio," the transferor will have
the right to designate, from time to time, additional accounts to be included as
accounts for the trust. In addition, the transferor will be required to
designate additional accounts under the circumstances and in the amounts
specified in the accompanying prospectus supplement. The transferor will convey
to the trust its interest in all receivables of those additional accounts,
whether the receivables are then existing or subsequently created.
Each additional account must be an eligible account at the time of its
designation. However, additional accounts may not be of the same credit quality
as the initial accounts. Additional accounts may have been originated by the
originator or other account owner, as applicable, using credit criteria
different from those which were applied by the originator to the initial
accounts or may have been acquired by the originator or other account owner, as
applicable, from an institution which may have had different credit criteria.
The transferor is also permitted to add, from time to time, participations
and related collections to the trust. These "Participations" must be undivided
interests in a pool of assets primarily consisting of receivables arising under
consumer revolving credit card accounts. Participations may be issued under
separate agreements that are similar to the agreements governing the issuance of
the notes and that entitle the holder of the participation to receive
percentages of collections generated by the pool of assets supporting the
participation. Participations may have their own credit enhancement, pay out
events, servicing obligations and servicer defaults, all of which are likely to
be enforceable by a separate trustee under these participation agreements and
may be different from those specified in this prospectus. The rights and
remedies of the trust as the holder of a participation (and, therefore, the
noteholders) will be subject to all the terms and provisions of those
participation agreements.
The transfer and servicing agreement may be amended to permit the addition
of a participation to the trust without noteholder consent if:
o the transferor delivers to the owner trustee and the indenture trustee
a certificate of an authorized officer to the effect that, in the
transferor's reasonable belief, adding the participation will not have
a material adverse effect on the interests of the noteholders; and
o the amendment allowing the addition of the participation will not
result in a withdrawal or reduction of the rating of any outstanding
series under the trust.
When the transferor transfers receivables in additional accounts or
participations, it must satisfy several conditions, including, as applicable:
o notice to the owner trustee, the indenture trustee, the servicer and
each rating agency;
o delivery and acceptance by the owner trustee of a written assignment
of receivables in the additional accounts or participations to the
trust;
o delivery to the owner trustee of a computer file or microfiche list
with an accurate list of all additional accounts;
o delivery to the owner trustee and the indenture trustee of a
certificate of an authorized officer to the effect that:
o as of the date of assignment, called the "Addition Date," each
additional account is an eligible account;
o any action necessary to perfect the trust's interest in the
receivables arising in the additional accounts has been taken;
o as of the addition date, none of the originator (or any other account
owner), the servicer or the transferor is insolvent; and
o in the transferor's reasonable belief, adding the receivables in
additional accounts or participations will not have a material adverse
effect on the interests of the noteholders;
o delivery of opinions of counsel with respect to the transfer of the
receivables in the additional accounts or the participations to the
trust;
o in circumstances where the transferor, in its discretion, designates
additional accounts to be included as accounts for the trust or adds
participations to the trust, written confirmation from each rating
agency that the addition will not result in the reduction or
withdrawal of its rating of any outstanding series or class; and
o in circumstances where the transferor is required to designate
additional accounts to be included as accounts for the trust, or to
add participations to the trust, each rating agency then rating any
series of notes outstanding under the trust shall have previously, or,
in limited circumstances, within a three-month period, consented to
the designation of the additional accounts or the addition of the
participations.
In addition to the periodic reports otherwise required to be filed by the
servicer with the Securities and Exchange Commission (the "SEC") pursuant to the
Securities Exchange Act of 1934, the servicer intends to file, on behalf of the
trust, a Report on Form 8-K with respect to any addition to the trust of
receivables in additional accounts or participations that would have a material
effect on the composition of the assets of the trust.
The transferor may, from time to time, designate one or more of its
affiliates as additional transferors under the transfer and servicing agreement.
In connection with this designation, the transferor will exchange the transferor
certificate for a newly issued transferor certificate modified to reflect any
additional transferor's interest in the Transferor Interest. The transfer and
servicing agreement may be amended to permit the designation of these additional
transferors and the exchange of the Transferor Certificate without noteholder
consent upon:
o delivery to the owner trustee and the indenture trustee of a tax
opinion regarding the exchange; and
o receipt of written confirmation from each rating agency that the
exchange will not result in a reduction or withdrawal of its rating of
any outstanding series or class.
REMOVAL OF ACCOUNTS
The transferor has the right to designate removed accounts and to remove
participations from the trust and to require the indenture trustee to transfer
all receivables in the removed accounts back to the transferor, whether the
receivables already exist or arise after the designation. The transferor's
rights to removal are subject to satisfaction of several conditions, including:
o written notice to the owner trustee, the indenture trustee, the
servicer, each rating agency and each series enhancer;
o delivery to the owner trustee for execution a written reassignment of
receivables in the removed accounts and removed participations to the
transferor or its designee;
o delivery to the owner trustee of a computer file or microfiche list
with an accurate list of all removed accounts;
o written confirmation from each rating agency that the removal will not
result in the reduction or withdrawal of its rating of any outstanding
series or class;
o delivery to the owner trustee and the indenture trustee a certificate
of an authorized officer to the effect that, in the transferor's
reasonable belief:
o the removal will not have a material adverse effect on the interests
of the noteholders;
o the removal will not cause a pay out event or event of default; and
o the accounts to be removed were not selected through a selection
process believed to be materially adverse to the interests of the
noteholders; and
o any other conditions specified in the accompanying prospectus
supplement.
The conditions described above relating to rating agency confirmation and
the delivery of an officer's certificate will not apply if the transferor is
purchasing receivables in accounts designated for re-purchase by a merchant or
co-branding participant upon termination of its affinity agreement with the
originator or other account owner, as applicable.
In all cases of removal, the transferor will purchase the related
receivables by directing the servicer to deduct the principal amount of those
receivables from the Transferor Interest. If this would reduce the Transferor
Interest below the Required Transferor Interest, the transferor will make a cash
deposit in the trust's special funding account in the amount by which the
Transferor Interest would have been reduced below the Required Transferor
Interest. Any deduction or deposit is considered a payment in full for those
receivables.
COLLECTION AND OTHER SERVICING PROCEDURES
For each series of notes, the servicer will be responsible for servicing
and administering the receivables in accordance with the servicer's policies and
procedures for servicing credit card receivables comparable to the receivables.
The servicer will be required to maintain fidelity bond coverage insuring
against losses through wrongdoing of its officers and employees who are involved
in the servicing of credit card receivables covering these actions and in
amounts as the servicer believes to be reasonable from time to time.
DISCOUNT OPTION
The transferor, has the option to reclassify a percentage, called the
"Discount Percentage," of collections of principal receivables in the trust
portfolio as collections of finance charge receivables. This option is referred
to as the "Discount Option." The transferor may use the Discount Option to
compensate for a decline in the portfolio yield, but only if there would be
sufficient principal receivables to allow for that discounting. Exercise of the
Discount Option would result in a larger amount of collections of finance charge
receivables and a smaller amount of collections of principal receivables. By
doing so, the transferor would reduce the likelihood that a pay out event would
occur as a result of a decreased portfolio yield and, at the same time, would
increase the likelihood that the transferor will have to add principal
receivables to the trust.
If the Discount Percentage is greater than zero, an amount of collections
of principal receivables in the trust portfolio for each monthly period equal to
the product of:
o the Discount Percentage times
o total collections of principal receivables in the trust portfolio
will be considered collections of finance charge receivables in the trust
portfolio and allocated with all other collections of finance charge receivables
in the trust portfolio.
To exercise the Discount Option, the transferor must satisfy the conditions
in the transfer and servicing agreement, including written confirmation from
each rating agency that use of the Discount Option will not result in a
reduction or withdrawal of its rating of any outstanding series or class.
TRUST ACCOUNTS
The servicer will establish and maintain in the name of the indenture
trustee, for the benefit of noteholders of all series, a "Collection Account,"
which shall be either (a) a segregated trust account established with the
corporate trust department of a securities intermediary or (b) a segregated
account with a securities intermediary that is an eligible institution (a
"Qualified Account"). The servicer will also establish and maintain with a
securities intermediary in the name of the indenture trustee, a "Special Funding
Account," which also is required to be a qualified account. References to the
"Securities Intermediary" shall refer to any entity which is a person, including
a bank or broker, that in the ordinary course of its business maintains
securities accounts for others and is acting in that capacity and which is also
a depository institution organized under the laws of the United States or any
one of the fifty states, including the District of Columbia (or any domestic
branch of a foreign bank), and having a credit rating from each rating agency in
one of its generic credit rating categories which signifies investment grade. An
"Eligible Institution" is defined as:
(1) (a) a depository institution, which may include the owner trustee
or the indenture trustee;
(b) organized under the laws of the United States or any one of
the fifty states, including the District of Columbia (or any domestic
branch of a foreign bank); and
(c) which at all times (1) is a member of the FDIC and (2) has
either a long-term unsecured debt rating or a certificate of deposit
rating acceptable to each rating agency selected by the transferor to
rate a series or class of notes; or
(2) any other institution acceptable to each rating agency selected by
the transferor to rate a series or class of notes.
Funds in the collection account and the special funding account will be
assets of the trust and will be invested, at the direction of the servicer, in
"Eligible Investments" consisting of securities, instruments, security
entitlements or other investment property which evidence:
(1) direct obligations of, and obligations fully guaranteed as to
timely payment of principal and interest by, the United States of America;
(2) demand deposits, time deposits or certificates of deposit (having
original maturities of no more than 365 days) of depository institutions or
trust companies incorporated under the laws of the United States of America
or any are of the fifty states, including the District of Columbia (or
domestic branches of foreign banks) and subject to supervision and
examination of federal or state banking or depository institution
authorities; provided, that at the time of the trust's investment or
contractual commitment to invest, the short-term debt rating of that
depository institution or trust company shall be in the highest investment
category of Standard & Poor's Ratings Group ("Standard & Poor's") and
Moody's Investors Service Inc. ("Moody's");
(3) commercial paper or other short-term obligations having original
or remaining maturities of no more than 30 days having, at the time of the
trust's investment or contractual commitment to invest, a rating in the
highest rating category of Standard & Poor's and Moody's;
(4) demand deposits, time deposits and certificates of deposit which
are fully insured by the FDIC having, at the time of the trust's
investment, a rating in the highest rating category of Standard & Poor's
and Moody's;
(5) bankers' acceptances (having original maturities of no more than
365 days) issued by any depository institution or trust company referred to
in clause (2) above;
(6) money market funds having, at the time of the trust's investment,
a rating in the highest rating category of Standard & Poor's and Moody's
(including funds for which the indenture trustee or any of its affiliates
is investment manager or advisor);
(7) time deposits (having maturities not later than the next
distribution date) other than those referred to in clause (4) above, with a
person whose commercial paper has a credit rating satisfactory to Standard
& Poor's and Moody's; or
(8) any other investment upon receipt of written confirmation from
each rating agency that the additional form of investment will not result
in a reduction or withdrawal of its rating of any outstanding series or
class.
The indenture trustee, acting as the initial paying agent (together with
any successor to the indenture trustee acting in that capacity, and any entity
specified in an indenture supplement to act in that capacity for the related
series, referred to collectively as the "Paying Agent"), will have the revocable
power to withdraw funds from the collection account for the purpose of making
payments to the noteholders of any series pursuant to the related indenture
supplement.
FUNDING PERIOD
For any series of notes, the total amount of principal receivables in the
trust available to that series may be less than the total principal amount of
the notes of that series. If this occurs, the initial Invested Amount for that
series of notes will be less than the principal amount of that series of notes.
In this case, the related prospectus supplement will set forth the terms of the
"Funding Period," which is the period from that series' closing date to the
earlier of:
o the date that series' Invested Amount equals the principal amount of
that series of notes; and
o the date specified in the related prospectus supplement.
During the funding period, the portion of the series amount not invested in
receivables will be maintained in a "Pre-Funding Account," which is a trust
account established with the indenture trustee for the benefit of the
noteholders of that series. On the closing date for that series of notes, this
amount may be up to 100% of the principal balance of that series of notes. The
Invested Amount for that series will increase as new receivables are transferred
to the trust or as the Invested Amounts of other outstanding series are reduced.
The Invested Amount may decrease due to charge-offs allocated to the series.
During the funding period, funds on deposit in the pre-funding account will
be paid to the transferor as the Invested Amount increases. If the Invested
Amount for that series is not increased so that it equals the principal balance
of the notes of that series by the end of the funding period, any amount
remaining in the pre-funding account will be repaid to noteholders. This type of
event may also cause repayment of other amounts to noteholders, as set forth in
the related prospectus supplement.
The prospectus supplement for a series with a funding period will set
forth:
o the series' initial Invested Amount;
o the series' full Invested Amount, which is the initial principal
balance of the series of notes;
o the date on which the series' Invested Amount is expected to equal the
full Invested Amount;
o the date by which the funding period will end; and
o what other events, if any, will occur if the end of the funding period
is reached before the full Invested Amount is funded.
INVESTOR PERCENTAGE AND TRANSFEROR PERCENTAGE
The servicer will allocate all collections of finance charge receivables,
all collections of principal receivables and all receivables in accounts which
were written off as uncollectible by the servicer, called "Defaulted Accounts,"
among:
o each series issued and outstanding;
o the Transferor Interest; and
o if the related prospectus supplement so states, to any credit
enhancement providers.
All allocations of these amounts will be made through the respective Investor
Percentages for each series, the Transferor Percentage and, where applicable,
the percentage interest of credit enhancement providers, called the "Credit
Enhancement Percentage." The related prospectus supplements will set forth how
the Investor Percentages are calculated.
The Transferor Percentage is, in all cases, equal to 100% minus:
o the total Investor Percentages for all outstanding series; and, if
applicable, minus
o the total Credit Enhancement Percentages for all outstanding series.
APPLICATION OF COLLECTIONS
Except in the circumstance described below, the servicer must deposit into
the collection account, no later than two business days after processing, all
payments made on receivables in the trust portfolio. The servicer must also
allocate these deposits between accounts and to various parties, as described
below. However, the servicer will be able to make these deposits on a monthly or
other periodic basis if the conditions specified in the related prospectus are
satisfied.
The servicer must make daily or periodic deposits to the collection account
only to the extent that the funds are needed for deposit into other trust
accounts or distribution to noteholders or other parties. If the collection
account balance ever exceeds this amount for deposit or distribution, the
servicer will be able to withdraw the excess. Subject to the immediately
preceding sentence, the servicer may retain its servicing fee with respect to
any series and will not be required to deposit it in the collection account.
Each time a collection account deposit is made, the servicer will withdraw
from, or retain in, the collection account, as applicable, the following amounts
and apply them as indicated:
(1) the Transferor Percentage of collections of finance charge
receivables and principal receivables in the trust portfolio will be paid
or held for payment to the holders of the transferor certificates, provided
that collections of principal receivables allocable to the holders of the
transferor certificates will be:
(a) paid to the holders of the transferor certificates only if
the Transferor Interest exceeds zero; or
(b) deposited in the special funding account;
(2) for each series, the relevant Investor Percentage of collections
of finance charge receivables in the trust portfolio will be retained in
the collection account for allocation and payment as set forth in the
related prospectus supplement;
(3) if the series is in its revolving period, the applicable Investor
Percentage of collections of principal receivables in the trust portfolio
allocated to the series will be paid or held for payment to the holders of
the transferor certificates, provided that collections of principal
receivables will be:
(a) paid to the holders of the transferor certificates only if
the Transferor Interest is greater than a specified minimum level,
called the "Required Transferor Interest"; or
(b) deposited in the special funding account;
(4) if the series is in its controlled accumulation period, controlled
amortization period or early accumulation period, as applicable, the
applicable Investor Percentage of collections of principal receivables in
the trust portfolio allocated to the series up to the amount, if any,
specified in the accompanying prospectus supplement will be retained in the
collection account or deposited in a principal funding account, as
applicable, for allocation and payment to noteholders as described in the
accompanying prospectus supplement; provided that if collections of
principal receivables exceed the principal payments which may be allocated
or distributed to noteholders, the excess will be paid to the holders of
the transferor certificates, subject to the limitations described in clause
(3) above; and
(5) if the series is in its early amortization period, the applicable
Investor Percentage of collections of principal receivables in the trust
portfolio will be retained in the collection account for application and
payment as provided in the accompanying prospectus supplement.
In the case of a series of notes having more than one class, the amounts in
the collection account will be allocated and applied to each class in the manner
and order of priority described in the accompanying prospectus supplement.
Any amounts collected in respect of principal receivables and not paid to
the holders of the transferor certificates because the Transferor Interest is
less than the Required Transferor Interest as described in paragraph (3) above
(with respect to each series, "Unallocated Principal Collections"), together
with any adjustment payments as described below, will be paid to and held in the
special funding account and paid to the holders of the transferor certificates
if, and only to the extent that, the Transferor Interest is greater than the
Required Transferor Interest. If an amortization period or accumulation period
has commenced, unallocated principal collections will be held for distribution
to the noteholders on the dates specified in the accompanying prospectus
supplement or accumulated for distribution on the expected principal payment
date, as applicable, and distributed to the noteholders of each class or held
for and distributed to the noteholders of other series of notes issued by the
trust in the manner and order of priority specified in the accompanying
prospectus supplement.
SHARED EXCESS FINANCE CHARGE COLLECTIONS
If a series is identified in the prospectus supplement for that series as
included in a group, collections of finance charge receivables in the trust
portfolio allocated to the series in excess of the amount needed to make
deposits or payments may be shared with other series identified in the
prospectus supplements for those other series as included in the same group. If
one series requires more collections of finance charge receivables than
allocated through its Investor Percentage, it will have access to all of these
shared excess finance charge collections in other series in its group. If two or
more series require more collections of finance charge receivables, excess
finance charge collections in the group will be shared among the series in the
manner and priority set forth in the related prospectus supplements.
SHARED PRINCIPAL COLLECTIONS AND TRANSFEROR PRINCIPAL COLLECTIONS
If a series is allocated principal in excess of the amount needed for
deposit or distribution, this excess amount will be available to make principal
payments or deposits required by other series. These shared principal
collections may be limited to series identified in the prospectus supplements
for those series as included in the same group. If collections of principal
receivables in the trust portfolio allocated to a series are shared with another
series, the Invested Amount for the series from which collections were shared
will not be reduced.
In addition, collections of principal receivables in the trust portfolio
otherwise payable to the holders of the transferor interest may be available to
make principal payments or deposits required by noteholders of one or more
series. These shared transferor principal collections may be limited to series
identified in the prospectus supplements for those series as included in the
same group.
DEFAULTED RECEIVABLES; REBATES AND FRAUDULENT CHARGES; INVESTOR CHARGE-OFFS
Unless otherwise specified in the accompanying prospectus supplement, for
each series of notes, on the earlier of (a) the third business day and (b) the
fifth calendar day (or, if the fifth calendar day is not a business day, then
the preceding business day) preceding the seventeenth day of each calendar month
(the "Determination Date"), the servicer will calculate the aggregate Investor
Default Amount for the preceding monthly period, which will be equal to the
aggregate amount of the Investor Percentage of principal receivables in
defaulted accounts; that is, accounts which in that monthly period were written
off as uncollectible in accordance with the servicer's policies and procedures
for servicing credit card receivables, comparable to the receivables. If so
provided in the accompanying prospectus supplement, an amount equal to the
Investor Default Amount for any monthly period may be paid from other amounts,
including from credit enhancement, and applied to pay principal to noteholders
or, subject to limitations, the holder of the Transferor Interest, as
appropriate.
With respect to each series of notes, the Invested Amount with respect to
that series will be reduced by the amount of Investor Charge-Offs for any
monthly period. Investor Charge-Offs will be reimbursed on any distribution date
to the extent amounts on deposit in the collection account and otherwise
available exceed the interest, fees and any aggregate Investor Default Amount
payable on that date. This reimbursement of Investor Charge-Offs will result in
an increase in the Invested Amount with respect to that series.
If the servicer adjusts the amount of any principal receivable because of
transactions occurring in respect of a rebate or refund to a cardholder, or
because that principal receivable was created in respect of merchandise which
was refused or returned by a cardholder, then the Transferor Interest will be
reduced, on a net basis, by the amount of the adjustment. In addition, the
Transferor Interest will be reduced, on a net basis, as a result of transactions
in respect of any principal receivable which was discovered as having been
created through a fraudulent or counterfeit charge.
DEFEASANCE
If so specified in the prospectus supplement relating to a series, the
transferor may terminate its substantive obligations in respect of that series
or the trust by depositing with the indenture trustee, from amounts
representing, or acquired with, collections of receivables, money or eligible
investments sufficient to make all remaining scheduled interest and principal
payments on that series or all outstanding series of notes of the trust, as the
case may be, on the dates scheduled for those payments and to pay all amounts
owing to any credit enhancement provider with respect to that series or all
outstanding series, as the case may be, if that action would not result in a pay
out event for any series. Prior to its first exercise of its right to substitute
money or eligible investments for receivables, the transferor will deliver to
the indenture trustee an opinion of counsel to the effect that:
o for federal income tax purposes, the deposit and termination of
obligations will not cause the trust, or any portion of the trust, to
be deemed to be an association (or publicly traded partnership)
taxable as a corporation;
o the deposit and termination of obligations will not result in the
trust being required to register as an "investment company" within the
meaning of the Investment Company Act of 1940, as amended; and
o if the transferor's long-term unsecured debt obligations are not rated
at least P-3 or Baa3, respectively, by Moody's, the deposit and
termination of obligations would not be a fraudulent conveyance (based
in reliance on certificates to the effect that the receivables in the
trust portfolio and termination of obligations constitute fair value
for consideration paid and as to the solvency of the transferor).
FINAL PAYMENT OF PRINCIPAL; TERMINATION
For each series, the transferor has the option to repurchase the notes at
any time after the remaining outstanding principal amount of that series is 10%
or less of the initial principal amount of that series (as increased by the
principal balance of any notes of that series issued after the related closing
date) if the conditions set forth in the related indenture supplement are met.
The repurchase price will equal:
o the outstanding principal amount of the notes of that series, plus
o any accrued and unpaid interest through the day preceding the
distribution date on which the repurchase occurs or, if the repurchase
occurs on any other date, through the day preceding the distribution
date immediately following the repurchase date.
Any amounts on deposit in the principal funding account for that series
will be applied toward the repurchase price on behalf of the transferor.
For any series of notes, the related prospectus supplement may specify
different conditions to the transferor's repurchase option and a different
method for determining the repurchase price.
The notes of each series will be retired on the day following the date on
which the final payment of principal is scheduled to be made to the noteholders,
whether as a result of optional reassignment to the transferor or otherwise.
Each prospectus supplement will specify the series termination date with respect
to the related series of notes. However, the notes may be subject to prior
termination as provided above. For any series the failure to pay principal of
the related notes on the series termination date will be an event of default and
the indenture trustee or holders of a specified percentage of the notes of that
series will have the rights described under "The Indenture -Events of Default;
Rights upon Event of Default" in this prospectus.
Unless the servicer and the holder of the Transferor Interest instruct the
indenture trustee otherwise, the trust will terminate on the earlier of (a) the
day after the distribution date on which the aggregate Invested Amount and
Enhancement Invested Amount, if any, with respect to each series outstanding is
zero, or (b) January 1, 20___, (this date, the "Trust Termination Date"). Upon
the termination of the trust and the surrender of the transferor certificates,
the indenture trustee shall convey to the holders of the transferor certificates
all right, title and interest of the trust in and to the receivables and other
funds of the trust.
PAIRED SERIES
The prospectus supplement for a series of notes will specify whether that
series may be paired with a previously or later issued series so that a decrease
in the Invested Amount of the previously issued series results in a
corresponding increase in the Invested Amount of the later issued series. We
call each of these series a "Paired Series." In general, a series may be issued
as a paired series so the trust can fund the amount by which the previously
issued series has amortized and will amortize in the future.
If a pay out event occurs for the previously issued series or its paired
series when the previously issued series is amortizing, the Investor Percentage
for the allocation of collections of principal receivables for the previously
issued series may be reset to a lower percentage as described in the prospectus
supplement for that series and the period over which it will amortize may be
lengthened as a result. The extent to which the period over which it amortizes
is lengthened will depend on many factors, only one of which is the reduction of
its Investor Percentage. For a discussion of these factors, see "Risk Factors
-Issuance of additional series by the trust may affect the timing of payments to
you" in this prospectus and "Maturity Considerations" in the accompanying
prospectus supplement.
PAY OUT EVENTS
Unless otherwise specified in the accompanying prospectus supplement, as
described above, the revolving period will continue through the date specified
in the accompanying prospectus supplement unless a pay out event occurs prior to
that date. A "Pay Out Event" occurs with respect to all series issued by the
trust upon the occurrence of any of the following events:
o bankruptcy, insolvency, liquidation, conservatorship, receivership or
similar events relating to the transferor (including any additional
transferor) or the originator;
o the transferor is unable for any reason to transfer receivables to the
trust in accordance with the provisions of the transfer and servicing
agreement; or
o the trust becomes subject to regulation as an "investment company"
within the meaning of the Investment Company Act of 1940.
In addition, a pay out event may occur with respect to any series upon the
occurrence of any other event specified in the accompanying prospectus
supplement. On the date on which a pay out event is deemed to have occurred, the
early amortization period or, if so specified in the accompanying prospectus
supplement, the early accumulation period will commence. If, because of the
occurrence of a pay out event, the early amortization period begins earlier than
the scheduled commencement of an amortization period or prior to an expected
principal payment date, noteholders will begin receiving distributions of
principal earlier than they otherwise would have, which may shorten the average
life of the notes.
In addition to the consequences of a pay out event discussed above, unless
otherwise specified in the accompanying prospectus supplement, if bankruptcy,
insolvency or similar proceedings under the Bankruptcy Code or similar laws
occur with respect to the transferor, on the day of that event the transferor
will immediately cease to transfer principal receivables to the trust and
promptly give notice to the indenture trustee and the owner trustee of this
event. Any principal receivables transferred to the trust prior to the event, as
well as collections on those principal receivables and finance charge
receivables accrued at any time with respect to those principal receivables,
will continue to be part of the trust assets and will be applied as specified
above in "-Application of Collections" and in the accompanying prospectus
supplement.
If the only pay out event to occur is either the insolvency of the
transferor or the commencement of a bankruptcy case by or against the
transferor, the bankruptcy court may have the power to require the continued
transfer of principal receivables to the trust. See "Risk Factors -If a
conservator or receiver were appointed for the originator or the transferor or
if the originator or the transferor became a debtor in a bankruptcy case, delays
or reductions in payment of your notes could occur" in this prospectus.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
The servicer receives a fee for its servicing activities and reimbursement
of expenses incurred in administering the trust. This servicing fee accrues for
each outstanding series in the amounts and calculated on the balances set forth
in the related prospectus supplement. Each series' servicing fee is payable each
period from collections of finance charge receivables allocated to the series;
some series, however, may direct all or a portion of the Interchange arising
from the accounts toward paying the servicing fee. Neither the trust nor the
noteholders are responsible for any servicing fee allocable to the Transferor
Interest.
CERTAIN MATTERS REGARDING THE TRANSFEROR AND THE SERVICER
The servicer may not resign from its obligations and duties under the
transfer and servicing agreement, except upon a determination that performance
of its duties is no longer permissible under applicable law; or if:
o within 120 days of the determination that the servicer is no longer
permitted to act as servicer; and
o the indenture trustee is unable to appoint a successor,
the indenture trustee will act as servicer. If the indenture trustee is unable
to act as servicer, it will petition an appropriate court to appoint an eligible
successor.
The servicer may not resign until the indenture trustee or another
successor has assumed the servicer's obligations and duties.
The servicer will indemnify the trust, the owner trustee and the indenture
trustee for any losses suffered as a result of (a) its actions or omissions as
servicer or (b) the administration by the owner trustee of the trust, except in
each case, for losses resulting from the negligence or willful misconduct of the
owner trustee or the indenture trustee, as applicable.
Neither the servicer nor any of its directors, officers, employees or
agents will be under any other liability to the trust, the owner trustee, the
indenture trustee, the noteholders, any series enhancer or any other person for
any action taken, or for refraining from taking any action, in good faith under
the transfer and servicing agreement. However, none of them will be protected
against any liability resulting from willful wrongdoing, bad faith or gross
negligence in the performance of its duties or by reason of reckless disregard
of obligations and duties under the transfer and servicing agreement. In
addition, the transfer and servicing agreement provides that the servicer is not
under any obligation to appear in, prosecute or defend any legal action which is
not incidental to its servicing responsibilities under the transfer and
servicing agreement and which in its opinion may expose it to any expense or
liability.
Each transferor will be severally, but not jointly, liable for all of its
obligations, covenants, representations and warranties under the transfer and
servicing agreement. No transferor nor any of its directors, officers,
employees, incorporators or agents will be liable to the trust, the owner
trustee, the indenture trustee, the noteholders, any series enhancer or any
other person for any action taken, or for refraining from taking any action, in
good faith under the transfer and servicing agreement. However, none of them
will be protected against any liability resulting from willful wrongdoing, bad
faith or gross negligence in the performance of its duties or by reason of
reckless disregard of obligations and duties under the transfer and servicing
agreement.
The trust agreement provides that the transferor may transfer its interest
in all or a portion of the transferor certificate by exchanging its transferor
certificate for a newly issued transferor certificate and a second certificate,
called a "Supplemental Certificate." The terms of the supplemental certificate
must be defined in a supplement to the trust agreement. Before a supplemental
certificate is issued, the following must occur:
o notice of the exchange to the owner trustee, the indenture trustee,
the servicer and each rating agency;
o delivery to the owner trustee and the indenture trustee of an executed
supplement to the trust agreement;
o written confirmation from each rating agency that the exchange will
not result in a reduction or withdrawal of its rating of any
outstanding series or class;
o delivery to the owner trustee and the indenture trustee of a
certificate of an authorized officer of the transferor to the effect
that it reasonably believes the exchange will not have an adverse
effect;
o delivery to the owner trustee and the indenture trustee of a tax
opinion regarding the exchange; and
o the total amount of principal receivables in the trust portfolio, plus
the principal amount of any participations transferred to the trust
must exceed the Required Minimum Principal Balance on the date of the
exchange.
No supplemental certificate may be transferred or exchanged unless a tax
opinion is delivered to the owner trustee and the indenture trustee regarding
the exchange.
The transferor or the servicer may consolidate with, merge into, or sell
its business to, another entity, in accordance with the transfer and servicing
agreement, and the surviving entity will be the successor to the transferor or
servicer, as the case may be, on the following conditions:
o execution of an agreement relating to the succession that supplements
the transfer and servicing agreement;
o in the case of a succession relating to the transferor, (1) delivery
to the owner trustee and the indenture trustee of a certificate of an
authorized officer of the transferor and an opinion of counsel, each
addressing compliance with the applicable provisions of the transfer
and servicing agreement and the validity and enforceability of the
supplemental agreement and (2) written confirmation from each rating
agency that the succession will not result in a reduction or
withdrawal of its rating of any outstanding series or class; and
o in the case of a succession relating to the servicer, (1) delivery to
the owner trustee and the indenture trustee of a certificate of an
authorized officer of the servicer and an opinion of counsel, each
addressing compliance with the applicable provisions of the transfer
and servicing agreement, (2) notification of the succession to each
rating agency and (3) that the successor is eligible to act as
servicer.
SERVICER DEFAULT
The transfer and servicing agreement specifies the duties and obligations
of the servicer. A failure by the servicer to perform its duties or fulfill its
obligations can result in a Servicer Default.
A "Servicer Default" includes each of the following:
(1) failure by the servicer to make any payment, transfer or deposit,
or to give instructions or to give notice to the indenture trustee to do
so, on the required date under the transfer and servicing agreement, the
indenture or any indenture supplement or within the applicable grace period
not exceeding 5 business days;
(2) failure on the part of the servicer to observe or perform any of
its other covenants or agreements if the failure:
(a) materially adversely affects noteholders of any series issued
and outstanding under the trust; and
(b) continues unremedied for a period of 60 days after written
notice to (1) the servicer by the owner trustee or the indenture
trustee, or (2) the servicer, the owner trustee and the indenture
trustee by noteholders of 10% or more of the then-outstanding
principal amount of all of the trust's outstanding series (or, where
the servicer's failure does not relate to all series, 10% or more of
the then-outstanding principal amount of all series affected); or
(c) the assignment or the delegation by the servicer of its
duties, except as specifically permitted under the transfer and
servicing agreement;
(3) any representation, warranty or certification made by the servicer
in the transfer and servicing agreement, or in any certificate delivered
pursuant to the transfer and servicing agreement, proves to have been
incorrect when made if it:
(a) materially adversely affects noteholders of any series issued
and outstanding under the trust; and
(b) continues to be incorrect and to materially adversely affect
those noteholders for a period of 60 days after written notice to (1)
the servicer by the owner trustee or the indenture trustee, or (2) the
servicer, the owner trustee and the indenture trustee by noteholders
of 10% or more of the then-outstanding principal amount of all of the
trust's outstanding series (or, where the servicer's inaccuracy does
not relate to all series, 10% or more of the then-outstanding
principal amount of all series affected);
(4) specific bankruptcy, insolvency, liquidation, conservatorship,
receivership or similar events relating to the servicer; or
(5) any other event specified in the accompanying prospectus
supplement.
Notwithstanding the foregoing, a delay in or failure of performance
referred to in clause (1) above for a period of 10 business days after the
applicable grace period, or referred to under clause (2) or (3) for a period of
60 business days after the applicable grace period, will not constitute a
Servicer Default if the delay or failure could not be prevented by the exercise
of reasonable diligence by the servicer and the delay or failure was caused by
an act of God or other similar occurrence. Upon the occurrence of any of these
events, the servicer shall not be relieved from using all commercially
reasonable efforts to perform its obligations in a timely manner in accordance
with the terms of the transfer and servicing agreement and the servicer must
provide the indenture trustee, the owner trustee each transferor and any
provider of enhancement and/or any issuer of any third-party credit enhancement
(a "Series Enhancer") with an officer's certificate giving prompt notice of its
failure or delay, together with a description of its efforts to perform its
obligations.
If a Servicer Default occurs, for as long as it has not been remedied, the
indenture trustee or noteholders representing a majority of the then-outstanding
principal amount of all of the trust's outstanding series may give a notice to
the servicer and the owner trustee (and to the indenture trustee if given by the
noteholders) terminating all of the rights and obligations of the servicer under
the transfer and servicing agreement and the indenture trustee may appoint a new
servicer. The indenture trustee will as promptly as possible appoint an eligible
successor to the servicer. If no successor has been appointed or has accepted
the appointment by the time the servicer ceases to act as servicer, the
indenture trustee will automatically become the successor. If the indenture
trustee is unable to obtain bids from eligible servicers and the servicer
delivers a certificate of an authorized officer to the effect that it cannot in
good faith cure the Servicer Default which gave rise to a transfer of servicing,
and if the indenture trustee is legally unable to act as successor, then the
indenture trustee will give the transferor a right of first refusal to purchase
the interests of the noteholders in the trust on the distribution date in the
next calendar month at a price equal to the sum of the amounts specified for
each series outstanding in the related indenture supplement.
The rights and obligations of the transferor under the transfer and
servicing agreement will be unaffected by any change in servicer.
In the event of the bankruptcy of the servicer, the bankruptcy court may
have the power to prevent either the indenture trustee or the noteholders from
appointing a successor servicer.
REPORTS TO NOTEHOLDERS
Noteholders of each series issued by the trust will receive reports with
information on the series and the trust. The paying agent will forward to each
noteholder of record a report, prepared by the servicer, for its series on the
distribution dates for that series. The report will set forth information as
specified in the related prospectus supplement. If a series has multiple
classes, information will be provided for each class, as specified in the
related prospectus supplement.
Periodic information to noteholders generally will include:
o the total amount distributed;
o the amount of principal and interest for distribution
o collections of principal receivables and finance charge receivables
allocated to the series;
o the aggregate amount of principal receivables, the Invested Amount and
the Invested Amount as a percentage of the aggregate amount of the
principal receivables in the trust portfolio;
o the aggregate outstanding balance of accounts broken out by
delinquency status;
o the aggregate defaults allocated to the series;
o Investor Charge-Offs for the series and any reimbursements of previous
Investor Charge-Offs;
o the monthly servicing fee for that series;
o the amount available under any enhancement and credit enhancement, if
any, for the series or each class of the series;
o the "pool factor," which is the ratio of the current Invested Amount
to the initial Invested Amount;
o the Base Rate and Portfolio Yield (each as defined in the accompanying
prospectus supplement) for the series; and
o if the series or a class of the series bears interest at a floating or
variable rate, information relating to that rate.
By January 31 of each calendar year, the paying agent will also provide to
each person who at any time during the preceding calendar year was a noteholder
of record a statement, prepared by the servicer, containing the type of
information presented in the periodic reports, aggregated for that calendar year
or the portion of that calendar year that the person was a noteholder, together
with other information that is customarily provided to holders of debt, to
assist noteholders in preparing their United States tax returns.
EVIDENCE AS TO COMPLIANCE
The transfer and servicing agreement provides that on or before April 30 of
each calendar year, the servicer will have a firm of independent certified
public accountants furnish a report showing that, for the prior calendar year:
o the accounting firm has reviewed management's assertion that the
system of internal control over servicing of securitized credit card
receivables met the criteria for effective internal control and that,
in the accounting firm's opinion, management's assertion is fairly
stated in all material respects, and
o the accounting firm has compared amounts set forth in the periodic
reports prepared by the servicer for the prior calendar year with the
servicer's computer reports and that, in the accounting firm's
opinion, the amounts are in agreement, except for any discrepancies
disclosed.
The transfer and servicing agreement also provides that by April 30 of each
calendar year, the servicer will deliver to the owner trustee, the indenture
trustee and each rating agency a certificate of an authorized officer to the
effect that the servicer has fully performed its obligations under the transfer
and servicing agreement during the preceding year, or, if there has been a
default in the performance of any of its obligations, specifying the nature and
status of default.
AMENDMENTS
The transfer and servicing agreement may be amended by the transferor, the
servicer and the owner trustee, without the consent of the indenture trustee or
the noteholders of any series, on the following conditions:
o the transferor delivers to the owner trustee and the indenture trustee
a certificate of an authorized officer stating that, in the
transferor's reasonable belief, the amendment will not have a material
adverse effect on the interests of the noteholders; and
o written confirmation from each rating agency that the amendment will
not result in a reduction or withdrawal of its rating of any
outstanding series or class.
The transfer and servicing agreement may also be amended by the servicer
and the owner trustee at the direction of the transferor, without the consent of
the indenture trustee, the noteholders of any series or the series enhancers for
any series to add, modify or eliminate any provisions necessary or advisable in
order to enable the trust or any portion of the trust to (1) qualify as, and to
permit an election to be made for the trust to be treated as, a "financial asset
securitization investment trust" under the Internal Revenue Code of 1986, as
amended and (2) avoid the imposition of state or local income or franchise taxes
on the trust's property or its income. The following conditions apply for the
amendments described in this paragraph:
o delivery to the owner trustee and the indenture trustee of a
certificate of an authorized officer of the transferor to the effect
that the requirements under the transfer and servicing agreement
applicable to the proposed amendments have been met;
o receipt of written confirmation from each rating agency that the
amendment will not result in a reduction or withdrawal of its rating
of any outstanding series or class; and
o the amendment must not affect the rights, duties or obligations of the
indenture trustee or the owner trustee under the transfer and
servicing agreement.
The amendments which the transferor may make without the consent of the
noteholders of any series or the series enhancers for any series in accordance
with the preceding paragraph may include, without limitation, the addition of a
sale of receivables in the trust portfolio.
The transfer and servicing agreement may also be amended by the transferor,
the servicer and the owner trustee with the consent of noteholders representing
at least 66 2/3% of the then-outstanding principal balance of the notes of all
series adversely affected by the amendment. Even with consent, no amendment may
occur if it:
(1) reduces the amount of, or delays the timing of:
(a) any distributions to be made to noteholders of any series
(changes in pay out events or events of default that decrease the
likelihood of the occurrence of those events will not be considered
delays in the timing of distributions for purposes of this clause);
(b) deposits of amounts to be distributed; or
(c) the amount available under any series enhancement, without
the consent of each affected noteholder;
(2) changes the manner of calculating the interests of any noteholder,
without the consent of each affected noteholder;
(3) reduces the percentage of the outstanding principal balance of the
notes required to consent to any amendment, without the consent of each
affected noteholder; or
(4) adversely affects the rating of any series or class by any rating
agency, without the consent of noteholders representing at least 66 2/3% of
the then-outstanding principal balance of the notes of each affected series
or class.
THE INDENTURE
The following summarizes terms of the indenture and is qualified in its
entirety by reference to the indenture.
EVENTS OF DEFAULT; RIGHTS UPON EVENT OF DEFAULT
With respect to the notes of any series, "EVENTS OF DEFAULT" under the
indenture will be any of the following:
o the trust fails to pay principal when it becomes due and payable on
the series termination date for that series of notes;
o the trust fails to pay interest when it becomes due and payable and
the default continues for a period of 3 (or the number of days
specified in the prospectus supplement) days;
o bankruptcy, insolvency, conservatorship, receivership, liquidation or
similar events relating to the trust; or
o the trust fails to observe or perform covenants or agreements made in
the indenture, and:
the failure continues, or is not cured, for 60 days after notice to the trust by
the indenture trustee or to the trust and the indenture trustee by noteholders
representing 25% or more of the then-outstanding principal amount of all of the
trust's outstanding series; and as a result, the interests of the noteholders
are materially and adversely affected, and continue to be materially and
adversely affected during the 60-day period.
Failure to pay the full principal amount of a note on its expected
principal payment date will not constitute an event of default.
An event of default with respect to one series of notes will not
necessarily be an event of default with respect to any other series of notes.
If an event of default should occur and be continuing with respect to the
notes, the indenture trustee or noteholders holding more than 50% of the
then-outstanding principal balance of the notes of the affected series may
declare the principal of the notes of that series to be immediately due and
payable. This declaration may, under specified circumstances, be rescinded by
noteholders holding more than 50% of the then-outstanding principal balance of
the notes of that series.
Generally, in the case of any event of default, the indenture trustee will
be under no obligation to exercise any of the rights or powers under the
indenture if requested or directed by any of the holders of the notes of the
affected series if the indenture trustee reasonably believes it will not be
adequately indemnified against the costs, expenses and liabilities which might
be incurred by it in complying with that request. Subject to those provisions
for indemnification and limitations contained in the indenture, noteholders
holding more than 50% (or not less than 66 2/3% if an event of default has
occurred and is continuing) of the then-outstanding principal balance of the
notes of the affected series will have the right to direct the time, method and
place of conducting any proceeding for any remedy available to the indenture
trustee, and noteholders holding more than 50% of the then-outstanding principal
balance of the notes of the affected series may, in specified cases, waive any
default with respect to the notes, except a default in the payment of principal
or interest or a default relating to a covenant or provision of the indenture
that cannot be modified without the waiver or consent of all noteholders of the
affected series.
After acceleration of a series of notes, principal collections and finance
charge collections allocated to those notes will be applied to make monthly
principal and interest payments on the notes until the earlier of the date the
notes are paid in full or the legal maturity date of the notes. Funds in the
collection account and other trust accounts for an accelerated series of notes
will be applied immediately to pay principal of and interest on those notes.
Upon acceleration of the maturity of a series of notes following an event
of default, the indenture trustee will have a lien on the collateral for those
notes for its unpaid fees and expenses that ranks senior to the lien of those
notes on the collateral.
In general, the indenture trustee will enforce the rights and remedies of
the holders of accelerated notes. However, noteholders will have the right to
institute any proceeding with respect to the indenture if the following
conditions are met:
o the noteholder gives the indenture trustee written notice of a
continuing event of default;
o the noteholders of at least 25% of the Invested Amount of the affected
series make a written request of the indenture trustee to institute a
proceeding as indenture trustee;
o the noteholders offer reasonable indemnification to the indenture
trustee against the costs, expenses and liabilities of instituting a
proceeding;
o the indenture trustee has not instituted a proceeding within 60 days
after receipt of the request and offer of indemnification; and
o the indenture trustee has not received from noteholders holding more
than 50% of the then-outstanding principal balance of the notes of
that series a direction inconsistent with the request.
If any series of notes has been accelerated following an event of default,
and the indenture trustee has not received any valid directions from those
noteholders, the indenture trustee may elect to continue to hold the portions of
the trust assets that secures those notes and apply distributions on the trust
assets to make payments on those notes to the extent funds are available.
Subject to the provisions of the indenture relating to the duties of the
indenture trustee, in case any event of default occurs and is continuing with
respect to the notes, the indenture trustee:
o may institute proceedings in its own name for the collection of all
amounts then payable on the notes of the affected series; or
o may take any other appropriate action to protect and enforce the
rights and remedies of the indenture trustee and the noteholders of
the affected series.
Subject to the conditions described below, the indenture trustee also:
o may, at its own election, foreclose on the portion of the receivables
which secure a series of accelerated notes by causing the trust to
sell an interest in the assets of the trust by issuing a foreclosure
certificate to the holders of those notes;
o may, at its own election, foreclose on the portion of the receivables
which secure a series of accelerated notes by causing the trust to
sell an interest in the assets of the trust by issuing a foreclosure
certificate to a third party selected by the indenture trustee, but
only if it determines that the proceeds of the issuance of the
foreclosure certificate to that third party will be sufficient to pay
principal of and interest on the accelerated series of notes in full;
and
o must, at the direction of noteholders holding more than 50% of the
then-outstanding principal balance of the series of accelerated notes,
foreclose on the portion of the receivables which secure that series
of accelerated notes by causing the trust to sell an interest in the
assets of the trust by issuing a foreclosure certificate to the
holders of that series of notes or to one or more third parties.
The conditions that must be satisfied for the indenture trustee to exercise
one of these foreclosure remedies include:
(1) (a) the indenture trustee must receive the consent of all
noteholders of the affected series;
(b) the indenture trustee determines that any proceeds from
exercising the foreclosure remedy that are to be distributed to the
noteholders of that series are sufficient to discharge in full all
principal and interest due on those notes; or
(c) the indenture trustee determines that the trust assets may
not continue to provide sufficient funds for the payment of principal
and interest on those notes as they would have become due if the notes
had not been accelerated, and the indenture trustee obtains the
consent of noteholders holding at least 66 2/3% of the
then-outstanding principal balance of each class of the notes of the
affected series; and
(2) the indenture trustee has obtained an opinion of counsel:
(a) that exercise of the foreclosure remedy will not cause the
trust or any portion of the trust to be classified as an association
(or a publicly traded partnership) taxable as a corporation for
federal income tax purposes; and
(b) that exercise of the foreclosure remedy complies with
applicable federal and state securities laws.
A "Foreclosure Certificate" is an investor certificate issued by the trust
as a result of a foreclosure on a portion of the receivables that corresponds to
the portion of the receivables that secured the accelerated notes. The
foreclosure certificate represents an undivided interest in the assets of the
trust. The principal amount of the foreclosure certificate would be equal to the
principal amount of the accelerated series of notes, and the invested amount of
the foreclosure certificate would be equal to the Invested Amount of the
accelerated series of notes.
When a foreclosure certificate is issued with respect to accelerated notes,
those notes will be deemed to have been paid in full by the trust and not
outstanding, and the holders of the accelerated notes will no longer have any
claim against the trust. Accordingly, the Invested Amount securing the
accelerated notes will be allocable to the holders of the foreclosure
certificate.
A foreclosure certificate held by a noteholder or a third party will be
subject to restrictions on transfer, including:
o restrictions required to prevent the trust from becoming a publicly
traded partnership taxable as a corporation for federal income tax
purposes, including a limitation on the number of holders or interests
in the foreclosure certificate and restrictions on transfers to
holders that are partnerships, Subchapter S corporations or grantor
trusts for United States federal income tax purposes;
o restrictions on transfers of interest in the foreclosure certificate
to non-U.S. persons;
o restrictions on transfers to employee benefit plans, or any entity
whose underlying assets include "plan assets"; and
o other restrictions that counsel to the trust may require to avoid
adverse tax and other consequences to the trust or the noteholders.
The indenture trustee and the noteholders will covenant that they will not
at any time institute against the trust or the transferor any bankruptcy,
reorganization or other proceeding under any federal or state bankruptcy or
similar law.
None of the transferor, the administrator, the owner trustee, the indenture
trustee, the servicer, the originator or the trust, in its individual capacity,
nor any holder of an ownership interest in the trust, nor any of their
respective owners, beneficiaries, agents, officers, directors, employees,
successors or assigns shall, in the absence of an express agreement to the
contrary, be personally liable for the payment of the principal of or interest
on the notes or for the agreements of the trust contained in the indenture. The
notes will represent obligations solely of the trust, and the notes will not be
insured or guaranteed by the transferor, the servicer, the administrator, the
owner trustee, the indenture trustee, the originator or any other person or
entity.
CERTAIN COVENANTS
The indenture provides that the trust may not consolidate with, merge into
or sell its business to, another entity, unless:
o the entity formed by or surviving the consolidation or merger, or that
acquires the Issuer's business, is organized under the laws of the
United States, any of the fifty states or the District of Columbia;
o the entity is not subject to regulation as an "investment company"
under the Investment Company Act of 1940, as amended;
o the entity expressly assumes, by supplemental indenture, the trust's
obligation to make due and punctual payments upon the notes and the
performance of every covenant of the trust under the indenture;
o no payout event or event of default shall have occurred and be
continuing immediately after the merger, consolidation or sale;
o written confirmation is received from each rating agency that the
transaction will not result in a reduction or withdrawal of its rating
of any outstanding series or class;
o the trust has received an opinion of counsel to the effect that the
consolidation, merger or sale would have no material adverse federal
income tax consequence to any noteholder;
o any action as is necessary to maintain the lien and security interest
created by the indenture shall have been taken; and
o the trust has delivered to the indenture trustee an opinion of counsel
and officer's certificate each stating that the consolidation, merger
or sale satisfies all requirements under the indenture and that the
supplemental indenture is duly authorized, executed and delivered and
is valid, binding and enforceable.
The trust will not, among other things:
o except as expressly permitted by the indenture, the transfer and
servicing agreement or related documents, sell, transfer, exchange or
otherwise dispose of any of the assets of the trust, unless directed
to do so by the indenture trustee;
o claim any credit on or make any deduction from payments in respect of
the principal of and interest on the notes (other than amounts
withheld under the Code or applicable state law) or assert any claim
against any present or former noteholders because of the payment of
taxes levied or assessed upon the trust;
o voluntarily dissolve or liquidate in whole or in part; or
o permit (A) the validity or effectiveness of the indenture to be
impaired, or permit the lien under the indenture to be amended,
hypothecated, subordinated, terminated or discharged, or permit any
person to be released from any covenants or obligations with respect
to the notes under the indenture except as may be expressly permitted
by the indenture, (B) any lien, charge, excise, claim, security
interest, mortgage or other encumbrance to be created on or extend to
or otherwise arise upon or burden the assets of the trust, except as
may be created by the terms of the indenture; or (C) the lien of the
indenture not to constitute a valid first priority perfected security
interest in the assets of the trust that secure the notes.
The trust may not engage in any activity other than as specified under "The
Issuer" in this prospectus. The trust will not incur, assume or guarantee any
indebtedness other than indebtedness incurred pursuant to the notes and the
indenture.
MODIFICATION OF THE INDENTURE
The trust and the indenture trustee may, without the consent of any
noteholders, enter into one or more supplemental indentures, upon receiving
written confirmation from each rating agency that the action will not result in
a reduction or withdrawal of its rating of any outstanding series or class, for
any of the following purposes:
o to correct or enhance the description of any property subject to the
lien of the indenture, or to take any action that will enhance the
indenture trustee's lien under the indenture, or to add to the
property pledged to secure the notes;
o to reflect the agreement of another person to assume the role of the
trust;
o to add to the covenants of the trust, for the benefit of the
noteholders, or to surrender any right or power of the trust;
o to transfer or pledge any property to the indenture trustee;
o to cure any ambiguity, to correct or supplement any provision in the
indenture or in any supplemental indenture that may be inconsistent
with any other provision in the indenture or in any supplemental
indenture if that action would not materially and adversely affect the
interests of the noteholders;
o to appoint a successor to the indenture trustee with respect to the
notes and to add to or change any of the provisions of the indenture
to allow more than one indenture trustee to act under the indenture;
o to modify, eliminate or add to the provisions of the indenture as
necessary to qualify the indenture under the Trust Indenture Act of
1939, as amended, or any similar federal statute later enacted;
o to permit the issuance of one or more new series of notes in
accordance with the indenture; or
o to terminate any interest rate swap agreement or other credit
enhancement in accordance with the related indenture supplement.
The trust and the indenture trustee may also, without the consent of any
noteholders, enter into one or more supplemental indentures to add provisions
to, change in any manner or eliminate any provision of the indenture, or to
change the rights of the noteholders under the indenture, upon:
o receipt of written confirmation from each rating agency that the
action will not result in a reduction or withdrawal of its rating of
any outstanding series or class; and
o receipt of a certificate of an authorized officer of the transferor to
the effect that, in the transferor's reasonable belief, the action
will not have a material adverse effect on the interests of the
noteholders of any outstanding series.
The trust and the indenture trustee may also, without the consent of the
noteholders of any series or the series enhancers for any series, enter into one
or more supplemental indentures to add, modify or eliminate any provisions
necessary or advisable in order to enable the trust or any portion of the trust
to (1) qualify as, and to permit an election to be made for the trust to be
treated as, a "financial asset securitization investment trust" under the
Internal Revenue Code of 1986, as amended and (2) to avoid the imposition of
state or local income or franchise taxes on the trust's property or its income.
The following conditions apply for the amendments described in this paragraph:
o delivery to the owner trustee and the indenture trustee of a
certificate of an authorized officer of the transferor to the effect
that the requirements under the indenture applicable to the proposed
amendments have been met;
o receipt of written confirmation from each rating agency that the
action will not result in a reduction or withdrawal of its rating of
any outstanding series or class; and
o the amendment must not affect the rights, duties or obligations of the
indenture trustee or the owner trustee under the indenture.
The trust and the indenture trustee will not, without prior notice to each
rating agency and without the consent of each noteholder affected, enter into
any supplemental indenture to:
o change the date of payment of any installment of principal of or
interest on any note or reduce the principal amount of a note, the
note interest rate or the redemption price of the note or change any
place of payment where, or the currency in which, any note is payable;
o impair the right to institute suit for the enforcement of specified
payment provisions of the indenture;
o reduce the percentage of the aggregate principal amount of the notes
of any series, whose consent is required (a) for execution of any
supplemental indenture or (b) for any waiver of compliance with
specified provisions of the indenture or of some defaults under the
indenture and their consequences provided in the indenture;
o reduce the percentage of the aggregate outstanding amount of the notes
required to direct the indenture trustee to sell or liquidate the
trust assets if the proceeds of the sale would be insufficient to pay
the principal amount and interest due on those notes;
o decrease the percentage of the aggregate principal amount of the notes
required to amend the sections of the indenture that specify the
percentage of the principal amount of the notes of a series necessary
to amend the indenture or other related agreements;
o modify any provisions of the indenture regarding the voting of notes
held by the trust, any other party obligated on the notes, or the
originator, any other account owner or any of their affiliates; or
o permit the creation of any lien superior or equal to the lien of the
indenture with respect to any of the collateral for any notes or,
except as otherwise permitted or contemplated in the indenture,
terminate the lien of the indenture on the collateral or deprive any
noteholder of the security provided by the lien of the indenture.
The trust and the indenture trustee may otherwise, with prior notice to
each rating agency and with the consent of noteholders holding more than 50% of
the then-outstanding principal balance of the notes of each series adversely
affected, enter into one or more supplemental indentures to add provisions to,
change in any manner or eliminate any provision of the indenture, or to change
the rights of the noteholders under the indenture.
ANNUAL COMPLIANCE STATEMENT
The trust will be required to present to the indenture trustee each year a
written statement as to the performance of its obligations under the indenture.
INDENTURE TRUSTEE'S ANNUAL REPORT
The indenture trustee will be required to mail to the noteholders each year
a brief report relating to its eligibility and qualification to continue as
indenture trustee under the indenture, the property and funds physically held by
the indenture trustee and any action it took that materially affects the notes
and that has not been previously reported.
LIST OF NOTEHOLDERS
Upon the issuance of definitive notes, three or more holders of the notes
who have each owned a note for at least six months may obtain access to the list
of noteholders the indenture trustee maintains for the purpose of communicating
with other noteholders. The indenture trustee may elect not to allow the
requesting noteholders access to the list of noteholders if it agrees to mail
the requested communication or proxy, on behalf and at the expense of the
requesting noteholders, to all noteholders of record.
SATISFACTION AND DISCHARGE OF INDENTURE
An indenture will be discharged with respect to the notes upon the delivery
to the indenture trustee for cancellation of all the notes or, with specific
limitations, upon deposit with the indenture trustee of funds sufficient for the
payment in full of all the notes.
THE INDENTURE TRUSTEE
The indenture trustee may resign at any time, in which event your
administrator will appoint a successor indenture trustee for your series. The
administrator may also remove the indenture trustee if it ceases to be eligible
to continue as an indenture trustee under the indenture or if the indenture
trustee becomes insolvent. The administrator will then be obligated to appoint a
successor indenture trustee for your series. If an event of default occurs under
the indenture and the accompanying prospectus supplement provides that a given
class of notes of your series is subordinated to one or more other classes of
notes of your series, under the Trust Indenture Act of 1939, as amended, the
indenture trustee may be deemed to have a conflict of interest and be required
to resign as indenture trustee for one of more of those classes of notes. In
that case, a successor indenture trustee will be appointed for one or more of
those classes of notes and may provide for rights of senior noteholders to
consent to or direct actions by the indenture trustee which are different from
those of subordinated noteholders. Any resignation or removal of the indenture
trustee and appointment of a successor indenture trustee for any series of notes
will not become effective until the successor indenture trustee accepts its
appointment for your series.
CERTAIN MATTERS REGARDING THE ADMINISTRATOR
The administrator will, to the extent provided in the administration
agreement, provide the notices and perform on behalf of the trust other
administrative obligations required by the indenture.
CREDIT ENHANCEMENT
For any series, credit enhancement may be provided with respect to one or
more of the related classes. Credit enhancement may be in the form of the
subordination of one or more classes of the notes of that series, a letter of
credit, the establishment of a cash collateral guaranty or account, a surety
bond, an insurance policy, a spread account, a reserve account, the use of cross
support features or another method of credit enhancement described in the
accompanying prospectus supplement, or any combination of these. If so specified
in the accompanying prospectus supplement, any form of credit enhancement may be
structured so as to be drawn upon by more than one class to the extent described
in that accompanying prospectus supplement.
Unless otherwise specified in the accompanying prospectus supplement for a
series, the credit enhancement will not provide protection against all risks of
loss and will not guarantee repayment of the entire principal balance of the
notes and interest thereon. If losses occur which exceed the amount covered by
the credit enhancement or which are not covered by the credit enhancement,
noteholders will bear their allocable share of deficiencies.
If credit enhancement is provided with respect to a series, the
accompanying prospectus supplement will include a description of:
o the amount payable under that credit enhancement;
o any conditions to payment not described here;
o the conditions, if any, under which the amount payable under that
credit enhancement may be reduced and under which that credit
enhancement may be terminated or replaced; and
o any material provision of any agreement relating to that credit
enhancement.
Additionally, the accompanying prospectus supplement may set forth
information with respect to any credit enhancement provider, including:
o a brief description of its principal business activities;
o its principal place of business, place of incorporation and the
jurisdiction under which it is chartered or licensed to do business;
o if applicable, the identity of regulatory agencies which exercise
primary jurisdiction over the conduct of its business; and
o its total assets, and its stockholders' or policy holders' surplus, if
applicable, and other appropriate financial information as of the date
specified in the prospectus supplement.
If so specified in the accompanying prospectus supplement, credit
enhancement with respect to a series may be available to pay principal of the
notes of that series following the occurrence of pay out events with respect to
that series. In this event, the credit enhancement provider will have an
interest in cash flows in respect of the receivables to the extent described in
that prospectus supplement called the "Enhancement Invested Amount".
SUBORDINATION
If so specified in the accompanying prospectus supplement, one or more
classes of any series will be subordinated as described in the accompanying
prospectus supplement to the extent necessary to fund payments with respect to
the senior notes. The rights of the holders of these subordinated notes to
receive distributions of principal and/or interest on any distribution date for
that series will be subordinate in right and priority to the rights of the
holders of senior notes, but only to the extent set forth in the accompanying
prospectus supplement. If so specified in the accompanying prospectus
supplement, subordination may apply only in the event of specified types of
losses not covered by another credit enhancement.
The accompanying prospectus supplement will also set forth information
concerning:
o the amount of subordination of a class or classes of subordinated
notes in a series;
o the circumstances in which that subordination will be applicable;
o the manner, if any, in which the amount of subordination will decrease
over time; and
o the conditions under which amounts available from payments that would
otherwise be made to holders of those subordinated notes will be
distributed to holders of senior notes.
If collections of receivables otherwise distributable to holders of a
subordinated class of a series will be used as support for a class of another
series, the accompanying prospectus supplement will specify the manner and
conditions for applying that cross-support feature.
LETTER OF CREDIT
If so specified in the accompanying prospectus supplement, support for a
series or one or more of the related classes will be provided by one or more
letters of credit. A letter of credit may provide limited protection against
losses in addition to or in lieu of other credit enhancement. The issuer of the
letter of credit, referred to as the "L/C Bank," will be obligated to honor
demands with respect to that letter of credit, to the extent of the amount
available thereunder, to provide funds under the circumstances and subject to
any conditions as are specified in the accompanying prospectus supplement.
The maximum liability of an L/C Bank under its letter of credit will
generally be an amount equal to a percentage specified in the accompanying
prospectus supplement of the initial Investor Amount of a series or a class of
that series. The maximum amount available at any time to be paid under a letter
of credit will be set forth in the accompanying prospectus supplement.
CASH COLLATERAL GUARANTY OR ACCOUNT
If so specified in the accompanying prospectus supplement, support for
a series or one or more of the related classes will be provided by a guaranty,
referred to as the "Cash Collateral Guaranty" secured by the deposit of cash or
permitted investments in an account, referred to as the "Cash Collateral
Account," reserved for the beneficiaries of the cash collateral guaranty or by a
cash collateral account alone. The amount available pursuant to the cash
collateral guaranty or the cash collateral account will be the lesser of amounts
on deposit in the cash collateral account and an amount specified in the
accompanying prospectus supplement. The accompanying prospectus supplement will
set forth the circumstances under which payments are made to beneficiaries of
the cash collateral guaranty from the cash collateral account or from the cash
collateral account directly.
SURETY BOND OR INSURANCE POLICY
If so specified in the accompanying prospectus supplement, insurance
with respect to a series or one or more of the related classes will be provided
by one or more insurance companies. This insurance will guarantee, with respect
to one or more classes of the related series, distributions of interest or
principal in the manner and amount specified in the accompanying prospectus
supplement.
If so specified in the accompanying prospectus supplement, a surety bond
will be purchased for the benefit of the holders of any series or class of that
series to assure distributions of interest or principal with respect to that
series or class of notes in the manner and amount specified in the accompanying
prospectus supplement.
SPREAD ACCOUNT
If so specified in the accompanying prospectus supplement, support for a
series or one or more of the related classes will be provided by the periodic
deposit of available excess cash flow from the trust assets into an account,
referred to as the "Spread Account," intended to assist with subsequent
distribution of interest and principal on the notes of that class or series in
the manner specified in the accompanying prospectus supplement.
RESERVE ACCOUNT
If so specified in the accompanying prospectus supplement, support for a
series or one or more of the related classes or any related enhancement will be
provided by the establishment of an account, referred to as the "Reserve
Account." The reserve account may be funded, to the extent provided in the
accompanying prospectus supplement, by an initial cash deposit, the retention of
periodic distributions of principal or interest or both otherwise payable to one
or more classes of notes, including the subordinated notes, or the provision of
a letter of credit, guarantee, insurance policy or other form of credit or any
combination of these arrangements. The reserve account will be established to
assist with the subsequent distribution of principal or interest on the notes of
that series or the related class or any other amount owing on any related
enhancement in the manner provided in the accompanying prospectus supplement.
DESCRIPTION OF THE PURCHASE AGREEMENTS
The following summary is qualified in its entirety by the receivables
purchase agreement to be entered into by the originator and the transferor (the
"Receivables Purchase Agreement"). A forms of this agreement is filed as
exhibits to the registration statement of which this prospectus is a part.
SALE OF RECEIVABLES. The receivables transferred to the trust by the
transferor were acquired by the transferor from the originator pursuant to the
receivables purchase agreement. In connection with the sale of the receivables
to the transferor, the originator will (1) file appropriate UCC financing
statements to evidence that sale and perfect the transferor's right, title and
interest in those receivables and (ii) indicate in its computer files that the
receivables have been sold to the transferor.
In connection with this sale of receivables to the transferor, the
originator will indicate in its files that those receivables have been sold to
the transferor by the originator and that those receivables will be sold or
transferred by the transferor to the trust. The records and agreements relating
to the accounts and receivables for the trust portfolio may not be segregated by
the originator from other documents and agreements relating to other credit
accounts and receivables. The originator and the transferor will file UCC
financing statements meeting the requirements of applicable law in each of the
jurisdictions necessary to perfect the ownership or security interest of the
transferor in those receivables. See "Risk Factors -Some liens would be given
priority over your notes which would cause delayed or reduced payments" and
"Certain Legal Aspects of the Receivables" in this prospectus.
REPRESENTATIONS AND WARRANTIES. In the receivables purchase agreement, the
originator represents and warrants to the transferor to the effect that, among
other things, as of the date of the receivables purchase agreement and, with
respect to any receivables in any designated additional accounts, as of the date
of designation of those additional accounts, it is duly organized and in good
standing and has the authority to consummate the transactions contemplated by
the receivables purchase agreement. In the receivables purchase agreement, the
originator additionally represents and warrants that as of the initial cut-off
date and, with respect to any receivables in any designated additional accounts,
as of each date of designation of those additional accounts, each receivable
transferred thereunder is an eligible receivable. In the event of a breach of
any representation and warranty set forth in the receivables purchase agreement
which results in the requirement that the transferor accept retransfer of an
ineligible receivable under the transfer and servicing agreement, then the
originator will repurchase that ineligible receivable from the transferor on the
date of the retransfer. The purchase price for the ineligible receivables will
be the principal amount of those receivables plus applicable finance charges.
The originator also represents and warrants to the transferor in the
receivables purchase agreement that, among other things, as of the date of the
receivables purchase agreement and, with respect to any receivables in any
designated additional accounts, as of each date of designation of those
additional accounts (a) the receivables purchase agreement constitutes a valid
and binding obligation of the originator and (b) the receivables purchase
agreement constitutes a valid sale to the transferor of all right, title and
interest of the originator in and to the receivables existing in the accounts as
of the related cut-off date and in the related proceeds. If the breach of any of
the representations or warranties described in this paragraph results in the
obligation of the transferor under the transfer and servicing agreement to
accept retransfer of the receivables, the originator will repurchase the
receivables retransferred to the transferor for an amount of cash at least equal
to the amount of cash the transferor is required to deposit under the transfer
and servicing agreement in connection with the retransfer.
AMENDMENTS. The receivables purchase agreement may be amended by the
transferor and the originator without the consent of the noteholders. No
amendment, however, may have a materially adverse effect on the interest of the
noteholders and no amendment may change, modify, delete or add any other
obligation of the originator or the transferor unless written confirmation is
received from each rating agency that the amendment will not result in a
reduction or withdrawal of its rating of any outstanding series or class.
TERMINATION. The receivables purchase agreement will terminate immediately
after the trust terminates. In addition, if a receiver or conservator is
appointed for the originator or the originator becomes a debtor in a bankruptcy
case or other liquidation, bankruptcy, insolvency or similar events occur, the
originator will immediately cease to sell receivables to the transferor and
promptly give notice of that event to the transferor and the indenture trustee,
unless the bankruptcy court, receiver or conservator instructs otherwise.
NOTE RATINGS
Any rating of the notes by a rating agency will indicate:
o its view on the likelihood that noteholders will receive required
interest and principal payments; and
o its evaluation of the receivables and the availability of any credit
enhancement for the notes.
Among the things a rating will not indicate are:
o the likelihood that interest or principal payments will be paid on a
scheduled date;
o the likelihood that a pay out event will occur;
o the likelihood that a U.S. withholding tax will be imposed on non-U.S.
noteholders;
o the marketability of the notes;
o the market price of the notes; or
o whether the notes are an appropriate investment for any purchaser.
A rating will not be a recommendation to buy, sell or hold the notes. A
rating may be lowered or withdrawn at any time by a rating agency.
The transferor will request a rating of the notes offered by this
prospectus and the accompanying prospectus supplement from at least one rating
agency. Rating agencies other than those requested could assign a rating to the
notes and, if so, that a rating could be lower than any rating assigned by a
rating agency chosen by the transferor. Except as otherwise expressly stated,
any reference in this prospectus or the accompanying prospectus supplement to a
"Rating Agency" refers to a rating agency selected by the transferor to rate the
notes of a series or class issued by the trust.
CERTAIN LEGAL ASPECTS OF THE RECEIVABLES
TRANSFER OF RECEIVABLES
The originator, in the receivables purchase agreement will represent and
warrant that its transfer of receivables constitutes a valid sale and assignment
of all of its right, title and interest in and to the receivables. In the
transfer and servicing agreement, the transferor will represent and warrant that
its transfer of receivables constitutes a valid sale and assignment of all of
its right, title and interest in and to the receivables, except for its interest
as the holder of the transferor certificate, or creates in favor of the trust a
valid first-priority perfected security interest in the transferor's rights in
the receivables in existence at the time that the trust is formed or at the time
that receivables in additional accounts are transferred, as the case may be, and
a valid first-priority perfected security interest in the transferor's rights in
the receivables arising in accounts already designated for the trust on and
after their creation, in each case until termination of the trust.
Each of the transferor in the transfer and servicing agreement and the
originator in the receivables purchase agreement will represent that the
receivables are "accounts" or "general intangibles" for purposes of the UCC.
Both the sale of accounts and the transfer of accounts as security for an
obligation are subject to the provisions of Article 9 of the UCC. In addition, a
transfer of general intangibles as security for an obligation is subject to the
provisions of Article 9 of the UCC. Therefore, the originator and the transferor
will file appropriate UCC financing statements to perfect the respective
transferee's security interest in the receivables. Article 9 of the UCC,
however, does not apply to the sale of general intangibles. As a consequence,
some other action under applicable state law may be required in order to perfect
a sale against the interests of third parties.
There are limited circumstances in which prior or subsequent transferees of
receivables coming into existence after a series closing date could have an
interest in receivables with priority over the trust's interest. Under the
receivables purchase agreement, however, the originator will represent and
warrant that it has transferred the receivables to the transferor free and clear
of the lien of any third party (other than the indenture trustee). In addition,
the originator will covenant that it will not sell, pledge, assign, transfer or
grant any lien on any receivable (or any interest in any receivables) other than
to the transferor. Similarly, under the transfer and servicing agreement, the
transferor will represent and warrant that it has transferred the receivables to
the trust free and clear of the lien of any third party (other than the
indenture trustee), and the transferor will covenant that it will not sell,
pledge, assign, transfer, or grant any lien on any receivable (or any interest
in any receivable) other than to the trust. Nevertheless, a tax, governmental or
other nonconsensual lien on property of the transferor or the originator arising
prior to the time a receivable comes into existence may have priority over the
interest of the trust in the receivable. Furthermore, if the FDIC were appointed
as a receiver or conservator of the originator, administrative expenses of the
receiver or conservator may have priority over the interest of the trust in the
receivables.
For as long as the conditions specified in the related prospectus
supplement are satisfied, cash collections held by the servicer may be
commingled and used for the benefit of the servicer prior to each distribution
date and, in the event of the insolvency or bankruptcy of the servicer or, in
specified circumstances, the lapse of time periods, the trust may not have a
first-priority perfected security interest in these collections. In this event,
the amount payable to you could be lower than the outstanding principal and
accrued interest on the notes, thus resulting in losses to you. However, if the
conditions specified in the related prospectus supplement are not satisfied, the
servicer will deposit collections directly into the collection account within
two business days of each date of processing.
CERTAIN MATTERS RELATING TO CONSERVATORSHIP, RECEIVERSHIP AND BANKRUPTCY
The originator may be regulated and supervised by the Office of the
Comptroller of the Currency, which is authorized to appoint the FDIC as
conservator or receiver if events occur relating to the originator's financial
condition or the propriety of its actions. In addition, the FDIC could appoint
itself as conservator or receiver for the originator.
To the extent that
o the receivables purchase agreement complies with the regulatory
requirements of the FDIA,
o the security interest granted under the receivables purchase agreement
was perfected before the FDIC is appointed as conservator or receiver
for the originator, and
o the security interest was not taken in contemplation of the
originator's insolvency or with the intent to hinder, delay or defraud
the originator or its creditors,
the FDIA provides that the security interest should be respected. In addition,
opinions and policy statements issued by the FDIC suggest that, because of the
manner in which these transactions are structured, the FDIC would respect the
security interest granted by the originator in the receivables. Nevertheless, if
the FDIC were to assert a contrary position, or were to require the indenture
trustee to go through the administrative claims procedure established by the
FDIC in order to obtain payments on the notes, or were to request a stay of any
actions by the indenture trustee to enforce the receivables purchase agreement
or the notes against the originator, delays in payments on outstanding series of
notes and possible reductions in the amount of those payments could occur.
In addition, the FDIC as conservator or receiver for the originator could
repudiate the receivables purchase agreement. The FDIA would limit the damages
for any repudiation to the trust's "actual direct compensatory damages"
determined as of the date that the FDIC were appointed as conservator or
receiver for the originator. The FDIC, moreover, could delay its decision
whether to repudiate the receivables purchase agreement for a reasonable period
following its appointment as conservator or receiver for the originator.
Therefore, if the FDIC as conservator or receiver for the originator were to
repudiate the receivables purchase agreement, the amount payable to you could be
lower than the outstanding principal and accrued interest on the notes, thus
resulting in losses to you.
In addition, regardless of the terms of the indenture, the FDIC as
conservator or receiver for the originator may have the power to prevent the
commencement of an early amortization period, to prevent or limit the early
liquidation of the receivables and termination of the trust, or to require the
continued transfer of new principal receivables. Regardless of the instructions
of those authorized to direct the indenture trustee's action, moreover, the FDIC
as conservator or receiver for the originator may have the power to require the
early liquidation of the receivables, to require the early termination of the
trust and the retirement of the notes, or to prohibit or limit the continued
transfer of new principal receivables.
In the event of the bankruptcy of the servicer, the bankruptcy court may
have the power to prevent either the indenture trustee or the noteholders from
appointing a successor servicer. In addition, if the servicer becomes a debtor
in a bankruptcy case, the servicer's rights under the transfer and servicing
agreement (including the right to service the receivables) would be property of
the estate of the servicer and, under the Bankruptcy Code, subject to the
servicer's right to assume or reject the agreement. See "Description of the
Notes -Servicer Default" in this prospectus.
The transferor has been or will be structured so that (1) the filing of a
voluntary or involuntary petition for relief by or against the transferor under
the Bankruptcy Code and (2) the substantive consolidation of the assets and
liabilities of the transferor with those of its parent is unlikely. The
transferor is a separate, limited purpose entity, and its organizational
documents contains limitations on the nature of its business and restrictions on
its ability to commence a voluntary case or proceeding under the Bankruptcy Code
or similar laws without the prior unanimous consent of all of its directors. In
addition, the indenture trustee will covenant in the indenture that it will not
at any time institute against the transferor any bankruptcy, insolvency or
similar proceedings under the Bankruptcy Code or similar laws. Nevertheless, if
the transferor were to become a debtor in a bankruptcy case and if a bankruptcy
trustee or creditor of the transferor or the transferor as debtor-in-possession
were to take the position that the transfer of the receivables by the transferor
to the trust should be characterized as a pledge of those receivables, or if the
assets and liabilities of the transferor were substantively consolidated with
those of an entity in bankruptcy, then delays in payments on the notes and
possible reductions in the amount of those payments could result.
If bankruptcy, insolvency or similar proceedings under the Bankruptcy Code
or similar laws occur with respect to the transferor or the originator (if it is
not a bank), the transferor or the originator will promptly notify the indenture
trustee and a pay out event will occur with respect to each series. Pursuant to
the transfer and servicing agreement, newly created receivables will not be
transferred to the trust on and after this event. Any principal receivables
transferred to the trust prior to the event, as well as collections on those
principal receivables and finance charge receivables accrued at any time with
respect to those principal receivables, will continue to be part of the trust
assets and will be applied as specified above in "Description of the Notes
-Application of Collections" and in the accompanying prospectus supplement.
The bankruptcy court, however, may have the power to delay this procedure
or to require the continued transfer of principal receivables to the trust. See
"Risk Factors -If a conservator or receiver were appointed for the originator,
or if the transferor or the originator became a debtor in a bankruptcy case,
delays or reductions in payment of your notes could occur" in this prospectus.
CONSUMER PROTECTION LAWS
The relationship of the consumer and the provider of consumer credit is
extensively regulated by federal and state consumer protection laws. With
respect to credit accounts, the most significant federal laws include the
Federal Truth-in-Lending, Equal Credit Opportunity, Fair Credit Reporting and
Fair Debt Collection Practices Acts. These statutes impose various disclosure
requirements either before or when an account is opened, or both, and at the end
of monthly billing cycles, and, in addition, limit account holder liability for
unauthorized use prohibit discriminatory practices in extending credit, and
regulate practices followed in collections. In addition, account holders are
entitled under these laws to have payments and credits applied to the revolving
credit account promptly and to request prompt resolution of billing errors.
Congress and the states may enact new laws and amendments to existing laws to
regulate further the consumer revolving credit industry. The trust may be liable
for violations of consumer protection laws that apply to the receivables, either
as assignee from the transferor with respect to obligations arising before
transfer of the receivables to the trust or as the party directly responsible
for obligations arising after the transfer. In addition, an account holder may
be entitled to assert these violations by way of set-off against the obligation
to pay the amount of receivables owing. All receivables that were not created in
compliance in all material respects with the requirements of law (if
noncompliance has a material adverse effect on the noteholders' interest) will
be reassigned to the transferor. The servicer has also agreed in the transfer
and servicing agreement to indemnify the trust, among other things, for any
liability arising from these violations. For a discussion of the trust's rights
if the receivables were not created in compliance in all material respects with
applicable laws, see "Description of the Notes -Representations and Warranties"
in this prospectus.
Application of federal and state bankruptcy and debtor relief laws would
affect the interests of the noteholders if these laws result in any receivables
being charged-off as uncollectible. See "Description of the Notes -Defaulted
Receivables; Rebates and Fraudulent Charges Investor Charge-Offs" in this
prospectus.
FEDERAL INCOME TAX CONSEQUENCES
The following summary describes generally the material United States
federal income tax consequences of an investment in the notes. Additional
federal income tax considerations relevant to a particular series may be set
forth in the accompanying prospectus supplement. The following summary has been
prepared and reviewed by Stroock & Stroock Lavan LLP as special tax counsel to
the Issuer ("Special Tax Counsel"). The summary is based on the Internal Revenue
Code of 1986, as amended (the "CODE") as of the date of this prospectus, and
existing final, temporary and proposed Treasury regulations, revenue rulings and
judicial decisions, all of which are subject to prospective and retroactive
changes. The summary is addressed only to original purchasers of the notes,
deals only with notes held as capital assets within the meaning of Section 1221
of the Code and, except as specifically set forth below, does not address tax
consequences of holding notes that may be relevant to investors in light of
their own investment circumstances or their special tax situations, including
financial institutions, tax-exempt organizations, life insurance companies,
dealers in securities, non-U.S. persons, or investors holding the notes as part
of a conversion transaction, as part of a hedge or hedging transaction, or as a
position in a straddle for tax purposes. Further, this discussion does not
address alternative minimum tax consequences or any tax consequences to holders
of interests in a noteholder. Special Tax Counsel is of the opinion that the
following summary of federal income tax consequences is correct in all material
respects. An opinion of Special Tax Counsel, however, is not binding on the
Internal Revenue Service ("IRS") or the courts, and no ruling on any of the
issues discussed below will be sought from the IRS. Moreover, there are no
authorities on similar transactions involving interests issued by an entity with
terms similar to those of the notes described in this prospectus. Accordingly,
persons considering the purchase of notes should consult their own tax advisors
with regard to the United States federal income tax consequences of an
investment in the notes and the application of United States federal income tax
laws, as well as the laws of any state, local or foreign taxing jurisdictions,
to their particular situations.
TAX CHARACTERIZATION OF THE TRUST AND THE NOTES
TREATMENT OF THE TRUST AS AN ENTITY NOT SUBJECT TO TAX. Special Tax Counsel
is of the opinion that, although no transaction closely comparable to that
contemplated in this prospectus has been the subject of any Treasury Regulation,
revenue ruling or judicial decision, the trust will not be classified as an
association or as a publicly traded partnership taxable as a corporation for
federal income tax purposes. As a result, the trust will not be subject to
federal income tax. However, as discussed above, this opinion is not binding on
the IRS and no assurance can be given that this characterization will prevail.
THE PRECISE TAX CHARACTERIZATION OF THE TRUST FOR FEDERAL INCOME TAX
PURPOSES IS NOT evident. It might be viewed as merely holding assets on behalf
of the transferor as collateral for notes issued by the transferor. On the other
hand, the trust could be viewed as a separate entity for tax purposes issuing
its own notes. This distinction, however, should not have a significant tax
effect on noteholders except as stated below under "Possible Alternative
Characterizations."
TREATMENT OF THE NOTES AS DEBT. Special Tax Counsel is of the opinion that,
although no transaction closely comparable to that contemplated in this
prospectus has been the subject of any Treasury regulation, revenue ruling or
judicial decision, the notes will be characterized as debt for United States
federal income tax purposes. Additionally, the trust will agree by entering into
the Indenture, and the noteholders will agree by their purchase and holding of
notes, to treat the notes as debt for United States federal income tax purposes.
POSSIBLE ALTERNATIVE CHARACTERIZATIONS. If, contrary to the opinion of
Special Tax Counsel, the IRS successfully asserted that a series or class of
notes did not represent debt for United States federal income tax purposes,
those notes might be treated as equity interests in the trust or some other
entity. If so treated, investors could be treated either as partners in a
partnership or, alternatively, as shareholders in a taxable corporation.
Treatment of a noteholder as a partner could have adverse tax consequences to
holders; for example, income to foreign persons generally would be subject to
United States tax and United States tax return filing and withholding
requirements, and individual holders might be subject to limitations on their
ability to deduct their share of partnership expenses. If notes instead were
treated as corporate stock, the taxable corporation would not be able to reduce
its taxable income by deductions for interest expense on notes recharacterized
as equity, and any increase in the corporate tax imposed with respect to the
corporation could materially reduce cash available to make payments on the
notes; further, noteholders might not be entitled to any dividends received
deduction in respect of payments of interest on notes treated as dividends. In
addition, even if the notes are treated as debt, the trust is also able to issue
other securities which may be treated as debt or as equity interests in the
trust. The issuance of securities requires the delivery of a new opinion of
counsel generally to the effect that the issuance will not cause the trust to
become taxable as a separate entity for federal income tax purposes; however,
any new opinion would not bind the IRS, and the trust could become taxable as a
corporation as a result of the issuance, potentially diminishing cash available
to make payments on the notes. Prospective investors should consult with their
own tax advisors with regard to the consequences of each possible alternative
characterization to them in their particular circumstances; the following
discussion assumes that the characterization of the notes as debt is correct.
CONSEQUENCES TO HOLDERS OF THE OFFERED NOTES
Interest and Original Issue Discount. In general, stated interest on a note
will be includible in gross income as it accrues or is received in accordance
with an noteholder's usual method of tax accounting. If a class of notes is
issued with original issue discount ("OID"), the provisions of Sections 1271
through 1273 and 1275 of the Code will apply to those notes. Under those
provisions, a holder of a note (including a cash basis holder) generally would
be required to include the OID on a note in income for federal income tax
purposes on a constant yield basis, resulting in the inclusion of OID in income
in advance of the receipt of cash attributable to that income. In general, a
note will be treated as having OID to the extent that its "stated redemption
price" exceeds its "issue price," if the excess equals or exceeds 0.25 percent
multiplied by the weighted average life of the note (determined by taking into
account the number of complete years following issuance until payment is made
for each partial principal payment). Under Section 1272(a)(6) of the Code,
special provisions apply to debt instruments on which payments may be
accelerated due to prepayments of other obligations securing those debt
instruments. However, no regulations have been issued interpreting those
provisions, and the manner in which those provisions would apply to the notes is
unclear, but the application of Section 1272(a)(6) could affect the rate of
accrual of OID and could have other consequences to holders of the notes.
Additionally, the IRS could take the position based on Treasury regulations that
none of the interest payable on a note is "unconditionally payable" and hence
that all of the interest should be included in the note's stated redemption
price at maturity. If sustained, the treatment should not significantly affect
tax liabilities for most holders of the notes, but prospective noteholders
should consult their own tax advisors concerning the impact to them in their
particular circumstances. The trust intends to take the position that interest
on the notes constitutes "qualified stated interest" and that the above
consequences do not apply.
MARKET DISCOUNT. A holder of a note who purchases an interest in a note at
a discount that exceeds any OID not previously includible in income may be
subject to the "market discount" rules of Sections 1276 through 1278 of the
Code. These rules provide, in part, that gain on the sale or other disposition
of a note and partial principal payments on a note are treated as ordinary
income to the extent of accrued market discount. The market discount rules also
provide for deferral of interest deductions with respect to debt incurred to
purchase or carry a note that has market discount.
MARKET PREMIUM. A holder of a note who purchases an interest in a note at a
premium may elect to amortize the premium against interest income over the
remaining term of the note in accordance with the provisions of Section 171 of
the Code.
DISPOSITION OF THE NOTES; DEFEASANCE. Upon the sale, exchange or retirement
of a note, the holder of the note generally will recognize taxable gain or loss
in an amount equal to the difference between the amount realized on the
disposition (other than amounts attributable to accrued interest) and the
holder's adjusted tax basis in the note. A taxable exchange of a note could also
occur as a result of the transferor's substitution of money or investments for
the receivables in the trust portfolio. See "Description of the Notes
-Defeasance" in this prospectus. The holder's adjusted tax basis in the note
generally will equal the cost of the note to this holder, increased by any
market or original issue discount previously included in income by this holder
with respect to the note, and decreased by the amount of any bond premium
previously amortized and any payments of principal or OID previously received by
this holder with respect to the note. Any gain or loss generally will be capital
gain or loss, except to the extent of accrued market discount not previously
included in income, and will be long-term capital gain or loss if at the time of
sale the note has been held for more than one year.
FOREIGN HOLDERS. Under United States federal income tax law now in effect,
payments of interest by the trust to a holder of a note who, as to the United
States, is a nonresident alien individual or a foreign corporation (a "foreign
person") generally will be considered "portfolio interest," and generally will
not be subject to United States federal income tax and withholding tax, provided
the interest is not effectively connected with the conduct of a trade or
business within the United States by the foreign person and the foreign person
(1) is not for United States federal income tax purposes (a) actually or
constructively a "10 percent shareholder" of the transferor or the trust, (b) a
"controlled foreign corporation" with respect to which the transferor or the
trust is a "related person" within the meaning of the Code, or (c) a bank
extending credit pursuant to a loan agreement entered into in the ordinary
course of its trade or business, and (2) provides the person who is otherwise
required to withhold United States tax with respect to the notes with an
appropriate statement (on IRS Form W-8 or a substitute form), signed under
penalties of perjury, certifying that the beneficial owner of the note is a
foreign person and providing the foreign person's name and address. If a note is
held through a securities clearing organization or other financial institutions
(as is expected to be the case unless definitive notes are issued), the
organization or institution may provide the relevant signed statement generally
to the withholding agent; in that case, however, the signed statement generally
must be accompanied by an IRS Form W-8 or substitute form provided by the
foreign person that owns the note. If the interest is not portfolio interest,
then it will be subject to United States federal income and withholding tax at a
rate of 30%, unless reduced or eliminated pursuant to an applicable tax treaty
or the interest is effectively connected with the conduct of a trade or business
within the United States and, in either case, the appropriate statement has been
provided. The U.S. Treasury Department recently issued final Treasury
regulations which will revise some of the foregoing procedures whereby a foreign
person may establish an exemption from withholding generally beginning January
1, 2001; foreign persons should consult their tax advisors concerning the impact
to them, if any, of the revised procedures.
Any capital gain realized on the sale, redemption, retirement or other
taxable disposition of a note by a foreign person will be exempt from United
States federal income tax and withholding tax, provided that (1) the gain is not
effectively connected with the conduct of a trade or business in the United
States by the foreign person, and (2) in the case of an individual foreign
person, the individual is not present in the United States for 183 days or more
in the taxable year.
Backup Withholding. Payments of principal and interest, as well as payments
of proceeds from the sale, retirement or disposition of a note, may be subject
to "backup withholding" tax under Section 3406 of the Code at a rate of 31% if a
recipient of these payments fails to furnish to the payor identifying
information. Any amounts deducted and withheld would be allowed as a credit
against the recipient's United States federal income tax, provided appropriate
proof is provided under rules established by the IRS. Furthermore, penalties may
be imposed by the IRS on a recipient of payments that is required to supply
information but that does not do so in the proper manner. Backup withholding
will not apply with respect to payments made to exempt recipients, including as
corporations and financial institutions. Holders of the notes should consult
their tax advisors regarding their qualification for exemption from backup
withholding and the procedure for obtaining an exemption.
THE UNITED STATES FEDERAL INCOME TAX DISCUSSION SET FORTH ABOVE IS INCLUDED
FOR GENERAL INFORMATION ONLY, MAY NOT BE APPLICABLE DEPENDING UPON A HOLDER'S
PARTICULAR TAX SITUATION, AND DOES NOT PURPORT TO ADDRESS THE ISSUES DESCRIBED
WITH THE DEGREE OF SPECIFICITY THAT WOULD BE PROVIDED BY A TAXPAYER'S OWN TAX
ADVISOR. PROSPECTIVE PURCHASERS SHOULD CONSULT THEIR OWN TAX ADVISORS WITH
RESPECT TO THE TAX CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND
DISPOSITION OF THE NOTES AND THE POSSIBLE EFFECTS OF CHANGES IN FEDERAL TAX
LAWS.
STATE AND LOCAL TAX CONSEQUENCES
The discussion above does not address the taxation of the trust or the tax
consequences of the purchase, ownership or disposition of an interest in the
notes under any state or local tax law. Each investor should consult its own tax
adviser regarding state and local tax consequences. ERISA CONSIDERATIONS
Subject to the considerations described below and in the accompanying
prospectus supplement, the notes may be purchased by, on behalf of, or with
"plan assets" of any employee benefit or other plan that is subject to the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"), or
Section 4975 of the Internal Revenue Code of 1986, as amended (each, a "PLAN").
Any Plan fiduciary that proposes to cause a Plan to acquire any of the notes
should consult with its counsel with respect to the potential consequences under
ERISA and the Code of the Plan's acquisition and ownership of the Notes. See
"ERISA Considerations" in the accompanying prospectus supplement.
Section 406 of ERISA and Section 4975 of the Code prohibit Plans from
engaging in transactions involving "plan assets" with persons that are "parties
in interest" under ERISA or "disqualified persons" under the Code (collectively,
"Parties In Interest") with respect to the Plan. A violation of these
"prohibited transaction" rules may generate excise tax and other liabilities
under ERISA and Section 4975 of the Code for these persons, unless a statutory,
regulatory or administrative exemption is available.
Some employee benefit plans, including governmental plans (as defined in
Section 3(32) of ERISA) and some church plans (as defined in Section 3(33) of
ERISA), are not subject to the requirements of ERISA or Section 4975 of the
Code. Accordingly, assets of these plans may be invested in the notes without
regard to the ERISA considerations described in this prospectus, subject to the
provisions or other applicable federal and state law. However, any plan that is
qualified and exempt from taxation under Sections 401(a) and 501(a) of the Code
is subject to the prohibited transaction rules set forth in Section 503 of the
Code.
Fiduciaries or other persons contemplating purchasing the notes on behalf
or with "plan assets" of any Plan should consult their own counsel regarding
whether the trust assets represented by the notes would be considered "plan
assets," the consequences that would apply if the trust's assets were considered
"plan assets," and the availability of exemptive relief from the prohibited
transaction rules.
Finally, Plan fiduciaries and other Plan investors should consider the
fiduciary standards under ERISA or other applicable law in the context of the
Plan's particular circumstances before authorizing an investment of a portion of
the Plan's assets in the notes. Accordingly, among other factors, Plan
fiduciaries and other Plan investors should consider whether the investment (1)
satisfies the diversification requirement of ERISA or other applicable law, (2)
is in accordance with the Plan's governing instruments, and (3) is prudent in
light of the "Risk Factors" and other factors discussed in the accompanying
prospectus supplement.
PLAN OF DISTRIBUTION
Subject to the terms and conditions set forth in an underwriting agreement
to be entered into with respect to each series of notes, the transferor will
cause the notes to be sold by the trust to each of the underwriters named in
that underwriting agreement and in the accompanying prospectus supplement, and
each of those underwriters will severally agree to purchase from the trust, the
principal amount of notes set forth in that underwriting agreement and in the
accompanying prospectus supplement (subject to proportional adjustment on the
terms and conditions set forth in the related underwriting agreement in the
event of an increase or decrease in the aggregate amount of notes offered by
this prospectus and by the accompanying prospectus supplement).
In each underwriting agreement, the several underwriters will agree,
subject to the terms and conditions set forth in that underwriting agreement, to
purchase all the notes offered by this prospectus and by the accompanying
prospectus supplement if any of those notes are purchased. In the event of a
default by any underwriter, each underwriting agreement will provide that,
purchase commitments of the nondefaulting underwriters may be increased or the
underwriting agreement may be terminated. Each prospectus supplement will set
forth the price at which each series of notes or class being offered initially
will be offered to the public and any concessions that may be offered to dealers
participating in the offering of those notes. After the initial public offering,
the public offering price and the concessions may be changed.
Each underwriting agreement will provide that the transferor will indemnify
the related underwriters against liabilities, including liabilities under the
Securities Act of 1933, as amended.
The place and time of delivery for any series of notes in respect of which
this prospectus is delivered will be set forth in the accompanying prospectus
supplement.
REPORTS TO NOTEHOLDERS
The servicer will prepare monthly and annual reports that will contain
information about the trust. The financial information contained in the reports
will not be prepared in accordance with generally accepted accounting
principles. Unless and until definitive notes are issued, the reports will be
sent to Cede & Co. which is the nominee of The Depository Trust Company and the
registered holder of the notes. No financial reports will be sent to you. See
"Description of the Notes -Book-Entry Registration," "-Reports to Noteholders"
and "-Evidence as to Compliance" in this prospectus.
WHERE YOU CAN FIND MORE INFORMATION
We filed a registration statement relating to the notes with the SEC. This
prospectus is part of the registration statement, but the registration statement
includes additional information.
The servicer will file with the SEC all required annual, monthly and
special SEC reports and other information about the trust.
You may read and copy any reports, statements or other information we file
at the SEC's public reference room in Washington, D.C. You can request copies of
these documents, upon payment of a duplicating fee, by writing to the SEC.
Please call the SEC at (800) SEC-0330 for further information on the operation
of the public reference rooms. Our SEC filings are also available to the public
on the SEC Internet site (http://www.sec.gov.).
The SEC allows us to "incorporate by reference" information we file with
it, which means that we can disclose important information to you by referring
you to those documents. The information incorporated by reference is considered
to be part of this prospectus. Information that we file later with the SEC will
automatically update the information in this prospectus. In all cases, you
should rely on the later information over different information included in this
prospectus or the accompanying prospectus supplement. We incorporate by
reference any future annual, monthly and special SEC reports and proxy materials
filed by or on behalf of the trust until we terminate our offering of the notes.
As a recipient of this prospectus, you may request a copy of any document
we incorporate by reference, except exhibits to the documents (unless the
exhibits are specifically incorporated by reference), at no cost, by writing or
calling us at: Asset Backed Securities Corporation, 11 Madison Avenue, New York,
NY 10010, telephone, (212) 325-2000.
<PAGE>
INDEX OF TERMS FOR PROSPECTUS
TERM PAGE
Addition Date............................................................24
Administrator.............................................................7
Adverse Effect...........................................................18
Cash Collateral Account..................................................50
Cash Collateral Guaranty.................................................50
Collection Account.......................................................26
Credit Enhancement Percentage............................................29
Cut-Off Date..............................................................8
Defaulted Accounts.......................................................29
Determination Date.......................................................31
Discount Option..........................................................26
Discount Percentage......................................................26
Eligible Account.........................................................21
Eligible Institution.....................................................27
Eligible Investments.....................................................27
Eligible Receivable......................................................22
Enhancement Invested Amount..............................................49
Finance Charge Receivables................................................8
Foreclosure Certificate..................................................43
Funding Period...........................................................28
Invested Amount..........................................................10
Investor Percentage......................................................10
Issuer....................................................................6
L/C Bank.................................................................50
Moody's..................................................................27
Owner Trustee.............................................................6
Paired Series............................................................33
Participations...........................................................23
Parties In Interest......................................................60
Pay Out Event............................................................33
Paying Agent.............................................................28
Pre-Funding Account......................................................28
Principal Funding Account................................................16
Principal Receivables.....................................................7
Qualified Account........................................................26
Rating Agency............................................................53
Receivables Purchase Agreement...........................................51
Required Minimum Principal Balance.......................................19
Required Transferor Interest.............................................30
Reserve Account..........................................................51
Securities Act...........................................................17
Securities Intermediary..................................................26
Series Enhancer..........................................................37
Servicer Default.........................................................36
Special Funding Account..................................................26
Special Tax Counsel......................................................56
Spread Account...........................................................51
Standard & Poor's........................................................27
Supplemental Certificate.................................................35
Tax Opinion..............................................................18
Transferor Certificate...................................................11
Transferor Interest......................................................11
Transferor Percentage....................................................11
Trust.....................................................................6
Trust Portfolio...........................................................7
Trust Termination Date...................................................33
Unallocated Principal Collections........................................30
<PAGE>
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
The globally offered Credit Card Master Note Trust Asset Backed Notes (the
"global securities") to be issued in series from time to time (each, a "series")
will be available only in book-entry form. Investors in the global securities
may, as specified in the related prospectus supplement hold those global
securities through any of The Depository Trust Company ("DTC"), Clearstream,
Luxembourg or Euroclear. The global securities will be tradable as home market
instruments in both the European and U.S. domestic markets. Initial settlement
and all secondary trades will settle in same-day funds.
Secondary market trading between investors holding global securities
through Clearstream, Luxembourg and Euroclear will be conducted in the ordinary
way in accordance with their normal rules and operating procedures and in
accordance with conventional eurobond practice (i.e., seven calendar day
settlement).
Secondary market trading between investors holding global securities
through DTC will be conducted according to the rules and procedures applicable
to U.S. corporate debt obligations.
Secondary cross-market trading between Clearstream, Luxembourg or Euroclear
and DTC participants holding notes will be effected on a
delivery-against-payment basis through the respective depositaries of
Clearstream, Luxembourg and Euroclear (in this capacity) and as DTC
participants.
Non-U.S. holders (as described below) of global securities will be subject
to U.S. withholding taxes unless the holders meet specified requirements and
deliver appropriate U.S. tax documents to the securities clearing organizations
or their participants.
INITIAL SETTLEMENT
All global securities will be held in book-entry form by DTC in the name of
Cede & Co. as nominee of DTC. Investors' interests in the global securities will
be represented through financial institutions acting on their behalf as direct
and indirect participants in DTC. As a result, Clearstream, Luxembourg and
Euroclear will hold positions on behalf of their participants through their
respective depositaries, which in turn will hold positions in accounts as DTC
participants.
Investors electing to hold their global securities through DTC (other than
through accounts at Clearstream, Luxembourg or Euroclear) will follow the
settlement practices applicable to U.S. corporate debt obligations. Investor
securities custody accounts will be credited with their holdings against payment
in same-day funds on the settlement date.
Investors electing to hold their global securities through Clearstream,
Luxembourg or Euroclear accounts will follow the settlement procedures
applicable to conventional eurobonds in registered form. Global securities will
be credited to the securities custody accounts on the settlement date against
payment for value on the settlement date.
SECONDARY MARKET TRADING
Because the purchaser determines the place of delivery, it is important to
establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
Trading between DTC Participants. Secondary market trading between DTC
participants (other than Citibank, N.A. ("Citibank") and Morgan Guaranty Trust
Company of New York ("Morgan") as depositories for Clearstream, Luxembourg and
Euroclear, respectively) will be settled using the procedures applicable to U.S.
corporate debt obligations in same-day funds.
Trading between Clearstream, Luxembourg Customers and/or Euroclear
Participants. Secondary market trading between Clearstream, Luxembourg customers
or Euroclear participants will be settled using the procedures applicable to
conventional eurobonds in same-day funds.
Trading between DTC seller and Clearstream, Luxembourg or Euroclear
purchaser. When global securities are to be transferred from the account of a
DTC participant (other than Citibank and Morgan as depositories for Clearstream,
Luxembourg and Euroclear, respectively) to the account of a Clearstream,
Luxembourg customer or a Euroclear participant, the purchaser must send
instructions to Clearstream, Luxembourg prior to settlement date 12:30.
Clearstream, Luxembourg or Euroclear, as the case may be, will instruct Citibank
or Morgan, respectively, to receive the global securities for payment. Payment
will then be made by Citibank or Morgan, as the case may be, to the DTC
participant's account against delivery of the global securities. After
settlement has been completed, the global securities will be credited to the
respective clearing system and by the clearing system, in accordance with its
usual procedures, to the Clearstream, Luxembourg customer's or Euroclear
participant's account. Credit for the global securities will appear the next day
(European time) and the cash debit will be back-valued to, and the interest on
the global securities will accrue from, the value date (which would be the
preceding day when settlement occurred in New York). If settlement is not
completed on the intended value date (i.e., the trade fails), the Clearstream,
Luxembourg or Euroclear cash debit will be valued instead as of the actual
settlement date.
Clearstream, Luxembourg customers and Euroclear participants will need to
make available to the respective clearing systems the funds necessary to process
same-day funds settlement. The most direct means of doing so is to pre-position
funds for settlement, either from cash on hand or existing lines of credit, as
they would for any settlement occurring within Clearstream, Luxembourg or
Euroclear. Under this approach, they may take on credit exposure to Clearstream,
Luxembourg or Euroclear until the global securities are credited to their
accounts one day later.
As an alternative, if Clearstream, Luxembourg or Euroclear has extended a
line of credit to them, Clearstream, Luxembourg customers or Euroclear
participants can elect not to pre-position funds and allow that credit line to
be drawn upon the finance settlement. Under this procedure, Clearstream,
Luxembourg customers or Euroclear participants purchasing global securities
would incur overdraft charges for one day, assuming they cleared the overdraft
when the global securities were credited to their accounts. However, interest on
the global securities would accrue from the value date. Therefore, in many cases
the investment income on the global securities earned during that one-day period
may substantially reduce or offset the amount of the overdraft charges, although
this result will depend on each Clearstream, Luxembourg customer's or Euroclear
participant's particular cost of funds.
Since the settlement is taking place during New York business hours, DTC
participants can employ their usual procedures for sending global securities to
Citibank or Morgan for the benefit of Clearstream, Luxembourg customers or
Euroclear participants. The sale proceeds will be available to the DTC seller on
the settlement date. Thus, to the DTC participant a cross-market transaction
will settle no differently from a trade between two DTC participants.
Trading between Clearstream, Luxembourg or Euroclear seller and DTC
purchaser. Due to time zone differences in their favor, Clearstream, Luxembourg
customers and Euroclear participants may employ their customary procedures for
transactions in which global securities are to be transferred by the respective
clearing system, through Citibank or Morgan, to another DTC participant. The
seller will send instructions to Clearstream, Luxembourg before settlement date
12:30. In these cases, Clearstream, Luxembourg or Euroclear will instruct
Citibank or Morgan, as appropriate, to credit the global securities to the DTC
participant's account against payment. The payment will then be reflected in the
account of the Clearstream, Luxembourg customer or Euroclear participant the
following day, and receipt of the cash proceeds in the Clearstream, Luxembourg
customer's or Euroclear participant's account would be back-valued to the value
date (which would be the preceding day, when settlement occurred in New York).
If the Clearstream, Luxembourg customer or Euroclear participant has a line of
credit with its respective clearing system and elects to draw on a line of
credit in anticipation of receipt of the sale proceeds in its account, the
back-valuation may substantially reduce or offset any overdraft charges incurred
over that one-day period. If settlement is not completed on the intended value
date (i.e., the trade fails), receipt of the cash proceeds in the Clearstream,
Luxembourg customer's or Euroclear participant's account would instead be valued
as of the actual settlement date.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of global securities holding securities through
Clearstream, Luxembourg or Euroclear (or through DTC if the holder has an
address outside the U.S.) will be subject to the 30% U.S. withholding tax that
generally applies to payments of interest (including original issue discount) on
registered debt issued by U.S. Persons, unless, under currently applicable law,
(1) each clearing system, bank or other financial institution that holds
customers' securities in the ordinary course of its trade or business in the
chain of intermediaries between the beneficial owner and the U.S. entity
required to withhold tax complies with applicable certification requirements and
(2) a beneficial owner takes one of the following steps to obtain an exemption
or reduced tax rate:
Exemption for non-U.S. Persons (Form W-8). Beneficial owners of notes that
are non-U.S. Persons generally can obtain a complete exemption from the
withholding tax by filing a signed Form W-8 (Certificate of Foreign Status). If
the information shown on Form W-8 changes, a new Form W-8 must be filed within
30 days of the change.
Exemption for non-U.S. Persons with effectively connected income (Form
4224). A non-U.S. Person, including a non-U.S. corporation or bank with a U.S.
branch, for which the interest income is effectively connected with its conduct
of a trade or business in the United States, can obtain an exemption from the
withholding tax by filing Form 4224 (Exemption from Withholding of Tax on Income
Effectively Connected with the Conduct of a Trade or Business in the United
States).
Exemption or reduced rate for non-U.S. Persons resident in treaty countries
(Form 1001). Non-U.S. Persons that are note owners residing in a country that
has a tax treaty with the United States can obtain an exemption or reduced tax
rate (depending on the treaty terms) by filing Form 1001 (Ownership, Exemption
or Reduced Rate Certificate). If the treaty provides only for a reduced rate,
withholding tax will be imposed at that rate unless the filer alternatively
files Form W-8. Form 1001 may be filed by the note owner or his agent.
Exemption for U.S. Persons (Form W-9). U.S. Persons can obtain a complete
exemption from the withholding tax by filing Form W-9 (Payer's Request for
Taxpayer Identification Number and Certification).
U.S. Federal Income Tax Reporting Procedure. The note owner of a global
security or, in the case of a Form 1001 or a Form 4224 filer, his agent, files
by submitting the appropriate form to the person through whom it holds (the
clearing agency, in the case of persons holding directly on the books of the
clearing agency). Form W-8 and Form 1001 are effective for three calendar years
and Form 4224 is effective for one calendar year.
The term "U.S. Person" means (1) a citizen or resident of the United
States, (2) a corporation or partnership organized in or under the laws of the
United States, any state of the fifty states, or any political subdivision of
either (including the District of Columbia), or (3) an estate or trust the
income of which is includible in gross income for United States tax purposes
regardless of its source. This summary does not deal with all aspects of U.S.
Federal income tax withholding that may be relevant to foreign holders of the
global securities. Investors are advised to consult their own tax advisors for
specific tax advice concerning their holding and disposing of the global
securities. Further, the U.S. Treasury Department has recently finalized new
regulations that will revise some aspects of the current system for withholding
on amounts paid to foreign persons. Under these regulations, interest or OID
paid to a nonresident alien would continue to be exempt from U.S. withholding
taxes (including backup withholding) provided that the holder complies with the
new certification procedures.
<PAGE>
____________ DEALER FLOORPLAN MASTER NOTE TRUST ____-___
Issuer
ASSET BACKED SECURITIES CORPORATION
Transferor
--------------------
Servicer
Series 200_-__
$
Class A Floating Rate Asset Backed Notes
$
Class B Floating Rate Asset Backed Notes
$
Class C Floating Rate Asset Backed Notes
--------------------
PROSPECTUS SUPPLEMENT
--------------------
----------
----------
<PAGE>
SUBJECT TO COMPLETION, DATED ________, 2000
PROSPECTUS SUPPLEMENT TO PROSPECTUS DATED _______, 2000
__________ DEALER FLOORPLAN MASTER NOTE TRUST 200_-_
ASSET BACKED SECURITIES CORPORATION
Transferor
----------------------
Servicer
The trust will issue the following classes of asset backed notes:
<TABLE>
<CAPTION>
CLASS A NOTES CLASS B NOTES CLASS C NOTES
<S> <C> <C> <C>
PRINCIPAL AMOUNT: $ $ $
INTEREST RATE: [Libor plus] __% per year [Libor plus] __% per year [Libor plus] __% per year
Monthly on the 17th, Monthly on the 17th, Monthly on the 17th,
INTEREST PAYMENT DATES: beginning, _______, 200_ beginning, _______, 200_ beginning, _______, 200_
EXPECTED PRINCIPAL PAYMENT
DATE: ______, 200_ ______, 200_ ______, 200_
LEGAL MATURITY DATE: ______, 200_ ______, 200_ ______, 200_
PRICE TO PUBLIC: $ (or %) $ (or %) $ (or %)
UNDERWRITING DISCOUNT: $ (or %) $ (or %) $ (or %)
PROCEEDS TO ISSUER: $ (or %) $ (or %) $ (or %)
</TABLE>
The Class B notes are subordinated to the Class A notes. The Class C notes are
subordinated to the Class A and Class B notes.
We expect to issue your series of notes on or about, _____ 200_. We will deliver
your series of notes in book-entry form.
YOU SHOULD CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE S-_ IN THIS
PROSPECTUS SUPPLEMENT AND ON PAGE _ IN THE PROSPECTUS.
The notes are obligations of __________ Dealer Floorplan Master Note Trust
200_-_ only and are not obligations of Asset Backed Securities Corporation,
_____________, _____________ or any other person.
Neither the Securities and Exchange Commission nor any state securities
commission has approved these notes or determined that this prospectus
supplement or the prospectus is accurate or complete. Any representation to the
contrary is a criminal offense.
CREDIT SUISSE FIRST BOSTON
____________, 2000
<PAGE>
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS PROSPECTUS SUPPLEMENT AND
THE ACCOMPANYING PROSPECTUS
We provide information to you about the notes in two separate
documents:
o the accompanying prospectus, which provides general information,
some of which may not apply to your series of notes, and
o this prospectus supplement, which describes the specific terms of
your series of notes.
If the terms of your series of notes vary between this prospectus
supplement and the accompanying prospectus, you should rely on the information
in this prospectus supplement.
You should rely only on the information provided in this prospectus
supplement and the accompanying prospectus, including the information
incorporated by reference. We have not authorized anyone to provide you with
different information. We are not offering the notes in any state where the
offer is not permitted.
We include cross references in this prospectus supplement and the
accompanying prospectus to captions in these materials where you can find
further related discussions. The following Table of Contents and the Table of
Contents in the accompanying prospectus provide the pages on which these
captions are located.
This prospectus supplement uses defined terms. You can find a listing
of the pages where definitions can be found under the caption "Index of Terms
for Prospectus Supplement" beginning on page S-__ in this prospectus supplement
and under the caption "Index of Terms for Prospectus" beginning on page __ in
the accompanying prospectus.
TABLE OF CONTENTS
PAGE
Transaction Summary......................................................S-
Summary of Terms.........................................................S-
Risk Factors.............................................................S-
_________'s Dealer Floorplan Portfolio...................................S-
The Trust Portfolio......................................................S-
Maturity Considerations..................................................S-
The Originator...........................................................S-
The Servicer ............................................................S-
The Transferor...........................................................S-
Description of Series Provisions.........................................S-
ERISA Considerations.....................................................S-
Underwriting.............................................................S-
Legal Matters............................................................S-
Index of Terms for Prospectus Supplement.................................S-
Annex I: Other Series Issued and Outstanding.............................S-
<PAGE>
<TABLE>
<CAPTION>
TRANSACTION SUMMARY
<S> <C> <C>
Trust: __________ Dealer Floorplan Master Note Trust 200_-_
Transferor: Asset Backed Securities Corporation
Originator: ___________
Servicer: ___________
Indenture Trustee: ___________
Owner Trustee: ___________
Closing Date: _______, 200_
Clearance and Settlement: DTC/Clearstream, Luxembourg/Euroclear
Servicing Fee Rate: ___%
CLASS A NOTES CLASS B NOTES CLASS C NOTES
Anticipated Ratings
(Moody's/Standard &
Poor's/Fitch IBCA):* Aaa/AAA/AAA A2/A/A Baa2/BBB/BBB
Credit Enhancement: subordination of Class B subordination of Class C spread account
and Class C
Interest Rate: [One-Month LIBOR] plus [ [One-Month LIBOR] plus [ [One-Month LIBOR] plus [
]% per year ]% per year ]% per year
Interest Accrual Method:
[actual/360] [actual/360] [actual/360]
Interest Payment Dates:
monthly (17th) monthly (17th) monthly (17th)
[Interest Rate Index Reset [2 London business days [2 London business days [2 London business days
Date:] before each interest before each interest before each interest
payment date] payment date] payment date]
First Interest Payment Date:
_____, 200_ _____, 200_ _____, 200_
Expected Principal Payment
Date: _____, 200_ _____, 200_ _____, 200_
Commencement of Accumulation
Period
(subject to adjustment):
_____, 200_ _____, 200_ _____, 200_
Legal Final Maturity Date:
_____, 200_ _____, 200_ _____, 200_
---------------
* It is a condition to issuance that one of these ratings be obtained.
</TABLE>
<PAGE>
SUMMARY OF TERMS
This summary highlights selected information and does not contain all
of the information that you need to consider in making your investment decision.
You should carefully read this entire document and the accompanying prospectus
before you purchase any notes.
THE ISSUER
The notes will be issued by __________ Dealer Floorplan Master Note Trust
200_-_, a Delaware statutory business trust, pursuant to an indenture supplement
to an indenture, each between the trust and the indenture trustee.
The indenture trustee is _______________.
THE SERIES 200_-_ NOTES
INTEREST
The Class A notes will bear interest at [one-month LIBOR as determined each
month] plus __% per annum.
The Class B notes will bear interest at [one-month LIBOR as determined each
month] plus __% per annum.
The Class C notes will bear interest at [one-month LIBOR as determined each
month] plus __% per annum.
For each class of the Series 200_-__ notes, interest will be calculated as
follows:
o Principal balance, multiplied by
o Number of days in prior monthly interest period, multiplied by
o applicable interest rate, divided by o 360.
Each interest period begins on and includes a distribution date and ends on but
excludes the next distribution date. However, the first interest period will
begin on and include the closing date.
Interest on the Series 200_-__ notes will be paid on each distribution date,
which will be _____ [17], 200_ and the 17th day of each following month if the
17th is a business day and, if not, the following business day.
See "Description of Series Provisions -- Interest Payments" in this prospectus
supplement for a description of how and when LIBOR will be determined.
PRINCIPAL
Principal of the Class A notes, the Class B notes and the Class C notes is
expected to be paid in full on the _____ 200_ distribution date. However:
o no principal will be paid on the Class B notes until the Class A notes are
paid in full; and
o no principal will be paid on the Class C notes until the Class A and Class
B notes are paid in full.
We are scheduled to begin accumulating collections of principal receivables
starting on, _____ 200_ for payment to the Series 200_-__ noteholders on the
expected principal payment date, but we may begin accumulating at a later date.
Principal of the Series 200_-__ notes may be paid earlier or later than the
expected principal payment date. You will not be entitled to any premium for
early or late payment of principal. If specified adverse events known as pay out
events occur, principal may be paid earlier than expected. If collections of the
receivables are less than expected or are collected more slowly than expected,
then principal payments may be delayed. If the Series 200_-__ notes are not paid
on the expected principal payment date, collections of principal receivables
will continue to be used to pay principal on the Series 200_-__ notes until the
notes are paid or until ______, 200_, whichever occurs first. _______, 200_ is
the legal maturity date for Series 200_-__ .
For more information about principal payments, see "Maturity Considerations,"
"Description of Series Provisions -- Principal Payments" and "-- Allocation
Percentages" in this prospectus supplement.
CREDIT ENHANCEMENT
SUBORDINATION
Credit enhancement for the Class A notes is provided by the subordination of the
Class B notes and the Class C notes.
Credit enhancement for the Class B notes is provided by the subordination of the
Class C notes.
SPREAD ACCOUNT
A spread account will provide credit enhancement for the Class C notes. The
spread account initially will not be funded. After the Series 200_-__ notes are
issued, deposits into the spread account will be made each month from available
finance charge collections and, if necessary and available, excess finance
charge collections from other series in group one up to the required spread
account amount as described in this prospectus supplement under "Description of
Series Provisions -- Spread Account." The spread account will be used to make
payments on the Class C notes if collections of receivables allocated to the
Class C notes are insufficient to make required payments.
Credit enhancement for your series is for your series' benefit only, and you are
not entitled to the benefits of credit enhancement available to other series.
For more information about credit enhancement, see "Description of Series
Provisions -- Reallocated Principal Collections," "-- Application of
Collections" and "-- Defaulted Receivables; Investor Charge-Offs" in this
prospectus supplement.
EVENTS OF DEFAULT
The Series 200_-__ notes are subject to specified events of default described
under "Description of Series Provisions -- Events of Default" in this prospectus
supplement and "The Indenture -- Events of Default; Rights upon Event of
Default" in the accompanying prospectus. These include, among other things, the
failure to pay interest for __ days after it is due or to pay principal on the
legal maturity date.
In case any event of default occurs and continues with respect to the Series
200_-__ notes, the indenture trustee or holders of more than 50% of the
then-outstanding principal balance of the Series 200_-__ notes may declare the
principal amount of the notes to be immediately due and payable. That
declaration may, be rescinded by holders of more than 50% of the
then-outstanding principal balance of the Series 200_-__ notes.
After an event of default and the acceleration of the Series 200_-__ notes,
funds on deposit in the collection account, the principal funding account, the
reserve account and, with respect to the Class C notes, the spread account will
be applied to pay principal of and interest on the Series 200_-__ notes to the
extent permitted by law. Principal collections and finance charge collections
allocated to Series 200_-__ will be applied to make monthly principal and
interest payments on the Series 200_-__ notes until the earlier of the date
those notes are paid in full or the legal final maturity of those notes.
If the Series 200_-__ notes are accelerated or the issuer fails to pay the
principal of the Series 200_-__ notes on the legal maturity, once conditions
described in the prospectus under "The Indenture -- Events of Default; Rights
upon Event of Default" are satisfied, the indenture trustee may, if legally
permitted, or will at the direction of holders of at least 66 2/3% of the
principal amount of each class of Series 200_-__ notes:
o institute proceedings in its own name for the collection of all amounts
then payable on the Series 200_-__ notes;
o take any other appropriate action to protect and enforce the rights and
remedies of the indenture trustee and the Series 200_-__ noteholders; or
o foreclose on a portion of the trust's assets by causing the trust to sell
an interest in the assets of the trust by issuing a foreclosure certificate
to the holders of the notes or to a third party selected by the indenture
trustee or by holders of more than 50% of the then-outstanding principal
balance of the Series 200_-__ notes.
A foreclosure certificate is an investor certificate issued by the trust
representing ownership of the interest in the assets of the trust securing the
Series 200_-__ notes. A foreclosure certificate held by a noteholder or a third
party will be subject to restrictions on transfer described under "The Indenture
-- Events of Default; Rights upon Event of Default" in the accompanying
prospectus.
OTHER INTERESTS IN THE TRUST
OTHER SERIES OF NOTES
The trust will issue other series of notes secured by the assets of the trust
from time to time in the future. A summary of the outstanding series is in
"Annex I: Other Series Issued and Outstanding" included at the end of this
prospectus supplement. The issuance of future series will occur without prior
review or consent by you or any other noteholder.
THE TRANSFEROR INTEREST
The interest in the trust not securing your series or any other series is the
transferor interest. The transferor interest is owned by the transferor. The
transferor may, however, sell all or a portion of its interest in the transferor
interest. The transferor interest does not provide credit enhancement for your
series or any other series.
THE RECEIVABLES
The primary assets of the trust are a pool of wholesale receivables generated or
to be generated from time to time in a portfolio of revolving financing
arrangements with [automobile dealers] to finance their [automobile and light
truck inventory held by the trust and cash held by the trust]. The receivables
consist of principal receivables and finance charge receivables.
The following information is as of _______ 200_:
o Receivables in the trust: $
o Accounts designated to the trust: ________
For more information, see "The Trust Portfolio" in this prospectus supplement.
ALLOCATIONS OF COLLECTIONS
The servicer will collect payments on the receivables and will deposit those
collections in an account. It will keep track of those collections that are
finance charge receivables and those that are principal receivables.
Each month, the servicer will allocate collections received among:
o your series;
o other series outstanding; and
o the transferor interest in the trust.
The amount allocated to your series will be determined based mainly upon the
size of the invested amount of your series compared to the total amount of
principal receivables in the trust. At the time of issuance of the Series
200_-__ notes, the invested amount for Series 200_-__ will be $______. You are
entitled to receive payments of interest and principal only from collections of
receivables and other trust assets allocated to your series. If the invested
amount of your series declines, amounts allocated and available for payment to
your series and to you may be reduced. For a description of the allocation
calculations and the events which may lead to these reductions, see "Description
of Series Provisions -- Allocation Percentages" and "-- Reallocated Principal
Collections" in this prospectus supplement.
APPLICATION OF COLLECTIONS
FINANCE CHARGE COLLECTIONS
The trust will apply your series' share of collections of finance charge
receivables each month in the following order of priority:
o to pay interest on the Class A notes;
o to pay interest on the Class B notes;
o to pay the servicing fee;
o to pay interest on the Class C notes;
o to cover your series' allocation of defaulted receivables;
o to cover reductions in your series' invested amount resulting from investor
charge-offs allocated to your series and from reallocated principal
collections, in each case that have not been reimbursed;
o to fund, in limited circumstances, a reserve account to cover interest
payment shortfalls for Class A and Class B during the accumulation period;
o to make a deposit, if needed, to the spread account for Class C up to the
required spread account amount; and
o to other series in group one or to the holders of the transferor
certificates.
For a more detailed description of these applications, see "Description of
Series Provisions -- Application of Collections" in this prospectus supplement.
PRINCIPAL COLLECTIONS
The trust will apply your series' share of principal collections each month as
follows:
o During the revolving period, no principal will be paid to you or
accumulated in a trust account. Instead, your series' share of principal
collections will be treated as shared principal collections and may be
available to make principal payments for other series in group one.
o The accumulation period is scheduled to begin on, ______ 200 , but may
begin at a later date. During the accumulation period, your series' share
of principal collections will be deposited in a trust account, up to a
controlled deposit amount. On the expected principal payment date, amounts
on deposit in that account will be paid first to the Class A noteholders,
then to the Class B noteholders and then to the Class C noteholders.
o If a pay out event (described below) that applies to Series 200_-__ or to
all series occurs, the early amortization period will begin. During the
early amortization period, your series' share of principal collections will
be paid first to the Class A noteholders, then to the Class B noteholders
and then to the Class C noteholders.
o During any of the above periods, principal collections allocated to your
series, may be reallocated, if necessary, to make required interest
payments on the Class A notes and the Class B notes not made from available
finance charge collections, excess finance charge collections available
from other series in group one or funds in the reserve account. However,
for any monthly period, the sum of these reallocated principal collections
cannot exceed __% of the initial invested amount of your series, as reduced
due to the writing off of receivables or for previously reallocated
principal collections, in each case that have not been reimbursed.
o Any remaining principal collections will first be made available to other
series in group one and then be paid to the holders of the transferor
certificates or deposited in the special funding account.
For a more detailed description of these applications, see "Description of
Series Provisions -- Application of Collections" in this prospectus supplement.
PAY OUT EVENTS
The documents under which the Series 200_-__ notes will be issued include a list
of adverse events known as pay out events. If a pay out event that applies to
Series 200_-__ or to all series occurs, the trust will use collections of
principal receivables allocated to Series 200_-__ each month to pay principal on
the Series 200_-__ notes.
Pay out events may occur if the transferor fails to make required payments or
deposits, violates other covenants and agreements or makes representations and
warranties that are materially incorrect.
The following also are pay out events:
o The yield on the trust portfolio less the amount of receivables that are
written off as uncollectible allocated to Series 200_-__ , averaged over
three months is less than the weighted average interest rate for Series
200_-__ , calculated by taking into account the interest rate for the Class
A notes, the Class B notes and the Class C notes, plus the servicing fee
rate for Series 200_-__ ;
o The Class A notes, the Class B notes or the Class C notes are not paid in
full on their expected principal payment dates;
o Bankruptcy, insolvency or similar events relating to the transferor
(including any additional transferor) or the servicer;
o The transferor (including any additional transferor) is unable to transfer
receivables to the trust as required under the transfer and servicing
agreement;
o The transferor does not transfer receivables in additional accounts to the
trust within 5 business days of when required under the transfer and
servicing agreement;
o Specified defaults of the servicer;
o The trust becomes subject to regulation as an "investment company" under
the Investment Company Act of 1940; or
o An event of default occurs for the Series 200_-__ notes.
For a more detailed discussion of the pay out events, see "Description of Series
Provisions -- Pay Out Events" in this prospectus supplement and "Description of
the Notes -- Pay Out Events" in the accompanying prospectus.
OPTIONAL REDEMPTION
The trust has the option to repurchase your notes when the outstanding principal
amount for your series has been reduced to 10% or less of the initial principal
amount (as increased by the principal amount of any notes of your series issued
after the closing date). See "Description of the Notes -- Final Payment of
Principal; Termination" in the accompanying prospectus.
DENOMINATIONS
Beneficial interests in the Series 200_-___ notes may be purchased in minimum
denominations of $1,000 and multiples of $1,000 in excess of that amount.
REGISTRATION, CLEARANCE AND SETTLEMENT
The Series 200_-__ notes will be in book-entry form and will be registered in
the name of Cede & Co., as the nominee of The Depository Trust Company. Except
in limited circumstances, you will not receive a definitive instrument
representing your notes. See "Description of the Notes -- Definitive Notes" in
the accompanying prospectus.
You may elect to hold your Series 200_-__ notes through The Depository Trust
Company, in the United States, or Clearstream, Luxembourg or the Euroclear
System, in Europe.
Transfers will be made in accordance with the rules and operating procedures of
those clearing systems. See "Description of the Notes -- Book-Entry
Registration" in the accompanying prospectus.
TAX STATUS
Subject to important considerations described under "Federal Income Tax
Consequences" in the accompanying prospectus, Stroock & Stroock Lavan LLP, as
special tax counsel to the trust, is of the opinion that under existing law your
Series 200_-__ notes will be characterized as debt for federal income tax
purposes. By your acceptance of a Series 200_-__ note, you will agree to treat
your Series 200_-__ notes as debt for federal, state and local income and
franchise tax purposes. See "Federal Income Tax Consequences" in the
accompanying prospectus for additional information concerning the application of
federal income tax laws.
ERISA CONSIDERATIONS
Subject to important considerations described under "ERISA Considerations" in
this prospectus supplement and in the accompanying prospectus, the Series
200_-__ notes are eligible for purchase by persons investing assets of employee
benefit plans or individual retirement accounts. A fiduciary or other person
contemplating purchasing the Series 200_-__ notes on behalf of or with plan
assets of any plan or account should consult with its counsel regarding whether
the purchase or holding of the Series 200_-__ notes could give rise to a
transaction prohibited or not otherwise permissible under ERISA or Section 4975
of the Internal Revenue Code.
<PAGE>
RISK FACTORS
You should carefully consider the following risk factors prior to any
purchase of certificates. You should also consider the information set forth
under "Risk Factors" in the prospectus.
YOU MAY HAVE DIFFICULTY SELLING YOUR
NOTES................................. The notes will not be listed on any
securities exchange. As a result, if you
wish to sell your notes, you will have
to find a purchaser that is willing to
purchase your notes. The underwriter
intends to make a secondary market for
the offered notes. The underwriter may
do so by offering to buy the notes from
investors that wish to sell. However,
the underwriter will not be obligated to
make offers to buy the notes and may
stop making offers at any time. In
addition, the prices offered, if any,
may not reflect prices that other
potential purchasers, were they to be
given the opportunity, would be willing
to pay. There have been times in the
past where there have been very few
buyers of similar asset backed
securities, and there may be times again
in the future. As a result, you may not
be able to sell your notes when you wish
to do so or you may not be able to
obtain the price you wish to receive.
[GEOGRAPHIC CONCENTRATION MAY AFFECT
PERFORMANCE........................... Discuss any geographic risks, if
applicable]
THE SUBORDINATED NOTES HAVE A GREATER
RISK OF LOSS THAN THE OTHER NOTES..... The class C notes will not be paid any
distributions of interest until the
class B notes receive their interest
distributions and will not receive any
distributions of principal until the
class B notes receive their principal
distributions. The class B notes will
not be paid any distributions of
interest until the class A notes receive
their interest distributions and will
not receive any distributions of
principal until the class A notes
receive their principal distributions.
If the available funds are insufficient
to make all of the required
distributions on the class A, class B
and class C notes, the class C notes
will not and class B notes may not
receive all of their distributions. In
addition, losses due to defaults will be
allocated first to the class C notes and
second to the class B notes to the
extent not covered by excess interest at
that time. Any allocation of a loss to
class B notes or class C notes will
reduce the amount of interest and, to
the extent not reimbursed from future
excess interest, principal they will
receive. As a result of the foregoing,
the class C notes and the class B notes
will be affected to a larger degree by
any losses on the receivables.
THE TRUST ASSETS ARE THE ONLY SOURCE
OF PAYMENTS ON THENOTES.............. All distributions on the notes will be
made from payments by borrowers under
the receivables. The trust has no other
assets [other than ______] to make
distributions on the notes. The
receivables are NOT insured or
guaranteed by any person. The trust is
the only person that is obligated to
make distributions on the notes. The
notes are NOT insured by any
governmental agency.
NOTE RATING.......................... The rating of the notes will depend on
an assessment by the rating agencies of
the receivables. The rating by the
rating agencies of the notes is not a
recommendation for you to purchase, hold
or sell the notes, and the rating does
not comment as to the market price or
suitability for a particular investor.
There is no assurance that the ratings
will remain in place for any given
period of time or that the ratings will
not be lowered or withdrawn by the
rating agencies. The ratings do not
address the possibility that offered
noteholders might realize a lower than
anticipated yield. The ratings of the
offered notes do not address the
possibility of the imposition of United
States withholding tax with respect to
non-U.S. persons. No rating of the
originator, the servicer or the company
is required to maintain the rating of
the offered notes.
THE NOTES ARE NOT SUITABLE
INVESTMENTS FOR ALL
INVESTORS............................ The notes are not suitable investments
for any investor that requires a regular
or predictable schedule of payments or
payment on any specific date. The notes
are complex investments that should be
considered only by investors who, either
alone or with their financial, tax and
legal advisors, have the expertise to
analyze the prepayment, reinvestment,
default and market risk, the tax
consequences of an investment, and the
interaction of these factors.
<PAGE>
_____________'S DEALER FLOORPLAN PORTFOLIO
The following discussion describes terms and characteristics that
generally apply to the accounts in the portfolio from which the accounts in the
trust portfolio were selected. The accounts selected for the trust portfolio do
not represent _______'s entire portfolio. Additional accounts consist of
eligible accounts which may or may not currently be in existence and which may
be selected using different criteria from those used in selecting the accounts
already included in the trust portfolio. See "Description of the Notes --
Addition of Trust Assets" in the accompanying prospectus. Consequently, actual
loss and delinquency, revenue and monthly payment rate experience with respect
to the initial accounts and the additional accounts may be different from the
experience for the trust portfolio described in this prospectus supplement.
BILLING AND PAYMENTS
Each receivable may have different billing and payment structures,
including different periodic finance charges and fees. The following information
reflects the typical billing and payment characteristics of the accounts.
[To be inserted]
DELINQUENCY AND LOSS EXPERIENCE
An account is contractually delinquent if the minimum payment is not
received by the appropriate due date indicated on the customer's statement.
[To be inserted]
The following tables set forth the aggregate delinquency and loss
experience for payments on the dealer floorplan accounts in ______'s portfolio
for each of the three calendar years in the period ended __________, and in the
trust portfolio for the period ended __________. Any particular segment of
______'s portfolio may have delinquency and gross charge-off characteristics
different from those of ______'s portfolio.
As of the beginning of the day on _______, 200_, the receivables in
the trust portfolio represented approximately __% of ______'s portfolio. Because
the trust portfolio is only a portion of ______'s portfolio, actual delinquency
and loss experience with respect to the receivables may be different from that
set forth below for ______'s portfolio. We cannot assure you that the future
delinquency and loss experience for the receivables in either ______'s portfolio
or trust portfolio will be similar to the historical experience set forth below.
<TABLE>
<CAPTION>
DELINQUENCY AS PERCENTAGE OF _______'S PORTFOLIO
(Dollars in Thousands)
YEAR ENDED
------------------------------------------------------------------------------
NUMBER OF AT MONTH END
DELINQUENT DAYS _____ 31, ____
--------------- ----------------------------------------------------------------------------------------------------------
PERCENTAGE AMOUNT PERCENTAGE AMOUNT PERCENTAGE AMOUNT PERCENTAGE AMOUNT
---------- ------ ---------- ------ ---------- ------ ---------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
30 to 59 Days.....
60 to 80 days.....
90 Days or Greater
Totals............
</TABLE>
<TABLE>
<CAPTION>
LOSS EXPERIENCE FOR _______'S PORTFOLIO
(Dollars in Thousands)
[Three] Months Ended [Three] Months Ended Year Ended
__________, ___ _________, __ __________, __
--------------------- -------------------- -------------------
<S> <C> <C> <C>
Average Receivables
Outstanding............
Gross Losses.............
Gross Losses as a
Percentage of Average
Receivables
Outstanding............
Recoveries...............
Net Losses...............
Net Losses as a
Percentage of Average
Receivables
Outstanding............
</TABLE>
<PAGE>
REVENUE EXPERIENCE
The following table sets forth the revenues from the payments on the
dealer floorplan accounts in ______'s portfolio for each of the periods shown.
<TABLE>
<CAPTION>
REVENUE EXPERIENCE FOR ______'S PORTFOLIO
(Dollars in Thousands)
[Three] Months Ended [Three] Months Ended Year Ended
__________, ___ _________, __ __________, __
--------------------- -------------------- -------------------
<S> <C> <C> <C>
Average Receivables
Outstanding Finance
Charges and Fees.......
Yield from Finance
Charges and Fees.......
Yield from Finance
Charges Fees...........
</TABLE>
There can be no assurance that the yield experience with respect to
the trust portfolio will be comparable to that set forth above for the ______'s
portfolio. In addition, revenue from the trust portfolio will depend on the
types of fees and charges assessed on the accounts, and could be adversely
affected by future changes made by _______ in fees and charges or by other
factors.
RECOVERIES
Pursuant to the terms of the transfer and servicing agreement, the
transferor will be required to transfer to the trust all of the recoveries that
are reasonably estimated by the servicer on receivables in charged-off accounts
of the trust, including amounts received by the transferor or the servicer from
the purchaser or transferee with respect to the sale or other disposition of
receivables in defaulted accounts ("Recoveries"). Collections of recoveries will
be treated as collections of finance charge receivables and included as part of
the Portfolio Yield.
PAYMENT RATES
The following table sets forth the highest and lowest monthly payment
rates on the dealer floorplan accounts during any month in the periods shown and
the average monthly payment rates for all months in the periods shown, in each
case calculated as a percentage of total opening monthly account balances during
the periods shown. Payment rates shown in the table are based on amounts which
would be deemed payments of principal receivables and finance charge receivables
with respect to the accounts.
MONTHLY PAYMENT RATES(1)
YEAR ENDED DECEMBER 31,
--------- --------- ---------
Lowest Month % % %
Highest Month % % %
Monthly Average % % %
---------------
(1) For each of the three calendar years in the period ended _________,
information is presented for dealer floorplan accounts in the originator's
portfolio. For the _________, this information is presented for dealer
floorplan accounts in the trust portfolio.
We cannot assure you that the monthly payment rates in the future will
be similar to the historical experience set forth above.
THE TRUST PORTFOLIO
The receivables conveyed to the trust arise in accounts selected from
_______'s portfolio at the time the trust was established, and in additional
accounts selected since that time, on the basis of criteria set forth in the
transfer and servicing agreement (the "Trust Portfolio"). The transferor has the
right to designate additional accounts for the trust portfolio and to transfer
to the trust all receivables of those additional accounts, whether the
receivables already exist or arise after the designation, if conditions are
satisfied. For a discussion of these conditions, see "Description of the Notes
-- Addition of Trust Assets" in the accompanying prospectus. In addition, the
transferor will be required to designate additional accounts, to the extent
available, (a) to maintain the Transferor Interest so that, during any period of
30 consecutive days, the Transferor Interest averaged over that period equals or
exceeds the Required Transferor Interest for the same period and (b) to
maintain, for so long as notes of any series remain outstanding, an aggregate
amount of principal receivables in the trust portfolio equal to or greater than
the Required Minimum Principal Balance (as adjusted for any series having a
paired series as described in the related indenture supplement).
The "Transferor Interest" on any date is equal to the difference
between:
(a) the sum of
(1) the product of (x) total amount of principal receivables in
the trust portfolio on immediately prior day and (x) 1 minus
the Discount Percentage and
(2) the special funding account balance, minus
(b) the total adjusted invested amounts of all series of notes then
outstanding.
The "Required Transferor Interest" is the product of :
o Required Transferor Percentage;
o Total amount of principal receivables in the trust portfolio; and
o 1 minus the Discount Percentage.
The "Required Transferor Percentage" initially is _%, but may be
reduced if conditions set forth in the transfer and servicing agreement are
satisfied, including receipt of written confirmation that reducing the Required
Transferor Percentage will not result in the reduction or withdrawal by any
rating agency of its rating of any outstanding series or class.
The "Discount Percentage" on the closing date is _%.
The "Required Minimum Principal Balance" on any date is, for all
outstanding series, unless otherwise provided in the related indenture
supplement for a series having a paired series, the sum of the initial invested
amounts for each series outstanding on that date plus the Required Transferor
Interest on that date minus the amounts on deposit in the special funding
account.
The transferor also has the right to designate removed accounts and to
require the indenture trustee to transfer all receivables in the removed
accounts back to the transferor, whether the receivables already exist or arise
after the designation, if conditions are satisfied. For a discussion of these
conditions, see "Description of the Notes -- Removal of Accounts" in the
accompanying prospectus.
Throughout the term of the trust, the accounts from which the
receivables arise will be the accounts designated by the transferor at the time
the trust is established plus any additional accounts minus any removed
accounts. As a result, the composition of the trust assets is expected to change
over time. For a general description of the receivables in the trust, see "The
Trust Portfolio" in the accompanying prospectus.
The following is selected information about the receivables:
o The receivables in the trust portfolio, as of the beginning of
the day on ________, included $____ of principal receivables and
$_________ of finance charge receivables.
o The accounts designated for the trust portfolio had an average
principal receivable balance of $__________ and an average credit
limit of $________.
o The percentage of the aggregate total receivable balance to the
aggregate total credit limit was __%. The average age of the
accounts was approximately months.
The following tables summarize the trust portfolio by various criteria
as of the beginning of the day on, ____________. Because the future composition
of the trust portfolio may change over time, these tables are not necessarily
indicative of the composition of the trust portfolio at any subsequent time.
COMPOSITION BY Account BALANCE
TRUST PORTFOLIO
(as of _________, ____)
(Dollars in Thousands)
RECEIVABLES ACCOUNT
BALANCE RANGE OUTSTANDING
Credit Balance................
No Balance....................
More than $0 and less than or
equal to $1,500.............
$1,500.01 - $5,000............
$5,000 - $10,000..............
Over $10,000..................
COMPOSITION BY CREDIT LIMIT
TRUST PORTFOLIO
(as of ________, ____)
(Dollars in Thousands)
RECEIVABLES ACCOUNT
BALANCE RANGE OUTSTANDING
Less than or equal to
$1,500......................
$1,500.01 - $5,000............
$5,000 - $10,000..............
Over $10,000..................
COMPOSITION BY PAYMENT STATUS
TRUST PORTFOLIO
(as of _________, 19__)
(Dollars in Thousands)
RECEIVABLES ACCOUNT
BALANCE RANGE OUTSTANDING
Current to 29 days............
Past due 30 - 59 days.........
Past due 60 - 89 days.........
Past due 90+ days.............
Total.........................
COMPOSITION BY Account AGE
TRUST PORTFOLIO
(as of _________, 19__)
(Dollars in Thousands)
RECEIVABLES ACCOUNT
BALANCE RANGE OUTSTANDING
Not more than 6 months........
Over 6 months to 12 months....
Over 1 year to 2 years........
Over 2 years to 3 years.......
Over 3 years to 4 years.......
Over 4 years..................
Total.........................
COMPOSITION BY AccountHOLDER BILLING ADDRESS
TRUST PORTFOLIO
(as of ________, 19__)
(Dollars in Thousands)
LOCATION
Alaska.........................
Arizona........................
Arkansas.......................
California.....................
Colorado.......................
Connecticut....................
Delaware.......................
District of Columbia...........
Florida........................
Georgia........................
Hawaii.........................
Idaho..........................
Illinois.......................
Indiana........................
Iowa...........................
Kansas.........................
Kentucky.......................
Louisiana......................
Maine..........................
Maryland.......................
Massachusetts..................
Michigan.......................
Minnesota......................
Mississippi....................
Missouri.......................
Montana........................
Nebraska.......................
Nevada.........................
New Hampshire..................
New Jersey.....................
New Mexico.....................
New York.......................
North Carolina.................
North Dakota...................
Ohio...........................
Oklahoma.......................
Oregon.........................
Pennsylvania...................
Rhode Island...................
South Carolina.................
South Dakota...................
Tennessee......................
Texas..........................
Utah...........................
Vermont........................
Virginia.......................
Washington.....................
West Virginia..................
Alabama........................
Wyoming........................
Other..........................
MATURITY CONSIDERATIONS
You are expected to receive payment of principal in full on ______,
200_, the "Expected Principal Payment Date." You may, however, receive payments
of principal earlier than the expected principal payment date if a pay out event
occurs and the early amortization period begins. The holders of the Class B
notes will not begin to receive payments of principal until the final principal
payment on the Class A notes has been made. The holders of the Class C notes
will not begin to receive payments of principal until the final principal
payments on the Class A notes and Class B notes have been made.
CONTROLLED ACCUMULATION PERIOD
Principal for payment to the Series 200_-___ noteholders will
accumulate during the controlled accumulation period in the principal funding
account established by the indenture trustee. The controlled accumulation period
is scheduled to begin at the close of business on _____, 200_ , but may be
delayed based on recent payment rate experience, as discussed under "Description
of Series Provisions -- Postponement of the Controlled Accumulation Period" in
this prospectus supplement. On each distribution date during the controlled
accumulation period, an amount will be deposited into the principal funding
account equal to, for each monthly period, the least of:
o Available Principal Collections;
o the Controlled Deposit Amount; and
o the Adjusted Invested Amount prior to any deposits on that day.
We expect, but cannot assure you, that the amounts available in the
principal funding account on the expected principal payment date will be
sufficient to pay in full the outstanding principal balance of the Class A
notes, the Class B notes and the Class C notes. If these amounts are not
available on the expected principal payment date, a pay out event will occur and
the early amortization period will begin.
EARLY AMORTIZATION PERIOD
If a pay out event occurs during either the revolving period or the
controlled accumulation period, the early amortization period will begin. If a
pay out event occurs during the controlled accumulation period, on the next
distribution date any amount on deposit in the principal funding account will be
paid to the Class A noteholders and, after the outstanding principal balance of
the Class A notes has been paid in full, any remaining amount will be paid to
the Class B noteholders and, after the outstanding principal balance of the
Class B notes has been paid in full, any remaining amount will be paid to the
Class C noteholders, up to the outstanding principal balance of the Class C
notes.
In addition, if the outstanding principal balance of the Class A notes
has not been paid in full, Available Principal Collections will be paid to the
Class A noteholders on each distribution date until the earlier of:
o the date the Class A notes are paid in full; and
o _______, 200 , called the "Series 200_-__ Termination Date".
After the Class A notes have been paid in full, and if the Series
200_-__ termination date or the trust termination date has not occurred,
Available Principal Collections will be paid to the Class B noteholders on each
distribution date until the earlier of:
o the date the Class B notes are paid in full; and
o the Series 200_-__ termination date.
After the Class B notes have been paid in full, and if the Series
200_-__ termination date or the trust termination date has not occurred,
Available Principal Collections will be paid to the Class C noteholders on each
distribution date until the earlier of:
o the date the Class C notes are paid in full; and
o the Series 200_-__ termination date.
THE ORIGINATOR
The "Originator" is _______________. [Insert description of the
Originator.]
THE SERVICER
The "Servicer" is _______________. [Insert description of the
Servicer.]
THE TRANSFEROR
Asset Backed Securities Corporation (the "Transferor") is a
special-purpose Delaware corporation organized for the purpose of issuing the
notes and other securities issued under the Registration Statement backed by
accounts or underlying securities of various types and acting as sponsor,
settlor or transferor or depositor with respect to trusts, custody accounts or
similar arrangements. It is not expected that the Transferor will have any
significant assets. The Transferor is an indirect, wholly owned subsidiary of
Credit Suisse First Boston, Inc. Neither Credit Suisse First Boston, Inc. nor
any of its affiliates has guaranteed, will guarantee or is or will be otherwise
obligated with respect to any notes.
The Transferor's principal executive office is located at 11 Madison
Avenue, New York, New York 10010, and its telephone number is (212) 325-2000.
DESCRIPTION OF SERIES PROVISIONS
The following is a summary of the material provisions of the Series
200_-__ notes. This summary is not a complete description of the terms of the
Series 200_-__ notes. You should refer to "Description of the Notes" in the
accompanying prospectus as well as to the transfer and servicing agreement, the
indenture and the Series 200_-__ indenture supplement for a complete
description. The form of each of the transfer and servicing agreement, the
indenture and an indenture supplement has been filed with the SEC as an exhibit
to the registration statement relating to the notes.
The Class A notes, Class B notes and Class C notes comprise the
"Series 200_-__ Notes" and will be issued under the indenture, as supplemented
by the indenture supplement relating to the Series 200_-__ notes (the "Series
200_-__ Indenture Supplement"), in each case between the trust and the indenture
trustee. As described under "Description of the Notes--New Issuances" in the
accompanying prospectus, the transferor may cause the owner trustee, on behalf
of the trust, and the indenture trustee to execute further indenture supplements
in order to issue additional series.
The "Closing Date" for Series 200_-__ is _____, 200_. The Series
200_-__ notes will be issued in denominations of $1,000 and integral multiples
of $1,000 and will be available only in book-entry form, registered in the name
of Cede, as nominee of DTC. As described under "Description of the
Notes--General," "-- Book-Entry Registration" and "-- Definitive Notes" in the
accompanying prospectus, unless and until definitive notes are issued, you will
be able to transfer your notes only through the facilities of DTC. You will
receive payments and notices through DTC and its participants. Payments of
interest and principal will be made on each distribution date on which those
amounts are due to the noteholders in whose names Series 200_-__ notes were
registered on the last day of the calendar month preceding that distribution
date (each, a "Record Date").
INTEREST PAYMENTS
The Class A notes will accrue interest from and including the closing
date through but excluding ______, 200_, and for each following interest period,
at a rate of __% per annum above LIBOR for the related LIBOR determination date
with respect to each interest period (the "Class A Note Interest Rate").
The Class B notes will accrue interest from and including the closing
date through but excluding ______, 200_, and for each following interest period,
at a rate of __% per annum above LIBOR for the related LIBOR determination date
with respect to each interest period (the "Class B Note Interest Rate").
The Class C notes will accrue interest from and including the closing
date through but excluding ______, 200_, and for each following interest period,
at a rate of __% per annum above LIBOR for the related LIBOR determination date
with respect to each interest period (the "Class C Note Interest Rate").
The indenture trustee will determine LIBOR for each interest period
two London business days before the related interest period commences. We refer
to each of these determination dates as a "LIBOR Determination Date." For
purposes of calculating LIBOR, a "London Business Day" is any business day on
which dealings in deposits in United States dollars are transacted in the London
interbank market.
An "Interest Period" begins on and includes a distribution date and
ends on but excludes the next distribution date. However, the first interest
period will begin on and include the closing date.
"LIBOR" means, for any LIBOR determination date, the rate for deposits
in United States dollars for a one-month period which appears on Telerate Page
3750 as of 11:00 a.m., London time, on that date. If that rate does not appear
on Telerate Page 3750, the rate for that LIBOR determination date will be
determined based on the rates at which deposits in United States dollars are
offered by four major banks selected by the servicer at approximately 11:00
a.m., London time, on that day to prime banks in the London interbank market for
a one-month period. The indenture trustee will request the principal London
office of each of those banks to provide a quotation of its rate. If at least
two quotations are provided, the rate for that LIBOR determination date will be
the arithmetic mean of the quotations. If fewer than two quotations are
provided, the rate for that LIBOR determination date will be the arithmetic mean
of the rates quoted by major banks in New York City, selected by the servicer,
at approximately 11:00 a.m., New York City time, on that day for loans in United
States dollars to leading European banks for a one-month period.
"Telerate Page 3750" means the display page currently so designated on
the Bridge Telerate Capital Markets Report (or any other page as may replace
that page on that service for the purpose of displaying comparable rates or
prices).
The Class A note interest rate, the Class B note interest rate and the
Class C note interest rate applicable to the then current and immediately
preceding interest period may be obtained by telephoning the indenture trustee
at its corporate trust office at (212) ______________.
Interest on the notes will be calculated on the basis of the actual
number of days in the related interest period and a 360-day year.
Interest will be paid on each "Distribution Date," which will be
______, 200_ and the 17th day of each following month (or, if the 17th day is
not a business day, the following business day). For purposes of this prospectus
supplement and the accompanying prospectus, a "Business Day" is, unless
otherwise indicated, any day other than a Saturday, a Sunday or a day on which
banking institutions in New York, New York, Delaware or any other state in which
the principal executive offices of the bank, the owner trustee, the indenture
trustee or other account owner, as the case may be, are located, are authorized
or obligated by law, executive order or governmental decree to be closed.
Interest payments on the Class A notes, the Class B notes and the
Class C notes on any distribution date will be calculated on the outstanding
principal balance of the Class A notes, the Class B notes and the Class C notes,
as applicable, as of the preceding record date, except that interest for the
first distribution date will accrue at the applicable note interest rate on the
initial outstanding principal balance of the Class A notes, the Class B notes
and the Class C notes, as applicable, from the closing date.
Interest due on the Class A notes, the Class B notes and the Class C
notes but not paid on any distribution date will be payable on the following
distribution date, together with additional interest on that amount at the
applicable note interest rate. We refer to this additional interest as "Class A
Additional Interest," "Class B Additional Interest" and "Class C Additional
Interest," as applicable. Additional interest will accrue on the same basis as
interest on the Series 200_-__ notes, and will accrue from the distribution date
on which the overdue interest became due, to but excluding the distribution date
on which the additional interest is paid.
Interest payments on the Series 200_-__ notes on any distribution date
will be paid from Available Finance Charge Collections for the related monthly
period and, to the extent Available Finance Charge Collections are insufficient
to pay the interest, from Excess Finance Charge Collections and Reallocated
Principal Collections (to the extent available) for the related monthly period.
Interest payments on the Class C notes on any distribution date will also be
paid from available amounts on deposit in the spread account to the extent
needed.
"Available Finance Charge Collections" means, with respect to any
monthly period, an amount equal to the sum of:
(a) the Investor Percentage of collections of finance charge
receivables deposited in the collection account for that
monthly period;
(b) an amount equal to the Principal Funding Investment
Proceeds, if any, for the related distribution date; and
(c) amounts, if any, to be withdrawn from the reserve account
which are required to be included in Available Finance
Charge Collections pursuant to the Series 200_-__ indenture
supplement for the related distribution date.
Each "Monthly Period" will be the period from and including the first
day of a calendar month to and including the last day of that calendar month
(other than the initial monthly period, which will commence on and include the
closing date and end on and include, 200_).
PRINCIPAL PAYMENTS
Principal payments on the Series 200_-__ notes will be paid from
"Available Principal Collections" which, for any monthly period, equal:
(a) the Investor Percentage of collections of principal
receivables deposited in the collection account for that
monthly period; minus
(b) the amount of Reallocated Principal Collections for that
monthly period; plus
(c) any Shared Principal Collections from other series in group
one and any Shared Transferor Principal Collections
allocated to your series.
REVOLVING PERIOD
The "Revolving Period" for the Series 200_-__ notes begins on the
closing date and ends on the earlier of the date the controlled accumulation
period or the early amortization period begins. During the revolving period, the
Investor Percentage of collections of principal receivables will, subject to
limitations, including the allocation of any Reallocated Principal Collections
for that monthly period, be treated as Shared Principal Collections and used to
pay principal to other series in group one or will be paid to the holders of the
transferor certificates.
CONTROLLED ACCUMULATION PERIOD
The "Controlled Accumulation Period" for the Series 200_-__ notes is
scheduled to begin on ______, 200_, but may be postponed, as discussed under
"Description of Series Provisions -- Postponement of the Controlled Accumulation
Period" in this prospectus supplement, and ends on the earliest of:
o the beginning of the early amortization period;
o the payment in full of the Invested Amount; and
o the Series 200_-__ termination date.
If a pay out event occurs before the controlled accumulation period begins,
there will be no controlled accumulation period and the early amortization
period will begin.
On each distribution date relating to the controlled accumulation
period, the indenture trustee will deposit in the principal funding account an
amount equal to the least of
(a) Available Principal Collections with respect to that
distribution date,
(b) the applicable Controlled Deposit Amount and
(c) the Adjusted Invested Amount prior to any deposits on that
date. Amounts in the principal funding account will be paid:
o first to Class A noteholders, up to the outstanding principal
balance of the Class A notes;
o then to Class B noteholders, up to the outstanding principal
balance of the Class B notes; and
o then to Class C noteholders, up to the outstanding principal
balance of the Class C notes;
in each case, on the expected principal payment date unless paid earlier due to
the commencement of the early amortization period.
During the controlled accumulation period, the portion of Available
Principal Collections not applied for the payment of principal on the Class A
notes, the Class B notes or the Class C notes on a distribution date generally
will be treated as Shared Principal Collections.
EARLY AMORTIZATION PERIOD
The "Early Amortization Period" for the Series 200_-__ notes will
begin on the day on which a pay out event with respect to Series 200_-__ occurs
and ends on the earlier of:
o the payment in full of the Invested Amount; and
o the Series 200_-__ termination date.
On each distribution date relating to the early amortization period,
the Class A noteholders will be entitled to receive Available Principal
Collections for the related monthly period in an amount up to the outstanding
principal balance of the Class A notes.
After payment in full of the outstanding principal balance of the
Class A notes, the Class B noteholders will be entitled to receive, on each
distribution date relating to the early amortization period, Available Principal
Collections for the related monthly period in an amount up to the outstanding
principal balance of the Class B notes.
After payment in full of the outstanding principal balance of the
Class B notes, the Class C noteholders will be entitled to receive on each
distribution date relating to the early amortization period, Available Principal
Collections for the related monthly period in an amount up to the outstanding
principal balance of the Class C notes.
See "-- Pay Out Events" below for a discussion of events that might
lead to the commencement of the early amortization period.
POSTPONEMENT OF CONTROLLED ACCUMULATION PERIOD
The controlled accumulation period is scheduled to last __ months.
However, the servicer may elect to extend the revolving period and postpone the
controlled accumulation period by providing a notice to the indenture trustee.
The servicer can make this election only if the number of months needed to fund
the principal funding account based on expected principal collections needed to
pay principal on the Series 200_-__ notes is less than __ months.
On each determination date beginning in ______ 200_ and ending when
the controlled accumulation period begins, the servicer will review the amount
of expected principal collections and determine the number of months expected to
be required to fully fund the principal funding account by the expected
principal payment date and may elect to postpone the controlled accumulation
period. In making its decision, the servicer is required to assume that the
principal payment rate will be no greater than the lowest monthly payment rate
for the prior 12 months and will consider the amount of principal expected to be
allocable to noteholders of all other series which are expected to be amortizing
or accumulating principal during the controlled accumulation period for Series
200_-__ . In no case will the controlled accumulation period be reduced to less
than one month.
The method for determining the number of months required to fully fund
the principal funding account may be changed upon receipt of written
confirmation that the change will not result in the reduction or withdrawal by
any rating agency of its rating of any outstanding series or class.
SUBORDINATION
The Class B notes and the Class C notes are subordinated to the Class
A notes. Interest payments will be made on the Class A notes prior to being made
on the Class B notes and the Class C notes. Interest payments will be made on
the Class B notes prior to being made on the Class C notes. Principal payments
on the Class B notes will not begin until the Class A notes have been paid in
full. Principal payments on the Class C notes will not begin until the Class A
notes and the Class B notes have been paid in full. If principal collections
allocated to your series are reallocated to pay the interest on the Class A
notes, the principal amount of the Class B notes and the Class C notes may not
be repaid. If principal collections allocated to your series are reallocated to
pay interest on the Class B notes, the principal amount of the Class C notes may
not be repaid. If a foreclosure certificate is sold after an event of default,
the net proceeds of that sale which are available to pay principal on the Series
200_-__ notes would be paid first to the Class A notes before any remaining net
proceeds would be available for payments due to the Class B notes or the Class C
notes.
ALLOCATION PERCENTAGES
Pursuant to the indenture, with respect to each monthly period, the
servicer will allocate among the Invested Amount, the invested amount for all
other series issued and outstanding and the Transferor Interest, all amounts
collected on finance charge receivables, all amounts collected on principal
receivables and all Defaulted Amounts with respect to that monthly period. These
amounts will be allocated based on the Investor Percentage.
"INVESTOR PERCENTAGE," for any monthly period, means (a) for Defaulted
Amounts at anytime and for collections of finance charge receivables and
principal receivables during the revolving period, the Floating Investor
Percentage and (b) for collections of finance charge receivables and principal
receivables during the controlled accumulation period and early amortization
period, the Fixed Investor Percentage.
FLOATING ALLOCATION DEFINITIONS
Defaulted Amounts at any time and collections of finance charge
receivables and principal receivables during the revolving period will be
allocated to the Invested Amount based on the Floating Investor Percentage. The
"Floating Investor Percentage" means, with respect to any monthly period, the
percentage equivalent of a fraction:
(a) the numerator of which is the Adjusted Invested Amount as of
the close of business on the last day of the preceding
monthly period (or with respect to the first monthly period,
the initial Invested Amount); and
(b) the denominator of which is the greater of:
(1) the sum of (A) the product of (x) the aggregate amount
of principal receivables in the trust as of the close
of business on the last day of the preceding monthly
period (or with respect to the first monthly period,
the aggregate amount of principal receivables in the
trust as of the close of business on the closing date)
and (y) one minus the Discount Percentage and (B) the
principal amount on deposit in the special funding
account as of the close of business on the last day of
the preceding monthly period (or with respect to the
first monthly period, as of the closing date) and
(2) the sum of the numerators used to calculate the
investor percentages for allocations with respect to
finance charge receivables, Defaulted Amounts or
principal receivables, as applicable, for all
outstanding series on the date of determination.
The denominator used in the calculation of Floating Investor
Percentage, however, will be adjusted as follows, with respect to any monthly
period in which an addition date occurs or in which a removal date occurs on
which, if any series has been paid in full, principal receivables in an
aggregate amount approximately equal to the initial invested amount of that
series are removed from the trust, the amount in clause (b)(1)(A) above shall
be:
(1) the product of (x) the aggregate amount of principal receivables
in the trust as of the close of business on the last day of the
prior monthly period and (y) one minus the Discount Percentage,
for the period from and including the first day of the prior
monthly period to but excluding the related addition date or
removal date; and
(2) the product of (x) the aggregate amount of principal receivables
in the trust as of the close of business on the related addition
date or removal date after adjusting for the aggregate amount of
principal receivables added to or removed from the trust on the
related addition date or removal date, as the case may be, and
(y) one minus the Discount Percentage, for the period from and
including the related addition date or removal date to and
including the last day of that monthly period.
FIXED ALLOCATION DEFINITIONS
Collections of finance charge receivables and principal receivables
during the controlled accumulation period and early amortization period will be
allocated to the Invested Amount based on the Fixed Investor Percentage. The
"Fixed Investor Percentage" means, with respect to any monthly period, the
percentage equivalent of a fraction:
(a) the numerator of which is the Invested Amount as of the close of
business on the last day of the revolving period; and
(b) the denominator of which is the greater of:
(1) the sum of (A) the product of (x) the aggregate amount of
principal receivables in the trust as of the close of
business on the last day of the prior monthly period (or
with respect to the first monthly period, the aggregate
amount of principal receivables in the trust as of the
closing date) and (y) one minus the Discount Percentage and
(B) the principal amount on deposit in the special funding
account as of the close of business on the last day of the
preceding monthly period (or with respect to the first
monthly period, as of the closing date) and
(2) the sum of the numerators used to calculate the investor
percentages for allocations with respect to principal
receivables or finance charge receivables, as applicable,
for all outstanding series on the date of determination.
The denominator used in the calculation of Fixed Investor Percentage,
however, will be adjusted as follows, with respect to any monthly period in
which an addition date occurs or in which a removal date occurs on which, if any
series has been paid in full, principal receivables in an aggregate amount
approximately equal to the initial invested amount of that series are removed
from the trust, the amount in clause (b)(1)(A) above shall be:
(1) the product of (x) the aggregate amount of principal receivables
in the trust as of the close of business on the last day of the
prior monthly period and (y) one minus the Discount Percentage,
for the period from and including the first day of the prior
monthly period to but excluding the related addition date or
removal date; and
(2) the product of (x) the aggregate amount of principal receivables
in the trust as of the close of business on the related addition
date or removal date after adjusting for the aggregate amount of
principal receivables added to or removed from the trust on the
related addition date or removal date, as the case may be, and
(y) one minus the Discount Percentage, for the period from and
including the related addition date or removal date to and
including the last day of that monthly period.
INVESTED AMOUNT DEFINITIONS
"Invested Amount," for any date of determination, means an amount
equal to
(a) the initial outstanding principal amount of the Series 200_-__
notes (as increased by the principal balance of any Series
200_-__ notes issued after the closing date), minus
(b) the amount of principal previously paid to the Series 200_-__
noteholders, minus
(c) the amount of unreimbursed Investor Charge-Offs and Reallocated
Principal Collections.
"Adjusted Invested Amount," for any date of determination, means the
(a) the Invested Amount as of that date, minus (b) the amount on deposit in the
principal funding account for that date.
REALLOCATED PRINCIPAL COLLECTIONS
On each distribution date, if the sum of Class A interest, Class B
interest and the monthly servicing fee cannot be paid from Available Finance
Charge Collections and Excess Finance Charge Collections as described below
under "--Application of Collections," then collections of principal receivables
allocated to the Invested Amount will be treated as collections of finance
charge receivables and will be available to pay these amounts, in an amount
equal to the Reallocated Principal Collections, and the Invested Amount will be
reduced accordingly. A reduction in the Invested Amount will reduce the
allocation of finance charge and principal collections to your series.
"Reallocated Principal Collections" means, for any monthly period,
Available Principal Collections used to pay interest on the Class A notes and
the Class B notes or used to pay the monthly servicing fee in an amount equal to
the lesser of:
o the Monthly Principal Reallocation Amount for that monthly
period; and
o the Invested Amount after giving effect to any Investor
Charge-Offs for that distribution date.
"Monthly Principal Reallocation Amount" means, for any monthly period,
the sum of:
the lower of:
o the excess of the amounts needed to pay current and past due
Class A Monthly Interest and Class A Additional Interest as
described under " --Application of Collections -- Payment of
Interest, Fees and Other Items" below over the Available
Finance Charge Collections allocated to cover these amounts;
and
o ___% of the initial Invested Amount minus the amount of
unreimbursed Investor Charge-Offs and unreimbursed
Reallocated Principal Collections; plus
the lower of:
o the sum of (A) the excess of the amounts needed to pay current
and past due Class B Monthly Interest and Class B Additional
Interest as described under "--Application of Collections --
Payments of Interest, Fees and Other Items" below over the
Available Finance Charge Collections allocated to cover these
amounts and (B) the excess of the monthly servicing fee over the
Available Finance Charge Collections allocated to cover these
amounts; and
o ___% of the initial Invested Amount minus the amount of
unreimbursed Investor Charge-Offs and unreimbursed Reallocated
Principal Collections.
APPLICATION OF COLLECTIONS
PAYMENT OF INTEREST, FEES AND OTHER ITEMS
On each distribution date, the servicer will direct the indenture
trustee to apply Available Finance Charge Collections and Excess Finance Charge
Collections on deposit in the collection account in the following order:
o an amount equal to the Class A Monthly Interest plus Class A
Additional Interest due for the related distribution date, and
past due for any prior distribution dates, will be paid to the
Class A noteholders on that distribution date;
o an amount equal to the Class B Monthly Interest plus Class B
Additional Interest due for the related distribution date, and
past due for any prior distribution dates, will be paid to the
Class B noteholders on that distribution date;
o an amount equal to the monthly servicing fee due for the related
distribution date, and past due for any prior distribution date,
will be paid to the servicer;
o an amount equal to the Class C Monthly Interest plus Class C
Additional Interest due for the related distribution date, and
past due for any prior distribution dates, will be paid to the
Class C noteholders on that distribution date;
o an amount equal to the Investor Default Amount, if any, for the
related monthly period, will be treated as Available Principal
Collections;
o an amount equal to the sum of the Investor Charge-Offs and the
amount of unreimbursed Reallocated Principal Collections will be
treated as Available Principal Collections;
o on and after the reserve account funding date, an amount equal to
the excess, if any, of the Required Reserve Account Amount over
the amount then on deposit in the reserve account will be
deposited into the reserve account;
o an amount equal to the excess, if any, of the Required Spread
Account Amount over the amount then on deposit in the spread
account will be deposited into the spread account;
o all remaining amounts will be treated as Excess Finance Charge
Collections and will be available to cover any shortfalls in
finance charge collections for other outstanding series in group
one and, after payment of these shortfalls, the remaining amount
will be paid to the holders of the transferor certificates.
In the event that Available Finance Charge Collections and Excess
Finance Charge Collections for any monthly period are insufficient to pay Class
C Monthly Interest when due, a draw will be made from amounts available in the
spread account and will be paid to the Class C noteholders on the related
distribution date.
"Class A Monthly Interest" with respect to any distribution date will
equal the product of
(a) the Class A note interest rate for the related interest period,
(b) the actual number of days in that interest period divided by 360
and
(c) the outstanding principal balance of the Class A notes as of the
close of business on the last day of the prior monthly period or,
with respect to the first distribution date, the outstanding
principal balance of the Class A notes as of the closing date.
"Class B Monthly Interest" with respect to any distribution date will
equal the product of
(a) the Class B note interest rate for the related interest period,
(b) the actual number of days in that interest period divided by 360
and
(c) the outstanding principal balance of the Class B notes as of the
close of business on the last day of the prior monthly period or,
with respect to the first distribution date, the outstanding
principal balance of the Class B notes as of the closing date.
"Class C Monthly Interest" with respect to any distribution date will
equal the product of
(a) the Class C note interest rate for the related interest period,
(b) the actual number of days in that interest period divided by 360
and
(c) the outstanding principal balance of the Class C notes as of the
close of business on the last day of the prior monthly period or,
with respect to the first distribution date, the outstanding
principal balance of the Class C notes as of the closing date.
"Monthly Interest" with respect to any distribution date will equal
the sum of the Class A Monthly Interest, the Class B Monthly Interest and the
Class C Monthly Interest for that distribution date.
"Payments of Principal"
On each distribution date, the servicer will direct the indenture
trustee to apply Available Principal Collections on deposit in the collection
account in the following priority:
(a) on each distribution date with respect to the revolving period,
all Available Principal Collections will be treated as Shared Principal
Collections and applied as described under "Description of Series Provisions
-Shared Principal Collections and Transferor Principal Collections" in this
prospectus supplement and "Description of the Notes -Shared Principal
Collections and Transferor Principal Collections" in the accompanying
prospectus;
(b) on each distribution date with respect to the controlled
accumulation period and the early amortization period, all Available Principal
Collections will be distributed or deposited in the following priority:
(1) during the controlled accumulation period, an amount equal
to Monthly Principal will be deposited in the principal
funding account;
(2) during the early amortization period, an amount equal to the
Monthly Principal will be distributed to the paying agent
for payment to the Class A noteholders until the outstanding
principal balance of the Class A notes has been paid in
full;
(3) during the early amortization period, an amount equal to
Monthly Principal will, after the outstanding principal
balance of the Class A notes has been paid in full, be
distributed to the paying agent for payment to the Class B
noteholders until the outstanding principal balance of the
Class B notes has been paid in full; and
(4) during the early amortization period, an amount equal to
Monthly Principal will, after the outstanding principal
balances of the Class A notes and the Class B notes have
been paid in full, be distributed to the paying agent for
payment to the Class C noteholders until the outstanding
principal balance of the Class C notes has been paid in
full;
(c) on each distribution date with respect to the controlled
accumulation period and the early amortization period, the balance of Available
Principal Collections not applied pursuant to (b) above, if any, will be treated
as Shared Principal Collections and applied as described under "Description of
Series Provisions -Shared Principal Collections and Transferor Principal
Collections" in this prospectus supplement and "Description of the Notes -Shared
Principal Collections and Transferor Principal Collections" in the accompanying
prospectus.
"Monthly Principal" with respect to any distribution date will equal
the least of
o the Available Principal Collections on deposit in the collection
account with respect to that distribution date,
o for each distribution date with respect to the controlled
accumulation period, the Controlled Deposit Amount for that
distribution date and
o the Adjusted Invested Amount (as adjusted for any Investor
Charge-Offs and Reallocated Principal Collections on that
distribution date) prior to any deposits into the principal
funding account on that distribution date.
"Controlled Deposit Amount" means, for any distribution date, the sum
of (1) the Controlled Accumulation Amount for that distribution date, plus (2)
the Accumulation Shortfall, if any.
"Controlled Accumulation Amount" means for any distribution date with
respect to the controlled accumulation period, $________. However, if the
commencement of the controlled accumulation period is postponed as described
above under "--Postponement of Controlled Accumulation Period," the Controlled
Accumulation Amount may be higher than the amount stated above for each
distribution date with respect to the controlled accumulation period and will be
determined by the servicer in accordance with the Series 200_-__ indenture
supplement based on the principal payment rates for the accounts and on the
invested amounts of other series (other than excluded series) which are
scheduled to be in their revolving periods and then scheduled to create Shared
Principal Collections during the controlled accumulation period.
"Accumulation Shortfall" means:
(a) on the first distribution date during the controlled accumulation
period, the excess, if any, of the Controlled Accumulation Amount for that
distribution date over the amount deposited in the principal funding account on
that distribution date; and
(b) on each subsequent distribution date during the controlled
accumulation period, the excess, if any, of the applicable Controlled
Accumulation Amount for that subsequent distribution date plus any Accumulation
Shortfall for the prior distribution date over the amount deposited in the
principal funding account on that subsequent distribution date.
SHARED EXCESS FINANCE CHARGE COLLECTIONS
Finance charge collections -and other amounts treated like finance
charge collections -in excess of the amount required to make payments or
deposits for your series will be made available to other series included in
group one whose allocation of finance charge collections is not sufficient to
make its required payments or deposits. We call these collections "Excess
Finance Charge Collections." If your series requires more finance charge
collections than allocated through the Investor Percentage, it will have access
to finance charge collections -and other amounts treated like finance charge
collections -from other series in group one. Each series that is part of group
one and has a shortfall will receive a share of the total amount of Excess
Finance Charge Collections available for that month based on the amount of
shortfall for that series divided by the total shortfall for all series for that
same month.
SHARED PRINCIPAL COLLECTIONS AND TRANSFEROR PRINCIPAL COLLECTIONS
Collections of principal receivables for any monthly period allocated
to the Invested Amount will first be used to cover, during the controlled
accumulation period, deposits of the applicable Controlled Deposit Amount to the
principal funding account, and during the early amortization period, payments to
the noteholders. The servicer will determine the amount of collections of
principal receivables for any monthly period allocated to the Invested Amount
remaining after covering required payments to the noteholders and any similar
amount remaining for any other series in group one ("Shared Principal
Collections"). The servicer will allocate the Shared Principal Collections to
cover any scheduled or permitted principal distributions to noteholders and
deposits to principal funding accounts, if any, for any series in group one
which have not been covered out of the collections of principal receivables
allocable to the other series in group one and other amounts for those series
("Principal Shortfalls"). Shared Principal Collections will not be used to cover
investor charge-offs for any series. If Principal Shortfalls exceed Shared
Principal Collections for any monthly period, Shared Principal Collections will
be allocated pro rata among the applicable series in group one based on the
relative amounts of Principal Shortfalls. To the extent that Shared Principal
Collections exceed Principal Shortfalls, the balance will, subject to
limitations, be paid to the holders of the transferor certificates.
In addition, the servicer will, under the terms of the indenture,
determine the amount of collections of principal receivables for any monthly
period allocated to the Transferor Interest but not due to the holder of any
supplemental certificate and other amounts payable to the transferor with
respect to collections of principal receivables ("Shared Transferor Principal
Collections"). Shared Transferor Principal Collections will be applied, if
necessary, to cover payments of principal due to noteholders during the
controlled accumulation period and the early amortization period that have not
been covered out of collections of principal receivables allocated to Series
200_-__ and other amounts and Shared Principal Collections. To the extent
Principal Shortfalls for series designated to receive Shared Transferor
Principal Collections exceed Shared Principal Collections allocable to each of
these series and Shared Transferor Principal Collections, for any monthly
period, Shared Transferor Principal Collections will be allocated pro rata among
the applicable series in group one based on the remaining Principal Shortfalls
for each of these series.
DEFAULTED RECEIVABLES; INVESTOR CHARGE-OFFS
The Investor Default Amount represents the series' share of losses
from the trust portfolio. On each distribution date, the servicer will calculate
the "Investor Default Amount" by multiplying:
o the Floating Investor Percentage for that month, by
o the "Defaulted Amount," which is the total amount of principal
receivables (other than ineligible receivables) in the trust that
were charged-off for that month.
If the Investor Default Amount exceeds the amount of finance charge collections
allocated to fund this amount for the prior month, then the Invested Amount will
be reduced by the excess. The Invested Amount will also be reduced by the amount
of any Reallocated Principal Collections used to cover any Investor Default
Amounts. In no event, however, will the Invested Amount be reduced below zero.
Reductions in the Invested Amount from both of these items may be reimbursed
from subsequent finance charge collections allocated for reimbursement, if
available. If the Invested Amount is reduced to zero, your series will not
receive any further allocations of finance charge and principal collections.
PRINCIPAL FUNDING Account
The indenture trustee will establish and maintain with an eligible
institution a segregated trust account held for the benefit of the noteholders
to serve as the "Principal Funding Account." During the controlled accumulation
period, the indenture trustee at the direction of the servicer will transfer
Available Principal Collections from the collection account to the principal
funding account as described under "-Application of Collections" in this
prospectus supplement.
Funds on deposit in the principal funding account will be invested to
the following distribution date by the indenture trustee at the direction of the
servicer in eligible investments. Investment earnings (net of investment losses
and expenses) on funds on deposit in the principal funding account (the
"Principal Funding Investment Proceeds") will be deposited in the collection
account and included in Available Finance Charge Collections for the related
interest period. If, for any distribution date, the Principal Funding Investment
Proceeds are less than the sum of:
(a) the product of
o the balance of the principal funding account, up to the
outstanding principal balance of the Class A notes, on the record
date immediately preceding that distribution date,
o the Class A note interest rate for the related interest period
and
o the number of days in the related interest period divided by 360,
plus
(b) the product of
o the balance of the principal funding account in excess of the
outstanding principal balance of the Class A notes on the record
date immediately preceding that distribution date,
o the Class B note interest rate for the related interest period
and
o the number of days in the related interest period divided by 360,
then the indenture trustee will withdraw the shortfall, called the "Reserve Draw
Amount," to the extent required and available, from the reserve account and
deposit it in the collection account for use as Available Finance Charge
Collections.
RESERVE ACCOUNT
The indenture trustee will establish and maintain with an eligible
institution a segregated trust account held for the benefit of the noteholders
to serve as the "Reserve Account." The reserve account is established to assist
with the subsequent distribution of interest on the notes during the controlled
accumulation period and on the first distribution date with respect to the early
amortization period. On each distribution date from and after the reserve
account funding date, but prior to the termination of the reserve account, the
indenture trustee, acting pursuant to the servicer's instructions, will apply
Available Finance Charge Collections and Excess Finance Charge Collections
allocated to the Series 200_-__ notes (to the extent described above under
"-Application of Collections -Payment of Interest, Fees and Other Items") to
increase the amount on deposit in the reserve account (to the extent that amount
is less than the Required Reserve Account Amount).
The "Reserve Account Funding Date" will be the distribution date with
respect to the monthly period which commences no later than three months prior
to the commencement of the controlled accumulation period, or an earlier date as
the servicer may determine.
The "Required Reserve Account Amount" for any distribution date on or
after the reserve account funding date will be equal to (a) 0.__% of the
outstanding principal balance of the Class A notes or (b) any other amount
designated by the transferor; except that if the designation is of a lesser
amount, the transferor will provide the servicer and the indenture trustee with
written confirmation that the designation will not result in the reduction or
withdrawal by any rating agency of its rating of any outstanding series or class
and the transferor will deliver to the indenture trustee a certificate of an
authorized officer of the transferor to the effect that, based on the facts
known to that officer at the time, in the reasonable belief of the transferor,
the designation will not cause a pay out event or an event that, after the
giving of notice or the lapse of time, would cause a pay out event to occur with
respect to Series 200_-__ .
On each distribution date, after giving effect to any deposit to be
made to, and any withdrawal to be made from, the reserve account on that
distribution date, the indenture trustee will withdraw from the reserve account
an amount equal to the excess, if any, of the amount on deposit in the reserve
account over the Required Reserve Account Amount, will deposit the excess in the
spread account to the extent that funds available in the spread account are less
than the Required Spread Account Amount and will distribute any remaining excess
to the holders of the transferor certificates. Any amounts withdrawn from the
reserve account and deposited in the spread account as described above will be
available for distribution only to the holders of the Class C notes. Any amounts
withdrawn from the reserve account and distributed to the holders of the
transferor certificates as described above will not be available for
distribution to the noteholders.
So long as the reserve account is not terminated as described below,
all amounts on deposit in the reserve account on any distribution date (after
giving effect to any deposits to, or withdrawals from, the reserve account to be
made on that distribution date) will be invested to the following distribution
date by the indenture trustee at the direction of the servicer in eligible
investments. The interest and other investment income (net of investment
expenses and losses) earned on these investments will be retained in the reserve
account (to the extent the amount on deposit is less than the Required Reserve
Account Amount) or deposited in the collection account and treated as Available
Finance Charge Collections.
On or before each distribution date with respect to the controlled
accumulation period and on the first distribution date with respect to the early
amortization period, a withdrawal will be made from the reserve account, and the
amount of this withdrawal will be deposited in the collection account and
included as Available Finance Charge Collections, as provided in the Series
200_-__ indenture supplement, for that distribution date in an aggregate amount
equal to the least of (a) the amount then on deposit in the reserve account with
respect to that distribution date, (b) the Required Reserve Account Amount and
(c) the reserve draw amount with respect to that distribution date. However, the
amount of the withdrawal will be reduced to the extent that funds otherwise
would be available to be deposited in the reserve account on that distribution
date.
The reserve account will be terminated upon the earliest to occur of:
o the first distribution date for the early amortization period;
o the expected principal payment date; and
o the termination of the trust.
Upon the termination of the reserve account, all amounts on deposit in the
reserve account (after giving effect to any withdrawal from the reserve account
on that date as described above) will be deposited in the spread account to the
extent that funds available in the spread account are less than the Required
Spread Account Amount and any remaining amounts will be distributed to the
holders of the transferor certificates. Any amounts withdrawn from the reserve
account and deposited in the spread account as described above will be available
for distribution only to the holders of the Class C notes. Any amounts withdrawn
from the reserve account and distributed to the holders of the transferor
certificates as described above will not be available for distribution to the
noteholders.
SPREAD ACCOUNT
The servicer will establish and maintain with an eligible institution
the spread account as a segregated account held as security for the benefit of
the Class C noteholders (the "Spread Account"). Amounts on deposit in the spread
account will be used (a) to fund shortfalls in interest payments on the Class C
notes and (b) on the Series 200_-__ termination date, to fund any shortfall in
payment of the outstanding principal balance of the Class C notes.
The spread account initially will not be funded, but will be funded by
(a) Available Finance Charge Collections and Excess Finance Charge Collections,
as described above under "-Application of Collections -Payment of Interest, Fees
and Other Items," and (b) amounts, if any, withdrawn from the reserve account to
be treated as Available Finance Charge Collections, as described above under
"-Reserve Account," and deposited into the spread account on any distribution
date to the extent that the funds available in the spread account are less than
the Required Spread Account Amount on that distribution date.
The "Required Spread Account Amount" will be determined on each
distribution date, and, in general, for any date of determination, will be equal
to the product of (a) the Spread Account Percentage in effect on the date of
determination and (b) the initial Invested Amount. However, as long as no event
of default for your series has occurred and is continuing, the Required Spread
Account Amount will not exceed the outstanding principal balance of the Class C
Notes minus the excess, if any, of the principal funding account balance over
the sum of the outstanding principal balances of the Class A notes and the Class
B notes on the date of determination.
Once an event of default for your series occurs and is continuing, the
Required Spread Account Amount for any distribution date will automatically
increase to the sum of
(a) the amount on deposit in the spread account on that distribution
date plus
(b) Available Finance Charge Collections and Excess Finance Charge
Collections for that distribution date available immediately
after funding the reserve account plus
(c) amounts withdrawn from the reserve account to be treated as
Available Finance Charge Collections, as described above under
"-Reserve Account." However, following an event of default for
your series, if the maturity of your notes is not accelerated,
the increase in the Required Spread Account Amount will be
limited to an amount equal to the outstanding principal amount of
your series of notes.
"Spread Account Percentage" will be determined as follows:
<TABLE>
<CAPTION>
IF THE QUARTERLY EXCESS SPREAD PERCENTAGE IS THEN, THE SPREAD ACCOUNT
GREATER THAN OR EQUAL TO: AND LESS THAN: PERCENTAGE WILL EQUAL:
<S> <C> <C>
---% ---% ---%
---% ---% ---%
---% ---% ---%
</TABLE>
However, if a pay out event (other than a pay out event resulting from the
occurrence of an event of default) for Series 200_-__ has occurred, the Spread
Account Percentage will be [--]%.
After the Spread Account Percentage has been increased above zero as
specified in the table above, it will remain at the specified percentage until:
(a) further increased to a higher required percentage as specified
above, or
(b) the distribution date on which the Quarterly Excess Spread
Percentage has increased to a level above that for the then current Spread
Account Percentage, in which case the Spread Account Percentage will be
decreased to the appropriate percentage as specified above (or, if the Quarterly
Excess Spread Percentage is greater than or equal to [--]%, the Spread Account
Percentage will be zero and the Required Spread Account Amount will be zero).
However, if a pay out event (other than a pay out event resulting from the
occurrence of an event of default) with respect to Series 200_-__ has occurred,
the Spread Account Percentage will equal [--]% (as provided in the definition of
Spread Account Percentage above) and may not be subsequently reduced.
The "Quarterly Excess Spread Percentage" will be determined as
follows:
For the [Month 1] 200_ distribution date: The Modified Excess Spread
Percentage.
For the [Month 2] 200_ distribution date: The Modified Excess Spread
Percentage for the first monthly
period, plus the Excess Spread
Percentage for the [Month 1] 200_
monthly period .
For the [Month 3] 200_ distribution date: The Modified Excess Spread
Percentage for the first monthly
period, plus the Excess Spread
Percentage for the [Month 1] 200_
monthly period, plus the Excess
Spread Percentage for the [Month 2]
200_ monthly period .
For each following distribution date: The sum of the Excess Spread
Percentages for the 3 prior monthly
periods.
The "Excess Spread Percentage" for any monthly period will be
determined as follows:
o during the controlled accumulation period, but only if the amount
on deposit in the reserve account is greater than or equal to the
Required Reserve Account Amount:
o Available Finance Charge Collections for that monthly period
available immediately after covering Class A's portion of
the Investor Default Amount times 12, divided by
o The Adjusted Invested Amount on the first day of that
monthly period
o in all other cases:
o Available Finance Charge Collections for that monthly period
available immediately after covering Class A's portion of
the Investor Default Amount times 12, divided by
o The Invested Amount on the first day of that monthly period.
The "Modified Excess Spread Percentage" will be calculated for the
first monthly period in accordance with the Series 200_-__ indenture supplement
based on collections of finance charge receivables for that monthly period in
relation to the amount of interest and servicing fee accrued for the first
distribution date.
Funds on deposit in the spread account will be invested at the
direction of the servicer in eligible investments. For purposes of the spread
account, the reference in the definition of eligible investments to a rating in
the "highest rating category" refers to a rating of at least A-2 by Standard &
Poor's, P-2 by Moody's or F2 by Fitch. Investment earnings (net of losses and
investment expenses) will, except as otherwise indicated in this prospectus
supplement, not be deposited into the spread account and will be paid to the
holders of the transferor certificates. However, after an event of default
relating to your series of notes, these investment earnings will be available
for payment to holders of the Class C notes.
SPREAD ACCOUNT DISTRIBUTIONS
If on any distribution date, the interest to be paid on the Class C
notes exceeds the amount allocated to pay that interest, the indenture trustee,
at the instruction of the servicer, will withdraw from the spread account the
lesser of (1) the amount on deposit in the spread account (including investment
earnings to the extent necessary to fund that excess) and (2) the amount of the
excess, and will deposit that amount into the collection account for payment of
interest on the Class C notes.
On the Series 200_-__ termination date, funds available in the spread
account (after giving effect to any withdrawals to be made as discussed in the
preceding paragraph) will be used to fund any shortfall in the payment of the
outstanding principal balance of the Class C notes.
Funds on deposit in the spread account on any distribution date in
excess of the Required Spread Account Amount on that date will be paid to the
holders of the transferor certificates. On the date on which all amounts due to
the Class C noteholders from the spread account have been paid in full, all
amounts, if any, then remaining in the spread account will be distributed to the
holders of the transferor certificates.
ISSUANCE OF ADDITIONAL NOTES
The Series 200_-__ indenture supplement provides that, from time to
time during the revolving period, the transferor may, subject to conditions
described below, cause the trust to issue additional notes of Series 200_-__
(each issuance, an "Additional Issuance"). When issued, the additional notes of
each class will be identical in all respects to the other outstanding notes of
that class and will be equally and ratably entitled to the benefits of the
transfer and servicing agreement, the indenture and the Series 200_-__ indenture
supplement without preference, priority or distinction.
In connection with each additional issuance, the outstanding principal
amounts of each class of notes and the series enhancement will be increased
proportionately. The additional series enhancement provided in connection with
an additional issuance may take the form of a letter of credit, the
establishment of a cash collateral account, the purchase of interest rate caps
or swaps and/or another form of series enhancement, provided that the form and
amount of additional series enhancement will not cause a reduction or withdrawal
by any rating agency of its rating of any outstanding series or class.
Following an additional issuance, the respective portions of the
series enhancement that are for the benefit of the noteholders will remain the
same, as a percentage of the total series enhancement, as the respective
proportions in effect on the closing date. The Controlled Accumulation Amount
also will be increased proportionately to reflect the principal amount of
additional notes.
In order to issue additional notes, several conditions must be
satisfied, including:
o notice to the indenture trustee, the owner trustee, the servicer
and any series enhancer of the issuance and the date upon which
it is to occur;
o after giving effect to the additional issuance, the total amount
of principal receivables must at least equal the Required Minimum
Principal Balance, and the Transferor Interest must equal or
exceed the Required Transferor Interest;
o delivery to the indenture trustee of any additional series
enhancement agreement related to the additional issuance,
executed by each of the parties to the series enhancement
agreement;
o delivery to the indenture trustee of written confirmation that
the additional issuance will not result in the reduction or
withdrawal by any rating agency of its rating of any outstanding
series or class;
o delivery to the indenture trustee of a certificate of an
authorized officer of the transferor to the effect that, in the
transferor's reasonable belief, the issuance will not have a
material adverse effect on the interests of the noteholders at
the date of issuance or at any future date;
o as of the date of the additional issuance, all amounts due to the
Series 200_-_ noteholders must have been paid, and there must not
be any unreimbursed Investor Charge-Offs;
o the excess of the principal amount of the additional notes over
their issue price shall not exceed the maximum amount permitted
under the Code without the creation of original issue discount;
and
o delivery by the transferor to the indenture trustee of an opinion
of counsel acceptable to the indenture trustee that, for federal
income tax purposes,
(1) the issuance will not adversely affect the tax
characterization as debt of notes of any outstanding
series or class that were characterized as debt at the
time of their issuance;
(2) the new issuance will not cause the trust to be deemed
to be an association (or publicly traded partnership)
taxable as a corporation; and
(3) the new issuance will not cause or constitute an event
in which gain or loss would be recognized by any
noteholder.
There are no restrictions on the timing or amount of any additional
issuance, provided that the conditions described above are met. As of the date
of any additional issuance, the Invested Amount will be increased to reflect the
initial principal balance of the additional notes of each class.
PAIRED SERIES
Your series of notes may be paired with one or more series of notes
issued at a later time once the controlled accumulation period or the early
amortization period for your series begins. We call each of these later issued
series a "Paired Series." All or a portion of a paired series may be pre-funded
with an initial deposit to a funding account that is for the sole benefit of the
paired series; in the alternative, a paired series may have a principal amount
that can be increased. Once your series is paid in full, if there have been no
unreimbursed investor charge-offs for any paired series, the invested amount of
the paired series will be increased by an amount up to the full Invested Amount
of your series. The issuance of the paired series will be subject to the
conditions described under "Description of the Notes -New Issuances" in the
accompanying prospectus.
We cannot assure you that the terms of any paired series will not have
an impact on the calculation of the Investor Percentage or the timing or amount
of payments received by you as a Series 200_-__ noteholder. The extent to which
the timing or amount of payments received by you may be affected will depend on
many factors, only one of which is a change in the calculation of the Investor
Percentage.
PAY OUT EVENTS
As described above, the revolving period will continue through
_______, 200 (unless that date is postponed as described under "-Postponement of
Controlled Accumulation Period" in this prospectus supplement), unless a pay out
event occurs prior to that date.
A "Pay Out Event" refers to any of the following events:
(a) failure by the transferor (1) to make any payment or deposit on
the date required under the transfer and servicing agreement, the indenture or
the Series 200_-__ indenture supplement (or within the applicable grace period
which shall not exceed five days) or (2) to observe or perform in any material
respect any other covenants or agreements of the transferor set forth in the
transfer and servicing agreement, the indenture or the Series 200_-__ indenture
supplement, which failure has a material adverse effect on the Series 200_-__
noteholders and which continues unremedied for a period of 60 days after written
notice of the failure, requiring the same to be remedied, and continues to
materially and adversely affect the interests of the noteholders for the
designated period;
(b) any representation or warranty made by the transferor in the
transfer and servicing agreement, the indenture or the Series 200_-__ indenture
supplement, or any information required to be given by the transferor to the
indenture trustee to identify the accounts proves to have been incorrect in any
material respect when made or delivered and which continues to be incorrect in
any material respect for a period of 60 days after written notice of the
failure, requiring the same to be remedied, and as a result of which the
interests of the noteholders are materially and adversely affected and continue
to be materially and adversely affected for the designated period; except that a
pay out event pursuant to this subparagraph (b) will not occur if the transferor
has accepted reassignment of the related receivable or all related receivables,
if applicable, during the designated period in accordance with the provisions of
the transfer and servicing agreement;
(c) a failure by the transferor to convey receivables in additional
accounts or participations to the trust within 5 business days after the date
required by the transfer and servicing agreement;
(d) any servicer default occurs which would have a material adverse
effect on the Series 200_-__ noteholders;
(e) the average of the Portfolio Yields for any three consecutive
monthly periods is less than the average of the Base Rates for the same monthly
periods;
(f) insufficient moneys are available to pay in full the outstanding
principal balances of all the Series 200_-__ notes on the expected principal
payment date;
(g) bankruptcy, insolvency, liquidation, conservatorship, receivership
or similar events relating to the transferor (including any additional
transferor) or the originator;
(h) the transferor is unable for any reason to transfer receivables to
the trust in accordance with the provisions of the transfer and servicing
agreement;
(i) the trust becomes subject to regulation as an "investment company"
within the meaning of the Investment Company Act of 1940, as amended; or
(j) an event of default for Series 200_-__ occurs under the indenture.
In the case of any event described in clause (a), (b), (d) or (f)
above, a pay out event will be deemed to have occurred with respect to the notes
only if, after any applicable grace period, either the indenture trustee or the
Series 200_-__ noteholders evidencing interests aggregating not less than 50% of
the aggregate unpaid principal amount of the Series 200_-__ notes, by written
notice to the transferor and the servicer (and to the indenture trustee if given
by the Series 200_-__ noteholders), declare that a pay out event has occurred
with respect to the Series 200_-__ notes as of the date of the notice.
In the case of any event described in clause (g), (h) or (i), a pay
out event with respect to all series then outstanding, and in the case of any
event described in clause (c), (e) or (j), a pay out event with respect to only
the Series 200_-__ notes, will occur without any notice or other action on the
part of the indenture trustee or the Series 200_-__ noteholders immediately upon
the occurrence of the event.
On the date on which a pay out event is deemed to have occurred, the
early amortization period will begin.
See "Description of the Notes -Pay Out Events" in the accompanying
prospectus for an additional discussion of the consequences of an insolvency,
conservatorship or receivership of the transferor.
The term "Base Rate" means, with respect to any monthly period, the
annualized percentage equivalent of a fraction:
o the numerator of which is the sum of the Monthly Interest and the
Monthly Servicing Fee, each for the related distribution date;
and
o the denominator of which is the Invested Amount as of the close
of business on the last day of that monthly period.
The term "Portfolio Yield" means, with respect to any monthly period,
the annualized percentage equivalent of a fraction:
o the numerator of which is the sum of collections of finance
charge receivables, Excess Finance Charge Collections, Principal
Funding Investment Proceeds and amounts withdrawn from the
reserve account, if any, deposited in the collection account and
allocable to the Series 200_-__ notes for that monthly period,
calculated on a cash basis after subtracting the Investor Default
Amount for that monthly period; and
o the denominator of which is the Invested Amount as of the close
of business on the last day of that monthly period.
EVENTS OF DEFAULT
The events of default for Series 200_-__ , as well as the rights and
remedies available to the indenture trustee and the Series 200_-__ noteholders
when an event of default occurs, are described under "The Indenture -Events of
Default; Rights Upon Event of Default" in the accompanying prospectus.
If an event of default for Series 200_-__ occurs, the indenture
trustee or the holders of a majority of the then-outstanding principal balance
of the Series 200_-__ notes may declare the Series 200_-__ notes to be
immediately due and payable. If the Series 200_-__ notes are accelerated, you
may receive principal prior to the expected principal payment date for your
notes.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
The share of the servicing fee allocable to the Invested Amount with
respect to any distribution date (the "Monthly Servicing Fee") will be equal to
one-twelfth of the product of (a) ___% and (b) (1) the Adjusted Invested Amount
as of the last day of the monthly period preceding that distribution date, minus
(2) the product of the amount, if any, on deposit in the special funding account
as of the last day of the monthly period preceding that distribution date and
the Investor Percentage of collections of finance charge receivables with
respect to that monthly period. However, with respect to the first distribution
date, the monthly servicing fee will equal $___.
The servicer will pay from its servicing compensation expenses
incurred in connection with servicing the receivables including, without
limitation, payment of the fees and disbursements of the indenture trustee and
independent certified public accountants and other fees which are not expressly
stated in the transfer and servicing agreement, the indenture or the Series
200_-__ indenture supplement to be payable by the trust or the noteholders other
than federal, state and local income and franchise taxes, if any, of the trust.
REPORTS TO NOTEHOLDERS
On each distribution date, the paying agent, on behalf of the
indenture trustee will forward to each noteholder of record, a statement
prepared by the servicer setting forth the items described in "Description of
the Notes -Reports to Noteholders" in the accompanying prospectus.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended
("ERISA"), and Section 4975 of the Code impose requirements on employee benefit
plans and other plans and arrangements, including individual retirement accounts
and annuities, Keogh plans and collective investment funds or insurance company
general or separate accounts in which the plans, accounts or arrangements are
invested, that are subject to the fiduciary responsibility provisions of ERISA
and/or Section 4975 of the Code (collectively, "Plans"), and on persons who are
fiduciaries with respect to Plans, in connection with the investment of "plan
assets" of any Plan ("Plan Assets"). ERISA generally imposes on Plan fiduciaries
general fiduciary requirements, including those of investment prudence and
diversification and the requirement that a Plan's investments be made in
accordance with the documents governing the Plan.
ERISA and Section 4975 of the Code prohibit a broad range of
transactions involving Plan Assets and persons ("parties in interest" under
ERISA and "disqualified persons" under the Code, collectively, "Parties In
Interest") who have specified relationships to a Plan or its Plan Assets, unless
a statutory or administrative exemption is available. Parties in Interest that
participate in a prohibited transaction may be subject to a penalty imposed
under ERISA and/or an excise tax imposed pursuant to Section 4975 of the Code,
unless a statutory or administrative exemption is available. These prohibited
transactions generally are set forth in Section 406 of ERISA and Section 4975 of
the Code.
Subject to the considerations described below and in the accompanying
Prospectus, the notes are eligible for purchase with Plan Assets of any Plan.
Any fiduciary or other Plan investor considering whether to purchase
the notes with Plan Assets of any Plan should determine whether that purchase is
consistent with its fiduciary duties and whether that purchase would constitute
or result in a non-exempt prohibited transaction under ERISA and/or Section 4975
of the Code because any of the transferor, the servicer, the indenture trustee,
the owner trustee or any other party may be Parties in Interest with respect to
the investing Plan and may be deemed to be benefiting from the issuance of the
notes. If the transferor or the servicer is a Party in Interest with respect to
the prospective Plan investor, any fiduciary or other Plan investor considering
whether to purchase or hold the notes should consult with its counsel regarding
the availability of exemptive relief under U.S. Department of Labor ("DOL")
Prohibited Transaction Class Exemption ("PTCE") 96-23 (relating to transactions
determined by "in-house asset managers"), 95-60 (relating to transactions
involving insurance company general accounts), 91-38 (relating to transactions
involving bank collective investment funds), 90-1 (relating to transactions
involving insurance company pooled separate accounts) or 84-14 (relating to
transactions determined by independent "qualified professional asset managers")
or any other prohibited transaction exemption issued by the DOL. A purchaser of
the notes should be aware, however, that even if the conditions specified in one
or more of the above-referenced exemptions are met, the scope of the exemptive
relief provided by the exemption might not cover all acts which might be
construed as prohibited transactions.
In addition, under DOL Regulation Section 2510.3-101 (the "Plan Asset
Regulation"), the purchase with Plan Assets of equity interests in the issuer
could, in specified circumstances, cause the receivables and other assets of the
issuer to be deemed Plan Assets of the investing Plan which, in turn, would
subject the issuer and its assets to the fiduciary responsibility provisions of
ERISA and the prohibited transaction provisions of ERISA and Section 4975 of the
Code. Nevertheless, because the notes (a) are expected to be treated as
indebtedness under local law and will, in the opinion of Special Tax Counsel, be
treated as debt, rather than equity, for federal tax purposes (see "Federal
Income Tax Consequences -Tax Characterization of the Trust and the Notes
-Treatment of the Notes as Debt" in the accompanying prospectus), and (b) should
not be deemed to have any "substantial equity features," purchases of the notes
with Plan Assets should not be treated as equity investments and, therefore, the
receivables and other assets included as assets of the issuer should not be
deemed to be Plan Assets of the investing Plans. Those conclusions are based, in
part, upon the traditional debt features of the notes, including the reasonable
expectation of purchasers of the notes that the notes will be repaid when due,
as well as the absence of conversion rights, warrants and other typical equity
features.
The notes may not be purchased or held by any Plan, or any person
investing Plan Assets of any Plan, if any of the transferor, the servicer, the
indenture trustee, the owner trustee or any of their respective affiliates
(a) has investment or administrative discretion with respect to the
Plan Assets used to effect the purchase;
(b) has authority or responsibility to give, or regularly gives,
investment advice with respect to the Plan Assets, for a fee and
pursuant to an agreement or understanding that the advice (1)
will serve as a primary basis for investment decisions with
respect to the Plan Assets, and (2) will be based on the
particular investment needs of that Plan; or
(c) unless PTCE 95-60, 91-38 or 90-1 is applicable, is an employer
maintaining or contributing to that Plan. Each purchaser or
holder of the notes or any interest in the notes will be deemed
to have represented by its purchase and holding that it is not
subject to the foregoing limitation.
Any fiduciary or other Plan investor considering whether to purchase
any notes on behalf of or with Plan Assets of any Plan should consult with its
counsel and refer to this prospectus supplement for guidance regarding the ERISA
considerations applicable to the notes offered by this prospectus supplement and
the accompanying prospectus.
UNDERWRITING
Subject to the terms and conditions set forth in an underwriting
agreement as supplemented by a terms agreement relating to the Class A notes
(together, the "Class A Underwriting Agreement") between the transferor and the
Class A underwriters named below (the "Class A Underwriters"), the terms and
conditions set forth in an underwriting agreement as supplemented by a terms
agreement relating to the Class B notes (together, the "Class B Underwriting
Agreement") between the transferor and the Class B underwriters named below (the
"Class B Underwriters") and the terms and conditions set forth in an
underwriting agreement as supplemented by a terms agreement relating the Class C
notes (together, the "Class C Underwriting Agreement" and, together with the
Class A underwriting agreement and the Class B underwriting agreement, the
"Underwriting Agreement") between the transferor and the Class C underwriters
named below (the "Class C Underwriters" and, together with the Class A
underwriters and the Class B underwriters, the "UNDERWRITERS"), the transferor
has agreed to sell to the underwriters, and each of the underwriters has
severally agreed to purchase, the principal amount of the notes set forth
opposite its name:
UNDERWRITERS PRINCIPAL AMOUNT PRINCIPAL AMOUNT PRINCIPAL AMOUNT
OF CLASS A NOTES OF CLASS B NOTES OF CLASS C NOTES
Total................. $
In the Class A underwriting agreement, the Class A underwriters have
agreed, subject to the terms and conditions set forth in that agreement, to
purchase all of the Class A notes offered hereby if any of the Class A notes are
purchased. In the Class B underwriting agreement, the Class B underwriters have
agreed, subject to the terms and conditions set forth in that agreement, to
purchase all of the Class B notes offered hereby if any of the Class B notes are
purchased. In the Class C underwriting agreement, the Class C underwriters have
agreed, subject to the terms and conditions set forth in that agreement, to
purchase all of the Class C notes offered hereby if any of the Class C notes are
purchased.
The Class A underwriters propose initially to offer the Class A notes
to the public at [ ]% of their principal amount and to dealers at that price
less concessions not in excess of [ ]% of the principal amount of the Class A
notes. The Class A underwriters may allow, and the dealers may reallow,
concessions not in excess of [ ]% of the principal amount of the Class A notes
to brokers and dealers. After the initial public offering, the public offering
price and other selling terms may be changed by the Class A underwriters.
The Class B underwriters propose initially to offer the Class B notes
to the public at [ ]% of their principal amount and to dealers at that price
less concessions not in excess of [ ]% of the principal amount of the Class B
notes. The Class B underwriters may allow, and the dealers may reallow,
concessions not in excess of [ ]% of the principal amount of the Class B notes
to brokers and dealers. After the initial public offering, the public offering
price and other selling terms may be changed by the Class B underwriters.
The Class C underwriters propose initially to offer the Class C notes
to the public at [ ]% of their principal amount and to dealers at that price
less concessions not in excess of [ ]% of the principal amount of the Class C
notes. The Class C underwriters may allow, and the dealers may reallow,
concessions not in excess of [ ]% of the principal amount of the Class C notes
to brokers and dealers. After the initial public offering, the public offering
price and other selling terms may be changed by the Class C underwriters.
We will receive proceeds of approximately $[] from the sale of the
notes (representing [ ]% of the principal amount of each Class A note, [ ]% of
the principal amount of each Class B note and [ ]% of the principal amount of
each Class C note) after paying the underwriting discount of $[] (representing [
]% of the principal amount of each Class A note, [ ]% of the principal amount of
each Class B note and [ ]% of the principal amount of each Class C note).
Additional offering expenses are estimated to be $[].
The transferor will indemnify the underwriters against liabilities,
including liabilities under the Securities Act, or contribute to payments the
underwriters may be required to make.
The underwriters may engage in over-allotment transactions,
stabilizing transactions, syndicate covering transactions and penalty bids with
respect to the notes in accordance with Regulation M under the Exchange Act.
Over-allotment transactions involve syndicate sales in excess of the offering
size, which creates a syndicate short position. Stabilizing transactions permit
bids to purchase the notes so long as the stabilizing bids do not exceed a
specified maximum. Syndicate covering transactions involve purchases of the
notes in the open market after the distribution has been completed in order to
cover syndicate short positions. Penalty bids permit the underwriters to reclaim
a selling concession from a syndicate member when the notes originally sold by
that syndicate member are purchased in a syndicate covering transaction.
Over-allotment transactions, stabilizing transactions, syndicate covering
transactions and penalty bids may cause the prices of the notes to be higher
than they would otherwise be in the absence of those transactions. Neither the
transferor nor the underwriters represent that the underwriters will engage in
any of these transactions or that those transactions, once commenced, will not
be discontinued without notice at any time.
The transferor is an affiliate of the underwriters.
LEGAL MATTERS
Certain legal matters relating to the issuance of the notes will be
passed upon for the transferor and the underwriters by Stroock & Stroock Lavan
LLP, New York, New York, special counsel to the transferor.
<PAGE>
INDEX OF TERMS FOR PROSPECTUS SUPPLEMENT
TERMS PAGE
Accumulation Shortfall.................................................33
Additional Issuance....................................................40
Adjusted Invested Amount...............................................29
Available Finance Charge Collections...................................23
Available Principal Collections........................................24
Base Rate..............................................................43
Business Day...........................................................23
Class A Additional Interest............................................23
Class A Monthly Interest...............................................31
Class A Note Interest Rate.............................................22
Class A Underwriters...................................................46
Class A Underwriting Agreement.........................................46
Class B Additional Interest............................................23
Class B Monthly Interest...............................................31
Class B Note Interest Rate.............................................22
Class B Underwriters...................................................46
Class B Underwriting Agreement.........................................46
Class C Additional Interest............................................23
Class C Monthly Interest...............................................31
Class C Note Interest Rate.............................................22
Class C Underwriters...................................................46
Class C Underwriting Agreement.........................................46
Closing Date...........................................................21
Controlled Accumulation Amount.........................................32
Controlled Accumulation Period.........................................24
Controlled Deposit Amount..............................................32
Defaulted Amount.......................................................34
Discount Percentage....................................................16
Distribution Date......................................................23
Early Amortization Period..............................................25
ERISA..................................................................44
Excess Finance Charge Collections......................................33
Excess Spread Percentage...............................................38
Expected Principal Payment Date........................................19
Fixed Investor Percentage..............................................28
Floating Investor Percentage...........................................27
Interest Period........................................................22
Invested Amount........................................................29
Investor Default Amount................................................34
LIBOR Determination Date...............................................22
London Business Day....................................................22
Modified Excess Spread Percentage......................................39
Monthly Interest.......................................................31
Monthly Period.........................................................24
Monthly Principal......................................................32
Monthly Principal Reallocation Amount..................................29
Monthly Servicing Fee..................................................44
Originator.............................................................21
Paired Series..........................................................41
Parties In Interest....................................................44
Pay Out Event..........................................................41
Payments of Principal..................................................31
Plan Asset Regulation..................................................45
Plan Assets............................................................44
Plans..................................................................44
Portfolio Yield........................................................43
Principal Funding Account..............................................34
Principal Funding Investment Proceeds..................................35
Principal Shortfalls...................................................33
Quarterly Excess Spread Percentage.....................................38
Reallocated Principal Collections......................................29
Record Date............................................................22
Recoveries.............................................................14
Required Minimum Principal Balance.....................................16
Required Reserve Account Amount........................................35
Required Spread Account Amount.........................................37
Required Transferor Interest...........................................16
Required Transferor Percentage.........................................16
Reserve Account........................................................35
Reserve Account Funding Date...........................................35
Reserve Draw Amount....................................................35
Revolving Period.......................................................24
Series 200_-__ Indenture Supplement....................................21
Series 200_-__ Notes...................................................21
Series 200_-__ Termination Date........................................20
Servicer...............................................................21
Shared Principal Collections...........................................33
Shared Transferor Principal Collections................................34
Spread Account.........................................................37
Spread Account Percentage..............................................37
Telerate Page 3750.....................................................22
Transferor.............................................................21
Transferor Interest....................................................15
Trust Portfolio........................................................15
Underwriting Agreement.................................................46
<PAGE>
ANNEX I
OTHER SERIES ISSUED AND OUTSTANDING
The table below sets forth the principal characteristics of the other
series previously issued by the trust that are currently outstanding, all of
which are in group one. For more specific information with respect to any
series, any prospective investor should contact _______________ at
______________. ___________________ will provide, without charge, to any
prospective purchaser of the notes, a copy of the disclosure documents for any
previous publicly-issued series.
[1. Series 200_-__
Current Class A Invested Amount..................$
Class A note interest rate.......................[one-month] LIBOR plus __% per
annum
Initial Class B Invested Amount..................$
Current Class B Invested Amount..................$
Class B note interest rate.......................[one-month] LIBOR plus __% per
annum
Initial Class C Invested Amount..................$
Current Class C Invested Amount..................$
Class C note interest rate.......................[one-month] LIBOR plus __% per
annum
[Controlled Accumulation Amount..................$*]
[Expected principal payment date.................[] distribution date]
Annual servicing fee percentage..................___% per annum
[Enhancement for the Class A notes...............Subordination of Class B and
Class C notes]
[Enhancement for the Class B notes...............Subordination of Class C notes]
[Enhancement for the Class C notes...............spread account]
Series 200_-__ termination date..................[] distribution date
Series Issuance Date....................... , 200_
Initial Class A Invested Amount..................$
--------------
* Subject to change if the commencement of the accumulation period or controlled
accumulation period, as applicable, is delayed.]
<PAGE>
ASSET BACKED SECURITIES CORPORATION
Transferor or Sponsor
DEALER FLOORPLAN
ASSET BACKED NOTES
The trust may periodically issue asset backed notes in one or more series with
one or more classes and will own:
o receivables arising from time to time in the ordinary course of
business in revolving financing arrangements with dealers,
manufacturers and distributors,
o participation certificates evidencing participation interests in
loans similar to the types of loans described above;
o payments due on those receivables; and
o other property described in this prospectus and in the
accompanying prospectus supplement.
The notes
o will be paid only from the trust assets;
o offered with this prospectus will be rated in one of the four
highest rating categories by at least one nationally recognized
rating organization;
o may have one or more forms of credit enhancement; and
o will be issued as part of a designated series which may include
one or more classes of notes and credit enhancement.
YOU SHOULD CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE __ IN THIS
PROSPECTUS.
The notes are obligations of the Dealer Floorplan Master Note Trust described in
the related prospectus supplement only and are not obligations of Asset Backed
Securities Corporation or any other person.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED THESE NOTES OR DETERMINED THAT THIS PROSPECTUS IS
ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL offense.
CREDIT SUISSE FIRST BOSTON
The date of this Prospectus is _________, 2000
<PAGE>
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS PROSPECTUS AND THE
ACCOMPANYING PROSPECTUS SUPPLEMENT
We provide information to you about the notes in two separate
documents: (a) this prospectus, which provides general information, some of
which may not apply to your series of notes, and (b) the accompanying prospectus
supplement, which describes the specific terms of your series of notes,
including:
o the terms, including interest rates, for each class;
o the timing of interest and principal payments;
o information about the receivables;
o information about credit enhancement, if any, for each class;
o the ratings for each class being offered; and o the method for
selling the notes.
If the terms of your series of notes vary between this prospectus and
the accompanying prospectus supplement, you should rely on the information in
the prospectus supplement.
You should rely only on the information provided in this prospectus
and the accompanying prospectus supplement, including the information
incorporated by reference. We have not authorized anyone to provide you with
different information. We are not offering the notes in any state where the
offer is not permitted.
We include cross references in this prospectus and the accompanying
prospectus supplement to captions in these materials where you can find further
related discussions. The following Table of Contents and the Table of Contents
in the accompanying prospectus supplement provide the pages on which these
captions are located.
This prospectus uses defined terms. You can find a listing of the
pages where definitions can be found under the caption "Index of Terms for
Prospectus" beginning on page __ in this prospectus.
TABLE OF CONTENTS
PAGE
Risk Factors.............................................................
The Issuer ..............................................................
The Trust Portfolio .....................................................
Maturity Considerations .................................................
Use of Proceeds .........................................................
Description of the Notes ................................................
The Indenture............................................................
Credit Enhancement ......................................................
Description of the Purchase Agreements ..................................
Note Ratings.............................................................
Certain Legal Aspects of the Receivables ................................
Federal Income Tax Consequences. ........................................
ERISA Considerations ....................................................
Plan of Distribution ....................................................
Reports to Noteholders ..................................................
Where You Can Find More Information .....................................
Index of Terms for Prospectus............................................
Annex I: Global Clearance, Settlement and Tax Documentation Procedures ..
RISK FACTORS
You should consider the following risk factors in deciding whether to
purchase the notes.
IT MAY NOT BE POSSIBLE TO FIND AN INVESTOR TO PURCHASE YOUR NOTES.
The underwriters may assist in resales of the notes but they are not
required to do so. A secondary market for any notes may not develop. If a
secondary market does develop, it might not continue or it might not be
sufficiently liquid to allow you to resell any of your notes.
SOME LIENS WOULD BE GIVEN PRIORITY OVER YOUR NOTES WHICH COULD CAUSE DELAYED OR
REDUCED PAYMENTS.
Each of the originator and the transferor will account for the
transfer of the receivables as a sale. Even so, a court could conclude that the
originator or the transferor owns the receivables and that the trust holds only
a security interest. Even if a court would reach that conclusion, however, the
indenture trustee will have a "first priority perfected security interest."
If a court were to conclude that the trust has only a security
interest, a tax or governmental lien (or other lien imposed under applicable
state or federal law without consent) on the property of the person that owns
the receivables arising before receivables come into existence may be senior to
the trust's interest in the receivables. Additionally, if a receiver or
conservator were appointed for the originator, the fees and expenses of the
receiver or conservator might be paid from the receivables before the trust
receives any payments on the receivables. If insolvency or bankruptcy
proceedings were commenced by or against the servicer or if specified time
periods were to elapse, moreover, the trust may not have a first-priority
perfected security interest in collections commingled and used for the benefit
of the servicer. If any of these events were to occur, payments to you could be
delayed or reduced. See "Certain Legal Aspects of the Receivables -Transfer of
Receivables" and "Description of the Notes -Representations and Warranties" in
this prospectus.
IF THE TRANSFEROR OR THE ORIGINATOR OR TRANSFEROR BECAME A DEBTOR IN A
BANKRUPTCY CASE, DELAYS OR REDUCTIONS IN PAYMENT OF YOUR NOTES COULD OCCUR.
If an originator became a debtor in a bankruptcy case, and if its
transfer of the receivables to the transferor were construed as the grant of a
security interest to secure a borrowing, your payments of outstanding principal
and interest could be delayed and possibly reduced.
If an originator or the transferor became a debtor in a bankruptcy
case, an early payment of principal on all outstanding series could result.
Under the terms of the transfer and servicing agreement, new principal
receivables would not be transferred to the trust. However, the bankruptcy
court, the conservator or the receiver may have the power, regardless of the
terms of the transfer and servicing agreement, (a) to delay this procedure, (b)
to prevent the early payment of principal or (c) to require new principal
receivables to continue being transferred.
In addition, a court overseeing the servicer's bankruptcy case may
have the power to prevent either the indenture trustee or the noteholders from
appointing a new servicer. See "Certain Legal Aspects of the Receivables
-Certain Matters Relating to Conservatorship, Receivership and Bankruptcy" in
this prospectus.
POTENTIAL LACK OF SECURITY
The transferor will assign security interests in the consumer and
commercial products the receivables to the related trust. Generally, under
applicable state laws, a security interest in consumer and commercial products
which secures wholesale financing obligations may be perfected by the filing of
UCC financing statements. The originator and transferor will take all actions
necessary under applicable state laws to perfect the originator's security
interest in the consumer and commercial products. However, at the time a product
is sold, the originator's security interest in the product will terminate.
Therefore, if a dealer fails to remit amounts owed with respect to products that
have been sold, the related receivables will no longer be secured by products.
RISK OF INABILITY TO SELL PRODUCTS
Payment of the receivables and accordingly, your notes, is largely
dependent upon the retail sale of the related consumer and commercial products.
The level of retail sales of consumer and commercial products may change as the
result of a variety of social and economic factors. These factors include
interest rates, unemployment levels, the rate of inflation and consumer
perception of economic conditions generally. In addition, the use of incentive
programs (e.g., manufacturers' rebate programs) may affect retail sales.
However, the transferor is unable to determine and has no basis to predict the
extent economic or social factors will affect the level of consumer and
commercial product sales.
LIMITED REMEDIES FOR BREACHES OF REPRESENTATIONS COULD REDUCE OR DELAY PAYMENTS.
The originator and/or the transferor of the receivables will make
representations and warranties relating to the validity and enforceability of
the receivables arising under the accounts in the trust portfolio, and as to the
perfection and priority of the indenture trustee's interest in the receivables.
However, neither the owner trustee nor the indenture trustee will make any
examination of the receivables or the related assets to determine the presence
of defects, compliance with the representations and warranties or for any other
purpose.
If a representation or warranty relating to the receivables is
violated, the related obligors may have defenses to payment or offset rights, or
creditors of the originator or the transferor may claim rights to the trust
assets. If a representation or warranty is violated, the transferor may have an
opportunity to cure the violation. If it is unable to cure the violation within
the specified time period or if there is no right to cure the violation, the
transferor must accept reassignment of the receivables affected by the
violation. These reassignments are the only remedy for breaches of
representations and warranties, even if your damages exceed your share of the
reassignment price. See "Description of the Notes -Representations and
Warranties" in this prospectus.
PAYMENT PATTERNS OF RECEIVABLES COULD REDUCE COLLECTIONS.
The receivables transferred to the trust may be paid at any time. We
cannot assure the creation of additional receivables in the trust's accounts or
that any particular pattern of payments will occur. A significant decline in the
amount of new receivables generated could result in the occurrence of a pay out
event for one or more series and the commencement of the early amortization
period or, if applicable, the early accumulation period for each of those
series. If a pay out event occurs, you could receive payment of principal sooner
than expected. The originator's ability to compete in the current industry
environment will affect its ability to generate new receivables and might also
affect payment patterns on the receivables.
SUBORDINATED CLASSES BEAR LOSSES BEFORE SENIOR CLASSES.
One or more classes of notes in a series may be subordinated to one or
more senior classes of notes in the same series. Principal allocations to the
subordinated class or classes will not begin until each of the more senior
classes has been paid in full. Additionally, if collections of finance charge
receivables allocated to a series are insufficient to cover amounts due for that
series' senior notes, the Invested Amount for the series might be reduced. This
would reduce the amount of the collections of finance charge receivables
available to the subordinated notes in future periods and could cause a possible
delay or reduction in principal and interest payments on the subordinated notes.
ALLOCATIONS OF CHARGED-OFF RECEIVABLES COULD REDUCE PAYMENTS TO YOU.
The servicer will write off the receivables if the receivables become
uncollectible. Your series will be allocated a portion of these charged-off
receivables. See "Description of Series Provisions -Allocation Percentages" in
the accompanying prospectus supplement. If the amount of charged-off receivables
allocated to your series of notes exceeds the amount of funds available to
reimburse those charge-offs, you may not receive the full amount of principal
and interest due to you. See "Description of Series Provisions -Reallocated
Principal Collections," "-Application of Collections" and "-Defaulted
Receivables; Investor Charge-Offs" in the accompanying prospectus supplement.
RECHARACTERIZATION OF PRINCIPAL RECEIVABLES WOULD REDUCE PRINCIPAL RECEIVABLES
AND MAY REQUIRE ADDITION OF NEW RECEIVABLES.
The transferor may designate a percentage of the receivables that
would otherwise be treated as principal receivables to be treated as finance
charge receivables. This designation should decrease the likelihood of an early
amortization event occurring as a result of a reduction of the average net
portfolio yield for a given period. However, this designation will also reduce
the aggregate amount of principal receivables, which may increase the likelihood
that the transferor will be required to add receivables to the trust. If the
transferor were unable to add receivables and could not make a sufficient cash
deposit into the special funding account, one or more series of notes, including
your series, could go into early amortization.
ISSUANCE OF ADDITIONAL SERIES BY THE TRUST MAY AFFECT THE TIMING OF PAYMENTS TO
YOU.
The trust expects to issue additional series from time to time. The
trust may issue additional series with terms that are different from your series
without your prior review or consent. It is a condition to the issuance of each
new series that each rating agency that has rated an outstanding series confirm
in writing that the issuance of the new series will not result in a reduction or
withdrawal of its rating of any class of any outstanding series. The rating
agency confirmation primarily will be based on the trust's ability to pay
principal by the legal maturity date and interest on each distribution date. The
rating agency confirmation will not consider how the terms of a new series could
affect the timing and amounts of payments on your series.
THE ISSUER
The Dealer Floorplan Master Note Trust specified in the related
prospectus supplement (the "Issuer" or the "Trust") will be a statutory business
trust created under the laws of the State of Delaware. It will operated under a
trust agreement among Asset Backed Securities Corporation, the transferor
specified in the related prospectus supplement (which may be Asset Backed
Securities Corporation) and the owner trustee specified in the related
prospectus supplement (the "Owner Trustee"). If Asset Backed Securities
Corporation is not the transferor for a Trust, it will be the sponsor of the
Trust.
The activities of the issuer will be limited to:
o acquiring, owning and managing the trust assets and the proceeds
of those assets;
o issuing and making payments on the notes; and
o engaging in related activities.
The administrator specified in the related prospectus supplement (the
"Administrator") will provide the notices and perform on behalf of the issuer
and other administrative obligations required by the transfer and servicing
agreement, the indenture and the indenture supplement for each series, and will
be compensated for acting as the administrator.
The transferor will pay the fees of the owner trustee and will
reimburse it for liabilities and expenses.
THE TRUST PORTFOLIO
The assets of the trust will include receivables generated in
revolving financing arrangements with dealers, manufacturers and distributors
originated in accounts designated as trust accounts, all of which are owned by
the originator. These designated accounts are referred to as the "Trust
Portfolio." In addition to the receivables in the trust portfolio, the trust
assets include, to the extent noted below:
o all monies due or to become due in payment of these receivables;
o all proceeds of these receivables;
o all proceeds of any credit insurance policies relating to these
receivables;
o Interchange, if the prospectus supplement for your series of
notes so indicates;
o any recoveries allocable to the trust because of these
receivables;
o all monies on deposit in specified trust accounts or investments
made with these monies, including any earned investment proceeds
if the prospectus supplement for your series of notes so
indicates;
o proceeds of any credit enhancement, as described in the
prospectus supplement for your series of notes; and
o proceeds of any derivative contracts between the trust and a
counterparty, as described in the prospectus supplement for your
series of notes.
Receivables in the trust will consist of:
"Principal Receivables," which are amounts initially advanced in the
financing under the trust accounts; and
"Finance Charge Receivables," which are periodic finance charges and
other amounts charged.
The trust considers collections of Interchange and recoveries as
collections of finance charge receivables. If the originator exercises the
Discount Option, an amount of monthly collections of principal receivables will
be considered finance charge collections. See "Description of the Notes
-Discount Option" for a description of the manner of and the conditions to
exercise of the Discount Option.
A group of accounts will be selected as of the date specified in the
related prospectus supplement (the "Cut-Off Date") and designated as trust
accounts. Additional accounts may be designated for inclusion in the trust as
well as participations in lieu of, or in addition to, additional accounts.
Accounts designated as trust accounts must meet eligibility criteria set forth
in the transfer and servicing agreement. Receivables conveyed to the trust must
also meet eligibility criteria set forth in the transfer and servicing
agreement. If receivables conveyed to the trust are found to have been
ineligible when created or designated for inclusion, the transferor must accept
retransfer of these receivables.
The transferor has the right, and may be required to, designate
additional accounts for inclusion in the trust portfolio, as described under
"Description of the Notes -Addition of Trust Assets" in this prospectus.
The transferor also has the right to remove accounts from the trust
portfolio, as described under "Description of the Notes -Removal of Accounts" in
this prospectus. If the transferor does so, the trust will reconvey all
receivables in these removed accounts, whether existing or to be created, to the
transferor.
When the trust issues a new series of notes, the transferor will
represent and warrant to the trust that, as of the closing date for the new
series, the accounts designated as trust accounts met the eligibility criteria
set forth in the transfer and servicing agreement at their time of designation.
See "Description of the Notes -Representations and Warranties" in this
prospectus for more information on eligibility criteria for accounts and
receivables.
The prospectus supplement relating to each series of notes will
provide information about the trust portfolio as of the date specified. This
information will include:
o the amount of principal receivables;
o the amount of finance charge receivables;
o the range and average of principal balances of the accounts;
o the range and average of credit limits of the accounts;
o the range and average of ages of the accounts;
o the geographic distribution of the accounts; and
o delinquency statistics relating to the accounts.
MATURITY CONSIDERATIONS
Following its revolving period, each series of notes is expected to
begin to accumulate principal or begin to distribute principal to noteholders.
The accompanying prospectus supplement describes the conditions under which an
accumulation or amortization period will begin for your class of notes.
Principal will accumulate in a principal funding account if your
series features controlled accumulation or early accumulation and one of these
accumulation periods begins. As described in the accompanying prospectus
supplement, during controlled accumulation on each distribution date an amount
of principal, up to the amount specified, will be set aside in the principal
funding account. If a pay out event occurs and your series features early
accumulation, the full amount of principal available to your series will be
deposited in the principal funding account, up to the amount specified in the
related prospectus supplement. This accumulated principal will be paid to you on
the expected principal payment date for your class of notes, or earlier if an
amortization period begins before your expected principal payment date. Note
that although your series may feature an accumulation period, your class of
notes might not make use of it.
Principal will be paid to you in increments, up to the amount
specified in the accompanying prospectus supplement, if your series features
controlled amortization and this period begins. Your class of notes might also
begin to pay principal to you if the accompanying prospectus supplement
specifies that your class will begin early amortization. Early amortization will
begin for all classes of your series when a pay out event occurs. During any
amortization period, principal will be paid to you only on a distribution date.
If the series described in the accompanying prospectus supplement
features multiple classes, different classes of your series may have differing
priorities for the accumulation or payment of principal. This means that
noteholders of other classes could begin to receive payments of principal before
you do.
We can give you no assurance that principal will be available when
expected, either to accumulate or to pay to you. The expected principal payment
date for your class of notes is based upon assumptions about payment rates on
the receivables, as detailed in the accompanying prospectus supplement. We can
give you no assurance that these payment rate assumptions will be correct.
Payment rates depend on collections of receivables. The accompanying prospectus
supplement will provide historical payment rates, total charge-offs and other
information relating to the originator's portfolio. We cannot assure you that
future events will be consistent with this historical performance. The life of
your notes might be longer than expected if principal is collected more slowly.
The accompanying prospectus supplement may provide that if the principal payment
rate falls below a specified level, a pay out event will occur. The occurrence
of any pay out event may substantially shorten the average life of your notes.
USE OF PROCEEDS
The net proceeds from the sale of each series of notes offered by this
prospectus will be paid to the transferor. The transferor will use those
proceeds to pay the originator the purchase price of the receivables transferred
to the transferor by originator pursuant to the receivables purchase agreement.
The originator will use the proceeds received from the transferor for its
general corporate purposes.
DESCRIPTION OF THE NOTES
The notes will be issued in series. Each series will represent an
obligation of the trust. Each series of notes will be issued pursuant to the
indenture, as supplemented by an indenture supplement, in each case entered into
by the trust and the indenture trustee. The following summaries describe
provisions common to each series of notes. The accompanying prospectus
supplement gives you additional information specific to the notes of your
series. The summaries are not complete and are subject to, and are qualified by,
all of the provisions of the transfer and servicing agreement, the indenture and
the related indenture supplement.
GENERAL
The notes will be secured by and paid from the assets of the trust.
Each series will be allocated collections of principal receivables and finance
charge receivables based on a percentage called the "Investor Percentage." The
Investor Percentage will be based on the Invested Amount for a series. The
"Invested Amount" for a series on any date will be equal to:
o the initial outstanding principal amount of that series of notes
as of the related closing date for that series (increased by the
principal balance of any notes of that series issued after the
closing date for that series); minus
o the amount of principal paid to the related noteholders prior to
that date; minus
o the amount of unreimbursed Investor Charge-Offs with respect to
those notes prior to that date.
If so specified in the prospectus supplement relating to any series of notes,
under specified circumstances the Invested Amount may be further adjusted by the
amount of principal allocated to noteholders, the funds on deposit in any
specified account, and any other amount specified in the accompanying prospectus
supplement.
Each series of notes may consist of one or more classes, one or more
of which may be senior notes and one or more of which may be subordinated notes.
Each class of a series will evidence the right to receive a specified portion of
each distribution of principal or interest or both. Each class of a series may
differ from other classes in some aspects, including:
o amounts allocated to principal payments;
o maturity date;
o interest rate; and
o availability and amount of enhancement.
Payments and deposits of interest and principal will be made on
distribution dates to noteholders in whose names the notes were registered on
the record dates specified in the accompanying prospectus supplement. Interest
will be distributed to noteholders in the amounts, for the periods and on the
dates specified in the accompanying prospectus supplement.
The transferor initially will own the "Transferor Interest" which
represents the right to receive all cash flows from the trust assets not
required to make payments on the notes or to credit enhancement providers. The
holder of the Transferor Interest, subject to limitations, will have the right
to a percentage, called the "Transferor Percentage," of all payments from the
receivables in the trust. The Transferor Interest may be transferred, in whole
or in part, subject to limitations and conditions described in the trust
agreement, and, at the discretion of the transferor, the Transferor Interest may
be held either in an uncertificated form or in the form of a certificate
representing the Transferor Interest, called a "Transferor Certificate." See
"-Certain Matters Regarding the Transferor and the Servicer" in this prospectus.
During the revolving period, the Invested Amount of a series will
remain constant except under limited circumstances. See "-Defaulted Receivables;
Rebates and Fraudulent Charges; Investor Charge-Offs" in this prospectus. The
amount of principal receivables in the trust, however, will vary each day as new
principal receivables are created and others are paid. The amount of the
Transferor Interest will fluctuate each day, therefore, to reflect the changes
in the amount of the principal receivables in the trust. When a series is
amortizing, the Invested Amount of that series will decline as customer payments
of principal receivables are collected and distributed, or accumulated for
distribution, to the noteholders. As a result, the Transferor Interest will
generally increase to reflect reductions in the Invested Amount for that series
and will also change to reflect the variations in the amount of principal
receivables in the trust. The Transferor Interest may also be reduced as the
result of new issuances. See "-New Issuances" in this prospectus.
Generally, notes offered through the prospectus and the accompanying
prospectus supplement:
o will be represented by notes registered in the name of a DTC
nominee;
o will be available for purchase in minimum denominations of $1,000
and multiples of $1,000 in excess of that amount; and
o will be available for purchase in book-entry form only.
The accompanying prospectus supplement will specify if your notes have
different characteristics from those listed above.
DTC has informed the transferor that its nominee will be Cede & Co.
Accordingly, Cede & Co. is expected to be the holder of record of each series of
notes. As an owner of beneficial interests in the notes, called a "Note Owner,"
you will generally not be entitled to a definitive note representing your
interest in the issued notes because you will own notes through a book-entry
record maintained by DTC. References in this prospectus and the accompanying
prospectus supplement to distributions, reports, notices and statements to
noteholders refer to DTC or Cede & Co., as registered holder of the notes, for
distribution to you in accordance with DTC procedures. All references in this
prospectus and the accompanying prospectus supplement to actions by noteholders
shall refer to actions taken by DTC upon instructions from DTC Participants.
The accompanying prospectus supplement may state that application will
be made to list your series or class of notes on the Luxembourg Stock Exchange
or another exchange.
BOOK-ENTRY REGISTRATION
Following is a description of the form your notes will take. We also
describe how your notes may be transferred and how payments will be made to you.
The information in this section concerning DTC and DTC's book-entry
system has been provided by DTC. The transferor has not independently verified
the accuracy of this information.
You may hold your notes through DTC in the U.S., Clearstream,
Luxembourg or Euroclear in Europe or in any other manner described in the
accompanying prospectus supplement. You may hold your notes directly with one of
these systems if you are a participant in the system, or indirectly through
organizations which are participants.
Cede & Co., as nominee for DTC, will hold the global notes.
Clearstream, Luxembourg and Euroclear will hold omnibus positions on behalf of
the Clearstream, Luxembourg Customers and the Euroclear Participants,
respectively, through customers' securities accounts in Clearstream,
Luxembourg's and Euroclear's names on the books of their respective depositaries
collectively called the "DEPOSITARIES," which in turn will hold positions in
customers' securities accounts in the depositaries' names on the books of DTC.
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 Uniform Commercial Code, and a
"clearing agency" registered pursuant to the provisions of Section 17A of the
Securities Exchange Act of 1934. DTC was created to hold securities for its
participants and facilitate the clearance and settlement of securities
transactions between participants through electronic book-entry changes in
accounts of participants, thereby eliminating the need for physical movement of
certificates. Participants include securities brokers and dealers (who may
include the underwriters of any series), banks, trust companies and clearing
corporations and may include other organizations. Indirect access to the DTC
system also is available to others including banks, brokers, dealers and trust
companies, as indirect participants, that clear through or maintain a custodial
relationship with a participant, either directly or indirectly.
Transfers between DTC participants will occur in accordance with DTC
rules. Transfers between Clearstream, Luxembourg customers and Euroclear
participants will occur in the ordinary way in accordance with their applicable
rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through Clearstream,
Luxembourg customers or Euroclear participants, on the other, will be effected
through DTC in accordance with DTC rules on behalf of the relevant European
international clearing system by its depositary; however, cross-market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in the system in accordance
with its rules and procedures and within its established deadlines (European
time). The relevant European international clearing system will, if the
transaction meets its settlement requirements, deliver instructions to its
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.
Clearstream, Luxembourg customers and Euroclear participants may not deliver
instructions directly to the depositaries.
Because of time-zone differences, credits of securities in
Clearstream, Luxembourg or Euroclear as a result of a transaction with a
Participant will be made during the subsequent securities settlement processing,
dated the business day following the DTC settlement date, and the credits or any
transactions in the securities settled during processing will be reported to the
relevant Clearstream, Luxembourg customer or Euroclear participant. Cash
received in Clearstream, Luxembourg or Euroclear as a result of sales of
securities by or through a Clearstream, Luxembourg customer or a Euroclear
participant to a DTC participant will be received with value on the DTC
settlement date but will be available in the relevant Clearstream, Luxembourg or
Euroclear cash account only as of the business day following settlement in DTC.
Note owners that are not participants or indirect participants but
desire to purchase, sell or otherwise transfer ownership of, or other interest
in, notes may do so only through participants and indirect participants. In
addition, note owners will receive all distributions of principal of and
interest on the notes from the indenture trustee through the participants who in
turn will receive them from DTC. Under a book-entry format, note owners may
experience some delay in their receipt of payments, since payments will be
forwarded by the indenture trustee to Cede & Co., as nominee for DTC. DTC will
forward payments to its participants, which thereafter will forward them to
indirect participants or note owners. It is anticipated that the only
"noteholder" will be Cede & Co., as nominee of DTC. Note owners will not be
recognized by the indenture trustee as noteholders, as it is used in the
indenture, and note owners will only be permitted to exercise the rights of
noteholders indirectly through the participants who in turn will exercise the
rights of noteholders through DTC.
Under the rules, regulations and procedures creating and affecting DTC
and its operations, DTC is required to make book-entry transfers among
participants on whose behalf it acts with respect to the notes and is required
to receive and transmit distributions of principal and interest on the notes.
Participants and indirect participants with which note owners have accounts with
respect to the notes similarly are required to make book-entry transfers and
receive and transmit payments on behalf of their respective note owners.
Accordingly, although note owners will not possess notes, note owners will
receive payments and will be able to transfer their interests.
Because DTC can only act on behalf of participants, who in turn act on
behalf of indirect participants and banks, the ability of a note owner to pledge
notes to persons or entities that do not participate in the DTC system, or
otherwise take actions in respect of those notes, may be limited due to the lack
of a physical certificate for those notes.
DTC has advised the transferor that it will take any action permitted
to be taken by a noteholder under the indenture only at the direction of one or
more participants to whose account with DTC the notes are credited.
Additionally, DTC has advised the transferor that it will take actions with
respect to specified percentages of the Invested Amount only at the direction of
and on behalf of participants whose holdings include interests that satisfy
specified percentages. DTC may take conflicting actions with respect to other
interests to the extent that actions are taken on behalf of participants whose
holdings include these interests.
Clearstream Banking, societe anonyme, 67 Bd Grande-Duchesse Charlotte,
L-2967 Luxembourg ("Clearstream, Luxembourg"), was incorporated in 1970 as
"Cedel S.A.", a company with limited liability under Luxembourg law (a societe
anonyme). Cedel S.A. subsequently changed its name to Cedelbank. On January 10,
2000, Cedelbank's parent company, Cedel International, societe anonyme ("CI")
merged its clearing, settlement and custody business with that of Deutsche Borse
Clearing AG ("DBC"). The merger involved the transfer by CI of substantially all
of its assets and liabilities (including its shares in CB) to a new Luxembourg
company, New Cedel International, societe anonyme ("New CI"), which is 50% owned
by CI and 50% owned by DBC's parent company Deutsche Borse AG. The shareholders
of these two entities are banks, securities dealers and financial institutions.
Cedel International currently has 92 shareholders, including U.S. financial
institutions or their subsidiaries. No single entity may own more than 5 percent
of Cedel International's stock.
Further to the merger, the Board of Directors of New Cedel
International decided to rename the companies in the group in order to give them
a cohesive brand name. The new brand name that was chosen is "Clearstream". With
effect from January 14, 2000 New CI has been renamed "Clearstream International,
societe anonyme". On January 18, 2000, Cedelbank was renamed "Clearstream
Banking, societe anonyme", and Cedel Global Services was renamed "Clearstream
Services, societe anonyme".
On January 17, 2000 DBC was renamed "Clearstream Banking AG". This
means that there are now two entities in the corporate group headed by
Clearstream International which share the name "Clearstream Banking", the entity
previously named "Cedelbank" and the entity previously named "Deutsche Brse
Clearing AG".
Clearstream, Luxembourg holds securities for its customers
("Clearstream, Luxembourg Participants") and facilitates the clearance and
settlement of securities transactions between Clearstream, Luxembourg customers
through electronic book-entry changes in accounts of Clearstream, Luxembourg
customers, thereby eliminating the need for physical movement of certificates.
Transactions may be settled by Clearstream, Luxembourg in any of 36 currencies,
including United States Dollars. Clearstream, Luxembourg provides to its
customers, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. Clearstream, Luxembourg also deals with domestic
securities markets in over 30 countries through established depository and
custodial relationships. Clearstream, Luxembourg is registered as a bank in
Luxembourg, and as such is subject to regulation by the Commission de
Surveillance du Secteur Financier, "CSSF", which supervises Luxembourg banks.
Clearstream, Luxembourg's customers are world-wide financial institutions
including underwriters, securities brokers and dealers, banks, trust companies
and clearing corporations. Clearstream, Luxembourg's U.S. customers are limited
to securities brokers and dealers, and banks. Currently, Clearstream, Luxembourg
has approximately 2,000 customers located in over 80 countries, including all
major European countries, Canada, and the United States. Indirect access to
Clearstream, Luxembourg is available to other institutions that clear through or
maintain a custodial relationship with an account holder of Clearstream,
Luxembourg. Clearstream, Luxembourg has established an electronic bridge with
Morgan Guaranty Trust Company of New York as the Operator of the Euroclear
System (MGT/EOC) in Brussels to facilitate settlement of trades between
Clearstream, Luxembourg and MGT/EOC.
Euroclear was created in 1968 to hold securities for participants of
the Euroclear System 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 notes and any
risk from lack of simultaneous transfers of securities and cash. Transactions
may now be settled in any of 27 currencies, including United States dollars. The
Euroclear System 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. The Euroclear System is operated by Morgan Guaranty Trust
Company of New York, Brussels, Belgium office as the Euroclear operator, under
contract with Euro-clear Clearance System, S.C., a Belgian cooperative
corporation. 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 the Euroclear System on behalf of Euroclear participants. Euroclear
participants include banks (including central banks), securities brokers and
dealers and other professional financial intermediaries and may include the
underwriters of any series of notes. Indirect access to the Euroclear System is
also available to other firms that clear through or maintain a custodial
relationship with a Euroclear participant, either directly or indirectly.
The Euroclear operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. 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. These rules and laws govern transfers of securities and cash within the
Euroclear System, withdrawal of securities and cash from the Euroclear System,
and receipts of payments with respect to securities in the Euroclear System. All
securities in the Euroclear System are held on a fungible basis without
attribution of specific certificates to specific securities clearance accounts.
The Euroclear Operator acts under these rules and laws only on behalf of
Euroclear participants and has no record of or relationship with persons holding
through Euroclear participants.
Distributions with respect to notes held through Clearstream,
Luxembourg or Euroclear will be credited to the cash accounts of Clearstream,
Luxembourg customers or Euroclear participants in accordance with the relevant
system's rules and procedures, to the extent received by its depositary.
Distributions will be subject to tax reporting in accordance with relevant
United States tax laws and regulations. See "Federal Income Tax Consequences" in
this prospectus. Clearstream, Luxembourg or the Euroclear operator, as the case
may be, will take any other action permitted to be taken by a noteholder under
the indenture on behalf of a Clearstream, Luxembourg customer or Euroclear
participant only in accordance with its relevant rules and procedures and
subject to its depositary's ability to effect actions on its behalf through DTC.
Although DTC, Clearstream, Luxembourg and Euroclear have agreed to the
foregoing procedures in order to facilitate transfers of notes among
participants of DTC, Clearstream, Luxembourg and Euroclear, they are under no
obligation to perform or continue to perform procedures and the procedures may
be discontinued at any time.
DEFINITIVE NOTES
We refer to notes issued in fully registered, certificated form as
"Definitive Notes." The notes of each series will be issued as definitive notes
to note owners or their nominees, rather than to DTC or its nominee, only if:
o the transferor advises the indenture trustee for that series in
writing that DTC is no longer willing or able to discharge
properly its responsibilities as depository with respect to that
series of notes, and the indenture trustee or the transferor is
unable to locate a qualified successor;
o the transferor, at its option, advises the indenture trustee in
writing that it elects to terminate the book-entry system through
DTC; or
o after the occurrence of a Servicer Default, note owners
representing not less than 50% (or another percentage specified
in the accompanying prospectus supplement) of the Invested Amount
advise the indenture trustee and DTC through participants in
writing that the continuation of a book-entry system through DTC
(or a successor thereto) is no longer in the best interest of the
note owners.
If any of these events occur, DTC must notify all participants of the
availability through DTC of definitive notes. Upon surrender by DTC of the
definitive instrument representing the notes and instructions for
re-registration, the indenture trustee will issue the notes as definitive notes,
and thereafter the indenture trustee will recognize the registered holders of
those definitive notes as noteholders under the indenture.
Distribution of principal and interest on the notes will be made by
the indenture trustee directly to holders of definitive notes in accordance with
the procedures set forth in this prospectus and in the indenture. Interest
payments and any principal payments on each distribution date will be made to
holders in whose names the definitive notes were registered at the close of
business on the related record date. Distributions will be made by check mailed
to the address of the noteholders as it appears on the register maintained by
the indenture trustee. The final payment on any note (whether definitive notes
or the notes registered in the name of Cede & Co. representing the notes),
however, will be made only upon presentation and surrender of that note at the
office or agency specified in the notice of final distribution to noteholders.
The indenture trustee will provide this notice to registered noteholders not
later than the fifth day of the month of the final distributions.
Definitive notes will be transferable and exchangeable at the offices
of the transfer agent and registrar, which will initially be the indenture
trustee. No service charge will be imposed for any registration of transfer or
exchange, but the transfer agent and registrar may require payment of a sum
sufficient to cover any tax or other governmental charge imposed in connection
with the transfer or exchange. The transfer agent and registrar will not be
required to register the transfer or exchange of definitive notes for a period
of fifteen days preceding the due date for any payment on those definitive
notes.
INTEREST PAYMENTS
For each series of notes and each related class, interest will accrue
from the relevant closing date on the applicable outstanding principal balance
at the applicable interest rate. The interest rate on any note may be a fixed,
floating or any other type of rate as specified in the accompanying prospectus
supplement. Interest will be paid, or deposited for later payment, to
noteholders on the distribution dates.
Interest payments or deposits on any distribution date will be funded
from:
o collections of finance charge receivables allocated to the
Invested Amount during the preceding monthly period or periods;
o investment earnings, if any, on any funds held in trust accounts;
o any credit enhancement, to the extent described in the
accompanying prospectus supplement; and
o any derivative counterparty, to the extent described in the
accompanying prospectus supplement.
If interest payments will be made less frequently than monthly, an
interest funding account may be established to accumulate the required interest
amount. If a series has more than one class of notes, that series may have more
than one interest funding account.
Your class of notes will pay interest on the dates and at the interest
rate specified in the accompanying prospectus supplement. If your notes bear
interest at a floating or variable rate, the accompanying prospectus supplement
will describe how that rate is calculated.
PRINCIPAL PAYMENTS
Generally, each series will begin with a revolving period, which
begins on the closing date relating to that series and ends on the day before an
amortization period or accumulation period begins, during which no principal
payments will be made to the noteholders of that series.
During the controlled amortization period, which will be scheduled to
begin on the date specified in, or determined in the manner specified in, the
accompanying prospectus supplement, and during the early amortization period,
which will begin upon the occurrence of a pay out event or, if specified in the
accompanying prospectus supplement, the early accumulation period, principal
will be paid to any class of the series in the amounts and on the dates
specified in the accompanying prospectus supplement.
During an accumulation period, principal will be accumulated in a
trust account, called a "Principal Funding Account," established for the benefit
of that class of noteholders for later distribution to noteholders on the
expected principal payment date in the amounts specified in the accompanying
prospectus supplement.
Principal payments for any series or the related class will typically
be funded from collections of principal receivables received during the related
monthly period or periods as specified in the accompanying prospectus supplement
and allocated to that series or class and from other sources specified in the
accompanying prospectus supplement. If specified in the related prospectus
supplement, the Trust may issue securities from time to time and use the
proceeds of this issuance to make principal payments with respect to the series.
In the case of a series with more than one class of notes, the noteholders of
one or more classes may receive payments of principal at different times. The
accompanying prospectus supplement will describe the manner, timing and priority
of payments of principal to noteholders of each class.
Funds on deposit in any principal funding account for a series may be
subject to a guaranteed rate agreement or guaranteed investment contract or
other arrangement specified in the accompanying prospectus supplement intended
to assure a minimum rate of return on the investment of these funds. In order to
enhance the likelihood of the payment in full of the principal amount of a
series or a related class of notes at the end of an accumulation period, that
series or class of notes may be subject to a principal guaranty or other similar
arrangement specified in the accompanying prospectus supplement.
TRANSFER AND ASSIGNMENT OF RECEIVABLES
The originator will transfer and assign to the transferor, for
transfer and assignment by the transferor to the trust, all of the originator's
right, title and interest in and to the receivables in the accounts designated
as accounts of the trust and future receivables created in these accounts.
Except as set forth in the related prospectus supplement, each of the
originator and the transferor will indicate in its computer files or books and
records that the receivables have been conveyed to the trust. In addition, each
of the originator and the transferor (including any additional transferor) will
provide or cause to be provided to the owner trustee computer files or
microfiche lists, containing a true and complete list showing each account,
identified by account number and by total outstanding balance on the date of
transfer. Except as stated above or as set forth in the related prospectus
supplement, the records and agreements relating to the accounts and the
receivables maintained by any of the originator and the transferor (including
any additional transferor) are not and will not be segregated from other
documents and agreements relating to other dealer floorplan accounts and
receivables and are not and will not be stamped or marked to reflect the
transfers described above, but the computer records of each of the originator
and the transferor (including any additional transferor) will be required to be
marked to evidence these transfers. Each of the originator and the transferor
(including any additional transferor) will file in all appropriate jurisdictions
Uniform Commercial Code financing statements with respect to the receivables
meeting the requirements of applicable law. See "Risk Factors -Some liens would
be given priority over your notes which could cause delayed or reduced payments"
and "Certain Legal Aspects of the Receivables" in this prospectus.
NEW ISSUANCES
The indenture provides that, pursuant to any one or more indenture
supplements, the transferor may cause the owner trustee, on behalf of the trust,
to issue one or more new series of notes and may define all principal terms of
those series. Each series issued may have different terms and enhancements than
any other series. Upon the issuance of an additional series of notes, none of
the transferor, the servicer, the indenture trustee or the trust will be
required or will intend to obtain the consent of any noteholder of any other
series previously issued by the trust. However, as a condition of a new
issuance, the indenture trustee must receive written confirmation that the new
issuance will not result in the reduction or withdrawal by any rating agency of
its rating of any outstanding series or class. The trust may offer any series
under a prospectus or other disclosure document in offerings pursuant to this
prospectus or in transactions either registered under the Securities Act of
1933, as amended (the "Securities Act"), or exempt from registration under the
Securities Act directly, through one or more other underwriters or placement
agents, in fixed-price offerings or in negotiated transactions or otherwise.
Unless otherwise specified in the accompanying prospectus supplement,
a new issuance may only occur upon the satisfaction of conditions provided in
the indenture. Under the indenture, the transferor may cause the owner trustee,
on behalf of the trust, to issue new series of notes by notifying the owner
trustee, the indenture trustee, the Servicer and each rating agency at least
five days in advance of the date upon which the new issuance is to occur. Under
the indenture, the notice will state the date upon which the new issuance is to
occur.
The owner trustee will execute, and the indenture trustee will
authenticate, the notes of any series only upon delivery to them of the
following items, or satisfaction of the following conditions, among others:
(1) an indenture supplement specifying the principal terms of the
new series;
(2)(a) an opinion of counsel to the effect that, except as
otherwise stated in the related indenture supplement, the notes of the
new series will be characterized as indebtedness for federal income
tax purposes; and
(b) an opinion of counsel to the effect that, for federal income
tax purposes:
o the issuance will not adversely affect the tax
characterization as debt of notes of any outstanding
series or class that were characterized as debt at the
time of their issuance;
o the new issuance will not cause the trust to be deemed
to be an association (or publicly traded partnership)
taxable as a corporation; and
o the new issuance will not cause or constitute an event
in which gain or loss would be recognized by any
noteholder (an opinion of counsel with respect to any
matter to the effect referred to in clause (b) with
respect to any action is referred to in this prospectus
as a "Tax Opinion");
(3) if required by the related indenture supplement, the form of
credit enhancement and an appropriate credit enhancement agreement
with respect to that credit enhancement executed by the transferor and
the issuer of the credit enhancement;
(4) written confirmation from each rating agency that the new
issuance will not result in a reduction or withdrawal of its rating of
any outstanding series or class; and
(5)(a) the new issuance will not:
o cause a pay out event or an event of default; or
o materially and adversely affect the amount or timing of
payments to be made to the noteholders of any series or
class (any effect referred to in this clause on the
prior clause with respect to any action is referred to
in this prospectus as an "Adverse Effect"); and
(b) a certificate of an authorized officer of the transferor to
the effect that it reasonably believes the new issuance will not have
an adverse effect; and
(6) after giving effect to the new issuance, the total amount of
principal receivables plus the principal amount of any participation
interests previously transferred to the trust exceed a specified
minimum principal balance, called the "Required Minimum Principal
Balance."
REPRESENTATIONS AND WARRANTIES
When the trust issues a new series of notes, the transferor will make
several representations and warranties to the trust in the transfer and
servicing agreement, including the following:
o the execution and delivery by the transferor of the transfer and
servicing agreement and each other document relating to the
issuance to which it is a party will not conflict with any law or
any other agreement to which the transferor is a party; and
o all required governmental approvals in connection with the
execution and delivery by the transferor of the transfer and
servicing agreement and each other document relating to the
issuance have been obtained and remain in force and effect.
If a representation or warranty made by the transferor is later found
to be materially incorrect when made, and:
o continues to be materially incorrect for 60 days after notice to
the transferor by the indenture trustee, or to the transferor and
the indenture trustee by any noteholder; and
o as a result, the interests of the noteholders are materially and
adversely affected, and continue to be materially and adversely
affected during the 60-day period,
then the indenture trustee or noteholders holding more than 50% of the
then-outstanding principal balance of the notes of the affected series may give
notice to the transferor and the servicer (and to the indenture trustee if given
by the noteholders) declaring that a pay out event has occurred. Declaring a pay
out event will automatically begin early amortization or, if specified in the
accompanying prospectus supplement, early accumulation of principal.
The transferor will make other representations and warranties to the
trust in the transfer and servicing agreement, including the following:
o as of the closing date, the transferor is duly incorporated and
in good standing and has the authority to consummate the
issuance;
o the transfer and servicing agreement and each other document
relating to the issuance to which it is a party constitutes a
legal, valid and binding obligation enforceable against the
transferor; and
o the trust has all right, title and interest in the receivables in
the trust portfolio or has a first priority perfected security
interest in these receivables.
In the event:
o any representation or warranty described immediately above is
breached; and
o as a result, the interests of noteholders in the receivables in
the trust portfolio are materially and adversely affected;
then any of the owner trustee, the indenture trustee or noteholders representing
50% or more of the then-outstanding principal amount of all of the trust's
outstanding series may give notice to the transferor and the servicer (and to
the owner trustee and indenture trustee if given by the noteholders) directing
the transferor to accept reassignment of the entire trust portfolio and to pay
into the trust's collection account a cash deposit equal to the sum of the
amounts specified with respect to each outstanding series in the related
indenture supplement. However, no reassignment will be required if:
o within 60 days, or up to 120 days if specified in the notice, the
transferor cures the breach and any material adverse effect
caused by the breach; or
o on any day within the applicable 60-day to 120-day period the
relevant representation and warranty is then true and correct in
all material respects and the transferor delivers to the owner
trustee a certificate of an authorized officer describing the
nature of the breach and the manner in which the relevant
representation and warranty became true and correct.
Reassignment of the trust portfolio and the transferor's obligation to
make the cash deposit in the trust's collection account are the only remedies to
any breach of the representations and warranties described above.
The transferor makes representations and warranties in the transfer
and servicing agreement concerning the accounts and the receivables in the trust
portfolio. Only eligible accounts can be designated as accounts for the trust
portfolio. We can give you no assurance that eligible accounts will remain
eligible once added to the trust.
The transferor also represents that each receivable in the trust
portfolio is an eligible receivable when created. If a receivable in the trust
portfolio is found to be ineligible when created, and, as a result, the
interests of noteholders in any receivable in the trust portfolio are materially
and adversely affected, the transferor must accept reassignment of the principal
amount of this ineligible receivable. However, the transferor will have 60 days,
or up to 120 days if agreed to by the indenture trustee and the servicer, from
the earlier to occur of discovery of the breach by the transferor or receipt by
the transferor of written notice of the breach given by the owner trustee, the
indenture trustee or the servicer, to cure the ineligibility before reassignment
is required.
The transferor will accept reassignment by directing the servicer to
deduct the principal amount of the ineligible receivable from the Transferor
Interest. If this would reduce the Transferor Interest below the Required
Transferor Interest, the transferor will make a cash deposit in the trust's
special funding account in the amount by which the Transferor Interest would
have been reduced below the Required Transferor Interest. Any deduction or
deposit is considered a repayment in full of the ineligible receivable. The
transferor's obligation to accept reassignment of any ineligible receivable is
the only remedy for any breach of a representation concerning eligibility of
receivables.
The accompanying prospectus supplement may specify additional
representations and warranties made by the transferor when your notes are
issued. The indenture trustee is not required to make periodic examinations of
receivables in the trust portfolio or any records relating to them. However, the
servicer will deliver to the indenture trustee once each year an opinion of
counsel affirming, among other things, that no further action is necessary to
maintain the trust's perfected security interest in the receivables.
With respect to each series of notes, an "Eligible Account" means, as
of the cut-off date (or, with respect to additional accounts, as of their date
of designation for inclusion in the trust), each account owned by the originator
or other account owner:
o which was in existence and maintained by the originator or other
account owner, as applicable;
o which is payable in United States dollars;
o which has not been classified as stolen or lost;
o which has not been sold or pledged to any other party except for
any sale (1) to another account owner that has either entered
into a receivables purchase agreement or is an additional
transferor or (2) pursuant to a receivables purchase agreement;
o which does not have receivables which have been sold or pledged
by the originator or any other account owner, as the case may be,
to any other party other than pursuant to a receivables purchase
agreement;
o which, with respect to the initial accounts, is an account in
existence and maintained by the originator as of the cut-off date
or as of its date of designation for inclusion in the trust with
respect to additional accounts;
o which does not have any receivables that are defaulted
receivables; and
o which, except as provided below, does not have any receivables
that are more than 180 days past due from the date of the initial
billing statement.
Eligible accounts may include accounts, the receivables of which have
been charged off as of the cut-off date or as of its date of designation for
inclusion in the trust, as applicable, if:
o the balance of all receivables included in those accounts is
reflected on the books and records of the transferor as "zero";
and
o charging privileges for these accounts have been canceled in
accordance with the customary policies and procedures, as amended
from time to time, of the originator other account owner, as
applicable.
Under the transfer and servicing agreement, the definition of eligible
account may be changed by amendment to the agreement without the consent of the
noteholders if: (1) the transferor delivers to the owner trustee and the
indenture trustee a certificate of an authorized officer to the effect that, in
the reasonable belief of the transferor, the amendment will not as of the date
of the amendment adversely affect in any material respect the interest of the
noteholders, and (2) the amendment will not result in a withdrawal or reduction
of the rating of any outstanding series under the trust.
With respect to each series of notes, an "Eligible Receivable" means
each receivable:
o which has arisen in an eligible account;
o which was created in compliance, in all material respects, with
all requirements of law applicable to the institution that owned
the receivable at the time of its creation, and under the terms
of a dealer floorplan agreement which complies in all material
respects with all requirements of law applicable to the
originator or other account owner, as applicable;
o with respect to which all consents, licenses or authorizations
of, or registrations with, any governmental authority required to
be obtained or given in connection with the creation of the
receivable or the execution, delivery and performance by the
originator or other account owner, as applicable, of the related
dealer floorplan agreement have been duly obtained or given and
are in full force and effect;
o as to which, at the time of its transfer to the trust, the
transferor or the trust has good title, free and clear of all
liens and security interests arising under or through the
transferor, other than some tax liens for taxes not then due or
which the transferor is contesting;
o which has been the subject of either a valid transfer and
assignment from the transferor to the trust of all of the
transferor's right, title and interest in the receivable
(including any proceeds of the receivable), or the grant of a
first priority perfected security interest in the receivable (and
in the proceeds of the receivable), effective until the
termination of the trust;
o which is the legal, valid and binding payment obligation of the
obligor under the receivable, legally enforceable against that
obligor in accordance with its terms, subject to some
bankruptcy-related exceptions;
o which, at the time of transfer to the trust, has not been waived
or modified except as permitted under the customary policies and
procedures, as amended from time to time, of the originator or
other account owner, as applicable, and then only if the waiver
or modification is reflected in the servicer's computer file of
revolving dealer floorplan accounts;
o which, at the time of transfer to the trust, is not subject to
any right of rescission, setoff, counterclaim or any other
defense (including defenses arising out of violations of usury
laws) of the obligor, other than defenses arising out of
bankruptcy, insolvency or other similar laws affecting the
enforcement of creditors' rights in general;
o which, at the time of transfer to the trust, the originator or
other account owner, as applicable, has satisfied all of its
obligations required to be satisfied by that time;
o which, at the time of transfer to the trust, none of the
transferor, the originator or any other account owner, as
applicable, has taken any action, or omitted to take any action,
that would impair the rights of the trust or the noteholders; and
o which constitutes an "account" or "general intangible" under
Article 9 of the UCC as then in effect in the State of Delaware
or any other state where the filing of a financing statement is
required to perfect the trust's interest in the receivables and
the proceeds of the receivables.
ADDITION OF TRUST ASSETS
As described above under "The Trust Portfolio," the transferor will
have the right to designate, from time to time, additional accounts to be
included as accounts for the trust. In addition, the transferor will be required
to designate additional accounts under the circumstances and in the amounts
specified in the accompanying prospectus supplement. The transferor will convey
to the trust its interest in all receivables of those additional accounts,
whether the receivables are then existing or subsequently created.
Each additional account must be an eligible account at the time of its
designation. However, additional accounts may not be of the same credit quality
as the initial accounts. Additional accounts may have been originated by the
originator or other account owner, as applicable, using credit criteria
different from those which were applied by the originator to the initial
accounts or may have been acquired by the originator or other account owner, as
applicable, from an institution which may have had different credit criteria.
The transferor is also permitted to add, from time to time,
participations and related collections to the trust. These "Participations" must
be undivided interests in a pool of assets primarily consisting of receivables
arising under dealer floorplan accounts. Participations may be issued under
separate agreements that are similar to the agreements governing the issuance of
the notes and that entitle the holder of the participation to receive
percentages of collections generated by the pool of assets supporting the
participation. Participations may have their own credit enhancement, pay out
events, servicing obligations and servicer defaults, all of which are likely to
be enforceable by a separate trustee under these participation agreements and
may be different from those specified in this prospectus. The rights and
remedies of the trust as the holder of a participation (and, therefore, the
noteholders) will be subject to all the terms and provisions of those
participation agreements.
The transfer and servicing agreement may be amended to permit the
addition of a participation to the trust without noteholder consent if:
o the transferor delivers to the owner trustee and the indenture
trustee a certificate of an authorized officer to the effect
that, in the transferor's reasonable belief, adding the
participation will not have a material adverse effect on the
interests of the noteholders; and
o the amendment allowing the addition of the participation will not
result in a withdrawal or reduction of the rating of any
outstanding series under the trust.
When the transferor transfers receivables in additional accounts or
participations, it must satisfy several conditions, including, as applicable:
o notice to the owner trustee, the indenture trustee, the servicer
and each rating agency;
o delivery and acceptance by the owner trustee of a written
assignment of receivables in the additional accounts or
participations to the trust;
o delivery to the owner trustee of a computer file or microfiche
list with an accurate list of all additional accounts;
o delivery to the owner trustee and the indenture trustee of a
certificate of an authorized officer to the effect that:
o as of the date of assignment, called the "Addition Date,"
each additional account is an eligible account;
o any action necessary to perfect the trust's interest in the
receivables arising in the additional accounts has been
taken;
o as of the addition date, none of the originator (or any
other account owner), the servicer or the transferor is
insolvent; and
o in the transferor's reasonable belief, adding the
receivables in additional accounts or participations will
not have a material adverse effect on the interests of the
noteholders;
o delivery of opinions of counsel with respect to the transfer of
the receivables in the additional accounts or the participations
to the trust;
o in circumstances where the transferor, in its discretion,
designates additional accounts to be included as accounts for the
trust or adds participations to the trust, written confirmation
from each rating agency that the addition will not result in the
reduction or withdrawal of its rating of any outstanding series
or class; and
o in circumstances where the transferor is required to designate
additional accounts to be included as accounts for the trust, or
to add participations to the trust, each rating agency then
rating any series of notes outstanding under the trust shall have
previously, or, in limited circumstances, within a three-month
period, consented to the designation of the additional accounts
or the addition of the participations.
In addition to the periodic reports otherwise required to be filed by
the servicer with the Securities and Exchange Commission (the "SEC") pursuant to
the Securities Exchange Act of 1934, the servicer intends to file, on behalf of
the trust, a Report on Form 8-K with respect to any addition to the trust of
receivables in additional accounts or participations that would have a material
effect on the composition of the assets of the trust.
The transferor may, from time to time, designate one or more of its
affiliates as additional transferors under the transfer and servicing agreement.
In connection with this designation, the transferor will exchange the transferor
certificate for a newly issued transferor certificate modified to reflect any
additional transferor's interest in the Transferor Interest. The transfer and
servicing agreement may be amended to permit the designation of these additional
transferors and the exchange of the Transferor Certificate without noteholder
consent upon:
o delivery to the owner trustee and the indenture trustee of a tax
opinion regarding the exchange; and
o receipt of written confirmation from each rating agency that the
exchange will not result in a reduction or withdrawal of its
rating of any outstanding series or class.
REMOVAL OF ACCOUNTS
The transferor has the right to designate removed accounts and to
remove participations from the trust and to require the indenture trustee to
transfer all receivables in the removed accounts back to the transferor, whether
the receivables already exist or arise after the designation. The transferor's
rights to removal are subject to satisfaction of several conditions, including:
o written notice to the owner trustee, the indenture trustee, the
servicer, each rating agency and each series enhancer;
o delivery to the owner trustee for execution a written
reassignment of receivables in the removed accounts and removed
participations to the transferor or its designee;
o delivery to the owner trustee of a computer file or microfiche
list with an accurate list of all removed accounts;
o written confirmation from each rating agency that the removal
will not result in the reduction or withdrawal of its rating of
any outstanding series or class;
o delivery to the owner trustee and the indenture trustee a
certificate of an authorized officer to the effect that, in the
transferor's reasonable belief:
o the removal will not have a material adverse effect on the
interests of the noteholders;
o the removal will not cause a pay out event or event of
default; and
o the accounts to be removed were not selected through a
selection process believed to be materially adverse to the
interests of the noteholders; and
o any other conditions specified in the accompanying prospectus
supplement.
The conditions described above relating to rating agency confirmation
and the delivery of an officer's certificate will not apply if the transferor is
purchasing receivables in accounts designated for re-purchase by a merchant or
co-branding participant upon termination of its affinity agreement with the
originator or other account owner, as applicable.
In all cases of removal, the transferor will purchase the related
receivables by directing the servicer to deduct the principal amount of those
receivables from the Transferor Interest. If this would reduce the Transferor
Interest below the Required Transferor Interest, the transferor will make a cash
deposit in the trust's special funding account in the amount by which the
Transferor Interest would have been reduced below the Required Transferor
Interest. Any deduction or deposit is considered a payment in full for those
receivables.
COLLECTION AND OTHER SERVICING PROCEDURES
For each series of notes, the servicer will be responsible for
servicing and administering the receivables in accordance with the servicer's
policies and procedures for servicing dealer floorplan receivables comparable to
the receivables. The servicer will be required to maintain fidelity bond
coverage insuring against losses through wrongdoing of its officers and
employees who are involved in the servicing of dealer floorplan receivables
covering these actions and in amounts as the servicer believes to be reasonable
from time to time.
DISCOUNT OPTION
The transferor, has the option to reclassify a percentage, called the
"Discount Percentage," of collections of principal receivables in the trust
portfolio as collections of finance charge receivables. This option is referred
to as the "Discount Option." The transferor may use the Discount Option to
compensate for a decline in the portfolio yield, but only if there would be
sufficient principal receivables to allow for that discounting. Exercise of the
Discount Option would result in a larger amount of collections of finance charge
receivables and a smaller amount of collections of principal receivables. By
doing so, the transferor would reduce the likelihood that a pay out event would
occur as a result of a decreased portfolio yield and, at the same time, would
increase the likelihood that the transferor will have to add principal
receivables to the trust.
If the Discount Percentage is greater than zero, an amount of
collections of principal receivables in the trust portfolio for each monthly
period equal to the product of:
o the Discount Percentage times
o total collections of principal receivables in the trust portfolio
will be considered collections of finance charge receivables in the trust
portfolio and allocated with all other collections of finance charge receivables
in the trust portfolio.
To exercise the Discount Option, the transferor must satisfy the
conditions in the transfer and servicing agreement, including written
confirmation from each rating agency that use of the Discount Option will not
result in a reduction or withdrawal of its rating of any outstanding series or
class.
TRUST ACCOUNTS
The servicer will establish and maintain in the name of the indenture
trustee, for the benefit of noteholders of all series, a "Collection Account,"
which shall be either (a) a segregated trust account established with the
corporate trust department of a securities intermediary or (b) a segregated
account with a securities intermediary that is an eligible institution (a
"Qualified Account"). The servicer will also establish and maintain with a
securities intermediary in the name of the indenture trustee, a "Special Funding
Account," which also is required to be a qualified account. References to the
"Securities Intermediary" shall refer to any entity which is a person, including
a bank or broker, that in the ordinary course of its business maintains
securities accounts for others and is acting in that capacity and which is also
a depository institution organized under the laws of the United States or any
one of the fifty states, including the District of Columbia (or any domestic
branch of a foreign bank), and having a credit rating from each rating agency in
one of its generic credit rating categories which signifies investment grade. An
"Eligible Institution" is defined as:
(1) (a) a depository institution, which may include the owner
trustee or the indenture trustee;
(b) organized under the laws of the United States or any one
of the fifty states, including the District of Columbia (or any
domestic branch of a foreign bank); and
(c) which at all times (1) is a member of the FDIC and (2)
has either a long-term unsecured debt rating or a certificate of
deposit rating acceptable to each rating agency selected by the
transferor to rate a series or class of notes; or
(2) any other institution acceptable to each rating agency
selected by the transferor to rate a series or class of notes.
Funds in the collection account and the special funding account will
be assets of the trust and will be invested, at the direction of the servicer,
in "Eligible Investments" consisting of securities, instruments, security
entitlements or other investment property which evidence:
(1) direct obligations of, and obligations fully guaranteed as to
timely payment of principal and interest by, the United States of
America;
(2) demand deposits, time deposits or certificates of deposit
(having original maturities of no more than 365 days) of depository
institutions or trust companies incorporated under the laws of the
United States of America or any are of the fifty states, including the
District of Columbia (or domestic branches of foreign banks) and
subject to supervision and examination of federal or state banking or
depository institution authorities; provided, that at the time of the
trust's investment or contractual commitment to invest, the short-term
debt rating of that depository institution or trust company shall be
in the highest investment category of Standard & Poor's Ratings Group
("Standard & Poor's") and Moody's Investors Service Inc. ("Moody's");
(3) commercial paper or other short-term obligations having
original or remaining maturities of no more than 30 days having, at
the time of the trust's investment or contractual commitment to
invest, a rating in the highest rating category of Standard & Poor's
and Moody's;
(4) demand deposits, time deposits and certificates of deposit
which are fully insured by the FDIC having, at the time of the trust's
investment, a rating in the highest rating category of Standard &
Poor's and Moody's;
(5) bankers' acceptances (having original maturities of no more
than 365 days) issued by any depository institution or trust company
referred to in clause (2) above;
(6)money market funds having, at the time of the trust's
investment, a rating in the highest rating category of Standard &
Poor's and Moody's (including funds for which the indenture trustee or
any of its affiliates is investment manager or advisor);
(7) time deposits (having maturities not later than the next
distribution date) other than those referred to in clause (4) above,
with a person whose commercial paper has a credit rating satisfactory
to Standard & Poor's and Moody's; or
(8) any other investment upon receipt of written confirmation
from each rating agency that the additional form of investment will
not result in a reduction or withdrawal of its rating of any
outstanding series or class.
The indenture trustee, acting as the initial paying agent (together
with any successor to the indenture trustee acting in that capacity, and any
entity specified in an indenture supplement to act in that capacity for the
related series, referred to collectively as the "Paying Agent"), will have the
revocable power to withdraw funds from the collection account for the purpose of
making payments to the noteholders of any series pursuant to the related
indenture supplement.
FUNDING PERIOD
For any series of notes, the total amount of principal receivables in
the trust available to that series may be less than the total principal amount
of the notes of that series. If this occurs, the initial Invested Amount for
that series of notes will be less than the principal amount of that series of
notes. In this case, the related prospectus supplement will set forth the terms
of the "Funding Period," which is the period from that series' closing date to
the earlier of:
o the date that series' Invested Amount equals the principal amount
of that series of notes; and
o the date specified in the related prospectus supplement.
During the funding period, the portion of the series amount not
invested in receivables will be maintained in a "Pre-Funding Account," which is
a trust account established with the indenture trustee for the benefit of the
noteholders of that series. On the closing date for that series of notes, this
amount may be up to 100% of the principal balance of that series of notes. The
Invested Amount for that series will increase as new receivables are transferred
to the trust or as the Invested Amounts of other outstanding series are reduced.
The Invested Amount may decrease due to charge-offs allocated to the series.
During the funding period, funds on deposit in the pre-funding account
will be paid to the transferor as the Invested Amount increases. If the Invested
Amount for that series is not increased so that it equals the principal balance
of the notes of that series by the end of the funding period, any amount
remaining in the pre-funding account will be repaid to noteholders. This type of
event may also cause repayment of other amounts to noteholders, as set forth in
the related prospectus supplement.
The prospectus supplement for a series with a funding period will set
forth:
o the series' initial Invested Amount;
o the series' full Invested Amount, which is the initial principal
balance of the series of notes;
o the date on which the series' Invested Amount is expected to
equal the full Invested Amount;
o the date by which the funding period will end; and
o what other events, if any, will occur if the end of the funding
period is reached before the full Invested Amount is funded.
INVESTOR PERCENTAGE AND TRANSFEROR PERCENTAGE
The servicer will allocate all collections of finance charge
receivables, all collections of principal receivables and all receivables in
accounts which were written off as uncollectible by the servicer, called
"Defaulted Accounts," among:
o each series issued and outstanding;
o the Transferor Interest; and
o if the related prospectus supplement so states, to any credit
enhancement providers.
All allocations of these amounts will be made through the respective Investor
Percentages for each series, the Transferor Percentage and, where applicable,
the percentage interest of credit enhancement providers, called the "Credit
Enhancement Percentage." The related prospectus supplements will set forth how
the Investor Percentages are calculated.
The Transferor Percentage is, in all cases, equal to 100% minus:
o the total Investor Percentages for all outstanding series; and,
if applicable, minus
o the total Credit Enhancement Percentages for all outstanding
series.
APPLICATION OF COLLECTIONS
Except in the circumstance described below, the servicer must deposit
into the collection account, no later than two business days after processing,
all payments made on receivables in the trust portfolio. The servicer must also
allocate these deposits between accounts and to various parties, as described
below. However, the servicer will be able to make these deposits on a monthly or
other periodic basis if the conditions specified in the related prospectus are
satisfied.
The servicer must make daily or periodic deposits to the collection
account only to the extent that the funds are needed for deposit into other
trust accounts or distribution to noteholders or other parties. If the
collection account balance ever exceeds this amount for deposit or distribution,
the servicer will be able to withdraw the excess. Subject to the immediately
preceding sentence, the servicer may retain its servicing fee with respect to
any series and will not be required to deposit it in the collection account.
Each time a collection account deposit is made, the servicer will
withdraw from, or retain in, the collection account, as applicable, the
following amounts and apply them as indicated:
(1) the Transferor Percentage of collections of finance charge
receivables and principal receivables in the trust portfolio will be
paid or held for payment to the holders of the transferor
certificates, provided that collections of principal receivables
allocable to the holders of the transferor certificates will be:
(a) paid to the holders of the transferor certificates only
if the Transferor Interest exceeds zero; or
(b) deposited in the special funding account;
(2) for each series, the relevant Investor Percentage of
collections of finance charge receivables in the trust portfolio will
be retained in the collection account for allocation and payment as
set forth in the related prospectus supplement;
(3) if the series is in its revolving period, the applicable
Investor Percentage of collections of principal receivables in the
trust portfolio allocated to the series will be paid or held for
payment to the holders of the transferor certificates, provided that
collections of principal receivables will be:
(a) paid to the holders of the transferor certificates only
if the Transferor Interest is greater than a specified minimum level,
called the "Required Transferor Interest"; or
(b) deposited in the special funding account;
(4) if the series is in its controlled accumulation period,
controlled amortization period or early accumulation period, as
applicable, the applicable Investor Percentage of collections of
principal receivables in the trust portfolio allocated to the series
up to the amount, if any, specified in the accompanying prospectus
supplement will be retained in the collection account or deposited in
a principal funding account, as applicable, for allocation and payment
to noteholders as described in the accompanying prospectus supplement;
provided that if collections of principal receivables exceed the
principal payments which may be allocated or distributed to
noteholders, the excess will be paid to the holders of the transferor
certificates, subject to the limitations described in clause (3)
above; and
(5) if the series is in its early amortization period, the
applicable Investor Percentage of collections of principal receivables
in the trust portfolio will be retained in the collection account for
application and payment as provided in the accompanying prospectus
supplement.
In the case of a series of notes having more than one class, the
amounts in the collection account will be allocated and applied to each class in
the manner and order of priority described in the accompanying prospectus
supplement.
Any amounts collected in respect of principal receivables and not paid
to the holders of the transferor certificates because the Transferor Interest is
less than the Required Transferor Interest as described in paragraph (3) above
(with respect to each series, "Unallocated Principal Collections"), together
with any adjustment payments as described below, will be paid to and held in the
special funding account and paid to the holders of the transferor certificates
if, and only to the extent that, the Transferor Interest is greater than the
Required Transferor Interest. If an amortization period or accumulation period
has commenced, unallocated principal collections will be held for distribution
to the noteholders on the dates specified in the accompanying prospectus
supplement or accumulated for distribution on the expected principal payment
date, as applicable, and distributed to the noteholders of each class or held
for and distributed to the noteholders of other series of notes issued by the
trust in the manner and order of priority specified in the accompanying
prospectus supplement.
SHARED EXCESS FINANCE CHARGE COLLECTIONS
If a series is identified in the prospectus supplement for that series
as included in a group, collections of finance charge receivables in the trust
portfolio allocated to the series in excess of the amount needed to make
deposits or payments may be shared with other series identified in the
prospectus supplements for those other series as included in the same group. If
one series requires more collections of finance charge receivables than
allocated through its Investor Percentage, it will have access to all of these
shared excess finance charge collections in other series in its group. If two or
more series require more collections of finance charge receivables, excess
finance charge collections in the group will be shared among the series in the
manner and priority set forth in the related prospectus supplements.
SHARED PRINCIPAL COLLECTIONS AND TRANSFEROR PRINCIPAL COLLECTIONS
If a series is allocated principal in excess of the amount needed for
deposit or distribution, this excess amount will be available to make principal
payments or deposits required by other series. These shared principal
collections may be limited to series identified in the prospectus supplements
for those series as included in the same group. If collections of principal
receivables in the trust portfolio allocated to a series are shared with another
series, the Invested Amount for the series from which collections were shared
will not be reduced.
In addition, collections of principal receivables in the trust
portfolio otherwise payable to the holders of the transferor interest may be
available to make principal payments or deposits required by noteholders of one
or more series. These shared transferor principal collections may be limited to
series identified in the prospectus supplements for those series as included in
the same group.
DEFAULTED RECEIVABLES; REBATES AND FRAUDULENT CHARGES; INVESTOR CHARGE-OFFS
Unless otherwise specified in the accompanying prospectus supplement,
for each series of notes, on the earlier of (a) the third business day and (b)
the fifth calendar day (or, if the fifth calendar day is not a business day,
then the preceding business day) preceding the seventeenth day of each calendar
month (the "Determination Date"), the servicer will calculate the aggregate
Investor Default Amount for the preceding monthly period, which will be equal to
the aggregate amount of the Investor Percentage of principal receivables in
defaulted accounts; that is, accounts which in that monthly period were written
off as uncollectible in accordance with the servicer's policies and procedures
for servicing dealer floorplan receivables, comparable to the receivables. If so
provided in the accompanying prospectus supplement, an amount equal to the
Investor Default Amount for any monthly period may be paid from other amounts,
including from credit enhancement, and applied to pay principal to noteholders
or, subject to limitations, the holder of the Transferor Interest, as
appropriate.
With respect to each series of notes, the Invested Amount with respect
to that series will be reduced by the amount of Investor Charge-Offs for any
monthly period. Investor Charge-Offs will be reimbursed on any distribution date
to the extent amounts on deposit in the collection account and otherwise
available exceed the interest, fees and any aggregate Investor Default Amount
payable on that date. This reimbursement of Investor Charge-Offs will result in
an increase in the Invested Amount with respect to that series.
DEFEASANCE
If so specified in the prospectus supplement relating to a series, the
transferor may terminate its substantive obligations in respect of that series
or the trust by depositing with the indenture trustee, from amounts
representing, or acquired with, collections of receivables, money or eligible
investments sufficient to make all remaining scheduled interest and principal
payments on that series or all outstanding series of notes of the trust, as the
case may be, on the dates scheduled for those payments and to pay all amounts
owing to any credit enhancement provider with respect to that series or all
outstanding series, as the case may be, if that action would not result in a pay
out event for any series. Prior to its first exercise of its right to substitute
money or eligible investments for receivables, the transferor will deliver to
the indenture trustee an opinion of counsel to the effect that:
o for federal income tax purposes, the deposit and termination of
obligations will not cause the trust, or any portion of the
trust, to be deemed to be an association (or publicly traded
partnership) taxable as a corporation;
o the deposit and termination of obligations will not result in the
trust being required to register as an "investment company"
within the meaning of the Investment Company Act of 1940, as
amended; and
o if the transferor's long-term unsecured debt obligations are not
rated at least P-3 or Baa3, respectively, by Moody's, the deposit
and termination of obligations would not be a fraudulent
conveyance (based in reliance on certificates to the effect that
the receivables in the trust portfolio and termination of
obligations constitute fair value for consideration paid and as
to the solvency of the transferor).
FINAL PAYMENT OF PRINCIPAL; TERMINATION
For each series, the transferor has the option to repurchase the notes
at any time after the remaining outstanding principal amount of that series is
10% or less of the initial principal amount of that series (as increased by the
principal balance of any notes of that series issued after the related closing
date) if the conditions set forth in the related indenture supplement are met.
The repurchase price will equal:
o the outstanding principal amount of the notes of that series,
plus
o any accrued and unpaid interest through the day preceding the
distribution date on which the repurchase occurs or, if the
repurchase occurs on any other date, through the day preceding
the distribution date immediately following the repurchase date.
Any amounts on deposit in the principal funding account for that
series will be applied toward the repurchase price on behalf of the transferor.
For any series of notes, the related prospectus supplement may specify
different conditions to the transferor's repurchase option and a different
method for determining the repurchase price.
The notes of each series will be retired on the day following the date
on which the final payment of principal is scheduled to be made to the
noteholders, whether as a result of optional reassignment to the transferor or
otherwise. Each prospectus supplement will specify the series termination date
with respect to the related series of notes. However, the notes may be subject
to prior termination as provided above. For any series the failure to pay
principal of the related notes on the series termination date will be an event
of default and the indenture trustee or holders of a specified percentage of the
notes of that series will have the rights described under "The Indenture -Events
of Default; Rights upon Event of Default" in this prospectus.
Unless the servicer and the holder of the Transferor Interest instruct
the indenture trustee otherwise, the trust will terminate on the earlier of (a)
the day after the distribution date on which the aggregate Invested Amount and
Enhancement Invested Amount, if any, with respect to each series outstanding is
zero, or (b) January 1, 20___, (this date, the "Trust Termination Date"). Upon
the termination of the trust and the surrender of the transferor certificates,
the indenture trustee shall convey to the holders of the transferor certificates
all right, title and interest of the trust in and to the receivables and other
funds of the trust.
PAIRED SERIES
The prospectus supplement for a series of notes will specify whether
that series may be paired with a previously or later issued series so that a
decrease in the Invested Amount of the previously issued series results in a
corresponding increase in the Invested Amount of the later issued series. We
call each of these series a "Paired Series." In general, a series may be issued
as a paired series so the trust can fund the amount by which the previously
issued series has amortized and will amortize in the future.
If a pay out event occurs for the previously issued series or its
paired series when the previously issued series is amortizing, the Investor
Percentage for the allocation of collections of principal receivables for the
previously issued series may be reset to a lower percentage as described in the
prospectus supplement for that series and the period over which it will amortize
may be lengthened as a result. The extent to which the period over which it
amortizes is lengthened will depend on many factors, only one of which is the
reduction of its Investor Percentage. For a discussion of these factors, see
"Risk Factors -Issuance of additional series by the trust may affect the timing
of payments to you" in this prospectus and "Maturity Considerations" in the
accompanying prospectus supplement.
PAY OUT EVENTS
Unless otherwise specified in the accompanying prospectus supplement,
as described above, the revolving period will continue through the date
specified in the accompanying prospectus supplement unless a pay out event
occurs prior to that date. A "Pay Out Event" occurs with respect to all series
issued by the trust upon the occurrence of any of the following events:
o bankruptcy, insolvency, liquidation, conservatorship,
receivership or similar events relating to the transferor
(including any additional transferor) or the originator;
o the transferor is unable for any reason to transfer receivables
to the trust in accordance with the provisions of the transfer
and servicing agreement; or
o the trust becomes subject to regulation as an "investment
company" within the meaning of the Investment Company Act of
1940.
In addition, a pay out event may occur with respect to any series upon
the occurrence of any other event specified in the accompanying prospectus
supplement. On the date on which a pay out event is deemed to have occurred, the
early amortization period or, if so specified in the accompanying prospectus
supplement, the early accumulation period will commence. If, because of the
occurrence of a pay out event, the early amortization period begins earlier than
the scheduled commencement of an amortization period or prior to an expected
principal payment date, noteholders will begin receiving distributions of
principal earlier than they otherwise would have, which may shorten the average
life of the notes.
In addition to the consequences of a pay out event discussed above,
unless otherwise specified in the accompanying prospectus supplement, if
bankruptcy, insolvency or similar proceedings under the Bankruptcy Code or
similar laws occur with respect to the transferor, on the day of that event the
transferor will immediately cease to transfer principal receivables to the trust
and promptly give notice to the indenture trustee and the owner trustee of this
event. Any principal receivables transferred to the trust prior to the event, as
well as collections on those principal receivables and finance charge
receivables accrued at any time with respect to those principal receivables,
will continue to be part of the trust assets and will be applied as specified
above in "-Application of Collections" and in the accompanying prospectus
supplement.
If the only pay out event to occur is either the insolvency of the
transferor or the commencement of a bankruptcy case by or against the
transferor, the bankruptcy court may have the power to require the continued
transfer of principal receivables to the trust. See "Risk Factors -If the
originator or the transferor became a debtor in a bankruptcy case, delays or
reductions in payment of your notes could occur" in this prospectus.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
The servicer receives a fee for its servicing activities and
reimbursement of expenses incurred in administering the trust. This servicing
fee accrues for each outstanding series in the amounts and calculated on the
balances set forth in the related prospectus supplement. Each series' servicing
fee is payable each period from collections of finance charge receivables
allocated to the series; some series, however, may direct all or a portion of
the Interchange arising from the accounts toward paying the servicing fee.
Neither the trust nor the noteholders are responsible for any servicing fee
allocable to the Transferor Interest.
CERTAIN MATTERS REGARDING THE TRANSFEROR AND THE SERVICER
The servicer may not resign from its obligations and duties under the
transfer and servicing agreement, except upon a determination that performance
of its duties is no longer permissible under applicable law; or if:
o within 120 days of the determination that the servicer is no
longer permitted to act as servicer; and
o the indenture trustee is unable to appoint a successor,
the indenture trustee will act as servicer. If the indenture trustee is unable
to act as servicer, it will petition an appropriate court to appoint an eligible
successor.
The servicer may not resign until the indenture trustee or another
successor has assumed the servicer's obligations and duties.
The servicer will indemnify the trust, the owner trustee and the
indenture trustee for any losses suffered as a result of (a) its actions or
omissions as servicer or (b) the administration by the owner trustee of the
trust, except in each case, for losses resulting from the negligence or willful
misconduct of the owner trustee or the indenture trustee, as applicable.
Neither the servicer nor any of its directors, officers, employees or
agents will be under any other liability to the trust, the owner trustee, the
indenture trustee, the noteholders, any series enhancer or any other person for
any action taken, or for refraining from taking any action, in good faith under
the transfer and servicing agreement. However, none of them will be protected
against any liability resulting from willful wrongdoing, bad faith or gross
negligence in the performance of its duties or by reason of reckless disregard
of obligations and duties under the transfer and servicing agreement. In
addition, the transfer and servicing agreement provides that the servicer is not
under any obligation to appear in, prosecute or defend any legal action which is
not incidental to its servicing responsibilities under the transfer and
servicing agreement and which in its opinion may expose it to any expense or
liability.
Each transferor will be severally, but not jointly, liable for all of
its obligations, covenants, representations and warranties under the transfer
and servicing agreement. No transferor nor any of its directors, officers,
employees, incorporators or agents will be liable to the trust, the owner
trustee, the indenture trustee, the noteholders, any series enhancer or any
other person for any action taken, or for refraining from taking any action, in
good faith under the transfer and servicing agreement. However, none of them
will be protected against any liability resulting from willful wrongdoing, bad
faith or gross negligence in the performance of its duties or by reason of
reckless disregard of obligations and duties under the transfer and servicing
agreement.
The trust agreement provides that the transferor may transfer its
interest in all or a portion of the transferor certificate by exchanging its
transferor certificate for a newly issued transferor certificate and a second
certificate, called a "Supplemental Certificate." The terms of the supplemental
certificate must be defined in a supplement to the trust agreement. Before a
supplemental certificate is issued, the following must occur:
o notice of the exchange to the owner trustee, the indenture
trustee, the servicer and each rating agency;
o delivery to the owner trustee and the indenture trustee of an
executed supplement to the trust agreement;
o written confirmation from each rating agency that the exchange
will not result in a reduction or withdrawal of its rating of any
outstanding series or class;
o delivery to the owner trustee and the indenture trustee of a
certificate of an authorized officer of the transferor to the
effect that it reasonably believes the exchange will not have an
adverse effect;
o delivery to the owner trustee and the indenture trustee of a tax
opinion regarding the exchange; and
o the total amount of principal receivables in the trust portfolio,
plus the principal amount of any participations transferred to
the trust must exceed the Required Minimum Principal Balance on
the date of the exchange.
No supplemental certificate may be transferred or exchanged unless a
tax opinion is delivered to the owner trustee and the indenture trustee
regarding the exchange.
The transferor or the servicer may consolidate with, merge into, or
sell its business to, another entity, in accordance with the transfer and
servicing agreement, and the surviving entity will be the successor to the
transferor or servicer, as the case may be, on the following conditions:
o execution of an agreement relating to the succession that
supplements the transfer and servicing agreement;
o in the case of a succession relating to the transferor, (1)
delivery to the owner trustee and the indenture trustee of a
certificate of an authorized officer of the transferor and an
opinion of counsel, each addressing compliance with the
applicable provisions of the transfer and servicing agreement and
the validity and enforceability of the supplemental agreement and
(2) written confirmation from each rating agency that the
succession will not result in a reduction or withdrawal of its
rating of any outstanding series or class; and
o in the case of a succession relating to the servicer, (1)
delivery to the owner trustee and the indenture trustee of a
certificate of an authorized officer of the servicer and an
opinion of counsel, each addressing compliance with the
applicable provisions of the transfer and servicing agreement,
(2) notification of the succession to each rating agency and (3)
that the successor is eligible to act as servicer.
SERVICER DEFAULT
The transfer and servicing agreement specifies the duties and
obligations of the servicer. A failure by the servicer to perform its duties or
fulfill its obligations can result in a Servicer Default.
A "Servicer Default" includes each of the following:
(1) failure by the servicer to make any payment, transfer or
deposit, or to give instructions or to give notice to the indenture
trustee to do so, on the required date under the transfer and
servicing agreement, the indenture or any indenture supplement or
within the applicable grace period not exceeding 5 business days;
(2) failure on the part of the servicer to observe or perform any
of its other covenants or agreements if the failure:
(a) materially adversely affects noteholders of any series
issued and outstanding under the trust; and
(b) continues unremedied for a period of 60 days after written
notice to (1) the servicer by the owner trustee or the indenture
trustee, or (2) the servicer, the owner trustee and the indenture
trustee by noteholders of 10% or more of the then-outstanding
principal amount of all of the trust's outstanding series (or, where
the servicer's failure does not relate to all series, 10% or more of
the then-outstanding principal amount of all series affected); or
(c) the assignment or the delegation by the servicer of its
duties, except as specifically permitted under the transfer and
servicing agreement;
(3) any representation, warranty or certification made by the
servicer in the transfer and servicing agreement, or in any
certificate delivered pursuant to the transfer and servicing
agreement, proves to have been incorrect when made if it:
(a) materially adversely affects noteholders of any series
issued and outstanding under the trust; and
(b) continues to be incorrect and to materially adversely
affect those noteholders for a period of 60 days after written notice
to (1) the servicer by the owner trustee or the indenture trustee, or
(2) the servicer, the owner trustee and the indenture trustee by
noteholders of 10% or more of the then-outstanding principal amount of
all of the trust's outstanding series (or, where the servicer's
inaccuracy does not relate to all series, 10% or more of the
then-outstanding principal amount of all series affected);
(4) specific bankruptcy, insolvency, liquidation,
conservatorship, receivership or similar events relating to the
servicer; or
(5) any other event specified in the accompanying prospectus
supplement.
Notwithstanding the foregoing, a delay in or failure of performance
referred to in clause (1) above for a period of 10 business days after the
applicable grace period, or referred to under clause (2) or (3) for a period of
60 business days after the applicable grace period, will not constitute a
Servicer Default if the delay or failure could not be prevented by the exercise
of reasonable diligence by the servicer and the delay or failure was caused by
an act of God or other similar occurrence. Upon the occurrence of any of these
events, the servicer shall not be relieved from using all commercially
reasonable efforts to perform its obligations in a timely manner in accordance
with the terms of the transfer and servicing agreement and the servicer must
provide the indenture trustee, the owner trustee each transferor and any
provider of enhancement and/or any issuer of any third-party credit enhancement
(a "Series Enhancer") with an officer's certificate giving prompt notice of its
failure or delay, together with a description of its efforts to perform its
obligations.
If a Servicer Default occurs, for as long as it has not been remedied,
the indenture trustee or noteholders representing a majority of the
then-outstanding principal amount of all of the trust's outstanding series may
give a notice to the servicer and the owner trustee (and to the indenture
trustee if given by the noteholders) terminating all of the rights and
obligations of the servicer under the transfer and servicing agreement and the
indenture trustee may appoint a new servicer. The indenture trustee will as
promptly as possible appoint an eligible successor to the servicer. If no
successor has been appointed or has accepted the appointment by the time the
servicer ceases to act as servicer, the indenture trustee will automatically
become the successor. If the indenture trustee is unable to obtain bids from
eligible servicers and the servicer delivers a certificate of an authorized
officer to the effect that it cannot in good faith cure the Servicer Default
which gave rise to a transfer of servicing, and if the indenture trustee is
legally unable to act as successor, then the indenture trustee will give the
transferor a right of first refusal to purchase the interests of the noteholders
in the trust on the distribution date in the next calendar month at a price
equal to the sum of the amounts specified for each series outstanding in the
related indenture supplement.
The rights and obligations of the transferor under the transfer and
servicing agreement will be unaffected by any change in servicer.
In the event of the bankruptcy of the servicer, the bankruptcy court
may have the power to prevent either the indenture trustee or the noteholders
from appointing a successor servicer.
REPORTS TO NOTEHOLDERS
Noteholders of each series issued by the trust will receive reports
with information on the series and the trust. The paying agent will forward to
each noteholder of record a report, prepared by the servicer, for its series on
the distribution dates for that series. The report will set forth information as
specified in the related prospectus supplement. If a series has multiple
classes, information will be provided for each class, as specified in the
related prospectus supplement.
Periodic information to noteholders generally will include:
o the total amount distributed;
o the amount of principal and interest for distribution
o collections of principal receivables and finance charge
receivables allocated to the series;
o the aggregate amount of principal receivables, the Invested
Amount and the Invested Amount as a percentage of the aggregate
amount of the principal receivables in the trust portfolio;
o the aggregate outstanding balance of accounts broken out by
delinquency status;
o the aggregate defaults allocated to the series;
o Investor Charge-Offs for the series and any reimbursements of
previous Investor Charge-Offs;
o the monthly servicing fee for that series;
o the amount available under any enhancement and credit
enhancement, if any, for the series or each class of the series;
o the "pool factor," which is the ratio of the current Invested
Amount to the initial Invested Amount;
o the Base Rate and Portfolio Yield (each as defined in the
accompanying prospectus supplement) for the series; and
o if the series or a class of the series bears interest at a
floating or variable rate, information relating to that rate.
By January 31 of each calendar year, the paying agent will also
provide to each person who at any time during the preceding calendar year was a
noteholder of record a statement, prepared by the servicer, containing the type
of information presented in the periodic reports, aggregated for that calendar
year or the portion of that calendar year that the person was a noteholder,
together with other information that is customarily provided to holders of debt,
to assist noteholders in preparing their United States tax returns.
EVIDENCE AS TO COMPLIANCE
The transfer and servicing agreement provides that on or before April
30 of each calendar year, the servicer will have a firm of independent certified
public accountants furnish a report showing that, for the prior calendar year:
o the accounting firm has reviewed management's assertion that the
system of internal control over servicing of securitized dealer
floorplan receivables met the criteria for effective internal
control and that, in the accounting firm's opinion, management's
assertion is fairly stated in all material respects, and
o the accounting firm has compared amounts set forth in the
periodic reports prepared by the servicer for the prior calendar
year with the servicer's computer reports and that, in the
accounting firm's opinion, the amounts are in agreement, except
for any discrepancies disclosed.
The transfer and servicing agreement also provides that by April 30 of
each calendar year, the servicer will deliver to the owner trustee, the
indenture trustee and each rating agency a certificate of an authorized officer
to the effect that the servicer has fully performed its obligations under the
transfer and servicing agreement during the preceding year, or, if there has
been a default in the performance of any of its obligations, specifying the
nature and status of default.
AMENDMENTS
The transfer and servicing agreement may be amended by the transferor,
the servicer and the owner trustee, without the consent of the indenture trustee
or the noteholders of any series, on the following conditions:
o the transferor delivers to the owner trustee and the indenture
trustee a certificate of an authorized officer stating that, in
the transferor's reasonable belief, the amendment will not have a
material adverse effect on the interests of the noteholders; and
o written confirmation from each rating agency that the amendment
will not result in a reduction or withdrawal of its rating of any
outstanding series or class.
The transfer and servicing agreement may also be amended by the
servicer and the owner trustee at the direction of the transferor, without the
consent of the indenture trustee, the noteholders of any series or the series
enhancers for any series to add, modify or eliminate any provisions necessary or
advisable in order to enable the trust or any portion of the trust to (1)
qualify as, and to permit an election to be made for the trust to be treated as,
a "financial asset securitization investment trust" under the Internal Revenue
Code of 1986, as amended and (2) avoid the imposition of state or local income
or franchise taxes on the trust's property or its income. The following
conditions apply for the amendments described in this paragraph:
o delivery to the owner trustee and the indenture trustee of a
certificate of an authorized officer of the transferor to the
effect that the requirements under the transfer and servicing
agreement applicable to the proposed amendments have been met;
o receipt of written confirmation from each rating agency that the
amendment will not result in a reduction or withdrawal of its
rating of any outstanding series or class; and
o the amendment must not affect the rights, duties or obligations
of the indenture trustee or the owner trustee under the transfer
and servicing agreement.
The amendments which the transferor may make without the consent of
the noteholders of any series or the series enhancers for any series in
accordance with the preceding paragraph may include, without limitation, the
addition of a sale of receivables in the trust portfolio.
The transfer and servicing agreement may also be amended by the
transferor, the servicer and the owner trustee with the consent of noteholders
representing at least 66 2/3% of the then-outstanding principal balance of the
notes of all series adversely affected by the amendment. Even with consent, no
amendment may occur if it:
(1) reduces the amount of, or delays the timing of:
(a) any distributions to be made to noteholders of any series
(changes in pay out events or events of default that decrease the
likelihood of the occurrence of those events will not be considered
delays in the timing of distributions for purposes of this clause);
(b) deposits of amounts to be distributed; or
(c) the amount available under any series enhancement, without
the consent of each affected noteholder;
(2) changes the manner of calculating the interests of any
noteholder, without the consent of each affected noteholder;
(3) reduces the percentage of the outstanding principal balance
of the notes required to consent to any amendment, without the consent
of each affected noteholder; or
(4) adversely affects the rating of any series or class by any
rating agency, without the consent of noteholders representing at
least 66 2/3% of the then-outstanding principal balance of the notes
of each affected series or class.
THE INDENTURE
The following summarizes terms of the indenture and is qualified in
its entirety by reference to the indenture.
EVENTS OF DEFAULT; RIGHTS UPON EVENT OF DEFAULT
With respect to the notes of any series, "Events of Default" under the
indenture will be any of the following:
o the trust fails to pay principal when it becomes due and payable
on the series termination date for that series of notes;
o the trust fails to pay interest when it becomes due and payable
and the default continues for a period of 3 (or the number of
days specified in the prospectus supplement) days;
o bankruptcy, insolvency, conservatorship, receivership,
liquidation or similar events relating to the trust; or
o the trust fails to observe or perform covenants or agreements
made in the indenture, and:
the failure continues, or is not cured, for 60 days after notice to the trust by
the indenture trustee or to the trust and the indenture trustee by noteholders
representing 25% or more of the then-outstanding principal amount of all of the
trust's outstanding series; and as a result, the interests of the noteholders
are materially and adversely affected, and continue to be materially and
adversely affected during the 60-day period.
Failure to pay the full principal amount of a note on its expected
principal payment date will not constitute an event of default.
An event of default with respect to one series of notes will not
necessarily be an event of default with respect to any other series of notes.
If an event of default should occur and be continuing with respect to
the notes, the indenture trustee or noteholders holding more than 50% of the
then-outstanding principal balance of the notes of the affected series may
declare the principal of the notes of that series to be immediately due and
payable. This declaration may, under specified circumstances, be rescinded by
noteholders holding more than 50% of the then-outstanding principal balance of
the notes of that series.
Generally, in the case of any event of default, the indenture trustee
will be under no obligation to exercise any of the rights or powers under the
indenture if requested or directed by any of the holders of the notes of the
affected series if the indenture trustee reasonably believes it will not be
adequately indemnified against the costs, expenses and liabilities which might
be incurred by it in complying with that request. Subject to those provisions
for indemnification and limitations contained in the indenture, noteholders
holding more than 50% (or not less than 66 2/3% if an event of default has
occurred and is continuing) of the then-outstanding principal balance of the
notes of the affected series will have the right to direct the time, method and
place of conducting any proceeding for any remedy available to the indenture
trustee, and noteholders holding more than 50% of the then-outstanding principal
balance of the notes of the affected series may, in specified cases, waive any
default with respect to the notes, except a default in the payment of principal
or interest or a default relating to a covenant or provision of the indenture
that cannot be modified without the waiver or consent of all noteholders of the
affected series.
After acceleration of a series of notes, principal collections and
finance charge collections allocated to those notes will be applied to make
monthly principal and interest payments on the notes until the earlier of the
date the notes are paid in full or the legal maturity date of the notes. Funds
in the collection account and other trust accounts for an accelerated series of
notes will be applied immediately to pay principal of and interest on those
notes.
Upon acceleration of the maturity of a series of notes following an
event of default, the indenture trustee will have a lien on the collateral for
those notes for its unpaid fees and expenses that ranks senior to the lien of
those notes on the collateral.
In general, the indenture trustee will enforce the rights and remedies
of the holders of accelerated notes. However, noteholders will have the right to
institute any proceeding with respect to the indenture if the following
conditions are met:
o the noteholder gives the indenture trustee written notice of a
continuing event of default;
o the noteholders of at least 25% of the Invested Amount of the
affected series make a written request of the indenture trustee
to institute a proceeding as indenture trustee;
o the noteholders offer reasonable indemnification to the indenture
trustee against the costs, expenses and liabilities of
instituting a proceeding;
o the indenture trustee has not instituted a proceeding within 60
days after receipt of the request and offer of indemnification;
and
o the indenture trustee has not received from noteholders holding
more than 50% of the then-outstanding principal balance of the
notes of that series a direction inconsistent with the request.
If any series of notes has been accelerated following an event of
default, and the indenture trustee has not received any valid directions from
those noteholders, the indenture trustee may elect to continue to hold the
portions of the trust assets that secures those notes and apply distributions on
the trust assets to make payments on those notes to the extent funds are
available.
Subject to the provisions of the indenture relating to the duties of
the indenture trustee, in case any event of default occurs and is continuing
with respect to the notes, the indenture trustee:
o may institute proceedings in its own name for the collection of
all amounts then payable on the notes of the affected series; or
o may take any other appropriate action to protect and enforce the
rights and remedies of the indenture trustee and the noteholders
of the affected series.
Subject to the conditions described below, the indenture trustee also:
o may, at its own election, foreclose on the portion of the
receivables which secure a series of accelerated notes by causing
the trust to sell an interest in the assets of the trust by
issuing a foreclosure certificate to the holders of those notes;
o may, at its own election, foreclose on the portion of the
receivables which secure a series of accelerated notes by causing
the trust to sell an interest in the assets of the trust by
issuing a foreclosure certificate to a third party selected by
the indenture trustee, but only if it determines that the
proceeds of the issuance of the foreclosure certificate to that
third party will be sufficient to pay principal of and interest
on the accelerated series of notes in full; and
o must, at the direction of noteholders holding more than 50% of
the then-outstanding principal balance of the series of
accelerated notes, foreclose on the portion of the receivables
which secure that series of accelerated notes by causing the
trust to sell an interest in the assets of the trust by issuing a
foreclosure certificate to the holders of that series of notes or
to one or more third parties.
The conditions that must be satisfied for the indenture trustee to
exercise one of these foreclosure remedies include:
(1) (a) the indenture trustee must receive the consent of all
noteholders of the affected series;
(b) the indenture trustee determines that any proceeds from
exercising the foreclosure remedy that are to be distributed to the
noteholders of that series are sufficient to discharge in full all
principal and interest due on those notes; or
(c) the indenture trustee determines that the trust assets may
not continue to provide sufficient funds for the payment of principal
and interest on those notes as they would have become due if the notes
had not been accelerated, and the indenture trustee obtains the
consent of noteholders holding at least 66 2/3% of the
then-outstanding principal balance of each class of the notes of the
affected series; and
(2) the indenture trustee has obtained an opinion of counsel:
(a) that exercise of the foreclosure remedy will not cause the
trust or any portion of the trust to be classified as an association
(or a publicly traded partnership) taxable as a corporation for
federal income tax purposes; and
(b) that exercise of the foreclosure remedy complies with
applicable federal and state securities laws.
A "Foreclosure Certificate" is an investor certificate issued by the
trust as a result of a foreclosure on a portion of the receivables that
corresponds to the portion of the receivables that secured the accelerated
notes. The foreclosure certificate represents an undivided interest in the
assets of the trust. The principal amount of the foreclosure certificate would
be equal to the principal amount of the accelerated series of notes, and the
invested amount of the foreclosure certificate would be equal to the Invested
Amount of the accelerated series of notes.
When a foreclosure certificate is issued with respect to accelerated
notes, those notes will be deemed to have been paid in full by the trust and not
outstanding, and the holders of the accelerated notes will no longer have any
claim against the trust. Accordingly, the Invested Amount securing the
accelerated notes will be allocable to the holders of the foreclosure
certificate.
A foreclosure certificate held by a noteholder or a third party will
be subject to restrictions on transfer, including:
o restrictions required to prevent the trust from becoming a
publicly traded partnership taxable as a corporation for federal
income tax purposes, including a limitation on the number of
holders or interests in the foreclosure certificate and
restrictions on transfers to holders that are partnerships,
Subchapter S corporations or grantor trusts for United States
federal income tax purposes;
o restrictions on transfers of interest in the foreclosure
certificate to non-U.S. persons;
o restrictions on transfers to employee benefit plans, or any
entity whose underlying assets include "plan assets"; and
o other restrictions that counsel to the trust may require to avoid
adverse tax and other consequences to the trust or the
noteholders.
The indenture trustee and the noteholders will covenant that they will
not at any time institute against the trust or the transferor any bankruptcy,
reorganization or other proceeding under any federal or state bankruptcy or
similar law.
None of the transferor, the administrator, the owner trustee, the
indenture trustee, the servicer, the originator or the trust, in its individual
capacity, nor any holder of an ownership interest in the trust, nor any of their
respective owners, beneficiaries, agents, officers, directors, employees,
successors or assigns shall, in the absence of an express agreement to the
contrary, be personally liable for the payment of the principal of or interest
on the notes or for the agreements of the trust contained in the indenture. The
notes will represent obligations solely of the trust, and the notes will not be
insured or guaranteed by the transferor, the servicer, the administrator, the
owner trustee, the indenture trustee, the originator or any other person or
entity.
CERTAIN COVENANTS
The indenture provides that the trust may not consolidate with, merge
into or sell its business to, another entity, unless:
o the entity formed by or surviving the consolidation or merger, or
that acquires the Issuer's business, is organized under the laws
of the United States, any of the fifty states or the District of
Columbia;
o the entity is not subject to regulation as an "investment
company" under the Investment Company Act of 1940, as amended;
o the entity expressly assumes, by supplemental indenture, the
trust's obligation to make due and punctual payments upon the
notes and the performance of every covenant of the trust under
the indenture;
o no payout event or event of default shall have occurred and be
continuing immediately after the merger, consolidation or sale;
o written confirmation is received from each rating agency that the
transaction will not result in a reduction or withdrawal of its
rating of any outstanding series or class;
o the trust has received an opinion of counsel to the effect that
the consolidation, merger or sale would have no material adverse
federal income tax consequence to any noteholder;
o any action as is necessary to maintain the lien and security
interest created by the indenture shall have been taken; and
o the trust has delivered to the indenture trustee an opinion of
counsel and officer's certificate each stating that the
consolidation, merger or sale satisfies all requirements under
the indenture and that the supplemental indenture is duly
authorized, executed and delivered and is valid, binding and
enforceable.
The trust will not, among other things:
o except as expressly permitted by the indenture, the transfer and
servicing agreement or related documents, sell, transfer,
exchange or otherwise dispose of any of the assets of the trust,
unless directed to do so by the indenture trustee;
o claim any credit on or make any deduction from payments in
respect of the principal of and interest on the notes (other than
amounts withheld under the Code or applicable state law) or
assert any claim against any present or former noteholders
because of the payment of taxes levied or assessed upon the
trust;
o voluntarily dissolve or liquidate in whole or in part; or
o permit (A) the validity or effectiveness of the indenture to be
impaired, or permit the lien under the indenture to be amended,
hypothecated, subordinated, terminated or discharged, or permit
any person to be released from any covenants or obligations with
respect to the notes under the indenture except as may be
expressly permitted by the indenture, (B) any lien, charge,
excise, claim, security interest, mortgage or other encumbrance
to be created on or extend to or otherwise arise upon or burden
the assets of the trust, except as may be created by the terms of
the indenture; or (C) the lien of the indenture not to constitute
a valid first priority perfected security interest in the assets
of the trust that secure the notes.
The trust may not engage in any activity other than as specified under
"The Issuer" in this prospectus. The trust will not incur, assume or guarantee
any indebtedness other than indebtedness incurred pursuant to the notes and the
indenture.
MODIFICATION OF THE INDENTURE
The trust and the indenture trustee may, without the consent of any
noteholders, enter into one or more supplemental indentures, upon receiving
written confirmation from each rating agency that the action will not result in
a reduction or withdrawal of its rating of any outstanding series or class, for
any of the following purposes:
o to correct or enhance the description of any property subject to
the lien of the indenture, or to take any action that will
enhance the indenture trustee's lien under the indenture, or to
add to the property pledged to secure the notes;
o to reflect the agreement of another person to assume the role of
the trust;
o to add to the covenants of the trust, for the benefit of the
noteholders, or to surrender any right or power of the trust;
o to transfer or pledge any property to the indenture trustee;
o to cure any ambiguity, to correct or supplement any provision in
the indenture or in any supplemental indenture that may be
inconsistent with any other provision in the indenture or in any
supplemental indenture if that action would not materially and
adversely affect the interests of the noteholders;
o to appoint a successor to the indenture trustee with respect to
the notes and to add to or change any of the provisions of the
indenture to allow more than one indenture trustee to act under
the indenture;
o to modify, eliminate or add to the provisions of the indenture as
necessary to qualify the indenture under the Trust Indenture Act
of 1939, as amended, or any similar federal statute later
enacted;
o to permit the issuance of one or more new series of notes in
accordance with the indenture; or
o to terminate any interest rate swap agreement or other credit
enhancement in accordance with the related indenture supplement.
The trust and the indenture trustee may also, without the consent of
any noteholders, enter into one or more supplemental indentures to add
provisions to, change in any manner or eliminate any provision of the indenture,
or to change the rights of the noteholders under the indenture, upon:
o receipt of written confirmation from each rating agency that the
action will not result in a reduction or withdrawal of its rating
of any outstanding series or class; and
o receipt of a certificate of an authorized officer of the
transferor to the effect that, in the transferor's reasonable
belief, the action will not have a material adverse effect on the
interests of the noteholders of any outstanding series.
The trust and the indenture trustee may also, without the consent of
the noteholders of any series or the series enhancers for any series, enter into
one or more supplemental indentures to add, modify or eliminate any provisions
necessary or advisable in order to enable the trust or any portion of the trust
to (1) qualify as, and to permit an election to be made for the trust to be
treated as, a "financial asset securitization investment trust" under the
Internal Revenue Code of 1986, as amended and (2) to avoid the imposition of
state or local income or franchise taxes on the trust's property or its income.
The following conditions apply for the amendments described in this paragraph:
o delivery to the owner trustee and the indenture trustee of a
certificate of an authorized officer of the transferor to the
effect that the requirements under the indenture applicable to
the proposed amendments have been met;
o receipt of written confirmation from each rating agency that the
action will not result in a reduction or withdrawal of its rating
of any outstanding series or class; and
o the amendment must not affect the rights, duties or obligations
of the indenture trustee or the owner trustee under the
indenture.
The trust and the indenture trustee will not, without prior notice to
each rating agency and without the consent of each noteholder affected, enter
into any supplemental indenture to:
o change the date of payment of any installment of principal of or
interest on any note or reduce the principal amount of a note,
the note interest rate or the redemption price of the note or
change any place of payment where, or the currency in which, any
note is payable;
o impair the right to institute suit for the enforcement of
specified payment provisions of the indenture;
o reduce the percentage of the aggregate principal amount of the
notes of any series, whose consent is required (a) for execution
of any supplemental indenture or (b) for any waiver of compliance
with specified provisions of the indenture or of some defaults
under the indenture and their consequences provided in the
indenture;
o reduce the percentage of the aggregate outstanding amount of the
notes required to direct the indenture trustee to sell or
liquidate the trust assets if the proceeds of the sale would be
insufficient to pay the principal amount and interest due on
those notes;
o decrease the percentage of the aggregate principal amount of the
notes required to amend the sections of the indenture that
specify the percentage of the principal amount of the notes of a
series necessary to amend the indenture or other related
agreements;
o modify any provisions of the indenture regarding the voting of
notes held by the trust, any other party obligated on the notes,
or the originator, any other account owner or any of their
affiliates; or
o permit the creation of any lien superior or equal to the lien of
the indenture with respect to any of the collateral for any notes
or, except as otherwise permitted or contemplated in the
indenture, terminate the lien of the indenture on the collateral
or deprive any noteholder of the security provided by the lien of
the indenture.
The trust and the indenture trustee may otherwise, with prior notice
to each rating agency and with the consent of noteholders holding more than 50%
of the then-outstanding principal balance of the notes of each series adversely
affected, enter into one or more supplemental indentures to add provisions to,
change in any manner or eliminate any provision of the indenture, or to change
the rights of the noteholders under the indenture.
ANNUAL COMPLIANCE STATEMENT
The trust will be required to present to the indenture trustee each
year a written statement as to the performance of its obligations under the
indenture.
INDENTURE TRUSTEE'S ANNUAL REPORT
The indenture trustee will be required to mail to the noteholders each
year a brief report relating to its eligibility and qualification to continue as
indenture trustee under the indenture, the property and funds physically held by
the indenture trustee and any action it took that materially affects the notes
and that has not been previously reported.
LIST OF NOTEHOLDERS
Upon the issuance of definitive notes, three or more holders of the
notes who have each owned a note for at least six months may obtain access to
the list of noteholders the indenture trustee maintains for the purpose of
communicating with other noteholders. The indenture trustee may elect not to
allow the requesting noteholders access to the list of noteholders if it agrees
to mail the requested communication or proxy, on behalf and at the expense of
the requesting noteholders, to all noteholders of record.
SATISFACTION AND DISCHARGE OF INDENTURE
An indenture will be discharged with respect to the notes upon the
delivery to the indenture trustee for cancellation of all the notes or, with
specific limitations, upon deposit with the indenture trustee of funds
sufficient for the payment in full of all the notes.
THE INDENTURE TRUSTEE
The indenture trustee may resign at any time, in which event your
administrator will appoint a successor indenture trustee for your series. The
administrator may also remove the indenture trustee if it ceases to be eligible
to continue as an indenture trustee under the indenture or if the indenture
trustee becomes insolvent. The administrator will then be obligated to appoint a
successor indenture trustee for your series. If an event of default occurs under
the indenture and the accompanying prospectus supplement provides that a given
class of notes of your series is subordinated to one or more other classes of
notes of your series, under the Trust Indenture Act of 1939, as amended, the
indenture trustee may be deemed to have a conflict of interest and be required
to resign as indenture trustee for one of more of those classes of notes. In
that case, a successor indenture trustee will be appointed for one or more of
those classes of notes and may provide for rights of senior noteholders to
consent to or direct actions by the indenture trustee which are different from
those of subordinated noteholders. Any resignation or removal of the indenture
trustee and appointment of a successor indenture trustee for any series of notes
will not become effective until the successor indenture trustee accepts its
appointment for your series.
CERTAIN MATTERS REGARDING THE ADMINISTRATOR
The administrator will, to the extent provided in the administration
agreement, provide the notices and perform on behalf of the trust other
administrative obligations required by the indenture.
CREDIT ENHANCEMENT
For any series, credit enhancement may be provided with respect to one
or more of the related classes. Credit enhancement may be in the form of the
subordination of one or more classes of the notes of that series, a letter of
credit, the establishment of a cash collateral guaranty or account, a surety
bond, an insurance policy, a spread account, a reserve account, the use of cross
support features or another method of credit enhancement described in the
accompanying prospectus supplement, or any combination of these. If so specified
in the accompanying prospectus supplement, any form of credit enhancement may be
structured so as to be drawn upon by more than one class to the extent described
in that accompanying prospectus supplement.
Unless otherwise specified in the accompanying prospectus supplement
for a series, the credit enhancement will not provide protection against all
risks of loss and will not guarantee repayment of the entire principal balance
of the notes and interest thereon. If losses occur which exceed the amount
covered by the credit enhancement or which are not covered by the credit
enhancement, noteholders will bear their allocable share of deficiencies.
If credit enhancement is provided with respect to a series, the
accompanying prospectus supplement will include a description of:
o the amount payable under that credit enhancement;
o any conditions to payment not described here;
o the conditions, if any, under which the amount payable under that
credit enhancement may be reduced and under which that credit
enhancement may be terminated or replaced; and
o any material provision of any agreement relating to that credit
enhancement.
Additionally, the accompanying prospectus supplement may set forth
information with respect to any credit enhancement provider, including:
o a brief description of its principal business activities;
o its principal place of business, place of incorporation and the
jurisdiction under which it is chartered or licensed to do
business;
o if applicable, the identity of regulatory agencies which exercise
primary jurisdiction over the conduct of its business; and
o its total assets, and its stockholders' or policy holders'
surplus, if applicable, and other appropriate financial
information as of the date specified in the prospectus
supplement.
If so specified in the accompanying prospectus supplement, credit
enhancement with respect to a series may be available to pay principal of the
notes of that series following the occurrence of pay out events with respect to
that series. In this event, the credit enhancement provider will have an
interest in cash flows in respect of the receivables to the extent described in
that prospectus supplement called the "Enhancement Invested Amount".
SUBORDINATION
If so specified in the accompanying prospectus supplement, one or more
classes of any series will be subordinated as described in the accompanying
prospectus supplement to the extent necessary to fund payments with respect to
the senior notes. The rights of the holders of these subordinated notes to
receive distributions of principal and/or interest on any distribution date for
that series will be subordinate in right and priority to the rights of the
holders of senior notes, but only to the extent set forth in the accompanying
prospectus supplement. If so specified in the accompanying prospectus
supplement, subordination may apply only in the event of specified types of
losses not covered by another credit enhancement.
The accompanying prospectus supplement will also set forth information
concerning:
o the amount of subordination of a class or classes of subordinated
notes in a series;
o the circumstances in which that subordination will be applicable;
o the manner, if any, in which the amount of subordination will
decrease over time; and
o the conditions under which amounts available from payments that
would otherwise be made to holders of those subordinated notes
will be distributed to holders of senior notes.
If collections of receivables otherwise distributable to holders of a
subordinated class of a series will be used as support for a class of another
series, the accompanying prospectus supplement will specify the manner and
conditions for applying that cross-support feature.
LETTER OF CREDIT
If so specified in the accompanying prospectus supplement, support for
a series or one or more of the related classes will be provided by one or more
letters of credit. A letter of credit may provide limited protection against
losses in addition to or in lieu of other credit enhancement. The issuer of the
letter of credit, referred to as the "L/C Bank," will be obligated to honor
demands with respect to that letter of credit, to the extent of the amount
available thereunder, to provide funds under the circumstances and subject to
any conditions as are specified in the accompanying prospectus supplement.
The maximum liability of an L/C Bank under its letter of credit will
generally be an amount equal to a percentage specified in the accompanying
prospectus supplement of the initial Investor Amount of a series or a class of
that series. The maximum amount available at any time to be paid under a letter
of credit will be set forth in the accompanying prospectus supplement.
CASH COLLATERAL GUARANTY OR ACCOUNT
If so specified in the accompanying prospectus supplement, support for
a series or one or more of the related classes will be provided by a guaranty,
referred to as the "Cash Collateral Guaranty" secured by the deposit of cash or
permitted investments in an account, referred to as the "Cash Collateral
Account," reserved for the beneficiaries of the cash collateral guaranty or by a
cash collateral account alone. The amount available pursuant to the cash
collateral guaranty or the cash collateral account will be the lesser of amounts
on deposit in the cash collateral account and an amount specified in the
accompanying prospectus supplement. The accompanying prospectus supplement will
set forth the circumstances under which payments are made to beneficiaries of
the cash collateral guaranty from the cash collateral account or from the cash
collateral account directly.
SURETY BOND OR INSURANCE POLICY
If so specified in the accompanying prospectus supplement, insurance
with respect to a series or one or more of the related classes will be provided
by one or more insurance companies. This insurance will guarantee, with respect
to one or more classes of the related series, distributions of interest or
principal in the manner and amount specified in the accompanying prospectus
supplement.
If so specified in the accompanying prospectus supplement, a surety
bond will be purchased for the benefit of the holders of any series or class of
that series to assure distributions of interest or principal with respect to
that series or class of notes in the manner and amount specified in the
accompanying prospectus supplement.
SPREAD ACCOUNT
If so specified in the accompanying prospectus supplement, support for
a series or one or more of the related classes will be provided by the periodic
deposit of available excess cash flow from the trust assets into an account,
referred to as the "Spread Account," intended to assist with subsequent
distribution of interest and principal on the notes of that class or series in
the manner specified in the accompanying prospectus supplement.
RESERVE ACCOUNT
If so specified in the accompanying prospectus supplement, support for
a series or one or more of the related classes or any related enhancement will
be provided by the establishment of an account, referred to as the "Reserve
Account." The reserve account may be funded, to the extent provided in the
accompanying prospectus supplement, by an initial cash deposit, the retention of
periodic distributions of principal or interest or both otherwise payable to one
or more classes of notes, including the subordinated notes, or the provision of
a letter of credit, guarantee, insurance policy or other form of credit or any
combination of these arrangements. The reserve account will be established to
assist with the subsequent distribution of principal or interest on the notes of
that series or the related class or any other amount owing on any related
enhancement in the manner provided in the accompanying prospectus supplement.
DESCRIPTION OF THE PURCHASE AGREEMENTS
The following summary is qualified in its entirety by the receivables
purchase agreement to be entered into by the originator and the transferor (the
"Receivables Purchase Agreement"). A forms of this agreement is filed as
exhibits to the registration statement of which this prospectus is a part.
SALE OF RECEIVABLES. The receivables transferred to the trust by the
transferor were acquired by the transferor from the originator pursuant to the
receivables purchase agreement. In connection with the sale of the receivables
to the transferor, the originator will (1) file appropriate UCC financing
statements to evidence that sale and perfect the transferor's right, title and
interest in those receivables and (ii) indicate in its computer files that the
receivables have been sold to the transferor.
In connection with this sale of receivables to the transferor, the
originator will indicate in its files that those receivables have been sold to
the transferor by the originator and that those receivables will be sold or
transferred by the transferor to the trust. The records and agreements relating
to the accounts and receivables for the trust portfolio may not be segregated by
the originator from other documents and agreements relating to other credit
accounts and receivables. The originator and the transferor will file UCC
financing statements meeting the requirements of applicable law in each of the
jurisdictions necessary to perfect the ownership or security interest of the
transferor in those receivables. See "Risk Factors -Some liens would be given
priority over your notes which would cause delayed or reduced payments" and
"Certain Legal Aspects of the Receivables" in this prospectus.
REPRESENTATIONS AND WARRANTIES. In the receivables purchase agreement,
the originator represents and warrants to the transferor to the effect that,
among other things, as of the date of the receivables purchase agreement and,
with respect to any receivables in any designated additional accounts, as of the
date of designation of those additional accounts, it is duly organized and in
good standing and has the authority to consummate the transactions contemplated
by the receivables purchase agreement. In the receivables purchase agreement,
the originator additionally represents and warrants that as of the initial
cut-off date and, with respect to any receivables in any designated additional
accounts, as of each date of designation of those additional accounts, each
receivable transferred thereunder is an eligible receivable. In the event of a
breach of any representation and warranty set forth in the receivables purchase
agreement which results in the requirement that the transferor accept retransfer
of an ineligible receivable under the transfer and servicing agreement, then the
originator will repurchase that ineligible receivable from the transferor on the
date of the retransfer. The purchase price for the ineligible receivables will
be the principal amount of those receivables plus applicable finance charges.
The originator also represents and warrants to the transferor in the
receivables purchase agreement that, among other things, as of the date of the
receivables purchase agreement and, with respect to any receivables in any
designated additional accounts, as of each date of designation of those
additional accounts (a) the receivables purchase agreement constitutes a valid
and binding obligation of the originator and (b) the receivables purchase
agreement constitutes a valid sale to the transferor of all right, title and
interest of the originator in and to the receivables existing in the accounts as
of the related cut-off date and in the related proceeds. If the breach of any of
the representations or warranties described in this paragraph results in the
obligation of the transferor under the transfer and servicing agreement to
accept retransfer of the receivables, the originator will repurchase the
receivables retransferred to the transferor for an amount of cash at least equal
to the amount of cash the transferor is required to deposit under the transfer
and servicing agreement in connection with the retransfer.
AMENDMENTS. The receivables purchase agreement may be amended by the
transferor and the originator without the consent of the noteholders. No
amendment, however, may have a materially adverse effect on the interest of the
noteholders and no amendment may change, modify, delete or add any other
obligation of the originator or the transferor unless written confirmation is
received from each rating agency that the amendment will not result in a
reduction or withdrawal of its rating of any outstanding series or class.
TERMINATION. The receivables purchase agreement will terminate
immediately after the trust terminates. In addition, if a receiver or
conservator is appointed for the originator or the originator becomes a debtor
in a bankruptcy case or other liquidation, bankruptcy, insolvency or similar
events occur, the originator will immediately cease to sell receivables to the
transferor and promptly give notice of that event to the transferor and the
indenture trustee, unless the bankruptcy court, receiver or conservator
instructs otherwise.
NOTE RATINGS
Any rating of the notes by a rating agency will indicate:
o its view on the likelihood that noteholders will receive required
interest and principal payments; and
o its evaluation of the receivables and the availability of any
credit enhancement for the notes.
Among the things a rating will not indicate are:
o the likelihood that interest or principal payments will be paid
on a scheduled date;
o the likelihood that a pay out event will occur;
o the likelihood that a U.S. withholding tax will be imposed on
non-U.S. noteholders;
o the marketability of the notes;
o the market price of the notes; or
o whether the notes are an appropriate investment for any
purchaser.
A rating will not be a recommendation to buy, sell or hold the notes.
A rating may be lowered or withdrawn at any time by a rating agency.
The transferor will request a rating of the notes offered by this
prospectus and the accompanying prospectus supplement from at least one rating
agency. Rating agencies other than those requested could assign a rating to the
notes and, if so, that a rating could be lower than any rating assigned by a
rating agency chosen by the transferor. Except as otherwise expressly stated,
any reference in this prospectus or the accompanying prospectus supplement to a
"Rating Agency" refers to a rating agency selected by the transferor to rate the
notes of a series or class issued by the trust.
CERTAIN LEGAL ASPECTS OF THE RECEIVABLES
TRANSFER OF RECEIVABLES
The originator, in the receivables purchase agreement will represent
and warrant that its transfer of receivables constitutes a valid sale and
assignment of all of its right, title and interest in and to the receivables. In
the transfer and servicing agreement, the transferor will represent and warrant
that its transfer of receivables constitutes a valid sale and assignment of all
of its right, title and interest in and to the receivables, except for its
interest as the holder of the transferor certificate, or creates in favor of the
trust a valid first-priority perfected security interest in the transferor's
rights in the receivables in existence at the time that the trust is formed or
at the time that receivables in additional accounts are transferred, as the case
may be, and a valid first-priority perfected security interest in the
transferor's rights in the receivables arising in accounts already designated
for the trust on and after their creation, in each case until termination of the
trust.
Each of the transferor in the transfer and servicing agreement and the
originator in the receivables purchase agreement will represent that the
receivables are "accounts" or "general intangibles" for purposes of the UCC.
Both the sale of accounts and the transfer of accounts as security for an
obligation are subject to the provisions of Article 9 of the UCC. In addition, a
transfer of general intangibles as security for an obligation is subject to the
provisions of Article 9 of the UCC. Therefore, the originator and the transferor
will file appropriate UCC financing statements to perfect the respective
transferee's security interest in the receivables. Article 9 of the UCC,
however, does not apply to the sale of general intangibles. As a consequence,
some other action under applicable state law may be required in order to perfect
a sale against the interests of third parties.
There are limited circumstances in which prior or subsequent
transferees of receivables coming into existence after a series closing date
could have an interest in receivables with priority over the trust's interest.
Under the receivables purchase agreement, however, the originator will represent
and warrant that it has transferred the receivables to the transferor free and
clear of the lien of any third party (other than the indenture trustee). In
addition, the originator will covenant that it will not sell, pledge, assign,
transfer or grant any lien on any receivable (or any interest in any
receivables) other than to the transferor. Similarly, under the transfer and
servicing agreement, the transferor will represent and warrant that it has
transferred the receivables to the trust free and clear of the lien of any third
party (other than the indenture trustee), and the transferor will covenant that
it will not sell, pledge, assign, transfer, or grant any lien on any receivable
(or any interest in any receivable) other than to the trust. Nevertheless, a
tax, governmental or other nonconsensual lien on property of the transferor or
the originator arising prior to the time a receivable comes into existence may
have priority over the interest of the trust in the receivable.
For as long as the conditions specified in the related prospectus
supplement are satisfied, cash collections held by the servicer may be
commingled and used for the benefit of the servicer prior to each distribution
date and, in the event of the insolvency or bankruptcy of the servicer or, in
specified circumstances, the lapse of time periods, the trust may not have a
first-priority perfected security interest in these collections. In this event,
the amount payable to you could be lower than the outstanding principal and
accrued interest on the notes, thus resulting in losses to you. However, if the
conditions specified in the related prospectus supplement are not satisfied, the
servicer will deposit collections directly into the collection account within
two business days of each date of processing.
CERTAIN MATTERS RELATING TO BANKRUPTCY
In the event of the bankruptcy of the servicer, the bankruptcy court
may have the power to prevent either the indenture trustee or the noteholders
from appointing a successor servicer. In addition, if the servicer becomes a
debtor in a bankruptcy case, the servicer's rights under the transfer and
servicing agreement (including the right to service the receivables) would be
property of the estate of the servicer and, under the Bankruptcy Code, subject
to the servicer's right to assume or reject the agreement. See "Description of
the Notes -Servicer Default" in this prospectus.
The transferor has been or will be structured so that (1) the filing
of a voluntary or involuntary petition for relief by or against the transferor
under the Bankruptcy Code and (2) the substantive consolidation of the assets
and liabilities of the transferor with those of its parent is unlikely. The
transferor is a separate, limited purpose entity, and its organizational
documents contains limitations on the nature of its business and restrictions on
its ability to commence a voluntary case or proceeding under the Bankruptcy Code
or similar laws without the prior unanimous consent of all of its directors. In
addition, the indenture trustee will covenant in the indenture that it will not
at any time institute against the transferor any bankruptcy, insolvency or
similar proceedings under the Bankruptcy Code or similar laws. Nevertheless, if
the transferor were to become a debtor in a bankruptcy case and if a bankruptcy
trustee or creditor of the transferor or the transferor as debtor-in-possession
were to take the position that the transfer of the receivables by the transferor
to the trust should be characterized as a pledge of those receivables, or if the
assets and liabilities of the transferor were substantively consolidated with
those of an entity in bankruptcy, then delays in payments on the notes and
possible reductions in the amount of those payments could result.
If bankruptcy, insolvency or similar proceedings under the Bankruptcy
Code or similar laws occur with respect to the transferor or the originator (if
it is not a bank), the transferor or the originator will promptly notify the
indenture trustee and a pay out event will occur with respect to each series.
Pursuant to the transfer and servicing agreement, newly created receivables will
not be transferred to the trust on and after this event. Any principal
receivables transferred to the trust prior to the event, as well as collections
on those principal receivables and finance charge receivables accrued at any
time with respect to those principal receivables, will continue to be part of
the trust assets and will be applied as specified above in "Description of the
Notes -Application of Collections" and in the accompanying prospectus
supplement.
The bankruptcy court, however, may have the power to delay this
procedure or to require the continued transfer of principal receivables to the
trust. See "Risk Factors -If a conservator or receiver were appointed for the
originator, or if the transferor or the originator became a debtor in a
bankruptcy case, delays or reductions in payment of your notes could occur" in
this prospectus.
FEDERAL INCOME TAX CONSEQUENCES
The following summary describes generally the material United States
federal income tax consequences of an investment in the notes. Additional
federal income tax considerations relevant to a particular series may be set
forth in the accompanying prospectus supplement. The following summary has been
prepared and reviewed by Stroock & Stroock Lavan LLP as special tax counsel to
the Issuer ("Special Tax Counsel"). The summary is based on the Internal Revenue
Code of 1986, as amended (the "CODE") as of the date of this prospectus, and
existing final, temporary and proposed Treasury regulations, revenue rulings and
judicial decisions, all of which are subject to prospective and retroactive
changes. The summary is addressed only to original purchasers of the notes,
deals only with notes held as capital assets within the meaning of Section 1221
of the Code and, except as specifically set forth below, does not address tax
consequences of holding notes that may be relevant to investors in light of
their own investment circumstances or their special tax situations, including
financial institutions, tax-exempt organizations, life insurance companies,
dealers in securities, non-U.S. persons, or investors holding the notes as part
of a conversion transaction, as part of a hedge or hedging transaction, or as a
position in a straddle for tax purposes. Further, this discussion does not
address alternative minimum tax consequences or any tax consequences to holders
of interests in a noteholder. Special Tax Counsel is of the opinion that the
following summary of federal income tax consequences is correct in all material
respects. An opinion of Special Tax Counsel, however, is not binding on the
Internal Revenue Service ("IRS") or the courts, and no ruling on any of the
issues discussed below will be sought from the IRS. Moreover, there are no
authorities on similar transactions involving interests issued by an entity with
terms similar to those of the notes described in this prospectus. Accordingly,
persons considering the purchase of notes should consult their own tax advisors
with regard to the United States federal income tax consequences of an
investment in the notes and the application of United States federal income tax
laws, as well as the laws of any state, local or foreign taxing jurisdictions,
to their particular situations.
TAX CHARACTERIZATION OF THE TRUST AND THE NOTES
TREATMENT OF THE TRUST AS AN ENTITY NOT SUBJECT TO TAX. Special Tax
Counsel is of the opinion that, although no transaction closely comparable to
that contemplated in this prospectus has been the subject of any Treasury
Regulation, revenue ruling or judicial decision, the trust will not be
classified as an association or as a publicly traded partnership taxable as a
corporation for federal income tax purposes. As a result, the trust will not be
subject to federal income tax. However, as discussed above, this opinion is not
binding on the IRS and no assurance can be given that this characterization will
prevail.
THE PRECISE TAX CHARACTERIZATION OF THE TRUST FOR FEDERAL INCOME TAX
PURPOSES IS NOT evident. It might be viewed as merely holding assets on behalf
of the transferor as collateral for notes issued by the transferor. On the other
hand, the trust could be viewed as a separate entity for tax purposes issuing
its own notes. This distinction, however, should not have a significant tax
effect on noteholders except as stated below under "Possible Alternative
Characterizations."
TREATMENT OF THE NOTES AS DEBT. Special Tax Counsel is of the opinion
that, although no transaction closely comparable to that contemplated in this
prospectus has been the subject of any Treasury regulation, revenue ruling or
judicial decision, the notes will be characterized as debt for United States
federal income tax purposes. Additionally, the trust will agree by entering into
the Indenture, and the noteholders will agree by their purchase and holding of
notes, to treat the notes as debt for United States federal income tax purposes.
POSSIBLE ALTERNATIVE CHARACTERIZATIONS. If, contrary to the opinion of
Special Tax Counsel, the IRS successfully asserted that a series or class of
notes did not represent debt for United States federal income tax purposes,
those notes might be treated as equity interests in the trust or some other
entity. If so treated, investors could be treated either as partners in a
partnership or, alternatively, as shareholders in a taxable corporation.
Treatment of a noteholder as a partner could have adverse tax consequences to
holders; for example, income to foreign persons generally would be subject to
United States tax and United States tax return filing and withholding
requirements, and individual holders might be subject to limitations on their
ability to deduct their share of partnership expenses. If notes instead were
treated as corporate stock, the taxable corporation would not be able to reduce
its taxable income by deductions for interest expense on notes recharacterized
as equity, and any increase in the corporate tax imposed with respect to the
corporation could materially reduce cash available to make payments on the
notes; further, noteholders might not be entitled to any dividends received
deduction in respect of payments of interest on notes treated as dividends. In
addition, even if the notes are treated as debt, the trust is also able to issue
other securities which may be treated as debt or as equity interests in the
trust. The issuance of securities requires the delivery of a new opinion of
counsel generally to the effect that the issuance will not cause the trust to
become taxable as a separate entity for federal income tax purposes; however,
any new opinion would not bind the IRS, and the trust could become taxable as a
corporation as a result of the issuance, potentially diminishing cash available
to make payments on the notes. Prospective investors should consult with their
own tax advisors with regard to the consequences of each possible alternative
characterization to them in their particular circumstances; the following
discussion assumes that the characterization of the notes as debt is correct.
CONSEQUENCES TO HOLDERS OF THE OFFERED NOTES
Interest and Original Issue Discount. In general, stated interest on a
note will be includible in gross income as it accrues or is received in
accordance with an noteholder's usual method of tax accounting. If a class of
notes is issued with original issue discount ("OID"), the provisions of Sections
1271 through 1273 and 1275 of the Code will apply to those notes. Under those
provisions, a holder of a note (including a cash basis holder) generally would
be required to include the OID on a note in income for federal income tax
purposes on a constant yield basis, resulting in the inclusion of OID in income
in advance of the receipt of cash attributable to that income. In general, a
note will be treated as having OID to the extent that its "stated redemption
price" exceeds its "issue price," if the excess equals or exceeds 0.25 percent
multiplied by the weighted average life of the note (determined by taking into
account the number of complete years following issuance until payment is made
for each partial principal payment). Under Section 1272(a)(6) of the Code,
special provisions apply to debt instruments on which payments may be
accelerated due to prepayments of other obligations securing those debt
instruments. However, no regulations have been issued interpreting those
provisions, and the manner in which those provisions would apply to the notes is
unclear, but the application of Section 1272(a)(6) could affect the rate of
accrual of OID and could have other consequences to holders of the notes.
Additionally, the IRS could take the position based on Treasury regulations that
none of the interest payable on a note is "unconditionally payable" and hence
that all of the interest should be included in the note's stated redemption
price at maturity. If sustained, the treatment should not significantly affect
tax liabilities for most holders of the notes, but prospective noteholders
should consult their own tax advisors concerning the impact to them in their
particular circumstances. The trust intends to take the position that interest
on the notes constitutes "qualified stated interest" and that the above
consequences do not apply.
MARKET DISCOUNT. A holder of a note who purchases an interest in a
note at a discount that exceeds any OID not previously includible in income may
be subject to the "market discount" rules of Sections 1276 through 1278 of the
Code. These rules provide, in part, that gain on the sale or other disposition
of a note and partial principal payments on a note are treated as ordinary
income to the extent of accrued market discount. The market discount rules also
provide for deferral of interest deductions with respect to debt incurred to
purchase or carry a note that has market discount.
MARKET PREMIUM. A holder of a note who purchases an interest in a note
at a premium may elect to amortize the premium against interest income over the
remaining term of the note in accordance with the provisions of Section 171 of
the Code.
DISPOSITION OF THE NOTES; DEFEASANCE. Upon the sale, exchange or
retirement of a note, the holder of the note generally will recognize taxable
gain or loss in an amount equal to the difference between the amount realized on
the disposition (other than amounts attributable to accrued interest) and the
holder's adjusted tax basis in the note. A taxable exchange of a note could also
occur as a result of the transferor's substitution of money or investments for
the receivables in the trust portfolio. See "Description of the Notes
-Defeasance" in this prospectus. The holder's adjusted tax basis in the note
generally will equal the cost of the note to this holder, increased by any
market or original issue discount previously included in income by this holder
with respect to the note, and decreased by the amount of any bond premium
previously amortized and any payments of principal or OID previously received by
this holder with respect to the note. Any gain or loss generally will be capital
gain or loss, except to the extent of accrued market discount not previously
included in income, and will be long-term capital gain or loss if at the time of
sale the note has been held for more than one year.
FOREIGN HOLDERS. Under United States federal income tax law now in
effect, payments of interest by the trust to a holder of a note who, as to the
United States, is a nonresident alien individual or a foreign corporation (a
"foreign person") generally will be considered "portfolio interest," and
generally will not be subject to United States federal income tax and
withholding tax, provided the interest is not effectively connected with the
conduct of a trade or business within the United States by the foreign person
and the foreign person (1) is not for United States federal income tax purposes
(a) actually or constructively a "10 percent shareholder" of the transferor or
the trust, (b) a "controlled foreign corporation" with respect to which the
transferor or the trust is a "related person" within the meaning of the Code, or
(c) a bank extending credit pursuant to a loan agreement entered into in the
ordinary course of its trade or business, and (2) provides the person who is
otherwise required to withhold United States tax with respect to the notes with
an appropriate statement (on IRS Form W-8 or a substitute form), signed under
penalties of perjury, certifying that the beneficial owner of the note is a
foreign person and providing the foreign person's name and address. If a note is
held through a securities clearing organization or other financial institutions
(as is expected to be the case unless definitive notes are issued), the
organization or institution may provide the relevant signed statement generally
to the withholding agent; in that case, however, the signed statement generally
must be accompanied by an IRS Form W-8 or substitute form provided by the
foreign person that owns the note. If the interest is not portfolio interest,
then it will be subject to United States federal income and withholding tax at a
rate of 30%, unless reduced or eliminated pursuant to an applicable tax treaty
or the interest is effectively connected with the conduct of a trade or business
within the United States and, in either case, the appropriate statement has been
provided. The U.S. Treasury Department recently issued final Treasury
regulations which will revise some of the foregoing procedures whereby a foreign
person may establish an exemption from withholding generally beginning January
1, 2001; foreign persons should consult their tax advisors concerning the impact
to them, if any, of the revised procedures.
Any capital gain realized on the sale, redemption, retirement or other
taxable disposition of a note by a foreign person will be exempt from United
States federal income tax and withholding tax, provided that (1) the gain is not
effectively connected with the conduct of a trade or business in the United
States by the foreign person, and (2) in the case of an individual foreign
person, the individual is not present in the United States for 183 days or more
in the taxable year.
Backup Withholding. Payments of principal and interest, as well as
payments of proceeds from the sale, retirement or disposition of a note, may be
subject to "backup withholding" tax under Section 3406 of the Code at a rate of
31% if a recipient of these payments fails to furnish to the payor identifying
information. Any amounts deducted and withheld would be allowed as a credit
against the recipient's United States federal income tax, provided appropriate
proof is provided under rules established by the IRS. Furthermore, penalties may
be imposed by the IRS on a recipient of payments that is required to supply
information but that does not do so in the proper manner. Backup withholding
will not apply with respect to payments made to exempt recipients, including as
corporations and financial institutions. Holders of the notes should consult
their tax advisors regarding their qualification for exemption from backup
withholding and the procedure for obtaining an exemption.
THE UNITED STATES FEDERAL INCOME TAX DISCUSSION SET FORTH ABOVE IS
INCLUDED FOR GENERAL INFORMATION ONLY, MAY NOT BE APPLICABLE DEPENDING UPON A
HOLDER'S PARTICULAR TAX SITUATION, AND DOES NOT PURPORT TO ADDRESS THE ISSUES
DESCRIBED WITH THE DEGREE OF SPECIFICITY THAT WOULD BE PROVIDED BY A TAXPAYER'S
OWN TAX ADVISOR. PROSPECTIVE PURCHASERS SHOULD CONSULT THEIR OWN TAX ADVISORS
WITH RESPECT TO THE TAX CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND
DISPOSITION OF THE NOTES AND THE POSSIBLE EFFECTS OF CHANGES IN FEDERAL TAX
LAWS.
STATE AND LOCAL TAX CONSEQUENCES
The discussion above does not address the taxation of the trust or the
tax consequences of the purchase, ownership or disposition of an interest in the
notes under any state or local tax law. Each investor should consult its own tax
adviser regarding state and local tax consequences. ERISA CONSIDERATIONS
Subject to the considerations described below and in the accompanying
prospectus supplement, the notes may be purchased by, on behalf of, or with
"plan assets" of any employee benefit or other plan that is subject to the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"), or
Section 4975 of the Internal Revenue Code of 1986, as amended (each, a "PLAN").
Any Plan fiduciary that proposes to cause a Plan to acquire any of the notes
should consult with its counsel with respect to the potential consequences under
ERISA and the Code of the Plan's acquisition and ownership of the Notes. See
"ERISA Considerations" in the accompanying prospectus supplement.
Section 406 of ERISA and Section 4975 of the Code prohibit Plans from
engaging in transactions involving "plan assets" with persons that are "parties
in interest" under ERISA or "disqualified persons" under the Code (collectively,
"Parties In Interest") with respect to the Plan. A violation of these
"prohibited transaction" rules may generate excise tax and other liabilities
under ERISA and Section 4975 of the Code for these persons, unless a statutory,
regulatory or administrative exemption is available.
Some employee benefit plans, including governmental plans (as defined
in Section 3(32) of ERISA) and some church plans (as defined in Section 3(33) of
ERISA), are not subject to the requirements of ERISA or Section 4975 of the
Code. Accordingly, assets of these plans may be invested in the notes without
regard to the ERISA considerations described in this prospectus, subject to the
provisions or other applicable federal and state law. However, any plan that is
qualified and exempt from taxation under Sections 401(a) and 501(a) of the Code
is subject to the prohibited transaction rules set forth in Section 503 of the
Code.
Fiduciaries or other persons contemplating purchasing the notes on
behalf or with "plan assets" of any Plan should consult their own counsel
regarding whether the trust assets represented by the notes would be considered
"plan assets," the consequences that would apply if the trust's assets were
considered "plan assets," and the availability of exemptive relief from the
prohibited transaction rules.
Finally, Plan fiduciaries and other Plan investors should consider the
fiduciary standards under ERISA or other applicable law in the context of the
Plan's particular circumstances before authorizing an investment of a portion of
the Plan's assets in the notes. Accordingly, among other factors, Plan
fiduciaries and other Plan investors should consider whether the investment (1)
satisfies the diversification requirement of ERISA or other applicable law, (2)
is in accordance with the Plan's governing instruments, and (3) is prudent in
light of the "Risk Factors" and other factors discussed in the accompanying
prospectus supplement.
PLAN OF DISTRIBUTION
Subject to the terms and conditions set forth in an underwriting
agreement to be entered into with respect to each series of notes, the
transferor will cause the notes to be sold by the trust to each of the
underwriters named in that underwriting agreement and in the accompanying
prospectus supplement, and each of those underwriters will severally agree to
purchase from the trust, the principal amount of notes set forth in that
underwriting agreement and in the accompanying prospectus supplement (subject to
proportional adjustment on the terms and conditions set forth in the related
underwriting agreement in the event of an increase or decrease in the aggregate
amount of notes offered by this prospectus and by the accompanying prospectus
supplement).
In each underwriting agreement, the several underwriters will agree,
subject to the terms and conditions set forth in that underwriting agreement, to
purchase all the notes offered by this prospectus and by the accompanying
prospectus supplement if any of those notes are purchased. In the event of a
default by any underwriter, each underwriting agreement will provide that,
purchase commitments of the nondefaulting underwriters may be increased or the
underwriting agreement may be terminated. Each prospectus supplement will set
forth the price at which each series of notes or class being offered initially
will be offered to the public and any concessions that may be offered to dealers
participating in the offering of those notes. After the initial public offering,
the public offering price and the concessions may be changed.
Each underwriting agreement will provide that the transferor will
indemnify the related underwriters against liabilities, including liabilities
under the Securities Act of 1933, as amended.
The place and time of delivery for any series of notes in respect of
which this prospectus is delivered will be set forth in the accompanying
prospectus supplement.
REPORTS TO NOTEHOLDERS
The servicer will prepare monthly and annual reports that will contain
information about the trust. The financial information contained in the reports
will not be prepared in accordance with generally accepted accounting
principles. Unless and until definitive notes are issued, the reports will be
sent to Cede & Co. which is the nominee of The Depository Trust Company and the
registered holder of the notes. No financial reports will be sent to you. See
"Description of the Notes -Book-Entry Registration," "-Reports to Noteholders"
and "-Evidence as to Compliance" in this prospectus.
WHERE YOU CAN FIND MORE INFORMATION
We filed a registration statement relating to the notes with the SEC.
This prospectus is part of the registration statement, but the registration
statement includes additional information.
The servicer will file with the SEC all required annual, monthly and
special SEC reports and other information about the trust.
You may read and copy any reports, statements or other information we
file at the SEC's public reference room in Washington, D.C. You can request
copies of these documents, upon payment of a duplicating fee, by writing to the
SEC. Please call the SEC at (800) SEC-0330 for further information on the
operation of the public reference rooms. Our SEC filings are also available to
the public on the SEC Internet site (http://www.sec.gov.).
The SEC allows us to "incorporate by reference" information we file
with it, which means that we can disclose important information to you by
referring you to those documents. The information incorporated by reference is
considered to be part of this prospectus. Information that we file later with
the SEC will automatically update the information in this prospectus. In all
cases, you should rely on the later information over different information
included in this prospectus or the accompanying prospectus supplement. We
incorporate by reference any future annual, monthly and special SEC reports and
proxy materials filed by or on behalf of the trust until we terminate our
offering of the notes.
As a recipient of this prospectus, you may request a copy of any
document we incorporate by reference, except exhibits to the documents (unless
the exhibits are specifically incorporated by reference), at no cost, by writing
or calling us at: Asset Backed Securities Corporation, 11 Madison Avenue, New
York, NY 10010, telephone, (212) 325-2000.
<PAGE>
INDEX OF TERMS FOR PROSPECTUS
TERM PAGE
Addition Date............................................................23
Administrator.............................................................6
Adverse Effect...........................................................18
Cash Collateral Account..................................................50
Cash Collateral Guaranty.................................................50
Collection Account.......................................................26
Credit Enhancement Percentage............................................28
Cut-Off Date..............................................................7
Defaulted Accounts.......................................................28
Determination Date.......................................................30
Discount Option..........................................................25
Discount Percentage......................................................25
Eligible Account.........................................................20
Eligible Institution.....................................................26
Eligible Investments.....................................................26
Eligible Receivable......................................................21
Enhancement Invested Amount..............................................49
Events of Default........................................................40
Finance Charge Receivables................................................7
Foreclosure Certificate..................................................43
Funding Period...........................................................27
Invested Amount...........................................................9
Investor Percentage.......................................................9
Issuer....................................................................6
L/C Bank.................................................................49
Moody's..................................................................26
Owner Trustee.............................................................6
Paired Series............................................................32
Participations...........................................................22
Parties In Interest......................................................58
Pay Out Event............................................................33
Paying Agent.............................................................27
Pre-Funding Account......................................................27
Principal Funding Account................................................15
Principal Receivables.....................................................7
Qualified Account........................................................26
Rating Agency............................................................52
Receivables Purchase Agreement...........................................51
Required Minimum Principal Balance.......................................18
Required Transferor Interest.............................................29
Reserve Account..........................................................50
Securities Act...........................................................17
Securities Intermediary..................................................26
Series Enhancer..........................................................36
Servicer Default.........................................................35
Special Funding Account..................................................26
Special Tax Counsel......................................................54
Spread Account...........................................................50
Standard & Poor's........................................................26
Supplemental Certificate.................................................34
Tax Opinion..............................................................17
Transferor Certificate...................................................10
Transferor Interest......................................................10
Transferor Percentage....................................................10
Trust.....................................................................6
Trust Portfolio...........................................................6
Trust Termination Date...................................................32
Unallocated Principal Collections........................................30
<PAGE>
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
The globally offered Dealer Floorplan Master Note Trust Asset Backed
Notes (the "global securities") to be issued in series from time to time (each,
a "series") will be available only in book-entry form. Investors in the global
securities may, as specified in the related prospectus supplement hold those
global securities through any of The Depository Trust Company ("DTC"),
Clearstream, Luxembourg or Euroclear. The global securities will be tradable as
home market instruments in both the European and U.S. domestic markets. Initial
settlement and all secondary trades will settle in same-day funds.
Secondary market trading between investors holding global securities
through Clearstream, Luxembourg and Euroclear will be conducted in the ordinary
way in accordance with their normal rules and operating procedures and in
accordance with conventional eurobond practice (i.e., seven calendar day
settlement).
Secondary market trading between investors holding global securities
through DTC will be conducted according to the rules and procedures applicable
to U.S. corporate debt obligations.
Secondary cross-market trading between Clearstream, Luxembourg or
Euroclear and DTC participants holding notes will be effected on a
delivery-against-payment basis through the respective depositaries of
Clearstream, Luxembourg and Euroclear (in this capacity) and as DTC
participants.
Non-U.S. holders (as described below) of global securities will be
subject to U.S. withholding taxes unless the holders meet specified requirements
and deliver appropriate U.S. tax documents to the securities clearing
organizations or their participants.
INITIAL SETTLEMENT
All global securities will be held in book-entry form by DTC in the
name of Cede & Co. as nominee of DTC. Investors' interests in the global
securities will be represented through financial institutions acting on their
behalf as direct and indirect participants in DTC. As a result, Clearstream,
Luxembourg and Euroclear will hold positions on behalf of their participants
through their respective depositaries, which in turn will hold positions in
accounts as DTC participants.
Investors electing to hold their global securities through DTC (other
than through accounts at Clearstream, Luxembourg or Euroclear) will follow the
settlement practices applicable to U.S. corporate debt obligations. Investor
securities custody accounts will be credited with their holdings against payment
in same-day funds on the settlement date.
Investors electing to hold their global securities through
Clearstream, Luxembourg or Euroclear accounts will follow the settlement
procedures applicable to conventional eurobonds in registered form. Global
securities will be credited to the securities custody accounts on the settlement
date against payment for value on the settlement date.
SECONDARY MARKET TRADING
Because the purchaser determines the place of delivery, it is
important to establish at the time of the trade where both the purchaser's and
seller's accounts are located to ensure that settlement can be made on the
desired value date.
Trading between DTC Participants. Secondary market trading between DTC
participants (other than Citibank, N.A. ("Citibank") and Morgan Guaranty Trust
Company of New York ("Morgan") as depositories for Clearstream, Luxembourg and
Euroclear, respectively) will be settled using the procedures applicable to U.S.
corporate debt obligations in same-day funds.
Trading between Clearstream, Luxembourg Customers and/or Euroclear
Participants. Secondary market trading between Clearstream, Luxembourg customers
or Euroclear participants will be settled using the procedures applicable to
conventional eurobonds in same-day funds.
Trading between DTC seller and Clearstream, Luxembourg or Euroclear
purchaser. When global securities are to be transferred from the account of a
DTC participant (other than Citibank and Morgan as depositories for Clearstream,
Luxembourg and Euroclear, respectively) to the account of a Clearstream,
Luxembourg customer or a Euroclear participant, the purchaser must send
instructions to Clearstream, Luxembourg prior to settlement date 12:30.
Clearstream, Luxembourg or Euroclear, as the case may be, will instruct Citibank
or Morgan, respectively, to receive the global securities for payment. Payment
will then be made by Citibank or Morgan, as the case may be, to the DTC
participant's account against delivery of the global securities. After
settlement has been completed, the global securities will be credited to the
respective clearing system and by the clearing system, in accordance with its
usual procedures, to the Clearstream, Luxembourg customer's or Euroclear
participant's account. Credit for the global securities will appear the next day
(European time) and the cash debit will be back-valued to, and the interest on
the global securities will accrue from, the value date (which would be the
preceding day when settlement occurred in New York). If settlement is not
completed on the intended value date (i.e., the trade fails), the Clearstream,
Luxembourg or Euroclear cash debit will be valued instead as of the actual
settlement date.
Clearstream, Luxembourg customers and Euroclear participants will need
to make available to the respective clearing systems the funds necessary to
process same-day funds settlement. The most direct means of doing so is to
pre-position funds for settlement, either from cash on hand or existing lines of
credit, as they would for any settlement occurring within Clearstream,
Luxembourg or Euroclear. Under this approach, they may take on credit exposure
to Clearstream, Luxembourg or Euroclear until the global securities are credited
to their accounts one day later.
As an alternative, if Clearstream, Luxembourg or Euroclear has
extended a line of credit to them, Clearstream, Luxembourg customers or
Euroclear participants can elect not to pre-position funds and allow that credit
line to be drawn upon the finance settlement. Under this procedure, Clearstream,
Luxembourg customers or Euroclear participants purchasing global securities
would incur overdraft charges for one day, assuming they cleared the overdraft
when the global securities were credited to their accounts. However, interest on
the global securities would accrue from the value date. Therefore, in many cases
the investment income on the global securities earned during that one-day period
may substantially reduce or offset the amount of the overdraft charges, although
this result will depend on each Clearstream, Luxembourg customer's or Euroclear
participant's particular cost of funds.
Since the settlement is taking place during New York business hours,
DTC participants can employ their usual procedures for sending global securities
to Citibank or Morgan for the benefit of Clearstream, Luxembourg customers or
Euroclear participants. The sale proceeds will be available to the DTC seller on
the settlement date. Thus, to the DTC participant a cross-market transaction
will settle no differently from a trade between two DTC participants.
Trading between Clearstream, Luxembourg or Euroclear seller and DTC
purchaser. Due to time zone differences in their favor, Clearstream, Luxembourg
customers and Euroclear participants may employ their customary procedures for
transactions in which global securities are to be transferred by the respective
clearing system, through Citibank or Morgan, to another DTC participant. The
seller will send instructions to Clearstream, Luxembourg before settlement date
12:30. In these cases, Clearstream, Luxembourg or Euroclear will instruct
Citibank or Morgan, as appropriate, to credit the global securities to the DTC
participant's account against payment. The payment will then be reflected in the
account of the Clearstream, Luxembourg customer or Euroclear participant the
following day, and receipt of the cash proceeds in the Clearstream, Luxembourg
customer's or Euroclear participant's account would be back-valued to the value
date (which would be the preceding day, when settlement occurred in New York).
If the Clearstream, Luxembourg customer or Euroclear participant has a line of
credit with its respective clearing system and elects to draw on a line of
credit in anticipation of receipt of the sale proceeds in its account, the
back-valuation may substantially reduce or offset any overdraft charges incurred
over that one-day period. If settlement is not completed on the intended value
date (i.e., the trade fails), receipt of the cash proceeds in the Clearstream,
Luxembourg customer's or Euroclear participant's account would instead be valued
as of the actual settlement date.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of global securities holding securities through
Clearstream, Luxembourg or Euroclear (or through DTC if the holder has an
address outside the U.S.) will be subject to the 30% U.S. withholding tax that
generally applies to payments of interest (including original issue discount) on
registered debt issued by U.S. Persons, unless, under currently applicable law,
(1) each clearing system, bank or other financial institution that holds
customers' securities in the ordinary course of its trade or business in the
chain of intermediaries between the beneficial owner and the U.S. entity
required to withhold tax complies with applicable certification requirements and
(2) a beneficial owner takes one of the following steps to obtain an exemption
or reduced tax rate:
Exemption for non-U.S. Persons (Form W-8). Beneficial owners of notes
that are non-U.S. Persons generally can obtain a complete exemption from the
withholding tax by filing a signed Form W-8 (Certificate of Foreign Status). If
the information shown on Form W-8 changes, a new Form W-8 must be filed within
30 days of the change.
Exemption for non-U.S. Persons with effectively connected income (Form
4224). A non-U.S. Person, including a non-U.S. corporation or bank with a U.S.
branch, for which the interest income is effectively connected with its conduct
of a trade or business in the United States, can obtain an exemption from the
withholding tax by filing Form 4224 (Exemption from Withholding of Tax on Income
Effectively Connected with the Conduct of a Trade or Business in the United
States).
Exemption or reduced rate for non-U.S. Persons resident in treaty
countries (Form 1001). Non-U.S. Persons that are note owners residing in a
country that has a tax treaty with the United States can obtain an exemption or
reduced tax rate (depending on the treaty terms) by filing Form 1001 (Ownership,
Exemption or Reduced Rate Certificate). If the treaty provides only for a
reduced rate, withholding tax will be imposed at that rate unless the filer
alternatively files Form W-8. Form 1001 may be filed by the note owner or his
agent.
Exemption for U.S. Persons (Form W-9). U.S. Persons can obtain a
complete exemption from the withholding tax by filing Form W-9 (Payer's Request
for Taxpayer Identification Number and Certification).
U.S. Federal Income Tax Reporting Procedure. The note owner of a
global security or, in the case of a Form 1001 or a Form 4224 filer, his agent,
files by submitting the appropriate form to the person through whom it holds
(the clearing agency, in the case of persons holding directly on the books of
the clearing agency). Form W-8 and Form 1001 are effective for three calendar
years and Form 4224 is effective for one calendar year.
The term "U.S. Person" means (1) a citizen or resident of the United
States, (2) a corporation or partnership organized in or under the laws of the
United States, any state of the fifty states, or any political subdivision of
either (including the District of Columbia), or (3) an estate or trust the
income of which is includible in gross income for United States tax purposes
regardless of its source. This summary does not deal with all aspects of U.S.
Federal income tax withholding that may be relevant to foreign holders of the
global securities. Investors are advised to consult their own tax advisors for
specific tax advice concerning their holding and disposing of the global
securities. Further, the U.S. Treasury Department has recently finalized new
regulations that will revise some aspects of the current system for withholding
on amounts paid to foreign persons. Under these regulations, interest or OID
paid to a nonresident alien would continue to be exempt from U.S. withholding
taxes (including backup withholding) provided that the holder complies with the
new certification procedures.
<PAGE>
SUBJECT TO COMPLETION DATED ______, ___
PROSPECTUS SUPPLEMENT TO PROSPECTUS DATED _______ ___
$---------
__________ EQUIPMENT TRUST SECURITIES _____-_
OWNER TRUST
RECEIVABLE-BACKED NOTES
ASSET BACKED SECURITIES CORPORATION
SPONSOR
-------------------------
DEPOSITOR
-------------------------
SERVICER
THE OWNER TRUST WILL ISSUE THE FOLLOWING CLASSES OF NOTES--
<TABLE>
<CAPTION>
Initial Interest
Class of Aggregate Rate First Price to Underwriting
Notes Principal (per Payment Stated Maturity Public Discount
Amount annum) Date Date Per Note Per Note
---------- -------------- --------- ------------------ ----------------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
A-1 $__________ ______% _____________ _____________ _______% ______%
A-2 $__________ ______% _____________ _____________ _______% ______%
A-3 $__________ Floating _____________ _____________ _______% ______%
A-4 $__________ ______% _____________ _____________ _______% ______%
A-5 $ __________ ______% _____________ _____________ _______% ______%
B $ __________ ______% _____________ _____________ _______% _____%
C $ __________ ______% _____________ _____________ _______% ______%
D $ _________ ______% _____________ _____________ _______% _____%
</TABLE>
The total price to the public is $___________.
The total underwriting discount is $___________.
The total proceeds to the owner trust are $__________.
------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF
THISPROSPECTUS SUPPLEMENT OR THE ACCOMPANYING PROSPECTUS IS TRUTHFUL OR
COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
CREDIT SUISSE FIRST BOSTON
Prospectus Supplement dated _______, ______
CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE S-__ IN THIS PROSPECTUS
SUPPLEMENT AND ON PAGE ___ IN THE ACCOMPANYING PROSPECTUS.
The notes represent obligations of the owner trust only.
This prospectus supplement must be accompanied by the prospectus.
<PAGE>
TABLE OF CONTENTS
PAGE
PROSPECTUS SUPPLEMENT
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS.........................4
PROSPECTUS SUPPLEMENT SUMMARY.................................................5
BACKGROUND INFORMATION.......................................................13
RISK FACTORS.................................................................14
Future Contract Delinquency and Loss Experience of the
Contract Pool May Vary Substantially from the
originators' Historical Experience.....................................14
Some Note Classes Will be Entitled to Interest or
Principal Payments Before Other Note Classes and the
Swap Counterparty Will be Entitled to Payment Before
Some Note Classes..................................................... 14
Any Failure by the Swap Counterparty to Pay Amounts Owed
Under the Swap Agreement Would Reduce the Funds
Available to Pay Interest on the Class A-3 Notes...................... 15
Adverse Events in _____ High Concentration States May
Cause Increased Defaults and Delinquencies.............................16
Adverse Economic Conditions in High Concentration
Industries May Cause Increased Defaults and
Delinquencies..........................................................16
Product Defects or Obsolescence or Adverse Economic
Events for Two Vendors Accounting for High Proportions
of the Contracts May Cause Increased Defaults and
Delinquencies......................................................... 17
Product Defects or Obsolescence of Types of Equipment
Accounting for High Proportions of the Contracts May
Cause Increased Defaults or Delinquencies..............................18
The Owner Trust's Not Having Security Interests in
Computer Software and Services and the Owner Trust's
Not Being Named as Secured Party in Motor Vehicle
Title Certificates will Leave the Owner Trust Without
Collateral For the Associated Contracts................................19
THE OWNER TRUST..............................................................19
The Owner Trust...........................................................19
The Indenture.............................................................20
Capitalization of the Owner Trust.........................................20
The Owner Trustee.........................................................20
THE ORIGINATORS, THE SERVICER, THE SELLER AND THE DEPOSITOR..................20
ORIGINATION OF THE CONTRACTS.................................................20
THE CONTRACTS................................................................20
Description of the Contracts..............................................20
Statistics Relating to the Initial Cut-Off Date Contract
Pool...................................................................21
Statistics Relating to Delinquencies and Defaults.........................25
WEIGHTED AVERAGE LIFE OF THE NOTES...........................................26
DESCRIPTION OF THE NOTES AND INDENTURE.......................................35
Distributions.............................................................36
Interest..................................................................38
Principal.................................................................39
Class A-3 Swap Agreement..................................................49
Optional Purchase of Class A-5 Notes......................................50
Cash Collateral Account...................................................51
Optional Purchase of Contracts and Redemption of
Notes..................................................................53
Reports to Noteholders....................................................54
Servicing.................................................................54
The Indenture Trustee.....................................................55
Representation and Warranties.............................................55
Indemnification...........................................................56
Amendments................................................................56
RATINGS OF THE NOTES.........................................................57
USE OF PROCEEDS..............................................................58
LEGAL PROCEEDINGS............................................................58
PLAN OF DISTRIBUTION.........................................................59
LEGAL MATTERS................................................................61
INDEX OF DEFINED TERMS.......................................................62
PROSPECTUS:
IMPORTANT NOTICE ABOUT RESENTED IN THIS PROSPECTUS AND THE
ACCOMPANYING PROSPECTUS SUPPLEMENT........................................
PROSPECTUS SUMMARY...........................................................
RISK FACTORS.................................................................
THE SPONSOR..................................................................
THE DEPOSITOR................................................................
THE OWNER TRUSTS.............................................................
THE ORIGINATORS, THE SELLER AND THE SERVICER.................................
THE CONTRACTS................................................................
DESCRIPTION OF THE NOTES AND INDENTURE.......................................
DESCRIPTION OF THE POOLING AND SERVICING AGREEMENTS..........................
MATERIAL FEDERAL INCOME TAX CONSEQUENCES.....................................
ERISA CONSIDERATIONS.........................................................
RATINGS OF THE NOTES.........................................................
USE OF PROCEEDS..............................................................
PLAN OF DISTRIBUTION.........................................................
LEGAL MATTERS................................................................
WHERE YOU CAN FIND MORE INFORMATION..........................................
INDEX OF TERMS...............................................................
<PAGE>
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS
The sponsor tells you about the notes in two separate documents:
o the accompanying prospectus, which provides general
information, some of which may not apply to you; and
o this prospectus supplement, which describes the particular
terms of your series of notes.
The sponsor includes cross-references in this prospectus supplement
and in the accompanying prospectus to captions in these materials where you can
find further discussions. The following Table of Contents and the Table of
Contents included in the accompanying prospectus provide the pages on which
these captions are located.
You should rely only on the information contained in this document,
including the information described under the heading "WHERE YOU CAN FIND MORE
INFORMATION" in the prospectus. The sponsor has not authorized anyone to provide
you with information that is different. This document may only be used where it
is legal to sell these notes.
If you have received a copy of this prospectus supplement and
prospectus in an electronic format, and if the legal prospectus delivery period
has not expired, you may obtain a paper copy of this prospectus supplement and
prospectus from Asset Backed Securities Corporation, at Eleven Madison Avenue,
New York, New York 10010, telephone number (212) 325-2000, or an underwriter by
asking any of them for it.
PROSPECTUS SUPPLEMENT SUMMARY
The following is only a summary of note terms. It does not contain all
information that may be important to you. You should read this entire prospectus
supplement and the accompanying prospectus. In addition, you may wish to read
the documents governing the transfers of the contracts, the formation of the
owner trust and the issuance of notes. These documents have been filed as
exhibits to the registration statement of which this prospectus supplement is a
part.
There are material risks associated with an investment in the notes.
See "RISK FACTORS" on page S-___ of this prospectus supplement and on page ____
in the accompanying prospectus for a discussion of factors you should consider
before investing in the notes.
Owner Trustee....................... The owner trustee is _________________,
acting not in its individual capacity but
solely as owner trustee under the trust
agreement with the sponsor and the
depositor, and its telephone number is
____________. See "THE OWNER TRUST" in this
prospectus supplement.
Originators......................... ___________________ and _________________.
The address of each originator is
__________________________.
Sponsor............................ Asset Backed Securities Corporation, an
indirect, wholly owned subsidiary of Credit
Suisse First Boston, Inc. Neither Credit
Suisse First Boston Inc. nor any of its
affiliates has guaranteed, will guarantee
or is or will be otherwise obligated with
respect to any notes.
Indenture and Indenture
Trustee.......................... The notes will be issued under an
indenture. _________________ will serve as
indenture trustee. See "DESCRIPTION OF THE
NOTES AND INDENTURE-- THE INDENTURE
TRUSTEE," in this prospectus supplement.
Terms of the Notes:
o Payment Dates.................. The [20]th day of each month,
beginning _______ ____, or if that day is
not a business day, the next business day.
o Interest....................... See the cover page for the rates as to all
classes other than Class A-3. The Class A-3
interest rate will be the one-month London
interbank offered rate, plus _____%. See
"DESCRIPTION OF THE NOTES AND INDENTURE--
INTEREST." The owner trust will calculate
interest on the Class A-1 and Class A-3
Notes on the basis of the actual number of
days elapsed and a 360-day year. The owner
trust will calculate interest on the Class
A-2, Class A-4, Class A-5, Class B, Class C
and Class D Notes on the basis of a 360-day
year comprised of twelve 30-day months.
On each payment date and after the owner
trust repays any outstanding servicer
advances and pays the servicer's monthly
servicing fee, the owner trust will pay
interest on the notes in the following
order:
CLASS OF RECEIVES INTEREST
NOTES BEFORE CLASS
-------- ------------------
A-1, A-2, A-3, A-4 and A-5 B C and D
B C and D
C D
D None
If the available funds are insufficient to
pay interest on all classes of Class A
Notes, the owner trust will apply the
available funds pro rata to the classes of
Class A Notes based on their respective
principal balances.
See "DESCRIPTION OF THE NOTES AND INDENTURE
-- DISTRIBUTIONS" in this prospectus
supplement.
o Principal...................... After paying interest on the notes, the
owner trust will pay principal on the notes
on each payment date. The owner trust will
pay principal in the following order:
BEFORE AN EVENT OF DEFAULT:
1. (A) Until the Class A-1 Note principal
amount becomes zero, _______% of
the total principal payment amount
to the Class A-1 Notes and _____%
of the total principal payment
amount to the Class A-5 Notes;
(B) on the payment date when the Class
A-1 Note principal amount becomes
zero, first, the remaining Class
A-1 principal amount to the Class
A-1 noteholders, second, ______%
of the total principal payment
amount, but not greater than the
Class A principal payment amount,
to the Class A-5 noteholders and
third, the remaining Class A
principal payment amount to the
Class A-2, A-3, A-4 and A-5 Notes
in that order, with each
successive class not being
entitled to principal until the
prior class' principal amount is
reduced to zero;
(C) after the Class A-1 Note principal
amount is reduced to zero, ______%
of the total principal payment
amount, but not greater than the
Class A principal payment amount
to the Class A-5 Notes and then
the remaining Class A principal
payment amount to the Class A-2,
A-3, A-4 and A-5 Notes in that
order, with each successive class
not being entitled to principal
until the prior class' principal
amount is reduced to zero.
If the available amount is insufficient for
the full payment of the amounts called for
in (A), (B), or (C) above, the allocation
of the available amount will be as provided
in "DESCRIPTION OF THE NOTES AND INDENTURE
-- PRINCIPAL" in this prospectus
supplement;
2. after the Class A-1 Note principal
amount is reduced to zero, the Class B
principal payment amount to the Class
B Notes;
3. after the Class A-1 Note principal
amount is reduced to zero, the Class C
principal payment amount to the Class
C Notes; and
4. after the Class A-1 Note principal
amount is reduced to zero, the Class D
principal payment amount to the Class
D Notes.
The principal payment amount on each class
of the notes on each payment date will be
based on the difference between the
aggregate principal balance of that class
of notes on that payment date and the
target amount set for the class or in the
case of Class B, C and D a floor amount set
for the class, if greater than the target
amount.
AFTER AN EVENT OF DEFAULT:
Following an event of default with respect
to the notes, the owner trust will pay
principal in the following order:
CLASS OF
NOTES RECEIVES PRINCIPAL BEFORE CLASSES
----- ---------------------------------
A-1 A-2, A-3, A-4, A-5, B, C and D
A-2 A-3, A-4, A-5, B, C and D
A-3 A-4, A-5, B, C and D
A-4 A-5, B, C and D
A-5 B, C and D
B C and D
C D
D None
See "DESCRIPTION OF THE NOTES AND INDENTURE
-- DISTRIBUTIONS" in this prospectus
supplement.
o Class A-3 Swap
Agreement....................... The owner trust will enter into a swap
agreement with a swap counterparty solely
for the benefit of the Class A-3
noteholders. Under the swap agreement, the
swap counterparty's payments will be
calculated at the Class A-3 Note interest
rate and the owner trust's payments will be
calculated at the assumed fixed rate of
________%.
To the extent that interest on any payment
date at the Class A-3 Note interest rate
exceeds interest calculated at the assumed
fixed rate:
o the swap counterparty will be
obligated to pay an amount equal to
the excess to the owner trust,
o that payment will constitute a portion
of the amount available but only in
respect of the Class A-3 Notes and
o the Class A-3 Notes will be dependent
upon that payment for receipt of
interest to the extent of the excess.
Likewise under the swap agreement, to the
extent that interest calculated at the
assumed fixed rate exceeds interest
calculated at the Class A-3 Note interest
rate
o the owner trust will be obligated to
pay an amount equal to the excess to
the swap counterparty, and
o the payment will have the same
priority, in terms of application of
the amount available, as payment of
interest on the Class A-3 Notes.
Any shortfall in the payment of interest on
the Class A-3 Notes due entirely to the
failure of the swap counterparty to make a
required payment under the swap agreement
will not constitute an event of default
under the indenture. Except to the extent
the amount available on any payment date
exceeds the amount needed to pay:
o the servicing fee and servicer
advances,
o all interest and principal payable on
the notes, with Class A-3 Note
interest being calculated at the
assumed fixed rate for this purpose,
and
o all amounts payable in connection with
the cash collateral account, no
amounts in addition to those available
under the swap agreement will be
available under the indenture to make
up the shortfall. The only remedies in
these circumstances will be those
available to the owner trust under the
swap agreement. See "DESCRIPTION OF
THE NOTES AND INDENTURE -- THE CLASS
A-3 SWAP AGREEMENT" in this prospectus
supplement.
o Class A-3 Swap
Counterparty..................... _____________________________________ will
be the counterparty to the owner trust
under the swap agreement. The swap
counterparty currently has an "___"
long-term unsecured senior debt credit
rating from ________ and an "_____"
long-term unsecured senior debt credit
rating from _________. See "DESCRIPTION OF
THE NOTES AND INDENTURE-- THE CLASS A-3
SWAP COUNTERPARTY" in this prospectus
supplement.
o Stated Maturity Dates............. The notes will mature on the respective
dates shown on the cover of this prospectus
supplement. However, if the stated maturity
date is not a business day, then the stated
maturity date will be the next business
day.
o Optional Purchase of
Class......................... A-5 Notes................The owner trust
will have the right to purchase all of the
Class A-5 Notes, on any payment date, at a
purchase price equal to the principal
balance of the Class A-5 Notes plus a
premium.
Following any purchase, the Class A-5 Notes
will not be retired, but will continue to
be entitled to interest and principal
payments. See "DESCRIPTION OF THE NOTES AND
INDENTURE -- OPTIONAL PURCHASE OF CLASS A-5
NOTES" in this prospectus supplement.
o Optional Redemption When
the Aggregate Note Principal
Amount is Less Than 10%
of Initial Contract Pool
Principal Balance.............. ____________________, the seller of
contracts to the depositor, has the option
to purchase the owner trust's assets when
the outstanding note principal balance is
less than 10% of the initial contract pool
principal balance. If the seller exercises
this option, the indenture trustee will
redeem all notes on the next payment date.
The redemption price for each note will be
the note's principal amount plus unpaid
accrued interest to but excluding the
redemption date.
The contract principal balance of any
contract is the present value of the unpaid
scheduled payments due on that contract
discounted at the discount rate, called the
"discount rate," of _____%. This prospectus
supplement uses this discount rate to
calculate principal balances of contracts
throughout. The "contract pool principal
balance" is the aggregate of the individual
discounted contract principal balances.
See "DESCRIPTION OF THE NOTES AND INDENTURE
-- OPTIONAL PURCHASE OF CONTRACTS" in this
prospectus supplement.
Cut-off Date........................ _______, ______.
Closing Date........................ On or about _______, ______.
Servicing; Servicing Fee............ The servicer will be responsible for
servicing, managing and administering the
contracts and related interests, and
enforcing and making collections on the
contracts. The servicer may make advances
for delinquent scheduled payments, to the
extent it determines that advances will be
recoverable in future periods. Servicer
advances are reimbursable from contract
payments. See "Description of the Pooling
and Servicing Agreements -- Servicing" in
the accompanying prospectus.
The servicer's monthly fee will equal the
product of
o one twelfth of one percent and
o the aggregate contract pool principal
balance as of the last day of the
second preceding collection period.
The servicer fee is payable out of contract
payments. The servicer will pay any
sub-servicer servicing fees from its
monthly servicing fee. See "DESCRIPTION OF
THE NOTES -- SERVICING" in this prospectus
supplement.
Ratings............................. The owner trust will not issue any class
of notes unless __________________, and
_____________________. assign at least the
following ratings to each class of notes:
CLASS
----- ------ -------
A-1
A-2
A-3
A-4
A-5
B
C
D
See "Ratings of the Notes" in this
prospectus supplement and the accompanying
prospectus.
Owner Trust Assets
A. The Contracts............... The contracts will consist of the
following:
o equipment lease contracts,
o installment payment agreements,
o conditional sales/financing
agreements,
o promissory notes, and
o loan and security agreements.
As of _______, ______, the pool of
contracts for the owner trust had the
following characteristics. Percentages are
based on the contract pool principal
balance:
o Initial contract pool principal
balance.................$__________
o Number of contracts......... ________
o Average contract principal
balance.....................$______
o Leases as a percentage of the
contracts....................._____%
o Loans and other financing
arrangements as a percentage of
the contracts.................._____%;
o Underlying equipment type
concentration:
PRINCIPAL BALANCE
EQUIPMENT TYPE CONCENTRATION
---------............. ------%
---------............. ------%
---------............. ------%
---------............. ------%
---------............. ------%
---------............. ------%
---------............. ------%
No other single type of equipment accounted
for more than 5% of the initial contract
pool principal balance.
o Geographic concentration:
PRINCIPAL BALANCE
STATE CONCENTRATION
----- -------------
_________.......................... _______%
_________.......................... _______%
_________.......................... _______%
_________.......................... _______%
_________.......................... _______%
No other state represented more than 5% of
the initial contract pool principal
balance.
o Remaining terms
of the contracts........____ month to
____ months
o The weighted average
remaining term of the
contracts ..............____ months
o Weighted average
age of the contracts.....____ months
See "THE CONTRACTS -- STATISTICS RELATING
TO THE CUT-OFF DATE CONTRACT POOL" in this
prospectus supplement.
B. Cash Collateral
Account......................... The indenture trustee will establish a
cash collateral account having an initial
balance of $_________ (_______% of initial
contract pool principal balance) for the
benefit of the noteholders, which may
include proceeds of loans from third party
lenders to the owner trust under a cash
collateral account loan agreement. The
indenture trustee will use cash collateral
account funds to pay the following amounts
if payments on the contracts are
insufficient:
o interest due on the notes, with
interest on the Class A-3 Notes being
calculated for this purpose at the
assumed fixed rate of _______% in
connection with the swap agreement;
o the lesser of
o losses on liquidation of defaulted
contracts during the relevant
collection period, and
o the excess of the aggregate note
principal amount over the contract
pool principal balance, including
all scheduled payments for the
relevant collection period and
unpaid scheduled payments from
prior periods; and
o principal on the notes on the
applicable stated maturity date.
See "DESCRIPTION OF THE NOTES AND INDENTURE
-- CASH COLLATERAL ACCOUNT" in this
prospectus supplement.
Use of Proceeds..................... After the deposit of funds from the note
sale proceeds into the cash collateral
account and payment of expenses, the
indenture trustee will pay the remaining
proceeds of the sale of notes to the
depositor. The depositor will pay the
proceeds to a warehousing trustor to
_______________. in payment of the purchase
price of contracts acquired from them,
respectively. See "USE OF PROCEEDS" in this
prospectus supplement.
Legal Investment.................... The Class A-1 Notes will be eligible
securities for purchase by money market
funds under Rule 2a-7 under the Investment
Company Act of 1940.
BACKGROUND INFORMATION
The information in this section will help you understand the
information in this prospectus supplement and the accompanying prospectus.
The principal balance of any contract is the present value of the
unpaid scheduled payments due on the contract after a cut-off date. The
principal balance of a contract excludes all scheduled payments due on or prior
to, but not received as of, that date, as well as any scheduled payments due
after but received before that date. The principal balance also excludes any
prepayments received on or prior to that date. The scheduled payments are
discounted monthly at the rate of ________% per annum.
The aggregate principal balance of the contracts expected to be held
by the owner trust as of any particular date is referred to as the contract pool
principal balance. The contract pool principal balance, as of the initial
cut-off date, is referred to as the initial cut-off date contract pool principal
balance or the initial contract pool. The initial cut-off date is _______,
______ for all contracts transferred to the owner trust on the closing date for
the sale of the notes. It will be the first day of the month of transfer to the
owner trust for each substitute contract.
Contract balance percentages and amounts discussed below are based on
the aggregate principal balance of the contracts being transferred to the owner
trust as of the initial cut-off date, unless a different date is noted. Changes
in the characteristics of the contract pool between the initial cut-off date and
the closing date will not affect more than 5% of the initial cut-off date
contract pool principal balance.
RISK FACTORS
You should carefully consider the following risk factors before you
invest in notes. You should also carefully consider the risk factors beginning
on page ____ of the accompanying prospectus.
FUTURE CONTRACT DELINQUENCY AND LOSS EXPERIENCE OF THE CONTRACT POOL MAY VARY
SUBSTANTIALLY FROM THE ORIGINATORS' HISTORICAL EXPERIENCE
The sponsor presents the historical contract delinquency and loss
experience of the originators' portfolios of contracts similar to those being
transferred to the owner trust under "THE CONTRACTS -- STATISTICS RELATING TO
DELINQUENCIES AND DEFAULTS." However, the actual results for the owner trust's
contracts could be substantially worse. If so, you may not receive note interest
and principal payments in the amounts and at the times you expect.
SOME NOTE CLASSES WILL BE ENTITLED TO INTEREST OR PRINCIPAL PAYMENTS BEFORE
OTHER NOTE CLASSES AND THE SWAP COUNTERPARTY WILL BE ENTITLED TO PAYMENT BEFORE
SOME NOTE CLASSES
The owner trust will pay interest, principal or both on some classes
of notes prior to paying interest, principal or both on other classes of notes.
The subordination of some classes of notes to others means that the subordinated
classes are more likely to suffer the consequences of delinquent payments and
defaults on the contracts than the classes having prior payment rights. See
"DESCRIPTION OF THE NOTES AND INDENTURE -- DISTRIBUTIONS," "-- SUBORDINATION OF
SUBORDINATE NOTES" and "-- CASH COLLATERAL ACCOUNT" in this prospectus
supplement.
Similarly, if the owner trust has to pay any amounts to the swap
counterparty under the Class A-3 Notes swap agreement, that amount will have the
same priority of payment as interest owed to the Class A-3 noteholders. This
means that the amount owed to the swap counterparty must be paid before the
payment of interest to the Class B, C and D noteholders and before the payment
of principal to any noteholders. See "DESCRIPTION OF THE NOTES AND INDENTURE --
CLASS A-3 SWAP AGREEMENT" in this prospectus supplement.
Moreover, the more senior classes of notes could lose the credit
enhancement provided by the more subordinate classes and the cash collateral
account if delinquencies and defaults on contracts increase and the collections
on contracts and amounts in the cash collateral account are insufficient to pay
even the more senior classes of notes.
ANY FAILURE BY THE SWAP COUNTERPARTY TO PAY AMOUNTS OWED UNDER THE SWAP
AGREEMENT WOULD REDUCE THE FUNDS AVAILABLE TO PAY INTEREST ON THE CLASS A-3
NOTES
The Class A-3 Notes will be dependent upon payments to be made by the
swap counterparty under the swap agreement for receipt of the full amount of
interest on the Class A-3 Notes. This will be the case if the interest due on
the Class A-3 Notes at their floating rate exceeds the amount available to the
owner trust to pay the Class A-3 Note interest at the assumed fixed rate of
_________%. Any shortfall in the payment of interest on the Class A-3 Notes due
entirely to the failure of the swap counterparty to make a required payment
under the swap agreement will not constitute an event of default under the
indenture. Except to the extent the amount available on any payment date exceeds
the amount necessary to pay
o the servicing fee and servicer advances,
o all interest and principal payable on the notes, with Class A-3
Note interest being calculated at the assumed fixed rate for this
purpose and
o all amounts payable in connection with the cash collateral
account, no amounts in addition to those available under the swap
agreement will be available under the indenture to make up the
shortfall. The only remedies in these circumstances will be those
available to the owner trust under the swap agreement.
As a general matter, the obligations of the swap counterparty under
the swap agreement are unsecured. However, in the event that the swap
counterparty's long-term unsecured senior debt ceases to be rated at a level
acceptable to _______________ and ______________, the swap counterparty will be
obligated either to (a) post collateral or establish other arrangements to
secure its obligations under the swap agreement or (b) arrange for a substitute
swap counterparty to assume the rights and obligations of the swap counterparty
under the swap agreement, in either case so that the ratings of the notes are
maintained or, if applicable, restored to their level immediately prior to the
downgrading or withdrawal of the swap counterparty's debt. If the swap
counterparty fails to take either of these actions, the owner trust will be
entitled to terminate the swap agreement and to claim from the swap counterparty
the cost of obtaining a replacement swap from a swap counterparty satisfactory
to the note rating agencies. The Class A-3 noteholders bear the risk of any
failure by the swap counterparty to take the actions required of it and the risk
of any inability of the owner trust to obtain a replacement swap agreement.
ADVERSE EVENTS IN ______ HIGH CONCENTRATION STATES MAY CAUSE INCREASED DEFAULTS
AND DELINQUENCIES
If adverse events or economic conditions were particularly severe in a
geographic region where there is a substantial concentration of obligors, the
amount of delinquent payments and defaults on the contracts may increase. As a
result, the overall timing and amount of collections on the contracts held by
the owner trust may differ from what you expect, and you may experience delays
or reductions in payments.
The following are the approximate percentages of the initial contract
pool principal balance of the owner trust's contracts whose obligors are located
in the following states:
o _______% in __________,
o _______% in __________,
o _______% in __________,
o _______% in __________ and
o _______% in __________.
The remaining states accounted for _______% of the initial contract pool
principal balance, and none of these remaining states accounted for more than 5%
of the initial contract pool principal balance.
[Although the sponsor does not know of any matters likely to increase
the rate of delinquencies or defaults in these states, an example of an adverse
event specific to a geographic region is the possibility of a catastrophic
earthquake in California. An earthquake in California could have negative
regional economic repercussions and potentially cause obligors in that region to
delay or reduce their payments on contracts. Additionally, a substantial
downturn in the financial services industry, which is highly concentrated in the
states of New York and New Jersey, or in the oil and gas industry, which is
concentrated in the state of Texas could reduce revenues for obligors in those
states and ultimately reduce the associated obligors' ability to make timely
payments on their related contracts].
ADVERSE ECONOMIC CONDITIONS IN HIGH CONCENTRATION INDUSTRIES MAY CAUSE
INCREASED DEFAULTS AND DELINQUENCIES
If the industries in which there is a substantial concentration of
contracts experience adverse events or economic conditions, the timing and
amount of collections on the contracts held by the owner trust may differ from
what you expect. This could result in delays or reduced payments to you. As of
the initial cut-off date, of the contract pool principal balance, approximately
o ________% related to the manufacturing industry,
o ________% related to equipment used in the services industry,
excluding medical and professional services,
o _______% related to the retail and wholesale trade industry,
o _______% related to equipment used in transportation,
o _______% related to equipment used in professional services, and
o _______% related to the financial services industry.
While the sponsor does not know of any industry conditions, practices
or other matters likely to increase the rate of delinquencies or defaults on
contracts with end-users in these industries, some of them may be adversely
affected by various economic conditions. For example, a rise in interest rates
may weaken the demand for construction services. Moreover, the retail trade
industry is dependent upon the level of consumer confidence and spending.
Adverse developments concerning these conditions will tend to increase the rate
of delinquencies and defaults by contract obligors in those industries. This, in
turn, could result in reductions of or delays in the collection of funds for
payment of the notes.
The sponsor does not believe that any other industry accounts for more
than 5.00% of the contract pool principal balance. However, as shown in the
table below under the heading "Types of Obligor," the depositor's records list
______% of the contract pool principal balance in the category of "Other"
obligor. The depositor has not analyzed this category to determine whether or
not the contracts included in it could be grouped into some other more specific
type of equipment category. Any contracts in this "Other" category that relate
to any particular industry would be subject to all economic and other risks
associated with that industry. Any adverse developments in that industry will
tend to increase the rate of delinquencies and defaults by contract obligors in
that industry. This, in turn, could result in reductions or delays in collection
of funds for payment of the notes.
PRODUCT DEFECTS OR OBSOLESCENCE OR ADVERSE ECONOMIC EVENTS FOR TWO VENDORS
ACCOUNTING FOR HIGH PROPORTIONS OF THE CONTRACTS MAY CAUSE INCREASED DEFAULTS
AND DELINQUENCIES
_______________, a _____________________________ and __________ a
_____________ is the vendor of equipment for approximately _______% of the
contract pool principal balance calculated as of the initial cut-off date.
Products of ________________, a leading producer of computer systems, accounted
for approximately ______% of the contract pool balance calculated as of the
initial cut-off date. Although the sponsor is unaware of conditions likely to
increase the rate of defaults or delinquencies on contracts pertaining to
equipment produced by these two vendors, some events concerning these vendors or
their products could have that effect. For example, if either of these vendors
were to experience financial difficulties, the obligors' payment performance
with respect to the related contracts may decline as the obligors may be less
inclined to make payments on contracts with respect to a vendor which is
suffering financial difficulties. Additionally, the occurrence of a substantial
number of defects in products produced by either of these vendors may result in
decisions by the obligors on the contracts relating to equipment that proved
defective not to pay the contract amounts, to pay late or to pay smaller
amounts. This could result in reductions of or delays in payments you expect on
the notes. Moreover, obsolescence of the products of either of these vendors
could result in prepayments of contracts that would cause the notes to be paid
earlier than you expect. No other single vendor originated more than ____% of
the contract pool principal balance as of the initial cut-off date.
PRODUCT DEFECTS OR OBSOLESCENCE OF TYPES OF EQUIPMENT ACCOUNTING FOR HIGH
PROPORTIONS OF THE CONTRACTS MAY CAUSE INCREASED DEFAULTS OR DELINQUENCIES
If the types of equipment in which contracts are concentrated suffer
unexpectedly high rates of defects or become obsolete, the obligors on the
contracts may default, pay late or pay less than the amounts owed on the
contracts. This could result in reductions of or delays in payments you expect
on the notes.
As of the initial cut-off date, of the contract pool principal
balance, approximately
o _______% related to contracts involving telecommunications
equipment,
o _______% related to contracts involving transportation equipment,
o _______% related to contracts involving computer and
point-of-sale equipment,
o _______% related to contracts involving computer software,
o _______% related to contracts involving manufacturing,
o _______% related to contracts involving construction equipment,
and
o _______% related to contracts involving medical equipment.
The depositor does not believe that any other type of equipment accounts for
more than _____% of the contract pool principal balance. However, as shown in
the table below under the heading "Types of Equipment," the depositor's records
list _____% of the contract pool principal balance in the category of "Other"
types of equipment. The depositor has not analyzed this category to determine
whether or not the contracts included in it could be grouped into some other
more specific type of equipment category. Any contracts in this "Other" category
that relate to any particular type of equipment would be subject to all defect,
obsolescence and other risks associated with that type of equipment. Any adverse
developments concerning that type of equipment will tend to increase the rate of
delinquencies and defaults by obligors on contracts involving that type of
equipment. This, in turn, could result in reductions or delays in collection of
funds for payment of the notes.
THE OWNER TRUST'S NOT HAVING SECURITY INTERESTS IN COMPUTER SOFTWARE AND
SERVICES AND THE OWNER TRUST'S NOT BEING NAMED AS SECURED PARTY IN MOTOR VEHICLE
TITLE CERTIFICATES WILL LEAVE THE OWNER TRUST WITHOUT COLLATERAL FOR THE
ASSOCIATED CONTRACTS
The owner trust will have no security interest in computer software
and computer services contracts, which accounted for ______% of the initial
contract pool balance, and the owner trust will not be named as a secured party
in the title certificates for motor vehicle contracts, which accounted for a
substantial portion of the ______% of the initial contract pool principal
balance attributable to the transportation industry. If the obligor on this type
of contract fails to pay or is late in paying, the owner trust will have no
recourse to the software, services or motor vehicles, as the case may be,
underlying the contracts. This increases the risk that the owner trust will be
unable to pay or will be late in paying the amounts you expect on the notes.
THE TRUST ASSETS ARE THE ONLY SOURCE OF PAYMENTS ON THE NOTES
All distributions on the notes will be made from payments by borrowers
under the receivables. The Trust has no other assets [other than _______] to
make distributions on the notes. The receivables are NOT insured or guaranteed
by any person. The Trust is the only person that is obligated to make
distributions on the notes.
THE OWNER TRUST
THE OWNER TRUST
The sponsor created the owner trust on _______, _____ under a trust
agreement, which the parties will amend and restate on the closing date for the
sale of the notes, among the sponsor the depositor and the owner trustee.
Under a pooling and servicing agreement, dated as of _______, ______,
among
o the depositor,
o the owner trust,
o _________________, an originator and the seller of contracts to
the depositor and
o the servicer.
The depositor will transfer all of the contracts and the related security
interests to the owner trust. As noted in "THE SELLER AND ORIGINATORS --
UNDERWRITING AND SERVICING - DOCUMENTATION" and "THE CONTRACTS -- SOFTWARE AND
SERVICES" in the accompanying prospectus, some transferred contracts will not
have associated security interests.
The owner trust will issue an equity certificate, representing the
beneficial ownership interest in the owner trust, to the depositor. The equity
certificate will be entitled to any excess amount available on any payment date
after reimbursement of servicer advances and payment of servicing fees,
principal and interest on the notes, any amount owed to the swap counterparty
and amounts payable in connection with the cash collateral account. See
"DESCRIPTION OF THE INDENTURE AND NOTES -- DISTRIBUTIONS" in this prospectus
supplement. The sponsor is not offering and selling the equity certificate under
this prospectus supplement and the accompanying prospectus.
THE INDENTURE
Under an indenture dated as of _______, ______ between the owner trust
and __________, as indenture trustee, the indenture trustee will authenticate
and deliver the notes.
CAPITALIZATION OF THE OWNER TRUST
If the issuance and sale of the notes had taken place on the initial
cut-off date, the capitalization of the owner trust on that date would have
consisted of notes with an aggregate principal amount of $_____________ and an
equity certificate.
THE OWNER TRUSTEE
_____________ will be the owner trustee under the trust agreement. The
owner trustee is a ______________ and its principal offices are located at
__________________________-.
THE ORIGINATORS, THE SERVICER, THE
SELLER AND THE DEPOSITOR
[TO BE INSERTED]
ORIGINATION OF THE CONTRACTS
[TO BE INSERTED]
THE CONTRACTS
DESCRIPTION OF THE CONTRACTS
All of the contracts are commercial, rather than consumer, leases,
loans or agreements. See "THE CONTRACTS" in the accompanying prospectus.
STATISTICS RELATING TO THE INITIAL CUT-OFF DATE CONTRACT POOL
The initial contract pool principal balance is $_______________. This
amount is based upon the contract pool principal balance determined as of the
initial cut-off date, but also includes an amount in respect of scheduled
payments on the contracts due prior to, but not received as of, the cut-off
date. The following tables set forth the characteristics of the contracts as of
the cut-off date. Tables presented in this section may not total due to
rounding.
<TABLE>
<CAPTION>
COMPOSITION OF THE INITIAL CUT-OFF DATE CONTRACT POOL
WEIGHTED WEIGHTED AVERAGE
INITIAL AVERAGE AVERAGE CONTRACT
CONTRACT POOL ORIGINAL REMAINING PRINCIPAL
PRINCIPAL TERM TERM BALANCE
NUMBER OF CONTRACTS BALANCE (RANGE) (RANGE) (RANGE)
------------------ ------------ --------- -------- --------
<S> <C> <C> <C> <C>
_________ $_________ _____ months ____ months $______
(____ months to (___ month to ($_____ to
______ months) ____ months) $________)
</TABLE>
<TABLE>
<CAPTION>
TYPE OF CONTRACTS
AGGREGATE % OF INITIAL
AGGREGATE % OF TOTAL CONTRACT CONTRACT POOL
NUMBER OF NUMBER OF PRINCIPAL PRINCIPAL
TYPE OF CONTRACT CONTRACTS CONTRACTS BALANCE BALANCE
---------------- --------- --------- ------- -------
<S> <C> <C> <C> <C>
True Lease.....................
Finance Leases.................
Loans/Conditional Sales........
Installment Payment
Agreements.................
Total................... ......... 100.00% $ 100.00%
========= =========== ========= =========
</TABLE>
<TABLE>
<CAPTION>
GEOGRAPHICAL DIVERSITY
AGGREGATE % OF INITIAL
AGGREGATE % OF TOTAL CONTRACT CONTRACT POOL
NUMBER OF NUMBER OF PRINCIPAL PRINCIPAL
STATE CONTRACTS CONTRACTS BALANCE BALANCE
----- --------- --------- --------- -------------
<S> <C> <C> <C> <C>
---------.....................
----------....................
---------.....................
---------.....................
-----------...................
----------....................
----------....................
----------....................
--------......................
---------.....................
--------......................
-------.......................
-----.........................
-------.......................
---------.....................
-------.......................
---------.....................
--------......................
--------......................
--------......................
---------.....................
--------......................
------........................
--------......................
-------.......................
Total................. 100.00% $ 100.00%
========= ============ ========= ========
</TABLE>
<TABLE>
<CAPTION>
PAYMENT STATUS
AGGREGATE % OF INITIAL
AGGREGATE % OF TOTAL CONTRACT CONTRACT POOL
NUMBER OF NUMBER OF PRINCIPAL PRINCIPAL
DAYS DELINQUENT CONTRACTS CONTRACTS BALANCE BALANCE
--------------- --------- --------- --------- ---------------
<S> <C> <C> <C> <C>
Current, including 1 to 30
day delinquent contracts.............
31 - 60 days delinquent.................
Total........................... 100.00% 100.00%
======== ====== ========= ========
</TABLE>
<TABLE>
<CAPTION>
TYPES OF EQUIPMENT
AGGREGATE % OF INITIAL
AGGREGATE % OF TOTAL CONTRACT CONTRACT POOL
NUMBER OF NUMBER OF PRINCIPAL PRINCIPAL
TYPE OF EQUIPMENT CONTRACTS CONTRACTS BALANCE BALANCE
----------------- --------- --------- ------- -------
<S> <C> <C> <C> <C>
Telecommunications....................
Transportation........................
Computer..............................
Computer Software.....................
Manufacturing.........................
Construction..........................
Medical...............................
Automotive Diagnostic
Equipment..........................
Printing..............................
Resources.............................
Office Equipment......................
Commercial Retail Fixtures
Industrial............................
Other, including $__________
as the largest and $__________
as the average contract
principal balance..................
Total........................... 100.00% $ 100.00%
========= ============ ========= ========
</TABLE>
The depositor does not believe that any other type of equipment accounts for
more than 5% of the contract pool principal balance. However, the depositor has
not analyzed the contracts included in the category "Other" in the above table
to determine whether or not the contracts included in it could be grouped into
some other more specific type of equipment category.
<TABLE>
<CAPTION>
CONTRACT PRINCIPAL BALANCES
AGGREGATE % OF INITIAL
AGGREGATE % OF TOTAL CONTRACT CONTRACT POOL
NUMBER OF NUMBER OF PRINCIPAL PRINCIPAL
CONTRACT PRINCIPAL BALANCE CONTRACTS CONTRACTS BALANCE BALANCE
-------------------------- --------- --------- ------- -------
<S> <C> <C> <C> <C>
$ 0.01 to $ 5,000.00.....
$ 5,000.01 to $ 25,000.00.....
$ 25,000.01 to $ 50,000.00.....
$ 50,000.01 to $ 100,000.00.....
$ 100,000.01 to $ 500,000.00.....
$ 500,000.01 to $1,000,000.00
$ 1,000,000.01 to $2,000,000.00.....
$ 2,000,000.01 to $3,000,000.00.....
$3,000,000.01 to $4,000,000.00
$ 4,000,000.01 to $5,000,000.00.....
Over $5,000,000, the largest
single contract principal
balance being $__________........
Total...................... 100.00% $ 100.00%
========= ======== ========= =========
</TABLE>
<TABLE>
<CAPTION>
REMAINING TERMS OF CONTRACTS
AGGREGATE % OF INITIAL
AGGREGATE % OF TOTAL CONTRACT CONTRACT POOL
NUMBER OF NUMBER OF PRINCIPAL PRINCIPAL
REMAINING TERMS OF CONTRACTS CONTRACTS CONTRACTS BALANCE BALANCE
---------------------------- --------- --------- --------- ------------
(MONTHS)
<S> <C> <C> <C> <C>
0 - 12.............................
13 - 24............................
25 - 36............................
37 - 48............................
49 - 60............................
61 - 72............................
73 - 84............................
85 - 96............................
97 - 108............................
Over 108............................
Total......................... 100.00 $ 100.00
========= ====== ========= ======
</TABLE>
<TABLE>
<CAPTION>
TYPES OF OBLIGOR
AGGREGATE % OF INITIAL
AGGREGATE % OF TOTAL CONTRACT CONTRACT POOL
NUMBER OF NUMBER OF PRINCIPAL PRINCIPAL
TYPE OF OBLIGOR CONTRACTS CONTRACTS BALANCE BALANCE
--------------- --------- --------- ------- -------
<S> <C> <C> <C> <C>
Manufacturing......................
Service Organizations..............
Retail & Wholesale.................
Transportation.....................
Professional.......................
Financial Services.................
Manufacturing &
Construction....................
Machine tools......................
Medical............................
Resources..........................
Government.........................
Print Center.......................
Other, including $__________
as the largest and $_______
as the average principal
balance.........................
Total......................... 100.00% $ 100.00%
=============== ====== ================== ======
</TABLE>
The sponsor does not believe that any other industry accounts for more than
5.00% of the contract pool principal balance. However, the depositor has not
analyzed the contracts included in the category "Other" in the above table to
determine whether or not the contracts could be grouped into some other more
specific industry category.
<TABLE>
<CAPTION>
OBLIGOR CONCENTRATION
AGGREGATE
AGGREGATE CONTRACT % OF INITIAL
OBLIGORS (INCLUDING CONTRACTS NUMBER OF PRINCIPAL CONTRACT POOL
SECURING VENDOR LOANS) CONTRACTS BALANCE PRINCIPAL BALANCE
---------------------- --------- ------- -----------------
<S> <C> <C> <C>
Top 5.............................. _____ $________ ______%
</TABLE>
STATISTICS RELATING TO DELINQUENCIES AND DEFAULTS
The following table shows contract delinquency statistics for the
originators' portfolios of receivables similar to the contracts, on an aggregate
basis, as of December 31 in each of the past five years and as of _______, _____
and _____. The applicable originators used the underwriting standards described
in the prospectus under the section titled "THE ORIGINATORS-- UNDERWRITING--"
for all of these receivables. For these purposes, a "DELINQUENCY" means that the
obligor on the contract has failed to make a required scheduled payment in an
amount equal to at least 90% of the required scheduled payment within 60 days of
the due date. For these purposes, any payment made by the obligor on a contract
subsequent to the required payment date is applied to the earliest payment which
was unpaid. These statistics are not necessarily indicative of the future
performance of the contracts. The following table is based on the net investment
for all contracts originated by ___________________. and the gross receivable
for contracts originated by the other originators. Net investment is the sum of
all payments plus any expected equipment residual value under a contract
discounted to present value using the contract's implicit interest rate. The
gross receivable is the undiscounted sum of all payments under a contract.
<TABLE>
<CAPTION>
CONTRACT DELINQUENCIES
PERCENT OF CONTRACT BALANCES
WHICH WERE DELINQUENT
------------------------------------------------------
CONTRACT 31 TO 60 61 TO 90 OVER 90
----------------------------------------- BALANCE DAYS DAYS DAYS TOTAL
------- ---- ---- ---- -----
AS OF (IN THOUSANDS)
-----
<S> <C> <C> <C> <C> <C>
12/31/____........................... $________ ______% _____% _____% _____%
12/31/____........................... $________ ______% _____% _____% _____%
12/31/____........................... $________ ______% _____% _____% _____%
12/31/____........................... $________ ______% _____% _____% _____%
12/31/____........................... $________ ______% _____% _____% _____%
03/31/____........................... $________ ______% _____% _____% _____%
03/31/____........................... $________ _____% ____% _____% ____%
</TABLE>
LOSSES AND RECOVERIES
The following table shows statistics for gross losses and losses net
of recoveries on defaulted contracts within the originators' portfolios of
receivables similar to the contracts during the twelve-month period ending
December 31 in each of the past five years and the three-month periods ended
March 31, _____ and _______. Gross losses means total losses before recoveries
measured against the net investment of the contracts, gross of any allowance for
losses. Losses net of recoveries means losses after recoveries measured against
the net investment of the contracts, gross of any allowance for losses. These
statistics are not necessarily indicative of the future performance of the
contracts.
<TABLE>
<CAPTION>
AGGREGATE NET GROSS LOSSES AS A NET LOSSES AS A
INVESTMENT OF PERCENTAGE OF NET PERCENTAGE OF NET
TWELVE MONTHS ENDED CONTRACTS INVESTMENT INVESTMENT
-------------------- ----------- ------------ -------------
(IN THOUSANDS)
<S> <C> <C> <C>
12/31/___....................... $________ ______% _____%
12/31/___....................... $________ ______% _____%
12/31/___....................... $________ ______% _____%
12/31/___....................... $________ ______% _____%
12/31/____...................... $________ _____% _____%
THREE MONTHS ENDED
-------------------
03/31/__........................ $________ _____% _____%
03/31/__........................ $________ ____% _____%
</TABLE>
WEIGHTED AVERAGE LIFE OF THE NOTES
The rate of payments on contracts will directly affect
o the rate of note principal payments;
o the aggregate amount of each note interest payment; and
o the yield to maturity of the notes.
The payments on the contracts may be in the form of payments scheduled
to be made under the terms of the contracts, prepayments or liquidations due to
default, casualty and other events which cannot be predicted. _____________ may
purchase contracts from the owner trust if the contracts were ineligible for
transfer at the time of transfer to the owner trust. Any payments for these
reasons, other than scheduled payments may result in distributions to you of
amounts which would otherwise have been distributed over the remaining term of
the contracts. Each prepayment, liquidation or repurchase of a contract, if the
contract is not replaced by the depositor with a comparable substitute contract
as described under "THE CONTRACTS -- SUBSTITUTION OF CONTRACTS" in the
accompanying prospectus, will shorten the weighted average remaining term of the
contracts and the weighted average life of the notes. See "RISK FACTORS --
CONTRACT PREPAYMENTS, INELIGIBILITY OR DEFAULT MAY CAUSE EARLIER REPAYMENT OF
THE NOTES THAN YOU EXPECT AND YOU MAY NOT BE ABLE TO FIND INVESTMENTS WITH THE
SAME YIELD AS THE NOTES AT THE TIME OF REPAYMENT" in the accompanying
prospectus.
The following chart sets forth the percentage of the initial principal
amount of each class of notes which would be outstanding on the distribution
dates set forth below assuming the conditional prepayment rates ("CPR")
indicated in the chart. This information is hypothetical. The conditional
prepayment rate assumes that a fraction of the outstanding contracts is prepaid
on each payment date, which implies that each contract in the pool of contracts
is equally likely to prepay. This fraction, expressed as a percentage, is
annualized to arrive at the conditional prepayment rate for the contracts. The
conditional prepayment rate measures prepayments based on the contract pool
principal balance, after the payment of all payments scheduled to be made under
the terms of the contracts during each collection period. The conditional
prepayment rate further assumes that all contracts are the same size and
amortize at the same rate. The conditional prepayment rate also assumes that
each contract will be either paid as scheduled or prepaid in full. The amounts
set forth below are based upon the timely receipt of scheduled monthly contract
payments, and assume that:
o the seller exercises its option to cause a redemption of the
notes when the aggregate note principal balance is less than 10%
of the initial aggregate discounted contract balance of the
contracts, and
o the closing date for the sale of the contracts to the owner trust
is _______, ______.
These tables are based upon the contract pool principal balance
determined using the discount rate of _______%. In addition, it is assumed for
the purposes of these tables only, that the owner trust issues the notes in the
following initial principal amounts and at the following fixed interest rates:
<TABLE>
<CAPTION>
CLASS INITIAL PRINCIPAL AMOUNT INTEREST RATE
----- ------------------------ -------------
<S> <C> <C>
A-1............................ $___________ ______%
A-2............................ _______ ______
A-3............................ ______ ______
A-4............................ ______ ______
A-5............................ ______ _____
B.............................. ______ ______
C.............................. ______ ______
D.............................. ______ ______
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE OF THE INITIAL PRINCIPAL
OF THE CLASS A-1 NOTES
CPR
PAYMENT DATE 0% 6% 9% 12% 18%
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Closing Date...........................................
_____________..........................................
_____________..........................................
_____________..........................................
____________...........................................
_____________..........................................
____________...........................................
____________...........................................
____________...........................................
____________...........................................
____________...........................................
____________...........................................
____________...........................................
____________...........................................
____________...........................................
____________...........................................
____________...........................................
------------
------------...........................................
------------...........................................
------------...........................................
------------...........................................
-------------..........................................
-------------..........................................
-------------..........................................
-------------..........................................
-------------..........................................
-------------..........................................
-------------..........................................
-------------..........................................
-------------..........................................
-------------..........................................
-------------..........................................
-------------..........................................
-------------..........................................
-------------..........................................
-------------..........................................
-------------..........................................
-------------..........................................
-------------..........................................
-------------..........................................
-------------..........................................
-------------..........................................
-------------..........................................
-------------..........................................
--------------.........................................
---------------........................................
-------------..........................................
--------------.........................................
---------------........................................
----------.............................................
Weighted Average Life To Call (in years................
Weighted Average Life To Maturity (in years)...........
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE OF THE INITIAL PRINCIPAL
OF THE CLASS A-2 NOTES
CPR
PAYMENT DATE 0% 6% 9% 12% 18%
------------ -- -- -- --- ---
<S> <C> <C> <C> <C> <C>
Closing Date...........................................
________________.......................................
_________________......................................
___________________....................................
___________________....................................
_______________........................................
__________________.....................................
___________________....................................
_________________......................................
___________________....................................
__________________.....................................
_____________________..................................
_______________........................................
___________________....................................
_________________......................................
____________...........................................
_________________......................................
_____________________..................................
__________________.....................................
________________.......................................
___________________....................................
________________.......................................
______________.........................................
_________________......................................
______________.........................................
________________.......................................
_____________..........................................
_________________......................................
_________________......................................
_____________________..................................
_______________________................................
____________________...................................
_________________......................................
______________.........................................
_________________......................................
______________.........................................
_________________......................................
______________.........................................
_________________......................................
______________.........................................
______________.........................................
____________...........................................
______________.........................................
_________________......................................
_____________..........................................
________________.......................................
_____________..........................................
____________...........................................
_________________......................................
_____________..........................................
----------
Weighted Average Life To Call (in years)...............
Weighted Average Life To Maturity (in years)...........
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE OF THE INITIAL PRINCIPAL
OF THE CLASS A-3 NOTES
CPR
--------------------------------------------------------
PAYMENT DATE 0% 6% 9% 12% 18%
------------ -- -- -- --- ---
<S> <C> <C> <C> <C> <C>
Closing Date...........................................
_________________......................................
________________.......................................
______________.........................................
______________.........................................
____________...........................................
____________...........................................
_______________........................................
____________...........................................
____________...........................................
______________.........................................
______________.........................................
____________...........................................
_______________........................................
_________________......................................
_______________........................................
_____________..........................................
________________.......................................
________________.......................................
_________________......................................
___________________....................................
________________.......................................
______________.........................................
____________...........................................
_______________........................................
_________________......................................
_______________........................................
___________________....................................
________________.......................................
__________________.....................................
______________.........................................
________________.......................................
______________.........................................
_________________......................................
______________.........................................
______________.........................................
_____________..........................................
________________.......................................
______________.........................................
________________.......................................
_________________......................................
____________________...................................
________________.......................................
_______________........................................
_________________......................................
__________________.....................................
_______________........................................
________________.......................................
______________.........................................
__________________.....................................
---------
Weighted Average Life To Call (in years)...............
Weighted Average Life To Maturity (in years)...........
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE OF THE INITIAL PRINCIPAL
OF THE CLASS A-4 NOTES
CPR
--------------------------------------------------------
PAYMENT DATE 0% 6% 9% 12% 18%
------------ -- -- -- --- ---
<S> <C> <C> <C> <C> <C>
Closing Date...........................................
_________________......................................
________________.......................................
______________.........................................
______________.........................................
____________...........................................
____________...........................................
_______________........................................
____________...........................................
____________...........................................
______________.........................................
______________.........................................
____________...........................................
_______________........................................
_________________......................................
_______________........................................
_____________..........................................
________________.......................................
________________.......................................
_________________......................................
___________________....................................
________________.......................................
______________.........................................
____________...........................................
_______________........................................
_________________......................................
_______________........................................
___________________....................................
________________.......................................
__________________.....................................
______________.........................................
________________.......................................
______________.........................................
_________________......................................
______________.........................................
______________.........................................
_____________..........................................
________________.......................................
______________.........................................
________________.......................................
_________________......................................
____________________...................................
________________.......................................
_______________........................................
_________________......................................
__________________.....................................
_______________........................................
________________.......................................
______________.........................................
__________________.....................................
---------
Weighted Average Life To Call (in years)...............
Weighted Average Life To Maturity (in years)...........
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE OF THE INITIAL PRINCIPAL
OF THE CLASS A-5 NOTES
CPR
--------------------------------------------------------
PAYMENT DATE 0% 6% 9% 12% 18%
------------ -- -- -- --- ---
<S> <C> <C> <C> <C> <C>
Closing Date...........................................
_________________......................................
________________.......................................
______________.........................................
______________.........................................
____________...........................................
____________...........................................
_______________........................................
____________...........................................
____________...........................................
______________.........................................
______________.........................................
____________...........................................
_______________........................................
_________________......................................
_______________........................................
_____________..........................................
________________.......................................
________________.......................................
_________________......................................
___________________....................................
________________.......................................
______________.........................................
____________...........................................
_______________........................................
_________________......................................
_______________........................................
___________________....................................
________________.......................................
__________________.....................................
______________.........................................
________________.......................................
______________.........................................
_________________......................................
______________.........................................
______________.........................................
_____________..........................................
________________.......................................
______________.........................................
________________.......................................
_________________......................................
____________________...................................
________________.......................................
_______________........................................
_________________......................................
__________________.....................................
_______________........................................
________________.......................................
______________.........................................
__________________.....................................
---------
Weighted Average Life To Call (in years)...............
Weighted Average Life To Maturity (in years)...........
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE OF THE INITIAL PRINCIPAL
OF THE CLASS B NOTES
CPR
--------------------------------------------------------
PAYMENT DATE 0% 6% 9% 12% 18%
------------ -- -- -- --- ---
<S> <C> <C> <C> <C> <C>
Closing Date...........................................
_________________......................................
________________.......................................
______________.........................................
______________.........................................
____________...........................................
____________...........................................
_______________........................................
____________...........................................
____________...........................................
______________.........................................
______________.........................................
____________...........................................
_______________........................................
_________________......................................
_______________........................................
_____________..........................................
________________.......................................
________________.......................................
_________________......................................
___________________....................................
________________.......................................
______________.........................................
____________...........................................
_______________........................................
_________________......................................
_______________........................................
___________________....................................
________________.......................................
__________________.....................................
______________.........................................
________________.......................................
______________.........................................
_________________......................................
______________.........................................
______________.........................................
_____________..........................................
________________.......................................
______________.........................................
________________.......................................
_________________......................................
____________________...................................
________________.......................................
_______________........................................
_________________......................................
__________________.....................................
_______________........................................
________________.......................................
______________.........................................
__________________.....................................
---------
Weighted Average Life To Call (in years)...............
Weighted Average Life To Maturity (in years)...........
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE OF THE INITIAL PRINCIPAL
OF THE CLASS C NOTES
CPR
--------------------------------------------------------
PAYMENT DATE 0% 6% 9% 12% 18%
------------ -- -- -- --- ---
<S> <C> <C> <C> <C> <C>
Closing Date...........................................
_________________......................................
________________.......................................
______________.........................................
______________.........................................
____________...........................................
____________...........................................
_______________........................................
____________...........................................
____________...........................................
______________.........................................
______________.........................................
____________...........................................
_______________........................................
_________________......................................
_______________........................................
_____________..........................................
________________.......................................
________________.......................................
_________________......................................
___________________....................................
________________.......................................
______________.........................................
____________...........................................
_______________........................................
_________________......................................
_______________........................................
___________________....................................
________________.......................................
__________________.....................................
______________.........................................
________________.......................................
______________.........................................
_________________......................................
______________.........................................
______________.........................................
_____________..........................................
________________.......................................
______________.........................................
________________.......................................
_________________......................................
____________________...................................
________________.......................................
_______________........................................
_________________......................................
__________________.....................................
_______________........................................
________________.......................................
______________.........................................
__________________.....................................
---------
Weighted Average Life To Call (in years)...............
Weighted Average Life To Maturity (in years)...........
</TABLE>
<PAGE>
DESCRIPTION OF THE NOTES AND INDENTURE
This section adds to the information in the accompanying prospectus
under the caption "DESCRIPTION OF THE NOTES AND INDENTURE." However, as these
statements are only summaries, you should read the pooling and servicing
agreement and the indenture. The sponsor filed the forms of these documents as
exhibits to the registration statement it filed with the Securities and Exchange
Commission for the notes.
The notes will be issued under an indenture between the owner trust
and the indenture trustee.
The owner trust will issue eight classes of notes, consisting of five
classes of senior notes, designated as the
o Class A-1 Notes,
o Class A-2 Notes,
o Class A-3 Notes,
o Class A-4 Notes and
o Class A-5 Notes.
These are referred to in this document as "Class A Notes." The owner trust will
also issue three classes of subordinate notes, designated as the Class B Notes,
the Class C Notes and the Class D Notes. The Class B, Class C and Class D Notes
are the "Subordinate Classes."
Investors may purchase the notes in book-entry form in minimum
denominations of $1,000 and in integral multiples of $1 in excess of $1,000.
Each class will initially be represented by one or more notes registered in the
name of the nominee of The Depository Trust Company. The owner trustee will pay
note interest and principal on the 20th day of each month, or, if not a business
day, the next succeeding business day, commencing in __________ _____, to
registered noteholders as of the related record date. So long as the notes
remain in book-entry form, the record date for any payment date will be the
business day immediately preceding the payment date. If the notes are no longer
in book-entry form, the record date will be the last business day of the month
immediately preceding the payment date. However, the owner trust will make the
final payment on the notes only upon presentation and surrender of the notes to
the indenture trustee. The owner trust will make all payments on the notes in
immediately available funds. See "DESCRIPTION OF THE NOTES AND INDENTURE --
BOOK-ENTRY REGISTRATION" in the accompanying prospectus.
DISTRIBUTIONS
The owner trust will pay note principal and interest on each payment
date from the "Available Pledged Revenues" for the payment date, as well as
amounts permitted to be withdrawn from the cash collateral account. See "--CASH
COLLATERAL ACCOUNT" below. The "Available Pledged Revenues" as of any payment
date are the sum of
(a) the following amounts on deposit in the collection account which
the owner trust received during the related collection period
(1) scheduled contract payments, except payments in respect of
o taxes,
o insurance premium reimbursements,
o security deposits,
o late charges,
o documentation fees,
o extension fees,
o administrative charges or,
o maintenance premiums,
(2) prepayments of contracts, and
(3) proceeds of liquidating defaulted contracts,
(b) the purchase price paid by the seller in repurchasing ineligible
contracts from the owner trust,
(c) the amounts that the seller paid to purchase the contracts in
exercise of its option to do so when the aggregate note principal
amount is reduced to less than 10% of the initial contract pool
principal balance and that were on deposit in the collection
account as of the business day before the payment date,
(d) investment earnings on amounts held in the collection or note
distribution account and
(e) to the extent necessary to pay interest, amounts of the type
described in (a) above that the owner trust received after the
end of the related collection period.
However, Available Pledged Revenues do not include any amount
allocable to the depositor as representing the residual value of equipment
subject to a lease, except to the extent that the end-user or a vendor
guaranteed the equipment residual value.
On each payment date, the servicer will direct the indenture trustee
to apply Available Pledged Revenues to the following payments in the following
order of priority:
(1) reimbursement of servicer advances;
(2) the servicing fee;
(3) interest on the notes in the following order of priority:
(a) interest on the Class A-1, A-2, A-3, A-4, and A-5 Notes,
including any overdue interest, allocated pro rata based on
the respective principal amounts of the Class A-1, A-2, A-3,
A-4 and A-5 Notes,
(b) interest on the Class B Notes, including any overdue
interest,
(c) interest on the Class C Notes, including any overdue
interest,
(d) interest on the Class D Notes, including any overdue
interest,
(4) principal on the notes in the amounts and priority described
under "PRINCIPAL" below;
(5) any amount necessary to increase the cash collateral account
balance to its required level;
(6) amounts payable in connection with the cash collateral account;
(7) any shortfall in the payment of interest on the Class A-3 Notes
due to the failure of the swap counterparty to pay amounts owed
to the owner trust under the swap agreement, together with
interest on the shortfall; and
(8) any remainder to the holder of the equity certificate.
The owner trust is to make payments first from the Available Pledged Revenues,
and second, but only as to amounts described in clauses (3) and (4) immediately
above, from amounts permitted to be withdrawn from the cash collateral account
as described under "CASH COLLATERAL ACCOUNT" below. For purposes of the above
allocation of Available Pledged Revenues in respect of interest, the Class A-3
interest rate will be assumed to be the assumed fixed rate of __________%
determined in connection with the swap agreement.
INTEREST
The priorities of interest payments are set forth under
"DISTRIBUTIONS" above.
The owner trust will pay interest on each class of notes from and
including the closing date to but excluding _________, ______, and after that
date for each successive interest period. Interest on the Class A-1 and A-3
Notes will be computed on the basis of the actual number of days elapsed and a
360-day year. Interest on the other classes of notes will be computed on the
basis of a 360-day year comprised of twelve 30-day months.
The rates for classes other than Class A-3 are set forth on the cover
page of this prospectus supplement. The Class A-3 interest rate shall be the
one-month London interbank offered rate, referred to as One-Month LIBOR, plus
______%.
One-Month LIBOR means as of any LIBOR Determination Date and with
respect to the related interest period, the rate of interest per annum equal to
the London interbank offered rate for deposits in U.S. dollars having a maturity
of one month which appears on Telerate Page 3750 as of 11:00 a.m., London time,
on the LIBOR Determination Date. If the rate does not appear on Telerate Page
3750, One-Month LIBOR for the LIBOR Determination Date will be determined on the
basis of the rates at which deposits in U.S. dollars having a maturity of one
month and in a principal amount of not less than U.S. $1,000,000, are offered at
approximately 11:00 a.m., London time, on the LIBOR Determination Date to prime
banks in the London interbank market by the Reference Banks. The servicer will
request the principal London office of each of the Reference Banks to provide a
quotation of its rate to the indenture trustee. If at least two quotations are
provided, One-Month LIBOR will be the arithmetic mean, rounded upwards, if
necessary, to the nearest .01%, of the offered rates. If fewer than two
quotations are provided, One-Month LIBOR will be the arithmetic mean, rounded
upwards, if necessary to the nearest .01%, of the rates quoted at approximately
11:00 a.m., New York City time, on the LIBOR Determination Date to the indenture
trustee by three major banks in New York, New York, selected by the servicer,
for loans in United States dollars to leading European banks having a maturity
of one month and in a principal amount of not less than U.S. $1,000,000.
However, if those banks do not quote a rate to the indenture trustee as
described in this sentence, One-Month LIBOR will be the One-Month LIBOR in
effect for the immediately preceding interest period.
LIBOR Determination Date means for the interest period from and
including the closing date to but excluding ________________- the second
business day preceding the closing date for the sale of the notes, and for each
subsequent interest period the second business day preceding the interest
period. For purposes of computing One-Month LIBOR, a business day is any
business day on which dealings in deposits in United States dollars are
transacted in the London interbank market.
Telerate Page 3750 means the display page so designated on the Dow
Jones Telerate Service, or another page replacing that page on that service for
the purpose of displaying comparable rates or prices.
Reference Banks means four leading banks, selected by the servicer,
engaged in transactions in Eurodollar deposits in the international Eurocurrency
market and having an established place of business in London.
If on any payment date, the owner trust does not have sufficient
funds, after payment of servicer advances and the servicing fee, to make a full
payment of interest on any class of notes, the amount of the shortfall will be
carried forward and, together with interest on the shortfall amount at the
applicable interest rate for that class, added to the amount of interest the
affected class of noteholders will be entitled to receive on the next payment
date.
PRINCIPAL
This section gives only an overview of how the owner trust will pay
principal. The sponsor recommends that you read this section in connection with
the more detailed terms set forth in the pooling and servicing agreement
included as an exhibit to the registration statement filed with the Securities
and Exchange Commission for the notes.
OVERVIEW OF PRINCIPAL DISTRIBUTIONS
The principal required to be paid on the notes on each payment date
will be the amount necessary to pay the notes down so that their aggregate
principal balance equals the contract pool principal balance as of the last day
of the prior month. This amount will be allocated among the various classes of
notes according to the priorities described in this section.
For so long as the Class A-1 Notes are outstanding, 100% of the
principal will be allocated between the Class A-1 Notes and the Class A-5 Notes.
After the Class A-1 note principal balance has been paid to zero, the principal
will be allocated:
first, among the Class A Notes as a group, between the Class
A-5 Notes on one hand and the Class A-2, Class A-3 and Class A-4
Notes, on the other hand, sequentially in that order, then again
to the Class A-5 Notes;
second, to the Class B Notes;
third, to the Class C Notes; and
fourth, to the Class D Notes
Subject to the operation of the floors for each of the Subordinate
Classes, after the payment date on which the the Class A-1 note principal amount
has been paid to zero, the owner trust will pay principal proportionately, among
the Class A Notes as a group, the Class B Notes, the Class C Notes and the Class
D Notes, in the priorities listed above. However, the principal paydown rules
incorporate a concept of a floor on each class of the Subordinate Classes, which
means that the Subordinate Classes, for so long as any notes senior to that
class are outstanding, cannot be paid an amount of principal which would reduce
that Subordinate Class below its floor principal amount. If a Subordinate Class
is at its floor level, that Subordinate Class is "locked out" from receiving
further principal payments, with the additional effect of reallocating the
principal that would otherwise have been paid to that Subordinate Class to the
most senior class then outstanding. The levels of the floors are not static, but
are subject to increase if the owner trust experiences contract pool losses that
cannot be funded from the current period's Available Pledged Revenues or the
cash collateral account. This increase in the level of the floors tends to "lock
out" the Subordinate Classes earlier, which accelerates the payment of the
reallocated principal to the senior classes. If unfunded losses become severe
and the cash collateral account is depleted, the unfunded loss amount could be
so large that the principal paydown rules result in a sequential-pay senior
subordinated structure among the various note classes, with no principal being
paid to a Subordinate Class unless the note principal amount of each class
senior to it has been paid in full. The floors operate both before and after an
event of default.
BEFORE AN EVENT OF DEFAULT
This chart summarizes how principal will be paid on the notes before
any event of default. The section headed "Definitions Concerning Principal
Payments" below defines various terms relating to the payment of principal.
-------------------- ----------------------------------------------------------
CLASS PRINCIPAL PAYMENTS
-------------------- ----------------------------------------------------------
Class A-1 o Begins receiving principal on first payment date
o Receives ________-% of Total Principal Payment Amount
until paid in full, but will receive 100% of the Total
Principal Payment Amount if any of its principal is
outstanding after its stated maturity date until paid
in full
-------------------- ----------------------------------------------------------
Class A-2 o Begins receiving principal once Class A-1 is paid in
full
o Receives the Class A Principal Payment Amount reduced
by any amount paid to Class A-5, until Class A-2 is
paid in full, but will receive 100% of the Class A
Principal Payment Amount if any of its principal is
outstanding after its stated maturity date, until paid
in full
o May also receive principal payments reallocated away
from the Subordinate Classes through the operation of
the floors
-------------------- ----------------------------------------------------------
Class A-3 o Begins receiving principal once Class A-2 is paid in
full
o Receives the Class A Principal Payment Amount reduced
by any amount paid to Class A-5, until Class A-3 is
paid in full, but will receive 100% of the Class A
Principal Payment Amount if any of its principal is
outstanding after its stated maturity date, until paid
in full
o May also receive principal payments reallocated away
from the Subordinate Classes through the operation of
the floors
-------------------- ----------------------------------------------------------
Class A-4 o Begins receiving principal once Class A-3 is paid in
full
o Receives the Class A Principal Payment Amount reduced
by any amount paid to Class A-5, until Class A-4 is
paid in full, but will receive 100% of the Class A
Principal Payment Amount if any of its principal is
outstanding after its stated maturity date, until paid
in full
o May also receive principal payments reallocated away
from the Subordinate Classes through the operation of
the floors
-------------------- ----------------------------------------------------------
Class A-5 o Begins receiving principal on first payment date
o Receives ______% of the Total Principal Payment Amount
until Class A-1 is paid in full and the same percentage
after Class A-1 is paid in full until Class A-4 is paid
in full but only to the extent of the Class A Principal
Payment Amount
o Once Class A-4 is paid in full, Class A-5 receives 100%
of the Class A Principal Payment Amount until paid in
full
o May also receive principal payments reallocated away
from the Subordinate Classes through the operation of
the floors
-------------------- ----------------------------------------------------------
Class B o Begins receiving principal once Class A-1 is paid in
full
o Receives the Class B Principal Payment Amount until
paid in full
o Through the operation of its floor, Class B's principal
payments are subject to reallocation for the benefit of
Class A
o May also receive principal payments reallocated away
from Class C and Class D through the operation of the
floors
-------------------- ----------------------------------------------------------
Class C o Begins receiving principal once Class A-1 is paid in
full
o Receives the Class C Principal Payment Amount until
paid in full
o Through the operation of its floor, Class C's principal
payments are subject to reallocation for the benefit of
Class A and Class B
o May also receive principal payments reallocated away
from Class D through the operation of the floors
-------------------- ----------------------------------------------------------
Class D o Begins receiving principal once Class A-1 is paid in
full
o Receives the Class D Principal Payment Amount until
paid in full
o Through the operation of its floor, Class D's principal
payments are subject to re-allocation for the benefit
of Class A, Class B and Class C
-------------------- ----------------------------------------------------------
DETAILED PRINCIPAL DISTRIBUTION RULES
The priority of principal payments will be in the following order:
(1) prior to the payment date on which the Class A-1 Note principal
amount has been reduced to zero, the Class A Principal Payment
Amount will be equal to the Total Principal Payment Amount and
will be allocated ______% to the Class A-1 Notes and ______% to
the Class A-5 Notes. However, if the Class A-1 Notes have not
been paid to zero by their stated maturity date, 100% of the
Class A Principal Payment Amount will be paid to the Class A-1
Notes on their stated maturity date and on each subsequent
payment date until their note principal amount is zero;
(2) on and after the payment date on which the Class A-1 principal
amount has been reduced to zero, and disregarding the amount that
must first be applied to reduce the Class A-1 principal amount to
zero, the Total Principal Payment Amount will be allocated among
the various classes in the following order of priority:
(a) the Class A Principal Payment Amount to the Class A
noteholders, allocated as follows:
(1) ______% of the Total Principal Payment Amount, but in
no event greater than the Class A Principal Payment
Amount, to the Class A-5 noteholders, and
(2) the Class A Principal Payment Amount reduced by any
payments to the Class A-5 noteholders under clause
(2)(a)(1) to the Class A-2 noteholders until the Class
A-2 principal amount equals zero, then to the Class A-3
noteholders until the Class A-3 principal amount equals
zero, then to the Class A-4 noteholders until the Class
A-4 principal amount equals zero and then to the Class
A-5 noteholders until the Class A-5 principal amount
equals zero;
However, if the Class A-2, Class A-3 or Class A-4 Notes
have not been paid to zero by their respective stated
maturity dates, 100% of the Class A Principal Payment Amount
will be paid to that class on its stated maturity date and
on each subsequent payment date until its note principal
amount is zero;
(b) the Class B Principal Payment Amount to the Class B
noteholders;
(c) the Class C Principal Payment Amount to the Class C
noteholders;
(d) the Class D Principal Payment Amount to the Class D
noteholders; and
(e) any Reallocated Principal, sequentially to the Class A-2,
Class A-3, Class A-4, Class A-5, Class B, Class C and Class
D Notes.
PRINCIPAL DISTRIBUTIONS AFTER AN EVENT OF DEFAULT
After an event of default occurs, all principal distributions among
the classes will be made as follows:
<TABLE>
<CAPTION>
----------------------- ----------------------------------------------------------------------------------------------
CLASS PRINCIPAL PAYMENTS
----------------------- ----------------------------------------------------------------------------------------------
<S> <C>
Class A-1 100% of the Class A Principal Payment Amount until paid in full
----------------------- ----------------------------------------------------------------------------------------------
Class A-2 100% of the Class A Principal Payment Amount until paid in full
----------------------- ----------------------------------------------------------------------------------------------
Class A-3 100% of the Class A Principal Payment Amount until paid in full
----------------------- ----------------------------------------------------------------------------------------------
Class A-4 100% of the Class A Principal Payment Amount until paid in full
----------------------- ----------------------------------------------------------------------------------------------
Class A-5 100% of the Class A Principal Payment Amount until paid in full
----------------------- ----------------------------------------------------------------------------------------------
Class B 100% of the Class B Principal Payment Amount until paid in full
----------------------- ----------------------------------------------------------------------------------------------
Class C 100% of the Class C Principal Payment Amount until paid in full
----------------------- ----------------------------------------------------------------------------------------------
Class D 100% of the Class D Principal Payment Amount until paid in full
----------------------- ----------------------------------------------------------------------------------------------
</TABLE>
The principles described above in the sections labelled
"PRINCIPAL--OVERVIEW OF PRINCIPAL DISTRIBUTIONS," "--BEFORE AN EVENT OF DEFAULT"
and "DETAILED PRINCIPAL DISTRIBUTION RULES" will also apply after an event of
default except that the allocations between Class A-5, on the one hand, and the
other classes of Class A Notes, on the other hand, as described in those
sections, will not apply after an event of default.
Also, any Reallocated Principal will be allocated sequentially to the
Class A-1, A-2, A-3, A-4, A-5, B, C and D noteholders in that order.
DEFINITIONS CONCERNING PRINCIPAL PAYMENTS
The CLASS A BASE PRINCIPAL PAYMENT AMOUNT is:
(1) as to any payment date until the payment date on which the Class
A-1 principal amount equals zero, 100% of the Total Principal
Payment Amount; and
(2) for any subsequent payment date, and disregarding any amount
first used on the payment date on which the Class A-1 principal
amount is paid to zero, the excess of:
(x) the sum of the Class A-2, A-3, A-4 and A-5 notes principal
amounts over
(y) the Class A Target Principal Amount;
However, the Class A Principal Payment Amount may not exceed the Class
A principal balance.
The CLASS A PERCENTAGE will be approximately ________%.
The CLASS A TARGET PRINCIPAL AMOUNT for any payment date will be the
product of (a) the Class A Percentage and (b) the contract pool principal
balance as of the last day of the collection period immediately preceding the
payment date.
The CLASS A PRINCIPAL PAYMENT AMOUNT is the sum of the Class A Base
Principal Payment Amount plus the Class A Principal Shortfall Amount.
The CLASS A PRINCIPAL SHORTFALL AMOUNT means, for any payment date
that is the stated maturity date for a class of Class A Notes and any subsequent
payment date until that class' principal amount is zero, the excess of (a) sum
of the principal amount of that class, plus, until the Class A-4 principal
amount has been reduced to zero, _______% of the Total Principal Payment Amount,
over (b) the Total Principal Payment Amount.
The CLASS B FLOOR for any payment date will equal:
(1) ______% of the initial contract pool principal balance, plus
(2) the Unfunded Loss Amount, if any, for that payment date, minus,
(3) the sum of the Class C principal amount, and the Class D principal
amount, prior to giving effect to any payments of principal on the Class C or D
Notes on that payment date, and the amount on deposit in the cash collateral
account after giving effect to withdrawals to be made on the payment date.
However, the Class B Floor may not be greater than the Class B principal amount
or less than zero.
The CLASS B PERCENTAGE will be approximately ________%.
The CLASS B PRINCIPAL PAYMENT AMOUNT will equal
(1) zero until the payment date on which the Class A-1 principal
amount equals zero; and
(2) for any subsequent payment date the excess, if any, of:
(a) the Class B principal amount over
(b) the greater of
(x) the Class B Target Principal Amount and
(y) the Class B Floor.
However, the Class B Principal Payment Amount may not exceed the Class
B principal amount.
The CLASS B TARGET PRINCIPAL AMOUNT for any payment date will be the
product of (a) the Class B Percentage and (b) the contract pool principal
balance as of the last day of the collection period immediately preceding the
payment date.
The CLASS C FLOOR for any payment date will equal:
(1) ______% of the initial contract pool principal balance, plus
(2) the Unfunded Loss Amount, if any, for the payment date, minus
(3) the sum of the Class D principal amount, prior to giving effect to
any payments of principal on the Class D Notes on the payment date, and the
amount on deposit in the cash collateral account after giving effect to
withdrawals to be made on the payment date.
However, the Class C Floor may not be greater than the Class C principal amount
or less than zero. Furthermore, if the Class B principal amount immediately
prior to any payment date is less than or equal to the Class B Floor for that
payment date, the Class C Floor for that payment date will equal the Class C
principal amount immediately prior to that payment date.
The CLASS C PERCENTAGE will be approximately _______%.
The CLASS C PRINCIPAL PAYMENT AMOUNT will equal
(1) zero until the payment date on which the Class A-1 principal
amount equals zero; and
(2) for any subsequent payment date, the excess, if any, of:
(a) the Class C principal amount over
(b) the greater of
(x) the Class C Target Principal Amount and
(y) the Class C Floor.
However, the Class C Principal Payment Amount may not exceed the Class
C principal amount.
The CLASS C TARGET PRINCIPAL AMOUNT for any payment date will be the
product of (a) the Class C Percentage and (b) the contract pool principal
balance as of the last day of the collection period immediately preceding the
payment date.
The CLASS D FLOOR for any payment date will equal:
(1) _______% of the initial contract pool principal balance, plus
(2) the Unfunded Loss Amount, if any, for the payment date, minus,
(3) the amount on deposit in the cash collateral account after giving
effect to withdrawals to be made on the payment date.
However, the Class D Floor may not be greater than the Class D principal amount
or less than zero. Furthermore, if the Class C principal amount on any payment
date is less than or equal to the Class C Floor on that payment date, the Class
D Floor for that payment date will equal the Class D principal amount
immediately prior to that payment date.
The CLASS D PERCENTAGE will be approximately _______%.
The CLASS D PRINCIPAL PAYMENT AMOUNT will equal:
(1) zero until the payment date on which the Class A-1 principal
amount equals zero; and
(2) for any subsequent payment date, the excess, if any, of:
(a) the Class D principal amount minus
(b) the greater of
(x) the Class D Target Principal Amount and
(y) the Class D Floor.
However, Class D Principal Payment Amount may not exceed the Class D
principal balance.
The CLASS D TARGET PRINCIPAL AMOUNT for any payment date will be the
product of (a) the Class D Percentage and (b) the contract pool principal
balance as of the last day of the collection period immediately preceding the
payment date.
The COLLECTION PERIOD for any payment date is the calendar month
preceding the month in which the payment date occurs.
A DEFAULTED CONTRACT as to any collection period is any contract:
(a) which the servicer has determined is uncollectible in accordance
with its credit and collection policies and procedures,
(b) as to which during the collection period 10% or more of a
scheduled payment shall have become delinquent 180 days or more, or
(c) as to which the end-user has suffered an insolvency event.
PLEDGED REVENUES means the sum of
o all scheduled payments on the contracts received on or after the
cut-off date;
o any prepayment received on the contracts on or after the cut-off
date;
o the purchase amount of any contracts purchased by the seller;
o the amount paid by the depositor to purchase the contracts under
its option to purchase all contracts when the aggregate principal
amount of the notes is less than 10% of the initial contract pool
principal balance;
o the liquidation proceeds received in respect of any contracts;
and
o any earnings on the investment of amounts credited to the
collection account or the note distribution account.
However, Pledged Revenues shall not include any amounts received with
respect to any residual value of leased equipment except to the extent
guaranteed by a vendor or end-user.
PRINCIPAL AMOUNT means, when used with respect to a class of notes,
the initial principal balance of the class set forth on the cover page of this
prospectus supplement, less the sum of all distributions previously made to the
class and all amounts held on deposit for payment to that class in respect of
principal.
The REALLOCATED PRINCIPAL for any payment date will equal the excess,
if any, of (1) the Total Principal Payment Amount, over (2) the sum of the Class
A Principal Payment Amount, the Class B Principal Payment Amount, the Class C
Principal Payment Amount and the Class D Principal Payment Amount.
The RELATED COLLECTION PERIOD PLEDGED REVENUE means as to any payment
date, the amount of Pledged Revenues in the collection account as of the
business day preceding the payment date which were received by the depositor
during the related collection period, including all liquidation proceeds as to
Defaulted Contracts, but not including the residual value of leased equipment
except to the extent guaranteed by a vendor or end-user.
The REQUIRED PAYOFF AMOUNT as to a collection period for any contract
is the sum of
(1) the scheduled payment due in that collection period plus any
scheduled payments not received that were due in prior collection
periods and
(2) the contract principal balance determined as if the scheduled
payment due in that collection period had been received.
The TOTAL PRINCIPAL PAYMENT AMOUNT for any payment date is the excess
of (x) the aggregate note principal amount immediately prior to that payment
date over (y) the contract pool principal balance as of the last day of the
collection period immediately preceding the payment date. For this purpose, the
contract pool principal balance will be deemed to be zero on any payment date on
which the contract pool principal balance is less than $10,000,000. The contract
principal balance of any contract which became a defaulted contract during a
given collection period or which was a contract subject to a warranty claim
which the depositor was obligated to purchase as of the end of a given
collection period will, for purposes of computing the Total Principal Payment
Amount and the requisite amount for the cash collateral account, be deemed to be
zero on and after the last day of the collection period.
The UNFUNDED LOSS AMOUNT for any payment date will equal any excess
of:
(a) the remainder of
(1) the aggregate note principal amount, prior to giving
effect to the payment of principal on the notes on the
payment date, minus
(2) the lesser of
(A) the contract pool principal balance as of the
last day of the collection period immediately
preceding the preceding payment date, minus the
contract pool principal balance as of the last
day of the collection period immediately
preceding the payment date, or
(B) the Related Collection Period Pledged Revenue
remaining after payment of amounts owing to the
servicer and note interest on the payment date
plus any withdrawal from the cash collateral
account for payment of note principal on the
payment date,
over
(b) the Required Payoff Amount for all contracts as of the end
of the related collection period.
CLASS A-3 SWAP AGREEMENT
The owner trust will enter into a swap agreement with
________________________as swap counterparty for the sole benefit of the Class
A-3 Notes. Under the swap agreement, the swap counterparty's payments will be
calculated at the Class A-3 Note interest rate and the owner trust's payments
will be calculated at an assumed fixed rate of ______%. To the extent that on
any payment date interest calculated at the Class A-3 Note interest rate exceeds
interest calculated at the assumed fixed rate:
o the swap counterparty will be obligated to pay an amount
equal to the excess to the owner trust,
o the payment will constitute a portion of the Available
Pledged Revenues, but only in respect of the Class A-3
Notes, and
o the Class A-3 Notes will be dependent upon the payment for
receipt of the interest to the extent of the excess.
Likewise, under the swap agreement to the extent that interest calculated at the
assumed fixed rate exceeds interest calculated at the Class A-3 Note interest
rate,
o the owner trust will be obligated to pay an amount equal to
the excess to the swap counterparty, and
o the payment will have the same priority, in terms of
application of the Available Pledged Revenues, as payment of
interest on the Class A-3 Notes.
Any shortfall in the payment of interest on the Class A-3 Notes due
entirely to the failure of the swap counterparty to make a required payment
under the swap agreement will not constitute an event of default under the
indenture. Except to the extent the amount available on any payment date exceeds
the amount necessary to pay the servicing fee, all interest and principal
payable on the notes, with Class A-3 Note interest being calculated at the
assumed fixed rate for this purpose, and all amounts payable in connection with
the cash collateral account, no amounts in addition to those available under the
swap agreement will be available under the indenture to make up the shortfall.
The only remedies in these circumstances will be those available to the owner
trust under the swap agreement.
As a general matter, the obligations of the swap counterparty under
the swap agreement are unsecured. However, if the swap counterparty's long-term
unsecured senior debt ceases to be rated at a level acceptable to ______________
and _____________, the swap counterparty will be obligated either to (a) post
collateral or establish other arrangements to secure its obligations under the
swap agreement or (b) arrange for a substitute swap counterparty to assume the
rights and obligations of the swap counterparty under the swap agreement, in
either case so that the ratings of the notes are maintained or, if applicable,
restored to their level immediately prior to the downgrading or withdrawal of
the swap counterparty's debt. If the swap counterparty fails to take either of
these actions, the owner trust will be entitled to terminate the swap agreement
and to claim from the swap counterparty the cost of obtaining a replacement swap
agreement from a swap counterparty satisfactory to the note rating agencies. The
Class A-3 noteholders bear the risk of any failure by the swap counterparty to
take the actions required of it and the risk of any inability of the owner trust
to obtain a replacement swap agreement.
The swap counterparty currently has an "______" long-term unsecured
senior debt credit rating from _________ and an "______" long-term unsecured
senior debt credit rating from ________.
OPTIONAL PURCHASE OF CLASS A-5 NOTES
The depositor may purchase all of the Class A-5 Notes, on any payment
date. The purchase price shall be equal to the Class A-5 principal amount plus a
premium equal to the excess, discounted as described below, of (1) the scheduled
future interest payments on the Class A-5 Notes, over (2) the interest that
would have accrued on the Class A-5 Notes over the same period at a per annum
rate of interest equal to _____% plus the bond equivalent yield to maturity on
the fifth business day preceding that payment date on a United States Treasury
security maturing on a date closest to the end of the remaining weighted average
life of the Class A-5 Notes. That excess shall be discounted to present value to
the payment date at the yield described in clause (2) above. For purposes of
this paragraph only, the depositor will determine (1) the Class A-5 principal
amount upon which interest will be deemed to accrue, and (2) the weighted
average remaining life of the Class A-5 Notes, based upon the amortization of
the contract pool principal balance remaining at the payment date at a
conditional prepayment rate of _____%. The depositor will pay the holders of
record on the related record date interest payable on the Class A-5 Notes on the
payment date in the ordinary manner. Following purchase, the owner trust will
not retire the Class A-5 Notes, but will, after the authentication and issuance
of replacement notes to the depositor, continue to treat them as being entitled
to interest and principal payments on each payment date in the manner described
above. Following the giving of proper notice of purchase, all holders of Class
A-5 Notes must surrender them for purchase on the relevant purchase date.
Effective on the purchase date, the owner trust will not treat the former
holders of the Class A-5 Notes as the holders of the notes except for purposes
of their right to be paid the purchase price.
CASH COLLATERAL ACCOUNT
The indenture trustee will establish the cash collateral account on or
prior to the closing date. It will be available to the indenture trustee for the
benefit of the noteholders. The depositor will initially fund the cash
collateral account in the amount of $_______ (______% of initial contract pool
principal balance), which may include proceeds of loans from third party lenders
to the owner trust under a cash collateral account loan agreement. Available
amounts on deposit from time to time in the cash collateral account shall be
used to fund the amounts specified below in the following order of priority to
the extent that amounts on deposit in the collection account, after payment of
servicer fees and advances, as of any deposit date are insufficient:
(1) to pay interest on the notes in the order of priority
described under "DISTRIBUTIONS" above;
(2) to pay any principal deficiency amount, which is equal to
the lesser of:
(a) the aggregate Liquidation Losses on all contracts that
became Defaulted Contracts during the related
collection period, or
(b) the excess, if any, of
(A) the aggregate principal amount of the notes,
after giving effect to all distributions of
principal from Available Pledged Revenues on the
payment date, over
(B) the aggregate of the Required Payoff Amounts for
all contracts as of the last day of the related
collection period; and
(3) to pay principal on the notes at the applicable stated
maturity dates and on the first payment date on which the
contract pool principal balance is less than $10,000,000.
Liquidation Loss means, as to any Defaulted Contract, the excess, if
any, of
(1) the required payoff amount of the contract for the
collection period during which the contract became a
Defaulted Contract, over
(2) that portion of the liquidation proceeds for the Defaulted
Contract allocated to the owner trust, as described under
"DESCRIPTION OF THE NOTES AND INDENTURE--LIQUIDATION
PROCEEDS" in the accompanying prospectus.
To the extent that the amount on deposit in the cash collateral
account as of any payment date is less than the required amount, the servicer is
to restore this deficiency from the remaining amount available in the collection
account, after payment of any servicer advances, the servicing fee, interest and
principal on the notes and amounts due to the swap counterparty under the swap
agreement, as described under "DISTRIBUTIONS" above.
The required amount of the cash collateral account will be
(1) for any payment date on or prior to the payment date
occurring in _____ ____, $________ (______% of the initial
contract pool principal balance), and
(2) for any payment date after that, the greater of
(a) the sum of
(1) ______% of the contract pool principal balance
for the payment date, plus
(2) the excess, if any, of
(A) the sum of the principal amounts of the
notes, after giving effect to all
distributions of principal on the
payment date, over
(B) the contract pool principal balance for
the payment date, and
(b) $________ (______% of the initial contract pool
principal balance).
However, in no event will the requisite amount exceed the sum of the
principal amounts of the notes.
The servicer or the indenture trustee acting at the direction of the
servicer will release any amount on deposit in the cash collateral account in
excess of the required amount and all investment earnings on funds in the cash
collateral account. The indenture trustee will pay these amounts to or upon the
servicer's order, and they will not be available to make payments on the notes.
The cash collateral account must be maintained with a qualified
institution. Funds on deposit in the cash collateral account will be invested in
eligible investments, as defined under "DESCRIPTION OF THE NOTES AND
INDENTURE--TRUST ACCOUNTS" in the accompanying prospectus.
OPTIONAL PURCHASE OF CONTRACTS AND REDEMPTION OF NOTES
The seller may purchase all of the contracts on any payment date
following the date on which the aggregate note principal amount at the time is
less than 10% of the initial contract pool principal balance. The purchase price
that the seller would pay in connection with a purchase shall be the sum of the
o unpaid servicer fees and advances,
o remaining principal amount of the notes, together with
accrued interest calculated at the swap agreement assumed
fixed rate in the case of the Class A-3 Notes,
o unreimbursed servicer advances and unpaid servicer fees, and
o any other amounts payable at the time from Available Pledged
Revenues, minus
o available amounts on deposit in the collection account.
If the seller does purchase the contracts, the notes shall be redeemed
on the payment date on which the purchase occurs. The redemption price will be
the principal amount of the notes redeemed plus accrued and unpaid interest on
the principal amount of each class of notes to but excluding the redemption
date.
REPORTS TO NOTEHOLDERS
The servicer will furnish to the indenture trustee, and the indenture
trustee will include with each distribution, a statement in respect of the
related payment date. The statement shall set forth, among other things, all
information necessary to enable the indenture trustee to make the distribution
required for the notes and to reconcile all deposits to and withdrawals from
accounts. See "DESCRIPTION OF THE NOTES AND INDENTURE--REPORTS TO NOTEHOLDERS"
in the accompanying prospectus. You will not receive reports directly from the
indenture trustee. The servicer will file the reports with the Securities and
Exchange Commission. However, in accordance with the Securities Exchange Act of
1934 and the rules and regulations of the Securities and Exchange Commission,
the owner trust expects that its obligation to file these reports will be
terminated at the end of _______.
SERVICING
The servicer will be responsible for
o managing,
o administering,
o servicing and
o making collections
on the contracts. Compensation to the servicer will include
(1) a monthly servicing fee, which will be payable to the
servicer from the amount available on each payment date, in
an amount equal to the product of one-twelfth of one percent
per annum multiplied by the contract pool principal balance
determined as of the first day of the related collection
period;
(2) any late fees, late payment interest, documentation fees,
insurance administration charges, extension fees and other
administrative charges, collectively, the administrative
fees, collected with respect to the contracts during the
related collection period; and
(3) any investment earnings on collections prior to their
deposit in the collection account.
The indenture trustee may terminate the servicer as servicer under
some circumstances, in which event the indenture trustee would appoint a
successor servicer to service the contracts. See "DESCRIPTION OF THE POOLING AND
SERVICING AGREEMENTS--SERVICING--EVENTS OF TERMINATION" in the accompanying
prospectus.
THE INDENTURE TRUSTEE
____________ will serve as the indenture trustee. The indenture
trustee may resign at any time, in which event the owner trust will be obligated
to appoint a successor trustee. The owner trust may also remove the indenture
trustee if
(1) the indenture trustee ceases to be eligible to continue as
indenture trustee under the indenture,
(2) a bankruptcy proceeding results in the event of relief or
appointment of a receiver as to the indenture trustee,
(3) the indenture trustee commences bankruptcy or similar
proceedings or
(4) the indenture trustee becomes incapable of acting.
Any resignation or removal of the indenture trustee and appointment of a
successor trustee will not become effective until acceptance of the appointment
by a successor trustee.
REPRESENTATION AND WARRANTIES
The seller will make representations and warranties with respect to
the contracts as described in the accompanying prospectus under "THE
CONTRACTS--REPRESENTATIONS AND WARRANTIES MADE BY THE SELLER."
On the date that the depositor adds a substitute contract to the
contract pool, the seller and the depositor will make the same representations
and warranties as if the transfer occurred on the closing date. However, for
these purposes (a) the contract pool on the closing date shall be deemed to
include the substitute contract in lieu of the contract being replaced or
substituted and (b) the contract principal balance of the substitute contract
shall be equal to or greater than the contract principal balance of the contract
being replaced or substituted as of the related cut-off date.
The owner trust shall reassign to the depositor, and the seller will
be obligated to purchase from the depositor, any contract transferred by the
owner trust at any time there is a breach of any of these representations or
warranties. However, the cure of the breach in all material respects, or the
waiver of the breach, will be an adequate remedy. This purchase shall occur no
later than the second deposit date after the servicer becomes aware, or receives
written notice, of the breach. The "deposit date" means the business day
preceding a payment date. This purchase obligation will constitute the sole
remedy against the depositor and the seller available to the owner trust, the
indenture trustee and the noteholders or equity certificateholder for a breach
of these representations or warranties.
Under the pooling and servicing agreement, a contract transferred by
the owner trust shall be reassigned to the seller and the seller shall make a
deposit in the collection account in immediately available funds in an amount
equal to the contract principal balance of the contract. Any amount the seller
deposits into the collection account in connection with the reassignment of a
contract transferred by the owner trust shall be considered payment in full of
the ineligible contract. This amount shall be treated as Available Pledged
Revenues. In the alternative, the seller may cause the depositor to convey to
the owner trust a substitute contract satisfying the terms and conditions
applicable to substitute contracts in replacement for the affected contract. The
affected contract shall be deemed released by the owner trust and indenture
trustee and reconveyed to the depositor and by the depositor to the seller.
INDEMNIFICATION
The pooling and servicing agreement provides that the servicer will
indemnify
o the depositor,
o the sponsor,
o the owner trust,
o the owner trustee,
o the indenture trustee,
o the holder of the equity certificate and o the noteholders
from and against any loss or injury sustained from third party claims resulting
from acts or omissions of the servicer with respect to trust assets or any duty
or obligations of the servicer under the agreement, except where the claims
result from willful misconduct, gross negligence or bad faith of the indemnified
person.
AMENDMENTS
When the pooling and servicing agreement and the indenture may be
amended only with the consent of the required majority of the noteholders, see
"DESCRIPTION OF THE NOTES AND INDENTURES--MODIFICATION OF INDENTURE WITH
NOTEHOLDER CONSENT" and "DESCRIPTION OF THE POOLING AND SERVICING
AGREEMENTS--AMENDMENT," the required majority means 66 2/3% of the principal
amount of the Class A Notes until paid in full, then of the Class B Notes until
paid in full, then of the Class C Notes until paid in full and then of the Class
D Notes.
The parties may amend the cash collateral account loan agreement
without noteholder consent to cure any ambiguity or inconsistency or to address
any other matter but only if the amendment will not adversely affect the
noteholders. The parties may also amend the cash collateral account loan
agreement in any other manner with the consent of the required majority of
noteholders determined as provided above. However, without the consent of all
noteholders, no amendment may reduce the amount available in the cash collateral
account for the payment of interest or principal on notes or reduce the
noteholder consent required for any amendment.
The parties may amend the swap agreement without noteholder consent to
cure any ambiguity or inconsistency or to address any other matter but only if
the amendment will not adversely affect the Class A-3 noteholders. The parties
may also amend the swap agreement in any other manner with the consent of at
least 66 2/3% of the principal amount of the Class A-3 Notes. However, without
the consent of all Class A-3 noteholders, no amendment may reduce the amount
available under the swap agreement for paying Class A-3 Note interest or reduce
the Class A-3 noteholder consent required for any amendment. Also, without the
consent of the swap counterparty, the parties may not amend the pooling and
servicing agreement so as to adversely affect the priority of payments from the
owner trust to the swap counterparty under the swap agreement.
Also, any amendment of the cash collateral account loan agreement or
the swap agreement requiring noteholder approval will not be effective unless
each rating agency confirms that the amendment will not result in a reduction,
qualification or withdrawal of the ratings on the relevant notes.
<PAGE>
RATINGS OF THE NOTES
It is a condition of issuance that each of _______________ and
_______________-.
o rate the Class A-1 Notes [in its highest short-term rating
category],
o rate the Class A-2, Class A-3, Class A-4 and Class A-5 Notes
in its highest long-term rating category,
o rate the Class B Notes at least ________ and _____,
respectively,
o rate the Class C Notes at least _____, _____and _____,
respectively, and
o rate the Class D Notes at least ______, _____ and _____,
respectively.
The ratings address the likelihood of the timely receipt of interest
and payment of principal on each class of notes on or before the stated maturity
date for the class. The ratings will be based primarily upon the Available
Pledged Revenues, the cash collateral account and the subordination provided by
o the Subordinate Classes, in the case of the Class A Notes,
o the Class C and Class D Notes, in the case of the Class B
Notes and
o the Class D Notes, in the case of the Class C Notes.
There is no assurance that any rating will not be lowered or withdrawn
by the assigning rating agency. In the event that ratings with respect to the
notes are qualified, reduced or withdrawn, no person or entity will be obligated
to provide any additional credit enhancement with respect to the notes.
The ratings should be evaluated independently from similar ratings on
other types of securities. A rating is not a recommendation to buy, sell or hold
notes, inasmuch as these ratings do not comment as to market price or
suitability for a particular investor. The ratings do not address the likelihood
of payment of principal on any class of notes prior to the stated maturity date
or the possibility of the imposition of United States withholding tax with
respect to non-United States Persons.
The term "United States Person" means
(1) a citizen or resident of the United States,
(2) a corporation or partnership organized in or under the laws
of the United States or any political subdivision of the
United States,
(3) an estate the income of which is includable in gross income
for United States federal income tax purposes, regardless of
its source, or
(4) a trust,
(A) with respect to which a court within the United
States is able to exercise primary supervision over its
administration, and one or more United States fiduciaries
have the authority to control all of its substantial
decisions, or
(B) otherwise, the income of which is subject to U.S.
federal income tax regardless of its source.
USE OF PROCEEDS
The owner trust will use the proceeds from the sale of notes, after
paying funds into the cash collateral account and paying expenses, to pay the
purchase price for the contracts to the depositor. The depositor will use the
proceeds to pay amounts owed to another trust for the acquisition of contracts
from the trust. The trust from which the owner trust acquired contracts will use
the proceeds it receives to pay down a warehouse receivables securitization
facility.
LEGAL PROCEEDINGS
None of
o the depositor,
o the sponsor,
o the servicer,
o the originators,
o the seller or
o the owner trust
are parties to any legal proceedings which could have a material adverse impact
on noteholders' interests in notes or the owner trust's assets.
PLAN OF DISTRIBUTION
Under the terms of an underwriting agreement dated ______, ________,
the underwriters have severally agreed to purchase the following respective
initial principal amounts of notes at the respective public offering prices less
the respective underwriting discounts shown on the cover page of this prospectus
supplement:
<TABLE>
<CAPTION>
INITIAL INITIAL INITIAL INITIAL INITIAL
PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL
AMOUNT OF AMOUNT OF AMOUNT OF AMOUNT OF AMOUNT OF
UNDERWRITER CLASS A-1 NOTES CLASS A-2 NOTES CLASS A-3 NOTES CLASS A-4 NOTES CLASS A-5
----------- --------------- --------------- --------------- --------------- ---------
NOTES
-----
<S> <C> <C> <C> <C> <C>
Credit Suisse First Boston
Corporation
------------
</TABLE>
<TABLE>
<CAPTION>
INITIAL INITIAL INITIAL
PRINCIPAL PRINCIPAL PRINCIPAL
AMOUNT OF AMOUNT OF AMOUNT OF
UNDERWRITER CLASS B NOTES CLASS C NOTES CLASS D NOTES
------------- -------------- --------------- ----------------
<S> <C> <C> <C>
Credit Suisse First Boston
Corporation
---------
</TABLE>
In the underwriting agreement, the underwriters have agreed to
purchase all of the notes being offered, if any of the notes are purchased. The
underwriters have advised the sponsor that they propose initially to offer the
notes to the public at the respective public offering prices shown on the cover
page of this prospectus supplement, and to dealers at that price, less a
concession not in excess of the amount noted in the table below. The
underwriters may allow and the dealers may reallow to other dealers a discount
not in excess of the amount noted in the table below.
DEALER DEALER
CONCESSION DISCOUNT
CLASS OF NOTE NOT TO EXCEED NOT TO EXCEED
A-1
A-2
A-3
A-4
A-5
B
C
D
After the notes are released for sale to the public, the offering
prices and other selling terms may be varied by the underwriters.
In connection with the offering of the notes, Credit Suisse First
Boston Corporation, on behalf of the underwriters, may engage in overallotment,
stabilizing transactions and syndicate covering transactions in accordance with
Regulation M under the Securities Exchange Act of 1934. Overallotment involves
sales in excess of the offering size, which creates a short position for the
underwriters. Stabilizing transactions involve bids to purchase the notes in the
open markets for the purpose of pegging, fixing or maintaining the price of the
notes. Syndicate covering transactions involve purchases of notes in the open
market after the distribution has been completed in order to cover short
positions. Stabilizing and syndicate covering transactions may cause the price
of the notes to be higher than it would otherwise be in the absence of those
transactions. If Credit Suisse First Boston Corporation, on behalf of the
Underwriters, engages in stabilizing or syndicate covering transactions, it may
discontinue them at any time.
The sponsor, the depositor and some of its affiliates have agreed to
indemnify the underwriters against some liabilities in connection with the sale
of notes, including liabilities under the Securities Act of 1933, as amended.
The notes are new issues of securities with no established trading
market. The underwriters have advised the sponsor that the underwriters intend
to make a market in the notes but are not obligated to do so and may discontinue
market making at any time without notice. No assurance can be given as to the
liquidity of the trading market for the notes.
The sponsor has estimated that it will spend approximately
$___________ for printing, rating agency, trustee and legal fees and other
expenses related to the offering.
The sponsor in an affiliate of Credit Suisse First Boston Corporation.
LEGAL MATTERS
Stroock & Stroock & Lavan LLP, has provided a legal opinion relating
to the notes in its capacity as special counsel to the owner trust, the
Underwriters and the sponsor. Other legal matters for the underwriters will be
passed upon by ___________________. The indenture, the pooling and servicing
agreement, the trust agreement and the notes will be governed by the laws of the
State of New York.
<PAGE>
INDEX OF DEFINED TERMS
Available Pledged Revenues................................................S-36
Class A Base Principal Payment Amount.....................................S-43
Class A Percentage........................................................S-43
Class A Principal Payment Amount..........................................S-44
Class A Principal Shortfall Amount........................................S-44
Class B Floor.............................................................S-44
Class B Percentage........................................................S-44
Class B Principal Payment Amount..........................................S-44
Class B Target Principal Amount...........................................S-44
Class C Floor.............................................................S-44
Class C Percentage........................................................S-45
Class C Principal Payment Amount..........................................S-45
Class C Target Principal Amount...........................................S-45
Class D Floor.............................................................S-45
Class D Percentage........................................................S-45
Class D Principal Payment Amount..........................................S-45
Class D Target Principal Amount...........................................S-46
collection period.........................................................S-10
contract pool principal balance...........................................S-10
contract principal balance................................................S-10
CPR.......................................................................S-26
Defaulted Contract........................................................S-46
delinquency...............................................................S-14
deposit date..............................................................S-50
LIBOR Determination Date..................................................S-38
Liquidation Loss..........................................................S-50
One-Month LIBOR...........................................................S-38
Pledged Revenues..........................................................S-46
principal amount..........................................................S-46
principal deficiency amount...............................................S-50
Reallocated Principal.....................................................S-46
Reference Banks...........................................................S-38
Related Collection Period Pledged Revenue.................................S-47
Required Payoff Amount....................................................S-47
Subordinate Classes.......................................................S-35
Telerate Page 3750........................................................S-38
Total Principal Payment Amount............................................S-47
Unfunded Loss Amount......................................................S-47
United States Person......................................................S-56
<PAGE>
PROSPECTUS
-----------
ASSET BACKED SECURITIES CORPORATION
SPONSOR
EQUIPMENT RECEIVABLE-BACKED NOTES
(ISSUABLE IN SERIES)
The sponsor will form an owner trust for each series of notes. Each owner trust
will offer equipment receivable-backed notes under this prospectus and a
prospectus supplement. The prospectus supplement will be prepared separately for
each series of notes. Each series may include one or more classes of notes.
Each owner trust will use the note sale proceeds to acquire a pool of contracts
from the depositor specified in your prospectus supplement.
The right of each class of notes to receive payments may be senior or
subordinate to the rights of one or more of the other classes of notes. The rate
of payment on the notes of any class will depend on the priority of payment of
the class and the rate and timing of payments of the related contracts.
THE NOTES OF EACH SERIES WILL BE OBLIGATIONS OF THE RELATED OWNER TRUST ONLY.
------------------
CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE __ OF THIS PROSPECTUS AND
THE OTHER RISK FACTORS INCLUDED IN THE ACCOMPANYING PROSPECTUS SUPPLEMENT.
------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------
This prospectus may not be used to consummate sales of notes unless accompanied
by the prospectus supplement relating to the notes.
------------------
CREDIT SUISSE FIRST BOSTON
Prospectus dated ----------, ------.
<PAGE>
TABLE OF CONTENTS
PAGE
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS PROSPECTUS AND THE
ACCOMPANYING PROSPECTUS SUPPLEMENT..................................1
RISK FACTORS.............................................................2
The Absence of an Existing Market for the Notes May Limit Your Ability to
Resell the Notes....................................................2
Contract Prepayment, Ineligibility or Default May Cause Earlier Repayments
of the Notes than You Expect and You May Not Be Able To Find
Investments with the Same Yield as the Notes at the Time of the
Repayment...........................................................2
The Price at Which You Can Resell Your Notes May Decrease if the Ratings
of Your Notes Change................................................3
The Subordination of Some Classes of Notes is Only a Limited Form of
Credit Enhancement and Does Not Ensure Payment of the More Senior
Classes 3 Limited Assets are Available for Payment of the Notes;
Noteholders Will Have No Recourse to the Originators, Depositor,
Servicer or their Affiliates in the Event Delinquencies and Losses
Reduce the Trust's
Assets..............................................................4
Even if an Owner Trust Repossesses and Sells the Equipment Relating to a
Contract After an Obligor Defaults, Shortfalls in Amounts Available To
Pay the Notes May Occur if the Market Value of the Equipment Has
Declined............................................................4
Not Having Possession of Contract Files May Hinder an Owner Trust's
Ability to Realize the Value of Equipment Securing the Contracts....4
Failure to Take all Steps Necessary to Perfect Security Interests in
Equipment, to Record Assignment of Security Interests to the Owner
Trust or to Record Security Interests in Titled Equipment May Hinder
the Owner Trust's Ability to Realize the Value of Equipment Securing
the Contracts.......................................................6
Repurchase Obligation of the Seller Provides You Only Limited Protection
Against Prior Liens on the Contracts or Equipment...................6
If a Bankruptcy Court Rules that the Transfer of Contracts from a Vendor
to an Originator was not a True Sale then Payments on the Contracts
may be Reduced or Delayed...........................................7
A Bankruptcy Court Determination that the Transfer of Contracts from
Originators to the Seller, from the Seller to the Depositor or from
the Depositor to the Owner Trust was not a True Sale then Payments on
the Contracts Could be Reduced or Delayed...........................7
Insolvency of the Vendors Could Delay or Reduce Payments to You..........8
End-User Bankruptcy May Reduce or Delay Collections on the Contracts, and
Disposition of Equipment Relating to These or Other Defaulting
End-Users May be Delayed or May not Result in Complete Recovery of
Amounts Due.........................................................8
Commingling of Collections Could Result in Reduced Payments to
You.................................................................9
Bankruptcy of Depositor or the Owner Trust May Cause Delays in or Reduce
Collections Under the Contracts.....................................9
The Seller's Obligation to Repurchase Contacts Could be Impaired by
Bankruptcy..........................................................9
Contracts Relating to Software or Related Support and Consulting Services
are not Secured by the Software or Related Services................10
Limitations on Enforceability of Security Interests in the Equipment May
Hinder the Owner Trust's Ability to Realize the Value of Equipment
Securing the Contracts.............................................11
Bankruptcy Court Rejection of "True Leases" May Reduce Funds Available to
Pay Notes..........................................................11
THE SPONSOR..................................................................12
THE DEPOSITOR................................................................12
THE OWNER TRUSTS.............................................................12
THE ORIGINATORS, THE SELLER AND THE SERVICER.................................14
THE CONTRACTS................................................................14
DESCRIPTION OF THE NOTES AND INDENTURE.......................................35
DESCRIPTION OF THE POOLING AND SERVICING AGREEMENTS..........................49
CERTAIN LEGAL MATTERS AFFECTING THE CONTRACTS................................55
MATERIAL FEDERAL INCOME TAX CONSEQUENCES.....................................57
ERISA CONSIDERATIONS.........................................................65
RATINGS OF THE NOTES.........................................................67
USE OF PROCEEDS..............................................................67
PLAN OF DISTRIBUTION.........................................................67
LEGAL MATTERS................................................................68
WHERE YOU CAN FIND MORE INFORMATION..........................................69
INDEX OF TERMS...............................................................70
<PAGE>
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS
PROSPECTUS AND THE ACCOMPANYING PROSPECTUS SUPPLEMENT
The sponsor tells you about the notes in two separate documents:
o this prospectus, which provides general information, some of
which may not apply to a particular series of notes, including
your series of notes; and
o the prospectus supplement related to the particular terms of your
series of notes.
SOME PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR IN SOME WAY AFFECT THE PRICE OF THE NOTES. THESE
TYPES OF TRANSACTIONS MAY INCLUDE STABILIZING, THE PURCHASE OF NOTES TO COVER
SYNDICATE SHORT POSITIONS AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION
OF THESE ACTIVITIES, PLEASE READ THE SECTION ENTITLED "PLAN OF DISTRIBUTION" IN
YOUR PROSPECTUS SUPPLEMENT.
RISK FACTORS
You should carefully consider the following risk factors and
additional risk factors listed in your prospectus supplement before you invest
in the notes.
THE ABSENCE OF AN EXISTING MARKET FOR THE NOTES MAY LIMIT YOUR ABILITY TO RESELL
THE NOTES
There is currently no public market for the notes and the sponsor
cannot assure you that one will develop. Thus, you may not be able to resell
your notes at all, or may be able to do so only at a substantial discount. The
underwriters may assist in resales of the notes but they are not obligated to do
so. The sponsor does not intend to apply for listing of the notes on any
securities exchange or for the inclusion of the notes on any automated quotation
system. Even if a secondary market does develop, it may not continue.
CONTRACT PREPAYMENT, INELIGIBILITY OR DEFAULT MAY CAUSE EARLIER REPAYMENTS OF
THE NOTES THAN YOU EXPECT AND YOU MAY NOT BE ABLE TO FIND INVESTMENTS WITH THE
SAME YIELD AS THE NOTES AT THE TIME OF THE REPAYMENT
A higher than anticipated level of prepayments or liquidation of
contracts that become defaulted may cause an owner trust to pay principal on the
notes sooner than you expected. Also, an owner trust may pay principal sooner
than you expected if the depositor or a seller repurchases ineligible contracts.
Similarly, upon the occurrence of an event of default under the indenture, you
may receive principal of the notes sooner than you expected. See "DESCRIPTION OF
THE NOTES AND INDENTURE-- EVENTS OF DEFAULT; RIGHTS UPON EVENT OF DEFAULT." You
may not be able to reinvest those distributions of principal at yields
equivalent to the yield on the notes; therefore, the ultimate return you receive
on your investment in the notes may be less than the return you expected on the
notes.
The rate of early terminations or repurchases of contracts due to
prepayments ineligibility, or defaults is influenced by various factors
including:
o technological change;
o changes in customer requirements;
o the level of interest rates;
o the level of casualty losses; and
o the overall economic environment.
Unless otherwise set forth in your prospectus supplement, under the
pooling and servicing agreement, the servicer may allow an obligor to prepay a
contract at any time if the payment, alone, or together with the contract's
remaining contract principal balance and any scheduled payment owed and not yet
received, is equal to the entire contract principal balance of the contract. The
principal balance of a contract is the present value of the future scheduled
payments under the contract, discounted at a discount rate that will be
specified in the prospectus supplement for your notes.
The sponsor cannot predict the actual rate of prepayments which will
be experienced on the contracts. However, your prospectus supplement will
present information as to the principal balances of the notes remaining at
various times under several hypothetical prepayment rates. See "WEIGHTED AVERAGE
LIFE OF THE NOTES" in your prospectus supplement.
THE PRICE AT WHICH YOU CAN RESELL YOUR NOTES MAY DECREASE IF THE RATINGS OF YOUR
NOTES CHANGE
At any time, the rating agencies may lower their respective ratings of
the notes or withdraw their ratings entirely. In the event that a rating
assigned to any note is subsequently lowered or withdrawn for any reason, you
may not be able to resell your notes or to resell them without a substantial
discount. For more detailed information regarding the ratings assigned to any
class of the notes, See "RATINGS OF THE NOTES" in this prospectus and the
prospectus supplement.
THE SUBORDINATION OF SOME CLASSES OF NOTES IS ONLY A LIMITED FORM OF CREDIT
ENHANCEMENT AND DOES NOT ENSURE PAYMENT OF THE MORE SENIOR CLASSES
An owner trust will pay interest and principal on some classes of
notes prior to paying interest and principal on other classes of notes. The
subordination of some classes of notes to others means that the subordinated
classes of notes are more likely to suffer the consequences of delinquent
payments and defaults on the contracts than the more senior classes of notes.
The more senior classes of notes could lose the credit enhancement
provided by the more subordinate classes if delinquencies and defaults on the
contracts increase and if the collections on the contracts and any credit
enhancement described in your prospectus supplement are insufficient to pay even
the more senior classes of notes.
Your prospectus supplement will describe any subordination provisions
applicable to your notes.
LIMITED ASSETS ARE AVAILABLE FOR PAYMENT OF THE NOTES; NOTEHOLDERS WILL HAVE NO
RECOURSE TO THE ORIGINATORS, SPONSOR, DEPOSITOR, SERVICER OR THEIR AFFILIATES IN
THE EVENT DELINQUENCIES AND LOSSES REDUCE THE TRUST'S ASSETS
Each owner trust will be a limited purpose trust with limited assets.
Moreover, you have no recourse to the general credit of the servicer, sponsor,
depositor, originator or their affiliates. Therefore, you must rely solely upon
the contracts and any credit enhancement described in your prospectus supplement
for payment of principal and interest on the notes.
An increase in delinquent or defaulted payments on contracts could
result in your being paid less than you expect on the notes or in delays in
payment.
If a contract is a vendor loan, you must rely solely upon the end-user
contracts securing the vendor loan for payments in respect of that contract.
Most vendor loans are non-recourse to the vendors. In non-recourse loans you are
limited to recovering amounts due solely from the end-user contracts and related
security.
EVEN IF AN OWNER TRUST REPOSSESSES AND SELLS THE EQUIPMENT RELATING TO A
CONTRACT AFTER AN OBLIGOR DEFAULTS, SHORTFALLS IN AMOUNTS AVAILABLE TO PAY THE
NOTES MAY OCCUR IF THE MARKET VALUE OF THE EQUIPMENT HAS DECLINED
If a contract held by the trust becomes a defaulted contract, the only
sources of payment for amounts owed on that contract will be the income and
proceeds from the sale of any related equipment and a deficiency judgment, if
any, against the obligor under the defaulted contract. Since the market value of
the equipment may decline faster than the discounted contract balance, the owner
trust may not recover the entire amount due on the contract and might not
receive any recoveries on the equipment. The prospectus supplement for your
notes may describe some forms of credit enhancement which are intended to make
up for deficiencies in the proceeds and recoveries on the contracts. However,
this protection is limited and could be depleted if those deficiencies are
larger than the sponsor anticipates.
NOT HAVING POSSESSION OF CONTRACT FILES MAY HINDER AN OWNER TRUST'S ABILITY TO
REALIZE THE VALUE OF EQUIPMENT SECURING THE CONTRACTS
To facilitate servicing and reduce administrative costs, the servicer
or a sub-servicer, unless otherwise specified in your prospectus supplement,
will retain possession of the documents evidencing the contracts held by the
owner trust. As a result, a subsequent purchaser of contracts could take
physical possession of the documents without knowledge of their assignment. That
subsequent purchaser could then have a security interest in the contracts senior
to the owner trust's security interest. In the event that the owner trust must
rely upon repossession and sale of the equipment securing defaulted contracts to
recover amounts due on the defaulted contracts, the owner trust's ability to
realize upon the equipment would be limited by the existence of the third
party's senior security interest in those contracts. In this event, there may be
a delay or reduction in distributions to you.
Similarly, with respect to contracts securing vendor loans, the vendor
will retain the original documents associated with some contracts. The
applicable originator will file Uniform Commercial Code financing statements
reflecting the pledge of those contracts to the applicable originator as
security for the vendor loans. However, the related documents will remain in the
vendor's possession. If a subsequent purchaser were able to take physical
possession of the related documents without knowledge of the pledge to the
originator, the owner trust's security interest in those contracts could be
defeated. In this event, there may be a delay or reduction in distributions to
you.
FAILURE TO TAKE ALL STEPS NECESSARY TO PERFECT SECURITY INTERESTS IN EQUIPMENT,
TO RECORD ASSIGNMENT OF SECURITY INTERESTS TO THE OWNER TRUST OR TO RECORD
SECURITY INTERESTS IN TITLED EQUIPMENT MAY HINDER THE OWNER TRUST'S ABILITY TO
REALIZE THE VALUE OF EQUIPMENT SECURING THE CONTRACTS
The depositor will receive security interests in financed equipment
securing contracts from the seller of such financed equipment, which will obtain
security interests in financed equipment from other originator or through its
own origination activities. The depositor will assign the security interests to
the owner trust. However, in some instances, the originators may not file
financing statements for equipment relating to a single obligor in a single
jurisdiction when the value of the equipment is less than a minimum amount which
will be specified in the related prospectus supplement. As a result, the
originator will not acquire, and the depositor and owner trust will not have, a
perfected security interest in the equipment. As a result, creditors of the
end-user may acquire superior interests in the equipment.
Additionally, regardless of equipment value, the sponsor will require
the originators to annotate their records to note the depositor's security
interest but may not require the filing of assignments of financing statements
for the equipment to reflect the depositor's, the owner trust's or the indenture
trustee's interests. Because of this, an originator or the servicer could
inadvertently release the security interest in the equipment securing a
contract. The owner trust would then not have a security interest in the
equipment.
Also, any transfer to the depositor of an originator's security
interest in motor vehicles securing the contracts is subject to state vehicle
registration laws. The depositor's transfer of a security interest in motor
vehicles to the owner trust is also subject to these registration laws. These
registration laws require that the secured party's name appear on the
certificate of title or similar registration of title to a motor vehicle in
order for the secured party's security interest to be perfected. The applicable
originator will be identified on the certificates or similar registrations of
title. However, the certificates of title or similar registrations of title will
not identify the depositor or owner trust as secured party. In addition, some
equipment related to the contracts may constitute fixtures under the real estate
or Uniform Commercial Code provisions of the state in which the equipment is
located. The relevant originator will not file assignments of fixture filings in
favor of the depositor or owner trusts. Therefore, a third party could acquire
an interest in the motor vehicles or real estate fixtures superior to that of
the owner trusts.
REPURCHASE OBLIGATION OF THE SELLER PROVIDES YOU ONLY LIMITED PROTECTION AGAINST
PRIOR LIENS ON THE CONTRACTS OR EQUIPMENT
Federal or state law may grant liens on contracts or equipment that
have priority over the owner trust's interest. If the creditor associated with
any prior lien exercises its remedies it is unlikely that sufficient cash
proceeds from the contract and related equipment will be available to pay the
contract balance to the trust. In that event, there may be a delay or reduction
in distributions to you. An example of a lien arising under federal or state law
is a tax lien on property of the originator or the depositor arising prior to
the time a contract is conveyed to the owner trust. The tax lien has priority
over the interest of the owner trust in the contracts.
In most cases where vendors have assigned contracts to originators,
the vendors have warranted to the originators that there are no prior liens on
the contracts. Additionally, where vendors have assigned contracts to
originators, the vendors have agreed not to grant any lien on any contracts
transferred to the originators. In all cases, the seller will warrant to the
depositor and the owner trust that there are no prior liens on the contracts.
The seller also will warrant to the depositor and the owner trust that it will
not grant any lien on the contracts. In the event that those warranties are not
true as to any contract, the seller will be required under the pooling and
servicing agreement to repurchase the contract. There can be no assurance that
the seller will be able to repurchase a contract at the time when it is asked to
do so.
IF A BANKRUPTCY COURT RULES THAT THE TRANSFER OF CONTRACTS FROM A VENDOR TO AN
ORIGINATOR WAS NOT A TRUE SALE THEN PAYMENTS ON THE CONTRACTS MAY BE REDUCED OR
DELAYED
Vendors sell contracts to the originators, which contracts will be
transferred directly or indirectly to the depositor and then the owner trust. If
a bankruptcy court decides that the acquisition of a contract by an originator
is not a sale of the contract from the vendor to the originator, the contract
would be part of the vendor's bankruptcy estate. Accordingly, the contract would
be available to the vendor's creditors. In that case, it is unlikely the trust
will receive all of the scheduled payments on the contracts, and there may be a
delay or reduction in distributions to you. In order to treat the transfer of
contracts to the trust as not being a true sale, the bankruptcy court would
recharacterize the transfer as a pledge of the contracts to secure borrowings by
the vendor. Additionally, if the transfer of contracts to an originator from a
vendor is recharacterized as a pledge, then a tax or government lien on the
property of the pledging vendor arising before the contracts came into existence
may have priority over the owner trust's interest in the contracts.
A BANKRUPTCY COURT DETERMINATION THAT THE TRANSFER OF CONTRACTS FROM ORIGINATORS
TO THE SELLER, FROM THE SELLER TO THE DEPOSITOR OR FROM THE DEPOSITOR TO THE
OWNER TRUST WAS NOT A TRUE SALE THEN PAYMENTS ON THE CONTRACTS COULD BE REDUCED
OR DELAYED
If an originator, the seller or the depositor became a debtor in a
bankruptcy case, creditors of that party, or that party acting as a
debtor-in-possession, may assert that the transfer of the contracts was
ineffective to remove the contracts from that party's estate. In that case, the
distribution of contract payments to the trust might be subject to the automatic
stay provisions of the United States Bankruptcy Code. This would delay the
distribution of those payments to the noteholders for an uncertain period of
time. Furthermore, if the bankruptcy court rules in favor of the creditors or
the debtor in possession, the result may be reductions in payments under the
contracts to the trust. In either case, you may experience delays or reduction
in distributions to you. In addition, a bankruptcy trustee would have the power
to sell the contracts if the proceeds of the sale could satisfy the amount of
the debt deemed owed by the originator, the seller or the depositor, as the case
may be. The bankruptcy trustee could also substitute other collateral in lieu of
the contracts to secure the debt. Additionally, the bankruptcy court could
adjust the debt if the originator, the seller or the depositor were to file for
reorganization under Chapter 11 of the Bankruptcy Code. Each of these parties
will represent and warrant that the conveyance of the contracts by it is in each
case a valid sale and transfer of the contracts. In addition, in agreements
conveying the contracts, the originators, the seller and the depositor have
agreed that they will each treat the transactions described in this prospectus
as a sale of the contracts.
INSOLVENCY OF THE VENDORS COULD DELAY OR REDUCE PAYMENTS TO YOU
In the event a vendor under a vendor loan becomes subject to
insolvency proceedings, the end-user contracts and equipment securing the vendor
loan as well as the vendor's obligation to make payments would also become
subject to the insolvency proceedings. In that event, payments to the owner
trust in respect of those vendor contracts may be reduced or delayed. Payments
to you may be reduced if collections from the remaining unaffected contracts are
insufficient to cover losses to the owner trust. In those cases in which
transfers of end-user contracts by vendors to originator provide that the
originator have recourse to the vendor for all or a portion of the losses the
originator may incur as a result of a default under those end-user contracts,
the vendor's bankruptcy, may similarly result in reductions or payment delays in
amounts due from the vendor.
END-USER BANKRUPTCY MAY REDUCE OR DELAY COLLECTIONS ON THE CONTRACTS, AND
DISPOSITION OF EQUIPMENT RELATING TO THESE OR OTHER DEFAULTING END-USERS MAY BE
DELAYED OR MAY NOT RESULT IN COMPLETE RECOVERY OF AMOUNTS DUE
Bankruptcy and insolvency laws could affect your interests in
contracts with end-user obligors who become subject to bankruptcy proceedings.
Those laws could result in contracts of a bankrupt end-user being written off as
uncollectible or result in delay in payments due on the contracts. As a result,
you may be subject to delays in receiving payments, and you may also suffer
losses if collections from the remaining unaffected contracts are insufficient
to cover losses to the trust. Foreclosure sales of equipment and obtaining
deficiency judgments following foreclosure sales may not yield sufficient
proceeds to pay off the balance owed on a contract. If you must rely on
repossession and disposition of equipment to recover amounts due on defaulted
contracts, those amounts may be insufficient. Factors that may affect whether
you receive the full amount due on a contract include the failure to file
financing statements to perfect the originator's or owner trust's security
interest in the equipment securing the contract. The depreciation, obsolescence,
damage, or loss of any item of equipment will also affect whether you receive
the full amount due on a contract.
COMMINGLING OF COLLECTIONS COULD RESULT IN REDUCED PAYMENTS TO YOU
Cash held by the servicer may be commingled and used for the benefit
of the servicer prior to the date on which the collections are required to be
deposited in a collection account as described under "DESCRIPTION OF THE POOLING
AND SERVICING AGREEMENTS -- COLLECTIONS ON CONTRACTS." In the event of the
insolvency or receivership of the servicer, an owner trust may not have a
perfected ownership or security interest in these collections. In that case, you
may suffer losses on your investment as a result.
BANKRUPTCY OF DEPOSITOR OR THE OWNER TRUST MAY CAUSE DELAYS IN OR REDUCE
COLLECTIONS UNDER THE CONTRACTS
If an owner trust or the depositor becomes insolvent under any federal
bankruptcy or similar state laws, the right of an indenture trustee to foreclose
upon and sell the assets of an owner trust is likely to be significantly
impaired by applicable bankruptcy laws. This would be the case before or
possibly even after an indenture trustee has foreclosed upon and sold the assets
of an owner trust. Under the bankruptcy laws, payments on debts are not made,
and secured creditors are prohibited from repossessing their security from a
debtor in a bankruptcy case or from disposing of security repossessed from the
debtor, without bankruptcy court approval. Moreover, the bankruptcy laws may
permit the debtor to continue to retain and to use collateral even though the
debtor is in default under the applicable debt instruments, if the secured
creditor is provided adequate protection. The meaning of the term adequate
protection may vary according to circumstances, but it is intended in general to
protect the value of the security from any diminution in the value of the
collateral as a result of its use by the debtor during the pendency of the
bankruptcy case. Because there is no precise definition of the term adequate
protection and because the bankruptcy court has broad discretionary powers, it
is impossible to predict if or how you would be compensated for any diminution
in value of the owner trust assets.
THE SELLER'S OBLIGATION TO REPURCHASE CONTACTS COULD BE IMPAIRED BY BANKRUPTCY
The seller of contracts to the depositor, will make representations
and warranties regarding the contracts, the equipment and other matters. See
"THE CONTRACTS -- REPRESENTATIONS AND WARRANTIES MADE BY THE SELLER." If any
representation or warranty with regard to a specific contract is breached, is
not cured within a specified period of time, and the value of the contract is
materially and adversely affected by the breach, the seller must purchase the
contract from the applicable owner trust at a price equal to the amount required
to pay off the contract. If the seller becomes bankrupt or insolvent, each
indenture trustee's right to compel a purchase would both be impaired and have
to be satisfied out of any available "assets" of the seller's bankruptcy estate.
In that case, you may suffer a loss on your investment in a note as a result.
CONTRACTS RELATING TO SOFTWARE OR RELATED SUPPORT AND CONSULTING SERVICES ARE
NOT SECURED BY THE SOFTWARE OR RELATED SERVICES
Some of the contracts held by the owner trust may relate to software
that is not owned by an originator or related support and consulting services.
In these cases, the vendor or a licensor traditionally owns the software, and
the software and related support and consulting services do not serve as
collateral for the contracts. Thus, the owner trust will not have an interest in
the software or related support and consulting services. The owner trust will
own solely the associated contracts' cash flow. Accordingly, if any of these
contracts becomes a defaulted contract, the owner trust will not be able to
foreclose on the software or related support and consulting services. Because
there will be no proceeds from the software or related support and consulting
services which could be used to make payments to you, the owner trust must look
solely to the obligor to collect amounts due on the contract. There can be no
assurance that the obligor will be able to pay in full amounts due under the
contract.
LIMITATIONS ON ENFORCEABILITY OF SECURITY INTERESTS IN THE EQUIPMENT MAY HINDER
THE OWNER TRUST'S ABILITY TO REALIZE THE VALUE OF EQUIPMENT SECURING THE
CONTRACTS
State law limitations on the enforceability of security interests and
the manner in which a secured party may dispose of collateral may limit the
owner trust's ability to obtain or dispose of collateral in a timely fashion.
This could reduce or delay the availability of funds to pay the notes. Under
these state law limitations:
o if the obligor becomes bankrupt or insolvent, the owner trust may
need the permission of a bankruptcy court to obtain and sell its
collateral;
o some jurisdictions require that the obligor be notified of the
default and be given a time period within which it may cure the
default prior to repossession; and
o the obligor may have the right to redeem collateral for its
obligations prior to actual sale by paying the lessor or secured
party the unpaid balance of the obligation plus the secured
party's expenses for repossessing, holding and preparing the
collateral for disposition.
BANKRUPTCY COURT REJECTION OF "TRUE LEASES" MAY REDUCE FUNDS AVAILABLE TO PAY
NOTES
A bankruptcy trustee or debtor-in-possession under federal bankruptcy
or similar state laws has the right to assume or reject any executory contract
or unexpired lease which is considered to be a "true lease" under applicable
law. A "true lease" is a contract under which the applicable originator or
vendor holds a residual interest in equipment of more than a nominal amount.
Some contracts will be true leases and thus subject to rejection by the lessor
under federal bankruptcy or similar state laws. For this reason, the originator,
as debtor-in-possession or the originator's bankruptcy trustee may reject the
leases of which that originator is the lessor. Upon any rejection, payments to
the applicable originator under the rejected contract may terminate and your
investment may be subject to losses. In addition, any contract which is a true
lease that a vendor originated and transferred to an originator in a transaction
in which the vendor continues to be the lessor, will be subject to rejection by
the vendor, as debtor in possession, or by the vendor's bankruptcy trustee. An
example of this transaction is a transfer by a vendor to an originator of a
security interest in the lease contract or a transfer by a vendor to an
originator of an interest in the right to payments only under the lease
contract. Upon any rejection, payments to the applicable originator under the
rejected contract may terminate and your investment may be subject to losses.
THE SPONSOR
The sponsor is Asset Backed Securities Corporation and was
incorporated in the State of Delaware on December 31, 1985, and is an indirect,
wholly owned subsidiary of Credit Suisse First Boston, Inc. Credit Suisse First
Boston Corporation, which may act as an underwriter in offerings made by this
prospectus, as described in "Plan of Distribution" below, is also a wholly owned
subsidiary of Credit Suisse First Boston, Inc. The principal executive offices
of the sponsor are located at Eleven Madison Avenue, New York, NY 10010. Its
telephone number is (212) 325-2000.
The sponsor was organized, among other things, for the purposes of
establishing trusts, selling beneficial interests in those trusts and acquiring
and selling equipment assets to trusts. Neither the sponsor, its parent nor any
of the sponsor's affiliates will ensure or guarantee distributions on the notes
of any series.
THE DEPOSITOR
The depositor will be a special purpose entity specified in your
prospectus supplement. The depositor will not be responsible for payment of any
principal, interest or any other amount in respect of any series of notes.
THE OWNER TRUSTS
The sponsor will form each owner trust under a trust agreement among
the sponsor, the depositor and the owner trustee, as described in your
prospectus supplement. Each owner trust may issue one or more classes of
securities, representing debt of or beneficial ownership interests in the owner
trust. The trust will not offer the beneficial ownership interests under this
prospectus.
The assets of each owner trust, as further specified in your
prospectus supplement, will consist of:
(1) a pool including some or all of the following types of contracts:
o equipment lease contracts,
o conditional sale/financing agreements,
o installment payment agreements,
o promissory notes, and
o loan and security agreements;
(2) amounts on deposit in, and any eligible investments allocated to,
accounts established under the related indenture and the pooling
and servicing agreement;
(3) the depositor's rights under the related purchase and sale
agreement or other instrument by which it acquired contracts, if
any; and
(4) the depositor's rights with respect to any cash collateral
account or other form of credit enhancement for the notes.
The owner trust will have the right, as set forth in your prospectus
supplement, to:
o all funds payable under the contracts after the cut-off
date, the date on which the owner trust's right to contract
payments commences. This includes all scheduled but unpaid
amounts due prior to the cut-off date, but excludes any
scheduled payments due on or after, but received prior to,
the date the depositor transfers the contracts to an owner
trust. This does not include contract payments in respect of
taxes, insurance premiums, security deposits, late charges,
administrative fees or charges;
o prepayments, except for any portion allocated to the
depositor in respect of equipment leases; o liquidation
proceeds received with respect to defaulted contracts,
except for any portion allocable to the depositor under an
equipment lease;
o earnings from the investment of funds in the collection
account and note distribution account maintained by the
servicer; and
o security interests in the equipment related to the
contracts, but excluding ownership rights.
No owner trust will engage in any business activity unless otherwise
specified in your prospectus supplement, other than
o issuing notes and ownership interests in the owner trust;
o purchasing contracts and related assets;
o holding and dealing with the assets of the owner trust;
o making payments on the notes and other securities it issued;
o entering into and performing the duties, responsibilities
and functions required under any of the related pooling and
servicing agreement, indenture, contracts, and related
documents; and
o matters incidental to the above.
The assets of an owner trust will be separate from the assets of all
other owner trusts the sponsor or depositor creates. Accordingly, the assets of
one owner trust will not be available to make payments on the securities issued
by any other owner trust.
The sponsor will specify the owner trustee of the owner trust for
notes being offered to you in your prospectus supplement. The owner trustee's
liability in connection with the sale of notes will be limited to the express
obligations of the owner trustee in the related trust agreement and indenture.
An owner trustee may resign at any time, in which event the depositor or the
sponsor, as specified in your prospectus supplement or any designee must appoint
a successor owner trustee. The depositor or the sponsor, as specified in your
prospectus supplement or any designee may also remove an owner trustee if the
owner trustee ceases to be eligible to continue as such under the related trust
agreement or if the owner trustee becomes insolvent. Any resignation or removal
of an owner trustee will not become effective until acceptance of the
appointment of a successor owner trustee.
THE ORIGINATORS, THE SELLER AND THE SERVICER
Your prospectus supplement will provide information on the
originators, the seller and the servicer.
THE CONTRACTS
With respect to any series of notes, this prospectus and any
prospectus supplement refer to the aggregate of the contracts in an owner trust,
as of any particular date, as the contract pool. This prospectus and any
prospectus supplement refer to the contract pool, as of the cut-off date
specified in the prospectus supplement for your notes, as the cut-off date or
initial contract pool. This prospectus and any prospectus supplement refer to
equipment, software and services collectively as financed items.
DESCRIPTION OF THE CONTRACTS
The following description of the contracts describes the material
terms of the contracts to be included in each contract pool, although an
immaterial number of contracts in a contract pool may differ in one or more
provisions from the description below.
END-USER CONTRACTS
Each owner trust will include contracts to which the end-user of the
equipment is a party. The sponsor lists the types of contracts under "THE OWNER
TRUSTS" above.
There will be no limit on the number of contracts in a particular
contract pool which may consist of any of those types. Each contract is
required, however, to be an "eligible contract," as of the date the depositor
transfers the contracts to the respective owner trusts. An eligible contract is
a contract as to which the representations and warranties listed below under
"--REPRESENTATIONS AND WARRANTIES MADE BY THE SELLER" are true as of the
transfer date.
CONDITIONAL SALE AGREEMENTS
Each originator may offer financing for equipment under conditional
sale agreements assigned to the applicable originator by the vendor of the
equipment. Each originator will either use its standard pre-printed form or a
vendor's standard, pre-printed form to document the conditional sale agreements
in a contract pool. The conditional sale agreement sets forth the description of
each financed item and the schedule of installment payments. Typically, loans
under conditional sale agreements are fixed rate and are for a term of one to
seven years. Payments under conditional sale agreements typically are due
monthly. Conditional sale agreements typically:
o provide for a grant by the end-user of the equipment of a
security interest in the equipment, which security interest
is assigned by the vendor to the originator;
o may allow prepayment of the obligation upon payment, where
allowed by applicable state law, of an additional prepayment
fee;
o require the end-user to maintain the equipment, keep it free
and clear of liens and encumbrances and pay all taxes
related to the equipment;
o restrict the modification or disposal of the equipment
without the vendor's, or its assignee's, consent;
o include a disclaimer of warranties;
o include the end-user's indemnity against liabilities arising
from the use, possession or ownership of the equipment;
o include the end-user's absolute and unconditional obligation
to pay the installment payments on the loan; and
o include specific events of default and remedies for default.
A conditional sale agreement typically requires each end-user to maintain
insurance, the terms of which may vary. The terms of a conditional sale
agreement often may be modified at its inception at the end-user's request.
LEASES
The originators, either directly or by assignment from vendors, may
offer financing of equipment, software and services under leases. Leases may
consist of individual lease agreements relating to a single, separate
transaction and financed item. Alternatively, the individual leases may be
governed by a master lease agreement which contains the general terms and
conditions of the transaction. Specific terms and conditions, such as
descriptions of the specific equipment, software and services being leased or
financed and the schedule of related rental payments, are typically contained in
a supplement or schedule to the master lease agreement, which is signed by the
end-user as lessee, and either the vendor or the originator, as lessor. The
supplement to the master lease agreement incorporates the master lease agreement
by reference, and is treated by the originator as a separate lease. The
originator or the vendor originates each lease in the ordinary course of
business. Vendors who originate leases assign them to the originator. An
originator also may purchase leases on a portfolio basis.
The initial terms of the leases in the contract pool typically range
from one to seven years. Each lease provides for the periodic payment by the
end-user of rent in advance or arrears, generally monthly or quarterly. The
periodic payments represent the amortization, generally on a level basis, of the
total amount that an end-user is required to pay throughout the term of a lease.
A contract pool will include "NET LEASES" under which the end-user
assumes responsibility for
o the financed items, including operation, maintenance,
repair, and insurance or self-insurance,
o return of the equipment at the expiration or termination of
the lease, and
o the payment of all sales, use and property taxes relating to
the financed items during the lease term.
The end-user further agrees to indemnify the lessor for any
liabilities arising out of the use or operation of the financed items. In most
cases, the end-user also authorized the lessor to perform the end-user's
obligations under the lease at the end-user's expense, if it so elects, in cases
where the end-user has failed to perform. In addition, the leases often contain
"HELL OR HIGH WATER" clauses unconditionally obligating the end-user to make
periodic payments, without setoff, at the times and in the amounts specified in
the lease. If an originator is the lessor, the lease will often contain no
express or implied warranties with respect to the financed items other than a
warranty of quiet enjoyment. If a vendor is the lessor, the lease or a related
agreement may contain representations and warranties with respect to the
financed items in addition to a warranty of quiet enjoyment. However, the
end-user typically agrees not to assert any warranty claims against any
assignee, including the originator, of the vendor by way of setoff, counterclaim
or otherwise, and further agrees that it may only bring that type of claim
against the vendor. Leases of equipment often require the end-user to maintain,
at its expense, casualty insurance covering damage to or loss of the equipment
during the lease term or to self-insure against these risks, if approved in
advance by the originator or vendor, as applicable.
The leases may include both "TRUE LEASES" and leases intended for
security as defined in Section 1-201(37) of the Uniform Commercial Code. Under a
"TRUE LEASE", the lessor bears the risk of ownership, except for the risk of
loss of the equipment, which is passed to the end-user under the leases. The
lessor also takes any tax benefits associated with the ownership of depreciable
property under applicable law. No title is conferred upon the lessee. The lessee
under a "TRUE LEASE" has the right to the temporary use of property for a term
shorter than the economic life of the property in exchange for payments at
scheduled intervals during the lease term. Additionally, the lessor retains a
significant "RESIDUAL" economic interest in the leased property. End of lease
options for "TRUE LEASES" include purchase or renewal at fair market value.
Under leases intended for security, the lessor in effect finances the
"PURCHASE" of the leased property by the lessee and retains a security interest
in the leased property. The lessee retains the leased property for substantially
all its economic life and the lessor retains no significant residual interest.
Such leases are considered conditional sales type leases for federal income tax
purposes and, accordingly, the lessor does not take any federal tax benefits
associated with the ownership of depreciable property. End of lease options for
these leases depend on the terms of the related individual lease agreement or
master lease agreement supplement, but often these terms provide for the
purchase of the equipment at a prestated price, which may be nominal. The
inclusion of "TRUE LEASES" in a contract pool should have no federal income tax
impact on holders of notes since the notes are treated as debt for federal
income tax purposes. However, the inclusion of "TRUE LEASES" may result in the
imposition of state and local taxes which would reduce cash available for
payment on the notes.
A lease will either prohibit the end-user from altering or modifying
the equipment or permit the end-user to alter or modify the equipment only to
the extent the alterations or modifications are readily removable without damage
to the equipment. Under some master lease agreements, the end-user may assign
its rights and obligations under the lease, but only upon receiving the prior
written consent of the lessor. Under some leases, the lessee may relocate the
equipment upon giving the lessor prompt written notice of the relocation. The
right to grant or deny consent or to receive written notice will be exercised by
the servicer under the authority delegated to it in the related pooling and
servicing agreement. Some leases will permit the end-user to substitute
substantially identical leased equipment for leased equipment scheduled to be
returned to the lessor under the lease.
While the terms and conditions of the leases will not usually permit
cancellation by the end-user, the lessor and the end-user may modify or
terminate some leases before the end of the lease term. The originator, or a
vendor, with the consent of the originator, may permit the modifications to a
lease term or early lease terminations. The modifications typically arise in
connection with additional financing opportunities from the same end-user.
End-users may also negotiate with the originator, at the originator's
discretion, an early termination arrangement allowing the end-user to purchase
the equipment during the term of a lease. The early-termination purchase price
is often equal to or in excess of the present value of the remaining rental
payments under the lease plus the anticipated market value of the related
equipment as of the end of the lease term. The originator may permit early
termination of a lease in connection with the acquisition of new technology
requiring replacement of the equipment. In these cases, the end-user returns the
related equipment to the vendor or originator and pays an amount generally equal
to the present value of the remaining rental payments under the lease plus an
early termination fee to the originator. Modifications usually involve repricing
a lease or modification of the lease term. Occasionally the lessor and the
end-user may modify a lease in connection with an increase in the capacity or
performance of equipment by adding additional equipment that includes new
technology. Coincident with the financing of an upgrade to the equipment, the
originator may reprice and extend the related base lease term to be coterminous
with the desired term of the lease relating to the upgrade. In some cases,
subject to conditions described under "DESCRIPTION OF THE POOLING AND SERVICING
AGREEMENTS -- SERVICING," base lease extensions may remain in a contract pool.
The sponsor expects that the servicer will continue to permit these
modifications and terminations with respect to leases included in a contract
pool under the authority delegated to it in the related pooling and servicing
agreement. The servicer's ability to modify leases is limited by the conditions
and covenants of the servicer described under "DESCRIPTION OF THE POOLING AND
SERVICING AGREEMENTS -- SERVICING."
The originator may modify the standard terms and conditions of the
lease agreement at the inception of a lease at the request of the end-user.
Common permitted modifications include, but are not limited to:
o prearranged mid-lease purchase options, early termination
options and lease extension options as described above;
o modifications to the lessor's equipment inspection rights;
o modifications to the end-user's insurance requirements
permitting the end-user to self-insure against casualty to
the equipment;
o the end-user's right to assign the lease or sub-lease the
financed items to an affiliated entity, so long as the
end-user remains liable under the lease and promptly
notifies the lessor or its assignee of the assignment or
sublease; and
o extended grace periods for late payments of rent.
In some cases, after a lease term expires the originator may permit
the end-user to continue to use the related equipment for so long as the
end-user continues to make lease payments. After the expiration of the term of a
lease, any continued lease payments will belong to the depositor, not the owner
trust.
SECURED NOTES
Each originator may also provide direct initial financing or
refinancing of equipment and software under secured promissory notes, which
consist of an installment note and a separate security agreement. In an initial
financing transaction, the originator pays to the vendor the purchase price for
the equipment or software. In a refinancing transaction, the originator pays off
an end-user's existing financing source, and the initial financing or
refinancing is documented as a direct loan by the originator to the end-user of
the equipment or software using a secured note. In the case of a refinancing
transaction, upon payment to the existing financing source, the originator
obtains a release of the original financing party's lien on the financed
equipment. In either case, the originator records its own lien against the
financed equipment or software and takes possession of the secured note. Except
for the lack of references to "sale" or "purchase" of equipment, a secured note
contains terms and conditions substantially similar to those contained in
conditional sale agreements.
INSTALLMENT PAYMENT/FINANCING AGREEMENTS
Each originator may provide financing for software license fees and
related support and consulting services under
o installment payment supplements to software license
agreements,
o separate installment payment agreements, and
o other forms of financing agreements assigned to the
originator by vendors of software.
Each financing agreement of this type:
o generally is an unsecured obligation of the end-user;
o generally provides for a fixed schedule of payments with no
end-user right of prepayment;
o generally is noncancellable for its term;
o generally contains a "HELL OR HIGH WATER" clause
unconditionally obligating the end-user to make periodic
payments, without setoff, at the times and in the amounts
specified. If a financing agreement does not provide for
noncancellability or a "HELL OR HIGH WATER" clause, the
financing agreement will typically have the benefit of a
vendor guarantee;
o generally permits the assignment of the payment agreement to
a third party, including the originator, and includes the
end-user's agreement not to assert against assignee any
claims or defenses the end-user may have against the vendor;
and
o generally contains default and remedy provisions that
usually include acceleration of amounts due and to become
due and, in some cases, the right of the vendor, or the
originator by assignment, to terminate the underlying
software license and all related support and consulting
activities.
EQUIPMENT
The end-user contracts may consist of some or all of the following
types of new and used equipment:
1) information technology equipment, including:
o computer work stations, o mainframe, mid-range and personal
computers,
o data storage devices,
o media and video production/post production equipment,
o servers and
o computer related peripheral equipment,
2) communications equipment, such as telephone switching and
networking systems,
3) commercial business and industrial equipment, such as:
o printing presses,
o machine tools and other manufacturing equipment,
o photocopiers, facsimile machines and other office equipment,
o energy savings and control equipment,
o corrugated boards,
o plastic injections,
o folding cartons
o silk screening equipment,
o automotive diagnostic and
o automated testing equipment,
4) retail equipment, such as
o petroleum retail equipment,
o fuel dispensers,
o ATM units,
o convenience store operating equipment,
o embroidery machines,
o coin operated, vending, amusement and coffee service
equipment and
o restaurant equipment,
5) medical and dental equipment, such as diagnostic and
therapeutic examination equipment for radiology, nuclear
medicine and ultrasound and laboratory analysis equipment,
6) resources equipment, such as feller-bunchers and grapplers,
7) transportation and construction equipment, such as:
o heavy and medium duty trucks, highway trailers and other
title vehicles,
o school buses,
o bulldozers,
o loaders,
o graders,
o excavators,
o machine tools,
o forklifts,
o other materials handling equipment,
o golf carts,
o aircraft engines,
o other road and off-road machinery and
o electronics manufacturing and testing equipment,
8) other equipment
o forestry,
o pollution control,
o mining and steel mill equipment,
o laundry, janitorial, and cleaning equipment,
o photographic equipment,
o refuse equipment and
o furniture and fixtures equipment.
In each case, the depositor will transfer the security interests of
the originator in the equipment subject to each related end-user contract, but
not ownership interests in the case of leased equipment, to the relevant owner
trust.
SOFTWARE AND SERVICES
Some end-user contracts may cover license fees and other fees owed by
the end-user under either perpetual or term software license agreements and
other related agreements in connection with the end-user's use of computer
software programs. The end-user contracts may also cover related support and
consulting services which are provided by the vendor, an affiliate of the vendor
or a third party contract party and which facilitate the obligor's use of the
software. Neither the vendors or licensors of the software nor the end-users
under the related end-user contracts will convey to the originator any interest
in the software or the software license agreement, other than the right to
collect the payment of software license fees. However, in some cases, the
vendors may convey to the originator the right to exercise rights and remedies
under the relevant software license agreement or related agreements.
Consequently, unless otherwise specified in your prospectus supplement, an owner
trust will not have title to or a security interest in the software, nor will it
own the related services, and would not be able to realize any value from the
software or related servicer under a related end-user contract upon a default by
the end-user.
VENDOR LOANS
The contracts may include limited recourse loan or repayment
obligations of a vendor. These may take the form of promissory notes with
related security interests documented by security agreements or specific
provisions in related program agreements. Each of the obligations is secured by
all of the vendor's interest in an individual end-user contract originated by
the vendor and by the equipment related to the end-user contract.
The originator may originate vendor loans through, and the vendor
loans may incorporate terms and conditions of, a program agreement. See "PROGRAM
AGREEMENTS WITH VENDORS." Vendor loans generally are non-recourse to the vendor,
meaning that the originator may obtain repayment solely from the proceeds of the
end-user contracts and related equipment securing the vendor loan. However, the
originator may have recourse to a vendor for nonpayment of a vendor loan through
a limited recourse arrangement in the related program agreement or other related
agreement. The repayment terms under a vendor loan, including periodic amounts
payable and schedule of payments, will correspond to the payment terms of the
end-user under the end-user contract collaterally assigned under the vendor
loan. Each vendor loan will either include most, if not all, of the
representations and warranties regarding the end-user contract and related
equipment typically included in a vendor agreement, or incorporate these
representations and warranties included in any related program agreement by
reference.
PROGRAM AGREEMENTS WITH VENDORS
An originator's program agreement is typically an agreement with
equipment manufacturers, dealers and distributors, or software licensors or
distributors, located in the United States. The program agreement provides an
originator with the opportunity to finance transactions relating to the
acquisition or use by an end-user of a vendor's equipment, software, services or
other products. Vendor program arrangements provide an originator with a steady,
sustainable flow of new business, often with lower costs of origination than
asset-based financings marketed directly to end-users. Some of the program
agreements take the form of a referral relationship, which is less formal, and
may or may not include credit or remarketing support to the originator from the
vendor.
Each program agreement under which vendors or another party originate
and document contracts and assign them to the originator typically includes
vendor representations, warranties and covenants regarding each contract
assigned to an originator, including that:
o the obligations of the end-user under the assigned contract
are absolute, unconditional, noncancellable, enforceable in
accordance with their terms and free from any rights of
offset, counterclaim or defense;
o the originator holds the sole original of the contract and
has either title to or a first priority perfected security
interest in the equipment, except with respect to situations
where no financing statement is filed due to the minimum
value involved;
o the equipment and the contract are free and clear of all
liens, claims or encumbrances except for permitted liens;
o the end-user has irrevocably accepted the equipment or the
software; and
o the end-user duly authorized and signed the assigned
contract;
Each program agreement under which the originators document and
originate contracts typically include vendor representations, warranties and
covenants regarding each contract, including that
o the equipment has been delivered to and accepted by the
end-user;
o the vendor has not received any advance payments;
o the vendor has good title to the equipment; and
o the vendor has not made any misrepresentations to the
end-user.
In each of the two above described program structures, relevant
agreements also typically provide for
o remedies for misrepresentations or breaches of warranties or
covenants by the vendor regarding an assigned contract.
These remedies usually require the vendor to repurchase the
affected end-user contract for the originator's investment
balance in the contract plus costs incurred by the
originator in breaking any underlying funding arrangement;
and
o the right of an originator to further assign its interests
in assigned contracts, all related payments and any related
interest in equipment.
In addition, the originators may enter into profit sharing
arrangements with some vendors. These arrangements typically will provide for
sharing of revenues generated under the program and for joint participation in
management. Under the terms of these arrangements, the originators typically
maintain direct or indirect control over all credit decision-making activities.
Also, a program agreement or profit sharing arrangement may include
recourse against a vendor with respect to end-user defaults under some end-user
contracts,
o by specifying that the assignment of the contract from the
vendor to the originator is with full recourse against the
vendor;
o by specifying that the vendor will absorb a limited fixed
dollar or percentage amount of "FIRST LOSSES" on the
contract;
o by inclusion of the contract in an ultimate net loss pool
created under the program agreement as well as guarantees by
the applicable vendor with respect to certain contracts
which are cancelable or which do not contain "HELL OR HIGH
WATER" provisions; or
o by providing for vendor repurchase of the contract or vendor
indemnification payments for breaches of certain
representations and warranties made by the vendor with
respect to the contract.
If an end-user defaults under a contract subject to a net loss pool, the
originator may be permitted to draw against the net loss pool up to the amount
of the originator's remaining unpaid investment balance in the defaulted
contract. The originator may also be permitted to draw against the net loss pool
with respect to contracts that are not included in the pool of contracts in a
particular owner trust and, accordingly, there can be no assurance that any
amounts contributed by a vendor to a net loss pool will be available with
respect to a defaulted contract included in the pool of contracts owned by a
particular owner trust.
The manner in which the vendor assigns contracts to the originator
varies from one program agreement to another, depending upon
o the nature of the items financed,
o the form of the contract,
o the accounting treatment sought by the vendor and the
end-user, and
o tax considerations.
For example, an originator might:
o accept a vendor loan and collateral assignment of the
contract and related equipment or security interest in the
equipment from the vendor; or
o accept a full assignment of the contract and a collateral
assignment of the related equipment or security interest
from the vendor, which collateral assignment secures the
end-user's obligations under the contract or lease.
The originator also may receive, from a vendor with respect to software, a full
assignment of leases, installment payment agreements, installment payment
supplements to license agreements, and other types of financing agreements used
in financing software license payments and related support and consulting
services. These assignments may include an assignment of the software vendor's
or licensor's right, or the agreement of the vendor or licensor, at the
originator's instructions, to terminate the software license covered by the
contract and suspend related support in the event of an end-user default under
the contract. In some cases, the software vendor also agrees not to relicense
the same or similar software to a defaulted end-user for some period of time,
e.g., one year, unless the end-user cures its default.
Some portion of the contracts included in the pool of contracts,
especially in the case of conditional sale agreements, may consist of contracts
originated by vendors and assigned to the originator in vendor assignments, each
of which relates to an individual contract, rather than under a program
agreement. Each vendor assignment will either be with or without recourse
against the vendor for end-user defaults. Each vendor assignment will typically
contain many, if not all, of the representations, warranties and covenants
typically contained in program agreements, as well as a vendor repurchase
requirement in the event of a breach by the vendor of the representations,
warranties or covenants. Vendor assignments may or may not provide for any
vendor remarketing support in the event of an end-user default.
RESIDUAL INVESTMENTS
Any of the originators may finance all or a portion of the residual
interest in the equipment under program agreements and under direct transactions
between an obligor and the applicable originator. Any investment by the
originator in a residual interest shall be referred to as a residual investment.
Program agreements may provide that the originator may, at its sole discretion
and in connection with the funding of a lease of equipment, make a residual
investment in that equipment by advancing additional funds against a portion of
the anticipated residual value of the equipment, and not just against the
discounted present value of the rental payments due under the contract. Residual
investments may take the form of an advance of the present value of some
specified percentage of the anticipated residual value of the equipment or a
specified percentage, typically not greater than 10%, of the amount to be paid
by the originator in funding the present value of the rental payments due under
the contract.
With respect to vendor assignments, the originator may advance the
entire purchase price of the equipment subject to a true lease, take title to
the equipment, and accept an assignment of the true lease contract from a
vendor. With respect to the leases originated by the originator the originator
may advance the entire purchase price of the equipment to the vendor, take title
to the equipment from the vendor, and enter into a true lease contract with an
obligor. In either of the two foregoing types of transactions, the originator
will have advanced more than the discounted present value of the rents payable
under the true lease contracts by paying the purchase price for the equipment,
and so will have made a residual investment in the equipment.
In some program agreements, the originator may make the residual
investment in the form of a full recourse loan of additional funds to the
vendor. That loan is repayable by the vendor at the expiration or termination of
the contract with interest and is secured by a security interest in the financed
equipment. In some transactions involving vendor assignments or direct
transactions with obligors under true lease contracts, the originator may obtain
the obligation of either the vendor or the obligor to purchase the equipment at
the end of the lease term for the full amount of the originator's residual
investment in the equipment with accrued interest. Any transaction in which the
originator may look to either the vendor or the obligor, and not just the value
of equipment itself, to recover its residual investment with interest shall be
referred to as a "GUARANTEED RESIDUAL INVESTMENT". Other than guaranteed
residual investments, a residual investment will not be included in the
discounted contract balance of any contract and, therefore, would not be
financed with the proceeds of the notes. This type residual investment is
referred to in this prospectus as the "EXCLUDED RESIDUAL INVESTMENT."
The seller or an affiliate of the seller will transfer the excluded
residual investment associated with any contract included in a pool of contracts
to the depositor or another affiliate under the terms of a purchase and sale
agreement or other transfer agreement. Unless otherwise specified in your
prospectus supplement, the depositor will not transfer the excluded residual
investment to an owner trust under the related pooling and servicing agreement.
The related owner trust's interest in contracts with associated residual
investments, other than with guaranteed residual investments, will typically be
limited to the discounted present value of the rental payments due under the
contract and a security interest in the related equipment. The originator may
assign its excluded residual investment to a third party, including the security
interest in the equipment in respect of the residual investment.
CONTRACT FILES
Each originator will indicate in the appropriate computer files
relating to the contracts being transferred to an owner trust that the
originator has transferred the contracts for the benefit of the holders of the
notes. Each originator will also deliver to the indenture trustee a computer
file, microfiche or written list containing a true and complete list of all
contracts which it has transferred, identified by account number and by the
discounted contract balance of the contracts as of the transfer date.
COLLECTION ON CONTRACTS
Your prospectus supplement will describe how all collections received
with respect to the contracts will be allocated.
PAYMENTS GENERALLY
The contracts usually require that an obligor make periodic payments
on a monthly basis. Some contracts, however, provide for quarterly, semi-annual
or annual payments. Obligors typically must make the payments under all of the
contracts in United States dollars. Payment requirements usually are fixed and
specified, rather than being tied to a formula or are otherwise at a floating
rate. Payments under the contracts are ordinarily payable in advance, although a
small percentage provide for payments in arrears.
EXPENSES RELATING TO EQUIPMENT
The contracts require the obligors to assume the responsibility for
payment of all expenses of the related equipment including, without limitation,
o any expenses in connection with the maintenance and repair
of the related equipment,
o the payment of any and all premiums for casualty and
liability insurance, and
o the payment of all taxes relating to the equipment.
INSURANCE; REPAIR AND REPLACEMENT
Unless otherwise set forth in your prospectus supplement, lease
contracts require that the obligors will maintain liability insurance and which
must name the lessor as additional insured.
o leases, or
o loan and security agreements
An originator may waive this requirement from time to time. For some lease
contracts, the obligor's already existing self-insurance program permits the
obligor to self-insure the equipment. The originators may not track or verify
insurance coverage as to the equipment related to a contract after the
commencement of the contract.
Often, the failure to maintain this insurance constitutes an event of
default under the applicable contract. Usually, the obligor also agrees to
indemnify the originator for all liability and expenses arising from the use,
condition or ownership of the equipment.
If the equipment is damaged or destroyed, each lease contract, unless
otherwise set forth in your prospectus supplement, requires that the obligor:
o repair the equipment;
o make a termination payment to the lessor in an amount not
less than the amount required to pay off the contract; or
o in some cases, replace the damaged or destroyed equipment
with other equipment of comparable use and value.
The related pooling and servicing agreement, unless otherwise set forth in your
prospectus supplement, permits the servicer, in the case of the destruction of
the equipment related to a particular lease contract, either to:
o allow the lessee to replace this equipment, provided that
the replacement equipment is, in the judgment of the
servicer, of comparable use and at least equivalent value to
the value of the equipment which was destroyed, or
o accept the termination payment referred to above.
ASSIGNMENT OF CONTRACTS
Typically the contracts will permit the assignment of the contract by
the lessor or secured party without the consent of the obligor. However,
occasionally, contracts require notification of the assignment to, or the
consent of, the obligor. The seller will represent and warrant in the purchase
and sale agreement that these notices have been given, or approvals will have
been received, not more than ten days following the date of the transfer of the
contract to the depositor. Typically, the contracts do not permit assignment of
the contracts, or the related equipment, by the obligor without the prior
consent of the lessor or secured party, except the contracts often may permit:
o assignments to a parent, subsidiary or affiliate;
o the assignment to a third party, provided the obligor
remains liable under the contract; or
o assignment to a third party with a credit standing, which
the originator determines in accordance with its
underwriting policy and practice at the time for an
equivalent contract type, term and amount, to be equal to or
better than the original obligor.
Under the related pooling and servicing agreement, the servicer may permit an
assignment of a particular contract from an obligor to a third party only if the
servicer, utilizing the current underwriting criteria for its contract
origination activities, determines that the third party is of sufficient credit
quality that the servicer would permit the third party to become an obligor with
respect to a contract that the servicer originates.
EVENTS OF DEFAULT AND REMEDIES
Events of default under the contracts ordinarily include:
o the failure to pay all amounts required by the contract when
due;
o the failure of the obligor to perform its agreements and
covenants under the applicable contract;
o material misrepresentations made by the obligor;
o the bankruptcy or insolvency of the obligor or the
appointment of a receiver for the obligor; and
o in some cases, default by the obligor under other contracts
or agreements.
Some of these default provisions are, in some instances, subject to notice
provisions and cure periods. Remedies available to the lessor or secured party
upon the occurrence of an event of default by the obligor typically include the
right
o to cancel or terminate in the case of a contract subject to
a true lease,
o to accelerate payments in the case of a contract subject to
financing,
o to recover possession of the related equipment and
o to receive an amount intended to make the lessor or secured
party, as the case may be, whole plus costs and expenses,
including legal fees, which the lessor or secured party
incurs as a result of the default.
Notwithstanding these events of default and remedies, unless otherwise set forth
in your prospectus supplement, the pooling and servicing agreement, permits the
servicer to take the actions, with respect to delinquent and defaulted
contracts, a reasonably prudent creditor would take under similar circumstances.
See "DESCRIPTION OF THE POOLING AND SERVICING AGREEMENTS -- SERVICING". The
originators may occasionally provide payment extensions, typically of three
months or less. Longer extensions are occasionally granted to customers
experiencing delays in payment due to cash flow shortages or other reasons.
However, originators do not intend extensions to be used to provide a temporary
solution for a delinquent account. Rather, extensions are intended to be used
when, in the judgment of the relevant credit authority, the extension is
necessary to avoid a termination and liquidation of the contract and will
maximize the amount to be received by the related owner trust with respect to
the contract.
PREPAYMENTS AND EARLY TERMINATION
Any contract may either:
o not permit the obligor to prepay the amounts due under the
contract or otherwise terminate the contract prior to its
scheduled expiration date;
o allow for a prepayment or early termination upon payment of
an amount that is at least equal to the contract principal
balance, determined using a discount rate specified in your
prospectus supplement; or
o allow for a prepayment or early termination without the
payment of the contract principal balance.
Some contracts, often written as installment sales contracts, promissory notes
or loan and security agreements, permit the obligor to prepay the contract, in
whole or in part, at any time at par plus accrued interest.
Under each pooling and servicing agreement, the servicer may allow the
prepayment of any contract, but only if the amount paid, or, in the case of a
partial prepayment, the sum of that amount and the remaining principal balance
of the contract after application of that amount, is at least equal to the
amount required to pay off the contract. The required payoff amount, with
respect to any collection period for any contract, is equal to the sum of:
o the scheduled payment due in that collection period and not
yet received, together with any scheduled payments due in
prior collection periods and not yet received; plus
o the discounted contract principal balance of the contract as
of the last day of that collection period, after taking into
account the scheduled payment due in that collection period.
In no event will revenues pledged for a series of notes include, nor
will the notes otherwise be payable from, any portion of a prepayment on a
contract that exceeds the required payoff amount for that contract.
Under the pooling and servicing agreement, the depositor may replace
any prepaid contract with a substitute contract. See " -- SUBSTITUTION OF
CONTRACTS" below.
DISCLAIMER OF WARRANTIES
The contracts which are subject to a true lease contain provisions by
which the lessor, or the originator, as assignee of the lessor, disclaims all
warranties with respect to the equipment. The lessor often assigns the
manufacturer's warranties to the obligor for the term of the lease. Under true
leases, the obligor accepts the equipment under the applicable contract
following delivery and an opportunity to inspect the related equipment.
ADDITIONAL EQUIPMENT
If specified in your prospectus supplement, some of the contracts
which are subject to a true lease constitute leases of additional equipment,
generally costing $25,000 or less, with existing obligors. Pursuant to the terms
of the original contract between the lessor and the obligor, the parties
document leases for additional equipment on a written form that the lessor
prepares and delivers to the obligor, but the obligor does not execute, which
written form describes all of the terms of the lease. Under the terms of the
contract, the obligor agrees that unless it objects in writing within a
specified period of time, it is deemed to have accepted the lease of this
additional equipment.
REPRESENTATIONS AND WARRANTIES MADE BY THE SELLER
Unless otherwise set forth in your prospectus supplement, the seller
of contracts to the depositor, will make the representations and warranties set
forth below regarding the contracts and the related equipment included in each
pool of contracts transferred to an owner trust as of the related transfer date.
The representations and warranties will also apply to contracts that the
depositor reacquires from a trust to which the depositor previously transferred
the contracts in connection with a warehouse receivables securitization
facility.
(1) the information with respect to the contracts is true and correct
in all material respects;
(2) immediately prior to the transfer of a contract, the contract was
owned by the transferring party free and clear of any adverse
claim except for permitted claims;
(3) the contract is not a defaulted or delinquent contract;
(4) no provision of the contract has been waived, altered or modified
in any material respect, except by instruments or documents
contained in the files relating to the contract;
(5) the contract is a valid and binding payment obligation of the
obligor and its terms are enforceable, except as may be limited
by insolvency, bankruptcy, moratorium, reorganization, or other
similar laws affecting enforceability of creditors' rights and
the availability of equitable remedies;
(6) the contract is not and will not be subject to rights of
rescission, setoff, counterclaim or defense;
(7) the contract, at the time it was made, did not violate the laws
of the United States or any state in any material respect;
(8) (A) the contract and any related equipment have not been sold,
transferred, assigned or pledged by the originator to any person
other than the end-user, the seller, the depositor or any related
financing trust; and
(B) either
(x) the contract is secured by a perfected lien, subject to
permitted liens and subject to minimum filing value
exceptions, on the related equipment or, in the case of
any vendor loan, related end-user contract or equipment
or
(y) in the case of a contract secured by a vehicle, within
90 calendar days of the origination or a acquisition of
the contract by the originator all required state
registration or recording procedures were initiated,
and the originator's interest will be so noted or
recorded within 180 days of the acquisition or
origination;
(9) if the contract constitutes either an "INSTRUMENT" or "CHATTEL
PAPER" for purposes of the Uniform Commercial Code, there is not
more than one "SECURED PARTY'S ORIGINAL" counterpart of the
contract;
(10) all filings necessary to evidence the conveyance or transfer of
the contract to the depositor have been made or provided for in
all appropriate jurisdictions, except that the parties have not
made filings to note the seller;
(11) the obligor is not, to the seller's knowledge, subject to
bankruptcy or other insolvency proceedings;
(12) the contract is a U.S. dollar-denominated obligation and the
obligor's billing address is located in the United States or
Puerto Rico;
(13) the contract does not require the prior written notifications to
a consent of an obligor or contain any other restriction on the
transfer or assignment of the contract other than notifications
that will have been given and consents or waivers of restrictions
that will have been obtained within ten days after the date the
contract was sold to the trust;
(14) the obligations of the related obligor under the contract are
irrevocable and unconditional and non-cancelable or, if not
irrevocable and unconditional, are guaranteed by the vendor; or
in the case of leases with governments, upon a cancellation of
the lease, either the vendor is obligated to repurchase the lease
or the seller will indemnify the depositor in respect of the
cancellation;
(15) no adverse selection procedure was used in selecting the contract
for transfer;
(16) the obligor under the contract is required to maintain casualty
insurance with respect to the related equipment or to self-insure
against casualty with respect to the related equipment in an
amount that is consistent with servicer's normal servicing
requirements;
(17) the contract constitutes chattel paper, an account, an instrument
or a general intangible as defined under the Uniform Commercial
Code;
(18) no lease is a "CONSUMER LEASE" as defined in Section 2A-103(1)(e)
of the Uniform Commercial Code;
(19) to the best knowledge of the relevant originator each lessee has
accepted the related equipment and has had a reasonable
opportunity to inspect the equipment;
(20) except as provided in (14) above, the contract is not guaranteed
by any originator nor has the originator established any specific
credit reserve with respect to the related obligor;
(21) each lease is a "TRIPLE NET LEASE" under which the obligor is
responsible for the maintenance of the related equipment in a
manner that conforms with general industry standards;
(22) each vendor loan is secured by an eligible end-user contract(s)
having an aggregate contract principal balance(s) equal to the
outstanding principal amount of the vendor loan. In this context,
an eligible end-user contract is one that
A. satisfies all of these representations and warranties except
number (2) above and number (8) above, in respect of
ownership by the applicable originator;
B. in which the relevant originator or financing trust has a
perfected lien; and
C. in which the transfer of the relevant originator's or
financing trust's security interest in the contract to the
owner trust creates a duly perfected lien;
(23) the obligor is not the United States of America or any agency,
department, subdivision or instrumentality of the United States
of America;
(24) the contract contains customary provisions for this type of
financing, and the provisions are sufficient and enforceable,
except as listed as noted in (5) above, to enable the relevant
originator or its assignees to realize against the financed items
securing the contract; and
(25) if the obligor is a state or local government entity, the
transfer of the contract does not violate any applicable state or
local laws restricting or prohibiting transfer.
The owner trust may modify the above representations and warranties
and will describe any modification in the relevant prospectus supplement.
In the event of a breach of any representation or warranty with
respect to a contract that materially and adversely affects the owner trust's or
any noteholder's or equity certificateholder's interest in the contract or the
collectibility of the contract, the owner trust will have a warranty claim
against the seller. The seller will then be obligated to repurchase the
contract. However, the seller need not do so if the seller cures the breach by
the second deposit date after the date on which the servicer becomes aware and
gives notice to the seller of the breach. Any purchase shall be made on the
deposit date immediately following the end of the second collection period at a
price equal to the required payoff amount of the contract. The purchase price
will be allocated to the related owner trust plus, if applicable, the book value
of the related equipment which will be allocated to the depositor. The related
indenture trustee may enforce this purchase obligation on your behalf, and this
will constitute your sole remedy available against the seller, the depositor,
the trust or the originators for any uncured breach, except that the seller will
indemnify
o the related indenture trustee,
o the related owner trustee, and
o the related owner trust
against losses, damages, liabilities and claims which may be asserted against
any of them as a result of third-party claims arising out of the facts giving
rise to that breach. The seller may, in lieu of repurchasing the contract, cause
the depositor to deliver a substitute contract as provided in the next-following
section of this prospectus.
Upon the purchase by the seller of a contract, the depositor will
release the contract and related equipment to the seller.
SUBSTITUTION OF CONTRACTS
The depositor will have the option to substitute one or more contracts
having similar characteristics for contracts which are in default or have been
prepaid or which have undergone material modification. In addition, in the case
of a contract subject to a warranty claim, as described in " -- REPRESENTATIONS
AND WARRANTIES MADE BY THE SELLER" above, the seller may choose to replace the
contract with a substitute contract.
Some contracts may permit the obligor to prepay the amounts due under
the contract or otherwise to terminate the contract prior to its scheduled
expiration date. The depositor may replace any prepaid contract with a
substitute contract in lieu of applying the proceeds of the prepaid contract to
the pledged revenues as described in this section.
Material modification of a contract means a termination, release,
amendment, modification or waiver of a contract that is not otherwise permitted
under the pooling and servicing agreement. The depositor may provide substitute
contracts for any that have been so materially modified. The depositor may also
replace any defaulted contract with a substitute contract. The aggregate
contract principal balances of the defaulted contracts for which the depositor
may cause substitution is limited to 10% of the cut-off contract pool principal
balance. The depositor may replace a prepaid contract with a substitute contract
and the seller may choose to replace contracts subject to a warranty claim or a
material modification with substitute contracts, in either case without regard
to the 10% limitation described above.
The same credit criteria and eligibility standards for the contracts
in the contract pool on the closing date will also apply to substitute contracts
added to the assets of the owner trust. The servicer will include information
with respect to these substitute contracts, to the extent the servicer deems
them material, in required periodic reports under the Securities Exchange Act of
1934 filed with the Securities and Exchange Commission on behalf of the owner
trust. The substitute contracts will have contract principal balances equal to
or greater than the contracts being replaced. The representations and warranties
the seller makes with respect to the contracts in " -- REPRESENTATIONS AND
WARRANTIES MADE BY THE SELLER" above will be equally applicable to substitute
contracts.
DELINQUENCY AND NET LOSS EXPERIENCE
Your prospectus supplement will set forth statistics relating to the
delinquency and net loss experience on contracts within the originators' owned
and managed portfolios of receivables similar to the contracts in a contract
pool.
DESCRIPTION OF THE NOTES AND INDENTURE
The issuance of each series of notes will be under an indenture, a
form of which was filed with the Securities and Exchange Commission as an
exhibit to the registration statement of which this prospectus is a part. In
addition, a copy of the indenture for a series of notes will be filed with the
Securities and Exchange Commission following the issuance of each series. The
following summary describes certain material terms which may be common to each
indenture and the related notes, but does not purport to be complete and is
subject to all of the provisions of the indenture, the related notes and the
description set forth in your prospectus supplement.
The notes of each series will be issued in fully registered form only
and will represent the obligations of a separate owner trust.
Payments on the notes will be made by the indenture trustee on each
payment date to persons in whose names the notes are registered as of the
related record date. Unless otherwise specified in your prospectus supplement,
the payment date for the notes will be the 20th day of each month, or if the
20th is not a business day, the next succeeding business day. Unless otherwise
specified in your prospectus supplement, for so long as the notes are in
book-entry form, the record date for any payment date will be the business day
immediately preceding the payment date. Unless otherwise specified in your
prospectus supplement, if the owner trust issues certificated notes, the record
date will be the last business day of the month immediately preceding the
payment date.
A business day is any day other than a Saturday, Sunday or legal
holiday on which commercial banks in New York City or such other jurisdictions
specified in your prospectus supplement are open for regular business.
DISTRIBUTIONS
Your prospectus supplement will describe as to your series of notes
o the timing and priority of distributions,
o the amount or method of determining distributions,
o allocations of loss and
o the interest rates.
If specified in the related prospectus supplement, the trust may issue
securities from time to time and use the proceeds of this issuance to make
principal payments with respect to the notes of your series.
CREDIT ENHANCEMENT
As further specified in the your prospectus supplement,
o a cash collateral account,
o a financial guaranty insurance policy,
o subordination of one or more classes of notes,
o overcollateralization,
o letters of credit or liquidity facilities,
o repurchase obligations,
o third party payments or other support,
o cash deposits,
o a reserve fund or
o other form of credit enhancement which may become suitable
in light of credit enhancement practices or developments in
the future
may be established on or prior to the date the contracts are transferred. The
credit enhancement would be available to the related indenture trustee to pay
interest and principal on the notes in the manner and to the extent specified in
your prospectus supplement.
LIQUIDATION AND INSURANCE PROCEEDS
The allocation of liquidation proceeds which will consist generally of
all amounts the servicer receives in connection with the liquidation of a
contract and disposition of the related equipment, net of any related
out-of-pocket liquidation expenses, and the allocation of insurance proceeds for
physical damage to or loss of equipment covered by contracts, will be as follows
unless otherwise specified in your prospectus supplement:
1) with respect to any contract subject to financing, the
proceeds will be allocated to the owner trust; and
2) with respect to any contract subject to a lease, the
proceeds will, unless otherwise specified in your prospectus
supplement, be allocated on a pro rata basis between the
depositor, on the one hand, and the owner trust, on the
other, based respectively on
(a) the book value of the related equipment and
(b) the required payoff amount for the contract.
However, if the proceeds in respect of any contract subject to a lease and the
related equipment exceed the sum of the required payoff amount for the contract
and the book value of the equipment, the excess shall be allocated solely to the
depositor. For example, if the servicer, in connection with a defaulted contract
subject to a lease, derived liquidation proceeds in the amount of $100 from the
liquidation of the contract and disposition of the related equipment, and if the
required payoff amount of the contract was, as of the collection period during
which the contract became a liquidated contract, $120 and the book value of the
equipment was $30, the liquidation proceeds would be allocated to the owner
trust in the amount of $80 and to the depositor in the amount of $20. All
liquidation proceeds which are so allocable to the owner trust will be deposited
in a collection account and constitute pledged revenues to be applied to the
payment of interest and principal on the notes in accordance with the priorities
described under " -- DISTRIBUTIONS" above.
OPTIONAL PURCHASE OF CONTRACTS AND REDEMPTION OF NOTES
The seller or other entity specified in your prospectus supplement may
purchase all of the contracts owned by an owner trust on any payment date
following the date on which the unpaid principal balance of the related notes is
less than 10%, or such other percentage specified in your prospectus supplement,
of the initial contract pool principal balance. Except as otherwise described in
the prospectus supplement for your notes, the purchase price to be paid in
connection with the purchase shall be at least equal to the sum of
o the unpaid principal balance of the related notes as of that
payment date,
o accrued but unpaid interest,
o unreimbursed servicer advances, and
o accrued but unpaid servicer fees.
If the seller or another entity does purchase the contracts, the related notes
shall be redeemed on the payment date on which the purchase occurs. The
redemption price will be the principal amount of the notes plus accrued and
unpaid interest to but excluding the redemption date.
TRUST ACCOUNTS
Except as otherwise specified in your prospectus supplement, the
applicable indenture trustee will establish and maintain under each indenture
segregated trust accounts which need not be deposit accounts, but which must be
with a qualified institution. These accounts will include, among others, the
"COLLECTION ACCOUNT" and the "DISTRIBUTION ACCOUNT." The accounts may, as
described in the prospectus supplement for your notes, also include a cash
collateral or reserve fund account as credit enhancement. All of these accounts
are referred to collectively as the "TRUST ACCOUNTS."
"Qualified institution" means the corporate trust department of the
indenture trustee or any other depository institution
o organized under the laws of the United States or any state
or any domestic branch of a foreign bank,
o the deposits of which are insured by the Federal Deposit
Insurance Corporation and
o which has, or whose parent corporation has, short-term or
long-term debt ratings acceptable to Moody's Investors
Service, Inc., Standard & Poor's Ratings Services, a
division of The McGraw-Hill Companies, Inc. and Duff &
Phelps Credit Rating Co.
The servicer, as agent for the indenture trustee of any series, may
designate, or otherwise arrange for the purchase by the indenture trustee of,
investments to be made with funds in the trust accounts. All investments shall
be eligible investments as defined in the related indenture that will mature not
later than the business day preceding the applicable monthly payment date or any
other date approved by the rating agencies. Eligible investments include, among
other investments:
o obligations of the United States or of any agency of the
United States backed by the full faith and credit of the
United States;
o demand deposits, certificates of deposit, time deposits
demand notes or bankers acceptance of eligible financial
institutions;
o highly rated commercial paper or money market funds;
o repurchase agreements in respect of United States government
securities or securities guaranteed or otherwise backed by
the full faith and credit of the United States Government
with eligible institutions; and
o other investments which have been approved by each rating
agency.
REPORTS TO NOTEHOLDERS
With respect to each series of notes, the servicer will furnish to the
applicable indenture trustee, and the indenture trustee will include with each
distribution to you, a statement, as specified in your prospectus supplement, in
respect of the related payment date.
If you purchase a note, you may receive these reports by making a
written request to The Depository Trust Company. These reports do not constitute
financial statements prepared in accordance with generally accepted accounting
principles. None of the depositor, the sponsor, nor the servicer intends to send
any of their respective financial reports to owners of notes. The servicer, on
behalf of an owner trust, will file with the Securities and Exchange Commission
legally required periodic reports concerning the owner trust.
With respect to any series, the notes will be registered in the name
of a nominee of The Depository Trust Company and will not be registered in the
names of the beneficial owners or their nominees. As a result, unless and until
definitive notes are issued in the limited circumstances described under " --
ISSUANCE OF CERTIFICATED NOTES AT A LATER DATE" below, the indenture trustee
will not recognize you as a noteholder, as that term is used in the related
indenture. Hence, until that time, you will receive reports and other
information provided for under the related indenture only if, when and to the
extent The Depository Trust Company and its participating organizations provide
this information. The servicer will file a copy of each report with the
Securities and Exchange Commission on Form 8-K to the extent the Securities
Exchange Act of 1934 and the rules and regulations of the Securities and
Exchange Commission under the Exchange Act require it.
BOOK-ENTRY REGISTRATION
Unless your prospectus supplement states otherwise, you may hold your
notes through The Depository Trust Company, referred to as "DTC," in the United
States, or Clearstream, Luxembourg or Euroclear System in Europe, if you are a
participant of those systems, or indirectly through organizations that are
participants in those systems.
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 Uniform Commercial Code and a
"clearing agency" registered under to Section 17A of the Exchange Act. DTC was
created to hold securities for its direct participants and to facilitate the
clearance and settlement of securities transactions between its direct
participants through electronic book-entries, thus eliminating the need for
physical movement of certificates. DTC's direct participants include
o the underwriters offering the notes to you,
o securities brokers and dealers,
o banks,
o trust companies and
o clearing corporations, and may include other organizations.
Indirect access to the DTC system is also available to others such as banks,
brokers, dealers and trust companies that clear through or maintain a custodial
relationship with a direct participant, either directly or indirectly.
To facilitate subsequent transfers, DTC will register all deposited
notes in the name of DTC's nominee, Cede & Co. You will maintain beneficial
ownership of the notes despite the deposit of notes with DTC and their
registration in the name of Cede. DTC has no knowledge of the actual
noteholders; DTC's records reflect only the identity of its direct participants
to whose accounts the notes are credited, which may or may not be the
noteholders. DTC's direct and indirect participants will remain responsible for
keeping account of their holdings on behalf of their customers.
You have no entitlement to receive a certificate representing your
interest in a class of notes. As long as the notes are registered in the name of
Cede & Co., any action to be taken by you or any other noteholders will be taken
by DTC upon instructions from DTC's participants. All distributions, notices,
reports and statements to noteholders will be delivered to Cede, as the
registered holder of the notes, for distribution to noteholders in compliance
with DTC procedures.
You will receive all payments of principal and interest on the notes
through direct participants or indirect participants. DTC will forward the
payments to its direct participants which will forward them to indirect
participants or noteholders. Under a book-entry format, you may experience some
delay in their receipt of payments, since payments will be forwarded to Cede as
nominee of DTC. The indenture trustee will not recognize you as a noteholder, as
that term is used in the indenture. You may exercise the rights of noteholders
only indirectly through DTC and its direct participants and indirect
participants. Because DTC can act only on behalf of direct participants, who in
turn act on behalf of indirect participants, and on behalf of banks, trust
companies and other persons approved by it, there may be limits on your ability
to pledge the notes to persons or entities that do not participate in the DTC
system, or to otherwise act with respect to notes, due to the absence of
physical notes for the notes.
Arrangements among the various parties govern conveyance of notices
and other communications by
o DTC to direct participants,
o by direct participants to indirect participants and
o by direct participants and indirect participants to
noteholders, subject to any statutory or regulatory
requirements as may be in effect from time to time.
Standing instructions and customary practices govern payments by DTC
participants to noteholders, as is the case with securities held for the
accounts of customers in bearer form or registered in "street name" and will be
the responsibility of the DTC participant and not of DTC, the indenture trustee,
the owner trustee, the originators or the originator, subject to any statutory
or regulatory requirements as may be in effect from time to time. Payment of
principal and interest to DTC is the responsibility of the indenture trustee,
disbursement of the payments to direct participants shall be the responsibility
of DTC and disbursement of payments to noteholders shall be the responsibility
of direct participants and indirect participants.
Purchases of notes under the DTC system must be made by or through
direct participants, which will receive a credit for the notes on DTC's records.
The ownership interest of each actual noteholder is in turn to be recorded on
the direct participants' and indirect participants' records. Noteholders will
not receive written confirmation from DTC of their purchase, but noteholders are
expected to receive written confirmations providing details of the transaction,
as well as periodic statements of their holders, from the direct participant or
indirect participant through which the noteholder entered into the transaction.
Entries made on the books of DTC's participants acting on behalf of noteholders
evidence transfers of ownership interests in the notes.
DTC will not comment or vote with respect to the notes. DTC has
advised that it will take any action permitted to be taken by a noteholder under
the indenture only at the direction of one or more direct participants to whose
accounts with DTC the notes are credited. Additionally, DTC has advised that to
the extent that the indenture requires that any action may be taken only by
noteholders representing a specified percentage of the aggregate outstanding
principal amount of the notes, DTC will take the action only at the direction of
and on behalf of direct participants, whose holdings include undivided interests
that satisfy the specified percentage.
DTC may discontinue providing its services as securities depositary
with respect to the notes at any time by giving reasonable notice to the
indenture trustee. Under these circumstances, in the event that a successor
securities depositary is not obtained, fully registered, certificated notes are
required to be printed and delivered. The originator may decide to discontinue
use of the system of book-entry transfers through DTC or a successor securities
depositary. In that event, fully registered, certificated notes will be
delivered to noteholders. See " -- ISSUANCE OF DEFINITIVE NOTES AT A LATER
DATE."
The information in this section concerning DTC and DTC's book-entry
system are from sources that the sponsor believes to be reliable, but neither
the sponsor nor the owner trustee take any responsibility for the accuracy of
this information.
Clearstream Banking, societe anonyme, 67 Bd Grande-Duchesse Charlotte,
L-2967 Luxembourg ("Clearstream, Luxembourg"), was incorporated in 1970 as
"Cedel S.A.", a company with limited liability under Luxembourg law (a societe
anonyme). Cedel S.A. subsequently changed its name to Cedelbank. On January 10,
2000, Cedelbank's parent company, Cedel International, societe anonyme ("CI")
merged its clearing, settlement and custody business with that of Deutsche Borse
Clearing AG ("DBC"). The merger involved the transfer by CI of substantially all
of its assets and liabilities (including its shares in CB) to a new Luxembourg
company, New Cedel International, societe anonyme ("New CI"), which is 50% owned
by CI and 50% owned by DBC's parent company Deutsche Borse AG. The shareholders
of these two entities are banks, securities dealers and financial institutions.
Cedel International currently has 92 shareholders, including U.S. financial
institutions or their subsidiaries. No single entity may own more than 5 percent
of Cedel International's stock.
Further to the merger, the Board of Directors of New Cedel
International decided to rename the companies in the group in order to give them
a cohesive brand name. The new brand name that was chosen is "Clearstream". With
effect from January 14, 2000 New CI has been renamed "Clearstream International,
societe anonyme". On January 18, 2000, Cedelbank was renamed "Clearstream
Banking, societe anonyme", and Cedel Global Services was renamed "Clearstream
Services, societe anonyme".
On January 17, 2000 DBC was renamed "Clearstream Banking AG". This
means that there are now two entities in the corporate group headed by
Clearstream International which share the name "Clearstream Banking", the entity
previously named "Cedelbank" and the entity previously named "Deutsche Brse
Clearing AG".
Clearstream, Luxembourg holds securities for its customers
("Clearstream, Luxembourg Participants") and facilitates the clearance and
settlement of securities transactions between Clearstream, Luxembourg customers
through electronic book-entry changes in accounts of Clearstream, Luxembourg
customers, thereby eliminating the need for physical movement of certificates.
Transactions may be settled by Clearstream, Luxembourg in any of 36 currencies,
including United States Dollars. Clearstream, Luxembourg provides to its
customers, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. Clearstream, Luxembourg also deals with domestic
securities markets in over 30 countries through established depository and
custodial relationships. Clearstream, Luxembourg is registered as a bank in
Luxembourg, and as such is subject to regulation by the Commission de
Surveillance du Secteur Financier, "CSSF", which supervises Luxembourg banks.
Clearstream, Luxembourg's customers are world-wide financial institutions
including underwriters, securities brokers and dealers, banks, trust companies
and clearing corporations. Clearstream, Luxembourg's U.S. customers are limited
to securities brokers and dealers, and banks. Currently, Clearstream, Luxembourg
has approximately 2,000 customers located in over 80 countries, including all
major European countries, Canada, and the United States. Indirect access to
Clearstream, Luxembourg is available to other institutions that clear through or
maintain a custodial relationship with an account holder of Clearstream,
Luxembourg. Clearstream, Luxembourg has established an electronic bridge with
Morgan Guaranty Trust Company of New York as the Operator of the Euroclear
System (MGT/EOC) in Brussels to facilitate settlement of trades between
Clearstream, Luxembourg and MGT/EOC.
Clearstream, Luxembourg and Euroclear will hold omnibus positions on
behalf of the participants in the Clearstream, Luxembourg and Euroclear systems,
respectively, through customers' securities accounts in Clearstream, Luxembourg
's and Euroclear's names on the books of their respective depositaries which in
turn will hold these positions in customers' securities accounts in the
depositaries' names on the books of DTC.
Clearstream, Luxembourg is incorporated under the laws of Luxembourg
as a professional depositary. Clearstream, Luxembourg holds securities for its
participants and facilitates the clearance and settlement of securities
transactions between its participants through electronic book-entry changes in
accounts of its participants, thus eliminating the need for physical movement of
certificates.
Indirect access to Clearstream, Luxembourg is also available to
others, such as banks, brokers, dealers and trust companies that clear through
or maintain a custodial relationship with a Clearstream, Luxembourg participant,
either directly or indirectly.
Euroclear was created in 1968 to hold securities for participants of
Euroclear and to clear and settle transactions between Euroclear's participants
through simultaneous electronic book-entry delivery against payment, thus
eliminating the need for physical movement of certificates and any risk from
lack of simultaneous transfers of securities and cash. The Brussels, Belgium
office of Morgan Guaranty Trust Company of New York operates Euroclear, under
contract with Euroclear Clearance Systems S.C., a Belgian cooperative
corporation. Euroclear's operator conducts all operations and all Euroclear
securities clearance accounts and Euroclear cash accounts are accounts with
Euroclear's operator. Euroclear Clearance Systems S.C. establishes policy for
Euroclear on behalf of Euroclear's participants, including banks, securities
brokers and dealers, and other professional financial intermediaries.
Indirect access to Euroclear is also available to other firms that
clear through or maintain a custodial relationship with a Euroclear participant,
either directly or indirectly.
Morgan Guaranty Trust Company of New York is the Belgian branch of a
New York banking corporation which is a member bank of the Federal Reserve
System. As such, the Board of Governors of the Federal Reserve System and the
New York Banking Department, as well as the Belgian Banking Commission,
regulates and examines it.
Euroclear holds all securities on a fungible basis without attribution
of specific certificates to specific securities clearance accounts. The
Euroclear operator acts under the Euroclear Terms and Conditions only on behalf
of Euroclear's participants, and has no record of or relationship with persons
holding through Euroclear's participants.
Transfers between direct participants will comply with DTC rules.
Transfers between Clearstream, Luxembourg 's participants and Euroclear's
participants will comply with their rules and operating procedures.
DTC will effect, under DTC rules, cross-market transfers between
persons holding directly or indirectly through DTC in the United States, on the
one hand, and directly or indirectly through Clearstream, Luxembourg or
Euroclear, on the other, through the relevant European international clearing
system through its Depositary; however, these cross-market transactions will
require delivery of instructions to the relevant European international clearing
system by the counterparty in this system as required by 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 its depositary to take action
to effect final settlement on its behalf by delivering or receiving securities
in DTC, and making or receiving payment using its normal procedures for same-day
funds settlement applicable to DTC. Clearstream, Luxembourg participants and
Euroclear participants may not deliver instructions directly to the
depositaries.
Because of time-zone differences, credits of securities in
Clearstream, Luxembourg or Euroclear as a result of a transaction with a DTC
participant will be made during the subsequent securities settlement processing
day, dated the business day following the DTC settlement date, and the credits
or any transactions in the securities settled during the processing day will be
reported to the relevant Clearstream, Luxembourg participant or Euroclear
participant on that business day. Cash received in Clearstream, Luxembourg or
Euroclear as a result of sales of securities by or through a Clearstream,
Luxembourg participant or a Euroclear participant to a DTC participant will be
received with value on the DTC settlement date but will be available in the
relevant Clearstream, Luxembourg or Euroclear cash account only as of the
business day following settlement in DTC.
Although DTC, Clearstream, Luxembourg and Euroclear have agreed to the
foregoing procedures in order to facilitate transfers of notes among
participants of DTC, Clearstream, Luxembourg and Euroclear, they are under no
obligation to perform or continue to perform these procedures and these
procedures may be discontinued at any time.
Except as required by law, none of the seller, the company, any
originator, the owner trustee, the depositor or the indenture trustee will have
any liability for any aspect of the records relating to, actions taken or
implemented by, or payments made on account of, beneficial ownership interests
in the notes held through DTC, or for maintaining, supervising or reviewing any
records or actions relating to beneficial ownership interests.
ISSUANCE OF CERTIFIED NOTES AT A LATER DATE
The owner trust will issue notes in fully registered, certificated
form to beneficial owners or their nominees rather than to DTC or its nominee,
only if:
(1) the owner trustee advises the indenture trustee in writing
that DTC is no longer willing or able to discharge properly its
responsibilities as depository with respect to the notes, and the
owner trustee or the indenture trustee is unable to locate a qualified
successor,
(2) the owner trustee elects to terminate the book-entry system,
or
(3) after the occurrence of an event of default under the
indenture, the holder of at least 66 2/3% of the principal amount of
its outstanding notes advises the indenture trustee that the
continuation of the book-entry system is met in their best interests.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the indenture trustee must notify all beneficial owners for
each class of notes held through DTC of the availability of notes in fully
registered, certificated form. Upon surrender by DTC of the global note
representing the notes and instructions for reregistration, the indenture
trustee will issue these fully registered, certificated notes, and the indenture
trustee will recognize the holders of fully registered, certificated notes as
noteholders under the indenture.
Additionally, upon the occurrence of any event described above, the
indenture trustee will distribute principal of and interest on the notes
directly to you as required by the indenture. Distributions will be made by
check, mailed to your address as it appears on the note register. Upon at least
five days' notice to noteholders for the class, however, the indenture trustee
will make the final payment on any note only upon presentation and surrender of
the note at the office or agency specified in the notice of final distribution
to noteholders. The indenture trustee will make the final payment in this manner
whether the notes are fully registered, certificated notes or the note for the
class registered in the name of Cede & Co. representing the notes of the class.
You may transfer any fully registered, certificated notes of any class
at the offices of the indenture trustee or its agent in New York, New York,
which the indenture trustee shall designate on or prior to the issuance of any
fully registered, certificated notes with respect to that class. There is no
service charge for any registration of transfer or exchange, but the indenture
trustee may require payment of a sum sufficient to cover any tax or other
governmental charge imposed in connection with the transfer or exchange.
MODIFICATION OF INDENTURE WITHOUT NOTEHOLDER CONSENT
Unless your prospectus supplement states otherwise, the owner trust
and the indenture trustee for a note series may, without your consent, enter
into one or more supplemental indentures for any of the following purposes:
o to change the collateral description;
o to provide for a successor to the owner trust to assume the
notes and the indenture obligations;
o to add additional covenants for your benefit, or to
surrender any rights or power of the owner trust;
o to transfer or pledge any property to the indenture trustee;
o if not adverse to the interests of noteholders, to correct
or supplement any provision in the indenture that is
ambiguous or inconsistent with any other provision of the
indenture or to make any other provision in respect of
matters under the indenture;
o to accept a successor indenture trustee or to change the
provisions of the indenture to facilitate the administration
by more than one trustee;
o to comply with the Trust Indenture Act of 1939, as amended;
or
o to elect to come under the FASIT provision of the Internal
Revenue Code, if the owner trust provides an opinion of
counsel as to no adverse impact on noteholders.
MODIFICATION OF INDENTURE WITH NOTEHOLDER CONSENT
Unless your prospectus supplement states otherwise, with the consent
of the required majority of the noteholders determined as described in the
prospectus supplement for your notes, prior notice to each rating agency and an
opinion of counsel, the owner trustee and the indenture trustee may modify the
indenture and your rights under it.
Without the consent of the holder of each outstanding note affected,
however, no modification of the indenture may:
o reduce the note principal amount, interest rate or
redemption price or change the timing of payments;
o modify the manner of application of payments in respect to
contracts to the notes;
o impair your right to sue to enforce payment provisions of
the indenture;
o reduce the percentage needed for consents of noteholders;
o permit the creation of any lien on collateral under the
indenture ranking prior to or on a parity with the lien of
the indenture;
o adversely affect the manner of determining notes outstanding
or the requisite note for liquidating the trust estate; or
o modify the provisions of the indenture relating to these
types of indenture modification without the consent of all
noteholders.
EVENTS OF DEFAULT; RIGHTS UPON EVENT OF DEFAULT
Except as otherwise provided in the prospectus supplement for your
notes, events of default under each indenture will consist of:
o a default for five calendar days or more in the payment of
interest due on any note;
o failure to pay the unpaid principal amount of any class of
notes on the maturity date for the notes;
o failure of the owner trust or the depositor to observe any
provisions set forth in the pooling and servicing agreement
or the indenture, which failure has a material adverse
effect on the noteholders and continues for 60 calendar days
after written notice;
o any representation or warranty made by the owner trust or
the depositor in the pooling and servicing agreement or
indenture was incorrect as of the time made, and continues
to be incorrect for a period of 60 calendar days after
notice is given and as a result of which the noteholders are
materially and adversely affected. A breach of a
representation or warranty as to a contract will be
considered not to have occurred if the seller purchases the
contract or effects a substitution for it, as provided in
"THE CONTRACTS -- REPRESENTATIONS AND WARRANTIES MADE BY THE
SELLER" and " -- SUBSTITUTION OF CONTRACTS" above;
o events of bankruptcy, insolvency, receivership or
liquidation of the owner trust or the depositor; or
o the owner trust becomes an investment company.
If an event of default should occur and be continuing with respect to
the notes of a series, the required holders may, except as to a bankruptcy or
insolvency event of default, deem the event not to have occurred.
If the indenture trustee declares the notes of a series due and
payable following an event of default, the indenture trustee may:
o institute proceedings to collect amounts due or foreclose on
the indenture collateral,
o exercise remedies as a secured party, or
o sell the indenture collateral, or elect to have the owner
trust maintain possession of the pledged revenues.
Unless otherwise provided in your prospectus supplement, the indenture
trustee, however, may not sell the indenture collateral following an event of
default, except an event arising from the owner trust's failure to pay interest
or principal, unless:
o the holders of all the outstanding notes consent to the
sale;
o the proceeds of the sale distributable to holders of the
notes are sufficient to pay in full the principal and
accrued interest on all the outstanding notes at the date of
the sale; or
o the indenture trustee determines, in complete reliance on
investment banking or accounting firm certifications, that
the trust estate would not be sufficient on an ongoing basis
to make all payments on the notes as the payments would have
become due if the obligations had not been declared due and
payable, and the indenture trustee obtains the consent of
the required holders.
Following a declaration upon an event of default that the notes are immediately
due and payable, the application of any proceeds of liquidation of the pledged
revenues will be in the order of priority described in the prospectus supplement
for your class of notes.
If an event of default occurs and is continuing, the indenture trustee
will be under no obligation to exercise any of the rights or powers under the
indenture at the request or direction of any of the holders of the notes, if the
indenture trustee reasonably believes it will not be adequately indemnified
against the costs, expenses and liabilities which it may incur in complying with
that request. A majority of the noteholders will have the right to direct the
time, method and place of conducting any proceeding or any remedy available to
the indenture trustee. Additionally, a majority of the noteholders may, in some
cases, waive any default, except a default in the payment of principal or
interest or a default in respect of a covenant or provision of the indenture
that cannot be modified without the waiver or consent of all of the holders of
the outstanding notes.
Unless otherwise provided in your prospectus supplement, no holder of
a note will have the right to institute any proceeding with respect to the
indenture, unless:
o the holder previously has given to the indenture trustee
written notice of a continuing event of default;
o the holders of not less than 25% in principal amount of the
outstanding notes make written request of the indenture
trustee to institute the proceeding in its own name as
indenture trustee;
o the holder or holders offer the indenture trustee reasonable
indemnity;
o the indenture trustee has for 60 days failed to institute
the proceeding; and
o no direction inconsistent with that written request has been
given to the indenture trustee during the 60-day period by
the holders of a majority in principal amount of the
outstanding notes.
In addition, the indenture trustee and you, by accepting the notes,
will covenant that they will not at any time institute against the sponsor, the
seller, the depositor or the owner trust any bankruptcy, reorganization or other
proceeding under any federal or state bankruptcy or similar law.
Neither the indenture trustee nor the owner trustee in its individual
capacity, nor the sponsor, the seller, the depositor, nor any of their
respective owners, beneficiaries, agents, officers, directors, employees,
affiliates, successors or assigns will be personally liable for the payment of
the notes or for any agreement or covenant of the owner trust contained in the
indenture.
OWNER TRUST COVENANTS
Each indenture will provide that the related owner trust may not
consolidate with or merge into any other entity, unless:
o the entity formed by or surviving the consolidation or
merger is organized under the laws of the United States or
any state;
o the entity expressly assumes the owner trust's obligation to
make due and punctual payments upon the notes and the
performance or observance of every agreement and covenant of
the owner trust under the indenture;
o no event of default shall have occurred and be continuing
immediately after the merger or consolidation;
o the rating agencies advise the owner trustee that the rating
of the notes then in effect would not be reduced or
withdrawn as a result of the merger or consolidation;
o the owner trustee has received an opinion of counsel to the
effect that the consolidation or merger would have no
material adverse tax consequence to the owner trust or to
any noteholder or equity certificate holder; and
o the owner trust or the person, if other than the owner
trust, formed by or surviving the consolidation or merger
has a net worth, immediately after the consolidation or
merger, that is (a) greater than zero and (b) not less than
the net worth of the owner trust immediately prior to giving
effect to the consolidation or merger.
Each owner trust will not, among other things:
o except as expressly permitted by the related indenture or
trust agreement, transfer any of the assets of the owner
trust;
o claim any credit on or make any deduction from, the
principal and interest payable in respect of the related
notes, other than amounts withheld under the bankruptcy code
or applicable state law, or assert any claim against any
present or former holder of notes because of the payment of
taxes levied or assessed upon the owner trust;
o dissolve or liquidate in whole or in part;
o permit the validity or effectiveness of the indenture to be
impaired or permit the release of any person from any
covenants or obligations relating to the notes under the
indenture except as expressly permitted in the indenture; or
o except as expressly permitted in the indenture, the pooling
and servicing agreement or the trust agreement, permit any
lien or claim to burden any assets of the owner trust.
No owner trust may engage in any activity other than as specified
above under "THE OWNER TRUSTS." Each owner trust will not incur, assume or
guarantee any indebtedness other than indebtedness incurred under the related
notes and the related indenture or otherwise in accordance with the related
indenture, trust agreement and pooling and servicing agreement.
ANNUAL COMPLIANCE STATEMENT
Each owner trust will be required to file annually with the applicable
indenture trustee a written statement as to the fulfillment of its obligations
under the indenture.
INDENTURE TRUSTEE'S ANNUAL REPORT
Each indenture trustee will be required to mail each year to all
noteholders of the related series a brief report relating to:
o its eligibility and qualification to continue as indenture
trustee under the related indenture,
o any amounts advanced by it under the indenture,
o the amount, interest rate and maturity date of certain
indebtedness owing by the owner trust to the indenture
trustee in its individual capacity,
o the property and funds physically held by the indenture
trustee and
o any action taken by it that materially affects the notes and
that has not been previously reported.
SATISFACTION AND DISCHARGE OF INDENTURE
The discharge of an indenture will occur with respect to the
collateral securing the notes of a series upon the delivery to the related
indenture trustee for cancellation of all the notes or, with certain
limitations, upon deposit with the indenture trustee of funds sufficient for the
payment in full of all of the notes.
THE INDENTURE TRUSTEE
The indenture trustee for any series will be specified in your
prospectus supplement. An indenture trustee may resign at any time, in which
event the depositor or the sponsor will be obligated to appoint a successor
trustee. The owner trust may also remove an indenture trustee
o if the indenture trustee ceases to be eligible to continue
to serve under the indenture,
o if the indenture trustee becomes subject to bankruptcy
proceedings, or
o if the indenture trustee becomes incapable of acting.
In these circumstances, the owner trust will be obligated to appoint a successor
trustee. Any resignation or removal of an indenture trustee and appointment of a
successor trustee will not become effective until acceptance of the appointment
by a successor trustee.
DESCRIPTION OF THE POOLING AND SERVICING AGREEMENTS
The following summarizes the material terms of each pooling and
servicing agreement, a form of which was filed with the registration statement
of which this prospectus is a part. In addition, a copy of the pooling and
servicing agreement relating to a series of notes will be filed with the
Securities and Exchange Commission following the sale of those notes. This
summary describes terms expected to be common to each pooling and servicing
agreement, but the sponsor does not intend this summary to be complete. This
summary is subject to the provisions of the pooling and servicing agreement
relating to a particular series and the description set forth in your prospectus
supplement. You should read the form of the pooling and servicing agreement
filed as noted above.
TRANSFER OF CONTRACTS AND EQUIPMENT
Prior to the offering of a series of notes, the seller may have sold
contracts to the depositor for deposit into a trust used in connection with
temporary financing arrangements. The depositor may reacquire some or all of
these contracts for deposit into the owner trust in connection with the offering
and sale of a particular series of notes. On or before the applicable closing
date, the seller will transfer to the depositor under one or more purchase
agreements all of its interest in the following:
o the contracts, its security interest in the related
equipment and the related equipment,
o the right to receive all scheduled payments and prepayments
received on the contracts on or after the date of transfer,
but excluding any scheduled payments due on or after, but
received prior to, the transfer date,
o all rights under insurance policies maintained on the
equipment under the contracts,
o all documents contained in the files and
o all proceeds derived from any of the above.
Under the pooling and servicing agreement, on the applicable closing
date, the depositor will transfer to the owner trust:
o all of its rights in the contracts and rights in the
equipment and other rights listed above, except that in the
case of leased equipment, the depositor will typically
retain ownership of the equipment, any rights to payments
made or attributable to the leased equipment upon expiration
of the related lease contract, of contract prepayments and
liquidation proceeds allocable to the depositor under the
pooling and servicing agreement and of any portion of the
purchase amount attributable to the book value of the leased
equipment, other than any guaranteed residual investment;
o all funds on deposit from time to time in the trust
accounts; and
o all its rights under the purchase and sale agreement.
Each pooling and servicing agreement will designate the servicer as
custodian to maintain possession, as the owner trust's agent, of the contracts
and all related documents. To facilitate servicing and save administrative
costs, the documents often will not be physically segregated from other similar
documents that are in the servicer's possession. Financing statements will be
filed on the transfer date in the applicable jurisdictions reflecting:
o the transfer of the contracts and the equipment by the
originators, other than the seller, to the seller,
o the transfer of the contracts and the equipment by the
seller to the depositor and, as applicable by any temporary
financing trust to the depositor,
o the transfer by the depositor to the owner trust, and
o the pledge by the owner trust to the indenture trustee.
The originators' accounting records and computer systems will also
reflect these assignments and this pledge.
COLLECTIONS ON CONTRACTS
The applicable indenture trustee will maintain a collection account,
into which the servicer will deposit the following amounts no later than, unless
otherwise set forth in your prospectus supplement, the second business day after
their processing:
o all scheduled payments made under the contracts;
o all prepayments, excluding any portion which your prospectus
supplement states is allocable to the depositor;
o amounts constituting liquidation proceeds on liquidated
contracts, to the extent specified in your prospectus
supplement;
o all payments made by the seller under the pooling and
servicing agreement to repurchase any contract as a result
of a breach of a representation or warranty, as described
under "THE CONTRACTS -- REPRESENTATIONS AND WARRANTIES MADE
BY THE SELLER," excluding, in the case of a lease contract,
any portion which your prospectus supplement states is
allocable to the depositor; and
o the amount paid by the depositor to purchase the contracts,
as described under "DESCRIPTION OF THE NOTES AND INDENTURE."
So long as no event of termination shall have occurred and be
continuing with respect to the servicer, the servicer may make the required
remittances to the collection account net of its servicing fees.
The servicer may withdraw from the collection account any amounts
deposited in error or required to be repaid to an obligor, based on the
servicer's good-faith determination that the amount was deposited in error or
must be returned to the obligor.
The servicer will pay to the depositor all proceeds from the
disposition of equipment subject to a true lease, to the extent allocable to the
depositor.
REVOLVING PERIOD
The applicable prospectus supplement may provide that all or a portion
of the principal collections may be applied by the trustee to the acquisition of
subsequent leases during a specified period rather than used to distribute
payments of principal to noteholders during that period. These notes would then
possess an interest only period, also commonly referred to as a "revolving
period", which will be followed by an "amortization period", during which
principal will be paid. Any interest only or revolving period may terminate
prior to the end of the specified period and result in the earlier than expected
principal repayment of the notes.
SERVICING
Your prospectus supplement will identify the servicer for your trust.
The servicer will be obligated under each pooling and servicing agreement to
service the contracts typically with reasonable care, using that degree of skill
and attention that the servicer generally exercises with respect to all
comparable contracts and related assets that it services for itself or others in
accordance with its credit and collections policy and applicable law. The
servicer may delegate servicing responsibilities to third parties or affiliates,
provided that the servicer will remain obligated to the related owner trust and
the depositor for the proper performance of the servicing responsibilities.
The servicer is obligated to act in a commercially reasonable manner
with respect to the repossession and disposition of equipment following a
contract default with a view to realizing proceeds at least equal to the
equipment's fair market value. The servicer may choose to dispose of equipment
through a new lease or in some other manner which provides for payment for the
equipment over time. In these cases, the servicer will be required to pay from
its own funds an amount which, in its reasonable judgment, is equal to the fair
market value of the equipment, less liquidation expenses, and the servicer will
be entitled to all subsequent payments in respect of the equipment. Any amounts
the servicer pays will constitute additional liquidation proceeds with respect
to the related contract and equipment and will be allocated as described under
"DESCRIPTION OF THE NOTES AND INDENTURE -- LIQUIDATION AND INSURANCE PROCEEDS."
The servicer is, unless otherwise set forth in your prospectus
supplement, responsible for:
o reviewing and certifying that the contract files are
complete;
o monitoring and tracking any property and sales taxes to be
paid by obligors;
o billing, collecting, and recording payments from obligors;
o communicating with and providing billing records to
obligors;
o depositing funds into the collection account;
o receiving payments as the owner trust's agent on the
insurance policies maintained by the obligors and
communicating with insurers;
o issuing reports to the indenture trustee specified in the
indenture and in the pooling and servicing agreement;
o repossessing and remarketing of equipment following obligor
defaults; and
o paying the fees and ordinary expenses of the indenture
trustee and the owner trustee.
The servicer shall be entitled to recover all reasonable out-of-pocket
expenses incurred by it in liquidating a contract and disposing of the related
equipment. The servicer is entitled to retain, from liquidation proceeds, a
reserve for out-of-pocket liquidation expenses in an amount equal to the
expenses, in addition to those previously incurred, as it reasonably estimates
will be incurred. The servicer is permitted to grant payment extensions on a
contract in accordance with its credit and collection policies and procedures if
the servicer believes in good faith that an extension is necessary to avoid a
termination and liquidation of the contract and will maximize the amount to be
received by the owner trust under the contract. The servicer is permitted to
agree to modifications or amendments to a contract in accordance with its credit
and collection policies and procedures.
PREPAYMENTS
The servicer may allow a prepayment of any lease contract, but only if
the amount paid or, in the case of a partial prepayment, the sum of its
prepayment and the remaining contract principal balance, is at least equal to
the required payoff amount of the contract.
EVIDENCE AS TO COMPLIANCE
Annually, the servicer must deliver to the indenture trustee a report
from a nationally recognized accounting firm stating that the accounting firm
has audited the financial statements of the servicer or its parent and issued an
opinion on those financial statements and that the accounting firm has examined
and provided a report as to statements of the servicer concerning the servicer's
controls over the servicing of:
o equipment contracts,
o installment sales contracts,
o promissory notes,
o loan and security agreements and
o other similar types of receivables under servicing
agreements substantially similar one to another.
MATTERS REGARDING THE SERVICER
The servicer may not resign from its obligations under a pooling and
servicing agreement except if its duties are no longer permissible under
applicable law. No resignation will become effective until a successor servicer
has assumed the servicer's obligations and duties under the pooling and
servicing agreement. Removal of the servicer is permissible only upon the
occurrence of an event of termination as discussed below.
The servicer typically must maintain an insurance policy or financial
guarantee bond in customary form covering errors and omissions by the servicer.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
Compensation to the servicer will include a monthly fee equal:
o to the product of one-twelfth of a percentage per annum
specified in your prospectus supplement multiplied by the
contract pool principal balance as of the last day of the
second preceding collection period, or
o in the case of the servicing fee with respect to the
collection period commencing on the date of transfer of the
contracts, the contract pool principal balance as of the
cut-off date,
plus any
o late fees,
o late payment interest,
o documentation fees,
o insurance administration charges, other administrative fees
and any extension fees collected with respect to the
contracts during the prior collection period and investment
earnings on collections prior to deposit of these amounts in
the collection account.
The servicer will pay all expenses incurred by it in connection with its
activities under the pooling and servicing agreement and, unless otherwise set
forth in your prospectus supplement, the annual fees and expenses of the owner
trustee as indenture trustee in connection with the notes. The servicer is
authorized to waive any administrative fees or extension fees that may be
collected in the ordinary course of servicing any contract.
EVENTS OF TERMINATION
An event of termination under a pooling and servicing agreement will
occur if:
o the servicer fails to make any required payment or deposit
and the failure continues for five business days after
notice from the indenture trustee or discovery by the
servicer;
o the servicer fails to observe in any material respect any
agreements of the servicer set forth in the pooling and
servicing agreement and the failure (1) materially and
adversely affects the rights of the owner trust, the equity
certificate holder or you, and (2) continues unremedied for
30 days after written notice to the servicer;
o events of bankruptcy or insolvency occur with respect to the
servicer; or
o any representation, warranty or statement of the servicer
made under the pooling and servicing agreement is incorrect
in any material respect, and (1) has a material adverse
effect on the owner trust or holders of the notes, and (2)
continues uncured for 30 days after the acquiring of written
notice.
RIGHTS UPON EVENT OF TERMINATION
If an event of termination remains unremedied, the indenture trustee
may, and at the written direction of the required majority of the noteholders,
which shall be the same as that required for amendment of the pooling and
servicing agreement, See "AMENDMENT" below, shall, terminate all of the rights
and obligations of the servicer under the pooling and servicing agreement. A
successor servicer will succeed to all the responsibilities, duties and
liabilities of the servicer under the pooling and servicing agreement. The
successor servicer will be entitled to similar compensation arrangements, except
that any successor servicer will not be liable for any acts or omissions of the
prior servicer occurring prior to a transfer of the servicer's servicing and
related functions or for any breach by the prior servicer of any of its
obligations. A majority of the noteholders may waive any default by the servicer
under the pooling and servicing agreement and its consequences.
AMENDMENT
The parties may amend any pooling and servicing agreement:
o to cure any ambiguity,
o to correct or supplement any provision in the pooling and
servicing agreement that may be inconsistent with any other
provision, or
o to make any other provisions with respect to matters or
questions arising under the pooling and servicing agreement
but only if the amendment will not adversely affect in any
material respect the interests of the noteholders.
Any pooling and servicing agreement may also be amended in any respect
by the parties with the consent of the required majority of the noteholders
determined as described in the prospectus supplement for your notes, except that
no amendment
o that reduces the amount or changes the timing of any
contract collections on any contracts or payments required
to be distributed on any note,
o that changes the interest rate on any note, that adversely
affects the priority of payment of principal or interest to
noteholders or
o that reduces the noteholder percentage required to consent
to these amendments or any waiver under the pooling and
servicing agreement,
may be effective without the consent of the holder of each note. Also, an
amendment under the foregoing sentence will not be effective unless each rating
agency confirms that the amendment will not result in a reduction, qualification
or withdrawal of the ratings on the notes.
CERTAIN LEGAL MATTERS AFFECTING THE CONTRACTS
To the extent provided in your prospectus supplement, certain of the
contracts are "chattel paper", "general intangibles" and "accounts" as defined
in the Uniform Commercial Code, or the UCC, in effect in the applicable state.
Pursuant to the UCC for most purposes, a sale of chattel paper is treated in a
manner similar to a transaction creating a security interest in chattel paper.
To the extent provided in your prospectus supplement, the depositor will cause
the filing of appropriate UCC-1 financing statements to be made with the
appropriate governmental authorities. The servicer will be obligated from time
to time to take such actions as are necessary to protect and perfect the trust's
interests in such contracts and their proceeds.
THE SECURITY INTEREST IN THE EQUIPMENT
The seller will convey the seller's interest in the equipment to the
depositor. The depositor will convey such security interest in the equipment to
the trust. UCC financing statements will not be filed to perfect any security
interest in the equipment unless otherwise specified in your prospectus
supplement. Moreover, in the event of the repossession and resale of equipment,
it may be subject to a superior lien. In such case, the senior lienholder may be
entitled to be paid the full amount of the indebtedness owed to it out of the
sale proceeds before such proceeds could be applied to the payment of claims of
the servicer on behalf of the trust.
In the event of a default by the lessee, the servicer on behalf of the
trust may take action to enforce such defaulted contract by repossession and
resale of the leased equipment. Under the UCC in most states, a creditor can,
without prior notice to the debtor, repossess assets securing a defaulted
contract by the lessee's voluntary surrender of such assets or by "self-help"
repossession that does not involve a breach of the peace and by judicial
process.
In the event of a default by the lessee, some jurisdictions require
that the lessee be notified of the default and be given a time period within
which it may cure the default prior to repossession. Generally, this right of
reinstatement may be exercised on a limited number of occasions in any one-year
period.
The UCC and other state laws place restrictions on repossession sales,
including requirements that the secured party provide the lessee with reasonable
notice of the date, time and place of any public sale and/or the date after
which any private sale of the collateral may be held and that any such sale be
conducted in a commercially reasonable manner. Each pooling and servicing
agreement may require the servicer to sell promptly any repossessed item of
equipment, reacquire such equipment, re-lease such equipment for the benefit of
the noteholders or take such other action as specified in your prospectus
supplement.
Under most state laws, a lessee has the right to redeem collateral for
its obligations prior to actual sale by paying the secured party the unpaid
balance of the obligation plus reasonable expenses for repossession, holding and
preparing the collateral for disposition and arranging for its sale, plus, to
the extent provided for in the written agreement of the parties, reasonable
attorneys' fees.
In addition, because the market value of the equipment of the type
financed pursuant to the contracts generally declines with age and because of
obsolescence, the net disposition proceeds of leased equipment at any time
during the term of the lease may be less than the outstanding balance on the
contract principal balance which it secures. Because of this, and because other
creditors may have rights in the related leased equipment superior to those of
the trust, the servicer may not be able to recover the entire amount due on a
defaulted contract in the event that the servicer elects to repossess and sell
such leased equipment at any time.
Under the UCC and laws applicable in most states, a creditor is
entitled to obtain a deficiency judgment from a lessee for any deficiency on
repossession and resale of the asset securing the unpaid balance of such
lessee's contract. However, some states impose prohibitions or limitations on
deficiency judgments. In most jurisdictions the courts, in interpreting the UCC,
would impose upon a creditor an obligation to repossess the equipment in a
commercially reasonable manner and to "mitigate damages" in the event of a
lessee's failure to cure a default. The creditor would be required to exercise
reasonable judgment and follow acceptable commercial practice in seizing and
disposing of the equipment and to offset the net proceeds of such disposition
against its claim. In addition, a lessee may successfully invoke an election of
remedies defense to a deficiency claim in the event that the servicer's
repossession and sale of the leased equipment is found to be a retention
discharging the lessee from all further obligations under UCC Section 9-505(2).
If a deficiency judgment were granted, the judgment would be a personal judgment
against the lessee for the shortfall, but a defaulting lessee may have very
little capital or sources of income available following repossession. Therefore,
in many cases, it may not be useful to seek a deficiency judgment or, if one is
obtained, it may be settled at a significant discount.
Certain statutory provisions, including federal and state bankruptcy
and insolvency laws, may also limit the ability of the servicer to repossess and
resell collateral or obtain a deficiency judgment. In the event of the
bankruptcy or reorganization of a lessee, various provisions of the Bankruptcy
Code of 1978 and related laws may interfere with or eliminate the ability of the
servicer or the trustee to enforce its rights under the contracts. If bankruptcy
proceedings were instituted in respect of a lessee, the trustee could be
prevented from continuing to collect payments due from or on behalf of such
lessee or exercising any remedies assigned to such trustee without the approval
of the bankruptcy court, and the bankruptcy court could permit the lessee to use
or dispose of the leased equipment and provide the trustee with a lien on
substitute collateral, so long as such substitute collateral constituted
"adequate protection" as defined under the Bankruptcy Code.
In addition, certain of the contracts may be leased by the seller to
governmental entities. Payment by governmental authorities of amounts due under
such contracts may be contingent upon legislative approval. Accordingly, payment
delays and collection difficulties as described in your prospectus supplement
may limit collections with respect to certain governmental contracts.
These UCC and bankruptcy provisions, in addition to the possible
decrease in value of a repossessed item of equipment, may limit the amount
realized on the sale of the collateral to less than the amount due on the
related contract.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The following is a general and brief discussion of the material United
States federal income tax consequences of the purchase, ownership and
disposition of the notes. The discussion that follows constitutes the opinion of
Stroock & Stroock & Lavan LLP, special tax counsel to the sponsor, and is based
upon current provisions of the Internal Revenue Code of 1986, as amended,
existing and proposed Treasury Regulations, current administrative rulings,
judicial decisions and other applicable authorities in effect as of the date of
this prospectus, all of which are subject to change, possibly with retroactive
effect. There are no cases, regulations, or Internal Revenue Service rulings on
comparable transactions or instruments to those described in this prospectus. As
a result, there can be no assurance that the Internal Revenue Service will not
challenge the conclusions reached in this description of Material Federal Income
Tax Consequences, and no ruling from the Internal Revenue Service has been or
will be sought on any of the issues discussed below. Furthermore, legislative,
judicial or administrative changes may occur, perhaps with retroactive effect,
which could affect the accuracy of the statements set forth below.
The following does not attempt to explain fully every relevant
technical aspect of the applicable tax provisions. Additionally, this summary
does not include some of the complex technical rules which would not be
applicable to most investors but may apply to some specific types of investors,
such as dealers in securities. Also, the descriptions of the relevant tax rules
are intended to explain the general application of the rules. BECAUSE THIS
SUMMARY OF MATERIAL FEDERAL INCOME TAX CONSEQUENCES IS INTENDED TO BE GENERAL IN
NATURE, THE SPONSOR SUGGESTS THAT YOU CONSULT WITH YOUR OWN TAX ADVISORS AS TO
THE FEDERAL, STATE, LOCAL, FOREIGN AND ANY OTHER TAX CONSEQUENCES TO YOU OF THE
PURCHASE, OWNERSHIP AND DISPOSITION OF THE NOTES.
This summary of material federal income tax matters is divided into
two parts. The first part describes the classification of the notes as debt and
the treatment of the trust as a pass-through entity rather than as a corporation
or other entity subject to tax at the entity level. The second part describes
the taxation of an investor in the notes. Under the caption "GENERAL TAX
TREATMENT OF NOTEHOLDERS" is a description of the tax consequences for what is
expected to be the typical investment situation. The description of "GENERAL TAX
TREATMENT OF NOTEHOLDERS" provides a summary of federal income tax consequences
for investors who are citizens or residents of the United States who purchase
U.S. dollar denominated notes for investment at a purchase price equal to the
principal amount of the notes plus accrued interest, if any. There are a variety
of technical tax rules which can be expected to apply only to particular types
of investors or in particular special circumstances. Those rules and the
investors and circumstances to which they apply are separately described under
the caption "SPECIAL TAX RULES." THE SPONSOR SUGGESTS THAT YOU CONSULT A TAX
ADVISOR TO DETERMINE WHETHER ANY OF THE SPECIAL TAX RULES ARE APPLICABLE.
CLASSIFICATION OF THE NOTES AND THE TRUST
Under existing federal income tax law each trust will not be treated
as an association or publicly traded partnership taxable as a corporation and
the notes will be treated as indebtedness. In rendering these opinions Stroock &
Stroock & Lavan LLP has assumed that the terms of the various documents relating
to the issuance of the notes will be complied with by all of the parties to the
transaction. Those terms include a requirement, which each investor agrees to by
virtue of acquiring ownership of any beneficial interest in a note, that the
trust and the investors in the notes treat the notes as indebtedness for federal
income tax purposes. The opinion of Stroock & Stroock & Lavan LLP does not
foreclose the possibility of a contrary determination by the Internal Revenue
Service or by a court or of a contrary position by the Internal Revenue Service
or Treasury Department in regulations or rulings issued in the future.
Although it is the opinion of Stroock & Stroock & Lavan LLP that the
trust will not be treated as an association or publicly traded partnership
taxable as a corporation and the notes will be characterized as indebtedness for
federal income tax purposes, no assurance can be given that this
characterization of the trust or the notes will prevail. If, contrary to the
opinion of Stroock & Stroock & Lavan LLP, the Internal Revenue Service
successfully asserted that one or more of the notes did not represent debt for
federal income tax purposes, the notes might be treated as equity interests in
the trust. As a result, the trust might be classified as a publicly traded
partnership taxable as a corporation. If the trust were classified as a publicly
traded partnership taxable as a corporation, the trust would be subject to
United States federal income tax on its net income. An imposition of a
corporate-level income tax could materially reduce the amount of cash that would
be available to make payments of principal and interest on the notes.
Alternatively, if the trust were classified as a partnership, other than a
publicly traded partnership taxable as a corporation, the trust itself would not
be subject to United States federal income tax. Instead, holders of notes that
were determined to be equity interests in the partnership would be required to
take into account their allocable share of the trust's income and deductions.
This treatment may have adverse federal income tax consequences for some
noteholders. For example:
(1) income to some tax-exempt entities, including pension funds,
may constitute "UNRELATED BUSINESS TAXABLE INCOME,"
(2) income to foreign holders generally would be subject to U.S.
tax and U.S. tax return filing and withholding requirements,
(3) individual holders might be subject to certain limitations on
their ability to deduct their share of trust expenses, and
(4) income from the trust's assets would be taxable to
noteholders without regard to whether cash distributions are actually
made by the trust or any particular noteholder's method of tax
accounting.
The discussion that follows assumes that the notes will be treated as
indebtedness for federal income tax purposes.
GENERAL TAX TREATMENT OF NOTEHOLDERS
PAYMENTS OF INTEREST. An investor will be taxed on the amount of
payments of interest on a note as ordinary interest income at the time it
accrues or is received in accordance with the investor's regular method of
accounting for United States federal income tax purposes.
SALE OR OTHER DISPOSITION OF A NOTE. An investor who disposes of a
note, whether by sale, exchange for other property, or payment by the trust,
will recognize taxable gain or loss equal to the difference between the amount
realized on the sale or other disposition, not including any amount attributable
to accrued but unpaid interest, and the investor's adjusted tax basis in the
note. In general, an investor's adjusted tax basis in a note will be equal to
the initial purchase price. Any gain or loss recognized upon the sale or other
disposition of a note will be capital gain or loss. For non-corporate investors,
capital gain recognized on the sale or other disposition of a note held by the
investor for more than one year will be taxed at a maximum rate of 20%. Capital
gain for a note held for one year or less is taxed at the rates applicable to
ordinary income, i.e., up to 39.6%. Taxpayers must aggregate capital gains and
losses for each taxable year. In the event a taxpayer realizes a net capital
loss for any year there are limits on the amount of these capital losses which
can be deducted.
INFORMATION REPORTING AND BACKUP WITHHOLDING. The trust or an agent
acting on its behalf will be required to report annually to the Internal Revenue
Service, and to each non-corporate noteholder, the amount of interest paid on
the notes for each calendar year. Each non-corporate noteholder, other than
noteholders who are not subject to the reporting requirements, will be required
to provide, under penalties of perjury, a certificate, Form W-9, containing the
noteholder's:
o name,
o address,
o correct federal taxpayer identification number, and
o a statement that the noteholder is not subject to backup
withholding.
Should a non-exempt noteholder fail to provide the required certification, the
trust will be required to withhold or cause to be withheld 31% of the interest
otherwise payable to the noteholder and remit the withheld amounts to the
Internal Revenue Service as a credit against the noteholder's federal income tax
liability.
SPECIAL TAX RULES
SPECIAL TYPES OF INVESTORS. The reference to United States citizens or
residents in the description of "GENERAL TAX TREATMENT OF NOTEHOLDERS" set forth
above applies not only to individuals but also to any investor who is:
(1) a corporation or partnership created or organized in or under
the laws of the United States or of any political subdivision of the
United States,
(2) an estate the income of which is subject to United States
federal income taxation regardless of its source, or
(3) a trust if a court within the United States is able to
exercise primary jurisdiction over the administration of the trust and
one or more United States fiduciaries have the authority to control
all substantial decisions of the trust.
Any investor which is not a United States citizen or resident should
review the summary below for investment in notes by foreign persons. Also,
neither the description of "GENERAL TAX TREATMENT OF NOTEHOLDERS" above nor this
discussion of "SPECIAL TAX RULES" describes tax consequences to special classes
of investors, including investors who are:
o dealers in securities or currencies,
o persons holding notes as a part of a hedging transaction,
o certain financial institutions, or
o insurance companies.
Those particular types of investors are subject to specific federal income tax
treatment which is not generally applicable to other investors. This summary of
"MATERIAL FEDERAL INCOME TAX CONSEQUENCES" does not describe tax consequences
for those types of investors.
PURCHASE AT A DISCOUNT. An investor who purchases a note as part of
the initial offering by the trust for an issue price that is less than its
"stated redemption price at maturity" will generally be considered to have
purchased the note at an original issue discount for United States federal
income tax purposes. In general, the stated redemption price at maturity for a
note is equal to the principal amount. If a note is acquired with original issue
discount the investor will be required to include in income each year, taxable
as ordinary income in the same manner as cash interest payments, a portion of
the original issue discount. For cash basis investors, such as individuals, the
requirement that original issue discount be accrued as income each year means
the investor recognizes taxable income even though the investor does not receive
cash corresponding to that income. The amount of original issue discount accrued
as income each year is based upon a formula which looks at the constant yield on
the notes and the term to maturity so as to annually allocate a proportionate
share of original issue discount. Under these rules, investors generally will be
required to include in income increasingly greater amounts of original issue
discount in successive accrual periods.
In determining whether a note has original issue discount, the issue
price of the note may not necessarily equal the investor's purchase price,
although they generally should be the same. The issue price of a note will equal
the initial offering price to the public, not including bond houses, brokers or
similar persons or organizations acting in the capacity of underwriters or
wholesalers, at which price a substantial amount of the notes is sold.
If an investor acquires a note in a secondary market transaction for a
purchase price which is less than the principal amount or other amount payable
at maturity of the note, the difference is referred to for tax purposes as
market discount. Similarly to original issue discount, an investor must accrue a
portion of the market discount each year. The amount of market discount which
accrues annually will be calculated on a straight-line basis over the remaining
term to maturity of the note unless the investor elects to accrue market
discount using the constant yield method, i.e., the original issue discount
method. Unlike original issue discount, however, an investor does not include
accrued market discount in ordinary income each year. Rather, the aggregate
amount of accrued market discount is included in income when an investor sells
or otherwise disposes of the note. At that time, the portion of the amount
realized by the investor on the sale or other disposition of the note equal to
accrued market discount is taxed as ordinary income, which has a maximum tax
rate of 39.6%, rather than long term capital gain maximum tax rate of 20%.
If an investor would prefer to be taxed on the annual accrual of
market discount each year rather than being taxed on the aggregate amount of all
accrued market discount when the note is sold or otherwise disposed of, the
investor can file an election to do so. This election would apply to all of the
investor's debt investments acquired in or after the taxable year in which the
notes are acquired and not just to the notes.
Limitations imposed by the federal tax law which are intended to match
deductions with the taxation of income may defer deductions for interest paid by
an investor on indebtedness incurred or continued, or short sale expenses
incurred, to purchase or carry a note with market discount. A noteholder who
elects to include market discount in gross income as it accrues is exempt from
this rule.
Whenever an investor accrues and includes in income an amount of
original issue discount or market discount, the investor's adjusted basis in the
corresponding note is increased by that same amount. As a result, the investor
would recognize a lower capital gain or greater capital loss on the sale or
other disposition of the note.
In general, if the amount of original issue discount or market
discount would be less than 1/4th of one percent of the note's principal or
other stated redemption price at maturity, the investor can disregard the
original issue discount or market discount rules.
PURCHASE AT A PREMIUM. If an investor purchases a note for a price
that exceeds the principal amount or other amount payable at maturity, the
investor will be considered to have an amortizable bond premium. An investor can
elect to accrue a portion of the premium each year as a deduction to offset
interest income on the corresponding note. The amount of premium which can be
amortized and deducted each year is calculated using a constant yield method
over the remaining term to maturity of the note. The deduction is available only
to offset interest income on the corresponding note; it cannot be used as a
deduction to the extent it exceeds taxable note interest. The adjusted tax basis
which an investor has in a note must be reduced by the amount of premium for
which a deduction is claimed. Because the basis is reduced, the investor would
recognize a larger taxable capital gain, or a smaller capital loss, on the sale
or other disposition of the note. If an investor elects to amortize and deduct
premium, the election will apply to all of the investor's debt investments and
not just to the notes.
If an investor purchases in a secondary market transaction a note
which was originally issued with original issue discount for an amount which is
less than the sum of all amounts payable on the note after the purchase date
other than payments of qualified stated interest but in excess of its adjusted
issue price, I.E., the original issue price plus any accrued original issue
discount as those terms are described above, the excess is referred to for tax
purposes as "acquisition premium." The investor would be permitted to reduce the
daily portions of original issue discount the investor would otherwise include
in income by an amount corresponding to the ratio of (1) the excess of the
investor's purchase price for the note over the adjusted issue price of the note
as of the purchase date to (2) the excess of all amounts payable on the note
after the purchase date, other than payments of qualified stated interest, over
the note's adjusted issue price.
ELECTION TO TREAT ALL INTEREST AS ORIGINAL ISSUE DISCOUNT. An investor
may elect to include in gross income all interest that accrues on a note using
the constant-yield method described above under the heading "PURCHASE AT A
DISCOUNT" with modifications described below. For purposes of this election,
interest includes:
o qualified stated interest,
o original issue discount,
o DE MINIMIS original issue discount,
o market discount,
o DE MINIMIS market discount, and
o unstated interest,
as adjusted by any amortizable bond premium or acquisition premium.
In applying the constant-yield method to a note with respect to which
this election has been made, the issue price of the note will equal the electing
investor's adjusted basis in the note immediately after its acquisition. The
issue date of the note will be the date of its acquisition by the electing
investor, and no payments on the note will be treated as payments of qualified
stated interest. This election, if made, may not be revoked without the consent
of the Internal Revenue Service. Investors should consult with their own tax
advisors as to the effect in their circumstances of making this election.
FOREIGN INVESTORS. Special tax rules apply to the purchase of notes by
foreign persons. For U.S. tax purposes, foreign investors include any person who
is not
(1) a citizen or resident of the United States,
(2) a corporation, partnership or other entity organized in or
under the laws of the United States or any political subdivision of
the United States,
(3) an estate the income of which is includible in gross income
for U.S. federal income tax purposes, regardless of its source, or
(4) a trust if a court within the United States is able to
exercise primary supervision over the administration of the trust and
one or more United States fiduciaries have the authority to control
all substantial decisions of the trust.
Interest paid or accrued to a foreign investor that is not effectively
connected with the conduct of a trade or business within the United States by
the investor will generally be considered 'portfolio interest' and generally
will not be subject to United States federal income tax or withholding tax as
long as the foreign investor is not actually or constructively a 10 percent
shareholder of the trust or a controlled foreign corporation related to the
trust through stock ownership. Additionally, the foreign investor must provide
or have a financial institution provide on its behalf to the trust or paying
agent an appropriate statement Form W-8, that is signed under penalties of
perjury, certifying that the beneficial owner of the note is a foreign person
and providing that foreign person's name and address. If the information
provided in this statement changes, the foreign investor must provide a new Form
W-8 within 30 days. The Form W-8 is generally effective for three years. If the
foreign investor fails to satisfy these requirements so that interest on the
investor's Notes was not portfolio interest, interest payments would be subject
to United States federal income and withholding tax at a rate of 30% unless
reduced or eliminated under an applicable income tax treaty. To qualify for any
reduction as the result of an income tax treaty, the foreign investor must
provide the paying agent with Form 1001. This form is also effective for three
years.
The realization of any capital gain on the sale or other taxable
disposition of a note by a foreign investor will be exempt from United States
federal income and withholding tax, provided that
(1) the gain is not effectively connected with the conduct of a
trade or business in the United States by the investor and
(2) in the case of an individual foreign investor, the investor
is not present in the United States for 183 days or more during the
taxable year. If an individual foreign investor is present in the U.S.
for 183 days or more during the taxable year, the gain on the sale or
other disposition of the Notes could be subject to a 30% withholding
tax unless reduced by treaty.
If the interest, gain or income on a note held by a foreign investor
is effectively connected with the conduct of a trade or business in the United
States by the investor, the noteholder will be subject to United States federal
income tax on the interest, gain or income at regular federal income tax rates.
At the same time, the noteholder may be exempt from withholding tax if a Form
4224 is furnished to the paying agent. Form 4224 is effective for only one
calendar year. In addition, if the foreign investor is a foreign corporation, it
may be subject to a branch profits tax equal to 30% of its "EFFECTIVELY
CONNECTED EARNINGS AND PROFITS" for the taxable year, as adjusted for certain
items, unless it qualifies for a lower rate under an applicable tax treaty.
Regardless of when a foreign investor acquired a note, Treasury
Regulations which will become effective for note payments made after December
31, 2000 may change reporting requirements for certain withholding agents.
If a foreign investor fails to provide necessary documentation to the
trust or its paying agent regarding the investor's taxpayer identification
number or certification of exempt status, a 31% backup withholding tax may be
applied to note payments to that investor. Any amounts withheld under the backup
withholding rules will be allowed as a refund or a credit against the foreign
investor's U.S. federal income tax liability provided the required information
is furnished to the Internal Revenue Service.
STATE AND LOCAL TAX CONSEQUENCES
Because of the differences in state and local tax laws and their
applicability to different investors, it is not possible to summarize the
potential state and local tax consequences of purchasing, holding or disposing
of the notes and no opinions of counsel have been obtained regarding state tax
matters. ACCORDINGLY, THE SPONSOR RECOMMENDS THAT YOU CONSULT YOUR OWN TAX
ADVISORS REGARDING THE STATE AND LOCAL TAX CONSEQUENCES OF THE PURCHASE,
OWNERSHIP AND DISPOSITION OF NOTES.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended,
imposes specific requirements on employee benefit plans subject to ERISA and
prohibits some transactions between ERISA-regulated plans and persons who are
"PARTIES IN INTEREST," as defined under ERISA, with respect to assets of these
plans. Section 4975 of the Internal Revenue Code prohibits a similar set of
transactions between specified plans or individual retirement accounts and
persons who are "DISQUALIFIED PERSONS," as defined in the Internal Revenue Code,
with respect to Internal Revenue Code-regulated plans. Some employee benefit
plans, such as governmental plans and church plans, if no election has been made
under Section 410(d) of the Internal Revenue Code, are not subject to the
requirements of ERISA or Section 4975 of the Internal Revenue Code and assets of
the plans may be invested in the notes, subject to the provisions of other
applicable federal and state law, including Section 503 of the Internal Revenue
Code.
Investments by ERISA-regulated plans are subject to ERISA's general
fiduciary requirements, including the requirement of investment prudence and
diversification and the requirement that investments comply with the terms of
the documents governing the ERISA-regulated plan. Before investing in the notes,
an ERISA- regulated plan fiduciary should consider, among other factors, whether
to do so is appropriate in view of the overall investment policy and liquidity
needs of the ERISA plan.
PROHIBITED TRANSACTIONS
In addition, Section 406 of ERISA and Section 4975 of the Internal
Revenue Code prohibit parties in interest and disqualified persons with respect
to plans subject to those sections from engaging in some transactions involving
the plans or plan assets of the plans, unless a statutory or administrative
exemption applies to the transaction. Section 4975 of the Internal Revenue Code
of 1986, as amended and Sections 502(i) and 502(1) of ERISA provide for the
imposition of excise taxes and civil penalties on persons that engage or
participate in prohibited transactions. The
o originators,
o sponsor,
o depositor,
o underwriters,
o servicer,
o indenture trustee or
o owner trustee,
or their affiliates may be considered or may become parties in interest or
disqualified persons with respect to a plan. If so, the acquisition or holding
of the notes by, on behalf of or with plan assets of the plan may be considered
to give rise to a prohibited transaction within the meaning of ERISA and/or
Section 4975 of the Internal Revenue Code, unless an administrative exemption
described below or some other exemption is available.
The notes may not be purchased with the assets of a plan if the
originators, sponsor, the depositor, the underwriters, the servicer, the
indenture trustee, or the owner trustee or any of their affiliates either;
(a) has discretionary authority or control with respect to the
investment or management of the assets: or
(b) has authority or responsibility to give, or regularly gives,
investment advice with respect to the assets under an
agreement or understanding that the advice will serve as a
primary basis for investment decisions with respect to the
assets and that the advice will be based on the particular
needs of the plan; or
(c) is an employer of employees covered under the plan unless
the investment is made through an insurance company general
or pooled separate account or a bank collective investment
fund and an exemption is available.
Depending on the relevant facts and circumstances, some prohibited
transaction exemptions may apply to the purchase or holding of the notes -- for
example,
o Prohibited Transaction Class Exemption ("PTCE") 96-23, which
exempts transactions effected on behalf of a plan by an
in-house asset manager;
o PTCE 95-60, which exempts transactions between bank
collective investment funds and parties in interest;
o PTCE 91-38, which exempts transactions between bank
collective investment funds and parties in interest;
o PTCE 90-1, which exempts transactions between insurance
company pooled separate accounts and parties in interest; or
o PTCE 84-14, which exempts transactions effected on behalf of
a plan by a qualified professional asset manager.
There can be no assurance that any of these exemptions will apply with respect
to any plan's investment in the notes or, even if an exemption were deemed to
apply, that any exemption would apply to all prohibited transactions that may
occur in connection with that investment.
Due to the complexity of these rules and the penalties imposed, any
fiduciary or other plan investor who proposes to invest assets of a plan in the
notes should consult with its counsel with respect to the potential consequences
under ERISA and Section 4975 of the Internal Revenue Code of doing so.
RATINGS OF THE NOTES
The owner trust will not sell notes of a series unless one or more
nationally recognized rating agencies rate the notes of that series in a rating
category that signifies investment grade. Any rating that is made may be lowered
or withdrawn by the assigning rating agency at any time if, in its judgment,
circumstances so warrant. If a rating or ratings of notes is qualified, reduced
or withdrawn, no person or entity will be obligated to provide any additional
credit enhancement with respect to the notes so qualified, reduced or withdrawn.
The rating of the notes should be evaluated independently from similar
ratings on other types of securities. A rating is not a recommendation to buy,
sell or hold notes, inasmuch as a rating does not comment as to market price or
suitability for a particular investor. The ratings of the notes do not address
the likelihood of payment of principal on any class of notes prior to the stated
maturity date of the notes, or the possibility of the imposition of United
States withholding tax with respect to non-United States persons.
USE OF PROCEEDS
The proceeds from the sale of the notes of each series, after funding
a portion of the cash collateral account or other form of credit enhancement for
the series and paying the expenses of the sponsor, will be used to pay the
purchase price due to the depositor.
PLAN OF DISTRIBUTION
The sponsor or the owner trust may sell notes to or through
underwriters at the prices set forth in your prospectus supplement or in
negotiated transactions at varying prices, and also may sell notes directly to
other purchasers or through agents. The sponsor intends to offer the notes
through these various methods from time to time and that offerings may be made
concurrently through more than one of these methods or that an offering of a
particular series of notes may be made through a combination of these methods.
The underwriters will be obligated to purchase all of the notes
described in your prospectus supplement if any such notes are purchased. The
place and time of delivery for your notes will be set forth in your prospectus
supplement.
The sponsor, the originators, the depositor and certain of its
affiliates may agree to indemnify the underwriters and agents who participate in
the distribution of the notes against certain liabilities, including liabilities
under the Securities Act of 1933, as amended, or contribute to payments the
underwritten may be required to make.
Funds in cash collateral accounts and the trust accounts may, from
time to time, be invested in certain investments acquired from the underwriters.
If and to the extent required by applicable law or regulation, this
prospectus and your prospectus supplement will also be used by the underwriters
after the completion of the offering for market-making transactions in the
notes. Sales will be made at negotiated prices determined at the time of sales.
If and to the extent required by applicable law or regulation, this
prospectus and the prospectus supplement will also be used by the underwriter
after the completion of the offering in connection with offers and sales related
to market-making transactions in the notes in which the underwriter acts as
principal. The underwriter may also act as agent in these transactions. Sales
will be made at negotiated prices determined at the time of sale.
LEGAL MATTERS
Stroock & Stroock & Lavan LLP or other counsel specified in your
prospectus supplement, will provide a legal opinion relating to the notes in its
capacity as special counsel to the sponsor and the underwriters. Other legal
matters for underwriters will be passed upon by counsel to underwriters.
WHERE YOU CAN FIND MORE INFORMATION
Federal securities law requires the filing of certain information with
the Securities and Exchange Commission, including annual, quarterly and special
reports, proxy statements and other information. You can read and copy these
documents at the public reference facility maintained by the Securities and
Exchange Commission at Judiciary Plaza, 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549. You can also read and copy the reports, proxy statements
and other information at the following regional offices of the Securities and
Exchange Commission:
New York Regional Office Chicago Regional Office
Seven World Trade Center Citicorp Center
Suite 1300 500 West Madison Street, Suite 1400
New York, NY 10048 Chicago, IL 60661
Please call the Securities and Exchange Commission at 1-800-SEC-0330
for more information about the public reference rooms or visit the Securities
and Exchange Commission's web site at http://www.sec.gov to access available
filings.
The Securities and Exchange Commission allows offerors of securities
to incorporate by reference some of the information they file with it. This
means that offerors can disclose important information to you by referring you
to those documents. The information that the sponsor incorporates by reference
is considered to be part of this prospectus, and later information that the
sponsor files with the Securities and Exchange Commission will automatically
update and supersede this information.
All documents filed by the servicer, on behalf of a respective owner
trust, under Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of
1934, after the date of this prospectus and prior to the termination of the
offering of the notes will be incorporated by reference into this prospectus.
If you are a beneficial owner of the notes to whom a prospectus has
been delivered, the sponsor will, on request, send you a copy of the information
that has been incorporated by reference in this prospectus. The sponsor will
provide this information at no cost to you. Please address requests to: Asset
Backed Securities Corporation, 11 Madison Avenue, New York, New York 10010,
Telephone No. (212) 325-2000.
<PAGE>
INDEX OF TERMS
Collection Account........................................................36
Distribution Account......................................................36
DTC.......................................................................37
ERISA.....................................................................63
excluded residual investment..............................................24
guaranteed residual investment............................................24
Material modification.....................................................33
PTCE......................................................................65
Qualified institution.....................................................36
true lease................................................................10
Trust Account.............................................................36
<PAGE>
PROSPECTUS SUPPLEMENT TO PROSPECTUS DATED _________, 2000
$----------
ASSET BACKED SECURITIES CORPORATION STUDENT
LOAN TRUST ____-_
ASSET BACKED SECURITIES CORPORATION
Depositor
---------------------
Seller
FLOATING RATE ASSET-BACKED SENIOR NOTES
----------------
The sources for payment of the senior notes are a pool of education loans
originated under the Federal Family Education Loan Program to students and
parents of students, substantially all of which are guaranteed by
____________________, held by the trust, cash, held by the trust and an interest
rate swap.
CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE S-_ OF THIS PROSPECTUS
SUPPLEMENT AND PAGE __ OF THE PROSPECTUS. THE SENIOR NOTES ARE ASSET-BACKED
SECURITIES ISSUED BY A TRUST. THE SENIOR NOTES ARE NOT INTERESTS IN OR
OBLIGATIONS OF THE SELLER, THE DEPOSITOR OR ANY OF THEIR AFFILIATES.
<TABLE>
<CAPTION>
ORIGINAL
PRINCIPAL INTEREST RATE FINAL MATURITY PRICE TO UNDERWRITING PROCEEDS TO THE
AMOUNT (PER ANNUM) DATE(1) PUBLIC DISCOUNT DEPOSITOR(2)
<S> <C> <C> <C> <C> <C> <C>
Per Class A-1 Note $___________ Three-Month LIBOR ___________ _____% _______% ______%
plus ____% annually,
subject to an
interest rate cap
Per Class A-2 Note $___________ Three-Month LIBOR __________ _____% ________% ______%
plus ____% annually,
subject to an
interest rate cap
Total............. $___________
(1) The quarterly payment date of ___________ and __________, as applicable.
(2) Plus accrued interest, if any, from the date of initial issuance.
</TABLE>
The senior notes will be delivered in book-entry form only through The
Depository Trust Company, Clearstream, Luxembourg, societe anonyme and the
Euroclear System on or about ______, ____ against payment in immediately
available funds.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus supplement or the prospectus to which it relates is truthful or
complete. Any representation to the contrary is a criminal offense.
-------------------------
-------------------------
Prospectus Supplement dated ________, ____
<PAGE>
YOU SHOULD RELY ON INFORMATION CONTAINED IN THIS DOCUMENT. WE HAVE NOT
AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT. THIS
DOCUMENT MAY ONLY BE USED WHERE IT IS LEGAL TO SELL THESE SECURITIES. THE
INFORMATION IN THIS DOCUMENT MAY ONLY BE ACCURATE ON THE DATE OF THIS DOCUMENT.
We provide information to you about the senior notes in two separate documents
that progressively provide more detail: (1) the accompanying prospectus, which
provides general information, some of which may not apply to your senior notes
and (2) this prospectus supplement, which describes the specific terms of your
senior notes.
UNTIL __________, ____ ALL DEALERS THAT EFFECT TRANSACTIONS IN THE
SENIOR NOTES, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO
DELIVER A PROSPECTUS AND PROSPECTUS SUPPLEMENT. THIS REQUIREMENT IS IN ADDITION
TO THE DEALER'S OBLIGATION TO DELIVER A PROSPECTUS AND PROSPECTUS SUPPLEMENT
WHEN ACTING AS UNDERWRITERS WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
We are not offering the senior notes in any state where the offer is not
permitted. We do not claim the accuracy of the information in this prospectus
supplement and the accompanying prospectus as of any date other than the dates
stated on their respective covers.
Certain persons participating in the offering of the senior notes may engage in
transactions that stabilize, maintain or otherwise affect the prices of the
senior notes. These transactions could cause the prices of the senior notes to
be higher than they might otherwise be in the absence of these transactions. See
"Underwriting" in this prospectus supplement.
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
SUMMARY OF TERMS....................................3
RISK FACTORS........................................7
FORMATION OF THE TRUST.............................13
THE SELLER AND THE SERVICER........................14
THE FINANCED STUDENT LOAN POOL.....................15
DESCRIPTION OF THE NOTES...........................23
DESCRIPTION OF THE TRANSFER AND
SERVICING AGREEMENTS..............................31
FEDERAL FAMILY EDUCATION LOAN PROGRAM..............48
CERTAIN FEDERAL INCOME TAX AND
STATE TAX CONSEQUENCES............................51
ERISA CONSIDERATIONS...............................52
UNDERWRITING.......................................53
LEGAL MATTERS......................................54
REPORTS TO SECURITYHOLDERS.........................54
FORWARD LOOKING STATEMENTS.........................54
ANNEX I............................................55
INDEX OF PRINCIPAL TERMS...........................59
EXHIBIT A.........................................S-
PROSPECTUS
RISK FACTORS.........................................
FORMATION OF THE TRUSTS..............................
THE DEPOSITOR........................................
USE OF PROCEEDS......................................
THE SELLER AND THE SERVICER..........................
THE STUDENT LOAN POOLS...............................
THE STUDENT LOAN FINANCING BUSINESS..................
WEIGHTED AVERAGE LIFE OF THE SECURITIES..............
POOL FACTORS AND TRADING INFORMATION.................
DESCRIPTION OF THE NOTES.............................
DESCRIPTION OF THE CERTIFICATES......................
CERTAIN INFORMATION REGARDING THE
SECURITIES......................................
DESCRIPTION OF THE TRANSFER AND
SERVICING AGREEMENTS............................
CERTAIN LEGAL ASPECTS OF THE STUDENT
LOANS...........................................
CERTAIN FEDERAL INCOME TAX
CONSEQUENCES....................................
CERTAIN STATE TAX CONSEQUENCES.......................
ERISA CONSIDERATIONS.................................
PLAN OF DISTRIBUTION.................................
LEGAL MATTERS........................................
AVAILABLE INFORMATION................................
INCORPORATION OF CERTAIN DOCUMENTS BY
REFERENCE.......................................
INDEX OF PRINCIPAL TERMS.............................
SUMMARY OF TERMS
o This summary highlights selected information from this prospectus
supplement and does not contain all of the information that you need to
consider in making your investment decision. To understand all of the terms
of the offering of the senior notes, you should carefully read this entire
prospectus supplement and the accompanying prospectus.
o This summary provides an overview to aid your understanding and is
qualified by the full description of this other information in this
prospectus supplement and the accompanying prospectus.
o You can find a listing of the pages where capitalized terms used in this
prospectus supplement are defined under the caption "Index of Principal
Terms" beginning on page S-__ in this prospectus supplement.
PRINCIPAL PARTIES
THE TRUST
o Asset Backed Securities Corporation Student Loan Trust ____-_
THE DEPOSITOR
o Asset Backed Securities Corporation, an indirect, wholly owned subsidiary
of Credit Susse First Boston, Inc.
THE SELLER AND ADMINISTRATOR
o ____________________
THE SERVICER
o _________
THE ELIGIBLE LENDER TRUSTEE
o ________________
THE INDENTURE TRUSTEE
o ________________
THE SWAP COUNTERPARTY
o ________________
DATES
QUARTERLY PAYMENT DATES
Payments on the senior notes will be made to you on the 28th day of each
January, April, July and October. If the 28th is not a business day, payments
will be made to you on the next business day. The first quarterly payment date
is __________, ____.
CUTOFF DATE
__________, ____. The trust will receive payments made on the related student
loans on and after this date.
CLOSING DATE
On or about __________, ____.
DESCRIPTION OF THE SECURITIES
The Trust is offering the following student loan floating rate asset-backed
senior notes pursuant to this prospectus:
o Class A-1 Notes in the aggregate principal amount of $____________; and
o Class A-2 Notes in the aggregate principal amount of $___________.
The trust is also issuing $__________ aggregate principal amount of floating
rate asset-backed subordinate notes. The trust is not offering the subordinate
notes pursuant to this prospectus.
The trust will issue the senior notes in book-entry form in minimum
denominations of $1,000 and in multiples of $1,000 in excess of $1,000.
You may hold your senior notes through The Depository Trust Company,
Clearstream, Luxembourg or the Euroclear System.
INTEREST PAYMENTS
The note rate for each class of senior notes is specified on the cover page of
this prospectus supplement. The interest rate on a class of senior notes is
subject to an interest rate cap. Interest with respect to the senior notes will
be calculated on the basis of the actual number of days elapsed in the related
quarterly interest period and a 360-day year.
The first step in computing the interest rate cap for any quarterly interest
period is to determine the percent equivalent of (1) the sum of expected
interest collections and any net trust swap receipt less any net trust swap
payment, the administration fee and the servicing fee divided by (2) the
aggregate principal amount of the notes as of the last day of this quarterly
interest period. The servicer determines the interest rate cap by multiplying
the percent obtained in the preceding sentence by 365 (or 366 in the case of a
leap year) and then dividing it by the number of days in the related quarterly
interest period.
Expected interest collections equal the sum of:
o the amount of interest accrued on the student loans, net of any monthly
rebate fees and other amounts required to be remitted to the Department
of Education;
o all interest subsidy payments and special allowance payments accrued; and
o specified investment earnings.
Since your senior notes are subject to an interest rate cap, you may not receive
interest on your senior notes at the applicable note rate. The difference
between interest payable at the note rate and interest actually paid to you on a
quarterly payment date may be paid to you on a future quarterly payment date.
The ratings of the notes do not address the likelihood of the payment to you of
any these amounts.
PRINCIPAL PAYMENTS
No principal will be paid to you prior to the end of the revolving period. The
revolving period will begin on the date the senior notes are issued and will end
__________, ____ (or earlier as described in this prospectus supplement).
Following the end of the revolving period, principal will be paid on the senior
notes on each quarterly payment date in an amount generally equal to the
principal collections with respect to the related student loans for the
preceding quarterly period until the senior notes have been paid in full.
Principal payments on the senior notes generally will be made to the holders of
the senior notes sequentially. No principal will be paid on the Class A-2 Notes
until the Class A-1 Notes have been paid in full. No principal will be paid on
the subordinate notes until the senior notes have been paid in full.
An exception to this rule is that following a default under the indenture and
the acceleration of the notes, principal will be paid first on a pro rata basis,
to each class of senior notes until they have been paid in full, and second, to
the subordinate notes until they have been paid in full.
PRIORITY OF PAYMENTS
On each quarterly payment date, the indenture trustee will make the following
distributions to the extent of available funds:
o to the servicer and administrator, specified fees;
o pro rata, to the senior noteholders, interest and to the swap counterparty,
any net swap payment;
o to the subordinate noteholders, interest;
o following the termination of the revolving period to the senior
noteholders, principal; and
o to the reserve account, remaining funds.
Any shortfalls in funds available to make interest and principal distributions
required to be made on the notes on a quarterly payment date may be paid on
future quarterly payment dates.
FINAL MATURITY DATES
To the extent not previously paid prior to these dates, the unpaid principal
amount of each class of senior notes will be payable in full on the final
maturity date listed on the cover page of this prospectus supplement.
AUCTION SALE
Any student loans remaining in the trust as of the end of the collection period
immediately preceding the __________ quarterly payment date will be offered for
sale. The proceeds of any sale will be used to redeem your senior notes. The
auction price must at least equal the unpaid principal amount of the notes, plus
accrued and unpaid interest thereon.
OPTIONAL REDEMPTION
Any notes that remain outstanding on any quarterly payment date on which
____________________, or an assignee of ____________________, exercises its
option to purchase all of the assets of the trust will be prepaid in whole at
the applicable redemption price on this quarterly payment date. The redemption
price for any class of notes will equal the unpaid principal amount of that
class, plus accrued and unpaid interest thereon. The redemption price may not
include payment of all interest that you did not receive as a result of the
interest rate cap. Neither ____________________ nor its assignee may exercise
this option until the unpaid principal amount of the senior notes and the
subordinate notes is less than or equal to 20% of the initial unpaid principal
amount of the senior notes plus the subordinate notes.
TRUST PROPERTY
The primary property of the trust will include:
o the student loans;
o all amounts collected on the student loans on or after the cutoff date;
(net of interest accrued prior to the cutoff date);
o amounts on deposit in the accounts of the trust; and
o the interest rate swap.
THE INITIAL FINANCED STUDENT LOANS
The student loans consist of specified guaranteed education loans to students
and parents of students made under the Federal Family Education Loan Program.
All of the student loans are reinsured by the Department of Education. The
student loans to be transferred by ____________________ to the trust on the
closing date have the following characteristics as of __________, ____:
o Aggregate principal
amount: $______________
o Weighted average original
term: ______ mths
o Weighted average remaining
term: ______ mths
o Stafford Loans (%): _____%
o Federal Consolidation
Loans (%): _____%
o PLUS Loans (%): ____%
o SLS Loans (%): ____%
o Percent guaranteed by _________: _____%
ADDITIONAL STUDENT LOANS; REVOLVING PERIOD
From time to time after the closing date and before the earlier of the
occurrence of an early amortization event and __________, ____, the trust will
acquire additional student loans. The trust will purchase additional student
loans from collections received on the student loans owned by the trust that are
not used to cover specified fees and expenses of the trust, distributions on the
notes, deposits to the reserve account and payments due to the swap
counterparty.
ADDITIONAL STUDENT LOANS; SERIAL LOANS
Following the earlier of the occurrence of an early amortization event and
__________, ____, the trust may acquire additional student loans relating to
borrowers with student loans already owned by the trust. The trust will purchase
additional student loans from collections received on the student loans owned by
the trust that are not used to cover specified fees and expenses of the trust,
distributions on the notes, deposits to the reserve account and payments due to
the swap counterparty.
THE COLLECTION ACCOUNT
On the closing date, the depositor will make an initial deposit of
$_____________ into the collection account.
CREDIT ENHANCEMENT
The credit enhancement for the senior notes will consist primarily of the
following:
o reserve account; and
o subordination of the subordinate notes.
THE RESERVE ACCOUNT
The depositor will establish a reserve account with the indenture trustee. Funds
on deposit in the reserve account on each quarterly payment date will be
available to cover shortfalls in distributions of interest and principal on the
senior notes to the extent described in this prospectus supplement. The reserve
account will be funded as follows:
o On the closing date, the depositor will make an initial deposit of
$_________ into the reserve account.
o On each quarterly payment date, any available funds remaining after
making all prior distributions required to be made, will be deposited
into the reserve account.
Amounts in the reserve account on any quarterly payment date (after giving
effect to all distributions to be made on this date) in excess of the specified
reserve account balance will be released to ____________________ or an
affiliate. The specified reserve account balance for any quarterly payment date
will be the greater of (1) ____% of the outstanding principal balance of the
notes and (2) $_______.
SUBORDINATION OF THE SUBORDINATE NOTES
The subordination of the subordinate notes to the senior notes as described in
this prospectus supplement will provide additional credit enhancement for the
senior notes. Any losses on the student loans not covered by other forms of
credit enhancement will be allocated to the subordinate notes before being
allocated to the senior notes.
INTEREST RATE SWAP
The trust and the swap counterparty have entered into an interest rate swap.
Unless terminated earlier, the interest rate swap will terminate on the _____,
____ quarterly payment date. The trust will owe the swap counterparty a net swap
payment when (1) the weighted average discount rate per annum for direct
obligations of the United States with a maturity of 13 weeks plus a specified
percentage is greater than (2) the London interbank offered rate for deposits in
U.S. dollars having a maturity of three months. The swap counterparty will owe
the trust a net swap receipt when the calculation described in the immediately
preceding sentence is negative.
The amount of a net swap payment or a net swap receipt is the product of the
difference in the rates described in clause (1) and clause (2) above and the
interest rate swap's scheduled notional amount.
The scheduled notional amount for any quarterly payment date will be the lesser
of (1) the outstanding principal balance of the notes and (2) the amounts set
forth in Exhibit A to this prospectus supplement. The depositor expects the
scheduled notional amount for any quarterly payment date to initially equal
approximately __% of the then outstanding principal balance of the senior notes
and the subordinate notes. However, following the closing date, the depositor
may agree with the swap counterparty to cause the scheduled notional amount to
equal the outstanding principal balance of the notes.
While the interest rate swap is in effect, it will reduce, but not eliminate,
the risk that a note rate will be determined by the interest rate cap.
TAX STATUS
Stroock & Stroock & Lavan LLP, special federal income tax counsel to the
depositor, is of the opinion that (1) the trust will not be treated as an
association or a publicly traded partnership taxable as a corporation and (2)
the senior notes will be characterized as indebtedness for federal income tax
purposes. Each noteholder, by accepting a senior note, will agree to treat the
senior notes as indebtedness.
ERISA CONSIDERATIONS
Subject to the considerations discussed under "ERISA Considerations," the senior
notes are eligible for purchase by employee benefit plans.
RATINGS
At least two nationally recognized rating agencies must each rate the senior
notes in the highest long-term rating category.
RISK FACTORS
You should consider the following risk factors together with all the
information contained in this prospectus supplement and the related prospectus
in deciding whether to purchase any of the senior notes.
YOU MAY HAVE DIFFICULTY SELLING
YOUR NOTES................... The senior notes will not be listed on any
securities exchange. As a result, if you want
to sell your senior notes you must locate a
purchaser that is willing to purchase those
notes. The underwriters intend to make a
secondary market for the senior notes. The
underwriters will do so by offering to buy
the senior notes from investors that wish to
sell. However, the underwriters will not be
obligated to make offers to buy the senior
notes and may stop making offers at any time.
In addition, the prices offered, if any, may
not reflect prices that other potential
purchasers would be willing to pay, were they
to be given the opportunity. There have been
times in the past where there have been very
few buyers of asset backed securities (i.e.,
there has been a lack of liquidity), and
there may be these times in the future. As a
result, you may not be able to sell your
senior notes when you want to do so or you
may not be able to obtain the price that you
wish to receive.
THE TRUST HAS LIMITED ASSETS
TO MAKE PAYMENTS ON YOUR NOTES...The trust does not have, nor is it permitted
or expected to have, any significant assets
or sources of funds other than the student
loans (and the related guarantee agreements),
the reserve account and the interest rate
swap. The notes represent obligations solely
of the trust and will not be insured or
guaranteed by any entity. Consequently, you
must rely for repayment upon payments with
respect to the student loans and amounts on
deposit in the reserve account. Monies to be
deposited in the reserve account are limited
in amount and will be reduced, subject to a
specified minimum, as the aggregate principal
amount of the notes is reduced. If the
reserve account is exhausted, the trust will
depend solely on payments with respect to the
student loans to make payments on the notes
and you could suffer a loss. You will have no
claim to any amounts properly distributed to
the depositor, the seller, _________________
or the servicer from time to time. Neither
Credit Suisse First Boston, Inc. nor any of
its affiliates has guaranteed, will guarantee
or is or will be otherwise obligated with
respect to any notes.
YOU MAY EXPERIENCE LOSSES ON YOUR
INVESTMENT RESULTING FROM
PRINCIPAL BALANCE OF NOTES
EXCEEDING POOL BALANCE....... As of the closing date, the aggregate
principal amount of the senior notes and
subordinate notes will be equal to
approximately ___% of the sum of the
outstanding principal balance of the student
loans as of the cutoff date and the amount
deposited by the depositor in the reserve
account and the collection account on the
closing date. During the revolving period,
any collections on the student loans that are
not used to cover specified fees and expenses
of the trust, distributions on the notes,
deposits to the reserve account or payments
to the swap counterparty will be deposited in
the collateral reinvestment account. The
trust will apply amounts in the collateral
reinvestment account to increase the
outstanding principal balance of the student
loans. If the outstanding principal balance
of the student loans at the end of the
revolving period does not equal the aggregate
principal amount of the senior notes and
subordinate notes, amounts in the collateral
reinvestment account will be used to pay
principal on the notes.
You may experience losses to the extent that
excess interest collections are insufficient
to cause the outstanding principal balance of
the student loans to equal the aggregate
principal amount of the senior notes and
subordinate notes. The occurrence of any of
the following will increase the likelihood of
an insufficiency:
o A high rate of prepayments;
o An increase in the weighted average
discount rate per annum for direct
obligations of the United States with a
maturity of 13 weeks; or
o An increase in the London interbank
offered rate for deposits in U.S.
dollars having a maturity of three
months.
RISK OF CHANGE IN CHARACTERISTICS
OF THE STUDENT LOANS ........ Following the transfer of additional student
loans to the trust after the closing date,
the characteristics of the student loans may
differ significantly from the information
presented in this prospectus supplement. The
characteristics that may differ include the
composition of the student loans and of the
borrowers of the student loans, the related
guarantors (which may include additional
guarantors whose ability to fulfill their
insurance obligations may vary from that of
the initial guarantor), the distribution by
loan type, the distribution by interest rate,
the distribution by principal balance and the
distribution by remaining term to scheduled
maturity. You should consider potential
variances when making your investment
decision concerning the senior notes.
THE RETURN ON YOUR INVESTMENT
WILL CHANGE OVER TIME........ Your pre-tax return on your investment will
change from time to time for a number of
reasons including the following:
o THE RATE OF RETURN OF PRINCIPAL IS
UNCERTAIN. The amount of distributions
of principal on the senior notes and the
time when you receive those
distributions depends on the amount and
the times at which borrowers make
principal payments on the student loans.
Those principal payments may be
regularly scheduled payments or
unscheduled payments resulting from
prepayments, defaults or consolidations
of the student loans. In addition, if
the trust is not able to purchase
sufficient additional student loan
principal balances during the revolving
period, the noteholders will receive a
principal prepayment immediately
following the end of the revolving
period.
o The revolving period may terminate
earlier than ________, ____ if
o the student loans fail
specified performance tests,
o the amount of excess interest
for two successive quarterly
payment dates is below a
specified level,
o an event of default occurs
under the indenture or other
transaction documents or
o specified other events occur.
o YOU BEAR REINVESTMENT RISK. Asset backed
securities, like the senior notes,
usually produce more returns of
principal to investors when market
interest rates fall below the interest
rates on the student loans and produce
less returns of principal when market
interest rates are above the interest
rates on the student loans. As a result,
you are likely to receive more money to
reinvest at a time when other
investments generally are producing a
lower yield than that on the notes, and
are likely to receive less money to
reinvest when other investments
generally are producing a higher yield
than that on the notes. You will bear
the risk that the timing and amount of
distributions on your senior notes will
prevent you from attaining your desired
yield.
o AN EARLY TERMINATION MAY AFFECT THE
YIELD. Your investment in the senior
notes may end before you desire if (1)
the indenture trustee successfully
conducts an auction sale or (2)
____________________ exercises its
option to purchase all of the assets of
the trust. You will bear reinvestment
risk following an early termination.
CHANGES IN LEGISLATION MAY
ADVERSELY AFFECT STUDENT LOANS
AND FEDERAL GUARANTORS....... The Higher Education Act or other relevant
federal or state laws, rules and regulations
may be amended or modified in the future in a
manner that will adversely affect the federal
student loan programs described in this
prospectus supplement and the prospectus, the
student loans made thereunder or the
financial condition of the federal
guarantors.
In addition, if the direct student loan
program expands, the servicers may experience
increased costs due to reduced economies of
scale or other adverse effects on their
business to the extent the volume of loans
serviced by the servicers is reduced. These
cost increases could reduce the ability of
the servicers to satisfy their obligations to
service the student loans or to purchase
student loans in the event of specified
breaches of its covenants.
RISKS ASSOCIATED WITH SEQUENTIAL
PAYMENT OF PRINCIPAL ON THE
NOTES ....................... Since the Class A-2 Notes will generally not
be paid any principal distributions until the
principal balance of the Class A-1 Notes has
been reduced to zero, the Class A-1
noteholders would be most affected by a high
rate of principal prepayment or an early
termination of the revolving period. In
addition, as a result of this sequential
payment of principal, it is likely that at
any time the Class A-2 Notes will have a
greater percent of their initial principal
balance outstanding than the Class A-1 Notes
at any time. Consequently, the Class A-2
Notes will be allocated more losses than the
Class A-1 Notes following a default under the
indenture as a relative percentage of their
respective initial principal balances.
BASIS RISK..................... You may not be paid interest at the related
note rate as a result of an interest rate
cap. Any interest not paid as a result of the
interest rate cap may subsequently be paid to
you on a subordinated basis. The interest
rate cap may be triggered as a result of:
o The student loans generally bear
interest based on the rate per annum for
direct obligations of the United States
with a maturity of 13 weeks while the
note rate for each class of senior notes
is based on the London interbank offered
rate for deposits in U.S. dollars having
a maturity of three months.
o The principal balance of the student
loans will initially be less than the
aggregate principal amount of the senior
notes and the subordinate notes.
Consequently, the aggregate principal
balances of the student loans on which
interest will be collected will be less
than the principal amount of the senior
notes and the subordinate notes.
o The interest rate cap will be reduced as
a result of the trust's obligation to
pay specified fees to the Department of
Education.
If the note rate is limited by the interest
rate cap, the market value and liquidity of
your senior notes may decline.
BORROWER DEFAULT RISK ON CERTAIN
FEDERAL LOANS................ The student loans are generally 98% insured
by a federal guarantor. As a result, to the
extent a borrower of a student loan defaults,
the trust will experience a loss of generally
2% of the outstanding principal and accrued
interest on each student loan. The trust will
assign a defaulted student loan to the
applicable federal guarantor in exchange for
a guarantee payment on the 98% guaranteed
portion. The trust may not have any right to
pursue the borrower for the remaining 2%
unguaranteed portion. If the credit
enhancement described in this prospectus
supplement is not sufficient, you may suffer
a loss.
RISK OF DEPENDENCE ON GUARANTORS
AS SECURITY FOR STUDENT LOANS All of the student loans are unsecured. As a
result, the only security for payment of the
student loans are the guarantees provided
under the guarantee agreements between the
eligible lender trustee and the guarantors.
Substantially all of the student loans which
will be conveyed to the trust on the date of
issuance of the notes are guaranteed by
____________________ The financial condition
of a guarantor may be adversely affected by a
number of factors including:
o the amount of claims made against
the guarantor as result of borrower
defaults;
o the amount of claims reimbursed to the
guarantor from the Department of
Education (which range from 75% to 100%
depending on the date the student loan
was made and the performance of the
guarantor); and
o changes in legislation that may reduce
expenditures from the Department of
Education that support federal
guarantors or that may require federal
guarantors to pay more of their reserves
to the Department of Education.
If the financial status of the guarantors,
and particularly ____________________,
deteriorates, the guarantors may fail to make
guarantee payments to the eligible lender
trustee. In this event, you may suffer delays
in the payment of principal and interest on
your senior notes.
RISK OF LOSS OF GUARANTOR AND
DEPARTMENT OF EDUCATION
PAYMENTS FOR FAILURE TO COMPLY
WITH LOAN ORIGINATION AND
SERVICING PROCEDURES......... The Higher Education Act requires lenders and
their assignees making and servicing student
loans that are reinsured by the Department of
Education and guarantors guaranteeing federal
loans to follow specified procedures, to
ensure that the federal loans are properly
made and repaid. If the servicer fails to
follow these procedures or if the originator
of the loan failed to follow procedures
relating to the origination of any loans, the
Department of Education may refuse to make
reinsurance payments to the guarantors or to
make interest subsidy payments and special
allowance payments to the eligible lender
trustee. In addition, under these
circumstances the guarantors may refuse to
make guarantee payments to the trust. The
failure of the Department of Education to
provide reinsurance payments to the
guarantors could adversely affect the
guarantors' ability or legal obligation to
make payments under the guarantee agreements.
Loss of any these guarantee payments,
interest subsidy payments or special
allowance payments could adversely affect the
trust's ability to pay you timely interest
and principal. In this event, you may suffer
a loss on your investment.
RISK ASSOCIATED WITH THE INTEREST
RATE SWAP.................... The depositor expects the scheduled notional
amount of the interest rate swap for each
quarterly payment date to be less than the
outstanding principal balance of the notes.
As a result, the interest rate swap would not
give you full protection against a gap
between (1) the rate per annum for direct
obligations of the United States with a
maturity of 13 weeks and (2) the London
interbank offered rate for deposits in U.S.
dollars having a maturity of three months.
However, following the closing date, the
depositor may agree with the swap
counterparty to cause the scheduled notional
amount to equal the outstanding principal
balance of the notes.
In addition, the interest rate swap will
terminate prior to the final maturity date
for each class of the notes. If the interest
rate swap is terminated early, the trust or
the swap counterparty may be liable to pay to
the other a termination payment. Any
termination payment payable by the trust
could be substantial and could reduce amounts
otherwise payable to noteholders, thereby
resulting in shortfalls to you.
THE NOTES ARE NOT SUITABLE
INVESTMENTS FOR ALL INVESTORS The senior notes are not a suitable
investment if you require a regular or
predictable schedule of payments or payment
on any specific date. The senior notes are
complex investments that should be considered
only by investors who, either alone or with
their financial, tax and legal advisors, have
the expertise to analyze the prepayment,
reinvestment, default and market risk, the
tax consequences of an investment, and the
interaction of these factors.
WITHDRAWAL OR DOWNGRADING OF
INITIAL RATINGS WILL AFFECT THE
PRICES FOR NOTES............. A security rating is not a recommendation to
buy, sell or hold securities. Similar ratings
on different types of securities do not
necessarily mean the same thing. You are
encouraged to analyze the significance of
each rating independently from any other
rating. Any rating agency may change its
rating of the senior notes after the senior
notes are issued if that rating agency
believes that circumstances have changed. Any
subsequent change in rating will likely
affect the price that a subsequent purchaser
will be willing to pay for the senior notes.
The ratings do not address the likelihood of
(1) an early termination of the revolving
period or (2) the ultimate payment to you of
any interest not paid as a result of the
interest rate cap.
<PAGE>
FORMATION OF THE TRUST
THE TRUST
Asset Backed Securities Corporation Student Loan Trust ____-_ (the
"Trust") will be a trust formed under the laws of the State of Delaware pursuant
to the Trust Agreement for the transactions described in this prospectus
supplement and in the prospectus. The Trust will not engage in any activity
other than:
o acquiring, holding and managing the Student Loans (the
"Initial Financed Student Loans") sold to the Trust on ________,
____ (the "Closing Date"), the additional Student Loans acquired
by the Trust after the Closing Date (the "Additional Student
Loans" and, together with the Initial Financed Student Loans, the
"Financed Student Loans") and the other assets of the Trust and
proceeds therefrom,
o issuing the Notes,
o making payments thereon,
o originating Federal Consolidation Loans during the Revolving
Period,
o entering into the Interest Rate Swap, and
o engaging in other activities that are necessary, suitable or
convenient to accomplish the foregoing or are incidental thereto
or connected therewith.
The proceeds from the sale of the Notes will be used by
________________ (the "Eligible Lender Trustee") to purchase on behalf of the
Trust the Initial Financed Student Loans from ____________________, as Seller
pursuant to the Loan Sale Agreement, to fund the initial deposit into the
Reserve Account on the Closing Date of cash or Eligible Investments equal to
$_________ (the "Reserve Account Initial Deposit"), to fund the deposit into the
Collection Account on the Closing Date of cash or Eligible Investments equal to
$__________ and to fund the costs of issuance. Upon the consummation of the
transactions, the property of the Trust will consist of
o a pool of guaranteed education loans to students and parents of
students (the "Student Loans") made under the Federal Family
Education Loan Program ("FFELP"), legal title to which is held by
the Eligible Lender Trustee on behalf of the Trust,
o all funds collected in respect of the student loans on or after
the Cutoff Date, net of interest accrued thereon prior to the
Cutoff Date and not to be capitalized,
o all monies and investments on deposit in the Collection Account,
the Collateral Reinvestment Account and the Reserve Account and
o the Interest Rate Swap.
The Notes will be collateralized by the assets of the Trust as
described in this prospectus supplement. The Collection Account, the Reserve
Account, the Collateral Reinvestment Account and the Interest Rate Swap will be
maintained in the name of the Indenture Trustee for the benefit of the
Noteholders. To facilitate servicing and to minimize administrative burden and
expense, the Servicer will be appointed by the Eligible Lender Trustee as
custodian of the promissory notes representing the Financed Student Loans.
On behalf of the Trust, the Eligible Lender Trustee will use funds on
deposit in the Collateral Reinvestment Account during the Revolving Period to
make Additional Fundings, including to make or acquire Additional Student Loans
which will constitute property of the Trust. See "Description of the Transfer
and Servicing Agreements--Revolving Period and Additional Fundings" in this
prospectus supplement. In addition, after the Revolving Period, Additional
Student Loans will be added to the Trust to the extent that:
o the Eligible Lender Trustee on behalf of the Trust purchases
Serial Loans from the Seller,
o the Trust owns Financed Student Loans which are exchanged for
Serial Loans owned by the Seller as described in this prospectus
supplement or
o for 210 days after the end of the Revolving Period, Add-on
Consolidation Loans are added to Federal Consolidation Loans owned
by the Trust.
Any origination or conveyance during or after the Revolving Period of Additional
Student Loans is conditioned on compliance with the procedures described in the
Loan Sale Agreement. The Depositor expects that the amount of Additional
Fundings during the Revolving Period will approximately equal the amount
expected to be deposited during the Revolving Period into the Collateral
Reinvestment Account and that the timing of the Additional Fundings will be
sufficient so as not to cause a build-up of funds in the Collateral Reinvestment
Account that would cause an Early Amortization Event to occur prior to the
scheduled end of the Revolving Period on the last day of the Collection Period
preceding the ______ _____ Quarterly Payment Date. The Depositor's expectations
in this regard, based on current facts and circumstances, but relating to future
events, are inherently forward-looking. These expectations are based primarily
upon current market conditions, including conditions in the secondary market for
Student Loans, and current expectations as to when Additional Fundings will need
to be made (based, in part, on expectations as to the rate at which the Initial
Financed Student Loans will repay). There is a risk that market conditions will
change or that the actual repayment experience on the Initial Financed Student
Loans will be other than as expected. See Risk Factors--The Return on Your
Investment Will Change Over Time" in this prospectus supplement and "--Maturity
and Prepayment Experience" in the prospectus. In addition, a material adverse
change in the operations or business or financial condition of the Seller could
affect the amount or timing of Additional Fundings of New Loans or Serial Loans
during the Revolving Period. See "Federal Family Education Loan Program--Recent
Developments--Changes in Formulas for Determining Certain Interest Rates and
Special Allowance Payments" in this prospectus supplement. Accordingly, there
can be no assurance as to the amount or timing of Additional Fundings during the
Revolving Period. Upon an Early Amortization Event or in any event if the amount
on deposit in the Collateral Reinvestment Account has not been reduced to zero
by the end of the Revolving Period, any amounts remaining on deposit in the
Collateral Reinvestment Account will be paid on the Quarterly Payment Date
immediately following the end of the Revolving Period as a payment of principal
first to the Class A-1 Noteholders until the Class A-1 Notes have been paid in
full, then to the Class A-2 Noteholders until the Class A-2 Notes have been paid
in full and then to the Subordinate Noteholders. There can also be no assurance
as to the amount of Additional Fundings that will occur after the Revolving
Period. See "Description of the Transfer and Servicing Agreements--Revolving
Period and Additional Fundings" in this prospectus supplement.
The Trust's principal offices are in ________, _______ in care of
______________________________ as Eligible Lender Trustee, at the address listed
below.
ELIGIBLE LENDER TRUSTEE
_________________________ is the Eligible Lender Trustee for the Trust
under the Trust Agreement to be dated as of _________, ____ (as amended and
supplemented from time to time, the "Trust Agreement") among the Depositoe, the
Seller, ____________________ (the "Company"), a _____________ which is an
affiliate of the Seller, and the Eligible Lender Trustee. ____________________
is a ______________________ whose principal offices are located at
____________________ and whose New York offices are located at
______________________________. The Eligible Lender Trustee will acquire on
behalf of the Trust legal title to all the Financed Student Loans acquired from
time to time pursuant to the Loan Sale Agreement. The Eligible Lender Trustee on
behalf of the Trust will enter into a Guarantee Agreement with each of the
Guarantors with respect to the Financed Student Loans. The Eligible Lender
Trustee qualifies as an eligible lender and owner of all Financed Student Loans
for all purposes under the Higher Education Act and the Guarantee Agreements.
Failure of the Financed Student Loans to be owned by an eligible lender would
result in the loss of any Guarantee Payments from any Guarantor and any Federal
Assistance with respect to the Financed Student Loans. See "The Student Loan
Pools" in the prospectus. The Eligible Lender Trustee's liability in connection
with the issuance and sale of the Notes is limited solely to the express
obligations of the Eligible Lender Trustee set forth in the Trust Agreement, the
Loan Sale Agreement and the Servicing Agreement. See "Description of the Notes"
in this prospectus supplement and "Description of the Transfer and Servicing
Agreements" in this prospectus supplement and in the prospectus. The Seller and
its affiliates may maintain normal commercial banking relations with the
Eligible Lender Trustee.
THE SELLER AND THE SERVICER
_______________ (the "Seller" and the "Servicer") is a ___________.
[TO BE INSERTED]
THE FINANCED STUDENT LOAN POOL
The pool of Financed Student Loans will include the Initial Financed
Student Loans to be purchased by the Eligible Lender Trustee on behalf of the
Trust as of the Cutoff Date and any Additional Student Loans made or acquired by
the Eligible Lender Trustee on behalf of the Trust after the Closing Date.
No Initial Financed Student Loan as of the Cutoff Date consists of a
Student Loan that was subject to the Seller's prior obligation to sell the loan
to a third party.
Following the Closing Date and prior to the end of the Revolving
Period, the Trust will be obligated from time to time to purchase from the
Seller, and the Seller, subject to the availability of New Loans, will be
obligated to tender to the Trust, New Loans owned by the Seller each of which
will have been made to a borrower who is not a borrower under any Financed
Student Loan. In addition, following the Closing Date, and both during and after
the Revolving Period, the Trust will be obligated from time to time to purchase
from the Seller, subject to the availability of Serial Loans, Serial Loans owned
by the Seller. During the Revolving Period, the purchase of New Loans and Serial
Loans for the Loan Purchase Amount for the loan, will be funded by means of a
transfer of amounts on deposit in the Collateral Reinvestment Account as
described in this prospectus supplement. Following the end of the Revolving
Period, the purchase of Serial Loans will be funded by amounts representing
distributions of principal on the outstanding Financed Student Loans which would
otherwise have been part of the Available Funds or, alternatively, at the
Seller's option, the Eligible Lender Trustee will be obligated to exchange with
the Seller existing Financed Student Loans owned by the Trust for the Serial
Loans, provided that the Serial Loans and eligible Financed Student Loans meet
specified criteria described in this prospectus supplement. Any Purchase Premium
Amounts for Serial Loans purchased by the Trust after the Revolving Period will
be funded on the Quarterly Payment Date next succeeding the end of the
Collection Period during which the Serial Loan has been acquired by the Trust
from amounts, if any, then on deposit in the Reserve Account in excess of the
Specified Reserve Account Balance. No Purchase Premium Amounts will be payable
for Serial Loans exchanged for by the Trust.
In addition, following the Closing Date and prior to the end of the
Revolving Period, the Eligible Lender Trustee on behalf of the Trust will seek
to originate Federal Consolidation Loans to borrowers under Financed Student
Loans who are also borrowers under one or more Student Loans (whether or not all
the loans are in the Trust) under the Federal Consolidation Loan Program
described in the prospectus under "Federal Family Education Loan
Program--Federal Consolidation Loan Program" and under "Federal Family Education
Loan Program" in this prospectus supplement. Any of these originations by the
Eligible Lender Trustee on behalf of the Trust will be funded by means of a
transfer from the Collateral Reinvestment Account of the amount required to
repay any Student Loans that are being discharged in the consolidation process,
which amount will be paid by the Trust to the holder or holders of the Student
Loans to prepay the loans. The Eligible Lender Trustee will not be permitted to
originate Federal Consolidation Loans (including the addition of any Add-on
Consolidation Loans) on behalf of the Trust during the Revolving Period in an
aggregate principal amount in excess of [$35,000,000]; additionally, no Federal
Consolidation Loan may be originated by the Trust having a scheduled maturity
date after [October 28, 2030] if at the time of the origination the aggregate
principal balances of all Federal Consolidation Loans held by the Trust that
have a scheduled maturity date after [October 28, 2030], exceed or, after giving
effect to the origination, would exceed [$15,000,000]; provided, however, that
the Eligible Lender Trustee will be permitted to fund the addition of Add-on
Consolidation Loans in excess of the amounts if required to do so by the Act.
After the Revolving Period the Eligible Lender Trustee on behalf of the Trust
will cease to make Federal Consolidation Loans and Additional Student Loans will
consist solely of Serial Loans acquired in the manner specified above; provided,
however, that for a maximum period of 210 days following the end of the
Revolving Period, the Eligible Lender Trustee may be required to increase the
principal balance of Federal Consolidation Loans in the Trust by the amount of
any related Add-on Consolidation Loans as described below.
As described under "Federal Family Education Loan Program--Federal
Consolidation Loan Program" in the prospectus and under "Federal Family
Education Loan Program" in this prospectus supplement, borrowers may consolidate
additional loans ("Add-on Consolidation Loans") with an existing Federal
Consolidation Loan within 180 days from the date that the existing Federal
Consolidation Loan was made. As a result of the addition of any Add-on
Consolidation Loans, the related Federal Consolidation Loan may, in specified
cases, have a different interest rate and a different final payment date. Add-on
Consolidation Loans added to a Federal Consolidation Loan in the Trust during
the Revolving Period will be funded by means of a transfer from the Collateral
Reinvestment Account of the amount required to repay in full any Student Loans
that are being discharged in the consolidation process, which amount will be
paid by the Eligible Lender Trustee on behalf of the Trust to the holder or
holders of the Student Loans to prepay the loans. For a maximum period of 210
days following the end of the Revolving Period (30 days being attributed to the
processing of any Add-on Consolidation Loans), these amounts will be funded by
amounts representing distributions of principal on the outstanding Financed
Student Loans which would otherwise have been part of the Available Funds as
described under "Description of the Transfer and Servicing
Agreements--Distributions" in this prospectus supplement.
No selection procedures believed by the Depositor to be adverse to the
Noteholders were used or will be used in selecting the Financed Student Loans.
However, except for the criteria described in the preceding paragraphs and under
"Description of the Transfer and Servicing Agreements--Revolving Period and
Additional Fundings" in this prospectus supplement or contained in the Loan Sale
Agreement, there will be no required characteristics of the Additional Student
Loans. Therefore, following the transfer of Additional Student Loans to the
Eligible Lender Trustee on behalf of the Trust, the aggregate characteristics of
the entire pool of Financed Student Loans, including the composition of the
Financed Student Loans and of the related borrowers, the related Guarantors, the
distribution by loan type, the distribution by interest rate, the distribution
by principal balance and the distribution by remaining term to scheduled
maturity described in the following tables, may vary significantly from those of
the Initial Financed Student Loans as of the Cutoff Date. In addition, the
distribution by weighted average interest rate applicable to the Financed
Student Loans on any date following the Cutoff Date may vary significantly from
that set forth in the following tables as a result of variations in the
effective rates of interest applicable to the Financed Student Loans. Moreover,
the information described below with respect to the original term to maturity
and remaining term of maturity of the Initial Financed Student Loans as of the
Cutoff Date may vary significantly from the actual term to maturity of any of
the Financed Student Loans as a result of the granting of deferral and
forbearance periods with respect thereto.
Set forth below in the following tables is a description of specified
characteristics of the Initial Financed Student Loans as of _________, ____ (the
"Cutoff Date"). The percentages set forth in the tables below may not always add
to 100% due to rounding.
COMPOSITION OF THE INITIAL FINANCED STUDENT LOANS
AS OF THE CUTOFF DATE
Aggregate Outstanding Principal Balance (1).....................$______________
Number of Billing Accounts...................................... ______
Average Outstanding Principal Balance per Billing Account....... $________
Number of Loans................................................. _______
Average Outstanding Principal Balance per Loan.................. $________
Weighted Average Original Term to Maturity (2).................. ______ months
Weighted Average Remaining Term to Maturity (2)................. ______ months
Weighted Average Annual Interest Rate (3)....................... ____%
-----------
(1) Includes net principal balances due from borrowers, plus accrued interest
thereon estimated to be $_____________ as of the Cutoff Date to be
capitalized upon commencement of repayment.
(2) Determined from the date of origination or the Cutoff Date, as the case
may be, to the stated maturity date of the applicable Initial Financed
Student Loans, assuming repayment commences promptly upon expiration of
the typical grace period following the expected graduation date and
without giving effect to any deferral or forbearance periods that may be
granted in the future. See "Federal Family Education Loan Program" in this
prospectus supplement and in the prospectus.
(3) Determined using the interest rates applicable to the Initial Financed
Student Loans as of the Cutoff Date. However, because some of the Initial
Financed Student Loans effectively bear interest generally at a variable
rate per annum to the borrower, there can be no assurance that the
foregoing percentage will remain applicable to the Initial Financed
Student Loans at any time after the Cutoff Date. See "Federal Family
Education Loan Program" in this prospectus supplement and in the
prospectus.
DISTRIBUTION OF THE INITIAL FINANCED STUDENT LOANS
BY LOAN TYPE AS OF THE CUTOFF DATE
PERCENT OF INITIAL
FINANCED STUDENT
AGGREGATE LOANS BY
NUMBER OUTSTANDING OUTSTANDING
LOAN TYPE OF LOANS PRINCIPAL BALANCE(1) PRINCIPAL BALANCE
--------- -------- -------------------- -----------------
Stafford Loans (2)......... $ %
Federal Consolidation
Loans......................
PLUS Loans.................
SLS Loans.................. -------- -------------------- ----------------
Total................... $ %
======== ==================== ================
(1) Includes net principal balances due from borrowers, plus accrued interest
thereon estimated to be $_____________ as of the Cutoff Date to be
capitalized upon commencement of repayment.
(2) Includes Unsubsidized Stafford Loans having aggregate outstanding principal
balances as of the Cutoff Date of $--------------.
DISTRIBUTION OF THE INITIAL FINANCED STUDENT LOANS
BY BORROWER INTEREST RATES AS OF THE CUTOFF DATE
PERCENT OF INITIAL
FINANCED STUDENT
AGGREGATE LOANS
RANGE OF INTEREST NUMBER OUTSTANDING BY OUTSTANDING
RATES(1) OF LOANS PRINCIPAL BALANCE(2) PRINCIPAL BALANCE
----------------- -------- -------------------- -----------------
Less than 6.50%............ $ %
6.50% to 7.49%.............
7.50% to 7.99%.............
8.00% to 8.49%.............
8.50% to 8.99%.............
9.00% to 9.49%.............
9.50% and above............ --------- --------------------- -----------------
Total............. $ %
========= ===================== =================
(1) Determined using the interest rates applicable to the Initial Financed
Student Loans as of the Cutoff Date. However, because some of the Initial
Financed Student Loans effectively bear interest at a variable rate per
annum to the borrower, there can be no assurance that the foregoing
information will remain applicable to the Initial Financed Student Loans at
any time after the Cutoff Date. See "Federal Family Education Loan Program"
in this prospectus supplement and in the prospectus.
(2) Includes net principal balances due from borrowers, plus accrued interest
thereon estimated to be $_____________ as of the Cutoff Date to be
capitalized upon commencement of repayment.
DISTRIBUTION OF THE INITIAL FINANCED STUDENT LOANS
BY OUTSTANDING PRINCIPAL BALANCE AS OF THE CUTOFF DATE
PERCENT OF
INITIAL
FINANCED
AGGREGATE STUDENT LOANS
RANGE OF OUTSTANDING NUMBER OUTSTANDING BY OUTSTANDING
PRINCIPAL BALANCE OF LOANS PRINCIPAL BALANCE(1) PRINCIPAL BALANCE
-------------------- -------- -------------------- -----------------
Less than $2,000............ $ %
$ 2,000 to $ 3,999..........
$ 4,000 to $ 5,999..........
$ 6,000 to $ 7,999..........
$ 8,000 to $ 9,999..........
$10,000 to $11,999..........
$12,000 to $13,999..........
$14,000 to $15,999..........
$16,000 to $17,999..........
$18,000 to $19,999..........
$20,000 to $21,999..........
$22,000 to $23,999..........
$24,000 to $25,999..........
$26,000 to $27,999..........
$28,000 and above .......... -------- ---------------------- ---------------
Total.............. $ %
======== ====================== ===============
-----------------
(1) Includes net principal balances due from borrowers, plus accrued interest
thereon estimated to be $_____________ as of the Cutoff Date to be
capitalized upon commencement of repayment.
DISTRIBUTION OF THE INITIAL FINANCED STUDENT LOANS
BY REMAINING TERM TO SCHEDULED MATURITY AS OF THE CUTOFF DATE
PERCENT OF
INITIAL FINANCED
NUMBER OF MONTHS AGGREGATE STUDENT LOANS
REMAINING TO NUMBER OF OUTSTANDING BY OUTSTANDING
SCHEDULED MATURITY(1) OF LOANS PRINCIPAL BALANCE(2) PRINCIPAL BALANCE
--------------------- --------- -------------------- -----------------
Less than 24........... $ %
24 to 35...............
36 to 47...............
48 to 59...............
60 to 71...............
72 to 83...............
84 to 95...............
96 to 107 .............
108 to 119.............
120 to 131.............
132 to 143.............
144 to 155.............
156 to 167.............
168 to 179.............
180 to 191.............
192 and above.......... --------- --------------------- -----------------
Total......... $ %
========= ===================== =================
(1) Determined from the Cutoff Date to the stated maturity date of the
applicable Initial Financed Student Loans, assuming repayment commences
promptly upon expiration of the typical grace period following the expected
graduation date and without giving effect to any deferral or forbearance
periods that may be granted in the future. See "Federal Family Education
Loan Program" in this prospectus supplement and in the prospectus.
(2) Includes net principal balances due from borrowers, plus accrued interest
thereon estimated to be $____________ as of the Cutoff Date to be
capitalized upon commencement of repayment.
DISTRIBUTION OF THE INITIAL FINANCED STUDENT LOANS
BY BORROWER PAYMENT STATUS AS OF THE CUTOFF DATE
PERCENT OF
INITIAL FINANCED
AGGREGATE STUDENT LOANS
NUMBER OF OUTSTANDING BY OUTSTANDING
BORROWER PAYMENT STATUS(1) OF LOANS PRINCIPAL BALANCE(2) PRINCIPAL BALANCE
-------------------------- --------- -------------------- -----------------
Deferral..................... $ %
Forbearance..................
Grace........................
In-School....................
Repayment.................... -------- --------------------- -----------------
Total............... $ %
======== ===================== =================
----------------
(1) Refers to the status of the borrower of each Initial Financed Student Loan
as of the Cutoff Date: the borrower may still be attending school
("In-School"), may be in a grace period prior to repayment commencing
("Grace"), may be repaying the loan ("Repayment") or may have temporarily
ceased repaying the loan through a deferral ("Deferral") or a forbearance
("Forbearance") period. See "Federal Family Education Loan Program" in this
prospectus supplement and in the prospectus. For purposes of this table,
"In-School" excludes, and "Deferral" includes, all SLS or PLUS Loans of
borrowers still attending school.
(2) Includes net principal balances due from borrowers, plus accrued interest
thereon estimated to be $_____________ as of the Cutoff Date to be
capitalized upon commencement of repayment.
DISTRIBUTION OF THE INITIAL FINANCIAL STUDENT LOANS
BY LOCATION AS OF THE CUTOFF DATE
PERCENT OF INITIAL
FINANCED STUDENT
AGGREGATE LOANS
NUMBER OF OUTSTANDING BY OUTSTANDING
LOCATION (1) LOANS PRINCIPAL BALANCE (2) PRINCIPAL BALANCE
------------ --------- --------------------- ------------------
Alabama.............. $ %
Alaska...............
Arizona .............
Arkansas.............
California...........
Colorado.............
Connecticut..........
Delaware.............
Florida..............
Georgia..............
Hawaii...............
Idaho................
Illinois.............
Indiana..............
Iowa.................
Kansas...............
Kentucky.............
Louisiana............
Maine................
Maryland.............
Massachusetts........
Michigan.............
Minnesota............
Mississippi..........
Missouri.............
Montana..............
Nebraska.............
Nevada...............
New Hampshire........
New Jersey...........
New Mexico...........
New York.............
North Carolina.......
North Dakota.........
Ohio.................
Oklahoma.............
Oregon...............
Pennsylvania.........
Puerto Rico..........
Rhode Island.........
South Carolina.......
South Dakota.........
Tennessee............
Texas................
Utah.................
Vermont..............
Virginia.............
Washington...........
Washington DC........
West Virginia........
Wisconsin............
Wyoming..............
Other................
--------- --------------------- ------------------
Total....... $ %
========= ===================== ==================
----------------
(1) Based on the permanent billing addresses of the borrowers of the Initial
Financed Student Loans shown on the Servicer's records as of the Cutoff
Date.
(2) Includes net principal balances due from borrowers, plus accrued interest
thereon estimated to be $_____________ as of the Cutoff Date to be
capitalized upon commencement of repayment.
DISTRIBUTION OF INITIAL FINANCED STUDENT LOANS
BY DATE OF DISBURSEMENT
PERCENT OF INITIAL
AGGREGATE FINANCED STUDENT
OUTSTANDING LOANS
NUMBER PRINCIPAL BY OUTSTANDING
BORROWER PAYMENT STATUS (1) OF LOANS BALANCE (2) PRINCIPAL BALANCE
--------------------------- -------- ----------- ------------------
Pre-October 1, 1993............. $ %
On or After October 1, 1993 and
Prior to October 1, 1998......
October 1, 1998 and thereafter..
-------- ----------- ------------------
Total.................. $ %
======== =========== ==================
----------------
(1) Initial Financed Student Loans disbursed prior to October 1, 1993 are 100%
guaranteed by the Initial Guarantors and reinsured against default by the
Department up to a maximum of 100% of the Guarantee Payments. Initial
Financed Student Loans disbursed on or after October 1, 1993 and prior to
October 1, 1998 are 98% guaranteed by the Initial Guarantors and reinsured
against default by the Department up to a maximum of 98% of the Guarantee
Payments. Initial Financial Student Loans disbursed on or after October 1,
1998 are 98% guaranteed by the Initial Guarantors and reinsured against
default by the Department up to a maximum of 95% of the Guarantee Payments.
(2) Includes net principal balances due from borrowers, plus accrued interest
thereon estimated to be $_____________ as of the Cutoff Date to be
capitalized upon commencement of repayment.
DISTRIBUTION OF INITIAL FINANCED STUDENT LOANS
BY NUMBER OF DAYS OF DELINQUENCY AS OF THE CUTOFF DATE
PERCENT OF INITIAL
AGGREGATE FINANCED STUDENT
OUTSTANDING LOANS
NUMBER PRINCIPAL BY OUTSTANDING
DAYS DELINQUENT OF LOANS BALANCE (1) PRINCIPAL BALANCE
--------------- -------- ----------- ------------------
0 - 30......................... $ %
31 - 60........................
61 - 90........................
91 - 120.......................
121 and above..................
-------- ----------- ------------------
Total................. $ %
======== =========== ==================
----------------
(1) Includes net principal balances due from borrowers, plus accrued interest
thereon estimated to be $______________ as of the Cutoff Date to be
capitalized upon commencement of repayment.
Each of the Financed Student Loans provides or will provide for the
amortization of the outstanding principal balance of the Financed Student Loan
over a series of regular payments. Each regular payment consists of an
installment of interest which is calculated on the basis of the outstanding
principal balance of the Financed Student Loan multiplied by the applicable
interest rate and further multiplied by the period elapsed (as a fraction of a
calendar year) since the preceding payment of interest was made. As payments are
received in respect of the Financed Student Loan, the amount received is applied
first to interest accrued to the date of payment and the balance is applied to
reduce the unpaid principal balance. Accordingly, if a borrower pays a regular
installment before its scheduled due date, the portion of the payment allocable
to interest for the period since the preceding payment was made will be less
than it would have been had the payment been made as scheduled, and the portion
of the payment applied to reduce the unpaid principal balance will be
correspondingly greater. Conversely, if a borrower pays a monthly installment
after its scheduled due date, the portion of the payment allocable to interest
for the period since the preceding payment was made will be greater than it
would have been had the payment been made as scheduled, and the portion of the
payment applied to reduce the unpaid principal balance will be correspondingly
less. In either case, subject to any applicable Deferral Periods or Forbearance
Periods, the borrower pays a regular installment until the final scheduled
payment date, at which time the amount of the final installment is increased or
decreased as necessary to repay the then outstanding principal balance of the
Financed Student Loan.
GUARANTEE OF FINANCED STUDENT LOANS
By the Closing Date, the Eligible Lender Trustee will have entered into
a Guarantee Agreement with the Initial Guarantors pursuant to which
____________________, a ____________ ("_________") and specified other Federal
Guarantors (together, the "Initial Guarantors") have agreed to serve as
Guarantors for the Initial Financed Student Loans. As of the Cutoff Date, _____%
of the Initial Financed Student Loans are guaranteed by _________.
During the Revolving Period, the Trust may acquire Additional Student
Loans guaranteed by a Federal Guarantor other than the Initial Guarantors (each,
an "Additional Guarantor" and, together with the Initial Guarantors, the
"Guarantors") and enter into a Guarantee Agreement with the Eligible Lender
Trustee. In the aggregate no more than 20% of the Financed Student Loans (by
principal balance) may, following any addition, have guarantees from Additional
Guarantors and no more than 5% of the Financed Student Loans (by principal
balance) may, following any addition, have guarantees from any one Additional
Guarantor (unless and to the extent that either limitation is exceeded solely
though the origination on behalf of the Trust of Federal Consolidation Loans or
the purchase by the Trust of Serial Loans, in either case, that are made with
respect to Financed Student Loans guaranteed by an Additional Guarantor).
Pursuant to its Guarantee Agreement, each of the Guarantors guarantees
payment of 100% of the principal (including any interest capitalized from time
to time) and accrued interest for the Financed Student Loans as to which any one
of the following events has occurred:
o failure by the borrower under a Financed Student Loan to make
monthly principal or interest payments when due, provided the
failure continues for a statutorily determined period of time of
at least 180 days for Student Loans for which the first day of
delinquency occurs prior to October 7, 1998 or 270 days for
Student Loans for which the first day of delinquency occurs on or
after October 7, 1998 (except that the guarantee against the
failures will be 98% of unpaid principal plus accrued and unpaid
interest in the case of Financed Student Loans first disbursed on
or after October 1, 1993);
o any filing by or against the borrower under a Financed Student
Loan of a petition in bankruptcy pursuant to any chapter of the
Federal Bankruptcy Code, as amended;
o the death of the borrower under a Financed Student Loan;
o the total and permanent disability of the borrower under a
Financed Student Loan to work and earn money or attend school, as
certified by a qualified physician;
o the school closed thereby preventing the borrower from completing
his/her program of study; or
o the loan application was falsely certified.
When these conditions are satisfied, the Act requires the Federal
Guarantor generally to pay the claim within 90 days after its submission by the
lender. The obligations of each Guarantor pursuant to its Guarantee Agreement
are obligations solely of the Guarantor and are not supported by the full faith
and credit of the federal or any state government. However, the Act provides
that if the Secretary of Education (the "Secretary") determines that a Federal
Guarantor is unable to meet its insurance obligations, the Secretary shall
assume responsibility for all functions of the guarantor under the loan
insurance program of the guarantor. The Secretary is authorized, among other
things, to take those actions necessary to ensure the continued availability of
Student Loans to residents of the state or states in which the guarantor did
business, the full honoring of all guarantees issued by the guarantor prior to
the assumption by the Secretary of the functions of the guarantor, and the
proper servicing of Student Loans guaranteed by the guarantor prior to the
Secretary's assumption of the functions of the guarantor. For a further
discussion of the Secretary's authority in the event that a Federal Guarantor is
unable to meet its insurance obligations, See "Federal Family Education Loan
Program--Federal Guarantors" and "--Federal Insurance and Reinsurance of Federal
Guarantors" in the prospectus and "Federal Family Education Loan Program" in
this prospectus supplement.
Each Guarantor's guarantee obligations with respect to any Financed
Student Loan guaranteed by it are conditioned upon the satisfaction of all the
conditions set forth in the applicable Guarantee Agreement. These conditions
generally include, but are not limited to, the following:
o the origination and servicing of the Financed Student Loan being
performed in accordance with the Act and other applicable
requirements,
o the timely payment to the Guarantor of the guarantee fee payable
with respect to the Financed Student Loan,
o the timely submission to the Guarantor of all required pre-claim
delinquency status notifications and of the claim with respect to
the Financed Student Loan, and
o the transfer and endorsement of the promissory note evidencing the
Financed Student Loan to the Guarantor upon and in connection with
making a claim for Guarantee Payments thereon.
Failure to comply with any of the applicable conditions, including the
foregoing, may result in the refusal of the Guarantor to honor its Guarantee
Agreement with respect to the Financed Student Loan, in the denial of guarantee
coverage with respect to specified accrued interest amounts with respect thereto
or in the loss of specified Interest Subsidy Payments and Special Allowance
Payments with respect thereto. Under the Servicing Agreement and the Loan Sale
Agreement, the failure to comply would constitute a breach of the Servicer's
covenants or the Seller's representations and warranties, as the case may be,
and would create an obligation of the Servicer (subject to the limitations
described under "Risk Factors--The Return on Your Investment Will Change Over
Time" in this prospectus supplement) or the Seller, as the case may be, to
purchase or repurchase the Financed Student Loan or, in the case of a breach by
the Seller, to substitute for the loan and to reimburse the Trust for the
non-guaranteed interest amounts or the lost Interest Subsidy Payments and
Special Allowance Payments with respect thereto. The Servicer will not, however,
have any similar obligation to reimburse the Trust for non-guaranteed interest
amounts or lost Interest Subsidy Payments or Special Allowance Payments which
result from a breach of its covenants with respect to the Financed Student
Loans. See "Description of the Transfer and Servicing Agreement--Sale of Student
Loans; Representations and Warranties" and "Servicer Covenants" in the
prospectus.
Set forth below is current and historical information with respect to
_________ in its capacity as a Guarantor of all education loans guaranteed by
it:
[TO BE INSERTED]
DESCRIPTION OF THE NOTES
The Class A-1 Floating Rate Asset Backed Senior Notes (the "Class A-1
Notes"), the Class A-2 Floating Rate Asset Backed Senior Notes (the "Class A-2
Notes" and together with the Class A-1 Notes, the "Senior Notes") and the
Floating Rate Asset Backed Subordinate Notes (the "Subordinate Notes" and
together with the Senior Notes, the "Notes") will be issued pursuant to the
terms of the Indenture to be dated as of ________, ____, (as amended and
supplemented from time to time, the "Indenture"), between the Trust and
_______________, a _______________ (the "Indenture Trustee"), substantially in
the form filed as an exhibit to the Registration Statement. The following
summary describes some terms of the Notes, the Indenture and the Trust Agreement
pursuant to which the Trust will be formed. The summary does not purport to be
complete and is qualified in its entirety by reference to the provisions of the
Notes, the Indenture and the Trust Agreement. The following summary supplements,
and to the extent inconsistent therewith, replaces the description of the
general terms and provisions of the Notes, the Indenture and the Trust Agreement
set forth in the prospectus, to which description reference is hereby made.
PAYMENTS OF INTEREST
Interest on the Notes will be payable quarterly on or about each
January 28, April 28, July 28 and October 28 of each year (or, if the 28th day
is not a business day, on the next succeeding business day), commencing
_________, ____ (each, a "Quarterly Payment Date") to holders of record of the
Notes on the related Record Date. "Record Date" means, with respect to any
Quarterly Payment Date, the 27th day of the month in which the Quarterly Payment
Date occurs (whether or not the date is a business day). Interest on the
outstanding principal amount of each class of Notes will accrue from and
including the Closing Date (in the case of the first Quarterly Payment Date), or
from and including the most recent Quarterly Payment Date on which interest
thereon has been paid, to but excluding the current Quarterly Payment Date
(each, a "Quarterly Interest Period"). Interest accrued as of any Quarterly
Payment Date but not paid on the Quarterly Payment Date will be due on the next
Quarterly Payment Date, together with an amount equal to interest on this amount
at the applicable rate per annum described below. Interest payments on the Notes
will generally be funded from the Available Funds on deposit in the Collection
Account and from amounts on deposit in the Reserve Account remaining after the
distribution of the Servicing Fee and all overdue Servicing Fees, the
Administration Fee and all overdue Administration Fees for the Quarterly Payment
Date. See "Description of the Transfer and Servicing Agreement--Distributions"
and "--Credit Enhancement" in this prospectus supplement.
The "Class A-1 Note Rate", the "Class A-2 Note Rate", and the
"Subordinate Note Rate" for each Quarterly Interest Period will equal the lesser
of (a) the Class A-1 Note LIBOR Rate, the Class A-2 Note LIBOR Rate or the
Subordinate Note LIBOR Rate, as applicable, and (b) the Adjusted Student Loan
Rate for the Quarterly Interest Period. The "Class A-1 Note LIBOR Rate", the
"Class A-2 Note LIBOR Rate" and the "Subordinate Note LIBOR Rate" shall be equal
to Three-Month LIBOR for the related LIBOR Reset Period (determined as described
in this prospectus supplement) plus ____%, ____% and ____%, respectively.
Interest on the Notes will be calculated on the basis of the actual
number of days elapsed in each Quarterly Interest Period divided by 360. In the
case of the initial Quarterly Interest Period, interest will accrue for the
period from the Closing Date to but excluding _________, _____ based on
Three-Month LIBOR as determined on the initial LIBOR Determination Date and for
the period from ________, ____ to but excluding ________, ____ based on
Three-Month LIBOR as determined on the LIBOR Determination Date in ________,
____. See "--Calculation of Three-Month LIBOR."
The "Adjusted Student Loan Rate" for any Quarterly Interest Period will
equal the product of
(a) the quotient obtained by dividing
(1) 365 (or 366 in the case of a leap year) by
(2) the actual number of days elapsed in the Quarterly Interest
Period and
(b) the percentage equivalent of a fraction
(1) the numerator of which is equal to the sum of the Expected
Interest Collections and, if the Interest Rate Swap is still
in effect, the Net Trust Swap Receipt, if any, for the
Quarterly Interest Period less the sum of the Servicing Fee,
the Administration Fee, and, if the Interest Rate Swap is
still in effect, the Net Trust Swap Payment, if any, with
respect to the Quarterly Interest Period and
(2) the denominator of which is the aggregate principal amount of
the Notes as of the last day of the Quarterly Interest Period.
"Expected Interest Collections" means, with respect to any Quarterly
Interest Period, the sum of
o the amount of interest accrued, net of any accrued Monthly Rebate
Fees and other amounts required by the Act to be paid to the
Department (as described under "Federal Family Education Loan
Program" in this prospectus supplement and in the prospectus) with
respect to the Financed Student Loans for the Collection Period
preceding the applicable Quarterly Payment Date (the "Student Loan
Rate Accrual Period") (whether or not the interest is actually
paid),
o all Interest Subsidy Payments and Special Allowance Payments
estimated to have accrued for the Student Loan Rate Accrual Period
whether or not actually received (taking into account any expected
deduction therefrom of the Federal Origination Fees described
under "Federal Family Education Loan Program" in this prospectus
supplement and in the prospectus) and
o Investment Earnings (as defined in "Description of the Transfer
and Servicing Agreement--Accounts" in the prospectus) for the
Student Loan Rate Accrual Period.
Class A-1 Noteholders' Interest Basis Carryover, Class A-2 Noteholders'
Interest Basis Carryover and Subordinate Noteholders' Interest Basis Carryover
may be incurred on any Quarterly Payment Date (after the first Quarterly Payment
Date). Any Class A-1 Noteholders' Interest Basis Carryover, Class A-2
Noteholders' Interest Basis Carryover, and Subordinate Noteholders' Interest
Basis Carryover so incurred prior to the Parity Date will, however, not be
payable until on or after the Parity Date. On each Quarterly Payment Date from
and after the Parity Date, any Class A-1 Noteholders' Interest Basis Carryover,
Class A-2 Noteholders' Interest Basis Carryover and Subordinate Noteholders'
Interest Basis Carryover incurred and unpaid to and including the Quarterly
Payment Date will be payable on the Quarterly Payment Date but only out of any
Reserve Account Excess remaining after payment out of the excess of
o if the Revolving Period has terminated, any Purchase Premiums due
the Seller for Serial Loans purchased by the Trust prior to the
end of the related Collection Period,
o on the Parity Date (if the Parity Date occurs after the end of the
Revolving Period), any amount necessary to reduce to zero the
remaining amount by which the aggregate principal amount of the
Notes exceeds the Pool Balance and
o in the case of the Subordinate Noteholders' Interest Basis
Carryover, payment of the Class A-1 Noteholders' Interest Basis
Carryover and the Class A-2 Noteholders' Interest Basis Carryover.
The "Parity Date" is the first Quarterly Payment Date on which the
aggregate principal amount of the Notes, after giving effect to all
distributions on the date, is no longer in excess of the Pool Balance as of the
last day of the related Collection Period.
The "Pool Balance" at any time equals the aggregate principal balances
of the Financed Student Loans at the end of the preceding Collection Period
(including accrued interest thereon through the end of the Collection Period to
the extent the interest will be capitalized upon commencement of repayment),
after giving effect to the following, without duplication:
o all payments received by the Trust during the Collection Period
from or on behalf of borrowers, the Guarantors and, with respect
to specified payments on specified Financed Student Loans, the
Department (collectively, the "Obligors"),
o all Purchase Amounts received by the Trust for the Collection
Period from the Seller or the Servicer,
o all Additional Fundings made with respect to the Collection Period
and
o all losses realized on Financed Student Loans liquidated during
the Collection Period.
"Purchase Amount" with respect to a Financed Student Loan means the
unpaid balance owed by the applicable borrower plus accrued interest thereon to
the date of purchase. See "Description of the Transfer and Servicing
Agreements--Termination" in this prospectus supplement.
DISTRIBUTIONS OF PRINCIPAL
No principal payments will be made on the Notes during the Revolving
Period. Commencing with the end of the Revolving Period, principal payments will
be made to the Noteholders, sequentially, in the order of priority set forth in
the second succeeding paragraph on each Quarterly Payment Date in an amount
generally equal to the Principal Distribution Amount for the Quarterly Payment
Date, until the aggregate principal amount of the Notes is reduced to zero.
Payments of the Principal Distribution Amount will generally be derived from the
Available Funds remaining after the distribution of
o the Servicing Fee and all overdue Servicing Fees,
o the Administration Fee and all overdue Administration Fees,
o the Senior Noteholders' Interest Distribution Amount and the Trust
Swap Payment Amount, if any, and
o the Subordinate Noteholders' Interest Distribution Amount;
and, if the Available Funds are insufficient, from amounts on deposit in the
Reserve Account. See "Description of the Transfer and Servicing
Agreements--Distributions" and"--Credit Enhancement" in this prospectus
supplement. If the Available Funds and the amounts on deposit in the Reserve
Account are insufficient to pay the Senior Noteholders' Principal Distribution
Amount or, after the Senior Notes have been paid in full, the Subordinate
Noteholders' Principal Distribution, for a Quarterly Payment Date, the shortfall
will be added to the principal payable to the Senior Noteholders or the
Subordinate Noteholders, respectively, on subsequent Quarterly Payment Dates.
In addition, on each Quarterly Payment Date commencing with (1) the end
of the Revolving Period, for so long as the aggregate principal amount of the
Notes outstanding on this date is greater than the Pool Balance as of the close
of business on the last day of the related Collection Period and (2) the
________, ____ Quarterly Payment Date, any Reserve Account Excess for the
Quarterly Payment Date will, after payment to the Seller of any unpaid Purchase
Premium Amounts for any Serial Loans purchased by the Trust prior to the end of
the related Collection Period, be applied to pay the principal of the Notes in
the order of priority set forth below. Amounts, if any, available to be
distributed as set forth in the preceding sentence will not be part of the
Principal Distribution Amount for the Quarterly Payment Date and the Noteholders
will have no entitlement thereto except to the extent of any excess in the
Reserve Account of which there can be no assurance. See "Description of the
Transfer and Servicing Agreements--Credit Enhancement--Reserve Account" in this
prospectus supplement.
On each Quarterly Payment Date on which principal payments are made to
the holders (the "Senior Noteholders") of the Senior Notes (whether in respect
of the Senior Noteholders' Principal Distribution Amount, amounts on deposit in
the Reserve Account constituting Reserve Account Excess (as described in the
preceding paragraph) or amounts in respect of a mandatory redemption, as
described below, or otherwise), all payments of principal will be applied to pay
principal to the holders (the "Class A-1 Noteholders") of the Class A-1 Notes
until the aggregate principal amount of the Class A-1 Notes has been reduced to
zero, and then to the holders (the "Class A-2 Noteholders") of the Class A-2
Notes until the aggregate principal amount of the Class A-2 Notes has been
reduced to zero. In addition, on each Quarterly Payment Date on which principal
payments are made on the Notes (whether in respect of the Principal Distribution
Amount, amounts on deposit in the Reserve Account constituting Reserve Account
Excess (as described in the preceding paragraph) or amounts in respect of a
mandatory redemption, as described below, or otherwise), all payments of
principal will be applied to pay principal to the Senior Noteholders until the
aggregate principal amount of the Senior Notes has been paid in full, and then
to pay principal to the holders (the "Subordinate Noteholders" and, together
with the Senior Noteholders, the "Noteholders") of the Subordinate Notes until
the Subordinate Notes have been paid in full.
The aggregate outstanding principal amount, if any, of the Class A-1
Notes will be payable in full on the ________, ____ Quarterly Payment Date (the
"Class A-1 Note Final Maturity Date"), of the Class A-2 Notes will be payable in
full on the ________, ____ Quarterly Payment Due Date (the "Class A-2 Note Final
Maturity Date") and of the Subordinate Notes on the ________, ____ Quarterly
Payment Date (the "Subordinate Note Final Maturity Date"). However, the actual
maturity of any class of the Senior Notes or of the Subordinate Notes could
occur other than on these dates as a result of a variety of factors including
those described under "Risk Factors--The Return on Your Investment Will Change
Over Time" in this prospectus supplement.
MANDATORY REDEMPTION
If any amount remains on deposit in the Collateral Reinvestment Account
on the last day of the Revolving Period after giving effect to all Additional
Fundings on or prior to this date, the entire amount remaining on deposit in the
Collateral Reinvestment Account will be used on the Quarterly Payment Date on or
immediately following this date first to pay the Swap Counterparty any prior
unpaid Net Trust Swap Payment Carryover Shortfalls and then to redeem the Notes
in the order of priority set forth in the third preceding paragraph. The
aggregate principal amount of Notes to be redeemed will be an amount equal to
the amount then on deposit in the Collateral Reinvestment Account after giving
effect to the payment to the Swap Counterparty of any prior Net Trust Swap
Payment Carryover Shortfalls on the last day of the Revolving Period.
CALCULATION OF THREE-MONTH LIBOR
Pursuant to the Administration Agreement, the Administrator will
determine Three-Month LIBOR for purposes of calculating the Class A-1 Note LIBOR
Rate, the Class A-2 Note LIBOR Rate and the Subordinate Note LIBOR Rate for each
Quarterly Interest Period (x) on the second business day prior to the
commencement of the LIBOR Reset Period within the Quarterly Interest Period (or,
in the case of the initial LIBOR Reset Period, on the second business day prior
to the Closing Date) and (y) with respect to the initial Quarterly Interest
Period, as determined pursuant to clause (x) for the period from the Closing
Date to but excluding ________, ____ and as determined on the second business
day prior to ________, ____ for the period from ________, ____ to but excluding
________, ____ (each, a "LIBOR Determination Date"). For purposes of calculating
Three-Month LIBOR, a business day is any day on which banks in The City of New
York and the City of London are open for the transaction of international
business. Interest due for any Quarterly Interest Period will be determined
based on the actual number of days in the Quarterly Interest Period over a
360-day year.
"Three-Month LIBOR" means, with respect to any LIBOR Reset Period, the
London interbank offered rate for deposits in U.S. dollars having a maturity of
three months commencing on the related LIBOR Determination Date (the "Index
Maturity") which appears on Telerate Page 3750 as of 11:00 a.m. London time, on
the LIBOR Determination Date. If the rate does not appear on Telerate Page 3750,
the rate for that day will be determined on the basis of the rates at which
deposits in U.S. dollars, having the Index Maturity and in a principal amount of
not less than U.S. $1,000,000, are offered at approximately 11:00 a.m. London
time, on the LIBOR Determination Date, to prime banks in the London interbank
market by the Reference Banks. The Administrator will request the principal
London office of each Reference Bank to provide a quotation of its rate. If at
least two quotations are provided, the rate for that day will be the arithmetic
mean of the quotations. If fewer than two quotations are provided, the rate for
that day will be the arithmetic mean of the rates quoted by major banks in The
City of New York, selected by the Administrator, at approximately 11:00 a.m. New
York time, on the LIBOR Determination Date, for loans in U.S. dollars to leading
European banks having the Index Maturity and in a principal amount equal to an
amount of not less than U.S. $1,000,000; provided, however, that if the banks
selected as aforesaid are not quoting as mentioned in this sentence, Three-Month
LIBOR in effect for the applicable LIBOR Reset Period will be Three-Month LIBOR
in effect for the previous LIBOR Reset Period.
"LIBOR Reset Period" means the three-month period commencing on the
28th day (or, if any 28th day is not a business day, on the next succeeding
business day) of each January, April, July and October and ending on the day
immediately preceding the following LIBOR Reset Period; provided, however, that
the initial LIBOR Reset Period will commence on the Closing Date.
"Telerate Page 3750" means the display page so designated on the Dow
Jones Telerate Service (or another page as may replace that page on that service
for the purpose of displaying comparable rates or prices).
"Reference Banks" means four major banks in the London interbank market
selected by the Administrator.
BOOK-ENTRY REGISTRATION
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 UCC and a "clearing agency" registered
pursuant to the provisions of Section 17A of the Exchange Act. DTC was created
to hold securities for its participating organizations ("Participants") and to
facilitate the clearance and settlement of securities transactions between
Participants through electronic book-entry changes in their accounts, thereby
eliminating the need for physical movement of certificates. Participants include
the underwriters, securities brokers and dealers, banks, trust companies and
clearing corporations and may include some other organizations. Indirect access
to the DTC system also is available to others, including banks, brokers, dealers
and trust companies that clear through or maintain a custodial relationship with
a Participant, either directly or indirectly ("Indirect Participants").
Senior Noteholders that are not Participants or Indirect Participants
but desire to purchase, sell or otherwise transfer ownership of, or other
interests in, Senior Notes may do so only through Participants and Indirect
Participants. In addition, Senior Noteholders will receive all distributions of
principal of and interest on the Senior Notes from the Indenture Trustee through
DTC and its Participants. Under a book-entry format, Senior Noteholders will
receive payments after the related Quarterly Payment Date because, while
payments are required to be forwarded to Cede, as nominee for DTC, on each
Quarterly Payment Date, DTC will forward the payments to its Participants which
thereafter will be required to forward them to Indirect Participants or Senior
Noteholders. It is anticipated that the only "Senior Noteholder" will be Cede,
as nominee for DTC and that Senior Noteholders will not be recognized by the
Indenture Trustee as "Noteholders", as the terms are used in the Indenture.
Senior Noteholders will be permitted to exercise the rights of Senior
Noteholders indirectly through DTC and its Participants (which in turn will
exercise their rights through DTC).
Under the rules, regulations and procedures creating and affecting DTC
and its operations, DTC is required to make book-entry transfers among
Participants on whose behalf it acts with respect to the Senior Notes and is
required to receive and transmit distributions of principal of and interest on
the Senior Notes. Participants and Indirect Participants with which Senior
Noteholders have accounts with respect to the Senior Notes similarly are
required to make book-entry transfers and receive and transmit the payments on
behalf of their respective Senior Noteholders.
Because DTC can only act on behalf of Participants, which in turn act
on behalf of Indirect Participants and specified banks, the ability of a Senior
Noteholder to pledge Senior Notes to persons or entities that do not participate
in the DTC system, or otherwise to take actions in respect of the Senior Notes,
may be limited due to the lack of a physical certificate for the Senior Notes.
Clearstream, Luxembourg ("Clearstream, Luxembourg") is incorporated
under the laws of Luxembourg as a professional depository. Clearstream,
Luxembourg holds securities for its participating organizations ("Clearstream,
Luxembourg Participants") and facilitates the clearance and settlement of
securities transactions between Clearstream, Luxembourg Participants through
electronic book-entry changes in accounts of Clearstream, Luxembourg
Participants, thereby eliminating the need for physical movement of
certificates. Transactions may be settled in Clearsteam, Luxembourg in any of 28
currencies, including United States dollars. Clearstream, Luxembourg provides to
its Clearstream, Luxembourg Participants, among other things, services for
safekeeping, administration, clearance and settlement of internationally traded
securities and securities lending and borrowing. Clearstream, Luxembourg
interfaces with domestic markets in several countries. As a professional
depository, Clearstream, Luxembourg is subject to regulation by the Luxembourg
Monetary Institute. Clearstream, Luxembourg Participants are recognized
financial institutions around the world, including underwriters, securities
brokers and dealers, banks, trust companies, clearing corporations and specified
other organizations. Indirect access to Clearstream, Luxembourg is also
available to others, including, banks, brokers, dealers and trust companies that
clear through or maintain a custodial relationship with a Clearstream Luxembourg
Participant, either directly or indirectly.
The Euroclear System ("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 be settled in any of 27
currencies, including United States dollars. Euroclear includes various other
services, including securities lending and borrowing and interfaces with
domestic markets in several countries generally similar to the arrangements for
cross-market transfers with DTC described above. Euroclear is operated by the
Brussels, Belgium office of Morgan Guaranty Trust Company of New York (the
"Euroclear Operator", under contract with Euroclear Clearance Systems S.C., a
Belgian cooperative corporation (the "Cooperative"). All operations are
conducted by the Euroclear Operator, and all Euroclear securities clearance
accounts and Euroclear cash accounts are accounts with the Euroclear Operator,
not the Cooperative. The Cooperative establishes policy for Euroclear on behalf
of Euroclear Participants. Euroclear Participants include banks (including
central banks), securities brokers and dealers and other professional financial
intermediaries. Indirect access to Euroclear is also available to other firms
that clear through or maintain a custodial relationship with a Euroclear
Participant, either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. 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 the Euroclear, withdrawals of securities
and cash from the 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 with respect to Senior Notes held through Clearstream,
Luxembourg or Euroclear will be credited to the cash accounts of Clearstream,
Luxembourg Participants or Euroclear Participants in accordance with the
relevant system's rules and procedures, to the extent received by its Depositary
(as defined below). These distributions will be subject to tax reporting in
accordance with relevant United States tax laws and regulations. Clearstream,
Luxembourg or the Euroclear Operator, as the case may be, will take any other
action permitted to be taken by a Senior Noteholder under the Indenture on
behalf of a Clearstream, Luxembourg Participant or Euroclear Participant only in
accordance with the relevant rules and procedures and subject to the relevant
Depositary's ability to effect these actions on its behalf through DTC.
Senior Noteholders may hold their Senior Notes through DTC (in the
United States) or Clearstream, Luxembourg or Euroclear (in Europe) if they are
participants of these systems, or indirectly through organizations which are
participants in these systems.
The Senior Notes will initially be registered in the name of Cede &
Co., the nominee of DTC. Clearstream, Luxembourg and Euroclear will hold omnibus
positions on behalf of their participants through customers' securities accounts
in Clearstream, Luxembourg's and Euroclear's names on the books of their
respective depositaries which in turn will hold positions in customers'
securities accounts in the depositaries' names on the books of DTC. Citibank,
N.A. ("Citibank") will act as depositary for Clearstream, Luxembourg and Morgan
Guaranty Trust Company of New York ("Morgan") will act as depositary for
Euroclear (in these capacities, individually, the "Depositary" and,
collectively, the "Depositaries").
Transfers between Participants will occur in accordance with DTC Rules.
Transfers between Clearstream, Luxembourg Participants and Euroclear
Participants will occur in accordance with their respective rules and operating
procedures.
Because of time-zone differences, credits of securities received in
Clearstream, Luxembourg 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. These credits or any
transactions in these securities settled during this processing will be reported
to the relevant Euroclear or Clearstream, Luxembourg Participants on the
business day following the DTC settlement date. Cash received in Clearstream,
Luxembourg or Euroclear as a result of sales of securities by or through a
Clearstream, Luxembourg Participant or Euroclear Participant to a Participant
will be received with value on the DTC settlement date but will be available in
the relevant Clearstream, Luxembourg or Euroclear cash account only as of the
business day following settlement in DTC. For information with respect to tax
documentation procedures for the Senior Notes, see "Certain Federal Income Tax
Consequences--Trusts for Which a Partnership Election Is Made--Tax Consequences
to Holders of the Notes--FOREIGN HOLDERS" in the prospectus.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through Clearstream,
Luxembourg 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 its Depositary; however, these cross-market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in the system in accordance
with its rules and procedures and within its established deadlines (European
time). The relevant European international clearing system will, if the
transaction meets its settlement requirements, deliver instructions to its
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.
Clearstream, Luxembourg Participants and Euroclear Participants may not deliver
instructions to the Depositaries.
DTC has advised the Administrator that it will take any action
permitted to be taken by a Senior Noteholder under the Indenture, only at the
direction of one or more Participants to whose accounts with DTC the Senior
Notes are credited.
Although DTC, Clearstream, Luxembourg and Euroclear have agreed to the
foregoing procedures in order to facilitate transfers of interests in the Senior
Notes among participants of DTC, Clearstream, Luxembourg and Euroclear, they are
under no obligation to perform or continue to perform these procedures and these
procedures may be discontinued at any time.
According to DTC, the information set forth in the preceding two
paragraphs about DTC has been provided to the Industry by DTC for informational
purposes only and is not intended to serve as a representation, warranty or
contract modification of any kind.
NONE OF THE TRUST, THE SELLER, THE SERVICER, THE COMPANY, THE
ADMINISTRATOR, THE ELIGIBLE LENDER TRUSTEE, THE INDENTURE TRUSTEE OR THE
UNDERWRITERS WILL HAVE ANY RESPONSIBILITY OR OBLIGATION TO ANY PARTICIPANTS,
CLEARSTREAM, LUXEMBOURG PARTICIPANTS OR EUROCLEAR PARTICIPANTS OR THE PERSONS
FOR WHOM THEY ACT AS NOMINEES WITH RESPECT TO
o THE ACCURACY OF ANY RECORDS MAINTAINED BY DTC, CLEARSTREAM,
LUXEMBOURG OR EUROCLEAR OR ANY PARTICIPANT,
o THE PAYMENT BY DTC, CLEARSTREAM, LUXEMBOURG OR EUROCLEAR OR ANY
PARTICIPANT OF ANY AMOUNT DUE TO ANY BENEFICIAL OWNER IN RESPECT
OF THE PRINCIPAL AMOUNT OR INTEREST ON THE SENIOR NOTES,
o THE DELIVERY BY ANY PARTICIPANT, CLEARSTREAM LUXEMBOURG
PARTICIPANT OR EUROCLEAR PARTICIPANT OF ANY NOTICE TO ANY
BENEFICIAL OWNER WHICH IS REQUIRED OR PERMITTED UNDER THE TERMS OF
THE INDENTURE OR THE TRUST AGREEMENT TO BE GIVEN TO SENIOR
NOTEHOLDERS OR
o ANY OTHER ACTION TAKEN BY DTC AS THE SENIOR NOTEHOLDER.
DESCRIPTION OF THE TRANSFER AND SERVICING AGREEMENTS
The following is a summary of some terms of the Loan Sale Agreement to
be dated as of ________,____, (as amended and supplemented from time to time,
the "Loan Sale Agreement"), among the Depositor, the Seller, the Trust and the
Eligible Lender Trustee, pursuant to which the Eligible Lender Trustee on behalf
of the Trust will purchase the Financed Student Loans; the Servicing Agreement
to be dated as of ________, ____ (as amended and supplemented from time to time,
the "Servicing Agreement") among the Trust, _________ (the "Servicer"), the
Seller and the Eligible Lender Trustee pursuant to which the Servicer will
service the Financed Student Loans; the Administration Agreement to be dated as
of ________, ____, (as amended and supplemented from time to time, the
"Administration Agreement") among the Trust, the Indenture Trustee and ____, as
administrator (the "Administrator") pursuant to which the Administrator will
undertake some other administrative duties and functions with respect to the
Trust and the Financed Student Loans; and the Trust Agreement pursuant to which
the Trust will be created (collectively, the "Transfer and Servicing
Agreements"). Forms of the Transfer and Servicing Agreements have been filed as
exhibits to the Registration Statement. A copy of the Transfer and Servicing
Agreements will be filed with the Securities and Exchange Commission (the
"Commission") following the issuance of the Notes. This summary does not purport
to be complete and is subject to, and qualified in its entirety by reference to,
all the provisions of the Transfer and Servicing Agreements. The following
summary supplements, and to the extent inconsistent therewith replaces, the
description of the general terms and provisions of the Transfer and Servicing
Agreements set forth in the prospectus, to which description reference is hereby
made.
SALE OF FINANCED STUDENT LOANS; REPRESENTATIONS AND WARRANTIES
Information with respect to the sale of the Initial Financed Student
Loans from the Seller to the Depositor and from the Depositor to the Eligible
Lender Trustee on behalf of the Trust on the Closing Date pursuant to the Loan
Sale Agreement and the representations and warranties made by the Seller in
connection therewith and in connection with the purchase of Student Loans by the
Trust pursuant to Additional Fundings is set forth under "Description of the
Transfer and Servicing Agreements" in the prospectus.
REVOLVING PERIOD AND ADDITIONAL FUNDINGS
During the period (the "Revolving Period") from the Closing Date until
the first to occur of (1) an Early Amortization Event as described below or (2)
the last day of the Collection Period preceding the ________, ____ Quarterly
Payment Date, the Eligible Lender Trustee on behalf of the Trust will be
obligated from time to time, subject to specified conditions described in this
prospectus supplement, to acquire additional Student Loans or increase the
outstanding principal balance of the Financed Student Loans ("Additional
Fundings"). The Eligible Lender Trustee on behalf of the Trust will be obligated
from time to time, subject to specified conditions described in this prospectus
supplement, to purchase from the Seller, and the Seller, subject to the
availability of Student Loans and to the availability of funds therefor in the
Collateral Reinvestment Account, will be obligated to tender to the Trust,
Student Loans which
o are made to a borrower who is not a borrower under any Financed
Student Loan,
o are made under loan programs which existed as of the Closing Date
and
o are guaranteed by a Guarantor (each, a "New Loan" and,
collectively, the "New Loans").
New Loans will be made or acquired by _______ ("_____") or another eligible
lender on behalf of the Seller at the discretion and in accordance with usual
practices of the Seller. Each purchase of a New Loan will be made by the
Eligible Lender Trustee on behalf of the Trust pursuant to a transfer agreement
(each, a "Transfer Agreement") among the Seller, the Trust and the Eligible
Lender Trustee. During the Revolving Period, each purchase of a New Loan will be
funded by means of a transfer from the Collateral Reinvestment Account of an
amount equal to the sum of
o the principal balance owed by the related borrower plus accrued
interest thereon expected to be capitalized upon repayment (the
"Purchase Collateral Balance"),
o accrued interest on the principal balance owed by the related
borrower not expected to be capitalized upon repayment
("Noncapitalized Accrued Interest") and
o an additional amount not to exceed ____% of the Purchase
Collateral Balance (the "Purchase Premium Amount" and, together
with Noncapitalized Accrued Interest and the Purchase Collateral
Balance, the "Loan Purchase Amount").
Following the end of the Revolving Period, New Loans may not be purchased by the
Trust.
The term "Early Amortization Event" refers to any of the following
events:
o an Event of Default occurring under the Indenture, a Servicer
Default occurring under the Servicing Agreement or an
Administrator Default occurring under the Administration
Agreement;
o specified events of insolvency occurring with respect to the
Seller;
o the Trust becomes subject to registration as an investment company
under the Investment Company Act of 1940, as amended;
o as of the end of any Collection Period, the percentage (by
principal balance) of Financed Student Loans the borrowers of
which use the loans to attend schools identified by the related
Guarantor as proprietary or vocational exceeds ___% of the Pool
Balance;
o as of the end of any Collection Period, the percentage (by
principal balance) of Financed Student Loans which are not in
repayment and are not eligible for Interest Subsidy Payments
exceeds _____% of the Pool Balance;
o the Excess Spread, with respect to each of any two successive
Quarterly Payment Dates commencing with the Quarterly Payment Date
in ________, ____ is less than ____%; or
o the arithmetic average of the Delinquency Percentage as of the end
of each of two successive Collection Periods commencing with the
Quarterly Payment Date in ________, ____ exceeds _____%.
"Excess Spread" means, with respect to any Quarterly Payment Date, the
percentage equivalent of a fraction the numerator of which is the product of (a)
four and (b) the difference between (x) the sum of (1) the Expected Interest
Collections for the Quarterly Payment Date and (2) the Trust Swap Receipt
Amount, if any, for the Quarterly Payment Date and (y) the sum of
o the Servicing Fee for the Quarterly Payment Date and all prior
unpaid Servicing Fees,
o the Administration Fee for the Quarterly Payment Date and all
prior unpaid Administration Fees,
o the Senior Noteholders' Interest Distribution Amount and the Trust
Swap Payment Amount, if any, for the Quarterly Payment Date and
o the Subordinate Noteholders' Interest Distribution Amount for the
Quarterly Payment Date,
and the denominator of which is the average of the Pool Balance calculated as of
the first and the last day of the related Collection Period.
"Delinquency Percentage" means, as of any date of determination, the
percentage equivalent of a fraction the numerator of which is the aggregate
principal balances of the Financed Student Loans which are Repayment Loans that
either (a) are over 210 days delinquent or (b) have had claims filed with the
Department for which payment is still awaited, and the denominator of which is
the aggregate principal balances of the Financed Student Loans which are
Repayment Loans.
In addition, following the Closing Date and both during and subsequent
to the Revolving Period, the Eligible Lender Trustee on behalf of the Trust will
be obligated from time to time, subject to the conditions described below, to
purchase from the Seller Student Loans which
o are made to a borrower who is also a borrower under at least one
outstanding Financed Student Loan,
o are made under the same loan program as the Financed Student Loan,
and
o are guaranteed by the Guarantor that guaranteed the Financed
Student Loan (each, a "Serial Loan" and, collectively, the "Serial
Loans").
Serial Loans will be made or acquired by _____ or another eligible lender on
behalf of the Seller at the discretion and in accordance with usual business
practices of the Seller.
During the Revolving Period, each purchase of a Serial Loan will be
funded by means of a transfer from the Collateral Reinvestment Account of an
amount equal to the Loan Purchase Amount of the Serial Loan. Following the end
of the Revolving Period, the Purchased Collateral Balance for purchases of
Serial Loans will be funded by amounts representing distributions of principal
on the outstanding Financed Student Loans which otherwise would have been part
of the Available Funds as described under "--Distributions" below, and Purchase
Premium Amounts for the purchases will be funded on the next succeeding
Quarterly Payment Date from any Reserve Account Excess for the Quarterly Payment
Date as described in this prospectus supplement under "Description of the
Transfer and Servicing Agreements--Credit Enhancement--RESERVE ACCOUNT".
Alternatively, at the Seller's option, following the end of the Revolving Period
the Eligible Lender Trustee will be obligated, in lieu of purchasing Serial
Loans as described above, to exchange with the Seller existing Financed Student
Loans owned by the Trust for Serial Loans owned by the Seller; PROVIDED,
HOWEVER, that each Financed Student Loan so exchanged (an "Exchanged Financed
Student Loan") meets specified criteria including that (1) the Exchanged
Financed Student Loan was originated under the same loan program and is
guaranteed by the same Guarantor as the Financed Student Loan and entitles the
holder to receive interest based on the same interest rate index as the Serial
Loan to be exchanged into the Trust (an "Exchanged Serial Loan") and (2) the
Exchanged Financed Student Loan will not, at any level of the interest rate
index, have an interest rate that is greater than that of the Exchanged Serial
Loan. In addition, if the outstanding principal balance of an Exchanged Financed
Student Loan is less than that of the related Exchanged Serial Loan, an
additional amount equal to the difference will be remitted to the Seller from
amounts which would otherwise have been part of the Available Funds as described
under "--Distributions" below. No Purchase Premium Amounts will be payable for
an Exchanged Serial Loan.
A purchase of Serial Loans or acquisition of Exchanged Serial Loans
will be prohibited at any time after (1) an Event of Default occurs under the
Indenture, a Servicer Default occurs under the Servicing Agreement or an
Administrator Default occurs under the Administration Agreement or (2) specified
events of insolvency occur with respect to the Seller.
Any purchase of New Loans or Serial Loans or exchange of Exchanged
Financed Student Loans for Exchanged Serial Loans will be made by the Trust on a
date designated by the Seller (each, a "Transfer Date") pursuant to one or more
Transfer Agreements. On the Transfer Date, the Seller will assign without
recourse (except as otherwise set forth in the Transfer and Servicing
Agreements) to the Eligible Lender Trustee on behalf of the Trust the Seller's
entire interest in the New Loans, Serial Loans or Exchanged Serial Loans being
transferred on the Transfer Date, in exchange for the related Loan Purchase
Amount or the Exchanged Financed Student Loans being exchanged therefor (with
the payment of any Purchase Premium Amount for Serial Loans acquired by the
Trust after the Revolving Period being deferred to the next succeeding Quarterly
Payment Date on which amounts in excess of the Specified Reserve Account Balance
are available in the Reserve Account as described above).
In addition, following the Closing Date and prior to the end of the
Revolving Period, in the event that a borrower under a Financed Student Loan who
is also a borrower under one or more Student Loans (whether or not all the loans
are part of the Trust) elects to consolidate the loans, the Eligible Lender
Trustee on behalf of the Trust will seek to originate a Federal Consolidation
Loan pursuant to the Federal Consolidation Loan Program described in the
prospectus under "Federal Family Education Loan Program--Federal Consolidation
Loan Program" and under "Federal Family Education Loan Program" in this
prospectus supplement. The origination will be funded by means of a transfer
from the Collateral Reinvestment Account of the amount required to repay in full
any Student Loans that are being discharged in the consolidation process, which
amount will be paid by the Trust to the holder or holders of the Student Loans
to prepay the loans. No assurance can be given that the Eligible Lender Trustee,
rather than another lender, will be the lender which makes the Federal
Consolidation Loan. In the event that another lender makes the Federal
Consolidation Loan, any Financed Student Loan which is being consolidated by the
Federal Consolidation Loan will be prepaid. The Eligible Lender Trustee will not
be permitted to originate Federal Consolidation Loans (including the addition of
any Add-on Consolidation Loans) on behalf of the Trust during the Revolving
Period in an aggregate principal amount in excess of [$35,000,000];
additionally, no Federal Consolidation Loan may be originated by the Trust
having a scheduled maturity date after [October 28, 2030] if at the time of the
origination the aggregate principal balances of all Federal Consolidation Loans
held by the Trust that have a scheduled maturity date after [October 28, 2030]
exceed or, after giving effect to the origination, would exceed [$15,000,000];
provided, however, that the Eligible Lender Trustee will be permitted to fund
Add-on Consolidation Loans in excess of the amounts if required to do so by the
Act. After the Revolving Period the Eligible Lender Trustee on behalf of the
Trust will cease to originate Federal Consolidation Loans and any Federal
Consolidation Loan made with respect to a Financed Student Loan will be made by
another lender, thereby resulting in a prepayment of the Financed Student Loan;
PROVIDED, HOWEVER, that for a maximum period of 210 days following the end of
the Revolving Period, the Eligible Lender Trustee may be required to increase
the principal balance of any Federal Consolidation Loan by the amount of any
related Add-on Consolidation Loan, as described below.
As described under "Federal Family Education Loan Program--Federal
Consolidation Loan Program" in the prospectus and "Federal Family Education Loan
Program" in this prospectus supplement, borrowers may consolidate additional
Student Loans ("Add-on Consolidation Loans") with an existing Federal
Consolidation Loan within 180 days from the date that the existing Federal
Consolidation Loan was made. As a result of the addition of any Add-on
Consolidation Loans, the related Federal Consolidation Loan may, in some cases,
have a different interest rate and a different final payment date. Any Add-on
Consolidation Loan added during the Revolving Period to a Federal Consolidation
Loan in the Trust will be funded by means of a transfer from the Collateral
Reinvestment Account of the amount required to repay in full any Student Loans
that are being discharged in the consolidation process, which amount will be
paid by the Eligible Lender Trustee on behalf of the Trust to the holder or
holders of the Student Loans to prepay the loans. For a maximum period of 210
days following the end of the Revolving Period (30 days being attributed to the
processing of any Add-on Consolidation Loans), the amounts will be funded by
amounts representing distributions of principal on the outstanding Financed
Student Loans which would otherwise have been part of the Available Funds as
described under "--Distributions" below.
As described under "Federal Family Education Loan Program" in this
prospectus supplement and in the prospectus, during specified qualifying
periods, interest on specified Financed Student Loans is not required to be paid
currently, but instead is added to the outstanding principal balance of the loan
at the end of the qualifying period. In order to minimize the possibility that
the failure to receive current interest payments on the loans during the
qualifying periods will result in a shortfall of the amount required to be
distributed on the Notes, amounts on deposit in the Collateral Reinvestment
Account will be applied during the Revolving Period to make interest payments to
the Noteholders in lieu of current collections of interest on the loans.
Following the end of the Revolving Period, the Collateral Reinvestment Account
will cease to be available as a source to fund the interest payments to the
Noteholders, and thereafter the payments will be funded through the application
of amounts which would otherwise have been distributable in respect of the
Principal Distribution Amount for the related Quarterly Payment Date as
described under "--Distributions" below.
ACCOUNTS
In addition to the collection account (the "Collection Account")
referred to in the prospectus under "Description of the Transfer and Servicing
Agreements--Accounts", the Administrator will establish and maintain a
collateral reinvestment account (the "Collateral Reinvestment Account") and a
reserve account (the "Reserve Account") in the name of the Indenture Trustee on
behalf of the Noteholders.
SERVICING COMPENSATION; ADMINISTRATION FEE
The Servicer will be entitled to receive from the Trust monthly, on
each Monthly Payment Date or Quarterly Payment Date, a monthly servicing fee
(the "Servicing Fee") in an amount equal to the lesser of (a) one-twelfth of
____% or a larger percentage approved by the rating agencies rating the Notes,
not to exceed ____% (or of ____% if the Monthly Payment Date or Quarterly
Payment Date is on or after the ________, ____ Quarterly Payment Date) of the
aggregate principal balances of the Financed Student Loans as of the last day of
the preceding calendar month and (b) the sum of
1. one-twelfth of the In-School Percentage of the principal balance
of each billing account relating to a Financed Student Loan as of
the last day of the preceding calendar month which was an
In-School Student Loan (as defined in this prospectus supplement)
on the last day of the preceding calendar month or, if the average
principal balance of billing accounts relating to In-School
Student Loans as of the last day of the preceding calendar month
was $2,500 or less, $1.50 per billing account,
2. one-twelfth of the GRDF Percentage of the principal balance as of
the last day of the preceding calendar month of each billing
account relating to a Financed Student Loan which was a Grace,
Repayment, Deferral or Forbearance Student Loan (each, as defined
in this prospectus supplement) as of the last day of the preceding
calendar month or, if the average principal balance of the billing
accounts as of the last day of the preceding calendar month was
$3,000 or less, $3.00 per billing account,
3. a fee of $1.00 for each notification sent by the Servicer during
the preceding calendar month on behalf of the Trust to a borrower
providing information to the borrower with respect to Federal
Consolidation Loan programs,
4. a one-time fee of $75.00 for each Federal Consolidation Loan
originated by the Eligible Lender Trustee on behalf of the Trust
during the preceding calendar month,
5. a fee of $25.00 for each Financed Student Loan for which, during
the preceding calendar month, claim documentation was completed
and provided to the Guarantor or for which the Servicer performed
bankruptcy or ineligible billing account processing (that, in the
case of ineligible billing account processing, resulted in a
demand letter being sent to the borrower), in each case as
required by the claims-processing requirements of the related
Guarantor,
6. a fee of $0.05 per Financed Student Loan for storing and
warehousing the applicable loan documentation for each loan during
the preceding calendar month,
7. a one-time fee of $0.40 for each billing account transferred by
the Seller to the Trust during the preceding calendar month,
8. a fee equal to one-twelfth of the product of (A) the aggregate
principal balances of the Financed Student Loans outstanding as of
the last day of the preceding calendar month and (B) 0.05%, which
fee will be payable so long as specified servicing regulations of
the Department remain in effect, and
9. a fee of $70.00 per hour for system development requests made by
the Eligible Lender Trustee on behalf of the Trust and provided by
the Servicer during the preceding calendar month.
"Monthly Payment Date" means the twenty-eighth day of each month (or if
any twenty-eighth day is not a business day, the next succeeding business day),
commencing ________, ____.
For purposes of making the determinations set forth in clauses (1) and
(2) of the second preceding paragraph, the "In-School Percentage" and "GRDF
Percentage" shall each be determined based on the average principal balance of
the billing accounts relating to the In-School Student Loans and the billing
accounts relating to the Grace, Repayment, Deferral and Forbearance Student
Loans, respectively, as of the last day of the preceding calendar month, as
follows:
AVERAGE PRINCIPAL IN-SCHOOL AVERAGE PRINCIPAL GRDF
BALANCE PERCENTAGE BALANCE PERCENTAGE
----------------- ---------- ----------------- ----------
$2,501 - $3,000......... 0.625% $ 3,001 - $ 3,400......... 1.100%
$3,001 - $3,500......... 0.525% $ 3,401 - $ 3,900......... 0.950%
$3,501 - $4,000......... 0.450% $ 3,901 - $ 4,400......... 0.830%
$4,001 - $4,750......... 0.375% $ 4,401 - $ 4,800......... 0.740%
$5,501 - $6,250......... 0.260% $ 5,401 - $ 6,000......... 0.575%
$6,251 and above........ 0.230% $ 6,001 - $ 6,600......... 0.510%
$ 6,601 - $ 7,200......... 0.475%
$ 7,201 - $10,000......... 0.450%
$10,001 - $13,000......... 0.350%
$13,001 and above......... 0.300%
The Servicing Fee (together with any portion of the Servicing Fee that
remains unpaid from prior Monthly Payment Dates) will be payable on each Monthly
Payment Date and will be paid solely out of the Monthly Available Funds in the
case of each Monthly Payment Date that is not a Quarterly Payment Date (and out
of the Available Funds in the case of each Quarterly Payment Date) and amounts
on deposit in the Reserve Account on the Monthly Payment Date. To the extent
that, for any Monthly Payment Date, the Servicing Fee is the amount calculated
as described in clause (a) of the first paragraph under "--Servicing
Compensation; Administration Fee," then an amount (the "Servicing Fee
Shortfall") equal to the excess of the amount described in clause (b) of the
first paragraph under "--Servicing Compensation; Administration Fee," over the
amount described in clause (a) of the first paragraph under "--Servicing
Compensation; Administration Fee," shall be payable on the next succeeding
Monthly Payment Date (or if the Monthly Payment Date is also a Quarterly Payment
Date, on the Quarterly Payment Date) from any remaining amounts on deposit in
the Reserve Account that are in excess of the Specified Reserve Account Balance,
pursuant to the priorities described under "--Credit Enhancement--RESERVE
ACCOUNT" below. The Servicer will be obligated to perform its servicing
obligations whether or not it receives any amounts in respect of Servicing Fee
Shortfalls.
As compensation for the performance of the Administrator's obligations
under the Administration Agreement and as reimbursement for its expenses related
thereto, the Administrator will be entitled to receive monthly in arrears, on
each Monthly Payment Date that is not a Quarterly Payment Date and on each
Quarterly Payment Date, a monthly administration fee (the "Administration Fee")
in an amount equal to one-twelfth of the product of (1) ___% and (2) the Pool
Balance as of the close of business on the last day of the calendar month
immediately preceding the related Monthly Payment Date or Quarterly Payment
Date.
DISTRIBUTIONS
DEPOSITS TO THE COLLECTION ACCOUNT. On or about the third business day
prior to each Monthly Payment Date (the "Determination Date"), the Administrator
will provide the Indenture Trustee with specified information with respect to
the preceding Monthly Collection Period or, in the case of a Monthly Payment
Date that is also a Quarterly Payment Date, the preceding Collection Period,
including the amount of the Monthly Available Funds or the Available Funds, as
the case may be, received with respect to the Financed Student Loans and the
aggregate Purchase Amounts relating to the Financed Student Loans to be
repurchased by the Seller or to be purchased by the Servicer.
"Monthly Collection Period" means, with respect to any Monthly Payment
Date that is not a Quarterly Payment Date, the calendar month immediately
preceding the month of the Monthly Payment Date.
"Collection Period" means each period of three calendar months from and
including the date next following the end of the preceding Collection Period (or
with respect to the first Collection Period, the period beginning on the Cutoff
Date and ending on ________, ____).
For purposes of this prospectus supplement, "Monthly Available Funds"
means, with respect to each Monthly Payment Date that is not a Quarterly Payment
Date, the sum of the following amounts with respect to the related Monthly
Collection Period:
1. all collections received by the Servicer on the Financed Student
Loans during the Collection Period (net, for the first Collection
Period, of interest accrued prior to the Cutoff Date and not to be
capitalized) and remitted to the Indenture Trustee (including any
Guarantee Payments received with respect to the Financed Student
Loans);
2. Interest Subsidy Payments and Special Allowance Payments received
by the Eligible Lender Trustee during the Monthly Collection
Period with respect to the Financed Student Loans;
3. all proceeds of the liquidation of defaulted Financed Student
Loans ("Liquidated Student Loans"), which became Liquidated
Student Loans during the Monthly Collection Period in accordance
with the Servicer's customary servicing procedures, net of
expenses incurred by the Servicer in connection with the
liquidation and any amounts required by law to be remitted to the
borrowers on the Liquidated Student Loans (the net proceeds,
"Liquidation Proceeds"), and all recoveries in respect of
Liquidated Student Loans which were written off in prior Monthly
Collection Periods and have been received by the Servicer during
the Monthly Collection Period and remitted to the Indenture
Trustee;
4. that portion of amounts released from the Collateral Reinvestment
Account with respect to Additional Fundings relating to interest
costs on the Financed Student Loans which are or will be
capitalized;
5. the aggregate amount received by the Indenture Trustee on the
Financed Student Loans repurchased by the Seller or purchased by
the Servicer under an obligation which arose during the related
Monthly Collection Period;
6. Investment Earnings for the Monthly Payment Date; and
7. with respect to each Monthly Payment Date other than a Quarterly
Payment Date and other than a Monthly Payment Date immediately
succeeding a Quarterly Payment Date,
the Monthly Available Funds remaining on deposit in the Collection Account from
the Monthly Collection Period relating to the preceding Monthly Payment Date
after giving effect to application of the Monthly Available Funds on the
preceding Monthly Payment Date; PROVIDED, HOWEVER, that if with respect to any
Monthly Payment Date there would not be sufficient funds, after application of
the Monthly Available Funds (as defined above) and amounts available in the
Reserve Account, to pay any of the items specified in clauses (1) and (2),
respectively, under the second paragraph of "--DISTRIBUTIONS--DISTRIBUTIONS FROM
THE COLLECTION ACCOUNT" below, then the Monthly Available Funds for the Monthly
Payment Date will include, in addition to the Monthly Available Funds (as
defined above), amounts on deposit in the Collection Account on the
Determination Date relating to the Monthly Payment Date which would have
constituted part of the Monthly Available Funds for the Monthly Payment Date
succeeding the Monthly Payment Date up to the amount necessary to pay the items,
and the Monthly Available Funds for the succeeding Monthly Payment Date will be
adjusted accordingly; and PROVIDED, FURTHER, that the Monthly Available Funds
will exclude (A) all payments and proceeds (including Liquidation Proceeds) of
any Financed Student Loans the Purchase Amount of which was included in the
Monthly Available Funds for a prior Monthly Collection Period; (B) except as
expressly included in clause (4) above, amounts released from the Collateral
Reinvestment Account; (C) any Monthly Rebate Fees paid during the related
Monthly Collection Period by or on behalf of the Trust as described under
"Federal Family Education Loan Program--Fees Payable on Certain Financed Student
Loans" in this prospectus supplement; and (D) any collections in respect of
principal on the Financed Student Loans applied during the related Monthly
Collection Period by the Eligible Lender Trustee on behalf of the Trust prior to
the end of the Revolving Period to make deposits to the Collateral Reinvestment
Account, as described under "--DISTRIBUTIONS FROM THE COLLECTION ACCOUNT" below
and, after the end of the Revolving Period, to fund the addition of any Add-on
Consolidation Loans, to purchase Serial Loans or to fund the acquisition of
Exchanged Serial Loans as described under "--Revolving Period and Additional
Fundings" above.
"Available Funds" means, with respect to any Quarterly Payment Date and the
related Collection Period, the sum of the amounts specified in clauses (1)
though (6) of the definition of Monthly Available Funds for each of the three
Monthly Collection Periods included in the Collection Period plus any Trust Swap
Receipt Amount received by the Trust with respect to the Quarterly Payment Date;
PROVIDED, HOWEVER, that if with respect to any Quarterly Payment Date there
would not be sufficient funds, after application of the Available Funds (as
defined above) and amounts available in the Reserve Account, to pay any of the
items specified in clauses (1) through (6), respectively, under the third
paragraph of "--DISTRIBUTIONS FROM THE COLLECTION ACCOUNT" below, then the
Available Funds for the Quarterly Payment Date will include, in addition to the
Available Funds (as defined above), amounts on deposit in the Collection Account
on the Determination Date relating to the Quarterly Payment Date which would
have constituted part of the Available Funds for the Quarterly Payment Date
succeeding the Quarterly Payment Date up to the amount necessary to pay these
items, and the Available Funds for the succeeding Quarterly Payment Date will be
adjusted accordingly; and provided, further, that the Available Funds will
exclude
o all payments and proceeds (including Liquidation Proceeds) of any
Financed Student Loans the Purchase Amount of which was included
in the Monthly Available Funds for a prior Monthly Collection
Period;
o except as expressly included in clause (4) above, amounts released
from the Collateral Reinvestment Account;
o any Monthly Rebate Fees paid during the related Monthly Collection
Period by or on behalf of the Trust as described under "Federal
Family Education Loan Program--Fees Payable on Certain Financed
Student Loans" in this prospectus supplement; and
o any collections in respect of principal on the Financed Student
Loans applied during the related Monthly Collection Period by the
Eligible Lender Trustee on behalf of the Trust prior to the end of
the Revolving Period to make deposits to the Collateral
Reinvestment Account, as described under "--DISTRIBUTIONS FROM THE
COLLECTION ACCOUNT" below and, after the end of the Revolving
Period, to fund the addition of any Add-on Consolidation Loans, to
purchase Serial Loans or to fund the acquisition of Exchanged
Serial Loans as described under "--Revolving Period and Additional
Fundings" above.
DISTRIBUTIONS FROM THE COLLECTION ACCOUNT. From time to time during the
Revolving Period, on any day tin this prospectus supplement, the Administrator
may instruct the Indenture Trustee to withdraw all collections in respect of
principal on the Financed Student Loans then on deposit in the Collection
Account and deposit these amounts in the Collateral Reinvestment Account. In
addition, from time to time during the Revolving Period, the Administrator may
instruct the Indenture Trustee to withdraw funds on deposit in the Collateral
Reinvestment Account to the extent the funds are not needed to make Additional
Fundings and redeposit the amounts in the Collection Account.
On each Monthly Payment Date that is not a Quarterly Payment Date, the
Administrator will instruct the Indenture Trustee to make the following
distributions to the extent of the Monthly Available Funds in the Collection
Account for the Monthly Payment Date, in the following order of priority:
(1) to the Servicer, the Servicing Fee for the Monthly Payment Date
and all prior unpaid Servicing Fees (but not any Servicing Fee
Shortfall or prior unpaid Servicing Fee Shortfalls); and
(2) to the Administrator, the Administration Fee for the Monthly
Payment Date and all prior unpaid Administration Fees.
On each Quarterly Payment Date, the Administrator will instruct the
Indenture Trustee to make the following deposits and distributions to the extent
of the Available Funds for the Quarterly Payment Date in the Collection Account,
in the following order of priority:
(1) to the Servicer, the Servicing Fee for the Quarterly Payment Date
and all prior unpaid Servicing Fees (but not any Servicing Fee
Shortfall or prior unpaid Servicing Fee Shortfalls);
(2) to the Administrator, the Administration Fee for the Quarterly
Payment Date and all prior unpaid Administration Fees;
(3) to the Class A-1 Noteholders, the Class A-1 Noteholders' Interest
Distribution Amount, to the Class A-2 Noteholders, the Class A-2
Noteholders' Interest Distribution Amount, and to the Swap
Counterparty, the Trust Swap Payment Amount, if any, for the
Quarterly Payment Date, PRO RATA, based on the ratio of each
amount to the total of the amounts;
(4) to the Subordinate Noteholders, the Subordinate Noteholders'
Interest Distribution Amount for the Quarterly Payment Date;
(5) if the Revolving Period has terminated, to the Senior Noteholders,
the Senior Noteholders' Principal Distribution Amount for the
Quarterly Payment Date (the amount to be allocated among the
Senior Noteholders as described in this prospectus supplement
under "Description of the Notes--Distributions of Principal");
(6) after the Senior Notes have been paid in full, to the Subordinate
Noteholders, the Subordinate Noteholders' Principal Distribution
Amount for the Quarterly Payment Date; and
(7) to the Reserve Account, any remaining amounts after application of
clauses (1) through (6) above.
For purposes of this prospectus supplement, the following terms have
the following meanings:
The "Class A-1 Noteholders' Interest Basis Carryover" means, the sum of
(1) if the Class A-1 Note Rate for any Quarterly Payment Date is based on the
Adjusted Student Loan Rate, the excess of (a) the amount of interest on the
Class A-1 Notes that would have accrued in respect of the related Quarterly
Interest Period had interest been calculated based on the Class A-1 Note LIBOR
Rate over (b) the amount of interest on the Class A-1 Notes actually accrued in
respect of the Quarterly Interest Period based on the Adjusted Student Loan
Rate, and (2) the unpaid portion of any excess from prior Quarterly Payment
Dates and interest accrued thereon at the Class A-1 Note Rate calculated based
on the Class A-1 Note LIBOR Rate.
The "Class A-1 Noteholders' Interest Carryover Shortfall" means, with
respect to any Quarterly Payment Date, the excess of (1) the Class A-1
Noteholders' Interest Distribution Amount on the preceding Quarterly Payment
Date over (2) the amount of interest actually distributed to the Class A-1
Noteholders on the preceding Quarterly Payment Date, plus interest on the amount
of the excess, to the extent permitted by law, at the interest rate borne by the
Class A-1 Notes from the preceding Quarterly Payment Date to the current
Quarterly Payment Date.
The "Class A-1 Noteholders' Interest Distribution Amount" means, with
respect to any Quarterly Payment Date, the sum of (1) the amount of interest
accrued at the Class A-1 Note Rate for the related Quarterly Interest Period on
the aggregate principal amount of the Class A-1 Notes outstanding on the
immediately preceding Quarterly Payment Date (after giving effect to all
principal distributions to the Class A-1 Noteholders on on the immediately
preceding Quarterly Payment Date) or, in the case of the first Quarterly Payment
Date, on the Closing Date and (2) the Class A-1 Noteholders' Interest Carryover
Shortfall for the Quarterly Payment Date; provided, however, that the Class A-1
Noteholders' Interest Distribution Amount will not include any Class A-1
Noteholders' Interest Basis Carryover.
The "Class A-2 Noteholders' Interest Basis Carryover" means, the sum of
(1) if the Class A-2 Note Rate for any Quarterly Payment Date is based on the
Adjusted Student Loan Rate, the excess of (a) the amount of interest on the
Class A-2 Notes that would have accrued in respect of the related Quarterly
Interest Period had interest been calculated based on the Class A-2 Note LIBOR
Rate over (b) the amount of interest on the Class A-2 Notes actually accrued in
respect of the Quarterly Interest Period based on the Adjusted Student Loan
Rate, and (2) the unpaid portion of any excess from prior Quarterly Payment
Dates and interest accrued thereon at the Class A-2 Note Rate calculated based
on the Class A-2 Note LIBOR Rate.
The "Class A-2 Noteholders' Interest Carryover Shortfall" means, with
respect to any Quarterly Payment Date, the excess of (1) the Class A-2
Noteholders' Interest Distribution Amount on the preceding Quarterly Payment
Date over (2) the amount of interest actually distributed to the Class A-2
Noteholders on the preceding Quarterly Payment Date, plus interest on the amount
of the excess, to the extent permitted by law, at the interest rate borne by the
Class A-2 Notes from the preceding Quarterly Payment Date to the current
Quarterly Payment Date.
The "Class A-2 Noteholders' Interest Distribution Amount" means, with
respect to any Quarterly Payment Date, the sum of (1) the amount of interest
accrued at the Class A-2 Note Rate for the related Quarterly Interest Period on
the aggregate principal amount of the Class A-2 Notes outstanding on the
immediately preceding Quarterly Payment Date (after giving effect to all
principal distributions to the Class A-2 Noteholders on on the immediately
preceding Quarterly Payment Date) or, in the case of the first Quarterly Payment
Date, on the Closing Date and (2) the Class A-2 Noteholders' Interest Carryover
Shortfall for the Quarterly Payment Date; provided, however, that the Class A-2
Noteholders' Interest Distribution Amount will not include any Class A-2
Noteholders' Interest Basis Carryover.
The "Net Trust Swap Payment Carryover Shortfall" means, with respect to
any Quarterly Payment Date with respect to which there shall be an amount owed
by the Trust to the Swap Counterparty under the Interest Rate Swap, the excess
of (1) the Trust Swap Payment Amount on the preceding Quarterly Payment Date
over (2) the amount actually paid to the Swap Counterparty out of Available
Funds on the preceding Quarterly Payment Date, plus interest on the excess from
the preceding Quarterly Payment Date to the current Quarterly Payment Date at
the rate of Three Month LIBOR for the related Quarterly Interest Period.
The "Net Trust Swap Receipt Carryover Shortfall" means, with respect to
any Quarterly Payment Date with respect to which there shall be an amount owed
by the Swap Counterparty to the Trust under the Interest Rate Swap, the excess
of (1) the Trust Swap Receipt Amount on the preceding Quarterly Payment Date
over (2) the amount actually paid by the Swap Counterparty to the Trust on the
preceding Quarterly Payment Date, plus interest on the excess from the preceding
Quarterly Payment Date to the current Quarterly Payment Date at the rate of
Three Month LIBOR for the related Quarterly Interest Period.
The "Noteholders' Interest Distribution Amount" means, with respect to
any Quarterly Payment Date, the sum of the Class A-1 Noteholders' Interest
Distribution Amount, the Class A-2 Noteholders' Interest Distribution Amount and
the Subordinate Noteholders' Interest Distribution Amount for the Quarterly
Payment Date.
"Principal Distribution Adjustment" means, with respect to any
Quarterly Payment Date if the Revolving Period has terminated, the amount of the
Available Funds on the Quarterly Payment Date to be used to make additional
principal distributions to the Senior Noteholders (and, after the Senior Notes
have been paid in full, to the Subordinate Noteholders) to account for (1) the
amount of any insignificant balance remaining outstanding as of the Quarterly
Payment Date on a Financed Student Loan after receipt of a final payment from a
borrower or a Guarantor, when the insignificant balances are waived in the
ordinary course of business by the Servicer at the direction of the
Administrator in accordance with the Servicing Agreement, or (2) the amount of
principal collections erroneously treated as interest collections including,
without limitation, by reason of the failure by a borrower to capitalize
interest that had been expected to be capitalized; provided, however, that the
Principal Distribution Adjustment for any Quarterly Payment Date shall not
exceed the lesser of (x) $100,000 and (y) the amount of any Reserve Account
Excess remaining after giving effect to all distributions to be made therefrom
on the Quarterly Payment Date other than distributions to the Company out of the
excess.
"Principal Distribution Amount" means, with respect to any Quarterly
Payment Date (if the Revolving Period has terminated prior to the end of the
related Collection Period with respect to the Quarterly Payment Date), the sum
of the following amounts with respect to the related Collection Period:
1. that portion of all collections received by the Servicer on the
Financed Student Loans and remitted to the Indenture Trustee that
is allocable to principal (including the portion of any Guarantee
Payments received that is allocable to principal) of the Financed
Student Loans less the sum of
o any collections which are applied by the Trust during the
Collection Period to purchase Serial Loans,
o any collections which are applied by the Trust during the
Collection Period to fund the addition of any Add-on
Consolidation Loans and
o accrued and unpaid interest on the Financed Student Loans for
the Collection Period to the extent the interest is not
currently being paid but will be capitalized upon
commencement of repayment of the Financed Student Loans;
2. all Liquidation Proceeds attributable to the principal balances of
Financed Student Loans which became Liquidated Student Loans
during the Collection Period in accordance with the Servicer's
customary servicing procedures to the extent received the Servicer
during the related Collection Period and remitted to the Indenture
Trustee, together with all Realized Losses on the Financed Student
Loans;
3. to the extent attributable to principal, the amount received by
the Indenture Trustee with respect to each Financed Student Loan
repurchased by the Seller or purchased by the Servicer as a result
of a breach of a representation, warranty or covenant under an
obligation which arose during the related Collection Period; and
4. the Principal Distribution Adjustment, if any;
provided, however, that the Principal Distribution Amount will exclude all
payments and proceeds (including Liquidation Proceeds) of any Financed Student
Loan the Purchase Amount of which was included in the Available Funds for a
prior Collection Period and, if the Revolving Period terminated during the
related Collection Period, will exclude all amounts representing collections in
respect of principal on the Financed Student Loans during the Collection Period
that were deposited in the Collateral Reinvestment Account.
"Realized Losses" means the excess of the aggregate principal balances
of the Liquidated Student Loans over the related Liquidation Proceeds to the
extent allocable to principal.
The "Senior Noteholders' Distribution Amount" means, with respect to
any Quarterly Payment Date, the sum of the Class A-1 Noteholders' Interest
Distribution Amount, the Class A-2 Noteholders' Interest Distribution Amount and
the Senior Noteholders' Principal Distribution Amount for the Quarterly Payment
Date.
The "Senior Noteholders' Interest Distribution Amount" means, with
respect to any Quarterly Payment Date, the sum of (1) the Class A-1 Noteholders'
Interest Distribution Amount, and (2) the Class A-2 Noteholders' Interest
Distribution Amount, for the Quarterly Payment Date; provided, however, that the
Senior Noteholders' Interest Distribution Amount will not include any Class A-1
Noteholders' Interest Basis Carryover or Class A-2 Noteholders' Interest Basis
Carryover.
The "Senior Noteholders' Principal Carryover Shortfall" means, as of
the close of any Quarterly Payment Date, the excess of (1) the Senior
Noteholders' Principal Distribution Amount on the Quarterly Payment Date over
(2) the amount of principal actually distributed to the Senior Noteholders on
the Quarterly Payment Date.
The "Senior Noteholders' Principal Distribution Amount" means, with
respect to any Quarterly Payment Date (if the Revolving Period has terminated
prior to the end of the related Collection Period with respect to the Quarterly
Payments Date), the Principal Distribution Amount for the Quarterly Payment Date
plus the Senior Noteholders' Principal Carryover Shortfall as of the close of
the preceding Quarterly Payment Date; provided, however, that the Senior
Noteholders' Principal Distribution Amount will not exceed the aggregate
principal amount of the Senior Notes outstanding on the preceding Quarterly
Payment Date. In addition, (1) on the Class A-1 Note Final Maturity Date, the
principal required to be distributed to the Class A-1 Noteholders will include
the amount required to reduce the outstanding aggregate principal amount of the
Class A-1 Notes to zero and (2) on the Class A-2 Note Final Maturity Date, the
principal required to be distributed to the Class A-2 Noteholders will include
the amount required to reduce the outstanding aggregate principal amount of the
Class A-2 Notes to zero.
The "Subordinate Noteholders' Distribution Amount" means, with respect
to any Quarterly Payment Date, the Subordinate Noteholders' Interest
Distribution Amount for the Quarterly Payment Date plus, with respect to any
Quarterly Payment Date on and after which the Senior Notes have been paid in
full, the Subordinate Noteholders' Principal Distribution Amount for the
Quarterly Payment Date.
The "Subordinate Noteholders' Interest Basis Carryover" means, the sum
of (1) if the Subordinate Note Rate for any Quarterly Payment Date is based on
the Adjusted Student Loan Rate, the excess of (a) the amount of interest on the
Subordinate Notes that would have accrued in respect of the related Quarterly
Interest Period had interest been calculated based on the Subordinate Note LIBOR
Rate over (b) the amount of interest on the Subordinate Notes actually accrued
in respect of the Quarterly Interest Period based on the Adjusted Student Loan
Rate, and (2) the unpaid portion of any excess from prior Quarterly Payment
Dates and interest accrued thereon at the Subordinate Note Rate calculated based
on the Subordinate Note LIBOR Rate.
The "Subordinate Noteholders' Interest Carryover Shortfall" means, with
respect to any Quarterly Payment Date, the excess of (1) the Subordinate
Noteholders' Interest Distribution Amount on the preceding Quarterly Payment
Date over (2) the amount of interest actually distributed to the Subordinate
Noteholders on the preceding Quarterly Payment Date, plus interest on the amount
of the excess, to the extent permitted by law, at the rate borne by the
Subordinate Notes from the preceding Quarterly Payment Date to the current
Quarterly Payment Date.
The "Subordinate Noteholders' Interest Distribution Amount" means, with
respect to any Quarterly Payment Date, the sum of (1) the amount of interest
accrued at the Subordinate Note Rate for the related Quarterly Interest Period
on the aggregate principal amount of the Subordinate Notes outstanding on the
immediately preceding Quarterly Payment Date (after giving effect to all
principal distributions to the Subordinate Noteholders on the Quarterly Payment
Date) or, in the case of the first Quarterly Payment Date, on the Closing Date
and (2) the Subordinate Noteholders' Interest Carryover Shortfall for the
Quarterly Payment Date; provided, however, that the Subordinate Noteholders'
Interest Distribution Amount will not include any Subordinate Noteholders'
Interest Basis Carryover.
The "Subordinate Noteholders' Principal Carryover Shortfall" means, as
of the close of any Quarterly Payment Date on or after which the Senior Notes
have been paid in full, the excess of (1) the Subordinate Noteholders' Principal
Distribution Amount on the Quarterly Payment Date over (2) the amount of
principal actually distributed to the Subordinate Noteholders on the Quarterly
Payment Date.
The "Subordinate Noteholders' Principal Distribution Amount" means,
with respect to each Quarterly Payment Date on and after which the aggregate
principal amount of the Senior Notes has been paid in full, the sum of (a) the
Principal Distribution Amount for the Quarterly Payment Date (or, in the case of
the Quarterly Payment Date on which the aggregate principal amount of the Senior
Notes is paid in full, any remaining Principal Distribution Amount not otherwise
distributed to Senior Noteholders on the Quarterly Payment Date) and (b) the
Subordinate Noteholders' Principal Carryover Shortfall as of the close of the
preceding Quarterly Payment Date; provided, however, that the Subordinate
Noteholders' Principal Distribution Amount will in no event exceed the aggregate
principal amount of the Subordinate Notes outstanding on the preceding Quarterly
Payment Date. In addition, on the Subordinate Note Final Maturity Date, the
principal required to be distributed to the Subordinate Noteholders will include
the amount required to reduce the outstanding principal amount of the
Subordinate Notes to zero.
The "Trust Swap Payment Amount" means, with respect to any Quarterly
Payment Date, the sum of (1) if the Interest Rate Swap is still in effect, the
Net Trust Swap Payment for the Quarterly Payment Date and (2) the Net Trust Swap
Payment Carryover Shortfall for the Quarterly Payment Date.
The "Trust Swap Receipt Amount" means, with respect to any Quarterly
Payment Date, the sum of (1) if the Interest Rate Swap is still in effect, the
Net Trust Swap Receipt for the Quarterly Payment Date and (2) the Net Trust Swap
Receipt Carryover Shortfall for the Quarterly Payment Date.
CREDIT ENHANCEMENT
RESERVE ACCOUNT. Pursuant to the Administration Agreement and the Loan
Sale Agreement, the Reserve Account will be created with an initial deposit by
the Depositor on the Closing Date of cash or Eligible Investments in an amount
equal to the Reserve Account Initial Deposit. The Reserve Account will be
augmented on each Quarterly Payment Date by the deposit tin this prospectus
supplement of the amount of the Available Funds remaining after payment of the
Servicing Fee and all overdue Servicing Fees, the Administration Fee and all
overdue Administration Fees, the Senior Noteholders' Interest Distribution
Amount and the Trust Swap Payment Amount, if any, the Subordinate Noteholders'
Interest Distribution Amount and, if the Revolving Period has terminated, the
Senior Noteholders' Principal Distribution Amount and the Subordinate
Noteholders' Principal Distribution Amount, all for the Quarterly Payment Date.
See "--Distributions" above. As described below, subject to some limitations,
amounts on deposit in the Reserve Account will be released to the Company to the
extent that the amount on deposit in the Reserve Account exceeds the Specified
Reserve Account Balance.
"Specified Reserve Account Balance" with respect to any Quarterly
Payment Date generally will be the greater of:
(a) ____% of the aggregate principal amount of the Notes outstanding on
the Quarterly Payment Date after taking into account the effect of distributions
on the Quarterly Payment Date, or
(b) $_______;
provided, however, that the Specified Reserve Account Balance shall in no event
exceed the aggregate principal amount of the Notes outstanding on the Quarterly
Payment Date.
If the amount on deposit in the Reserve Account on any Quarterly
Payment Date (after giving effect to all distributions required to be made from
the Available Funds on the Quarterly Payment Date) is greater than the Specified
Reserve Account Balance for the Quarterly Payment Date, the Administrator will
instruct the Indenture Trustee to apply the amount of the excess (the "Reserve
Account Excess") (a) during the Revolving Period, for deposit to the Collateral
Reinvestment Account; provided, however, that if this date is on or after the
Parity Date, to the extent that the funds represent payments (other than
principal payments) with respect to the Financed Student Loans, the funds shall
be applied in the order of priority set forth in clauses (b)(3) through (6)
below, and (b) at and after the termination of the Revolving Period, to the
following (in the priority indicated):
1. to the Seller for any unpaid Purchase Premium Amounts for any
Serial Loans purchased by the Trust prior to the end of the
related Collection Period;
2. if the Quarterly Payment Date is on or prior to the Parity Date,
to the payment of the unpaid principal amount of the Senior Notes
(to be allocated between the Class A-1 Noteholders and the Class
A-2 Noteholders as described in this prospectus supplement under
"Description of the Notes--Distributions of Principal") or, if the
Senior Notes have been paid in full, of the Subordinate Notes,
until the aggregate principal amount of the Notes is equal to the
Pool Balance as of the close of business on the last day of the
related Collection Period;
3. if the Quarterly Payment Date is after the ____ _____ Quarterly
Payment Date, to the payment of the unpaid principal amount of the
Senior Notes (to be allocated between the Class A-1 Noteholders
and the Class A-2 Noteholders as described in this prospectus
supplement under "Description of the Notes--Distributions of
Principal") or, if the Senior Notes have been paid in full, of the
Subordinate Notes;
4. to the Class A-1 Noteholders and the Class A-2 Noteholders, PRO
RATA, the aggregate unpaid amount of any Class A-1 Noteholders'
Interest Basis Carryover and Class A-2 Noteholders' Interest Basis
Carryover based on the ratio of each amount to the total of the
amounts;
5. to the Subordinate Noteholders, the aggregate unpaid amount of any
Subordinate Noteholders' Interest Basis Carryover;
6. to the Servicer, the Servicing Fee Shortfall and all prior unpaid
Servicing Fee Shortfalls, if any; and
7. to the Company, any excess remaining after application of clauses
(1) through (6) above,
and, upon the payment to the Company or an affiliate, the Noteholders will not
have any rights in, or claims to, the amounts.
Subject to the limitation described in the preceding paragraph, amounts
held from time to time in the Reserve Account will continue to be held for the
benefit of the Trust. Funds will be withdrawn from the Reserve Account (a) on
each Monthly Payment Date that is not a Quarterly Payment Date, to the extent
that the Monthly Available Funds on the Monthly Payment Date is insufficient to
pay: (1) the Servicing Fee and all overdue Servicing Fees and (2) the
Administration Fee and all overdue Administration Fees, and (b) on any Quarterly
Payment Date to the extent that the amount of the Available Funds on the
Quarterly Payment Date is insufficient to pay any of the items specified in
clauses (1) through (7), respectively, of the third paragraph under
"--Distributions--DISTRIBUTIONS FROM THE COLLECTION ACCOUNT" above on the
Quarterly Payment Date. The funds will be paid from the Reserve Account to the
persons and in the order of priority specified for distribution from the
Collection Account on the Quarterly Payment Date. As a result of the
subordination of the Subordinate Notes to the Senior Notes described elsewhere
in this prospectus supplement, any amounts that the Subordinate Noteholders
would otherwise receive from the Reserve Account in respect of the Subordinate
Noteholders' Interest Distribution Amount on any Quarterly Payment Date will be
paid to the Senior Noteholders until the Senior Noteholders' Interest
Distribution Amount for the Quarterly Payment Date has been paid in full. In
addition, as a result of the subordination, Subordinate Noteholders will not
receive any amounts from the Reserve Account in respect of the Subordinate
Noteholders' Principal Distribution Amount until the Senior Notes have been paid
in full. See "--SUBORDINATION" below.
The Reserve Account is intended to enhance the likelihood of timely
receipt by the Senior Noteholders and the Subordinate Noteholders of the full
amount of principal and interest due them and to decrease the likelihood that
the Senior Noteholders or the Subordinate Noteholders will experience losses. In
specified circumstances, however, the Reserve Account could be depleted. If the
amount required to be withdrawn from the Reserve Account to cover shortfalls in
the amount of the Available Funds (or the Monthly Available Funds) exceeds the
amount of cash in the Reserve Account, the Senior Noteholders or the Subordinate
Noteholders could incur losses or a temporary shortfall in the amount of
principal and interest distributed to the Senior Noteholders or the Subordinate
Noteholders, which result could, in turn, increase the average life of the
Senior Notes or the Subordinate Notes. Amounts on deposit in the Reserve Account
will not be available in any respect until the Parity Date to cover any
aggregate unpaid Class A-1 Noteholders' Interest Basis Carryover, Class A-2
Noteholders' Interest Basis Carryover or Subordinate Noteholders' Interest Basis
Carryover and after the Parity Date only amounts on deposit in the Reserve
Account that (after paying, for Quarterly Payment Dates occurring after the
Revolving Period, any unpaid Purchase Premium Amounts for any Serial Loans
purchased by the Trust prior to the end of the related Collection Period) are in
excess of the Specified Reserve Account Balance will be available therefor.
SUBORDINATION. While the Class A-1 Noteholders and the Class A-2
Noteholders will have equal priority to the payment of interest, on any
Quarterly Payment Date on which principal is due to be paid on the Senior Notes,
and the Class A-2 Noteholders will receive no payments of principal until the
Class A-1 Noteholders have received payments of principal in an amount
sufficient to reduce the aggregate principal amount of the Class A-1 Notes to
zero; provided, however, that from and after any acceleration of the Notes
following an Event of Default (as defined in the prospectus), principal will be
allocated pro rata between the Class A-1 Notes and the Class A-2 Notes, based on
the ratio of the aggregate principal amount of each class of Notes to the
aggregate principal amount of the Senior Notes, until the aggregate principal
amount of the Senior Notes has been reduced to zero. In addition, the rights of
the Subordinate Noteholders to receive payments of interest on any Quarterly
Payment Date out of the Available Funds or the Reserve Account are subordinated
to the rights of the Senior Noteholders to receive payments of interest on the
Quarterly Payment Date, and the rights of the Subordinate Noteholders to receive
payments of principal out of the Available Funds or the Reserve Account on any
Quarterly Payment Date are subordinated to the rights of the Senior Noteholders
to receive payments of interest and principal on the Quarterly Payment Date. The
Subordinate Noteholders will not be entitled to any payments of principal out of
the Available Funds or the Reserve Account until the Senior Notes are paid in
full.
INTEREST RATE SWAP
PAYMENTS UNDER THE SWAP AGREEMENT. On the Closing Date, the Trust will
enter into an interest rate swap agreement (the "Interest Rate Swap") with
_________________________ (the "Swap Counterparty"). The Interest Rate Swap will
be documented according to a 1992 ISDA Master Agreement (Multicurrency-Cross
Border) ("1992 Master Agreement") modified to reflect the terms of the Notes,
the Indenture and the Interest Rate Swap. The Interest Rate Swap will terminate
on the earliest to occur of the ________, ____ Quarterly Payment Date (the
"Scheduled Swap Termination Date"), the date on which the Notes have been paid
in full and the date on which the Interest Rate Swap is terminated in accordance
with its terms pursuant to an early termination (the "Swap Termination Date").
In accordance with the terms of the Interest Rate Swap, the Swap
Counterparty will pay to the Trust, on each Quarterly Payment Date with respect
to which the Interest Rate Swap is still in effect, an amount equal to the
product of
o the Swap Rate for the related Quarterly Interest Period,
o the Scheduled Notional Swap Amount for the Quarterly Payment Date
and
o the quotient of the number of days in the related Quarterly
Interest Period divided by 360.
The "Swap Rate" for any Quarterly Interest Period will be a rate equal to
Three-Month LIBOR (determined as described in this prospectus supplement under
"Description of the Notes--Calculation of Three-Month LIBOR") for the Quarterly
Interest Period. The "Scheduled Notional Swap Amount" for any Quarterly Payment
Date will be the lesser of (1) the outstanding principal balance of the Notes
immediately preceding the Quarterly Payment Date and (2) the amount listed on
Exhibit A hereto for the Quarterly Payment Date. The Depositor expects that the
Scheduled Notional Swap Amount for each Quarterly Payment Date prior to the Swap
Termination Date will be equal to approximately ___% of the outstanding
principal amount of the Notes immediately preceding the Quarterly Payment Date.
However, following the Closing Date, the depositor may agree with the Swap
Counterparty to cause the Scheduled Notional Swap Amount to equal the
outstanding principal balance of the Notes.
In exchange for the payment, the Trust will pay to the Swap
Counterparty, on each Quarterly Payment Date with respect to which the Interest
Rate Swap is still in effect, an amount equal to the product of
o the T-Bill Rate (determined as described below) for the related
Quarterly Interest Period plus at least ____% but not more than
____,
o the Scheduled Notional Swap Amount for the Quarterly Payment Date
and
o the quotient of the actual number of days in the Quarterly
Interest Period divided by 365 (or 366 in the case of any amount
which is being calculated with respect to a Quarterly Payment Date
in a leap year).
With respect to each Quarterly Payment Date with respect to which the Interest
Rate Swap is still in effect (and without regard to any payments remaining
unpaid from a prior Quarterly Payment Date), any difference between the payment
by the Swap Counterparty to the Trust and the payment by the Trust to the Swap
Counterparty will be referred to as a "Net Trust Swap Receipt", if the
difference is a positive number, and a "Net Trust Swap Payment", if the
difference is a negative number. Any payments pursuant to the Interest Rate Swap
will be made solely on a net basis, as described above. The Trust Swap Receipt
Amount, if any, will be distributed as part of the Available Funds on the
Quarterly Payment Date and the Trust Swap Payment Amount, if any, will be paid
out of the Available Funds.
The "T-Bill Rate", with respect to any Quarterly Interest Period, means
the weighted average of the T-Bill Rates for each day within the Quarterly
Interest Period and, with respect to any date within a Quarterly Interest
Period, means the weighted average discount rate per annum (expressed on a bond
equivalent basis and applied on a daily basis) for direct obligations of the
United States with a maturity of 13 weeks ("91-day Treasury Bills") sold at the
most recent 91-day Treasury Bill auction prior to the date, as reported by the
U.S. Department of the Treasury. In the event that the results of the auctions
of 91-day Treasury Bills cease to be reported as provided above, or that no
auction is held in a particular week, then the T-Bill Rate in effect as a result
of the last publication or report will remain in effect until the time, if any,
as the results of auctions of 91-day Treasury Bills shall again be reported or
the auction is held, as the case may be. The T-Bill Rate will be subject to a
Lock-In Period of six business days.
"Lock-In Period" means the period of days preceding any Quarterly
Payment Date during which the T-Bill Rate in effect on the first day of the
period will remain in effect until the end of the Quarterly Interest Period
related to the Quarterly Payment Date.
MODIFICATION AND AMENDMENT OF THE SWAP AGREEMENT AND TRANSFER AND
SERVICING AGREEMENTS. The Trust Agreement and the Indenture will contain
provisions permitting the Eligible Lender Trustee, with the consent of the
Indenture Trustee, to enter into any amendment to the Swap Agreement requested
by the Swap Counterparty to cure any ambiguity in, or correct or supplement any
provision of, the Swap Agreement, so long as the Eligible Lender Trustee
determines, and the Indenture Trustee agrees in writing, that the amendment will
not adversely affect the interests of the Noteholders. The written consent of
the Swap Counterparty will be required before any amendment is made to the
Indenture or the Transfer and Servicing Agreements.
CONDITIONS PRECEDENT. The respective obligations of the Swap
Counterparty and the Trust to pay specified amounts due under the Swap Agreement
will be subject to the following conditions precedent: (1) no Swap Default (as
defined below) or event that with the giving of notice or lapse of time or both
would become a Swap Default shall have occurred and be continuing and (2) no
Termination Event (as defined below) has occurred or been effectively
designated; provided, however, that the Swap Counterparty's obligation to pay
these amounts will not be subject to these conditions unless principal of the
Notes has been accelerated following an Event of Default under the Indenture or
an early termination under the Swap Agreement has occurred or been designated.
DEFAULTS UNDER THE SWAP. "Events of Default" under the Swap Agreement
(each a "Swap Default") are limited to
o the failure of the Trust or the Swap Counterparty to pay any
amount when due under the Interest Rate Swap after giving effect
to the applicable grace period; provided, however, that, in the
case of the Trust, the Trust has funds available after all prior
obligations of the Trust to make this payment,
o the occurrence of specified events of insolvency or bankruptcy of
the Trust or the Swap Counterparty,
o an acceleration of the principal of the Notes following an Event
of Default under the Indenture, and
o the following other standard events of default under the 1992
Master Agreement:
o "Breach of Agreement" (not applicable to the Trust),
o "Credit Support Default" (not applicable to the Trust),
o "Misrepresentation" (not applicable to the Trust), and
o "Merger without Assumption" (not applicable to the Trust), as
described in Sections 5(a)(ii), 5(a)(iii), 5(a)(iv) and
5(a)(viii) of the 1992 Master Agreement.
TERMINATION EVENTS. "Termination Events" under the Swap Agreement
consist of the following standard events under the 1992 Master Agreement:
"Illegality" (which generally relates to changes in law causing it to become
unlawful for either party to perform its obligations under the Interest Rate
Swap) and "Tax Event" (which generally relates to either party to the Interest
Rate Swap receiving a payment under the Interest Rate Swap from which an amount
has been deducted or withheld for or on account of taxes), as described in
Sections 5(b)(i) and 5(b)(ii) of the 1992 Master Agreement.
EARLY TERMINATION OF THE SWAP. Upon the occurrence of any Swap Default
under the Swap Agreement, the non-defaulting party will have the right to
designate an Early Termination Date (as defined in the Swap Agreement) upon the
occurrence of the Swap Default. The Trust may not designate an Early Termination
Date without the consent of the Administrator. With respect to Termination
Events, an Early Termination Date may be designated by one of the parties (as
specified in the Swap Agreement) and will occur only upon notice and, in some
circumstances, after any Affected Party has used reasonable efforts to transfer
it rights and obligations under the Swap Agreement to a related entity within a
limited period after notice has been given of the Termination Event, all as set
forth in the Swap Agreement. The occurrence of an Early Termination Date under
the Swap Agreement will constitute a "Swap Early Termination".
Upon any Swap Early Termination of the Swap Agreement, the Trust or the
Swap Counterparty may be liable to make a termination payment to the other
(regardless, if applicable, of which of the parties has caused the termination).
The amount of the termination payment will be based on the value of the Interest
Rate Swap computed in accordance with the procedures set forth in the Interest
Rate Swap. Any payment could be substantial. In the event that the trust is
required to make a termination payment, the payment will be payable in the same
order of priority as any Trust Swap Payment Amount payable to the Swap
Counterparty (which is payable pari passu with the Class A-1 Noteholders'
Interest Distribution Amount and the Class A-2 Noteholders' Interest
Distribution Amount); PROVIDED, HOWEVER, that, in the event that a termination
payment is owed to the Swap Counterparty following a Swap Default resulting from
a default of the Swap Counterparty or a Termination Event, the termination
payment will be subordinate to the right of the Noteholders to receive full
payment of principal of and interest on the Notes. Accordingly, termination
payments, if required to be made by the Trust, could result in shortfalls to
Noteholders.
If, following an Early Termination Date, a Termination Payment is owed
by the Trust to the Swap Counterparty and the Trust receives a payment
("Assumption Payment") from a successor swap counterparty to assume the position
of the Swap Counterparty, the portion of the Assumption Payment that does not
exceed the amount of the Termination Payment owed by the Trust to the Swap
Counterparty will be paid by the Trust to the Swap Counterparty and will not be
available to make distributions to Noteholders. Following the payment, the
amount of the Termination Payment owed by the Trust to the Swap Counterparty
will be reduced by the amount of the payment.
RATING AGENCY DOWNGRADE. If the rating of the Swap Counterparty (or any
successor credit support provider) is withdrawn or reduced below ___ or its
equivalent by any Swap Rating Agency (this withdrawal or reduction, a "Rating
Agency Downgrade"), the Swap Counterparty is required, no later than the 30th
day following the Rating Agency Downgrade, at the Swap Counterparty's expense,
either to (1) obtain a substitute Swap Counterparty that has a counterparty
rating of at least ___ or its equivalent by the Swap Rating Agency or (2) enter
into arrangements reasonably satisfactory to the Trustee, including collateral
arrangements, guarantees or letters of credit, which arrangements in the view of
the Swap Rating Agency will result in the total negation of the effect or impact
of the Rating Agency Downgrade on the Noteholders and the Depositor.
THE SWAP COUNTERPARTY. _________________________ is a __________
company with its principal place of business located at
_________________________. As of the date of the prospectus supplement, the Swap
Counterparty's counterparty ratings were _________________________.
THE INFORMATION SET OUT IN THE PRECEDING PARAGRAPH HAS BEEN PROVIDED BY
THE SWAP COUNTERPARTY AND IS NOT GUARANTEED AS TO ACCURACY OR COMPLETENESS, AND
IS NOT TO BE CONSTRUED AS REPRESENTATIONS, BY THE DEPOSITOR OR THE UNDERWRITERS.
EXCEPT FOR THE FOREGOING PARAGRAPH, THE SWAP COUNTERPARTY AND ITS AFFILIATES
HAVE NOT BEEN INVOLVED IN THE PREPARATION OF, AND DO NOT ACCEPT RESPONSIBILITY
FOR, THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS.
COMPANY LIABILITY
Anything to the contrary in the prospectus notwithstanding, the Company
will not be liable to any person or entity for the amount of any losses, claims,
damages or liabilities arising out of or based on the Trust Agreement.
TERMINATION
Certain information regarding termination of the Trust is set forth in
"Description of the Transfer and Servicing Agreements--Termination" in the
prospectus; PROVIDED, HOWEVER, that the information set forth under the heading
"Description of the Transfer and Servicing Agreements--Insolvency Event" is not
applicable in connection with the Trust.
Any Financed Student Loans remaining in the Trust as of the end of the
Collection Period immediately preceding the ________, ____ Quarterly Payment
Date will be offered for sale by the Indenture Trustee. The Seller, its
affiliates and unrelated third parties may offer bids to purchase the Financed
Student Loans on the Quarterly Payment Date. If at least two bids (one of which
is from a bidder other than the Seller and its affiliates) are received, the
Indenture Trustee will accept the highest bid equal to or in excess of the
greater of (x) the aggregate Purchase Amounts of the Financed Student Loans as
of the end of the Collection Period immediately preceding the Quarterly Payment
Date and (y) an amount that would be sufficient to
o reduce the outstanding principal amount of the Notes on the
Quarterly Payment Date to zero,
o pay to the Noteholders, the Noteholders' Interest Distribution
Amount payable on the Quarterly Payment Date plus any Class A-1
Noteholders' Interest Basis Carryover, Class A-2 Noteholders'
Interest Basis Carryover and Subordinate Noteholders' Interest
Basis Carryover and
o pay to the Swap Counterparty any prior unpaid Net Trust Swap
Payment Carryover Shortfalls and any other amounts owed by the
Trust to the Swap Counterparty under the Interest Rate Swap (the
greater amount, the "Minimum Purchase Price").
If at least two bids are not received or the highest bid is not equal to or in
excess of the Minimum Purchase Price, the Indenture Trustee will not consummate
the sale. The proceeds of any the sale will be used to redeem any Notes
outstanding on the Quarterly Payment Date. If the sale is not consummated in
accordance with the foregoing, the Indenture Trustee may, but shall not be under
any obligation to, solicit bids to purchase the Financed Student Loans on future
Quarterly Payment Dates upon terms similar to those described above. No
assurance can be given as to whether the Trustee will be successful in
soliciting acceptable bids to purchase the Financed Student Loans on either the
________, ____ Quarterly Payment Date or any subsequent Quarterly Payment Date.
OPTIONAL REDEMPTION
The Company or an assignee of the Company, may at its option purchase
from the Eligible Lender Trustee, as of the end of any Collection Period
immediately preceding a Quarterly Payment Date on which the then outstanding
Pool Balance is 20% or less of the aggregate initial principal amount of the
Notes, all remaining Financed Student Loans at a price equal to the greater of
the aggregate Purchase Amounts as of the end of the Collection Period and the
Minimum Purchase Price, which amount will be used to retire the Notes
concurrently therewith. The Minimum Purchase Price for a purchase occurring
prior to the ________, ____ Quarterly Payment shall include any termination
payment due to the Swap Counterparty. Upon termination of the Trust, all right,
title and interest in the Financed Student Loans and other funds of the Trust,
after giving effect to any final distributions to the Noteholders therefrom,
will be conveyed and transferred to the Company or the assignee.
FEDERAL FAMILY EDUCATION LOAN PROGRAM
A description of the Federal Family Education Loan Program is provided
in the prospectus under "Federal Family Education Loan Program." The information
provided below sets forth recent developments and additional information with
respect the Federal Family Education Loan Program.
RECENT DEVELOPMENTS-EMERGENCY STUDENT LOAN CONSOLIDATION ACT OF 1997.
On November 13, 1997, President Clinton signed into law the Emergency Student
Loan Consolidation Act of 1997, which made significant changes to the Federal
Consolidation Loan program. These changes include:
o providing that federal direct student loans are eligible to be
included in a Federal Consolidation Loan;
o changing the borrower interest rate on new Federal Consolidation
Loans (previously a fixed rate based on the weighted average of
the loans consolidated, rounded up to the nearest whole percent)
to the annually variable rate applicable to Stafford Loans (i.e.,
the bond equivalent rate at the last auction in May of 91-day
Treasury Bills plus 3.10%, not to exceed 8.25% per annum);
o providing that the portion of a Federal Consolidated Loan that is
comprised of Subsidized Stafford Loans retains its subsidy
benefits during periods of deferment; and
o establishing prohibitions against various forms of discrimination
in the making of Consolidation Loans.
Except for the last of the above changes, all these provisions expired on
September 30, 1998. The combination of the change to a variable rate and the
8.25% interest cap reduced the lender's yield in most cases below the rate that
would have been applicable under the previous weighted average formula.
RECENT DEVELOPMENTS--FY 1998 BUDGET. In the 1997 Budget Reconciliation
Act (P.L. 105-33), several changes were made to the Act impacting the FFELP.
These provisions include, among other things, requiring Federal Guarantors to
return $1 billion of their reserves to the U.S. Treasury by September 1, 2002
(to be paid in annual installments), greater restrictions on use of reserves by
Federal Guarantors and a continuation of the Administrative Cost Allowance
payable to Federal Guarantors (which is a fee paid to Guarantors equal to 0.85%
of new loans guaranteed).
RECENT DEVELOPMENTS--1998 AMENDMENTS. On May 22, 1998, Congress passed,
and on June 9, 1998, the President signed into law, a temporary measure relating
to the Higher Education Act and FFELP loans as part of the Intermodal Surface
Transportation Efficiency Act of 1998 (the "1998 Amendments") that revised
interest rate changes under the FFELP that were scheduled to become effective on
July 1, 1998. For loans made during the period July 1, 1998 through September
30, 1998, the borrower interest rate for Stafford Loans and Unsubsidized
Stafford Loans is reduced to a rate of 91-day Treasury Bill Rate plus 2.30%
(1.70% during school, grace and deferment), subject to a maximum rate of 8.25%.
As described below, the formula for Special Allowance Payments on Stafford Loans
and Unsubsidized Stafford Loans is calculated to produce a yield to the loan
holder of 91-day Treasury Bill Rate plus 2.80% (2.20% during school, grace and
deferment). The 1998 Amendments also adjusted the interest rate on PLUS Loans
disbursed on or after July 1, 1998 and before October 1, 1998 to a rate of
91-day T-bill plus 3.10%, subject to a maximum rate of 9%, but did not affect
the rate change on Federal Consolidation Loans during the same period which is
fixed at the rate of 91-day T-bill established at the final auction held prior
to June 1, 1998 plus 3.10% subject to a maximum rate of 8.25%. The formula for
Special Allowance Payments for PLUS Loans continues to provide that no Special
Allowance Payments will be paid unless the interest rate formula described in
the preceding sentence produces a rate which exceeds 9%.
RECENT DEVELOPMENTS--1998 REAUTHORIZATION BILL. On October 7, 1998,
President Clinton signed into law the Higher Education Amendments of 1998 (the
"1998 Reauthorization Bill"), which enacted significant reforms in the FFELP.
The major provisions of the 1998 Reauthorization Bill include the following:
o All references to a "transition" to full implementation of the
Federal Direct Loan Program were deleted from the FFELP statute.
o Guarantor reserve funds were restructured so that Federal
Guarantors are provided with additional flexibility in choosing
how to spend specified funds they receive.
o The minimum Federal Guarantor reserve level requirement is reduced
from 0.50% of the total attributable amount of all outstanding
loans guaranteed to 0.25% of the total attributable amount of all
outstanding loans guaranteed.
o Additional recall of reserve funds by the Secretary were mandated,
amounting to $85 million in fiscal year 2002, $82.5 million in
fiscal year 2006, and $82.5 million in fiscal year 2007. However,
specified minimum reserve levels are protected from recall.
o The administrative cost allowance was replaced by two (2) new
payments, a Student Loan processing and issuance fee equal to 65
basis points (40 basis points for loans made on or after October
1, 1993) paid at the time a loan is guaranteed, and an account
maintenance fee of 12 basis points (10 basis points for fiscal
years 2001-2003) paid annually on outstanding guaranteed Student
Loans.
o The percentage of collections on defaulted Student Loans a
Guarantor is permitted to retain is reduced from 27% to 24% (23%
beginning on October 1, 2003) plus the complement of the
reinsurance percentage applicable at the time a claim was paid to
the lender on the Student Loan.
o Federal reinsurance provided to Federal Guarantors is reduced from
98% to 95% for Student Loans first disbursed on or after October
1, 1998.
o The delinquency period required for a loan to be declared in
default is increased from 180 days to 270 days for loans on which
the first day of delinquency occurs on or after the date of
enactment of the 1998 Reauthorization Bill.
o Interest rates charged to borrowers on Stafford Loans, and the
yield for Stafford Loan holders established by the 1998
Amendments, were made permanent.
o Federal Consolidation Loan interest rates were revised to equal
the weighted average of the loans consolidated rounded up to the
nearest one-eighth of 1%, capped at 8.25%. When the 91-day
Treasury Bill Rate plus 3.1% exceeds the borrower's interest rate,
Special Allowance Payments are made to make up the difference.
o The lender-paid offset fee on Federal Consolidation Loans of 1.05%
is reduced to .62% for Loans made pursuant to applications
received on or after October 1, 1998 and on or before January 31,
1999.
o The Direct Consolidation Loan interest rate calculation was
revised to reflect the rate for Federal Consolidation Loans, and
will be effective for loans on which applications are received on
or after February 1, 1999.
o Lenders are required to offer extended repayment schedules to new
borrowers after the enactment of the 1998 Reauthorization Bill who
accumulate after the date outstanding loans under FFELP totaling
more than $30,000, under which schedules the repayment period may
extend up to 25 years subject to specified minimum repayment
amounts.
o The Secretary is authorized to enter into six (6) voluntary
flexible agreements with Federal Guarantors under which various
statutory and regulatory provisions can be waived.
o Federal Consolidation Loan lending restrictions are revised to
allow lenders who do not hold one of the borrower's underlying
federal loans to issue a Federal Consolidation Loan to a borrower
whose underlying Federal Loans are held by multiple holders.
o Inducement restrictions were revised to permit Federal Guarantors
and lenders to provide assistance to schools comparable to that
provided to schools by the Secretary under the federal direct
student loan program.
o The Secretary is now required to pay off Student Loan amounts owed
by borrowers due to failure of the borrower's school to make a
tuition refund allocable to the Student Loan.
o Discharge of FFELP and specified other Student Loans in bankruptcy
is now limited to cases of undue hardship regardless of whether
the Student Loan has been in repayment for seven (7) years prior
to the bankruptcy filing.
o All of the Federal Guarantors will be subject to the new recall of
reserves and reduced reinsurance provisions for Federal
Guarantors. The new recall of reserves and reduced reinsurance for
Federal Guarantors increases the risk that resources available to
the Federal Guarantors to meet their guarantee obligations will be
significantly reduced.
CONSOLIDATION OF FEDERAL BENEFIT BILLINGS AND RECEIPTS WITH OTHER
TRUSTS. Due to a recent change in Department policy limiting the granting of new
lender identification numbers, the Eligible Lender Trustee is allowed under the
Trust Agreement to permit the Trust, and other trusts established by or with
respect to the Seller to securitize Student Loans, to use a common Department
lender identification number. The billings submitted to the Department for
Interest Subsidy Payments and Special Allowance Payments on the Financed Student
Loans will be consolidated with the billings for the payments for Student Loans
in the other trusts using the same lender identification number and payments on
the billings will be made by the Department in lump sum form. The lump sum
payments will then be allocated among the various trusts using the lender
identification number.
In addition, the sharing of the lender identification number by the
Trust with other trusts may result in the receipt of claim payments by Federal
Guarantors in lump sum form. In that event, the payments would be allocated
among the trusts in a manner similar to the allocation process for Interest
Subsidy Payments and Special Allowance Payments.
The Department regards the Eligible Lender Trustee as the party
primarily responsible to the Department for any liabilities owed to the
Department or Federal Guarantors resulting from the Eligible Lender Trustee's
activities in the FFELP. As a result, if the Department or a Federal Guarantor
were to determine that the Eligible Lender Trustee owes a liability to the
Department or a Federal Guarantor on any Student Loan for which the Eligible
Lender Trustee is or was legal titleholder, including loans held in the Trust or
other trusts, the Department or the Federal Guarantor may seek to collect that
liability by offset against payments due the Eligible Lender Trustee under the
Trust. In the event that the Department or a Federal Guarantor determines a
liability exists in connection with a trust using the shared lender
identification number, the Department or the Federal Guarantor would be likely
to collect that liability by offset against amounts due the Eligible Lender
Trustee under the shared lender identification number, including amounts owed in
connection with the Trust.
In addition, other trusts using the shared lender identification number
may in a given quarter incur Federal Origination Fees that exceed the Interest
Subsidy Payments and Special Allowance Payments payable by the Department on the
loans in the other trusts, resulting in the consolidated payment from the
Department received by the Eligible Lender Trustee under the lender
identification number for that quarter being less than the amount owed by the
Department on the loans in the Trust for that quarter.
The Servicing Agreement for the Trust and the servicing agreements for
other trusts established by or with respect to the Seller which share the lender
identification number to be used by the Trust (the Trust and the other trusts,
collectively, the "Seller Trusts") will require the Eligible Lender Trustee or
the Servicer for each Seller Trust to allocate to the proper Seller Trust a
shortfall or an offset by the Department or a Federal Guarantor arising from the
Student Loans held by the Eligible Lender Trustee on the Seller Trust's behalf.
FEES PAYABLE ON CERTAIN FINANCED STUDENT LOANS. Under the Federal
Consolidation Program, the Trust will be obligated to pay to the Department a
monthly rebate fee (the "Monthly Rebate Fee") at an annualized rate of 1.05%
(0.62% for applications received between October 1, 1998 and January 31, 1999)
of the outstanding principal balance on the last day of each month plus accrued
interest thereon of each Federal Consolidation Loan which is a part of the
Trust, which rebate will be payable prior to distributions to the Noteholders
and which rebate will reduce the amount of funds which would otherwise be
available to make distributions on the Notes and will reduce the Adjusted
Student Loan Rate. In addition, the Trust must pay to the Department a 0.50%
origination fee (the "Federal Origination Fee") on the initial principal balance
of each Financed Student Loan which is originated on its behalf by the Eligible
Lender Trustee (i.e., each Federal Consolidation Loan originated on its behalf
by the Eligible Lender Trustee during the Revolving Period and each Add-on
Consolidation Loan added to a Federal Consolidation Loan in the Trust), which
fee will be deducted by the Department out of Interest Subsidy Payments and
Special Allowance Payments. If sufficient Interest Subsidy Payments and Special
Allowance Payments are not due to the Trust to cover the amount of the Federal
Origination Fee, the balance of the Federal Origination Fee may be deferred by
the Department until sufficient Interest Subsidy Payments and Special Allowance
Payments accrue to cover the fee or may be required to be paid immediately. If
the amounts never accrue, the Trust would be obligated to pay any remaining fee
from other assets of the Trust prior to making distributions to the Noteholders.
The offset of Interest Subsidy Payments and Special Allowance Payments, and the
payment of any remaining fee from other Trust assets will further reduce the
amount of the Available Funds from which payments to the Noteholders may be
made. Furthermore, any offset of Interest Subsidy Payments and Special Allowance
Payments will further reduce the Adjusted Student Loan Rate.
CERTAIN FEDERAL INCOME TAX AND STATE TAX CONSEQUENCES
Stroock & Stroock & Lavan LLP (the "Special Federal Tax Counsel") is of
the opinion that the Senior Notes will properly be characterized as indebtedness
for federal income tax purposes and that the Trust will not be an association
(or publicly traded partnership) taxable as a corporation for federal income tax
purposes. This opinion is not binding on the Internal Revenue Service (the
"IRS") and thus no assurance can be given that the characterization would
prevail if it were challenged. If the IRS were to contend successfully that the
Subordinate Notes and the Senior Notes were not debt for federal income tax
purposes, the arrangement among Noteholders and the Depositor might be
classified for federal income tax purposes as a publicly traded partnership
taxable as a corporation.
If the arrangement created by the Indenture were treated as a publicly
traded partnership taxable as a corporation, the resulting entity would be
subject to federal income taxes at corporate tax rates on its taxable income
generated with respect to the Financed Student Loans. Moreover, distributions by
the entity to all or some of the classes of Notes would probably not be
deductible in computing the entity's taxable income and all or part of the
distributions to holders of the Notes would probably be treated as dividends.
This entity-level tax could result in reduced distributions to the Noteholders
and the Noteholders could be liable for a share of the tax.
Because the Depositor will treat the Notes as indebtedness for federal
income tax purposes, the Trustee will not comply with the tax reporting
requirements that would apply under the foregoing alternative characterizations
of the Notes.
The Senior Notes provide for stated interest at a floating rate based
upon Three-Month LIBOR, but are subject to specified restrictions on the maximum
level of the floating rate. Under Treasury regulations governing "original issue
discount" ("OID"), stated interest payable at a variable rate is not taxed as
OID or contingent interest if the variable rate is a qualified floating rate.
The tax treatment of interest that is not based on a qualified floating rate is
not specified and the regulations do not address the tax treatment of debt
instruments bearing contingent interest except in circumstances not relevant to
this discussion. While (because of the imposition of an interest rate cap and
the allowance of the Class A-1 Noteholders' Interest Basis Carryover and the
Class A-2 Noteholders' Interest Basis Carryover) the tax treatment of interest
on the Senior Notes, is not entirely clear under the regulations, the Trust
intends to treat the stated interest as a "qualified floating rate" for OID
purposes and thus the interest should not be taxable to the Senior Noteholders
as OID or as contingent interest.
Prospective purchasers should read "Certain Federal Income Tax
Consequences" and "Certain State Tax Consequences" in the prospectus for a
discussion of the application of specified federal income tax laws and specified
state tax laws to the Trust and the Notes.
ERISA CONSIDERATIONS
Subject to the applicable provisions of ERISA and the Code, the Senior
Notes may be purchased by an employee benefit plan or an individual retirement
account or other arrangement described in Section 3(3) of ERISA or Section
4975(e)(1) of the Code (a "Plan"). Fiduciaries of a Plan subject to ERISA must
first determine that the Plan's acquisition of a Senior Note is consistent with
their fiduciary duties under ERISA, including the requirements of investment
prudence and diversification and the requirement that a Plan's investments be
made in accordance with the documents governing the Plan. Plan fiduciaries must
also determine that the acquisition will not result in a nonexempt prohibited
transaction as defined in Section 406 of ERISA or Section 4975 of the Code.
Employee benefit plans which are governmental plans (as defined in Section 3(32)
of ERISA) or specified church plans (as defined in Section 3(33) of ERISA) are
not subject to the fiduciary responsibility or prohibited transaction provisions
of ERISA or the Code. However, any plan which is qualified under Section 401(a)
of the Code and exempt from tax under Section 501(a) of the Code is subject to
the exclusive benefit rule under Section 401(a)(2) of ERISA and the prohibited
transaction rules set forth in Section 503 of the Code. See "ERISA
Considerations" in the prospectus.
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in the underwriting
agreement relating to the Senior Notes, the Depositor has agreed to cause the
Trust to sell to each of the underwriters named below for which Credit Suisse
First Boston Corporation is acting as representative and each of the
underwriters has severally agreed to purchase, the principal amount of Senior
Notes set forth opposite its name below.
PRINCIPAL AMOUNT
---------------------------------------
UNDERWRITER CLASS A-1 NOTES CLASS A-2 NOTES
------------- --------------- ---------------
____________________............. $ $
____________________............. $ $
- -
Total........................ $ $
=============== ===============
The underwriting agreement provides that the underwriters are obligated
to purchase all of the Senior Notes if any are purchased. The underwriting
agreement provides that if an underwriter defaults the purchase commitments of
non-defaulting underwriters may be increased or the offering of Senior Notes may
be terminated.
The underwriters propose to offer the Senior Notes initially at the
public offering prices on the cover page of this prospectus supplement, and to
selling group members at those prices less a concession of _____% per Class A-1
Note and _____% per Class A-2 Note. The underwriters and the selling group
members may allow a discount of _____% per Class A-1 Note and _____% per Class
A-2 Note on sales to specified other broker dealers. After the initial public
offering, the public offering prices and the concessions and discounts to
dealers may be changed by the representative.
The representative, on behalf of the underwriters, may engage in
over-allotment, stabilizing transactions, syndicate covering transactions and
penalty bids in accordance with Regulation M under the Exchange Act.
Over-allotment involves syndicate sales in excess of the offering size, which
creates a syndicate short position. Stabilizing transactions permit bids to
purchase the underlying security so long as the stabilizing bids do not exceed a
specified maximum. Syndicate covering transactions involve purchases of the
Senior Notes in the open market after the distribution has been completed in
order to cover syndicate short positions. Penalty bids permit the representative
to reclaim a selling concession from a syndicate member when the Senior Notes
originally sold by the syndicate member are purchased in a syndicate covering
transaction to cover syndicate short positions. These stabilizing transactions,
syndicate covering transactions and penalty bids may cause the price of the
Senior Notes to be higher than it would otherwise be in the absence of the
transactions. These transactions, if commenced, may be discontinued at any time.
We estimate that our out of pocket expenses for this offering will be
approximately $_______.
The Senior Notes are a new issue of securities with no established
trading market. One or more of the underwriters intend to make a secondary
market for the Senior Notes. However, they are not obligated to do so and may
discontinue making a secondary market for the Senior Notes at any time without
notice. No assurance can be given as to how liquid the trading market for the
Senior Notes will be.
The Depositor has agreed to indemnify the underwriters against
specified liabilities under the Securities Act, or contribute to payments which
the underwriters may be required to make.
The Trust may, from time to time, invest the funds in the Collection
Account, the Collateral Reinvestment Account and the Reserve Account in Eligible
Investments acquired from the Underwriters.
LEGAL MATTERS
Certain legal matters relating to the Senior Notes will be passed upon
for the Trust, the Depositor, the Seller, the Servicer, the Administrator and
for the underwriters by Stroock & Stroock & Lavan LLP, New York, New York.
Certain federal income tax matters will be passed upon for the Trust by Stroock
& Stroock & Lavan LLP.
REPORTS TO SECURITYHOLDERS
Unless and until Definitive Notes are issued, quarterly and annual
unaudited reports containing information concerning the Financed Student Loans
will be prepared by the Administrator and sent on behalf of the Trust only to
Cede & Co. ("Cede"), as nominee of The Depository Trust Company ("DTC") and
registered holder of the Senior Notes, and will not be sent to the beneficial
owners of the Senior Notes. Beneficial owners of Senior Notes will, however, be
able to obtain the reports by requesting them from the Indenture Trustee. The
reports will contain the information described under "Description of the
Transfer and Servicing Agreements--Statements to Indenture Trustee and Trust" in
the prospectus. The reports will not constitute financial statements prepared in
accordance with generally accepted accounting principles. See "Certain
Information Regarding the Securities--Book-Entry Registration" and "Reports to
Securityholders" in the prospectus. The Trust will file with the Commission the
periodic reports required under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), and the rules and regulations of the Commission
thereunder. These reports and other information may be inspected and copied at
prescribed rates at the public reference facilities maintained by the Commission
at 450 Fifth Street, N.W., Judiciary Plaza, Washington D.C. 20549. You may
obtain information on the operation of the Public Reference Room by calling the
Commission at 1-800-SEC-0330. The Commission maintains an internet site that
will obtain reports and other information regarding the Trust. The address of
that site is http://www.sec.gov.
FORWARD LOOKING STATEMENTS
Information under the heading "Formation of the Trust" and "Federal
Family Education Loan Program" contains various "forward looking statements",
which represent the Depositor's expectations or beliefs concerning future
events. The Depositor cautions that these statements are further qualified by
important factors that could cause actual results to differ materially from
those in the forward looking statements.
<PAGE>
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND
TAX DOCUMENTATION PROCEDURES
Except in specified limited circumstances, the globally offered Senior
Notes of Asset Backed Securities Corporation Student Loan Trust ____-_ (the
"Global Securities") will be available only in book-entry form. Investors in the
Global Securities may hold Global Securities through any of DTC, Clearstream,
Luxembourg or Euroclear. The Global Securities will be tradeable as home market
instruments in both the European and U.S. domestic markets. Initial settlements
and all secondary trades will settle in same-day funds.
Secondary market trading between investors holding Global Securities
through Clearstream, Luxembourg and Euroclear will be conducted in the ordinary
way in accordance with their normal rules and operating procedures and in
accordance with conventional eurobond practice (I.E., seven calendar day
settlement).
Secondary market trading between investors holding Global Securities
through DTC will be conducted according to the rules and procedures applicable
to U.S. corporate debt obligations and prior asset-backed securities issues.
Secondary cross-market trading between Clearstream, Luxembourg or
Euroclear and DTC Participants holding Global Securities will be effected on a
delivery-against-payment basis through the applicable Depositaries of
Clearstream, Luxembourg and Euroclear (in this capacity) and as DTC
Participants.
Non-U.S. holders (as described below) of Global Securities will be
subject to U.S. withholding taxes unless the holders meet specified requirements
and deliver appropriate U.S. tax documents to the securities clearing
organizations or their participants.
INITIAL SETTLEMENT
All Global Securities will be held in book-entry form by DTC in the
name of CEDE & CO. as nominee of DTC. Investors' interests in the Global
Securities will be represented through financial institutions acting on their
behalf as direct and indirect Participants in DTC. As a result, Clearstream,
Luxembourg and Euroclear will hold positions on behalf of their participants
through their respective Depositaries, which in turn will hold the positions in
accounts as DTC Participants.
Investors electing to hold their Global Securities through DTC will
follow the settlement practices applicable to conventional asset-backed
securities. Investor securities custody accounts will be credited with their
holdings against payment in same-day funds on the settlement date.
Investors electing to hold their Global Securities through Clearstream,
Luxembourg or Euroclear accounts will follow the settlement procedures
applicable to conventional eurobonds, except that there will be no temporary
global security and no "lock-up" or restricted period. Global Securities will be
credited to the securities custody accounts on the settlement date against
payment in same-day funds.
SECONDARY MARKET TRADING
Since the purchaser determines the place of delivery, it is important
to establish at the time of the trade where both the purchaser's and the
seller's accounts are located to ensure that settlement can be made on the
desired value date.
TRADING BETWEEN DTC PARTICIPANTS. Secondary market trading between DTC
Participants will be settled in same-day funds.
Trading between CLEARSTREAM, LUXEMBOURG AND/OR EUROCLEAR PARTICIPANTS.
Secondary market trading between Clearstream, Luxembourg Participants or
Euroclear Participants will be settled using the procedures applicable to
conventional eurobonds in same-day funds.
TRADING BETWEEN DTC SELLER AND CLEARSTREAM, LUXEMBOURG OR EUROCLEAR
PURCHASER. When Global Securities are to be transferred from the account of a
DTC Participant to the account of a Clearstream, Luxembourg Participant or a
Euroclear Participant, the purchaser will send instructions to Clearstream,
Luxembourg or Euroclear through a Clearstream, Luxembourg Participant or
Euroclear Participant at least one business day prior to settlement.
Clearstream, Luxembourg or Euroclear, as the case may be, will instruct the
applicable Depositary to receive the Global Securities against payment. Payment
will include interest accrued on the Global Securities from and including the
last coupon payment date to and excluding the settlement date, on the basis of a
calendar year consisting of twelve 30-day calendar months. Payment will then be
made by the respective Depositary of the DTC Participant's account against
delivery of the Global Securities. After settlement has been completed, the
Global Securities will be credited to the respective clearing system and by the
clearing system, in accordance with its usual procedures, to the Clearstream,
Luxembourg Participant's or Euroclear Participant's account. The securities
credit will appear the next day (European time) and the cash debit will be
back-valued to, and the interest on the Global Securities will accrue from, the
value date (which would be the preceding day when settlement occurred in New
York). If settlement is not completed on the intended value date (i.e., the
trade fails), the Clearstream, Luxembourg or Euroclear cash debit will be valued
instead as of the actual settlement date.
Clearstream, Luxembourg Participants and Euroclear Participants will
need to make available to the respective clearing systems the funds necessary to
process same-day funds settlement. The most direct means of doing so is to
preposition funds for settlement, either from cash on hand or existing lines of
credit, as they would for any settlement occurring within Clearstream,
Luxembourg or Euroclear. Under this approach, they may take on credit exposure
to Clearstream, Luxembourg or Euroclear until the Global Securities are credited
to their accounts one day later.
As an alternative, if Clearstream, Luxembourg or Euroclear has extended
a line of credit to them, Clearstream, Luxembourg Participants or Euroclear
Participants may elect not to preposition funds and allow that credit line to be
drawn upon to finance settlement. Under this procedure, Clearstream, Luxembourg
Participants or Euroclear Participants purchasing Global Securities would incur
overdraft charges for one day, assuming they cleared the overdraft when the
Global Securities were credited to their accounts. However, interest on the
Global Securities would accrue from the value date. Therefore, in many cases the
investment income on the Global Securities earned during that one-day period may
substantially reduce or offset the amount of the overdraft charges, although
this result will depend on each Clearstream, Luxembourg Participant's or
Euroclear Participant's particular cost of funds.
Since the settlement is taking place during New York business hours,
DTC Participants may employ their usual procedures for sending Global Securities
to the applicable Depositary for the benefit of Clearstream, Luxembourg
Participants or Euroclear Participants. The sale proceeds will be available to
the DTC seller on the settlement date. Thus, to the DTC Participants a
cross-market transaction will settle no differently from a trade between two DTC
Participants.
TRADING BETWEEN CLEARSTREAM, LUXEMBOURG OR EUROCLEAR SELLER AND DTC
PURCHASER. Due to time zone differences in their favor, Clearstream, Luxembourg
Participants and Euroclear Participants may employ their customary procedures
for transactions in which Global Securities are to be transferred by the
respective clearing system, through Euroclear Participants, to a DTC
Participant. The seller will send instructions to Clearstream, Luxembourg or
Euroclear through a Clearstream, Luxembourg Participant or a Euroclear
Participant at least one business day prior to settlement. In these cases,
Clearstream, Luxembourg or Euroclear will instruct Euroclear Participants, to
deliver the Global Securities to the DTC Participant's account against payment.
Payment will include interest accrued on the Global Securities from and
including the last coupon payment to and excluding the settlement date, on the
basis of a calendar year consisting of twelve 30-day calendar months. The
payment will then be reflected in the account of the Clearstream, Luxembourg
Participant or Euroclear Participant the following day, and receipt of the cash
proceeds in the Clearstream, Luxembourg Participant's or Euroclear Participant's
account would be back-valued to the value date (which would be the preceding
day, when settlement occurred in New York). Should the Clearstream, Luxembourg
Participant or Euroclear Participant have a line of credit with its respective
clearing system and elect to be in debit in anticipation of receipt of the sale
proceeds in its account, the back-valuation will extinguish any overdraft
incurred over that one-day period. If settlement is not completed on the
intended value date (i.e., the trade fails), receipt of the cash proceeds in the
Clearstream, Luxembourg Participant's or Euroclear Participant's account would
instead be valued as of the actual settlement date.
Finally, day traders that use Clearstream, Luxembourg or Euroclear and
that purchase Global Securities from DTC Participants for delivery to
Clearstream, Luxembourg Participants or Euroclear Participants should note that
these trades will automatically fail on the sale side unless affirmative action
is taken. At least three techniques should be readily available to eliminate
this potential problem:
(1) borrowing through Clearstream, Luxembourg or Euroclear for one day
(until the purchase side of the day trade is reflected in their Clearstream,
Luxembourg or Euroclear accounts) in accordance with the clearing system's
customary procedures;
(2) borrowing the Global Securities in the U.S. from a DTC Participant
no later than one day prior to settlement, which would give the Global
Securities sufficient time to be reflected in their Clearstream, Luxembourg or
Euroclear account in order to settle the sale side of the trade; or
(3) staggering the value dates for the buy and sell sides of the trade
so that the value date for the purchase from the DTC Participant is at least one
day prior to the value date for the sale to the Clearstream, Luxembourg
Participant or Euroclear Participant.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of Global Securities holding securities through
Clearstream, Luxembourg or Euroclear (or through DTC if the holder has an
address outside the U.S.) will be subject to 30% U.S. withholding tax that
generally applies to payments of interest on registered debt issued by U.S.
Persons, unless (1) each clearing system, bank or other financial institution
that holds customers' securities in the ordinary course of its trade or business
in the chain of intermediaries between the beneficial owner and the U.S. entity
required to withhold tax complies with applicable certification requirements and
(2) the beneficial owner takes one of the following steps to obtain an exemption
or reduced tax rate:
EXEMPTION FOR NON-U.S. PERSONS (FORM W-8). Beneficial owners of Global
Securities that are non-U.S. Persons can obtain a complete exemption from the
withholding tax by filing a signed Form W-8 (Certificate of Foreign Status). If
the information shown on Form W-8 changes, a new Form W-8 must be filed within
30 days of the change.
EXEMPTION FOR NON-U.S. PERSONS WITH EFFECTIVELY CONNECTED INCOME (FORM
4224). A non-U.S. Person, including a non-U.S. corporation or bank with a U.S.
branch, for which the interest income is effectively connected with its conduct
of a trade or business in the United States, can obtain an exemption from the
withholding tax by filing Form 4224 (Exemption from Withholding of Tax on Income
Effectively Connected with the Conduct of a Trade or Business in the United
States).
EXEMPTION OR REDUCED RATE FOR NON-U.S. PERSONS RESIDENT IN TREATY
COUNTRIES (FORM 1001). Non-U.S. Persons that are beneficial owners residing in a
country that has a tax treaty with the United States can obtain an exemption or
reduced tax rate (depending on the treaty terms) by filing Form 1001 (Ownership,
Exemption or Reduced Rate Certificate). If the treaty provides only for a
reduced rate, withholding tax will be imposed at that rate unless the filer
alternatively files Form W-8. Form 1001 may be filed by the beneficial owner or
his agent.
EXEMPTION FOR U.S. PERSONS (FORM W-9). U.S. Persons can obtain a
complete exemption from the withholding tax by filing Form W-9 (Payee's Request
for Taxpayer Identification Number and Certification).
U.S. FEDERAL INCOME TAX REPORTING PROCEDURE. The Global Securities
holder, or in the case of a Form 1001 or a Form 4224 filer, his agent, files by
submitting the appropriate form to the person through whom he holds (e.g., the
clearing agency, in the case of persons holding directly on the books of the
clearing agency). Form W-8 and Form 1001 are effective for three calendar years
and Form 4224 is effective for one calendar year.
This summary does not deal with all aspects of foreign income tax
withholding that may be relevant to foreign holders of these Global Securities
or with the application of tax documentation requirements that are generally
effective with respect to payments made after December 31, 2000. Investors are
advised to consult their own tax advisors for specific tax advice concerning
their holding and disposing of these Global Securities.
U.S. PERSON. As used in this prospectus supplement the term "U.S.
Person" means a beneficial owner of a Senior Note that is for United States
federal income tax purposes
o a citizen or resident of the United States,
o a corporation or partnership created or organized in or under the
laws of the United States or of any political subdivision of a
corporation or partnership,
o an estate the income of which is subject to United States federal
income taxation regardless of its source, or
o a trust if a court within the United States is able to exercise
primary supervision of the administration of the trust and one or
more United States persons have the authority to control all
substantial decisions of the trust.
As used in this prospectus supplement, the term "Non-U.S. Person" means a
beneficial owner of a Senior Note that is not a U.S. Person.
<PAGE>
INDEX OF PRINCIPAL TERMS
Set forth below is a list of the defined terms used in this prospectus
supplement and the pages on which the definitions of the terms may be found in
this prospectus supplement.
_____.......................................................................S-31
1992 Master Agreement.......................................................S-44
1998 Amendments.............................................................S-48
1998 Reauthorization Bill...................................................S-48
91-day Treasury Bills.......................................................S-45
Additional Fundings.........................................................S-31
Additional Guarantor........................................................S-22
Additional Student Loans....................................................S-13
Add-on Consolidation Loans..................................................S-15
Adjusted Student Loan Rate..................................................S-24
Administration Agreement....................................................S-31
Administration Fee..........................................................S-36
Administrator...............................................................S-31
Assumption Payment..........................................................S-46
Available Funds.............................................................S-37
Cede........................................................................S-54
Clearstream, Luxembourg.....................................................S-28
Clearstream, Luxembourg Participants........................................S-28
Citibank....................................................................S-29
Class A-1 Note Final Maturity Date..........................................S-26
Class A-1 Note LIBOR Rate...................................................S-24
Class A-1 Note Rate.........................................................S-24
Class A-1 Noteholders.......................................................S-26
Class A-1 Noteholders' Interest Basis Carryover.............................S-38
Class A-1 Noteholders' Interest Carryover Shortfall.........................S-39
Class A-1 Noteholders' Interest Distribution Amount.........................S-39
Class A-1 Notes.............................................................S-23
Class A-2 Note Final Maturity Date..........................................S-26
Class A-2 Note LIBOR Rate...................................................S-24
Class A-2 Note Rate.........................................................S-24
Class A-2 Noteholders.......................................................S-26
Class A-2 Noteholders' Interest Basis Carryover.............................S-39
Class A-2 Noteholders' Interest Carryover Shortfall.........................S-39
Class A-2 Noteholders' Interest Distribution Amount.........................S-39
Class A-2 Notes.............................................................S-23
Closing Date................................................................S-13
Collateral Reinvestment Account.............................................S-34
Collection Account..........................................................S-34
Collection Period...........................................................S-36
Commission..................................................................S-31
Company.....................................................................S-14
Cooperative.................................................................S-28
Cutoff Date.................................................................S-16
Deferral....................................................................S-19
Delinquency Percentage......................................................S-32
Depositaries................................................................S-29
Depositary..................................................................S-29
Determination Date..........................................................S-36
DTC.........................................................................S-54
DTC Services................................................................S-30
Early Amortization Event....................................................S-32
Eligible Lender Trustee.....................................................S-13
Euroclear...................................................................S-28
Euroclear Operator..........................................................S-28
Euroclear Participants......................................................S-28
Events of Default...........................................................S-45
Excess Spread...............................................................S-32
Exchange Act................................................................S-54
Exchanged Financed Student Loan.............................................S-33
Exchanged Serial Loan.......................................................S-33
Expected Interest Collections...............................................S-24
Federal Origination Fee.....................................................S-51
FFELP.......................................................................S-13
Financed Student Loans......................................................S-13
Forbearance.................................................................S-19
Global Securities...........................................................S-55
Grace.......................................................................S-19
GRDF Percentage.............................................................S-35
Guarantors..................................................................S-22
Illegality..................................................................S-46
Indenture...................................................................S-23
Indenture Trustee...........................................................S-23
Index Maturity..............................................................S-27
Indirect Participants.......................................................S-27
Industry....................................................................S-30
Initial Financed Student Loans..............................................S-13
Initial Guarantors..........................................................S-22
In-School...................................................................S-19
In-School Percentage........................................................S-35
Interest Rate Swap..........................................................S-44
IRS.........................................................................S-51
LIBOR Determination Date....................................................S-27
LIBOR Reset Period..........................................................S-27
Liquidated Student Loans....................................................S-36
Liquidation Proceeds........................................................S-36
Loan Purchase Amount........................................................S-31
Loan Sale Agreement.........................................................S-30
Lock-In Period..............................................................S-45
Minimum Purchase Price......................................................S-47
Monthly Available Funds.....................................................S-36
Monthly Collection Period...................................................S-36
Monthly Payment Date........................................................S-35
Monthly Rebate Fee..........................................................S-51
Morgan......................................................................S-29
Net Trust Swap Payment......................................................S-45
Net Trust Swap Payment Carryover Shortfall..................................S-39
Net Trust Swap Receipt......................................................S-45
Net Trust Swap Receipt Carryover Shortfall..................................S-39
New Loan....................................................................S-31
New Loans...................................................................S-31
Noncapitalized Accrued Interest.............................................S-31
Non-U.S. Person.............................................................S-58
Noteholders.................................................................S-26
Noteholders' Interest Distribution Amount...................................S-40
Notes.......................................................................S-23
Obligors....................................................................S-25
OID.........................................................................S-51
Parity Date.................................................................S-25
Participants................................................................S-27
Plan........................................................................S-52
Pool Balance................................................................S-25
Principal Distribution Adjustment...........................................S-40
Principal Distribution Amount...............................................S-40
Purchase Amount.............................................................S-25
Purchase Collateral Balance.................................................S-31
Purchase Premium Amount.....................................................S-31
Quarterly Interest Period...................................................S-24
Quarterly Payment Date......................................................S-24
Rating Agency Downgrade.....................................................S-46
Realized Losses.............................................................S-40
Record Date.................................................................S-24
Reference Banks.............................................................S-27
Repayment...................................................................S-19
Reserve Account.............................................................S-34
Reserve Account Excess......................................................S-42
Reserve Account Initial Deposit.............................................S-13
Revolving Period............................................................S-31
Scheduled Notional Swap Amount..............................................S-44
Scheduled Swap Termination Date.............................................S-44
Secretary...................................................................S-22
Seller......................................................................S-14
Seller Trusts...............................................................S-50
Senior Noteholders..........................................................S-26
Senior Noteholders' Distribution Amount.....................................S-41
Senior Noteholders' Interest Distribution Amount............................S-41
Senior Noteholders' Principal Carryover Shortfall...........................S-41
Senior Noteholders' Principal Distribution Amount...........................S-41
Senior Notes................................................................S-23
Serial Loan.................................................................S-32
Serial Loans................................................................S-32
Servicer................................................................S-14, 30
Servicing Agreement.........................................................S-30
Servicing Fee...............................................................S-34
Servicing Fee Shortfall.....................................................S-36
Special Federal Tax Counsel.................................................S-51
Specified Reserve Account Balance...........................................S-42
Student Loan Rate Accrual Period............................................S-24
Student Loans...............................................................S-13
Subordinate Note Final Maturity Date........................................S-26
Subordinate Note LIBOR Rate.................................................S-24
Subordinate Note Rate.......................................................S-24
Subordinate Noteholders.....................................................S-26
Subordinate Noteholders' Distribution Amount................................S-41
Subordinate Noteholders' Interest Basis Carryover...........................S-41
Subordinate Noteholders' Interest Carryover Shortfall.......................S-41
Subordinate Noteholders' Interest Distribution Amount.......................S-41
Subordinate Noteholders' Principal Carryover Shortfall......................S-42
Subordinate Noteholders' Principal Distribution Amount......................S-42
Subordinate Notes...........................................................S-23
Swap Counterparty...........................................................S-44
Swap Default................................................................S-45
Swap Early Termination......................................................S-46
Swap Rate...................................................................S-44
Swap Termination Date.......................................................S-44
Systems.....................................................................S-30
Tax Event...................................................................S-46
T-Bill Rate.................................................................S-45
Telerate Page 3750..........................................................S-27
Termination Events..........................................................S-46
Terms and Conditions........................................................S-29
Three-Month LIBOR...........................................................S-27
Transfer Agreement..........................................................S-31
Transfer and Servicing Agreements...........................................S-31
Transfer Date...............................................................S-33
Trust.......................................................................S-13
Trust Agreement.............................................................S-14
Trust Swap Payment Amount...................................................S-42
Trust Swap Receipt Amount...................................................S-42
U.S. Person.................................................................S-58
USA Funds...................................................................S-22
<PAGE>
PROSPECTUS
ASSET BACKED SECURITIES CORPORATION,
DEPOSITOR
STUDENT LOAN ASSET-BACKED NOTES AND ASSET-BACKED CERTIFICATES
(ISSUABLE IN SERIES)
-----------------------
A trust will issue the asset backed notes and the asset backed
certificates described in this prospectus in one or more series with one or more
classes. A supplement to this prospectus will set forth the amounts and prices
for the notes and certificates. The source for payment of the notes and
certificates will be collections on a pool of education loans to students and
parents of students.
The notes and certificates will represent interests in the trust and
will be paid only from the assets of the trust. The notes and certificates will
be rated in one of the four highest rating categories by at least one nationally
recognized rating organization. The notes and certificates may have one or more
forms of enhancement.
CONSIDER CAREFULLY THE FACTORS SET FORTH UNDER "RISK FACTORS" BEGINNING
AT PAGE 5 IN THIS PROSPECTUS AND IN THE RELATED PROSPECTUS SUPPLEMENT.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. MAKING ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
You should retain this prospectus for future reference. This prospectus
may not be used to consummate sales of notes or certificates offered hereby
unless accompanied by a prospectus.
CREDIT SUISSE FIRST BOSTON
The date of this prospectus is _______ __, 2000
<PAGE>
TABLE OF CONTENTS
RISK FACTORS...................................................................5
RISK OF LOSS FROM LIMITED CREDIT ENHANCEMENT...............................5
GUARANTEES OF STUDENT LOANS MAY NOT PREVENT LOSSES.........................5
DEFAULTS ON STUDENT LOANS WITHOUT GUARANTEES MAY RESULT IN LOSSES..........5
THE FINANCIAL CONDITION OF A FEDERAL GUARANTOR MAY BE ADVERSELY
AFFECTED BY A NUMBER OF FACTORS............................................5
RISK OF DEPARTMENT OF EDUCATION'S FAILURE TO PAY GUARANTEE PAYMENTS........6
RISK OF SELLER OR SERVICER NOT PERFORMING ON PURCHASE OBLIGATIONS..........6
CHANGES IN LEGISLATION MAY ADVERSELY AFFECT STUDENT LOANS AND FEDERAL
GUARANTORS, THE SELLER OR THE SERVICER.....................................6
FEES PAYABLE ON CERTAIN STUDENT LOANS MAY REDUCE AMOUNTS PAYABLE TO YOU....7
RISK OF CONSOLIDATION OF FEDERAL BENEFIT BILLINGS AND RECEIPTS WITH
OTHER TRUSTS...............................................................7
FAILURE TO COMPLY WITH THIRD-PARTY SERVICER REGULATIONS MAY ADVERSELY
AFFECT LOAN SERVICING......................................................8
CUSTODIAL RISK OF SERVICER.................................................8
INSOLVENCY RISK OF SERVICER OR ADMINISTRATOR...............................8
THE INVESTMENT RETURN ON THE SECURITIES IS UNCERTAIN.......................9
RISK OF VARIABILITY OF ACTUAL CASH FLOWS.................................10
NOTEHOLDERS' RIGHT TO CONTROL UPON CERTAIN DEFAULTS MAY ADVERSELY
AFFECT CERTIFICATEHOLDERS.................................................10
CONSUMER PROTECTION LAWS MAY AFFECT ENFORCEABILITY OF STUDENT LOANS.......10
BOOK-ENTRY REGISTRATION--BENEFICIAL OWNERS NOT RECOGNIZED BY TRUST........10
FORMATION OF THE TRUSTS.......................................................12
The Trusts................................................................12
Eligible Lender Trustee...................................................12
THE DEPOSITOR.................................................................12
USE OF PROCEEDS...............................................................13
THE SELLER AND THE SERVICER...................................................13
THE STUDENT LOAN POOLS........................................................13
THE STUDENT LOAN FINANCING BUSINESS...........................................14
Student Loan Programs.....................................................14
Description of Federal Student Loans......................................15
Legislative and Administrative Matters....................................15
Eligible Lenders, Students and Educational Institutions...................16
Financial Need Analysis...................................................17
Special Allowance Payments................................................17
Federal Stafford Loans....................................................18
INTEREST.............................................................18
INTEREST SUBSIDY PAYMENTS............................................19
LOAN LIMITS..........................................................19
REPAYMENT............................................................20
GRACE PERIODS, DEFERRAL PERIODS AND FORBEARANCE PERIODS..............20
Federal Unsubsidized Stafford Loans.......................................21
Federal PLUS and Federal SLS Loan Programs................................21
LOAN LIMITS..........................................................21
INTEREST.............................................................21
REPAYMENT, DEFERMENTS................................................22
Federal Consolidation Loan Program........................................22
Description of Private Student Loans Under the Programs...................24
Insurance of Student Loans; Guarantors of Student Loans...................24
Origination and Marketing Process.........................................26
Servicing and Collections Process.........................................27
Claims and Recovery Rates.................................................27
WEIGHTED AVERAGE LIVES OF THE SECURITIES......................................27
POOL FACTORS AND TRADING INFORMATION..........................................28
DESCRIPTION OF THE NOTES......................................................29
Principal of and Interest on the Notes....................................29
The Indenture.............................................................30
MODIFICATION OF INDENTURE............................................30
EVENTS OF DEFAULT; RIGHTS UPON EVENT OF DEFAULT......................31
CERTAIN COVENANTS....................................................32
ANNUAL COMPLIANCE STATEMENT..........................................33
INDENTURE TRUSTEE'S ANNUAL REPORT....................................33
SATISFACTION AND DISCHARGE OF INDENTURE..............................33
THE INDENTURE TRUSTEE................................................33
DESCRIPTION OF THE CERTIFICATES...............................................34
Principal and Interest in Respect of the Certificates.....................34
CERTAIN INFORMATION REGARDING THE SECURITIES..................................35
Fixed Rate Securities.....................................................35
Floating Rate Securities..................................................35
Book-Entry Registration...................................................35
Definitive Securities.....................................................37
List of Securityholders...................................................38
Reports to Securityholders................................................38
DESCRIPTION OF THE TRANSFER AND SERVICING AGREEMENTS..........................39
Sale of Student Loans; Representations and Warranties.....................39
Additional Fundings.......................................................40
Accounts..................................................................40
Servicing Procedures......................................................41
Payments on Student Loans.................................................41
Servicer Covenants........................................................41
Servicer Compensation.....................................................42
Distributions.............................................................42
Credit and Cash Flow Enhancement..........................................43
RESERVE ACCOUNT......................................................43
Statements to Indenture Trustee and Trust.................................43
Evidence as to Compliance.................................................44
Certain Matters Regarding the Servicer....................................45
Servicer Default..........................................................45
Rights Upon Servicer Default..............................................46
Waiver of Past Defaults...................................................46
Amendment.................................................................46
Payment of Notes..........................................................47
Termination...............................................................47
OPTIONAL REDEMPTION..................................................47
AUCTION OF STUDENT LOANS.............................................47
Administration Agreement..................................................47
CERTAIN LEGAL ASPECTS OF THE STUDENT LOANS....................................48
Transfer of Student Loans.................................................48
Consumer Protection Laws..................................................49
Loan Origination and Servicing Procedures Applicable to Student Loans.....49
Student Loans Generally Not Subject to Discharge in Bankruptcy............50
CERTAIN FEDERAL INCOME TAX CONSEQUENCES.......................................50
TRUSTS FOR WHICH A PARTNERSHIP ELECTION IS MADE...............................50
Tax Characterization of the Trust.........................................50
Tax Consequences to Holders of the Notes..................................50
TREATMENT OF THE NOTES AS INDEBTEDNESS...............................50
ORIGINAL ISSUE DISCOUNT..............................................50
INTEREST INCOME ON THE NOTES.........................................51
SALE OR OTHER DISPOSITION............................................51
FOREIGN HOLDERS......................................................52
BACKUP WITHHOLDING...................................................52
Recent Legislation........................................................53
Tax Consequences to Holders of the Certificates...........................53
CLASSIFICATION AS A PARTNERSHIP......................................53
TREATMENT OF THE TRUST AS A PARTNERSHIP..............................53
PARTNERSHIP TAXATION.................................................53
COMPUTATION OF INCOME................................................54
DETERMINING THE BASES OF TRUST ASSETS................................54
DISCOUNT AND PREMIUM.................................................55
DISPOSITION OF CERTIFICATES..........................................55
ALLOCATIONS BETWEEN TRANSFERORS AND TRANSFEREES......................55
SECTION 754 ELECTION.................................................56
ADMINISTRATIVE MATTERS...............................................56
TAX CONSEQUENCES TO FOREIGN CERTIFICATEHOLDERS.......................56
BACKUP WITHHOLDING...................................................57
TRUSTS IN WHICH ALL RESIDUAL INTERESTS ARE RETAINED BY THE SELLER, THE
DEPOSITOR OR AN AFFILIATE OF THE SELLER OR THE DEPOSITOR......................57
Tax Characterization of the Trust.........................................57
Tax Consequences to Holders of the Notes..................................57
TREATMENT OF THE NOTES AS INDEBTEDNESS...............................57
POSSIBLE ALTERNATIVE TREATMENTS OF THE NOTES.........................57
CERTAIN STATE TAX CONSEQUENCES................................................62
ERISA CONSIDERATIONS..........................................................62
The Notes.................................................................63
The Certificates..........................................................63
PLAN OF DISTRIBUTION..........................................................64
LEGAL MATTERS.................................................................65
AVAILABLE INFORMATION.........................................................65
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE...............................65
INDEX OF PRINCIPAL TERMS......................................................ii
<PAGE>
RISK FACTORS
You should consider the following factors and the additional factors
described under "Risk Factors" in the related prospectus supplement, together
with all the information contained in this prospectus and the related prospectus
supplement, before purchasing the securities.
CREDIT ENHANCEMENT MAY NOT
PROTECT YOU FROM ALL LOSSES........... An investment in the securities involves
a risk that you may lose all or part of
your investment. Although every trust
will include some form of credit
enhancement, that credit enhancement may
not cover every class of securities
issued by a trust. In addition, every
form of credit enhancement will have
limitations on, and exclusions from
coverage. As a result, there is always a
risk that you may not recover the full
amount of your investment.
GUARANTEES OF STUDENT LOANS MAY
NOT PREVENT LOSSES.................... A significant number of the student loans
in a trust will be guaranteed by either a
federal or a private guarantor. However,
those guarantees may not protect you
against all losses for several reasons,
including:
o federal guarantees are generally
limited to 98% of the principal
amount of the student loan;
o if the servicer fails to follow
prescribed servicing procedures or
if the originator of the loans fails
to follow procedures relating to the
origination of any student loans,
the applicable guarantors may refuse
to make guarantee payments to the
applicable trust and, if the loans
are federally insured, the
Department of Education may refuse
to make reinsurance payments to the
federal guarantors or to make
interest subsidy payments and
special allowance payments to the
eligible lender trustee; and
o private guarantors are not reinsured
by or entitled to any assistance
from the Department of Education. If
the loan loss reserves of a private
guarantor are not sufficient, that
private guarantor may not be able to
honor its obligations to make
guarantee payments.
DEFAULTS ON STUDENT LOANS WITHOUT
GUARANTEES MAY RESULT IN LOSSES....... A trust may include student loans that
are not guaranteed by any federal or
private guarantor, or by any other party
or governmental agency. Since all student
loans, whether guaranteed or not, are
unsecured, if a borrower under one of
these student loans defaults, the
applicable trust may suffer a loss.
THE FINANCIAL CONDITION OF A FEDERAL
GUARANTOR MAY BE ADVERSELY AFFECTED
BY A NUMBER OF FACTORS................ The financial condition of a federal
guarantor may be adversely affected by a
number of factors including:
o the amount of claims made against
the federal guarantor as result of
borrower defaults;
o the amount of claims reimbursed to
the federal guarantor from the
Department of Education;
o changes in legislation that may
reduce expenditures from the
Department of Education that support
federal guarantors or that may
require federal guarantors to pay
more of their reserves to the
Department of Education;
o loss of reinsurance benefits due to
the master servicer's or a
sub-servicer's failure to follow
required servicing procedures; and
o expansion of the federal direct
student loan program.
If the financial status of the federal
guarantors deteriorates, the federal
guarantors may fail to make guarantee
payments to the eligible lender trustee.
In this event, you may suffer delays in
the payment of principal and interest on
your securities.
RISK OF DEPARTMENT OF EDUCATION'S
FAILURE TO PAY GUARANTEE PAYMENTS..... If a federal guarantor is unable to meet
its insurance obligations, the related
trust may submit claims directly to the
Department of Education for payment. The
Department of Education's obligation to
pay guarantee claims directly to the
related trust is dependent upon the
Department of Education's determining
that the federal guarantor is unable to
meet its insurance obligations. If the
Department of Education delays in making
the determination, you may suffer a delay
in the payment of principal and interest
on your securities. In addition, if the
Department of Education determines that
the federal guarantor is able to meet its
insurance obligations, the Department of
Education will not make guarantee
payments to the related trust. If the
credit enhancement described in the
related prospectus supplement is not
sufficient to cover the federal
guarantor's obligations to the related
trust, you may suffer a loss on your
investment.
RISK OF SELLER OR SERVICER NOT
PERFORMING ON PURCHASE OBLIGATIONS.... The seller or the servicer will be
obligated to purchase from the applicable
trust student loans with respect to which
it materially breaches representations,
warranties or covenants. You can not be
sure, however, that the seller or the
servicer will have the financial
resources to purchase student loans. The
failure to so purchase a student loan
would not constitute an event of default
under the related indenture or permit the
exercise of remedies thereunder. However,
the breach of these representations,
warranties or covenants may cause you to
suffer a loss on your investment.
CHANGES IN LEGISLATION MAY
ADVERSELY AFFECT STUDENT LOANS,
FEDERAL GUARANTORS, THE SELLER OR
THE SERVICER.......................... You can not be positive that the Higher
Education Act or other relevant federal
or state laws, rules and regulations will
not be amended or modified in the future
in a manner that will adversely affect
the federal student loan programs
described in this prospectus, the student
loans made thereunder or the financial
condition of the federal guarantors, the
seller or the servicer.
In addition, if the direct student loan
programs described in this prospectus
expand, the servicers may experience
increased costs due to reduced economies
of scale or other adverse effects on
their business to the extent the volume
of loans serviced by the servicer is
reduced. These cost increases could
reduce the ability of the servicer to
satisfy its obligations to service the
student loans or to purchase student
loans in the event of specified breaches
of its covenants.
FEES PAYABLE ON CERTAIN STUDENT LOANS
MAY REDUCE AMOUNTS PAYABLE TO YOU..... Each trust will be obligated to pay to
the Department of Education a monthly
rebate at an annualized rate of generally
1.05% (or 0.62% for loans for which the
application was received between October
1, 1998 and January 31, 1999) of the
outstanding principal balance on each
federal consolidation loan which is a
part of the related trust. This rebate
will be payable prior to distributions
made to you. In addition, the trust must
pay to the Department of Education a
0.50% origination fee on the initial
principal balance of each student loan
which is originated on its behalf by the
eligible lender trustee subsequent to the
applicable closing date. This fee will be
deducted by the Department of Education
out of interest subsidy payments and
special allowance payments otherwise
payable to the trust(s). In this event
the amount available to be distributed to
you will be reduced. Under specified
circumstances, the related trust is
obligated to pay any portion of the
unpaid fee from other assets of the
related trust prior to making
distributions to you. As a result, the
payment of the rebate fee and origination
fee to the Department of Education will
affect the amount and timing of payments
to you. Moreover, if the origination fee
is deducted from interest subsidy
payments and special allowance payments
the interest rate payable on your
securities may be capped at a lower rate.
In this event, the value of your
investment may be impaired.
RISK OF CONSOLIDATION OF FEDERAL
BENEFIT BILLINGS AND RECEIPTS WITH
OTHER TRUSTS.......................... Due to a Department of Education policy
limiting the granting of new lender
identification numbers, all of the trusts
established by or for a seller to
securitize federal student loans may use
a common Department of Education lender
identification number. The Department of
Education regards the eligible lender
trustee as the party primarily
responsible to the Department of
Education for any liabilities owed to the
Department of Education or federal
guarantors resulting from the eligible
lender trustee's activities in the
federal family education loan program. In
the event that the Department of
Education or a federal guarantor
determines a liability exists in
connection with a trust using the shared
lender identification number, the
Department of Education or the federal
guarantor may collect that liability or
offset the liability from amounts due the
eligible lender trustee under the shared
lender identification number. As a
result, a trust may suffer a liability as
the result of another trust.
If any trust shares a lender
identification number with another trust,
the eligible lender trustee or the
servicer will allocate to the proper
trust shortfalls or an offset by the
Department of Education or a federal
guarantor arising from the student loans
held by the eligible lender trustee on
each trust's behalf. In the event the
amount available for indemnification by
one trust to another trust is
insufficient, you may suffer a loss on
your investment as a result of the
performance of another trust.
FAILURE TO COMPLY WITH THIRD-PARTY
SERVICER REGULATIONS MAY ADVERSELY
AFFECT LOAN SERVICING................. The Department of Education regulates
each servicer of federal student loans.
Under these regulations, a third-party
servicer, including the servicer, is
jointly and severally liable with its
client lenders for liabilities to the
Department of Education arising from the
servicer's violation of applicable
requirements. In addition, if the
servicer fails to meet standards of
financial responsibility or
administrative capability included in the
regulations, or violates other
requirements, the Department of Education
may fine the servicer and/or limit,
suspend, or terminate the servicer's
eligibility to contract to service
federal student loans. If a servicer were
so fined or held liable, or its
eligibility were limited, suspended, or
terminated, its ability to properly
service the student loans and to satisfy
its obligation to purchase student loans
with respect to which it breaches its
representations, warranties or covenants
could be adversely affected. Moreover, if
the Department of Education terminates a
servicer's eligibility, a servicing
transfer will take place and there will
be delays in collections and temporary
disruptions in servicing. Any servicing
transfer will at least temporarily
adversely affect payments to you.
CUSTODIAL RISK OF SERVICER............ The servicer as custodian on behalf of a
trust, with respect to the student loans
it services, will have custody of the
promissory notes evidencing the student
loans following the sale of the student
loans to the related eligible lender
trustee. Although the accounts of the
seller will be marked to indicate the
sale and although the seller will cause
UCC financing statements to be filed with
the appropriate authorities, the student
loans will not be physically segregated,
stamped or otherwise marked to indicate
that the student loans have been sold to
the eligible lender trustee. If, through
inadvertence or otherwise, any of the
student loans were sold to another party,
or a security interest in the student
loans were granted to another party that
purchased (or took the security interest
in) any of the student loans in the
ordinary course of its business and took
possession of the student loans, then the
purchaser (or secured party) might
acquire an interest in the student loans
superior to the interest of the eligible
lender trustee, if the purchaser (or
secured party) acquired the student loans
for new value and without knowledge of
the eligible lender trustee's interest.
INSOLVENCY RISK OF SERVICER,
ADMINISTRATOR OR SELLER............... In the event of a default by the servicer
or an administrator resulting solely from
specified events of insolvency or
bankruptcy, a court, conservator,
receiver or liquidator may have the power
to prevent either the indenture trustee
or the noteholders from appointing a
successor servicer or administrator, as
the case may be, and delays in
collections in respect of the student
loans may occur. Any delay in the
collections of student loans may delay
payments to you.
If the seller or the depositor becomes
subject to bankruptcy proceedings, you
could experience losses or delays in the
payments on your securities. The seller
will cause the sale of the student loans
to the depositor and the depositor will
cause the sale of the student loans to a
trust. However, if the seller or the
depositor becomes subject to a bankruptcy
proceeding, the court in the bankruptcy
proceeding could conclude that the seller
or the depositor effectively still owns
the student loans by concluding that the
sale to the trust was not a "true sale"
or that the trust should be consolidated
with the seller or the depositor for
bankruptcy purposes. If the court were to
reach this conclusion, you could
experience losses or delays in payments
on your securities.
The seller and the depositor have taken
and will take steps in structuring the
transactions described in this prospectus
and in the related prospectus supplement
to minimize the risk that a court would
consolidate the seller or the depositor
with the trust for bankruptcy purposes or
conclude that the sale of the student
loans to the depositor and the trust was
not a "true sale."
THE INVESTMENT RETURN ON THE
SECURITIES IS UNCERTAIN............... The return on your investment in the
securities of any series will depend on
o the price paid by you for your
securities,
o the rate at which interest accrues
on your securities and
o the rate at which you receive a
return of the principal.
Consequently, the length of time that
your securities are outstanding and
accruing interest. The last factor is the
biggest uncertainty in an investment in
the securities.
An obligor may prepay a student loan in
whole or in part, at any time. The
likelihood of an obligor prepaying a
student loan is higher as a result of
federal loan consolidation programs. In
addition, a trust may receive other
unscheduled payments from liquidations
due to default, including receipt of
guarantee payments and other student
loans purchased or repurchased by a
servicer or the seller. The rate of
prepayments on the student loans may be
influenced by a variety of economic,
social, competitive and other factors,
including changes in interest rates, the
availability of alternative financings
and the general economy. Because a pool
will include thousands of student loans
that are payable by obligors, it is
impossible to predict the amount and
timing of payments that will be received
and paid to securityholders in any month
or over the period of time that the
securities of a series remain
outstanding. In addition, the student
loans may be extended which may lengthen
the remaining term of the student loans
and delay payments to you. The seller's
or other entity's option to terminate a
trust early and, the possibility that all
of any pre-funded amount or any
collateral reinvestment amount will not
be used to purchase subsequent student
loans, creates additional uncertainty
regarding the timing of payments to
securityholders.
The different amounts of principal
payments on the securities and the
uncertainty of the timing of those
payments creates reinvestment risk.
Reinvestment risk refers to the fact that
you may not be able to invest the
payments on the securities received by
you at a rate that is equal to or greater
than the rate of interest borne by your
securities.
RISK OF VARIABILITY OF ACTUAL
CASH FLOWS............................ Amounts received by the related trust for
a particular collection period may vary
greatly from the payments actually due on
the student loans for the collection
period for a variety of economic, social
and other factors. The amount available
for distribution to you will be reduced
by the failure of borrowers to pay timely
the principal and interest due on the
related student loans. In addition, the
failure of a guarantor to timely meet its
guarantee obligations with respect to the
student loans could also reduce the
amount of funds available for
distribution to you on a given
distribution date. The effect of these
factors is impossible to predict.
NOTEHOLDERS' RIGHT TO CONTROL
UPON CERTAIN DEFAULTS MAY ADVERSELY
AFFECT CERTIFICATEHOLDERS............. In the event of a default by the servicer
or the administrator, the indenture
trustee or the noteholders may remove a
servicer or the administrator, as the
case may be, without the consent of the
eligible lender trustee or any of the
certificateholders. In addition, the
noteholders have the ability, with
specified exceptions, to waive defaults
by the servicer or the administrator,
including defaults that could materially
adversely affect the certificateholders.
CONSUMER PROTECTION LAWS MAY AFFECT
ENFORCEABILITY OF STUDENT LOANS....... Numerous federal and state consumer
protection laws and related regulations
impose substantial requirements upon
lenders and servicers involved in
consumer finance. Also, some state laws
impose finance charge ceilings and other
restrictions on consumer transactions and
require contract disclosures in addition
to those required under federal law.
These requirements impose specific
statutory liability that could affect an
assignee's ability to enforce consumer
finance contracts, including the student
loans. In addition, the remedies
available to the indenture trustee or the
noteholders upon an event of default
under the indenture may not be readily
available or may be limited by applicable
state and federal laws.
BOOK-ENTRY REGISTRATION--BENEFICIAL
OWNERS NOT RECOGNIZED BY TRUST........ Issuance of the securities in book-entry
form may reduce the liquidity of these
securities in the secondary trading
market since investors may be unwilling
to purchase securities for which they
cannot obtain physical certificates.
Since transactions in the securities can
be effected only through The Depository
Trust Company, Clearstream, Luxembourg,
Euroclear, participating organizations,
indirect participants and specified
banks, your ability to pledge a security
to persons or entities that do not
participate in The Depository Trust
Company, Clearstream, Luxembourg or
Euroclear system or otherwise to take
actions in respect of the securities may
be limited due to lack of a physical
certificate representing the securities.
You may experience some delay in the
receipt of distributions of interest and
principal on the securities since the
distributions will be forwarded by the
trustee to The Depository Trust Company
and The Depository Trust Company will
credit the distributions to the accounts
of its participants which will thereafter
credit them to your account either
directly or indirectly through indirect
participants.
<PAGE>
FORMATION OF THE TRUSTS
THE TRUSTS
With respect to each series of securities, the depositor will establish
a separate trust (each a "Trust" or the "Issuer") pursuant to the respective
trust agreement (each a "Trust Agreement"), for the transactions described in
this prospectus and in the related prospectus supplement. The property of each
Trust will consist of:
o a pool of education loans to students and parents of students (the
"Student Loans"), legal title to which is held by the related
eligible lender trustee (the "Eligible Lender Trustee") on behalf
of each Trust,
o all funds collected or to be collected in respect thereof
(including any Guarantee Payments with respect thereto) on or
after the applicable date specified in the related prospectus
supplement (the "Cutoff Date"),
o any other rights under certain collateral agreements with respect
to certain Private Graduate Loans to the extent assigned to each
Trust, and
o all moneys and investments on deposit in the collection account,
any reserve account and any other trust accounts or any other form
of credit or cash flow enhancement that may be obtained for the
benefit of holders of one or more classes of the Securities.
To the extent provided in the applicable prospectus supplement, the Notes will
be collateralized by the property of the related Trust. To facilitate servicing
and to minimize administrative burden and expense, the Servicer will be
appointed the custodian of the promissory notes representing the Student Loans
for each Trust and the related Eligible Lender Trustee.
The principal offices of each Trust and the related Eligible Lender
Trustee will be specified in the applicable prospectus supplement.
ELIGIBLE LENDER TRUSTEE
The Eligible Lender Trustee for each Trust will be the entity specified
in the related prospectus supplement. The Eligible Lender Trustee on behalf of
the related Trust will acquire legal title to all the related Student Loans
acquired pursuant to the related loan sale agreement and will enter into a
guarantee agreement with each of the guarantors with respect to the Student
Loans. Each Eligible Lender Trustee will qualify as an eligible lender and owner
of all Federal Student Loans for all purposes under the Higher Education Act and
the guarantee agreements. Failure of the Federal Student Loans to be owned by an
eligible lender would result in the loss of any federal guarantee payments from
any federal guarantor and any Federal Assistance with respect to the Federal
Student Loans. See "Federal Family Education Loan Program-Eligible Lenders,
Students and Educational Institutions" and "-Federal Insurance and Reinsurance
of Federal Guarantors." An Eligible Lender Trustee's liability in connection
with the issuance and sale of the Notes and the Certificates is limited solely
to the express obligations of the Eligible Lender Trustee set forth in the
related trust agreement and the related loan sale agreement. See "Description of
the Transfer and Servicing Agreements." An Eligible Lender Trustee may resign at
any time, in which event the administrator, or its successor, will be obligated
to appoint a successor trustee. The administrator of a Trust may also remove the
Eligible Lender Trustee if the Eligible Lender Trustee ceases to be eligible to
continue as Eligible Lender Trustee under the related Trust Agreement or if the
Eligible Lender Trustee becomes insolvent. In these circumstances, the
administrator will be obligated to appoint a qualified successor trustee. Any
resignation or removal of an Eligible Lender Trustee and appointment of a
successor trustee will not become effective until acceptance of the appointment
by the successor trustee.
THE DEPOSITOR
Asset Backed Securities Corporation (the "Depositor") was incorporated
in the State of Delaware on December 31, 1985, and is an indirect, wholly owned
subsidiary of Credit Suisse First Boston, Inc. Credit Suisse First Boston
Corporation, which may act as an underwriter in offerings made by this
Prospectus, as described in "Plan of Distribution" below, is also a wholly owned
subsidiary of Credit Suisse First Boston, Inc. The principal executive offices
of the Depositor are located at Eleven Madison Avenue, New York, NY 10010. Its
telephone number is (212) 325-2000.
The Depositor was organized, among other things, for the purposes of
establishing Trusts, selling beneficial interests in those Trusts and acquiring
and selling student loans to Trusts. Neither the Depositor, its parent nor any
of the Depositor's affiliates will insure or guarantee distributions on the
notes or certificates of any series.
USE OF PROCEEDS
The net proceeds from the sale of securities of a given series will be
applied by the applicable Trust to purchase the related Student Loans on the
closing date from the Depositor and to make the initial deposit into the reserve
account or pre-funding account, if any. The Depositor will use the net proceeds
paid to it with respect to any Trust for general corporate purposes.
THE SELLER AND THE SERVICER
Information with respect to the seller (the "Seller") and the servicer
(the "Servicer") will be set forth in the related prospectus supplement.
THE STUDENT LOAN POOLS
The Student Loans to be sold by the Seller to Depositor and by the
Depositor to the Eligible Lender Trustee on behalf of a Trust pursuant to the
related loan sale agreement (the "Loan Sale Agreement") will be selected from
the portfolio of Student Loans by several criteria, including that each Student
Loan:
o was originated in the United States of America, its territories or
its possessions under and in accordance with the Programs,
o contains terms in accordance with those required by the Programs,
the applicable guarantee agreements, if any, by which the Student
Loan may be guaranteed as to principal and interest by a Guarantor
and other applicable requirements, and
o satisfies the other criteria, if any, set forth in the related
prospectus supplement. No selection procedures believed by the
Seller or the Depositor to be adverse to the Securityholders of
any series will be used in selecting the related Student Loans.
The Student Loans that comprise assets of each Trust will be held by
the related Eligible Lender Trustee, as trustee on behalf of the Trust. The
Eligible Lender Trustee will also enter into, on behalf of the Trust, Guarantee
Agreements with the Guarantors pursuant to which each of the Student Loans will
be guaranteed by one of the Guarantors. SEE "Formation of the Trusts-Eligible
Lender Trustee".
Information with respect to each pool of Student Loans for a given
Trust will be set forth in the related prospectus supplement, including, to the
extent appropriate, the composition, the distribution by loan type, loan payment
status, and states of borrowers' residence and the portion of the Student Loans
guaranteed by the specified Guarantors.
In the case of each series for which the related Trust may acquire or
originate Student Loans after the related Cutoff Date, information with respect
to the Student Loans eligible to be acquired or originated by the related Trust
will be set forth in the related prospectus supplement as will information
regarding the duration and conditions of any related funding period (a "Funding
Period") or revolving period (a "Revolving Period"), the circumstances under
which Additional Fundings will be made during the period, and, if Additional
Fundings may continue to be made after the period, the circumstances under which
the Additional Fundings will be made.
In addition, if specified in the related prospectus supplement, the
assets of the related Trust may include specified rights of the Seller or the
Depositor to receive excess cashflow ("Excess Cashflow Rights") in respect of
Student Loans that are owned by one or more other Trusts established or
sponsored by the Seller or the Depositor. Excess Cashflow Rights will not exceed
10% of the assets of any Trust. The related prospectus supplement will disclose
summary data relating to the Excess Cashflow Rights.
THE STUDENT LOAN FINANCING BUSINESS
STUDENT LOAN PROGRAMS
The Student Loans to be sold by the Seller to the Depositor and by the
Depositor to the Eligible Lender Trustee on behalf of a Trust pursuant to the
related Loan Sale Agreement will be selected from Student Loans originated or
acquired by the Seller under various loan programs (the "Programs"). The
proceeds of the loans are used to finance a portion of the costs of
(1) undergraduate education ("Undergraduate Loans"),
(2) graduate education ("Graduate Loans") or
(3) post-graduate activities such as studying for bar exams or
participating in residency programs ("Post-Graduate Loans").
Undergraduate Loans and Graduate Loans may be originated through the
Federal Family Education Loan Program ("FFELP") under Title IV of the Higher
Education Act of 1965, as amended (together with all rules and regulations
promulgated thereunder by the Department and/or the Guarantor (the "Act")). As
described herein and in the related prospectus supplement, substantially all
payments of principal and interest with respect to loans originated through
FFELP (collectively, the "Federal Student Loans") will be guaranteed against
default, death, bankruptcy or disability of the applicable borrower, and a
closing of or a false certification by such borrower's school, by certain
federal guarantors pursuant to a guarantee agreement to be entered into between
such federal guarantors specified in the related Prospectus Supplement (each a
"Federal Guarantor" and collectively, the "Federal Guarantors") and the
applicable Eligible Lender Trustee (such agreements, each as amended or
supplemented from time to time, the "Federal Guarantee Agreements"). Each of the
Federal Guarantors is entitled, subject to certain conditions, to be reimbursed
by the Department for 75% to 100% of all Guarantee Payments it makes pursuant to
a program of federal reinsurance under the Higher Education Act of 1965, as
amended (such act, together with all rules and regulations promulgated
thereunder by the Department and/or the Federal Guarantors, the "Higher
Education Act"). In addition, each Eligible Lender Trustee, as a holder of the
Federal Student Loans on behalf of the related Trust, is entitled to receive
from the Department certain interest subsidy payments and special allowance
payments with respect to certain of such Federal Student Loans as described
herein. See "--Description of Federal Student Loans" below.
Payments of principal and interest with respect to the Private Student
Loans may be (1) unguaranteed by any federal or private guarantor, or by any
other party or governmental agency ("Private Unguaranteed Loans") or (2)
guaranteed against default, death, bankruptcy or disability of the applicable
borrower ("Private Guaranteed Loans") by certain private guarantors pursuant to
a guarantee agreement to be entered into among private guarantors specified in
the related Prospectus Supplement (each a "Private Guarantor" and collectively,
"Private Guarantors," and together with the Federal Guarantors, the "Guarantors"
or individually a "Guarantor"), the Seller and the Eligible Lender Trustee, or
by Private Guarantors pursuant to surety bonds issued to the Seller or the
Depositor and assigned to each Eligible Lender Trustee on behalf of the related
Trust (such agreement and surety bonds, each as amended or supplemented from
time to time, the "Private Guarantee Agreements" and, together with the Federal
Guarantee Agreements, the "Guarantee Agreements"). Payments under the Private
Guarantee Agreements are referred to as "Private Guarantee Payments" and
payments under Federal Guarantee Agreements are referred to as "Federal
Guarantee Payments." Private Guarantee Payments and Federal Guarantee Payments
are together referred to as "Guarantee Payments." See "--Description of Private
Student Loans" below.
DESCRIPTION OF FEDERAL STUDENT LOANS
FFELP provides for loans to be made to students or parents of students
enrolled in eligible institutions to finance a portion of the costs of attending
school. FFELP provides for loans to students and parents of students which are
(1) guaranteed by a Guarantor and reinsured by the federal government or (2)
directly insured by the federal government. Several types of Federal Student
Loans are currently authorized under the Act:
o loans to students who demonstrate need ("Federal Stafford Loans");
o loans to students who do not demonstrate need or who need
additional loans to supplement their Federal Stafford Loans
("Federal Unsubsidized Stafford Loans");
o loans to parents of students ("Federal PLUS Loans") who are
dependents and whose estimated costs of attendance exceed the
available Federal Unsubsidized Stafford Loans, Federal Stafford
Loans and other financial aid; and
o loans to consolidate the borrower's obligations under various
federally authorized student loan programs into a single loan
(each, a "Federal Consolidation Loan").
Prior to July 1, 1994, the Act also authorized loans to graduate and
professional students, independent undergraduate students and, under limited
circumstances, dependent undergraduate students, to supplement their Federal
Stafford Loans ("Federal Supplemental Loans to Students" or "Federal SLS
Loans"). The description and summaries of the Act, FFELP, the Guarantee
Agreements and the other statutes, regulations and amendments referred to in
this Prospectus describe or summarize the material provisions of the statutes,
regulations and agreements but do not purport to be comprehensive and are
qualified in their entirety by reference to each statute, regulation or
document. There can be no assurance that future amendments or modifications will
not materially change any of the terms or provisions of the programs described
in this Prospectus or of the statutes and regulations implementing these
programs. See "Risk Factors-CHANGES IN LEGISLATION MAY ADVERSELY AFFECT STUDENT
LOANS AND FEDERAL GUARANTORS."
LEGISLATIVE AND ADMINISTRATIVE MATTERS
Both the Act and the regulations promulgated thereunder have been the
subject of extensive amendments in recent years and there can be no assurance
that further amendment will not materially change the provisions described in
this prospectus or the effect thereof. The 1992 Amendments to the Act (the "1992
Amendments") extended the principal provisions of FFELP to October 1, 1998 (or,
in the case of borrowers who have received loans prior to that date, September
30, 2002, and the Higher Education Act Amendments of 1998 (the "1998
Reauthorization Bill") further extended the principal provisions of FFELP
through June 30, 2003.
The 1993 Act made a number of changes to the Federal Student Loan
programs, including imposing on lenders or holders of Federal Student Loans fees
and affecting the Department's financial assistance to Federal Guarantors by
reducing the percentage of claim payments the Department will reimburse to
Federal Guarantors, reducing more substantially the insurance premiums and
default collections that Federal Guarantors are entitled to receive and/or
retain and allowing the Department to reduce the administrative fees it pays to
Federal Guarantors. In addition, legislation contemplated replacement of a
minimum of approximately 60% of the Federal Student Loan programs with direct
lending by the Department by 1998. The expansion of the new program may involve
increasing reductions in the volume of loans made under the existing programs,
which could result in increased costs for the Seller and the Servicer due to
reduced economies of scale. It is expected that the volume of new loans held and
serviced by the Servicer will decrease due to the new program, although the
entities have not experienced a reduction to date and any reduction will not
necessarily be equal to the percentage by which existing Federal Student Loan
programs are replaced by the new program. As these reductions occur, the Seller
and the Servicer could experience increased costs due to reduced economies of
scale to the extent the volume of loans held by the Seller and the Servicer is
reduced. These cost increases could affect the ability of the Servicer to
satisfy its obligations to service the Student Loans or the obligations of the
Seller and the Servicer to repurchase Student Loans in the event of specified
breaches of their respective representations and warranties or covenants. SEE
"Description of the Transfer and Servicing Agreements--Sale of Student Loans;
Representations and Warranties" and"--Servicer Covenants". These volume
reductions could also reduce revenues received by Federal Guarantors that are
available to pay claims on defaulted Student Loans. Finally, the level of
competition in existence in the secondary market for loans made under the
existing programs could be reduced, resulting in fewer potential buyers of the
Federal Student Loans and lower prices available in the secondary market for
those loans. Further, the Department is implementing a direct consolidation loan
program, which may further reduce the volume of Federal Student Loans and
increase the prepayment of existing FFELP Loans. The volume of existing loans
that may be prepaid in this fashion is not determinable at this time. The
Emergency Student Loan Consolidation Act of 1997 authorizes FFELP loan
originators to consolidate direct loans into Federal Consolidated Loans. This
provision applies to loan applications received on or after November 13, 1997.
ELIGIBLE LENDERS, STUDENTS AND EDUCATIONAL INSTITUTIONS
Lenders eligible to make loans under FFELP generally include banks,
savings and loan associations, credit unions, pension funds, insurance
companies, and with conditions, schools and guarantors. Federal Student Loans
may only be made to a "qualified student", generally defined as a United States
citizen or national or otherwise eligible individual under federal regulations
who:
o has been accepted for enrollment or is enrolled and is maintaining
satisfactory academic progress at a participating educational
institution,
o is carrying at least one-half of the normal full-time academic
workload for the course of study the student is pursuing, as
determined by the institution,
o has agreed to notify promptly the holder of the loan of any
address change, and
o for Federal Stafford Loans, meets the application "need"
requirements for the particular loan program.
Each loan is to be evidenced by an unsecured promissory note.
Eligible schools include institutions of higher education and
proprietary institutions. Institutions of higher education must meet specified
standards, which generally provide that the institution:
o only admits persons who have a high school diploma or its
equivalent,
o is legally authorized to operate within a state,
o provides not less than a two-year program with credit acceptable
toward a bachelor's degree,
o is a public or non-profit institution and
o is accredited by a nationally recognized accrediting agency or is
determined by the Department to meet the standards of an
accredited institution.
Eligible proprietary institutions of higher education include business,
trade and vocational schools meeting standards which provide that the
institution:
o only admits persons who have a high school diploma or its
equivalent,
o or persons who are beyond the age of compulsory school attendance
and have the ability to benefit from the training offered (as
defined in the Act),
o is authorized by a state to provide a program of vocational
education designed to fit individuals for useful employment in
recognized occupations,
o has been in existence for at least two years,
o provides at least a six-month training program to prepare students
for gainful employment in a recognized occupation and
o is accredited by a nationally recognized accrediting agency or is
specially accredited by the Department.
With specified exceptions, institutions are excluded from consideration
as educational institutions if the institution:
o offers more than 50 percent of its courses by correspondence,
o enrolls 50 percent or more of its students in correspondence
courses,
o has a student enrollment in which more than 25 percent of the
students are incarcerated or
o has a student enrollment in which more than 50 percent of the
students are admitted without a high school diploma or its
equivalent on the basis of their ability to benefit from the
education provided (as defined by statute and regulation).
Further, schools are specifically excluded from participation if
o the educational institution has filed for bankruptcy,
o the owner, or its chief executive officer, has been convicted or
pleaded "NOLO CONTENDERE" or "guilty" to a crime involving the
acquisition, use or expenditure of federal student aid funds, or
has been judicially determined to have committed fraud involving
funds under the student aid program or
o the educational institution has a cohort default rate in excess of
the rate prescribed by the Act.
In order to participate in the program, the eligibility of a school
must be approved by the Department under standards established by regulation.
FINANCIAL NEED ANALYSIS
Student Loans may generally be made in amounts, subject to limits and
conditions, to cover the student's estimated costs of attendance, including
tuition and fees, books, supplies, room and board, transportation and
miscellaneous personal expenses (as determined by the institution). Each Federal
Stafford Loan and Federal Unsubsidized Stafford Loan borrower must undergo a
financial need analysis, which requires the borrower to submit a financial need
analysis form to a multiple data entry processor that forwards the information
to the federal central processor. The central processor evaluates the parents'
and student's financial condition under federal guidelines and calculates the
amount that the student and/or the family is expected to contribute towards the
student's cost of education (the "family contribution"). After receiving
information on the family contribution, the institution then subtracts the
family contribution from the cost for the student to attend the institution to
determine the student's eligibility for grants, loans, and work assistance. The
difference between the amount of grants and Federal Stafford Loans for which the
borrower is eligible and the student's estimated cost of attendance (the "Unmet
Need") may be borrowed through Federal Unsubsidized Stafford Loans subject to
annual and aggregate loan limits prescribed in the Act. Parents may finance the
family contribution amount through their own resources or through Federal PLUS
Loans.
SPECIAL ALLOWANCE PAYMENTS
The Act provides for quarterly special allowance payments ("Special
Allowance Payments") to be made by the Department to holders of Federal Student
Loans to the extent necessary to ensure that the holder receives at least a
specified market interest rate of return on the loans. The rates for Special
Allowance Payments are based on formulas that differ according to the type of
loan, the date the loan was originally made or insured and the type of funds
used to finance the loan (tax-exempt or taxable). A Special Allowance Payment is
made for each of the 3-month periods ending March 31, June 30, September 30 and
December 31. The Special Allowance Payment equals the average unpaid principal
balance (including interest permitted to be capitalized) of all eligible loans
held by the holder during the period multiplied by the special allowance
percentage. The special allowance percentage is computed by:
(1) determining the average of the bond equivalent rates of 91-day
Treasury bills auctioned for the 3-month period,
(2) subtracting the applicable borrower interest rate on the loan from
the average,
(3) adding the applicable Special Allowance Margin (as set forth
below) to the resultant percentage and
(4) dividing the resultant percentage by 4; provided, however, that,
if the amount determined by the application of clauses (1), (2)
and (3) is in the negative, the Special Allowance Margin is zero.
DATE OF FIRST DISBURSEMENT SPECIAL ALLOWANCE MARGIN
-------------------------- ------------------------
Prior to 10/17/86 3.50%
10/17/86 - 09/30/92 3.25%
10/01/92 - 06/30/95 3.10%
07/01/95 - 06/30/98 2.50% (Federal Stafford Loans and Federal
Unsubsidized Stafford Loans that are In-
School, Grace or Deferment); 3.10% (Federal
Stafford Loans and Federal Unsubsidized
Stafford Loans that are in repayment and all
other loans)
07/01/98 - 06/30/03 2.20% (Federal Stafford Loans and Federal
Unsubsidized Stafford Loans that are In-
School, Grace or Deferment); 2.80% (Federal
Stafford Loans and Federal Unsubsidized Loans
that are in repayment) and 3.10% for all
other loans
Special Allowance Payments are available on variable rate Federal PLUS
and Federal SLS Loans only if the variable rate, which is reset annually based
on the 52-week Treasury Bill, exceeds the applicable maximum rate. The maximum
is generally between 9% and 12%.
FEDERAL STAFFORD LOANS
The Act provides for:
(1) federal insurance or reinsurance of Federal Stafford Loans made by
eligible lenders to qualified students,
(2) federal interest subsidy payments on eligible Federal Stafford
Loans to be paid by the Department to holders of the loans in lieu
of the borrower making interest payments ("Interest Subsidy
Payments") and
(3) Special Allowance Payments representing an additional subsidy paid
by the Department to the holders of eligible Federal Stafford
Loans (the federal reinsurance obligations, together with those
obligations referred to in clauses (2) and (3) being collectively
referred to in this prospectus as "Federal Assistance").
INTEREST. The borrower's interest rate on a Federal Stafford Loan may
be fixed or variable. Federal Stafford Loan interest rates are summarized in the
chart below.
<TABLE>
<CAPTION>
TRIGGER DATE(1) BORROWER RATE(2) MAXIMUM RATE INTEREST RATE MARGIN
--------------- ---------------- ------------ --------------------
<S> <C> <C> <C>
Prior to 01/01/81.......... 7% 7% N/A
01/01/81 - 09/12/83........ 9% 9% N/A
09/13/83 - 06/30/88........ 8% 8% N/A
07/01/88 - 09/30/92........ 8% for 48 months; 8% for 48 months, 3.25%
thereafter, 91-Day Treasury then 10%
+ Interest Rate Margin
10/01/92 - 06/30/94........ 91-Day Treasury + Interest 9% 3.10%
Rate Margin
07/01/94 - 06/30/95........ 91-Day Treasury + Interest 8.25% 3.10%
Rate Margin
07/01/95 - 06/30/98........ 91-Day Treasury + Interest 8.25% 2.50% (In-School, Grace or
Rate Margin Deferment); 3.10% (in
repayment)
On or after 07/01/98....... 91-Day Treasury + Interest 8.25% 1.70% (In-School, Grace or
Rate Margin Deferment); 2.30% (in
repayment)
--------------
(1) The Trigger Date for Federal Stafford Loans made before October 1, 1992 is
the first day of enrollment period for which a borrower's first Federal
Stafford Loan is made and for Federal Stafford Loans made on October 1, 1992
and after the Trigger Date is the date of the disbursement of a borrower's
first Federal Stafford Loan.
(2) The rate for variable rate Federal Stafford Loans applicable for any
12-month period beginning on July 1 and ending on June 30, is determined on
the preceding June 1 and is equal to the lesser of (a) the applicable
Maximum Rate or (b) the sum of (1) the bond equivalent rate of 91-day
Treasury bills auctioned at the final auction held prior to June 1 and (2)
the applicable Interest Rate Margin.
</TABLE>
The 1992 Amendments provide that, for fixed rate loans made on or after
July 23, 1992 and for specified loans made to new borrowers on or after July 1,
1988, the lender must have converted by January 1, 1995 the interest rate on the
loans to an annual interest rate adjusted each July 1 equal to:
o for specified loans made between July 1, 1988 and July 23, 1992,
the 91-day Treasury bill rate at the final auction prior to the
preceding June 1 plus 3.25%,
o for loans made on or after July 23, 1992 and prior to July 1,
1998, the 91-day Treasury bill rate at the final auction prior to
the preceding June 1 plus 3.10%, and
o for loans made on or after July 1, 1998, the 91-day Treasury bill
rate at the final auction prior to the preceding June 1 plus 2.2%
(In-School, Grace or Deferment) or 2.8% (in repayment) in each
case capped at the applicable interest rate for the loan existing
prior to the conversion.
The variable interest rate does not apply to loans made prior to July 23, 1992
during the first 48 months of repayment.
INTEREST SUBSIDY PAYMENTS. The Department is responsible for paying
interest on Federal Stafford Loans while the borrower is a qualified student,
during a Grace Period or during Deferral Periods. The Department makes quarterly
Interest Subsidy Payments to the owner of Federal Stafford Loans in the amount
of interest accruing on the unpaid balance thereof prior to the commencement of
repayment or during any Deferral Periods. The Act provides that the owner of an
eligible Federal Stafford Loan shall be deemed to have a contractual right
against the United States of America to receive Interest Subsidy Payments (and
Special Allowance Payments) in accordance with its provisions. Receipt of
Interest Subsidy Payments and Special Allowance Payments is conditioned on
compliance with the requirements of the Act, including satisfaction of
need-based criteria (and the delivery of sufficient information by the borrower
and the lender to the Department to confirm the foregoing) and continued
eligibility of the loan for federal reinsurance. This eligibility may be lost,
however, if the loans are not held by an eligible lender, in accordance with the
requirement of the Act and the applicable Federal Guarantee Agreements. See
"--Eligible Lenders, Students and Educational Institutions" above, "Risk
Factors--RISK OF LOSS OF FEDERAL GUARANTOR AND DEPARTMENT OF EDUCATION PAYMENTS
FOR FAILURE TO COMPLY WITH LOAN ORIGINATION AND SERVICING PROCEDURES FOR STUDENT
LOANS", "Formation of the Trusts--Eligible Lender Trustee" and "Description of
the Transfer and Servicing Agreements--Servicing Procedures".
Interest Subsidy Payments and Special Allowance Payments are generally
received within 45 days to 60 days after submission to the Department of the
applicable claim forms for any given calendar quarter, although there can be no
assurance that the payments will in fact be received from the Department within
that period. See "Risk Factors--RISK OF VARIABILITY OF ACTUAL CASH FLOWS". The
Servicer has agreed to prepare and file with the Department all claims forms and
any other required documents or filings on behalf of each Eligible Lender
Trustee as owner of the related Federal Student Loans on behalf of each Trust.
The Servicer has also agreed to assist each Eligible Lender Trustee in
monitoring, pursuing and obtaining Interest Subsidy Payments and Special
Allowance Payments, if any, with respect to Federal Student Loans. Each Eligible
Lender Trustee will be required to remit Interest Subsidy Payments and Special
Allowance Payments it receives with respect to Federal Student Loans within two
business days of receipt thereof to the related Collection Account.
LOAN LIMITS. The Act requires that loans be disbursed by eligible
lenders in at least two separate and equal disbursements; except that for
schools with a cohort default rate of less than 10% for the three most recent
fiscal years for which data is available, loans for a period of enrollment of
not more than one semester, trimester or quarter, or of not more than four
months, may be disbursed in a single disbursement. The Act limited the amount a
student can borrow in any academic year and the amount he or she can have
outstanding in the aggregate. The following chart sets forth the current and
historic loan limits.
<PAGE>
<TABLE>
<CAPTION>
ALL
STUDENTS(1) INDEPENDENT STUDENTS
----------- --------------------
BASE AMOUNT ADDITIONAL
SUBSIDIZED AND UNSUBSIDIZED MAXIMUM
SUBSIDIZED UNSUBSIDIZED ONLY ON OR AGGREGATE
SUBSIDIZED ON OR AFTER ON OR AFTER AFTER TOTAL
BORROWER'S ACADEMIC LEVEL PRE-1/1/87 1/1/87 10/1/93(2) 7/1/94(3) AMOUNT IN
------------------------- ---------- ----------- -------------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Undergraduate (per year)
1st year............ $ 2,500 $ 2,625 $ 2,625 $ 4,000 $ 6,625
2nd year............ $ 2,500 $ 2,625 $ 3,500 $ 4,000 $ 7,500
3rd year and above.. $ 2,500 $ 4,000 $ 5,500 $ 5,000 $ 10,500
Graduate (per year)...... $ 5,000 $ 7,500 $ 8,500 $ 10,000 $ 18,500
Aggregate Limit;
Undergraduate....... $ 12,500 $ 17,250 $ 23,000 $ 23,000 $ 46,000
Graduate (including
undergraduate)...... $ 25,000 $ 54,750 $ 65,500 $ 73,000 $ 138,500
---------------
(1) The loan limits are inclusive of both Federal Stafford Loans and
Federal Direct Student Loans.
(2) These amounts represent the combined maximum loan amount per year for
Federal Stafford and Federal Unsubsidized Stafford Loans. Accordingly,
the maximum amount that a student may borrow under a Federal
Unsubsidized Stafford Loan is the difference between the combined
maximum loan amount and the amount the student received in the form of
a Federal Stafford Loan.
(3) Independent undergraduate students, graduate students or professional
students may borrow these additional amounts. In addition, dependent
undergraduate students may also receive these additional loan amounts
if the parents of the students are unable to provide the family
contribution amount and it is unlikely that the student's parents will
qualify for a Federal PLUS Loan.
</TABLE>
The annual loan limits are reduced in some instances where the student
is enrolled in a program that is less than one academic year or has less than a
full academic year remaining in his or her program. The Department has
discretion to raise these limits to accommodate highly specialized or
exceptionally expensive courses of study.
REPAYMENT. Repayment of principal on a Federal Stafford Loan generally
does not commence while a student remains a qualified student, but generally
begins upon expiration of the applicable Grace Period, as described below. Any
borrower may voluntarily prepay without premium or penalty any loan and in
connection therewith may waive any Grace Period or Deferral Period. In general,
each loan must be scheduled for repayment over a period of not more than ten
years after the commencement of repayment. New borrowers on or after October 7,
1998 who accumulate outstanding loans under FFELP totaling more than $30,000 are
entitled to extended repayment schedules of up to 25 years subject to minimum
repayment amounts. The Act currently requires minimum annual payments of $600
or, if greater, the amount of accrued interest for that year, unless the
borrower and the lender agree to lesser payments. Effective July 1, 1993, the
Act and regulations promulgated thereunder require lenders to offer the choice
of a standard, graduated or income-sensitive repayment schedule to all borrowers
who receive a loan on or after that date.
GRACE PERIODS, DEFERRAL PERIODS AND FORBEARANCE PERIODS. Repayment of
principal on a Federal Stafford Loan must generally commence following a period
of (a) not less than 9 months or more than 12 months (with respect to loans for
which the applicable interest rate is 7% per annum) and (b) not more than 6
months (with respect to loans for which the applicable interest rate is 9% per
annum or 8% per annum and for loans to first-time borrowers on or after July 1,
1988) after the borrower ceases to pursue at least a half-time course of study
(a "Grace Period"). However, during other periods (each, a "Deferral Period")
and subject to conditions, no principal repayments need be made, including
periods when the student has returned to an eligible educational institution on
a full-time basis or is pursuing studies pursuant to an approved graduate
fellowship program, or when the student is a member of the United States Armed
Forces or a volunteer under the Peace Corps Act or the Domestic Volunteer
Service Act of 1973, or when the borrower is temporarily totally disabled, or
periods during which the borrower may defer principal payments because of
temporary financial hardship. For new borrowers to whom loans are first
disbursed on or after July 1, 1993, payment of principal may be deferred only
while the borrower is at least a half-time student or is in an approved graduate
fellowship program or is enrolled in a rehabilitation program, or when the
borrower is seeking but unable to find full-time employment, subject to a
maximum deferment of three years, or when for any reason the lender determines
that payment of principal will cause the borrower economic hardship, also
subject to a maximum deferment of three years. The 1992 Amendments also permit
and in some cases require forbearance of loan collection in specified
circumstances (each period, a "Forbearance Period").
FEDERAL UNSUBSIDIZED STAFFORD LOANS
The Federal Unsubsidized Stafford Loan program created under the 1992
Amendments is designed for students who do not qualify for the maximum Federal
Stafford Loan due to parental and/or student income and assets in excess of
permitted amounts. The basic requirements for Federal Unsubsidized Stafford
Loans are essentially the same as those for the Federal Stafford Loans,
including with respect to provisions governing the interest rate, the annual
loan limits and the Special Allowance Payments. The terms of the Federal
Unsubsidized Stafford Loans, however, differ in some respects. The federal
government does not make Interest Subsidy Payments on Federal Unsubsidized
Stafford Loans. The borrower must either begin making interest payments within
60 days after the time the loan is disbursed or permit capitalization of the
interest by the lender until repayment begins. Federal Unsubsidized Stafford
Loan borrowers who obtained the loans on or after October 1, 1992 are required
to pay, upon disbursement, a 6.5% insurance fee to the Department, though no
guarantee fee may be charged by the applicable Federal Guarantor. Effective July
1, 1994, the maximum insurance premium charged by the Federal Guarantor is
reduced to 1% and the origination fee is 3%. Subject to the same loan limits
established for Federal Stafford Loans, the student may borrow up to the amount
of the student's Unmet Need. Lenders are authorized to make Federal Unsubsidized
Stafford Loans applicable for periods of enrollment beginning on or after
October 1, 1992.
FEDERAL PLUS AND FEDERAL SLS LOAN PROGRAMS
The Act authorizes Federal PLUS Loans to be made to parents of eligible
dependent students and previously authorized Federal SLS Loans to be made to
specified categories of students. After July 1, 1993, only parents who do not
have an adverse credit history or who can secure an endorser without an adverse
credit history are eligible for Federal PLUS Loans. The basic provisions
applicable to Federal PLUS and Federal SLS Loans are similar to those of Federal
Stafford Loans with respect to the federal insurance and reinsurance on the
loans. However, Federal PLUS and Federal SLS Loans differ from Federal Stafford
Loans, particularly because Interest Subsidy Payments are not available under
the Federal PLUS and Federal SLS Programs and in some instances Special
Allowance Payments are more restricted.
LOAN LIMITS. Federal PLUS and Federal SLS Loans disbursed prior to July
1, 1993 are limited to $4,000 per academic year with a maximum aggregate amount
of $20,000. Federal SLS Loan limits for loans disbursed on or after July 1, 1993
depended upon the class year of the student and the length of the academic year.
The annual loan limit for Federal SLS Loans first disbursed on or after July 1,
1993 ranged from $4,000 for first and second year undergraduate borrowers to
$10,000 for graduate borrowers, with a maximum aggregate amount of $23,000 for
undergraduate borrowers and $73,000 for graduate and professional borrowers.
After July 1, 1994, for purposes of new loans being originated, the Federal SLS
programs were merged with the Federal Unsubsidized Stafford Loan program with
the borrowing limits reflecting the combined eligibility under both programs.
The only limit on the annual and aggregate amounts of Federal PLUS Loans first
disbursed on or after July 1, 1993 is the cost of the student's education less
other financial aid received, including scholarship, grants and other student
loans.
INTEREST. THE INTEREST RATE DETERMINATION FOR A PLUS OR SLS LOAN IS
DEPENDENT ON WHEN THE LOAN WAS ORIGINALLY MADE AND DISBURSED AND THE PERIOD OF
ENROLLMENT. THE INTEREST RATES FOR PLUS AND SLS LOANS ARE SUMMARIZED IN THE
FOLLOWING CHART.
<TABLE>
<CAPTION>
Interest
Trigger Date(1) Borrower Rate(2) Maximum Rate Rate Margin
--------------------------------- ----------------------------------------- ------------------------ ----------------
<S> <C> <C> <C>
Prior to 10/01/81............ 9% 9% N/A
10/01/81 - 10/30/82.......... 14% 14% N/A
11/01/82 - 06/30/87.......... 12% 12% N/A
07/01/87 - 09/30/92.......... 52-Week Treasury + Interest Rate Margin 12% 3.25%
10/01/92 - 06/30/94.......... 52-Week Treasury + Interest Rate Margin PLUS 10%, SLS 11% 3.10%
07/01/94 - 06/30/98.......... 52-Week Treasury + Interest Rate Margin 9% 3.10%
(SLS repealed 07/01/94)
After 06/30/98............... 91-Day Treasury + Interest Rate Margin 9% 3.10%
---------------
(1) The Trigger Date for PLUS and SLS loans made before October 1, 1992 is
the first day of enrollment period for which the loan is made, and for
PLUS and SLS loans made on October 1, 1992 and after the Trigger Date
is the date of the disbursement of the loan, respectively.
(2) For PLUS or SLS loans that carry a variable rate, the rate is set
annually for 12-month periods beginning on July 1 and ending on June 30
on the preceding June 1 and is equal to the lesser of (a) the
applicable maximum rate and (b) the sum of (1) the bond equivalent rate
of 52-week Treasury bills (or 91 day Treasury bills in the case of
loans made or disbursed on or after June 30, 1998) auctioned at the
final auction held prior to June 1, and (2) the applicable Interest
Rate Margin.
</TABLE>
A holder of a PLUS or SLS Loan is eligible to receive Special Allowance
Payments during any quarter if (a) the sum of (1) the average of the bond
equivalent rates of 91-day Treasury bills auctioned during the quarter and (2)
the Interest Rate Margin exceeds (b) the Maximum Rate.
REPAYMENT, DEFERMENTS. The 1992 Amendments provide Federal SLS
borrowers with the option to defer commencement of repayment of principal until
the commencement of repayment of Federal Stafford Loans. Otherwise, repayment of
principal of Federal PLUS and Federal SLS Loans is required to commence no later
than 60 days after the date of disbursement of the loan, subject to deferral and
forbearance provisions. The deferral provisions which apply are more limited
than those which apply to Federal Stafford Loans. Repayment of interest,
however, may be deferred and capitalized during periods of educational
enrollments and periods of unemployment or hardship as specified under the Act.
Further, whereas Interest Subsidy Payments are not available for the deferments,
interest may be capitalized during the periods upon agreement of the lender and
borrower. Maximum loan repayment periods and minimum payment amounts are the
same as for Federal Stafford Loans.
A borrower may refinance all outstanding Federal PLUS Loans under a
single repayment schedule for principal and interest, with the new repayment
period calculated from the date of repayment of the most recent included loan.
The interest rate of the refinanced loan shall be the weighted average of the
rates of all Federal PLUS Loans being refinanced. A second type of refinancing
enables an eligible lender to reissue a Federal PLUS Loan which was initially
originated at a fixed rate prior to July 1, 1987 in order to permit the borrower
to obtain the variable interest rate available on Federal PLUS Loans on and
after July 1, 1987. If a lender is unwilling to refinance the original Federal
PLUS Loan, the borrower may obtain a loan from another lender for the purpose of
discharging the loan and obtaining a variable interest rate.
FEDERAL CONSOLIDATION LOAN PROGRAM
The Act authorizes a program under which borrowers may consolidate one
or more of their Student Loans into a single loan (each, a "Federal
Consolidation Loan") insured and reinsured on a basis similar to Federal
Stafford Loans. Federal Consolidation Loans may be made in an amount sufficient
to pay outstanding principal, unpaid interest, late charges and collection costs
on all federally insured or reinsured student loans incurred under FFELP
selected by the borrower, as well as loans made pursuant to various other
federal student loan programs and which may have been made by different lenders.
Under this program, a lender may make a Federal Consolidation Loan to an
eligible borrower at the request of the borrower if the lender holds an
outstanding loan of the borrower or the borrower certifies that he has been
unable to obtain a Federal Consolidation Loan from the holders of the
outstanding loans made to him. The 1998 Reauthorization Bill allows lenders to
make Federal Consolidation Loans to borrowers with multiple holders of
underlying FFELP loans even if the lender does not hold an outstanding loan. A
borrower who is unable to obtain a Federal Consolidation Loan from an eligible
lender or a Federal Consolidation Loan with an income-sensitive repayment plan
acceptable to the borrower may obtain a Federal Consolidation Loan under the
direct loan program. Federal Consolidation Loans that were made on or after July
1, 1994 have no minimum loan amount, although Federal Consolidation Loans for
less than $7,500 must be repaid in ten years. Applications for Federal
Consolidation Loans received on or after January 1, 1993 but prior to July 1,
1994, were available only to borrowers who had aggregate outstanding student
loan balances of at least $7,500; for applications received before January 1,
1993, Federal Consolidation Loans are available only to borrowers who have
aggregate outstanding student loan balances of at least $5,000. The borrowers
must be either in repayment status or in a grace period preceding repayment and,
for applications received prior to January 1, 1993, the borrower must not have
been delinquent by more than 90 days on any student loan payment; for
applications received on or after January 1, 1993, delinquent or defaulted
borrowers are eligible to obtain Federal Consolidation Loans if they will
reenter repayment through loan consolidation. For applications received on or
after January 1, 1993, borrowers may, within 180 days of the origination of a
Federal Consolidation Loan, add additional loans made prior to consolidation
("Add-on Consolidation Loans") for consolidation therewith. If the borrower
obtains loans subsequent to the Federal Consolidation Loan, the borrower may
consolidate the new loans and the Federal Consolidation Loan. The interest rate
and term of the Federal Consolidation Loan, following the consolidation with the
related Add-on Consolidation Loans, may be recomputed within the parameters
permitted by the Act. For applications received on or after January 1, 1993,
married couples who agree to be jointly and severally liable will be treated as
one borrower for purposes of loan consolidation eligibility. For applications
received on or after November 13, 1997, student loan borrowers may include
federal direct loans in Federal Consolidation Loans.
Federal Consolidation Loans made prior to July 1, 1994 bear interest at
a rate which equals the weighted average of interest rates on the unpaid
principal balances of outstanding loans, rounded up to the nearest whole one
percent, with a minimum rate of 9%. For Federal Consolidation Loans made on or
after July 1, 1994 through November 12, 1997, the weighted average interest rate
must be rounded up to the nearest whole percent. Federal Consolidation Loans
made on or after November 13, 1997 through September 30, 1998 will bear interest
at the annual variable rate applicable to Stafford Loans. Federal Consolidation
Loans for which the application is received on or after October 1, 1998 bear
interest at a rate equal to the weighted average interest rate of the loans
consolidated, rounded up to the nearest one-eighth of one percent and capped at
8.25%. Interest on Federal Consolidation Loans accrues and, for applications
received prior to January 1, 1993, is to be paid without Interest Subsidy by the
Department. For Federal Consolidation Loans received on or after January 1,
1993, all interest of the borrower is paid during all periods of Deferment.
However, Federal Consolidation Loan applications received on or after August 10,
1993 will only be subsidized if all of the underlying loans being consolidated
were subsidized Federal Stafford Loans; PROVIDED, HOWEVER, that in the case of
Federal Consolidation Loans made on or after November 13, 1997, that portion of
the Federal Consolidation Loan that is comprised of Subsidized Stafford Loans
will retain its subsidy benefits during periods of deferment. Borrowers may
elect to accelerate principal payments without penalty. Further, no insurance
premium may be charged to a borrower and no insurance premium may be charged to
a lender in connection with a Federal Consolidation Loan. However, a fee may be
charged to the lender by a Federal Guarantor to cover the costs of increased or
extended liability with respect to a Consolidation Loan, and lenders must pay a
Monthly Rebate Fee at an annualized rate of 1.05% for loans disbursed on or
after October 1, 1993 (0.62% for loans for which applications were received
between October 1, 1998 and January 31, 1999). Special Allowance Payments are
made on Consolidation Loans whenever the rate charged the borrower is limited by
the 9%/8.25% cap. However, for applications received on or after October 1,
1998, Special Allowance Payments are paid in order to afford the lender a yield
equal to the 91-day T-bill plus 3.1%, whenever that formula exceeds the
borrower's interest rate.
Repayment of Federal Consolidation Loans begins within 60 days after
discharge of all prior loans which are consolidated. Repayment schedule options
must include, for applications received on or after January 1, 1993, the
establishment of graduated or income sensitive repayment plans, subject to
limits applicable to the sum of the Federal Consolidation Loan and the amount of
the borrower's other eligible student loans outstanding. The lender may, at its
option, include the graduated and income sensitive repayment plans for
applications received prior to that date. Generally, depending on the total of
loans outstanding, repayment may be scheduled over periods no shorter than ten
but not more than 25 years in length. For applications received on or after
January 1, 1993, the maximum maturity schedule is 30 years for Federal
Consolidation Loans of $60,000 or more.
All eligible loans of a borrower paid in full through consolidation are
discharged in the consolidation process when the new Federal Consolidation Loan
is issued.
DESCRIPTION OF PRIVATE STUDENT LOANS UNDER THE PROGRAMS
In addition to the Federal Student Loans originated under the Act, the
Seller may sell to the Depositor for sale to the Trust, student loans that are
not federally guaranteed ("Private Student Loans"), that can be used by
borrowers to supplement their Federal Student Loans in situations where the
Federal Student Loans do not cover the cost of education. The holders of Private
Student Loans are not entitled to receive any Federal Assistance with respect
thereto. The terms any underwriting criteria for any program relating to the
origination of Private Student Loans will be set forth in the related prospectus
supplement.
INSURANCE OF STUDENT LOANS; GUARANTORS OF STUDENT LOANS
FEDERAL GUARANTORS. The Act authorizes Federal Guarantors to support
education financing and credit needs of students at post-secondary schools. The
Act encourages every state either to establish its own agency or to designate
another Federal Guarantor in cooperation with the Secretary. Under various
programs throughout the United States of America, Federal Guarantors insure and
sometimes service guaranteed student loans. The Federal Guarantors are reinsured
by the federal government for from 80% to 100% of each default claim paid,
depending on their claims experience, for loans disbursed prior to October 1,
1993, from 78% to 98% of each default claim paid for loans disbursed on or after
October 1, 1993 and prior to October 1, 1998 and from 75% to 95% of each default
claim paid for loans disbursed on or after October 1, 1998. Federal Guarantors
are reinsured by the federal government for 100% of death, disability,
bankruptcy, closed school and false certification claims paid. Loans guaranteed
under the lender of last resort provisions of the Act are also 100% guaranteed
and reinsured. SEE"--Federal Insurance and Reinsurance of Federal Guarantors"
below.
Federal Guarantors collect a one-time insurance premium ranging up to
1% of the principal amount of each guaranteed loan, depending on the Federal
Guarantor. Federal Guarantors are prohibited from charging insurance premiums on
loans made under the Federal Unsubsidized Stafford Loan program prior to July 1,
1994. On the loans made prior to July 1, 1994, the Act requires that a 6.5%
combined loan origination fee and insurance premium be paid by the borrower on
Federal Unsubsidized Stafford Loans. This fee is passed through to the
Department by the originating lender. Effective July 1, 1994, the maximum
insurance premium and origination fee for Federal Stafford Loans and Federal
Unsubsidized Stafford Loans are 1% and 3%, respectively.
Each Federal Student Loan to be sold to an Eligible Lender Trustee on
behalf of a Trust will be guaranteed as to principal and interest by a Federal
Guarantor pursuant to a Guarantee Agreement between the Federal Guarantor and
the applicable Eligible Lender Trustee. The applicable prospectus supplement for
each Trust will identify each related Federal Guarantor for the Federal Student
Loans held by the Trust as of the applicable Closing Date and the amount of the
Federal Student Loans it is guaranteeing for the Trust.
The 1993 Act granted the Department broad powers over Federal
Guarantors and their reserves. These powers include the authority to require a
Federal Guarantor to return all reserve funds to the Department if the
Department determines the action is necessary to ensure an orderly termination
of the Federal Guarantor, to serve the best interests of the student loan
programs or to ensure the proper maintenance of the Federal Guarantor's funds or
assets. The Department is also now authorized to direct a Federal Guarantor to
return a portion of its reserve funds which the Department determines is
unnecessary to pay the program expenses and contingent liabilities of the
Federal Guarantor and/or to cease any activities involving the use of the
Federal Guarantor's reserve funds or assets which the Department determines is a
misapplication or otherwise improper. The Department may also terminate a
Federal Guarantor's reinsurance agreement if the Department determines that the
action is necessary to protect the federal fiscal interest. These various
changes create a significant risk that the resources available to the Federal
Guarantors to meet their guarantee obligations will be significantly reduced.
FEDERAL INSURANCE AND REINSURANCE OF FEDERAL GUARANTORS. A Federal
Student Loan is considered to be in default for purposes of the Act when the
borrower fails to make an installment payment when due or to comply with other
terms of the loan, and if the failure persists for a period of time as specified
by the Act. Under specified circumstances a loan deemed ineligible for Federal
Reinsurance may be restored to eligibility. Procedures for the restoration of
eligibility are discussed below.
If the loan in default is covered by federal loan insurance in
accordance with the provisions of the Act, the Department is to pay the
applicable Federal Guarantor, as insurance beneficiary, the amount of the loss
sustained thereby, upon notice and determination of the amount, within 90 days
of the notification, subject to reduction as described below.
If the loan is guaranteed by a Federal Guarantor, the eligible lender
is reimbursed by the Federal Guarantor for 100% (or not more than 98% for loans
disbursed on or after October 1, 1993) of the unpaid principal balance of the
defaulted loan plus accrued and unpaid interest thereon so long as the eligible
lender has properly originated and serviced the loan. Under the Act, the
Department enters into a guarantee agreement with each Federal Guarantor, which
provides for federal reinsurance for amounts paid to eligible lenders by the
Federal Guarantor with respect to defaulted loans.
Pursuant to the agreements, the Department also agrees to reimburse a
Federal Guarantor for 100% of the amounts expended in connection with a claim
resulting from the death, bankruptcy, total and permanent disability of a
borrower, ineligible loan, the death of a student whose parent is the borrower
of a Federal PLUS Loan or claims by borrowers who received loans on or after
January 1, 1986 and who are unable to complete the programs in which they are
enrolled due to school closure or borrowers whose borrowing eligibility was
falsely certified by the eligible institution; claims are not included in
calculating a Federal Guarantor's claims rate experience for federal reinsurance
purposes. The Department also agrees to reimburse a Federal Guarantor for 100%
of the amounts expended in connection with claims on loans made under the lender
of last resort provisions. The Department is also required to repay the unpaid
balance of any loan if the borrower files for relief under Chapter 12 or 13 of
the Bankruptcy Code or files for relief under Chapter 7 or 11 of the Bankruptcy
Code and has been in repayment for more than 7 years or commences an action for
a determination of dischargeability under Section 523(a)(8)(b) of the Bankruptcy
Code, and is authorized to acquire the loans of borrowers who are at high risk
of default and who request an alternative repayment option from the Department.
Effective for bankruptcy actions commenced by the borrower on or after October
8, 1998, student loans will not be discharged unless there is an undue hardship
determination made by the bankruptcy court.
The amount of the reinsurance payment to the Federal Guarantor for
default claims is subject to reduction based upon the annual default claims rate
of the Federal Guarantor, calculated to equal the amount of federal reinsurance
claims paid by the Department to the Federal Guarantor during any fiscal year as
a percentage of the original principal amount of guaranteed loans in repayment
at the end of the prior federal fiscal year. The formula is summarized as
follows:
Reimbursement to Federal Guarantor by
Claims Rate of Federal Guarantor the Department of Education(1)
--------------------------------------- -------------------------------------
0% to and including 5%................. 100%
Greater than 5% to and including 9%.... 100% of claims to and including 5%;
90% of claims greater than 5%
Greater than 9%........................ 100% of claims to and including 5%;
90% of claims greater than 5% to and
including 9%; and 80% of claims
greater than 9%
---------------
(1) The federal reimbursement has been reduced to 98%, 88% and 78% for
loans disbursed on or after October 1, 1993 and prior to October 1,
1998 and 95%, 85% and 75% for loans disbursed on or after October 1,
1998.
The claims experience is not accumulated from year to year, but is
determined solely on the basis of claims in any one federal fiscal year compared
with the original principal balance of loans in repayment at the beginning of
that year.
The 1992 Amendments addressed education loan industry concerns
regarding the Department's commitment to providing support in the event of
Federal Guarantor failures. Pursuant to the 1992 Amendments, Federal Guarantors
are required to maintain specified reserve fund levels. The levels are defined
as 0.5% of the total attributable amount of all outstanding loans guaranteed by
the Federal Guarantor for the fiscal year of the Federal Guarantor that begins
in 1993, 0.7% for the Federal Guarantor's fiscal year beginning in 1994, 0.9%
for the Federal Guarantor's fiscal year beginning in 1995, and 1.1% for the
Federal Guarantor's fiscal year beginning on or after January 1, 1996. If the
Federal Guarantor fails to achieve the minimum reserve level in any two
consecutive years, if the Federal Guarantor's federal annual claims rate equals
or exceeds 9% or if the Department determines the Federal Guarantor's
administrative or financial condition jeopardizes its continued ability to
perform its responsibilities, the Department may require the Federal Guarantor
to submit and implement a management plan to address the deficiencies. The
Department may terminate the Federal Guarantor's agreements with the Department
if the Guarantor fails to submit the required plan, or fails to improve its
administrative or financial condition substantially, or if the Department
determines the Federal Guarantor is in danger of financial collapse. In this
event, the Department is required to assume responsibility for the functions of
the Federal Guarantor and in connection therewith is authorized to undertake
specified actions to assure the continued payment of claims, including maturity
advances to Federal Guarantors to cover immediate cash needs, transferring of
guarantees to another Federal Guarantor, or transfer of guarantees to the
Department itself. No assurance can be made that the Department will under any
given circumstance exercise its right to terminate a reimbursement agreement
with a Federal Guarantor or make a determination that the Federal Guarantor is
unable to meet its guarantee obligations.
The Act requires that, subject to compliance with the Act, the
Secretary must pay all amounts, which may be required to be paid under the Act
as a result of specified events of death, disability, bankruptcy, school closure
or false certification by the educational institution described in the Act. It
further provides that Federal Guarantors shall be deemed to have a contractual
right against the United States of America to receive reinsurance in accordance
with its provisions. In addition, the 1992 Amendments provide that if the
Department determines that a Federal Guarantor is unable to meet its insurance
obligations, holders of loans may submit insurance claims directly to the
Department until the obligations are transferred to a new Federal Guarantor
capable of meeting the obligations or until a successor Federal Guarantor
assumes the obligations. No assurance can be made that the Department would
under any given circumstances assume the obligation to assure satisfaction of a
guarantee obligation by exercising its right to terminate a reimbursement
agreement with a Federal Guarantor or by making a determination that the Federal
Guarantor is unable to meet its guarantee obligations.
PRIVATE GUARANTORS. Private Student Loans are not entitled to any
federal reinsurance or assistance from the Department or any other governmental
entity. Although each Private Guarantor maintains a loan loss reserve intended
to absorb losses arising from its guarantee commitments, there can be no
assurance that the amount of such reserve will be sufficient to cover the
obligations of such Private Guarantor over the term of the related Private
Student Loans.
ORIGINATION AND MARKETING PROCESS
The Act specifies rules regarding loan origination practices, which
lenders must comply with in order for their Federal Student Loans to be
guaranteed and to be eligible to receive Federal Assistance. Lenders of Federal
Student Loans are prohibited from offering points, premiums, payments or other
inducements, directly or indirectly, to any educational institution, guarantor
or individual in order to secure Federal Student Loan applications, and no
lender may conduct unsolicited mailings of Federal Student Loan applications to
students who have not previously received student loans from that lender.
Generally the student and school complete the combined application with
promissory note and mail or electronically transmit it either to a lender or
directly to the applicable Guarantor, if applicable. Both the lender and the
Guarantor, if applicable must approve the application, including confirming that
the application is complete and that it (as well as the prospective borrower and
institution) complies with all applicable requirements of the Act and the
requirements of the Guarantor, if applicable. The Act requires that each Federal
Guarantor have procedures designed to assure that it guarantees Federal Student
Loans only to students attending institutions which meet the requirements of the
Act. Certain lenders establish maximum default rates for institutions whose
students they will serve. For each application that is approved, the applicable
Guarantor, if applicable, will issue a guarantee certificate to the lender,
which will then cause the loan to be disbursed (typically in multiple
installments) and a disclosure statement confirming the terms of the Student
Loan to be sent to the student borrower. These procedures differ slightly for
Federal Consolidation Loans.
The origination procedures for any Private Student Loans included in a
Trust will be set forth in the related prospectus supplement.
SERVICING AND COLLECTIONS PROCESS
The applicable Guarantee Agreements and the Act require the holder of
Federal Student Loans to cause specified procedures, including due diligence
procedures and the taking of specific steps at specific intervals, to be
performed with respect to the servicing of the Federal Student Loans. These
procedures are designed to ensure that the Federal Student Loans are repaid on a
timely basis by or on behalf of borrowers. The Servicer agrees to perform the
servicing and collection procedures with respect to the Federal Student Loans on
behalf of each Trust pursuant to the related Loan Servicing Agreement between
the Servicer and the Eligible Lender Trustee (the "Loan Servicing Agreement").
The procedures generally include periodic attempts to contact any delinquent
borrower by telephone and by mail, commencing with one written notice within the
first ten days of delinquency and including multiple written notices and
telephone calls to the borrower thereafter at specified times during any
delinquency. All telephone calls and letters are automatically registered, and a
synopsis of each call or the mailing of each letter is noted in the Servicer's
loan file for the borrower. The Servicer is also required to perform skip
tracing procedures on delinquent borrowers whose current location is unknown,
including contacting the borrowers' schools and references. Failure to comply
with the established procedures could adversely affect the ability of a given
Eligible Lender Trustee, as holder of legal title to the Federal Student Loans
on behalf of the related Trust, to realize the benefits of any Guarantee
Agreement or to receive the benefits of Federal Assistance from the Department
with respect thereto. Failure to comply with established procedures with respect
to a Federal Student Loan may also result in the denial of coverage under a
Guarantee Agreement for specified accrued interest amounts, in circumstances
where the failure has not caused the loss of the guarantee of the principal of
the Federal Student Loan. SEE "Risk Factors--Risk that Failure to Comply with
Student Loan Origination and Servicing Procedures for Federal Student Loans May
Adversely Affect the Trust's Ability to Pay Principal and Interest on the
Related Notes and Certificates".
At prescribed times prior to submitting a claim for payment under a
Guarantee Agreement for a delinquent Federal Student Loan, the Servicer
generally is required to notify the applicable Guarantor of the existence of the
delinquency. These notices advise the Guarantor of seriously delinquent accounts
and allow the Guarantor to make additional attempts to collect on the loans
prior to the filing of claims. Any Federal Student Loan which is delinquent
beyond a specified number of days is considered to be in default, after which
the Servicer will submit a claim for reimbursement therefor to the applicable
Guarantor. Failure to file a claim within specified times of delinquency may
result in denial of the guarantee claim with respect to the Federal Student
Loan. The Servicer's failure to file a guarantee claim in a timely fashion would
constitute a breach of its covenants and, unless otherwise specified in the
prospectus supplement for a given series of Securities, would, if as a result of
the failure the related guaranty payment is no longer available to the related
Trust, create an obligation of the Servicer to arrange for the purchase of the
applicable Federal Student Loan from the applicable Eligible Lender Trustee on
behalf of the related Trust. The obligation of the Servicer to arrange for a
purchase will constitute the sole remedy available to Securityholders or the
Eligible Lender Trustee for a failure by the Servicer. SEE "Description of the
Transfer and Servicing Agreements--Servicer Covenants".
CLAIMS AND RECOVERY RATES
Certain historical information concerning guarantee claims and recovery
rates of the Guarantors for the Student Loans held by the related Trust as of
the applicable closing date specified in the related prospectus supplement (the
"Closing Date") with respect to each series of Securities will be set forth in
each prospectus supplement. There can be no assurance that the claim and
recovery experience on any pool of Student Loans with respect to a given Trust
will be comparable to prior experience or to any information set forth in each
prospectus supplement.
WEIGHTED AVERAGE LIVES OF THE SECURITIES
The weighted average lives of the Notes and the Certificates of any
series will generally be influenced by the rate at which the principal balances
of the related Student Loans are paid, which payment may be in the form of
scheduled amortization or prepayments. (For this purpose, the term "prepayments"
includes prepayments in full or in part (including pursuant to Federal
Consolidation Loans), as a result of:
o borrower default, death, disability or bankruptcy,
o a closing of or a false certification by the borrower's school and
o subsequent liquidation of the loans or collection of Guarantee
Payments with respect thereto and as a result of Student Loans
being repurchased by the Seller or the Servicer for administrative
reasons.)
Except as otherwise set forth in your prospectus supplement, all of the Student
Loans are prepayable at any time without penalty to the borrower. The rate of
prepayment of Student Loans is influenced by a variety of economic, social and
other factors, including as described below and in the applicable prospectus
supplement. In general, the rate of prepayments may tend to increase to the
extent that alternative financing becomes available at prevailing interest rates
which fall significantly below the interest rates applicable to the Student
Loans. However, because many of the Student Loans bear interest that either
actually or effectively is floating, it is impossible to predict whether changes
in prevailing interest rates will be similar to or will vary from changes in the
interest rates on the Student Loans. In addition, under specified circumstances,
the Seller or the Servicer will be obligated to repurchase or arrange for the
repurchase of Student Loans from a given Trust pursuant to the related Loan Sale
Agreement or Loan Servicing Agreement, as applicable, as a result of breaches of
applicable representations and warranties or covenants. SEE "Description of the
Transfer and Servicing Agreements--Sale of Student Loans; Representations and
Warranties" and"--Servicer Covenants". SEE ALSO "Description of the Transfer and
Servicing Agreements--Termination--Optional Redemption" regarding the Servicer's
option to purchase the Student Loans from a given Trust and "Insolvency Event"
regarding the sale of the Student Loans if an Insolvency Event with respect to
the Company occurs. Also, in the case of a Trust having a Funding Period or
Revolving Period, the addition of Student Loans to the Trust during the period
could affect the weighted average lives of the Securities of the related series.
SEE "Description of the Transfer and Servicing Agreements--Additional Fundings".
On the other hand, scheduled payments with respect to, and maturities
of, the Student Loans may be extended, including pursuant to applicable grace,
deferral and forbearance periods. The rate of payment of principal of the Notes
and the Certificates and the yield on the Notes and the Certificates may also be
affected by the rate of defaults resulting in losses on Student Loans, by the
severity of those losses and by the timing of those losses, which may affect the
ability of the Guarantors to make Guarantee Payments with respect thereto.
In light of the above considerations, there can be no assurance as to
the amount of principal payments to be made on the Notes or the Certificates of
a given series on each Distribution Date, since the amount will depend, in part,
on the amount of principal collected on the related pool of Student Loans during
the applicable Collection Period. Any reinvestment risks resulting from a faster
or slower incidence of prepayment of Student Loans will be borne entirely by the
Noteholders and the Certificateholders of a given series. The related prospectus
supplement may set forth additional information with respect to the maturity and
prepayment considerations applicable to the particular pool of Student Loans and
the related series of Securities.
POOL FACTORS AND TRADING INFORMATION
Each of the "Note Pool Factor" for each class of Notes and the
"Certificate Pool Factor" for each class of Certificates (each, a "Pool Factor")
will be a seven-digit decimal which the Servicer will compute prior to each
Distribution Date indicating the remaining outstanding principal amount of the
class of Notes or the remaining principal balance for the class of Certificates
(the "Certificate Balance"), respectively, as of that Distribution Date (after
giving effect to distributions to be made on the Distribution Date), as a
fraction of the initial outstanding principal amount of the class of the Notes
or the initial Certificate Balance for the class of Certificates, respectively.
Each Pool Factor will be 1.0000000 as of the Closing Date, and thereafter will
decline to reflect reductions in the outstanding principal amount of the
applicable class of Notes or reductions of the Certificate Balance of the
applicable class of Certificates, as applicable. A Securityholder's portion of
the aggregate outstanding principal amount of the related class of Notes or of
the aggregate outstanding Certificate Balance for the related class of
Certificates, as applicable, is the product of (1) the original denomination of
that Securityholder's Note or Certificate and (2) the applicable Pool Factor.
If so provided in the related prospectus supplement with respect to a
Trust, the Securityholders will receive reports on or about each Distribution
Date concerning the payments received on the Student Loans, the Pool Balance (as
the term is defined in the related prospectus supplement, the "Pool Balance"),
the applicable Pool Factor and various other items of information.
Securityholders of record during any calendar year will be furnished information
for tax reporting purposes not later than the latest date permitted by law. SEE
"Certain Information Regarding the Securities--Reports to Securityholders".
DESCRIPTION OF THE NOTES
With respect to each Trust, one or more classes of notes (the "Notes")
of a given series will be issued pursuant to the terms of an indenture (an
"Indenture") between the Trust and the trustee specified in the related
prospectus supplement (an "Indenture Trustee"), a form of which has been filed
as an exhibit to the Registration Statement of which this Prospectus is a part.
The following summary describes terms of the Notes and the Indenture. The
summary does not purport to be complete and is qualified in its entirety by
reference to all the provisions of the Notes and the Indenture.
Unless otherwise specified in the related prospectus supplement, each
class of Notes will initially be represented by one or more Notes, in each case
registered in the name of the nominee of DTC (together with any successor
depository selected by the Administrator, the "Depositary") except as set forth
below. Unless otherwise specified in the related prospectus supplement, the
Notes will be available for purchase in denominations of $1,000 and integral
multiples thereof in book-entry form only. The Depositor has been informed by
DTC that DTC's Nominee will be Cede, unless another nominee is specified in the
related prospectus supplement. Accordingly, the nominee is expected to be the
holder of record of the Notes of each class. Unless and until Definitive Notes
(as defined below) are issued under the limited circumstances described in this
prospectus or in the related prospectus supplement, no Noteholder will be
entitled to receive a physical certificate representing a Note. All references
in this prospectus and in the related prospectus supplement to actions by
Noteholders of Notes held in book-entry form refer to actions taken by DTC upon
instructions from its participating organizations (the "Participants") and all
references in this prospectus to distributions, notices, reports and statements
to Noteholders refer to distributions, notices, reports and statements to DTC or
its nominee, as the case may be, as the registered holder of the Notes for
distribution to Noteholders in accordance with DTC's procedures with respect
thereto. SEE "Certain Information Regarding the Securities--Book-Entry
Registration" and"--Definitive Securities".
PRINCIPAL OF AND INTEREST ON THE NOTES
The timing and priority of payment, seniority, allocations of losses,
interest at a per annum interest rate (the "Interest Rate") and amount of or
method of determining payments of principal and interest on each class of Notes
of a given series will be described in the related prospectus supplement. The
right of holders of any class of Notes to receive payments of principal and
interest may be senior or subordinate to the rights of holders of any other
class or classes of Notes of the series, as described in the related prospectus
supplement. Unless otherwise provided in the related prospectus supplement,
payments of interest on the Notes of the series will be made prior to payments
of principal thereon. Each class of Notes may have a different Interest Rate,
which may be a fixed, variable or adjustable Interest Rate or any combination of
the foregoing. The related prospectus supplement will specify the Interest Rate
for each class of Notes of a given series or the method for determining the
Interest Rate. SEE ALSO "Certain Information Regarding the Securities--Fixed
Rate Securities" and "Floating Rate Securities". One or more classes of the
Notes of a series may be redeemable in whole or in part under the circumstances
specified in the related prospectus supplement, including as a result of the
exercise by the Seller, or another party named in the related prospectus
supplement, of its option to purchase the related Student Loans.
Unless otherwise specified in the related prospectus supplement,
Noteholders of all classes within a series will have the same priority with
respect to payments of interest. The amount available for the payments could be
less than the amount of interest payable on the Notes on any of the dates
specified for payments in the related prospectus supplement (each, a
"Distribution Date"), in which case each class of Noteholders will receive its
ratable share (based upon the aggregate amount of interest due to the class of
Noteholders) of the aggregate amount available to be distributed in respect of
interest on the Notes of the series. SEE "Description of the Transfer and
Servicing Agreements-Distributions" and "Credit and Cash Flow Enhancement".
In the case of a series of Notes which includes two or more classes of
Notes, the sequential order and priority of payment in respect of principal and
interest, and any schedule or formula or other provisions applicable to the
determination thereof, of each class will be set forth in the related prospectus
supplement. Payments in respect of principal and interest of any class of Notes
will be made on a pro rata basis among all the Noteholders of the class.
In the case of a series of Notes relating to a Trust having a
Pre-Funding Account or Collateral Reinvestment Account, the Notes of the series
will be redeemed in part on the Distribution Date on or immediately following
the last day of the related Funding Period or Revolving Period, respectively, in
the event that any amount remains on deposit in the applicable account after
giving effect to all Additional Fundings on or prior to the date, in an
aggregate principal amount described in the related prospectus supplement.
SEE "Description of the Transfer and Servicing Agreements-Credit and
Cash Flow Enhancement-RESERVE ACCOUNT" for a description of the Reserve Account
and the distribution of amounts in excess of the Specified Reserve Account
Balance (as defined in the related prospectus supplement).
If specified in the related prospectus supplement, the Trust may issue
securities from time to time and use the proceeds of this issuance to make
principal payments with respect to your Notes or Certificates.
THE INDENTURE
MODIFICATION OF INDENTURE. WITH RESPECT TO EACH TRUST, WITH THE CONSENT
OF THE HOLDERS OF A MAJORITY OF THE OUTSTANDING NOTES OF THE RELATED SERIES, THE
INDENTURE TRUSTEE AND THE TRUST MAY EXECUTE A SUPPLEMENTAL INDENTURE TO ADD
PROVISIONS TO, OR CHANGE IN ANY MANNER OR ELIMINATE ANY PROVISIONS OF, THE
INDENTURE WITH RESPECT TO THE NOTES, OR TO MODIFY (EXCEPT AS PROVIDED BELOW) IN
ANY MANNER THE RIGHTS OF THE RELATED NOTEHOLDERS.
Unless otherwise specified in the related prospectus supplement with
respect to a series of Notes, however, without the consent of the holder of each
outstanding Note affected thereby, no supplemental indenture will:
o change the due date of any installment of principal of or interest
on any Note or reduce the principal amount thereof, the interest
rate specified thereon or the redemption price with respect
thereto or change any place of payment where or the coin or
currency in which any Note or any interest thereon is payable,
o impair the right to institute suit for the enforcement of
provisions of the related Indenture regarding payment,
o reduce the percentage of the aggregate amount of the outstanding
Notes of the series, the consent of the holders of which is
required for any supplemental indenture or the consent of the
holders of which is required for any waiver of compliance with
provisions of the related Indenture or of defaults thereunder and
their consequences as provided for in the Indenture,
o modify or alter the provisions of the related Indenture regarding
the voting of Notes held by the applicable Trust, the Seller or
the Depositor, an affiliate of either of them or any obligor on
the Notes,
o reduce the percentage of the aggregate outstanding amount of the
Notes, the consent of the holders of which is required to direct
the related Eligible Lender Trustee on behalf of the applicable
Trust to sell or liquidate the Student Loans if the proceeds of
the sale would be insufficient to pay the principal amount and
accrued but unpaid interest on the outstanding Notes of the
series,
o decrease the percentage of the aggregate principal amount of the
Notes required to amend the sections of the related Indenture
which specify the applicable percentage of aggregate principal
amount of the Notes necessary to amend the related Indenture or
other related agreements, or
o permit the creation of any lien ranking prior to or on a parity
with the lien of the related Indenture with respect to any of the
collateral for the Notes of the series or, except as otherwise
permitted or contemplated in the Indenture, terminate the lien of
the Indenture on any collateral or deprive the holder of any Note
of the security afforded by the lien of the Indenture.
Unless otherwise specified in the applicable prospectus supplement, the
applicable Trust and the related Indenture Trustee may also enter into
supplemental indentures without obtaining the consent of Noteholders of the
series, for the purpose of adding any provisions to or changing in any manner or
eliminating any of the provisions of the related Indenture or of modifying in
any manner the rights of Noteholders of the series so long as the action will
not, in the opinion of counsel satisfactory to the applicable Indenture Trustee,
materially and adversely affect the interest of any Noteholder of the series.
EVENTS OF DEFAULT; RIGHTS UPON EVENT OF DEFAULT. With respect to the
Notes of a given series, unless otherwise specified in the related prospectus
supplement, an "Event of Default" under the related Indenture will consist of
the following:
(1) a default for five days or more in the payment of any interest on
any Note after the same becomes due and payable;
(2) a default in the payment of the principal of or any installment of
the principal of any Note when the same becomes due and payable;
(3) a default in the observance or performance of any covenant or
agreement of the applicable Trust made in the related Indenture
and the continuation of any default for a period of 30 days after
notice thereof is given to the applicable Trust by the applicable
Indenture Trustee or to the applicable Trust and the applicable
Indenture Trustee by the holders of at least 25% in principal
amount of the Notes then outstanding; provided, however, that if
the Trust demonstrates that it is making a good faith attempt to
cure the default, the 30-day period may be extended by the
Indenture Trustee to 90 days;
(4) any representation or warranty made by the applicable Trust in the
related Indenture or in any certificate delivered pursuant thereto
or in connection therewith having been incorrect in a material
respect as of the time made, and the breach is not cured within 30
days after notice thereof is given to the Trust by the applicable
Indenture Trustee or to the Trust and the applicable Indenture
Trustee by the holders of at least 25% in principal amount of the
Notes of the series then outstanding; provided, however, that if
the Trust demonstrates that it is making a good faith attempt to
cure the breach, the 30-day period may be extended by the
Indenture Trustee to 90 days, or
(5) events of bankruptcy, insolvency, receivership or liquidation of
the Trust. However, the amount of principal required to be
distributed to Noteholders of the series under the related
Indenture on any Distribution Date will generally be limited to
amounts available after payment of all prior obligations of the
Trust.
Therefore, unless otherwise specified in the related prospectus supplement, the
failure to pay principal on a class of Notes generally will not result in the
occurrence of an Event of Default until the final scheduled Distribution Date
for the class of Notes. If, with respect to any series of Notes, interest is
paid at a variable rate based on an index, the related prospectus supplement may
provide that, in the event that, for any Distribution Date, the Interest Rate as
calculated based on the index is less than an alternate rate calculated for the
Distribution Date based on interest collections on the Student Loans (the amount
of the difference, the "Index Shortfall Carryover"), the Interest Rate for the
Distribution Date shall be the alternate rate and the Interest Shortfall
Carryover shall be payable as described in the prospectus supplement. Unless
otherwise provided in the prospectus supplement, payment of the Index Shortfall
Carryover shall be lower in priority than payment of interest on the Notes at
the Interest Rate (whether the Interest Rate is based on the index or the
alternate rate) and, accordingly, the nonpayment of the Interest Shortfall
Carryover on any Distribution Date shall not generally constitute a default in
the payment of interest on the Notes.
If an Event of Default should occur and be continuing with respect to
the Notes of any series, the related Indenture Trustee or holders of a majority
in principal amount of the Notes then outstanding may declare the principal of
the Notes to be immediately due and payable. Unless otherwise specified in the
related prospectus supplement, the declaration may be rescinded by the holders
of a majority in principal amount of the Notes then outstanding if (1) the
Eligible Lender Trustee on behalf of the related Trust has paid or deposited
with the Indenture Trustee a sum sufficient to pay (A) all payments of principal
of and interest on all Notes and all other amounts that would then be due under
the related Indenture or upon the Notes if the Event of Default giving rise to
the acceleration had not occurred, and (B) all sums paid or advanced by the
Indenture Trustee under the related Indenture and the reasonable compensation,
expenses, disbursements and advances of the Indenture Trustee and its agents and
counsel, and (2) all Events of Default, other than the nonpayment of the
principal of the Notes that has become due solely by the acceleration, have been
cured or, under the circumstances described below, waived.
If the Notes of any series have been declared to be due and payable
following an Event of Default with respect thereto, the related Indenture
Trustee may, in its discretion, exercise remedies as a secured party, require
the related Eligible Lender Trustee to sell the Student Loans or elect to have
the related Eligible Lender Trustee maintain possession of the Student Loans and
continue to apply collections with respect to the Student Loans as if there had
been no declaration of acceleration. Unless otherwise specified in the related
prospectus supplement, however, the related Indenture Trustee is prohibited from
directing the related Eligible Lender Trustee to sell the Student Loans
following an Event of Default, other than a default in the payment of any
principal or a default for five days or more in the payment of any interest on
any Note with respect to any series, unless
o the holders of all the outstanding Notes consent to the sale,
o the proceeds of the sale are sufficient to pay in full the
principal of and the accrued interest on the outstanding Notes at
the date of the sale, or
o the related Indenture Trustee determines that the collections on
the Student Loans would not be sufficient on an ongoing basis to
make all payments on the Notes as the payments would have become
due if the obligations had not been declared due and payable, and
the related Indenture Trustee obtains the consent of the holders
of 662/3% of the aggregate principal amount of the Notes then
outstanding.
Subject to the provisions of the applicable Indenture relating to the
duties of the related Indenture Trustee, if an Event of Default should occur and
be continuing with respect to a series of Notes, the related Indenture Trustee
will be under no obligation to exercise any of the rights or powers under the
applicable Indenture at the request or direction of any of the holders of the
Notes, if the Indenture Trustee reasonably believes it will not be adequately
indemnified against the costs, expenses and liabilities which might be incurred
by it in complying with the request. Subject to the provisions for
indemnification and other limitations contained in the related Indenture, the
holders of a majority in principal amount of the outstanding Notes of a given
series will have the right to direct the time, method and place of conducting
any proceeding or any remedy available to the Indenture Trustee and the holders
of a majority in principal amount of the Notes then outstanding may, in
specified cases, waive any default with respect thereto, except a default in the
payment of principal or interest or a default in respect of a covenant or
provision of the applicable Indenture that cannot be modified without the waiver
or consent of all the holders of the outstanding Notes.
Unless otherwise specified in the related prospectus supplement, no
holder of Notes of any series will have the right to institute any proceeding
with respect to the related Indenture, unless:
o the holder previously has given to the applicable Indenture
Trustee written notice of a continuing Event of Default,
o the holders of not less than 25% in principal amount of the
outstanding Notes have requested in writing that the Indenture
Trustee institute the proceeding in its own name as Indenture
Trustee,
o the holder or holders have offered the Indenture Trustee
reasonable indemnity,
o the Indenture Trustee has for 60 days failed to institute the
proceeding, and
o no direction inconsistent with the written request has been given
to the Indenture Trustee during the 60-day period by the holders
of a majority in principal amount of the outstanding Notes.
In addition, each Indenture Trustee and the related Noteholders will
covenant that they will not at any time institute against the applicable Trust
any bankruptcy, reorganization or other proceeding under any federal or state
bankruptcy or similar law.
With respect to any Trust, none of the related Indenture Trustee, the
Seller, the Depositor, the Administrator, the Servicer or the Eligible Lender
Trustee in its individual capacity, or any holder of a Certificate representing
an ownership interest in the applicable Trust, or any of their respective
owners, beneficiaries, agents, officers, directors, employees, successors or
assigns will, in the absence of an express agreement to the contrary, be
personally liable for the payment of the principal of or interest on the Notes
or for the agreements of the Trust contained in the Indenture.
CERTAIN COVENANTS. Each Indenture will provide that the related Trust
may not consolidate with or merge into any other entity, unless
o the entity formed by or surviving the consolidation or merger is
organized under the laws of the United States of America, any
state thereof or the District of Columbia,
o the entity expressly assumes the Trust's obligation to make due
and punctual payments upon the Notes of the related series and the
performance or observance of every agreement and covenant of the
Trust under the related Indenture,
o no Event of Default shall have occurred and be continuing
immediately after the merger or consolidation,
o the Trust has been advised that the ratings of the Notes and the
Certificates of the related series would not be reduced or
withdrawn by the Rating Agencies as a result of the merger or
consolidation, and
O the Trust has received an opinion of counsel to the effect that
the consolidation or merger would have no material adverse federal
or Indiana state tax consequence to the Trust or to any
Certificateholder or Noteholder of the related series.
Each Trust will not, among other things,
o except as expressly permitted by the applicable Indenture, the
applicable Transfer and Servicing Agreements or related documents
(collectively, the "Related Documents"), sell, transfer, exchange
or otherwise dispose of any of the assets of the Trust,
o claim any credit on or make any deduction from the principal and
interest payable in respect of the Notes of the related series
(other than amounts withheld under the Code or applicable state
law) or assert any claim against any present or former holder of
the Notes because of the payment of taxes levied or assessed upon
the Trust,
o except as contemplated by the Related Documents, dissolve or
liquidate in whole or in part,
o permit the validity or effectiveness of the applicable Indenture
to be impaired or permit any person to be released from any
covenants or obligations with respect to the Notes under the
applicable Indenture except as may be expressly permitted thereby,
or
o permit any lien, charge, excise, claim, security interest,
mortgage or other encumbrance to be created on or extend to or
otherwise arise upon or burden the assets of the Trust or any part
thereof, or any interest in the Trust or the proceeds thereof,
except as expressly permitted by the Related Documents.
No Trust may engage in any activity other than as specified under the
section of the related prospectus supplement entitled "Formation of the Trust".
No Trust will incur, assume or guarantee any indebtedness other than
indebtedness incurred pursuant to the Notes of the related series and the
applicable Indenture or otherwise in accordance with the Related Documents.
ANNUAL COMPLIANCE STATEMENT. Each Trust will be required to file
annually with the applicable Indenture Trustee a written statement as to the
fulfillment of its obligations under the related Indenture.
INDENTURE TRUSTEE'S ANNUAL REPORT. Each Indenture Trustee will be
required to mail each year to all related Noteholders a brief report relating
to, among other things, its eligibility and qualification to continue as the
Indenture Trustee under the applicable Indenture, any amounts advanced by it
under the Indenture, the amount, interest rate and maturity date of indebtedness
owing by the Trust to the applicable Indenture Trustee in its individual
capacity, the property and funds physically held by the applicable Indenture
Trustee and any action taken by it that materially affects the related Notes and
that has not been previously reported.
SATISFACTION AND DISCHARGE OF INDENTURE. An Indenture will be
discharged with respect to the collateral securing the related Notes upon the
delivery to the related Indenture Trustee for cancellation of all the Notes or,
with limitations, upon deposit with the Indenture Trustee of funds sufficient
for the payment in full of all the Notes.
THE INDENTURE TRUSTEE. The Indenture Trustee for a series of Notes will
be specified in the related prospectus supplement. The Indenture Trustee for any
series may resign at any time, in which event the Issuer will be obligated to
appoint a successor trustee for the series. The Issuer may also remove any
Indenture Trustee if the Indenture Trustee ceases to be eligible to continue
under the related Indenture or if the Indenture Trustee becomes insolvent. In
these circumstances, the Issuer will be obligated to appoint a successor trustee
for the applicable series of Notes. Any resignation or removal of the Indenture
Trustee and appointment of a successor trustee for any series of Notes does not
become effective until acceptance of the appointment by the successor trustee
for the series. In addition, the Administrator for any series may remove the
related Indenture Trustee at any time.
DESCRIPTION OF THE CERTIFICATES
With respect to each Trust, one or more classes of certificates (the
"Certificates" and together with the Notes, the "Securities") of a given series
will, unless otherwise specified in the related prospectus supplement, be issued
pursuant to the terms of a Trust Agreement, a form of which has been filed as an
exhibit to the Registration Statement of which this Prospectus is a part. The
following summary describes terms of the Certificates and the Trust Agreement.
The summary does not purport to be complete and is qualified in its entirety by
reference to all the provisions of the Certificates and the Trust Agreement.
Unless otherwise specified in the related prospectus supplement, each
class of Certificates will initially be represented by a single Certificate
registered in the name of the Depository, except as set forth below. Unless
otherwise specified in the related prospectus supplement and except for the
Certificates of a given series purchased by the Depositor or the Seller or an
affiliate specified in the related prospectus supplement (the "Company"), the
Certificates will be available for purchase in minimum denominations of $1,000
and integral multiples of $1,000 in excess thereof in book-entry form only. The
Depositor has been informed by DTC that DTC's Nominee will be Cede, unless
another nominee is specified in the related prospectus supplement. Accordingly,
the nominee is expected to be the holder of record of the Certificates of any
series that are not purchased by the applicable Company. Unless and until
Definitive Certificates (as defined below) are issued under the limited
circumstances described in this prospectus or in the related prospectus
supplement, no Certificateholder (other than the applicable Company) will be
entitled to receive a physical certificate representing a Certificate. All
references in this prospectus and in the related prospectus supplement to
actions by Certificateholders (other than the applicable Company) refer to
actions taken by DTC upon instructions from the Participants and all references
in this prospectus and in the related prospectus supplement to distributions,
notices, reports and statements to Certificateholders (other than the applicable
Company) refer to distributions, notices, reports and statements to DTC or its
nominee, as the case may be, as the registered holder of the Certificates, for
distribution to Certificateholders in accordance with DTC's procedures with
respect thereto. SEE "Certain Information Regarding the Securities--Book-Entry
Registration" and"--Definitive Securities". Unless otherwise specified in the
related prospectus supplement, Certificates of a given series owned by the
Seller, the Depositor or either's affiliates will be entitled to equal and
proportionate benefits under the applicable Trust Agreement, except that,
assuming that all Certificates of a given series are not all owned by the
Seller, the Depositor or either's affiliates, the Certificates owned by the
Seller, the Depositor or either's affiliates will be deemed not to be
outstanding for the purpose of determining whether the requisite percentage of
Certificateholders has given any request, demand, authorization, direction,
notice, consent or other action under the Related Documents (other than the
commencement by the related Trust of a voluntary proceeding in bankruptcy as
described under "Description of the Transfer and Servicing
Agreements--Insolvency Event").
PRINCIPAL AND INTEREST IN RESPECT OF THE CERTIFICATES
The timing and priority of distributions, seniority, allocations of
losses, interest at a per annum interest rate (the "Pass-Through Rate") and
amount of or method of determining distributions with respect to principal and
interest of each class of Certificates of a given series will be described in
the related prospectus supplement. Distributions of interest on the Certificates
will be made on each Distribution Date and will be made prior to distributions
with respect to principal of the Certificates. Each class of Certificates may
have a different Pass-Through Rate, which may be a fixed, variable or adjustable
Pass-Through Rate or any combination of the foregoing. The related prospectus
supplement will specify the Pass-Through Rate for each class of Certificates of
a given series or the method for determining the Pass-Through Rate. SEE ALSO
"Certain Information Regarding the Securities--Fixed Rate Securities" and
"Floating Rate Securities". Unless otherwise provided in the related prospectus
supplement, distributions in respect of the Certificates of a given series may
be subordinate to payments in respect of the Notes of the series as more fully
described in the related prospectus supplement. Distributions in respect of
interest on and principal of any class of Certificates will be made on a pro
rata basis among all the Certificateholders of the class.
In the case of a series of Certificates which includes two or more
classes of Certificates, the timing, sequential order, priority of payment or
amount of distributions in respect of interest and principal, and any schedule
or formula or other provisions applicable to the determination thereof, of each
class shall be as set forth in the related prospectus supplement.
SEE "Description of the Transfer and Servicing Agreements--Credit and
Cash Flow Enhancement--RESERVE ACCOUNT" for a description of the Reserve Account
and the distribution of amounts in excess of the Specified Reserve Account
Balance (as defined in the related prospectus supplement).
CERTAIN INFORMATION REGARDING THE SECURITIES
FIXED RATE SECURITIES
Each class of Securities may bear interest at a fixed rate per annum
("Fixed Rate Securities") or at a variable or adjustable rate per annum
("Floating Rate Securities"), as more fully described below and in the
applicable prospectus supplement. Each class of Fixed Rate Securities will bear
interest at the applicable per annum Interest Rate or Pass-Through Rate, as the
case may be, specified in the applicable prospectus supplement. Unless otherwise
set forth in the applicable prospectus supplement, interest on each class of
Fixed Rate Securities will be computed on the basis of a 360-day year of twelve
30-day months. See "Description of the Notes--Principal of and Interest on the
Notes" and "Description of the Certificates--Principal and Interest in Respect
of the Certificates".
FLOATING RATE SECURITIES
Each class of Floating Rate Securities will bear interest for each
applicable Interest Reset Period (as the term is defined in the related
prospectus supplement with respect to a class of Floating Rate Securities,
"Interest Reset Period") at a rate per annum determined by reference to an
interest rate basis (the "Base Rate"), plus or minus the Spread, if any, or
multiplied by the Spread Multiplier, if any, in each case as specified in the
related prospectus supplement. The "Spread" is the number of basis points (one
basis point equals one one-hundredth of a percentage point) that may be
specified in the applicable prospectus supplement as being applicable to the
class, and the "Spread Multiplier" is the percentage that may be specified in
the applicable prospectus supplement as being applicable to the class.
The applicable prospectus supplement will designate a Base Rate for a
given Floating Rate Security based on LIBOR, commercial paper rates, Federal
funds rates, U.S. Government treasury securities rates, negotiable certificates
of deposit rates or another rate or rates as set forth in the prospectus
supplement.
As specified in the applicable prospectus supplement, Floating Rate
Securities of a given class may also have either or both of the following (in
each case expressed as a rate per annum): (1) a maximum limitation, or ceiling,
on the rate at which interest may accrue during any interest period and (2) a
minimum limitation, or floor, on the rate at which interest may accrue during
any interest period. In addition to any maximum interest rate that may be
applicable to any class of Floating Rate Securities, the interest rate
applicable to any class of Floating Rate Securities will in no event be higher
than the maximum rate permitted by applicable law, as the same may be modified
by United States law of general application.
Each Trust with respect to which a class of Floating Rate Securities
will be issued will appoint, and enter into agreements with, a calculation agent
(each, a "Calculation Agent") to calculate interest rates on each class of
Floating Rate Securities issued with respect thereto. The applicable prospectus
supplement will set forth the identity of the Calculation Agent for each class
of Floating Rate Securities of a given series, which may be the Administrator,
the Eligible Lender Trustee or the Indenture Trustee with respect to the series.
All determinations of interest by the Calculation Agent shall, in the absence of
manifest error, be conclusive for all purposes and binding on the holders of
Floating Rate Securities of a given class. Unless otherwise specified in the
applicable prospectus supplement, all percentages resulting from any calculation
of the rate of interest on a Floating Rate Security will be rounded, if
necessary, to the nearest 1/100,000 of 1% (.0000001), with five one-millionths
of a percentage point rounded upward.
BOOK-ENTRY REGISTRATION
Persons acquiring beneficial ownership interests in the Notes may hold
their interests through The Depository Trust Company ("DTC") in the United
States or Clearstream, Luxembourg or Euroclear in Europe and persons acquiring
beneficial ownership interests in the Certificates may hold their interests
through DTC. Securities will be registered in the name of Cede & Co. ("Cede") as
nominee for DTC. Clearstream, Luxembourg and Euroclear will hold omnibus
positions with respect to the Notes on behalf of Clearstream, Luxembourg
Participants and the Euroclear Participants, respectively, through customers'
securities accounts in Clearstream, Luxembourg's and Euroclear's name on the
books of their respective depositaries (collectively, the "Depositaries") which
in turn will hold the positions in customers' securities accounts in the
Depositaries' names on the books of DTC.
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 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, banks, trust companies and clearing
corporations. Indirect access to the DTC system also is available to others
including banks, brokers, dealers and trust companies that clear through or
maintain a custodial relationship with a Participant, either directly or
indirectly ("Indirect Participants").
Clearstream Banking, societe anonyme, 67 Bd Grande-Duchesse Charlotte,
L-2967 Luxembourg ("Clearstream, Luxembourg"), was incorporated in 1970 as
"Cedel S.A.", a company with limited liability under Luxembourg law (a societe
anonyme). Cedel S.A. subsequently changed its name to Cedelbank. On January 10,
2000, Cedelbank's parent company, Cedel International, societe anonyme ("CI")
merged its clearing, settlement and custody business with that of Deutsche Borse
Clearing AG ("DBC"). The merger involved the transfer by CI of substantially all
of its assets and liabilities (including its shares in CB) to a new Luxembourg
company, New Cedel International, societe anonyme ("New CI"), which is 50% owned
by CI and 50% owned by DBC's parent company Deutsche Borse AG. The shareholders
of these two entities are banks, securities dealers and financial institutions.
Cedel International currently has 92 shareholders, including U.S. financial
institutions or their subsidiaries. No single entity may own more than 5 percent
of Cedel International's stock.
Further to the merger, the Board of Directors of New Cedel
International decided to rename the companies in the group in order to give them
a cohesive brand name. The new brand name that was chosen is "Clearstream". With
effect from January 14, 2000 New CI has been renamed "Clearstream International,
societe anonyme". On January 18, 2000, Cedelbank was renamed "Clearstream
Banking, societe anonyme", and Cedel Global Services was renamed "Clearstream
Services, societe anonyme".
On January 17, 2000 DBC was renamed "Clearstream Banking AG". This
means that there are now two entities in the corporate group headed by
Clearstream International which share the name "Clearstream Banking", the entity
previously named "Cedelbank" and the entity previously named "Deutsche Brse
Clearing AG".
Clearstream, Luxembourg holds securities for its customers
("Clearstream, Luxembourg Participants") and facilitates the clearance and
settlement of securities transactions between Clearstream, Luxembourg customers
through electronic book-entry changes in accounts of Clearstream, Luxembourg
customers, thereby eliminating the need for physical movement of certificates.
Transactions may be settled by Clearstream, Luxembourg in any of 36 currencies,
including United States Dollars. Clearstream, Luxembourg provides to its
customers, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. Clearstream, Luxembourg also deals with domestic
securities markets in over 30 countries through established depository and
custodial relationships. Clearstream, Luxembourg is registered as a bank in
Luxembourg, and as such is subject to regulation by the Commission de
Surveillance du Secteur Financier, "CSSF", which supervises Luxembourg banks.
Clearstream, Luxembourg's customers are world-wide financial institutions
including underwriters, securities brokers and dealers, banks, trust companies
and clearing corporations. Clearstream, Luxembourg's U.S. customers are limited
to securities brokers and dealers, and banks. Currently, Clearstream, Luxembourg
has approximately 2,000 customers located in over 80 countries, including all
major European countries, Canada, and the United States. Indirect access to
Clearstream, Luxembourg is available to other institutions that clear through or
maintain a custodial relationship with an account holder of Clearstream,
Luxembourg. Clearstream, Luxembourg has established an electronic bridge with
Morgan Guaranty Trust Company of New York as the Operator of the Euroclear
System (MGT/EOC) in Brussels to facilitate settlement of trades between
Clearstream, Luxembourg and MGT/EOC.
Securityholders that are not Participants or Indirect Participants but
desire to purchase, sell or otherwise transfer ownership of, or other interests
in, Securities held through DTC may do so only through Participants and Indirect
Participants. In addition, Securityholders will receive all distributions of
principal and interest from the related Indenture Trustee or the related
Eligible Lender Trustee, as applicable (the "Applicable Trustee"), through
Participants and Indirect Participants. Under a book-entry format,
Securityholders may experience some delay in their receipt of payments, since
the payments will be forwarded by the Applicable Trustee to DTC's Nominee. DTC
will forward the payments to its Participants, which thereafter will forward
them to Indirect Participants or Securityholders. Except for the Seller or an
affiliate of the Seller with respect to any series of Securities, it is
anticipated that the only "Securityholder", "Certificateholder" and "Noteholder"
will be DTC's Nominee. Securityholders will not be recognized by the Applicable
Trustee as Noteholders or Certificateholders, as the terms are used in each
Indenture and each Trust Agreement, respectively, and Securityholders will be
permitted to exercise the rights of Securityholders only indirectly through DTC
and its 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 Securities among Participants on whose behalf it acts with respect to the
Securities and to receive and transmit distributions of principal of, and
interest on, the Securities. Participants and Indirect Participants with which
Securityholders have accounts with respect to the Securities similarly are
required to make book-entry transfers and receive and transmit the payments on
behalf of their respective Securityholders. Accordingly, although
Securityholders will not possess Securities, the Rules provide a mechanism by
which Participants will receive payments and will be able to transfer their
interests.
Because DTC can only act on behalf of Participants, which in turn act
on behalf of Indirect Participants and specified banks, the ability of a
Securityholder to pledge Securities to persons or entities that do not
participate in the DTC system, or to otherwise act with respect to the
Securities, may be limited due to the lack of a physical certificate for the
Securities.
DTC has advised the Depositor that it will take any action permitted to
be taken by a Securityholder under the related Indenture or the related Trust
Agreement, as the case may be, only at the direction of one or more Participants
to whose accounts with DTC the Securities are credited. DTC may take conflicting
actions with respect to other undivided interests to the extent that the actions
are taken on behalf of Participants whose holdings include the undivided
interests.
Except as required by law, neither the Administrator nor the Applicable
Trustee will have any liability for any aspect of the records relating to or
payments made on account of beneficial ownership interests of the Securities
held by DTC's nominee or for maintaining, supervising or reviewing any records
relating to such beneficial ownership interests.
DEFINITIVE SECURITIES
Unless otherwise specified in the related prospectus supplement and
except with respect to the Certificates of a given series that may be purchased
by the Depositor or the Seller or an affiliate, the Notes and the Certificates
of a given series will be issued in fully registered, certificated form
("Definitive Notes" and "Definitive Certificates", respectively, and
collectively referred to in this prospectus as "Definitive Securities") to
Noteholders or Certificateholders or their respective nominees, rather than to
DTC or its nominee, only if:
o the related Administrator advises the Applicable Trustee in
writing that DTC is no longer willing or able to discharge
properly its responsibilities as depository with respect to the
Securities and the Administrator is unable to locate a qualified
successor,
o the Administrator, at its option, elects to terminate the
book-entry system through DTC, or
o after the occurrence of an Event of Default or a Servicer Default,
Securityholders representing at least a majority of the
outstanding principal amount of the Notes or the Certificates, as
the case may be, of the series advise the Applicable Trustee
through DTC in writing that the continuation of a book-entry
system through DTC (or a successor thereto) with respect to the
Notes or Certificates is no longer in the best interest of the
holders of the Securities.
Upon the occurrence of any event described in the immediately preceding
paragraph, the Applicable Trustee will be required to notify all applicable
Securityholders of a given series through Participants of the availability of
Definitive Securities. Upon surrender by DTC of the Definitive Securities
representing the corresponding Securities and receipt of instructions for
re-registration, the Applicable Trustee will reissue the Securities as
Definitive Securities to the Securityholders.
Distributions of principal of, and interest on, the Definitive
Securities will thereafter be made by the Applicable Trustee in accordance with
the procedures set forth in the related Indenture or the related Trust
Agreement, as the case may be, directly to holders of Definitive Securities in
whose names the Definitive Securities were registered at the close of business
on the applicable Record Date specified for the Securities in the related
prospectus supplement. Distributions will be made by check mailed to the address
of the holder as it appears on the register maintained by the Applicable
Trustee. The final payment on any Definitive Security, however, will be made
only upon presentation and surrender of the Definitive Security at the office or
agency specified in the notice of final distribution to applicable
Securityholders.
Definitive Securities will be transferable and exchangeable at the
offices of the Applicable Trustee or of a registrar named in a notice delivered
to holders of Definitive Securities. No service charge will be imposed for any
registration of transfer or exchange, but the Applicable Trustee may require
payment of a sum sufficient to cover any tax or other governmental charge
imposed in connection therewith.
LIST OF SECURITYHOLDERS
Unless otherwise specified in the related prospectus supplement,
holders of Notes evidencing not less than 25% of the aggregate outstanding
principal balance of the Notes may, by written request to the related Indenture
Trustee, obtain access to the list of all Noteholders maintained by the
Indenture Trustee for the purpose of communicating with other Noteholders with
respect to their rights under the related Indenture or the Notes. The Indenture
Trustee may elect not to afford the requesting Noteholders access to the list of
Noteholders if it agrees to mail the desired communication or proxy, on behalf
and at the expense of the requesting Noteholders, to all Noteholders of the
series.
Unless otherwise specified in the related prospectus supplement, three
or more Certificateholders of the series or one or more holders of the
Certificates evidencing not less than 25% of the Certificate Balance of the
Certificates may, by written request to the related Eligible Lender Trustee,
obtain access to the list of all Certificateholders for the purpose of
communicating with other Certificateholders with respect to their rights under
the related Trust Agreement or under the Certificates.
REPORTS TO SECURITYHOLDERS
With respect to each series of Securities, on each Distribution Date,
the Applicable Trustee will provide to Securityholders of record as of the
related Record Date a statement setting forth substantially the same information
as is required to be provided on the periodic report provided to the related
Indenture Trustee and the related Trust described under "Description of Transfer
and Servicing Agreements--Statements to Indenture Trustee and Trust". The
statements will be filed with the Commission during the period required by Rule
15d-1 under the Securities Exchange Act of 1934, as amended, and will not be
filed with the Commission thereafter. The statements provided to Securityholders
will not constitute financial statements prepared in accordance with generally
accepted accounting principles.
Within the prescribed period of time for tax reporting purposes after
the end of each calendar year during the term of each Trust, the Applicable
Trustee will mail to each person who at any time during the calendar year was a
Securityholder with respect to the Trust and received any payment thereon, a
statement containing information for the purposes of the Securityholder's
preparation of federal income tax returns. See "Certain Federal Income Tax
Consequences".
DESCRIPTION OF THE TRANSFER AND SERVICING AGREEMENTS
The following is a summary of terms of each Loan Sale Agreement and
Loan Servicing Agreement, pursuant to which the Depositor will purchase Student
Loans from the Seller, the related Eligible Lender Trustee on behalf of a Trust
will purchase Student Loans from the Depositor and the Servicer will service the
same; each Administration Agreement, pursuant to which the Administrator will
undertake administrative duties with respect to a Trust and the Student Loans;
and each Trust Agreement, pursuant to which a Trust will be created and the
related Certificates will be issued (collectively, the "Transfer and Servicing
Agreements"). Forms of each of the Transfer and Servicing Agreements have been
filed as exhibits to the Registration Statement of which this Prospectus is a
part. However, this summary does not purport to be complete and is qualified in
its entirety by reference to all of the provisions of the Transfer and Servicing
Agreements.
SALE OF STUDENT LOANS; REPRESENTATIONS AND WARRANTIES
On the applicable Closing Date, the Seller will sell and assign to the
Depositor and the Depositor will sell and assign to the related Eligible Lender
Trustee on behalf of the Trust, without recourse, except as provided in the Loan
Sale Agreement, its entire interest in the Student Loans and all collections
received and to be received with respect thereto for the period on and after the
Cutoff Date pursuant to the Loan Sale Agreement. Each Student Loan will be
identified in a schedule appearing as an exhibit to the Loan Sale Agreement.
Each Eligible Lender Trustee will, concurrently with the sale and assignment,
execute, authenticate and deliver the related Certificates and Notes. The net
proceeds received from the sale of the related Notes and Certificates will be
applied to the purchase of the Student Loans.
In each Loan Sale Agreement, the Seller will make representations and
warranties with respect to the Student Loans to a Trust for the benefit of the
Certificateholders and the Noteholders of a given series, including, among other
things, that:
o each Student Loan, on the date on which it is transferred to the
Trust, is free and clear of all security interests, liens, charges
and encumbrances and no offsets, defenses or counterclaims with
respect thereto have been asserted or threatened;
o the information provided with respect to the Student Loans is true
and correct as of the Cutoff Date; and
o each Student Loan, at the time it was originated, complied and, at
the Closing Date, complies in all material respects with
applicable federal and state laws (including, without limitation,
the Act) and applicable restrictions imposed by FFELP or any
Guarantee Agreement.
Unless otherwise provided in the related prospectus supplement,
following the discovery by or notice to the Seller of a breach of any
representation or warranty with respect to any Student Loan that materially and
adversely affects the interests of the related Certificateholders or the
Noteholders in the Student Loan (it being understood that any breach that does
not affect any Guarantor's obligation to guarantee payment of the Student Loan
will not be considered to have a material adverse effect), the Seller will,
unless the breach is cured within 60 days, repurchase the Student Loan from the
related Eligible Lender Trustee, as of the first day following the end of the
60-day period that is the last day of a Collection Period, at a price equal to
the unpaid principal balance owed by the applicable borrower plus accrued
interest thereon to the day of repurchase (the "Purchase Amount").
Alternatively, the Seller may, at its option, remit all or a portion of the
Purchase Amount by substituting into the related Trust a Student Loan that meets
criteria set forth in the related Loan Sale Agreement for the Student Loan as to
which the breach has occurred. In addition, the Seller will reimburse the
related Trust for any accrued interest amounts that a Guarantor refuses to pay
pursuant to its Guarantee Agreement, or for any Interest Subsidy Payments and
Special Allowance Payments that are lost or that must be repaid to the
Department with respect to a Federal Student Loan as a result of a breach of any
representation or warranty by the Seller. The repurchase, substitution and
reimbursement obligations of the Seller will constitute the sole remedy
available to or on behalf of a Trust, the related Certificateholders and the
related Noteholders for any uncured breach. The Seller's repurchase and
reimbursement obligations are contractual obligations pursuant to a Loan Sale
Agreement that may be enforced against the Seller, but the breach of which will
not constitute an Event of Default.
To assure uniform quality in servicing and to reduce administrative
costs, the Servicer will be appointed custodian of the promissory notes
representing the Student Loans and any other related documents by the related
Eligible Lender Trustee on behalf of each Trust. The Seller's and the Servicer's
records and computer systems will reflect the sale and assignment by the Seller
of the Student Loans to the related Eligible Lender Trustee on behalf of the
related Trust, and Uniform Commercial Code financing statements reflecting the
sale and assignment will be filed by the Administrator.
ADDITIONAL FUNDINGS
In the case of a Trust having a Pre-Funding Account or a Collateral
Reinvestment Account, the Trust will use funds on deposit in the account from
time to time during the related Funding Period or Revolving Period,
respectively, (1) to make interest payments to Noteholders and
Certificateholders in lieu of collections of interest on the Student Loans to
the extent interest is not paid currently but is capitalized and added to the
principal balance of the Student Loans and (2) to fund the addition of Student
Loans to the Trust under the circumstances and having the characteristics
described in the related prospectus supplement ("Additional Fundings"). The
additional Student Loans may be purchased by the Trust from the Seller or may be
originated by the Trust, if and to the extent specified in the related
prospectus supplement.
There can be no assurance that substantially all of the amounts on
deposit in any Pre-Funding Account or Collateral Reinvestment Account will be
expended during the related Funding Period or Revolving Period, respectively. If
the amount initially deposited into a Pre-Funding Account or a Collateral
Reinvestment Account for a series has not been reduced to zero by the end of the
related Funding Period or Revolving Period, respectively, the amounts remaining
on deposit in the Pre-Funding Account will be distributed to the related
Securityholders in the amounts described in the related prospectus supplement.
If and to the extent specified in the related prospectus supplement,
the related Trust may use distributions on the Student Loans, or may exchange
Student Loans with the Seller, in order to pay for Additional Fundings after any
Funding Period or Revolving Period.
ACCOUNTS
With respect to each Trust, the Administrator will establish and
maintain with the applicable Indenture Trustee one or more accounts, in the name
of the Indenture Trustee on behalf of the related Noteholders and
Certificateholders, into which all payments made on or with respect to the
related Student Loans will be deposited (the "Collection Account"). Any other
accounts to be established with respect to a Trust, including any Reserve
Account, any pre-funding account (the "Pre-Funding Account") and any collateral
reinvestment account ("Collateral Reinvestment Account"), will be described in
the related prospectus supplement.
For any series of Securities, funds in the Collection Account, any
Reserve Account, any Pre-Funding Account, any Collateral Reinvestment Account
and any other accounts identified in the related prospectus supplement
(collectively, the "Trust Accounts") will be invested as provided in the
applicable Trust Indenture in Eligible Investments. "Eligible Investments" are
generally limited to investments acceptable to the Rating Agencies as consistent
with the rating of the Securities. Except as described below or in the related
prospectus supplement, Eligible Investments are limited to obligations or
securities that mature not later than the business day immediately preceding the
next applicable Distribution Date. However, to the extent permitted by the
Rating Agencies, funds in any Reserve Account may be invested in securities that
will not mature prior to the date of the next distribution with respect to the
Securities and will not be sold to meet any shortfalls. Thus, the amount of cash
in any Reserve Account at any time may be less than the balance of the Reserve
Account. If the amount required to be withdrawn from any Reserve Account to
cover shortfalls in collections on the related Student Loans (as provided in the
related prospectus supplement) exceeds the amount of cash in the Reserve
Account, a temporary shortfall in the amounts distributed to the related
Noteholders or Certificateholders could result, which could, in turn, increase
the average lives of the Notes or the Certificates of the series. Except as
otherwise specified in the related prospectus supplement, investment earnings on
funds deposited in the Trust Accounts, net of losses and investment expenses
(collectively, "Investment Earnings"), will be deposited in the Collection
Account on each Distribution Date and will be treated as collections of interest
on the related Student Loans.
The Trust Accounts will be maintained as Eligible Deposit Accounts.
"Eligible Deposit Account" means either (a) a segregated account with an
Eligible Institution or (b) a segregated trust account with the corporate trust
department of a depository institution organized under the laws of the United
States of America or any one of the states thereof or the District of Columbia
(or any domestic branch of a foreign bank), having corporate trust powers and
acting as trustee for funds deposited in the account, so long as any of the
securities of the depository institution have a credit rating from each Rating
Agency in one of its generic rating categories which signifies investment grade.
"Eligible Institution" means a depository institution organized under the laws
of the United States of America or any one of the states thereof or the District
of Columbia (or any domestic branch of a foreign bank), (1) which has either (A)
a long-term unsecured debt rating acceptable to the Rating Agencies or (B) a
short-term unsecured debt rating or certificate of deposit rating acceptable to
the Rating Agencies, and (2) whose deposits are insured by the Federal Deposit
Insurance Corporation.
SERVICING PROCEDURES
Pursuant to each Loan Servicing Agreement, the Servicer will service,
and perform all other related tasks with respect to, all the Student Loans
acquired from time to time on behalf of each Trust. The Servicer will be
required pursuant to the related Loan Servicing Agreement to perform all
services and duties customary to the servicing of Student Loans (including all
collection practices), to do so in the same manner as the Servicer has serviced
student loans for parties other than the Seller and to do so in compliance with,
and to otherwise comply with, all standards and procedures provided for in the
Act, if applicable, the Guarantee Agreements and all other applicable federal
and state laws.
Without limiting the foregoing, the duties of the Servicer with respect
to each Trust under the related Loan Servicing Agreement will include, but will
not be limited to, the following:
o collecting and depositing into the Collection Account all payments
with respect to the Student Loans, including claiming and
obtaining any Guarantee Payments, any Interest Subsidy Payments
and Special Allowance Payments with respect to the Federal Student
Loans,
o responding to inquiries from borrowers under the Student Loans,
o investigating delinquencies and
o sending out statements and payment coupons.
In addition, the Servicer will keep ongoing records with respect to the Student
Loans and collections thereon and will furnish monthly and annual statements
with respect to the information to the Administrator, in accordance with the
Servicer's customary practices with respect to the Seller and as otherwise
required in the related Loan Servicing Agreement.
If so provided in the related prospectus supplement, the Servicer may
act as a master servicer and may from time to time perform its servicing
obligations under the applicable Loan Sale Agreement through subservicing
agreements with affiliated or unrelated third-party loan servicers.
PAYMENTS ON STUDENT LOANS
With respect to each Trust, the Servicer will deposit into the related
Collection Account, within two business days after receipt of freely available
funds, all payments on Student Loans and all proceeds of Student Loans received
by it during each collection period specified in the related prospectus
supplement (each, a "Collection Period"). The Eligible Lender Trustee will
deposit into the Collection Account, within two business days after receipt, all
Interest Subsidy Payments and all Special Allowance Payments with respect to the
Student Loans received by it during each Collection Period.
SERVICER COVENANTS
With respect to each Trust, the Servicer will covenant in the related
Loan Servicing Agreement that:
o it will duly satisfy all obligations on its part to be fulfilled
under or in connection with the Student Loans, maintain in effect
all qualifications required in order to service the Student Loans
and comply in all material respects with all requirements of law
in connection with servicing the Student Loans, the failure to
comply with which would have a materially adverse effect on the
related Certificateholders or Noteholders;
o it will not permit any rescission or cancellation of a Student
Loan except as ordered by a court of competent jurisdiction or
other government authority or as otherwise consented to by the
related Eligible Lender Trustee and the related Indenture Trustee;
o it will do nothing to impair the rights of the related
Certificateholders and the related Noteholders in the Student
Loans; and
o it will not reschedule, revise, defer or otherwise compromise with
respect to payments due on any Student Loan except pursuant to any
applicable deferral or forbearance periods or otherwise in
accordance with its guidelines for servicing student loans in
general and those of the Seller in particular and any applicable
FFELP or Guarantor requirements.
Under the terms of each Loan Servicing Agreement, unless otherwise
specified in the related prospectus supplement, if the Administrator or the
Servicer discovers, or receives written notice, that any covenant of the
Servicer set forth above has not been complied with in all material respects and
the noncompliance has not been cured within 60 days thereafter and has a
materially adverse effect on the interest of the related Certificateholders or
Noteholders in any Student Loan, unless the breach is cured or unless the Seller
is otherwise required to purchase the related Student Loan as a result of a
breach of the Seller's warranties in the related Loan Sale Agreement, the
Servicer will arrange for the purchase of the Student Loan as of the first day
following the end of the 60-day period that is the last day of a Collection
Period. In that event, the Servicer will arrange to be deposited into the
Collection Account an amount equal to the Purchase Amount of the Student Loan
and the related Trust's interest in any purchased Student Loan will be
automatically assigned to the Servicer or its designee. Upon the assignment, the
Servicer or its designee will be entitled to all payments made on the Student
Loan. In addition, if so specified in the related prospectus supplement, the
Servicer will reimburse the related Trust for any accrued interest amounts that
a Guarantor refuses to pay pursuant to its Guarantee Agreement, or for any prior
Interest Subsidy Payments and Special Allowance Payments that are lost or that
must be repaid to the Department with respect to a Federal Student Loan, as a
result of a breach of any covenant of the Servicer.
SERVICER COMPENSATION
Unless otherwise specified in the related prospectus supplement with
respect to any Trust, the Servicer will be entitled to receive the Servicing Fee
for each Collection Period at the specified percentage per annum (as set forth
in the related prospectus supplement) of the average Pool Balance for the
related Collection Period together with any other administrative fees and
similar charges specified in the related prospectus supplement, as compensation
for performing the functions as servicer for the related Trust described above
(the "Servicing Fee"). The Servicing Fee (together with any portion of the
Servicing Fee that remains unpaid from prior Distribution Dates) will be paid
prior to any payment in respect of the related Securities, as specified in the
applicable prospectus supplement.
The Servicing Fee will compensate the Servicer for performing the
functions of a third-party servicer of student loans as an agent for their
beneficial owner, including collecting and posting all payments, responding to
inquiries of borrowers on the Student Loans, investigating delinquencies,
pursuing, filing and directing the payment of any Guarantee Payments, Interest
Subsidy Payments or Special Allowance Payments, accounting for collections and
furnishing periodic accounting reports to the Administrator.
DISTRIBUTIONS
With respect to each series of Securities, beginning on the
Distribution Date specified in the related prospectus supplement, distributions
of principal and interest on each class of the Securities entitled thereto will
be made by the applicable Trustee to the Noteholders and the Certificateholders
of the series. The timing, calculation, allocation, order, source, priorities of
and requirements for all payments to each class of Noteholders and all
distributions to each class of Certificateholders of the series will be set
forth in the related prospectus supplement.
With respect to each Trust, collections on the related Student Loans
will be distributed from the Collection Account on each Distribution Date to
Noteholders and Certificateholders to the extent provided in the related
prospectus supplement. Credit and cash flow enhancement, including a Reserve
Account, will be available to cover any shortfalls in the amount available for
distribution to the extent specified in the related prospectus supplement. As
more fully described in the related prospectus supplement, and unless otherwise
specified in the related prospectus supplement, distributions in respect of
principal and/or interest of a class of Securities of a given series will be
subordinate to distributions in respect of interest on one or more other classes
of the series, and distributions in respect of the Certificates of the series
may be subordinate to payments in respect of the Notes of the series.
CREDIT AND CASH FLOW ENHANCEMENT
The amounts and types of credit enhancement arrangements and the
provider thereof, if applicable, with respect to each class of Securities of a
given series, if any, will be set forth in the related prospectus supplement. If
and to the extent provided in the related prospectus supplement, credit
enhancement may be in the form of subordination of one or more classes of
Securities, Reserve Accounts, over-collateralization, letters of credit, credit
or liquidity facilities, surety bonds, guaranteed investment contracts,
repurchase obligations, interest rate swaps, interest rate caps, interest rate
floors, currency swaps, other agreements with respect to third party payments or
other support, cash deposits or other arrangements described in the related
prospectus supplement or any combination of two or more of the foregoing. If
specified in the applicable prospectus supplement, credit enhancement for a
class of Securities may cover one or more other classes of Securities of the
same series, and credit enhancement for a series of Securities may cover one or
more other series of Securities.
The presence of a Reserve Account and other forms of credit enhancement
for the benefit of any class or series of Securities is intended to enhance the
likelihood of receipt by the Securityholders of the class or series of the full
amount of principal and interest due thereon and to decrease the likelihood that
the Securityholders will experience losses. Unless otherwise specified in the
related prospectus supplement, the credit enhancement for a class or series of
Securities will not provide protection against all risks of loss and will not
guarantee repayment of the entire principal balance and interest thereon. If
losses occur which exceed the amount covered by any credit enhancement or which
are not covered by any credit enhancement, Securityholders of any class or
series will bear their allocable share of deficiencies, as described in the
related prospectus supplement. In addition, if a form of credit enhancement
covers more than one series of Securities, Securityholders of any series will be
subject to the risk that the credit enhancement will be exhausted by the claims
of Securityholders of other series.
RESERVE ACCOUNT. If so provided in the related prospectus supplement,
pursuant to the related Loan Sale Agreement, the Seller will establish for a
series or class of Securities an account, as specified in the related prospectus
supplement (the "Reserve Account"), which will be maintained in the name of the
applicable Indenture Trustee. Unless otherwise provided in the related
prospectus supplement, the Reserve Account will be funded by an initial deposit
by the Seller on the Closing Date in the amount set forth in the related
prospectus supplement. As further described in the related prospectus
supplement, the amount on deposit in the Reserve Account will be increased on
each Distribution Date thereafter up to the Specified Reserve Account Balance
(as defined in the related prospectus supplement) by the deposit in the Reserve
Account of the amount of collections on the related Student Loans remaining on
each Distribution Date after the payment of all other required payments and
distributions on the date. Amounts in the Reserve Account will be available to
cover shortfalls in amounts due to the holders of those classes of Securities
specified in the related prospectus supplement in the manner and under the
circumstances specified in the related prospectus supplement. The related
prospectus supplement will also specify to whom and the manner and circumstances
under which amounts on deposit in the Reserve Account (after giving effect to
all other required distributions to be made by the applicable Trust) in excess
of the Specified Reserve Account Balance (as defined in the related prospectus
supplement) will be distributed.
STATEMENTS TO INDENTURE TRUSTEE AND TRUST
Prior to each Distribution Date with respect to each series of
Securities, the Administrator will prepare and provide to the related Indenture
Trustee and the related Eligible Lender Trustee as of the close of business on
the last day of the preceding Collection Period a statement, which will include
the following information (and any other information so specified in the related
prospectus supplement) with respect to the Distribution Date or the preceding
Collection Period as to the Notes and the Certificates of the series, to the
extent applicable:
(1) the amount of the distribution allocable to principal of each
class of the Notes and the Certificates;
(2) the amount of the distribution allocable to interest on each
class of the Notes and the Certificates, together with the interest
rates applicable with respect thereto;
(3) the Pool Balance as of the close of business on the last day
of the preceding Collection Period;
(4) the aggregate outstanding principal amount and the Note Pool
Factor of each class of the Notes, and the Certificate Balance and the
Certificate Pool Factor for each class of the Certificates as of the
Distribution Date, each after giving effect to payments allocated to
principal reported under clause (1) above;
(5) the amount of the Servicing Fee and the Administration Fee
paid to the Servicer and the Administrator, respectively, with respect
to the Collection Period;
(6) the Interest Rate or Pass-Through Rate for the next period for
any class of Notes or Certificates of the series with variable or
adjustable rates;
(7) the amount of the aggregate realized losses, if any, for the
Collection Period;
(8) the Noteholders' Interest Carryover Shortfall, the
Noteholders' Principal Carryover Shortfall, the Certificateholders'
Interest Carryover Shortfall and the Certificateholders' Principal
Carryover Shortfall (each as defined in the related prospectus
supplement), if any, in each case as applicable to each class of
Securities, and the change in the amounts from the preceding statement;
(9) the aggregate Purchase Amounts for Student Loans, if any, that
were repurchased in the Collection Period;
(10) the balance of the Reserve Account (if any) on the
Distribution Date, after giving effect to changes in the Reserve
Account on the Distribution Date;
(11) for each date during the Funding Period (if any), the
remaining Pre-Funding Amount or, for each date during the Revolving
Period (if any), the amount on deposit in the Collateral Reinvestment
Account; and
(12) the principal balance and number of Student Loans conveyed to
or originated by the Trust during the Collection Period.
Each amount set forth pursuant to subclauses (1), (2), (5) and (8) with
respect to the Notes or the Certificates of any series will be expressed as a
dollar amount per $1,000 of the initial principal amount of the Notes or the
initial Certificate Balance of the Certificates, as applicable.
EVIDENCE AS TO COMPLIANCE
Each Loan Servicing Agreement will provide that a firm of independent
public accountants will furnish to the related Trust and Indenture Trustee
annually a statement (based on the examination of documents and records and on
the accounting and auditing procedures considered appropriate under the
circumstances) as to compliance by the Servicer during the preceding twelve
months (or, in the case of the first certificate, the period from the applicable
Closing Date) with all applicable standards under the Loan Servicing Agreement
relating to the servicing of student loans, the Servicer's accounting records
and computer files with respect thereto and other matters.
Each Loan Servicing Agreement will also provide for delivery to the
related Trust and Indenture Trustee, concurrently with the delivery of each
statement of compliance referred to above, of a certificate signed by an officer
of the Servicer stating that, to his knowledge, the Servicer has fulfilled its
obligations under the Loan Servicing Agreement throughout the preceding twelve
months (or, in the case of the first certificate, the period from the applicable
Closing Date) or, if there has been a default in the fulfillment of any
obligation, describing each default. The Servicer has agreed to give the
Administrator, the related Indenture Trustee and Eligible Lender Trustee notice
of Servicer Defaults under the Loan Servicing Agreement.
Copies of the statements and certificates may be obtained by
Securityholders by a request in writing addressed to the applicable Trustee.
CERTAIN MATTERS REGARDING THE SERVICER
Each Loan Servicing Agreement will provide that the Servicer may not
resign from its obligations and duties as Servicer thereunder, except upon
determination that the Servicer's performance of the duties is no longer
permissible under applicable law. No resignation will become effective until the
related Indenture Trustee or a successor servicer has assumed the Servicer's
servicing obligations and duties under the Loan Servicing Agreement.
Each Loan Servicing Agreement will further provide that neither the
Servicer nor any of its directors, officers, employees or agents will be under
any liability to the related Trust or the related Noteholders or
Certificateholders for taking any action or for refraining from taking any
action pursuant to the related Loan Servicing Agreement, or for errors in
judgment; provided, however, that, unless otherwise limited in the related
prospectus supplement, neither the Servicer nor any person will be protected
against any liability that would otherwise be imposed by reason of willful
misfeasance, bad faith or negligence in the performance of the Servicer's duties
thereunder or by reason of reckless disregard of its obligations and duties
thereunder. In addition, each Loan Servicing Agreement will provide that the
Servicer is under no obligation to appear in, prosecute, or defend any legal
action that is not incidental to its servicing responsibilities under the Loan
Servicing Agreement and that, in its opinion, may cause it to incur any expense
or liability. Each Loan Servicing Agreement will, however, provide that the
Servicer may undertake any reasonable action that it deems necessary or
desirable in respect of the Loan Servicing Agreement and the interests of the
Securityholders.
Under the circumstances specified in each Loan Servicing Agreement, any
entity into which the Servicer may be merged or consolidated, or any entity
resulting from any merger or consolidation to which the Servicer is a party, or
any entity succeeding to the business of the Servicer, which corporation or
other entity in each of the foregoing cases assumes the obligations of the
Servicer, will be the successor of the Servicer under the Loan Servicing
Agreement.
SERVICER DEFAULT
Except as otherwise provided in the related prospectus supplement,
"Servicer Default" under each Loan Servicing Agreement will occur in the event
of:
o any failure by the Servicer to deliver to the Indenture Trustee
for deposit in any of the Trust Accounts any required payment,
which failure continues unremedied for three business days after
written notice from the Indenture Trustee or the related Eligible
Lender Trustee is received by the Servicer or after discovery by
the Servicer,
o any failure by the Servicer to observe or perform in any material
respect any other covenant or agreement of the Servicer under the
related Loan Servicing Agreement,
o any limitation, suspension or termination by the Secretary of the
Servicer's eligibility to service Federal Student Loans which
materially and adversely affects its ability to service the
Student Loans in the related Trust, or
o an Insolvency Event with respect to the Servicer occurs.
"Insolvency Event" means, with respect to any person, any of the
following events or actions: specified events of insolvency,
readjustment of debt, marshaling of assets and liabilities or
similar proceedings with respect to the person and specified
actions by the person indicating its insolvency, reorganization
pursuant to bankruptcy proceedings or inability to pay its
obligations.
RIGHTS UPON SERVICER DEFAULT
Unless otherwise specified in the related prospectus supplement, as
long as a Servicer Default under a Loan Servicing Agreement remains unremedied,
the related Indenture Trustee, or holders of Notes of the related series
evidencing not less than 75% in principal amount of the then outstanding Notes,
may terminate all the rights and obligations of the Servicer under the Loan
Servicing Agreement, whereupon a successor servicer appointed by the related
Indenture Trustee or the Indenture Trustee will succeed to all the
responsibilities, duties and liabilities of the Servicer under the Loan
Servicing Agreement, and will be entitled to similar compensation arrangements.
If, however, a bankruptcy trustee or similar official has been appointed for the
Servicer, and no Servicer Default other than the appointment has occurred, the
trustee or official may have the power to prevent the Indenture Trustee or the
Noteholders from effecting a transfer. In the event that the Indenture Trustee
is unwilling or unable to so act, it may appoint, or petition a court of
competent jurisdiction for the appointment of, a successor whose regular
business includes the servicing of student loans. The Indenture Trustee may make
the arrangements for compensation to be paid, which in no event may be greater
than the servicing compensation to the Servicer under the Loan Servicing
Agreement, unless the compensation arrangements will not result in a downgrading
of the Notes and Certificates by any Rating Agency. In the event a Servicer
Default occurs and is continuing, the Indenture Trustee or the Noteholders, as
described above, may remove the Servicer, without the consent of the related
Eligible Lender Trustee or any of the Certificateholders of the related series.
Moreover, only the Indenture Trustee or the Noteholders, and not the Eligible
Lender Trustee or the Certificateholders, have the ability to remove the
Servicer if a Servicer Default occurs and is continuing.
WAIVER OF PAST DEFAULTS
With respect to each Trust, unless otherwise specified in the related
prospectus supplement, the holders of Notes evidencing at least a majority in
principal amount of the then outstanding Notes (or the holders of Certificates
evidencing not less than a majority of the outstanding Certificate Balance), in
the case of any Servicer Default which does not adversely affect the Indenture
Trustee or the Noteholders of the related series, may, on behalf of all the
Noteholders and Certificateholders, waive any default by the Servicer in the
performance of its obligations under the related Loan Servicing Agreement and
its consequences, except a default in making any required deposits to or
payments from any of the Trust Accounts in accordance with the Loan Servicing
Agreement. Therefore, the Noteholders have the ability, except as noted above,
to waive defaults by the Servicer which could materially adversely affect the
Certificateholders. No waiver will impair the Noteholders' or
Certificateholders' rights with respect to subsequent defaults.
AMENDMENT
Unless otherwise provided in the related prospectus supplement, each of
the Transfer and Servicing Agreements may be amended by the parties thereto,
without the consent of the related Noteholders or Certificateholders, for the
purpose of adding any provisions to or changing in any manner or eliminating any
of the provisions of the Transfer and Servicing Agreements or of modifying in
any manner the rights of the Noteholders or Certificateholders; provided that
the action will not, in the opinion of counsel satisfactory to the related
Indenture Trustee and Eligible Lender Trustee, materially and adversely affect
the interest of any Noteholder or Certificateholder. Unless otherwise provided
in the related prospectus supplement, each of the Transfer and Servicing
Agreements may also be amended by the Seller, the Administrator, the Servicer,
the related Eligible Lender Trustee and the related Indenture Trustee, as
applicable, with the consent of the holders of Notes of the related series
evidencing at least a majority in principal amount of the then outstanding Notes
and the holders of Certificates of the related series evidencing at least a
majority of the Certificate Balance for the purpose of adding any provisions to
or changing in any manner or eliminating any of the provisions of the Transfer
and Servicing Agreements or of modifying in any manner the rights of the
Noteholders or Certificateholders; provided, however, that no amendment may (1)
increase or reduce in any manner the amount of, or accelerate or delay the
timing of, collections of payments (including any Guarantee Payments) with
respect to the Student Loans or distributions that are required to be made for
the benefit of the Noteholders or Certificateholders, or (2) reduce the
aforesaid percentage of the Notes or Certificates which are required to consent
to any amendment, without the consent of the holders of all the outstanding
Notes and Certificates.
Each Trust Agreement will provide that the related Eligible Lender
Trustee does not have the power to commence a voluntary proceeding in bankruptcy
relating to the Trust without the unanimous prior approval of all
Certificateholders (including the applicable Company) of the related series and
the delivery to the Eligible Lender Trustee by each Certificateholder (including
the Company) of a certificate certifying that the Certificateholder reasonably
believes that the related Trust is insolvent.
PAYMENT OF NOTES
Upon the payment in full of all outstanding Notes of a given series and
the satisfaction and discharge of the related Indenture, the Eligible Lender
Trustee will succeed to all the rights of the Indenture Trustee, and the
Certificateholders of the series will succeed to all the rights of the
Noteholders of the series, under the related Loan Servicing Agreement, except as
otherwise provided under the related Loan Servicing Agreement.
TERMINATION
With respect to each Trust, the obligations of the Depositor , the
Seller, the Servicer, the Administrator, the related Eligible Lender Trustee and
the related Indenture Trustee pursuant to the related Transfer and Servicing
Agreements will terminate upon (1) the maturity or other liquidation of the last
related Student Loan and the disposition of any amount received upon liquidation
of any remaining Student Loans and (2) the payment to the Noteholders and the
Certificateholders of the related series of all amounts required to be paid to
them pursuant to the Transfer and Servicing Agreements.
OPTIONAL REDEMPTION. If so specified in the related prospectus
supplement, in order to avoid excessive administrative expense, the Seller or
another party will be permitted at its option to purchase from the related
Eligible Lender Trustee, as of the end of any Collection Period immediately
preceding a Distribution Date, if the then outstanding Pool Balance is a
percentage specified in the related prospectus supplement (not to exceed 30%) of
the Initial Pool Balance (as defined in the related prospectus supplement, the
"Initial Pool Balance"), all remaining related Student Loans at a price equal to
the aggregate Purchase Amounts thereof as of the end of the Collection Period,
which amounts will be used to retire the related Notes and Certificates
concurrently therewith. Upon termination of a Trust, as more fully described in
the related prospectus supplement, all right, title and interest in the Student
Loans and other funds of the Trust, after giving effect to any final
distributions to Noteholders and Certificateholders of the related series
therefrom, will be conveyed and transferred to the Seller or other party.
AUCTION OF STUDENT LOANS. If so provided in the related prospectus
supplement, all remaining Student Loans held by a Trust will be offered for sale
by the Indenture Trustee on any Distribution Date occurring on or after a date
specified in the prospectus supplement. The Seller and unrelated third parties
may offer bids for the Student Loans. The Indenture Trustee will accept the
highest bid equal to or in excess of the aggregate Purchase Amounts of the
Student Loans as of the end of the Collection Period immediately preceding the
related Distribution Date. The proceeds of the sale will be used to redeem all
related Notes and to retire the Certificates.
ADMINISTRATION AGREEMENT
The administrator set forth in the related prospectus supplement, in
its capacity as administrator (the "Administrator"), will enter into an
agreement (as amended and supplemented from time to time, an "Administration
Agreement") with each Trust and the related Indenture Trustee pursuant to which
the Administrator will agree, to the extent provided Administration Agreement,
to provide the notices and to perform other administrative obligations required
by the related Indenture, the related Trust Agreement, the related Loan Sale
Agreement and the related Loan Servicing Agreement. Unless otherwise specified
in the related prospectus supplement with respect to any Trust, as compensation
for the performance of the Administrator's obligations under the applicable
Administration Agreement and as reimbursement for its expenses related thereto,
the Administrator will be entitled to an administration fee as specified in the
related prospectus supplement (the "Administration Fee").
Except as otherwise provided in the related prospectus supplement, an
"Administrator Default" will occur under an Administration Agreement in the
event of:
o a failure by the Administrator to direct the Indenture Trustee to
make any required distributions from any of the Trust Accounts,
which failure continues unremedied for three business days after
written notice from the Indenture Trustee or the Eligible Lender
Trustee of the failure,
o any failure by the Administrator to observe or perform in any
material respect any other covenant or agreement of the
Administrator in the Administration Agreement or
o an Insolvency Event with respect to the Administrator occurs.
Unless otherwise specified in the related prospectus supplement, the
procedures for terminating the rights and obligations of the Administrator and
appointing a successor Administrator following the occurrence of an
Administrator Default under the Administration Agreement and for waiving
defaults by the Administrator under the Administration Agreement will be
identical to those for replacing the Servicer and appointing a successor
Servicer following the occurrence of a Servicer Default under the Loan Servicing
Agreement and for waiving defaults by the Servicer under the Loan Servicing
Agreement, except that the procedures will apply to the Administrator and the
Administration Agreement rather than the Servicer and the Loan Servicing
Agreement.
CERTAIN LEGAL ASPECTS OF THE STUDENT LOANS
TRANSFER OF STUDENT LOANS
The Seller intends that the transfer of the Student Loans by it to the
Depositor will constitute a valid sale and assignment of the Student Loans. The
Depositor intends that the transfer of the Student Loans by it to the related
Eligible Lender Trustee on behalf of each Trust will constitute a valid sale and
assignment of the Student Loans. Notwithstanding the foregoing, if the transfer
of the Student Loans is deemed to be an assignment of collateral as security for
the benefit of the Depositor or a Trust, as applicable, a security interest in
the Student Loans may, pursuant to the provisions of 20 U.S.C. ss. 1087-2(d)(3),
be perfected either through the taking of possession of the loans or by the
filing of notice of the security interest in the manner provided by the
applicable Uniform Commercial Code ("UCC") for perfection of security interests
in accounts. A financing statement or statements covering the Student Loans will
be filed under the UCC to protect the interest of the Depositor and the Eligible
Lender Trustee in the event the transfer by the Seller or the Depositor is
deemed to be an assignment of collateral as security for the benefit of the
Depositor or the Trust, as applicable.
If the transfer of the Student Loans is deemed to be an assignment as
security for the benefit of the Depositor or a Trust, as applicable, there are
limited circumstances under the UCC in which prior or subsequent transferees of
Student Loans coming into existence after the Closing Date could have an
interest in the Student Loans with priority over the Depositor or related
Eligible Lender Trustee's interest, as applicable. A tax or other government
lien on property of the Seller or the Depositor, as applicable, arising prior to
the time a Student Loan comes into existence may also have priority over the
interest of the Depositor or related Eligible Lender Trustee, as applicable, in
the Student Loan. Under the related Loan Sale Agreement, however, the Seller
will warrant that it has caused the Student Loans to be transferred to the
Depositor free and clear of the lien of any third party and the Depositor will
warrant that it has caused the Student Loans to be transferred to the related
Eligible Lender Trustee on behalf of a Trust free and clear of the lien of any
third party. In addition, each of the Depositor and the Seller will covenant
that it will not sell, pledge, assign, transfer or grant any lien on any Student
Loan held by a Trust (or any interest in any Student Loan) other than to the
Depositor or the related Eligible Lender Trustee on behalf of a Trust, as
applicable, except as provided below.
Pursuant to each Loan Servicing Agreement, the Servicer as custodian on
behalf of the related Trust will have custody of the promissory notes evidencing
the Student Loans following the sale of the Student Loans to the related
Eligible Lender Trustee. Although the accounts and computer records of the
Seller and Servicer will be marked to indicate the sale and although the Seller
will cause UCC financing statements to be filed with the appropriate
authorities, the Student Loans will not be physically segregated, stamped or
otherwise marked to indicate that the Student Loans have been sold to the
Eligible Lender Trustee. If, through inadvertence or otherwise, any of the
Student Loans were sold to another party, or a security interest in the Student
Loans were granted to another party, that purchased (or took the security
interest in) any of the Student Loans in the ordinary course of its business and
took possession of the Student Loans, then the purchaser (or secured party)
might acquire an interest in the Student Loans superior to the interest of the
Eligible Lender Trustee if the purchaser (or secured party) acquired (or took a
security interest in) the Student Loans for new value and without actual
knowledge of the related Eligible Lender Trustee's interest. See "Description of
the Transfer and Servicing Agreements--Sale of Student Loans; Representations
and Warranties".
With respect to each Trust, in the event of a Servicer Default
resulting solely from specified events of insolvency or bankruptcy that may
occur with respect to the Seller or the Servicer, a court,
trustee-in-bankruptcy, conservator, receiver or liquidator may have the power to
prevent either the related Indenture Trustee or Noteholders of the related
series from appointing a successor Servicer. See "Description of the Transfer
and Servicing Agreements--Rights upon Servicer Default".
CONSUMER PROTECTION LAWS
Numerous federal and state consumer protection laws and related
regulations impose substantial requirements upon lenders and servicers involved
in consumer finance. Also, some state laws impose finance charge ceilings and
other restrictions on consumer transactions and require contract disclosures in
addition to those required under federal law. These requirements impose specific
statutory liabilities upon lenders who fail to comply with their provisions.
These requirements are generally inapplicable to Federal Student Loans, but a
Trust may be liable for violations of consumer protection laws that may apply to
the Student Loans, either as assignee or as the party directly responsible for
obligations arising after the transfer. For a discussion of a Trust's rights if
the Student Loans were not originated or serviced in compliance in all material
respects with applicable laws, SEE "Description of the Transfer and Servicing
Agreements--Sale of Student Loans; Representations and Warranties"
and"--Servicer Covenants".
LOAN ORIGINATION AND SERVICING PROCEDURES APPLICABLE TO STUDENT LOANS
The Act, including the implementing regulations thereunder, imposes
specified requirements, guidelines and procedures with respect to originating
and servicing student loans including the Federal Student Loans. Generally,
those procedures require that completed loan applications be processed, a
determination of whether an applicant is an eligible borrower under applicable
standards (including a review of a financial need analysis) be made, the
borrower's responsibilities under the loan be explained to him or her, the
promissory note evidencing the loan be executed by the borrower and then that
the loan proceeds be disbursed in a specified manner by the lender. After the
loan is made, the lender must establish repayment terms with the borrower,
properly administer deferrals and forbearances and credit the borrower for
payments made thereon. If a borrower becomes delinquent in repaying a loan, a
lender or a servicing agent must perform collection procedures (primarily
telephone calls and demand letters) which vary depending upon the length of time
a loan is delinquent. The Servicer has agreed pursuant to the related Loan
Servicing Agreement to perform collection and servicing procedures on behalf of
the related Trust. However, failure to follow these procedures or failure of the
originator of the loan to follow procedures relating to the origination of any
Federal Student Loans could result in adverse consequences. Any failure could
result in the Department's refusal to make reinsurance payments to the Federal
Guarantors or to make Interest Subsidy Payments and Special Allowance Payments
to the Eligible Lender Trustee with respect to the Federal Student Loans or in
the Federal Guarantors' refusal to honor their Guarantee Agreements with the
Eligible Lender Trustee with respect to the Federal Student Loans. Failure of
the Federal Guarantors to receive reinsurance payments from the Department could
adversely affect the Federal Guarantors' ability or legal obligation to make
Guarantee Payments to the related Eligible Lender Trustee with respect to the
Federal Student Loans.
Loss of any Guarantee Payments, Interest Subsidy Payments or Special
Allowance Payments could adversely affect the amount of Available Funds on any
Distribution Date and the related Trust's ability to pay principal and interest
on the Notes of the related series and to make distributions in respect of the
Certificates of the related series. Under specified circumstances, unless
otherwise specified in the related prospectus supplement, the related Trust has
the right, pursuant to the related Loan Sale Agreement and Loan Servicing
Agreement, to cause the Seller to repurchase any Student Loan, or to cause the
Servicer to arrange for the purchase of any Student Loan, if a breach of the
representations, warranties or covenants of the Seller or the Servicer, as the
case may be, with respect to the Student Loan has a material adverse effect on
the interest of the Trust in the Student Loan and the breach is not cured within
any applicable cure period. SEE "Description of the Transfer and Servicing
Agreements--Sale of Student Loans; Representations and Warranties"
and"--Servicer Covenants". The failure of the Seller to so purchase, or of the
Servicer to arrange for the purchase of, a Student Loan, if so required, would
constitute a breach of the related Loan Sale Agreement and Loan Servicing
Agreement, enforceable by the related Eligible Lender Trustee on behalf of the
related Trust or by the related Indenture Trustee on behalf of the Noteholders
of the related series, but would not constitute an Event of Default under the
Indenture.
STUDENT LOANS GENERALLY NOT SUBJECT TO DISCHARGE IN BANKRUPTCY
Effective for bankruptcy actions commenced on or after October 8, 1998,
Student Loans are generally not dischargeable by a borrower in bankruptcy
pursuant to the U.S. Bankruptcy Code, unless excepting the debt from discharge
will impose an undue hardship on the debtor and the debtor's dependents.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is, in the opinion of Stroock & Stroock & Lavan LLP
("Federal Tax Counsel"), a summary of all material federal income tax
consequences of the purchase, ownership and disposition of the Notes and the
Certificates. This summary does not purport to deal with federal income tax
consequences applicable to all categories of holders, some of which may be
subject to special rules. For example, it does not discuss the tax treatment of
Noteholders or Certificateholders that are insurance companies, regulated
investment companies or dealers in securities. Moreover, there are no cases or
Internal Revenue Service ("IRS") rulings on similar transactions involving debt
and/or equity interests issued by a trust with terms similar to those of the
Notes and/or the Certificates. As a result, the IRS may disagree with all or a
part of the discussion below. Prospective investors are urged to consult their
own tax advisors in determining the federal, state, local, foreign and any other
tax consequences to them of the purchase, ownership and disposition of the Notes
and the Certificates.
The following summary is based upon current provisions of the Internal
Revenue Code of 1986, as amended (the "Code"), the Treasury regulations
promulgated thereunder and judicial or ruling authority, all of which are
subject to change, which change may be retroactive. Each Trust will be provided
with an opinion of Federal Tax Counsel regarding federal income tax matters
discussed below, which opinion will be filed with the Commission on a Form 8-K
prior to the sale of the securities issued by the Trust. An opinion of Federal
Tax Counsel, however, is not binding on the IRS or the courts. No ruling on any
of the issues discussed below will be sought from the IRS. For purposes of the
following summary, references to the Trust, the Notes, the Certificates and
related terms, parties and documents shall be deemed to refer, unless otherwise
specified in this prospectus, to each Trust and the Notes, Certificates and
related terms, parties and documents applicable to the Trust. Each prospective
investor should consult with its tax advisor as to the federal, state, local,
foreign and any other tax consequences of the purchase, ownership and
disposition of securities specific to THE prospective investor.
TRUSTS FOR WHICH A PARTNERSHIP ELECTION IS MADE
TAX CHARACTERIZATION OF THE TRUST
Federal Tax Counsel will deliver its opinion that the Trust will not be
an association (or publicly traded partnership) taxable as a corporation for
federal income tax purposes. This opinion will be based on the assumption that
the terms of the Trust Agreement and related documents will be complied with and
on counsel's conclusions that the nature of the income of the Trust or the
satisfaction of safe harbors relating to the trading of the Certificates will
exempt the Trust from the rule that specified publicly traded partnerships are
taxable as corporations.
TAX CONSEQUENCES TO HOLDERS OF THE NOTES
Treatment of the Notes as Indebtedness. The Seller and the Depositor
will agree, and the Noteholders will agree by their purchase of Notes, to treat
the Notes as debt for federal income tax purposes. Federal Tax Counsel will,
except as otherwise provided in the related prospectus supplement, deliver an
opinion to the Trust that the Notes will be classified as debt for federal
income tax purposes. The discussion below assumes this characterization of the
Notes is correct.
ORIGINAL ISSUE DISCOUNT. The discussion below assumes that all payments
on the Notes are denominated in U.S. dollars, that the interest formula for the
Notes meets the requirements for "qualified stated interest" under Treasury
regulations (the "OID Regulations") relating to original issue discount ("OID"),
and that any OID on the Notes (i.e., any excess of the stated redemption price
at maturity of the Notes, generally the principal amount of the Notes, over
their issue price) is less than a de minimis amount (i.e., 0.25% of their
principal amount multiplied by the weighted number of full years included in
their term), all within the meaning of the OID regulations. If these conditions
are not satisfied with respect to any given series of Notes, additional tax
considerations with respect to the Notes will be disclosed in the Related
prospectus supplement. The OID Regulations do not address their application to
debt instruments including the Notes that are subject to prepayment based on the
prepayment of other debt instruments. The legislative history of the OID
provisions of the Code provides, however, that the calculation and accrual of
OID should be based on the prepayment assumption used by the parties in pricing
the transaction. In the event that any of the notes are issued with OID, the
prepayment assumption will be set forth in the related prospectus supplement.
Furthermore, although premium amortization and accrued market discount on debt
instruments including the Notes, which are subject to prepayment based on the
payments on other debt instruments, are to be determined under regulations yet
to be issued, the legislative history of these Code provisions provides that the
same prepayment assumption used to calculate OID, whether or not the debt
instrument is issued with OID, should be used.
INTEREST INCOME ON THE NOTES. Based on the above assumptions, except as
discussed in the following paragraph, the Notes will not be considered issued
with OID. The stated interest thereon will be taxable to a Noteholder as
ordinary interest income when received or accrued in accordance with the
Noteholder's method of tax accounting. Under the OID Regulations, a holder of a
Note that was issued with a de minimis amount of OID must include the OID in
income, on a pro rata basis, as principal payments are made on the Note.
Alternatively, a Noteholder may elect to accrue all interest, discount
(including de minimis market discount or OID) and premium in income as interest,
based on a constant yield method. If an election were made with respect to a
Note with market discount, the Noteholder would be deemed to have made an
election to include in income currently market discount with respect to all debt
instruments having market discount that the Noteholder acquires during the year
of the election and thereafter. Similarly, a Noteholder that makes this election
for a Note that is acquired at a premium will be deemed to have made an election
to amortize bond premium with respect to all debt instruments having amortizable
bond premium that the Noteholder owns at the beginning of the first taxable year
to which the election applies or acquires thereafter. The election to accrue
interest, discount and premium under a constant yield method with respect to a
Note is irrevocable. A purchaser who buys a Note for more or less than its
principal amount will generally be subject, respectively, to the premium
amortization or market discount rules of the Code.
Qualified Stated Interest, which is taxable in accordance with the
holder's method of accounting, is interest that is unconditionally payable
(I.E., payments can be compelled or the debt instrument provides terms and
conditions that make the likelihood of late payment or nonpayment remote) at
least annually at a single fixed rate (or variable rates). The Company intends
to treat the interest paid on the Notes as Qualified Stated Interest.
A holder of a Note that has a fixed maturity date of not more than one
year from the issue date of the Note (each, a "Short-Term Note") may be subject
to special rules. An accrual basis holder of a Short-Term Note (and specified
cash method holders, including regulated investment companies, banks and
securities dealers, as set forth in Section 1281 of the Code) generally will be
required to report interest income as interest accrues on a ratable basis over
the term of each interest period or, at the election of the holder, on a
constant yield basis. Cash basis holders of a Short-Term Note will, in general,
be required to report interest income as interest is paid (or, if earlier, upon
the taxable disposition of the Short-Term Note). However, a cash basis holder of
a Short-Term Note reporting interest income as it is paid may be required to
defer a portion of any interest expense otherwise deductible on indebtedness
incurred to purchase or carry the Short-Term Note until the taxable disposition
of the Short-Term Note. A cash basis taxpayer may elect under Section 1282 of
the Code to accrue interest income on all nongovernment debt obligations with a
term of one year or less, in which case the taxpayer would include interest on
the Short-Term Note in income as it accrues, and would not be subject to the
interest expense deferral rule referred to in the preceding sentence. Certain
special rules apply if a Short-Term Note is purchased for more or less than its
principal amount.
SALE OR OTHER DISPOSITION. If a Noteholder sells a Note, the holder
will recognize gain or loss in an amount equal to the difference between the
amount realized on the sale and the holder's adjusted tax basis in the Note. The
adjusted tax basis of a Note to a particular Noteholder will equal the holder's
cost for the Note, increased by any market discount, acquisition discount, OID
and gain previously included by the Noteholder in income with respect to the
Note and decreased by the amount of bond premium (if any) previously amortized
and by the amount of principal payments previously received by the Noteholder
with respect to the Note. Any gain or loss will be capital gain or loss if the
Note was held as a capital asset, except for gain representing accrued interest
and accrued market discount not previously included in income. Any gain or loss
would be long-term capital gain or loss if the Noteholder's holding period
exceeded one year. Capital losses generally may be used only to offset capital
gains.
FOREIGN HOLDERS. Interest paid (or accrued) to a Noteholder who is a
nonresident alien, foreign corporation or other person that is not a United
States person as the term is defined in the Code and the Treasury regulations
thereunder (a "foreign person") generally will be considered "portfolio
interest", and generally will not be subject to United States federal income tax
and withholding tax, provided, that:
o the interest is not effectively connected with the conduct of a
trade or business within the United States by the foreign person
o the foreign person is not actually or constructively a "10 percent
shareholder" of the Trust, the Seller or the Company (including a
holder of 10% of the outstanding Certificates) or a "controlled
foreign corporation" with respect to which the Trust, the Seller
or the Company is a "related person" within the meaning of the
Code, and
o the foreign person provides the Trustee or other person who is
otherwise required to withhold U.S. tax with respect to the Notes
with an appropriate statement (on Form W-8 or a similar form),
signed under penalty of perjury, certifying that the beneficial
owner of the Note is a foreign person and providing the foreign
person's name and address.
If a Note is held through a securities clearing organization or specified other
financial institutions, the organization or institution may provide the relevant
signed statement to the withholding agent; in that case, however, the signed
statement must be accompanied by a Form W-8 or substitute form provided by the
foreign person that owns the Note. If the interest is not portfolio interest,
then it will be subject to United States federal income and withholding tax at a
rate of 30%, unless reduced or eliminated pursuant to an applicable tax treaty.
Any capital gain realized on the sale, redemption, retirement or other
taxable disposition of a Note by a foreign person generally will be exempt from
United States federal income and withholding tax, provided that (1) the gain is
not effectively connected with the conduct of a trade or business in the United
States by the foreign person and (2) in the case of an individual foreign
person, the foreign person is not present in the United States for 183 days or
more in the taxable year.
If the interest, gain or income on a Note held by a foreign person is
effectively connected with the conduct of a trade or business in the United
States by the foreign person (although exempt from the withholding tax
previously discussed if the holder provides an appropriate statement), the
holder generally will be subject to United States federal income tax on the
interest, gain or income at regular federal income tax rates. In addition, if
the foreign person is a foreign corporation, it may be subject to a branch
profits tax equal to 30% of its "effectively connected earnings and profits"
within the meaning of the Code for the taxable year, as adjusted for specified
items, unless it qualifies for a lower rate under an applicable tax treaty (as
modified by the branch profits tax rules).
Final regulations dealing with backup withholding and information
reporting on income paid to foreign persons and related matters (the "New
Withholding Regulations") were published in the Federal Register on October 14,
1997. In general, the New Withholding Regulations do not significantly alter the
substantive withholding and information reporting requirements, but do unify
current certification procedures and forms and clarify reliance standards. The
New Withholding Regulations generally will be effective for payments made after
December 31, 2000, subject to transition rules. The discussion set forth above
does not take the New Withholding Regulations into account. Prospective
Noteholders who are foreign persons are strongly urged to consult their own tax
advisors with respect to the New Withholding Regulations.
BACKUP WITHHOLDING. Each holder of a Note (other than an exempt holder
including a corporation, tax-exempt organization, qualified pension and
profit-sharing trust, individual retirement account or nonresident alien who
provides certification as to status as a nonresident) will be required to
provide, under penalty of perjury, a certificate setting forth the holder's
name, address, correct federal taxpayer identification number and a statement
that the holder is not subject to backup withholding. Should a nonexempt
Noteholder fail to provide the required certification, the related Trust will be
required to withhold 31% of the amount otherwise payable to the holder and remit
the withheld amount to the IRS as a credit against the holder's federal income
tax liability. As previously mentioned, the New Withholding Regulations
generally will be effective for payments made after December 31, 2000, subject
to transition rules.
RECENT LEGISLATION
Sections 860H through 860L to the Code (the "FASIT Provisions") provide
for a new type of entity for federal income tax purposes known as a "financial
asset securitization investment trust" (a "FASIT"). The legislation providing
for the new FASIT entity, however, did not become effective until September 1,
1997, and many technical issues are to be addressed in Treasury regulations yet
to be drafted. In general, the FASIT legislation enables trusts including the
Trust to elect to be treated as a pass-through entity not subject to federal
entity-level income tax (except with respect to prohibited transactions) and to
issue securities that would be treated as debt for federal income tax purposes.
If a Trust is intended to qualify as a FASIT for federal income tax purposes,
the prospectus supplement will so indicate.
TAX CONSEQUENCES TO HOLDERS OF THE CERTIFICATES
The following discussion only applies to a Trust which issues one or
more classes of Certificates and assumes that all payments on the Certificates
are denominated in U.S. dollars, that a series of Securities includes a single
class of Certificates, that any Certificates are sold to persons other than the
Company, and that the Company retains an equity interest in the Trust. If these
conditions are not satisfied with respect to any given series of Certificates,
any additional tax considerations with respect to the Certificates will be
disclosed in the applicable prospectus supplement.
CLASSIFICATION AS A PARTNERSHIP
TREATMENT OF THE TRUST AS A PARTNERSHIP. The Seller, the Depositor and
the Servicer will agree, and the Certificateholders will agree by their purchase
of Certificates, to treat the Trust as a partnership for purposes of federal and
state income tax, franchise tax and any other tax measured in whole or in part
by income, with the assets of the partnership being the assets held by the
Trust, the partners of the partnership being the Certificateholders (including
the Company in its capacity as recipient of distributions from the Reserve
Account, if any), and the Notes being debt of the partnership. However, the
proper characterization of the arrangement involving the Trust, the
Certificateholders, the Noteholders, the Seller, the Depositor and the Servicer
is not clear because there is no authority on transactions comparable to that
contemplated in this prospectus.
Under the provisions of Subchapter K, a partnership is not considered a
separate taxable entity. Instead, partnership income is taxed directly to the
partners and each partner generally is viewed as owning a direct undivided
interest in each partnership asset. The partnership is generally treated as an
entity, however, for computing partnership income, determining the tax
consequences of transactions between a partner and the partnership, and
characterizing the gain on the sale or exchange of a partnership interest. The
following discussion is a summary of some of the material federal income tax
consequences of classifying the Trust as a partnership. Prospective owners of
Trust Certificates should consult their own tax advisors regarding the federal
income tax consequences discussed below, as well as any other material federal
income tax consequences that may result from applying the provisions of
Subchapter K to the ownership and transfer of a Trust Certificate.
PARTNERSHIP TAXATION. As a partnership, the Trust will not be subject
to federal income tax. Rather, each Certificateholder will be required to
separately take into account the holder's allocated share of income, gains,
losses, deductions and credits of the Trust. The Trust's income will consist
primarily of interest and finance charges earned on the Student Loans (including
appropriate adjustments for market discount, OID and bond premium), investment
income from investments of amounts on deposit in any related Trust Accounts and
any gain upon collection or disposition of Student Loans. The Trust's deductions
will consist primarily of interest accruing with respect to the Notes, servicing
and other fees, and losses or deductions upon collection or disposition of
Student Loans.
The tax items of a partnership are allocable to the partners in
accordance with the Code, Treasury regulations and the partnership agreement
(here, the Trust Agreement and related documents). The Trust Agreement will
provide, in general, that the Certificateholders will be allocated taxable
income of the Trust for each Interest Period (as defined in the applicable
prospectus supplement, an "Interest Period") equal to the sum of:
o the interest that accrues on the Certificates in accordance with
their terms for the Interest Period, including interest accruing
at the Pass-Through Rate for the Interest Period and interest on
amounts previously due on the Certificates but not yet
distributed;
o any Trust income attributable to discount on the Student Loans
that corresponds to any excess of the principal amount of the
Certificates over their initial issue price; and
o all other amounts of income payable to the Certificateholders for
the Interest Period.
All remaining taxable income of the Trust will be allocated to the Company.
Losses will generally be allocated in the manner in which they are borne. Based
on the economic arrangement of the parties, this approach for allocating Trust
income should be permissible under applicable Treasury regulations, although no
assurance can be given that the IRS would not require a greater amount of income
to be allocated to Certificateholders. Moreover, even under the foregoing method
of allocation, Certificateholders may be allocated income equal to the entire
amount of interest accruing on the Certificates for an Interest Period, based on
the Pass-Through Rate plus the other items described above, even though the
Trust might not make (or have sufficient cash to make) current cash
distributions of this amount. Thus, cash basis holders will in effect be
required to report income from the Certificates on the accrual basis and
Certificateholders may become liable for taxes on Trust income even if they have
not received cash from the Trust to pay the taxes. In addition, because tax
allocations and tax reporting will be done on a uniform basis for all
Certificateholders but Certificateholders may be purchasing Certificates at
different times and at different prices, Certificateholders may be required to
report on their tax returns taxable income that is greater or less than the
amount reported to them by the Trust.
An individual taxpayer's share of expenses of the Trust (including fees
to the Servicer but not interest expenses) are miscellaneous itemized deductions
which are deductible only to the extent they exceed two percent of the
individual's adjusted gross income (and not at all for alternative minimum tax
purposes). Accordingly, the deductions might be disallowed to the individual in
whole or in part and might result in the holder being taxed on an amount of
income that exceeds the amount of cash actually distributed to the holder over
the life of the Trust. The deductions may also be subject to reduction under
Section 68 of the Code if an individual taxpayer's adjusted gross income exceeds
limits.
The Trust intends to make all tax calculations relating to income and
allocations to Certificateholders on an aggregate basis. If the IRS were to
require that the calculations be made separately for each of the Student Loans,
the Trust might be required to incur additional expense but it is believed that
there would not be a material adverse effect on Certificateholders.
COMPUTATION OF INCOME. Taxable income of the Trust will be computed at
the Trust level and the portion allocated to the Trust Certificateholders will
be allocated to them pro rata. Consequently, the method of accounting for
taxable income will be chosen by, and any elections (including those described
above with respect to the market discount rules) will be made by, the Trust
rather than the Trust Certificateholders. The Trust intends, to the extent
possible, to (1) have the taxable income of the Trust computed under the accrual
method of accounting and (2) adopt a calendar-year taxable year for computing
the taxable income of the Trust. The tax year of the Trust, however, is
generally determined by reference to the tax years of the Certificateholders. An
owner of a Trust Certificate is required to include its pro rata share of Trust
income for a taxable year as determined by the Trust in the Trust
Certificateholder's gross income for its taxable year in which the taxable year
of the Trust ends.
DETERMINING THE BASES OF TRUST ASSETS. The Trust will become a
partnership on the first date when Trust Certificates are held by more than one
person. On that date, each of the Trust Certificateholders should be treated as
having purchased a share of the assets of the Trust (subject to the liability
for the Notes) followed immediately by a deemed contribution of the assets to
the newly formed partnership. The partnership's basis in the Trust's assets
would therefore equal the sum of the Trust Certificateholders' bases in their
respective interests in the Trust's assets immediately prior to the deemed
contribution to the partnership. To the extent that the fair market value of the
assets deemed contributed to the partnership varied from the bases of the assets
to the partnership, the allocation of taxable income to the Trust
Certificateholders would be adjusted in accordance with Section 704(c) of the
Code to account for the variations.
Under Section 708 of the Code, if 50% or more of the outstanding
interests in a partnership are sold or exchanged within any 12-month period, the
partnership will be deemed to terminate and then be reconstituted for federal
income tax purposes. If a termination occurs, the assets of the terminated
partnership are deemed to be constructively contributed to a reconstituted
partnership in exchange for interests in the reconstituted partnership. The
interests would be deemed distributed to the partners of the terminated
partnership in liquidation thereof, which distribution would not constitute a
sale or exchange. Accordingly, if the sale of the Trust Certificates terminates
the partnership under Section 708 of the Code, a Certificateholder's basis in
its ownership interest would not change. The Trust's taxable year would also
terminate as a result of a constructive termination and, if the
Certificateholder's taxable year is different from the Trust's, the termination
could result in the "bunching" of more than 12 months' income or loss of the
Trust in the Certificateholder's income tax return for the year in which the
Trust was deemed to terminate. A redemption of interests is not considered a
sale or exchange of interests for purposes of applying this constructive
termination rule.
DISCOUNT AND PREMIUM. To the extent that OID, if any, on the Student
Loans exceeds a de minimis amount, the Trust would have OID income. As indicated
above, a portion of the OID income may be allocated to the Certificateholders.
Moreover, the purchase price paid by the Trust for the Student Loans
may be greater or less than the remaining aggregate principal balances of the
Student Loans at the time of purchase. If so, the Student Loans will have been
acquired at a premium or discount, as the case may be. (As indicated above, the
Trust will make this calculation on an aggregate basis, but might be required to
recompute it on a loan by loan basis.)
If the Trust acquires the Student Loans at a market discount or
premium, the Trust will elect to include any discount in income currently as it
accrues over the life of the Student Loans or to offset any premium against
interest income on the Student Loans. As indicated above, a portion of the
market discount income or premium deduction may be allocated to
Certificateholders.
DISPOSITION OF CERTIFICATES. Generally, capital gain or loss will be
recognized on a sale of Certificates in an amount equal to the difference
between the amount realized and the seller's tax basis in the Certificates sold.
Any gain or loss would be long-term capital gain or loss if the
Certificateholder's holding period exceeded one year. A Certificateholder's tax
basis in a Certificate will generally equal the holder's cost increased by the
holder's share of Trust income (includible in gross income) and decreased by any
distributions received or losses allocated with respect to the Certificate. In
addition, both the tax basis in the Certificate and the amount realized on a
sale of a Certificate would include the holder's share of the Notes and other
liabilities of the Trust. A holder acquiring Certificates at different prices
may be required to maintain a single aggregate adjusted tax basis in the
Certificates and, upon sale or other disposition of some of the Certificates,
allocate a pro rata portion of the aggregate tax basis to the Certificates sold
(rather than maintaining a separate tax basis in each Certificate for purposes
of computing gain or loss on a sale of that Certificate).
Any gain on the sale of a Certificate attributable to the holder's
share of unrecognized accrued market discount on the Student Loans would
generally be treated as ordinary income to the holder.
If a Certificateholder is required to recognize an aggregate amount of
income (not including income attributable to disallowed itemized deductions
described above) over the life of the Certificates that exceeds the aggregate
cash distributions with respect thereto, the excess will generally give rise to
a capital loss upon the retirement of the Certificates.
ALLOCATIONS BETWEEN TRANSFERORS AND TRANSFEREES. In general, the
Trust's taxable income and losses will be determined monthly and the tax items
for a particular calendar month will be apportioned among the Certificateholders
in proportion to the principal amount of Certificates owned by them as of the
close of the last day of the month. As a result, a holder purchasing
Certificates may be allocated tax items (which will affect the tax liability and
tax basis of the holder) attributable to periods before the actual transaction.
The use of a monthly convention may not be permitted by existing laws
and regulations. If a monthly convention is not allowed (or only applies to
transfers of less than all of the partner's interest), taxable income or losses
of the Trust might be reallocated among the Certificateholders. The Depositor
and the Company are authorized to revise the Trust's method of allocation
between transferors and transferees to conform to a method permitted by future
laws, regulations or other IRS guidance.
SECTION 754 ELECTION. In the event that a Certificateholder sells a
Certificate at a profit (or loss), the purchasing Certificateholder will have a
higher (or lower) basis in the Certificate than the selling Certificateholder
had. The tax basis of the Trust's assets will not be adjusted to reflect that
higher (or lower) basis unless the Trust were to file an election under Section
754 of the Code. In order to avoid the administrative complexities that would be
involved in keeping accurate accounting records, as well as potentially onerous
information reporting requirements, the Trust will not make the election. As a
result, Certificateholders might be allocated a greater or lesser amount of
Trust income than would be appropriate based on their own purchase price for
Certificates.
ADMINISTRATIVE MATTERS. The Eligible Lender Trustee is required to keep
or cause to be kept complete and accurate books of the Trust. The Eligible
Lender Trustee will file a partnership information return (IRS Form 1065) with
the IRS for each taxable year of the Trust and will report each
Certificateholder's allocable share of items of Trust income and expense to
holders and the IRS on Schedule K-1. The Trust will provide the Schedule K-1
information to nominees that fail to provide the Trust with the information
statement described below and the nominees will be required to forward the
information to the beneficial owners of the Certificates. Generally, holders
must file tax returns that are consistent with the information returns filed by
the Trust or be subject to penalties unless the holder timely notifies the IRS
of all the inconsistencies.
Under Section 6031 of the Code, any person that holds Certificates as a
nominee at any time during a calendar year is required to furnish the Trust with
a statement containing information on the nominee, the beneficial owners and the
Certificates so held. The information includes (1) the name, address and
taxpayer identification number of the nominee and (2) as to each beneficial
owner:
o the name, address and identification number of the person,
o whether the person is a United States person, a tax-exempt entity
or a foreign government, an international organization, or any
wholly owned agency or instrumentality of either of the foregoing,
and
o information on Certificates that were held, bought or sold on
behalf of the person throughout the year.
In addition, brokers and financial institutions that hold Certificates through a
nominee are required to furnish directly to the Trust information as to
themselves and their ownership of Certificates. A clearing agency registered
under Section 17A of the Exchange Act that holds Certificates as a nominee is
not required to furnish any information statement to the Trust. The information
referred to above for any calendar year must be furnished to the Trust on or
before the following January 31. Nominees, brokers and financial institutions
that fail to provide the Trust with the information described above may be
subject to penalties.
The Company will be designated as "tax matters partner" in the related
Trust Agreement and will be responsible for representing the Certificateholders
in disputes with the IRS. The Code provides for administrative examination of a
partnership as if the partnership were a separate and distinct taxpayer.
Generally, the statute of limitations for partnership items does not expire
before three years after the later of the date on which the partnership
information return is filed or the last day for filing the return for the year
(determined without regard to extensions). Any adverse determination following
an audit of the return of the Trust by the appropriate taxing authorities could
result in an adjustment of the returns of the Certificateholders, and, under
specified circumstances, a Certificateholder may be precluded from separately
litigating a proposed adjustment to the items of the Trust. An adjustment could
also result in an audit of a Certificateholder's returns and adjustments of
items not related to the income and losses of the Trust.
TAX CONSEQUENCES TO FOREIGN CERTIFICATEHOLDERS. It is not clear whether
the Trust would be considered to be engaged in a trade or business in the United
States for purposes of federal withholding taxes with respect to non-U.S.
persons because there is no clear authority dealing with that issue under facts
substantially similar to those described in this prospectus. Although it is not
expected that the Trust would be engaged in a trade or business in the United
States for the purposes, the Trust will withhold as if it were so engaged in
order to protect the Trust from possible adverse consequences of a failure to
withhold. The Trust expects to withhold on the portion of its taxable income
that is allocable to foreign Certificateholders pursuant to Section 1446 of the
Code, as if the income were effectively connected to a U.S. trade or business,
at a rate of 35% for foreign holders that are taxable as corporations and 39.6%
for all other foreign holders. Subsequent adoption of Treasury regulations or
the issuance of other administrative pronouncements may require the Trust to
change its withholding procedures. In determining a holder's withholding status,
the Trust may rely on IRS Form W-8, IRS Form W-9 or the holder's certification
of nonforeign status signed under penalty of perjury. As previously mentioned,
the New Withholding Regulations generally will be effective for payments made
after December 31, 2000, subject to transition rules. The discussion set forth
above does not take into account the New Withholding Regulations. Prospective
Certificateholders who are foreign persons are strongly urged to consult their
own tax advisors with respect to the New Withholding Regulations.
Each foreign holder may be required to file a U.S. individual or
corporate income tax return (including in the case of a corporation, the branch
profits tax) on its share of the Trust's income. Each foreign holder must obtain
a taxpayer identification number from the IRS and submit that number to the
Trust in order to assure appropriate crediting of the taxes withheld. A foreign
holder generally would be entitled to file with the IRS a claim for refund with
respect to taxes withheld by the Trust, taking the position that no taxes were
due because the Trust was not engaged in a U.S. trade or business. However,
interest payments made (or accrued) to a Certificateholder who is a foreign
person may be considered "guaranteed payments" (to the extent the payments are
determined without regard to the income of the Trust). If these interest
payments are properly characterized as guaranteed payments, then the interest
will not be considered "portfolio interest." As a result, Certificateholders
will be subject to United States federal income tax and withholding tax at a
rate of 30% on the Trust's gross income, unless reduced or eliminated pursuant
to an applicable treaty. In this case, a foreign holder would only be entitled
to claim a refund for that portion of the taxes, if any, in excess of the taxes
that should be withheld with respect to the guaranteed payments. As a result,
each potential foreign Certificateholder should consult its tax advisor as to
whether the tax consequences of holding a Certificate make it an unsuitable
investment.
BACKUP WITHHOLDING. Distributions made on the Certificates and proceeds
from the sale of the Certificates will be subject to a "backup" withholding tax
of 31% if, in general, the Certificateholder fails to comply with identification
procedures, unless the holder is an exempt recipient under applicable provisions
of the Code. As previously mentioned, the New Withholding Regulations generally
will be effective for payments made after December 31, 1999, subject to
transition rules.
TRUSTS IN WHICH ALL RESIDUAL INTERESTS ARE RETAINED BY THE SELLER, THE
DEPOSITOR OR AN AFFILIATE OF THE SELLER OR THE DEPOSITOR
TAX CHARACTERIZATION OF THE TRUST
Any party that retains or acquires 100% of the Certificates agrees by
this retention or acquisition to disregard the Trust as an entity separate from
the sole Certificateholder. Federal Tax Counsel will deliver its opinion that a
Trust which issues one or more classes of Notes to investors and all the
Residual Interests of which are retained by the Seller, the Depositor or an
affiliate thereof will not be an association (or publicly traded partnership)
taxable as a corporation for federal income tax purposes, assuming that the
terms of the Trust Agreement and related documents will be complied with so
that, among other things, no election will be made to treat the Trust as a
corporation for federal income tax purposes.
Absent the election to be treated as a corporation for federal income
tax purposes, Treasury regulations provide that the Trust will be disregarded as
an entity separate from its sole Certificateholder for federal income tax
purposes.
TAX CONSEQUENCES TO HOLDERS OF THE NOTES
TREATMENT OF THE NOTES AS INDEBTEDNESS. The Seller and the Depositor
will agree, and the Noteholders will agree by their purchase of Notes, to treat
the Notes as debt for federal income tax purposes. Federal Tax Counsel will,
except as otherwise provided in the related prospectus supplement, advise the
Trust that the Notes will be classified as debt for federal income tax purposes.
Assuming the characterization of the Notes is correct, the federal income tax
consequences to Noteholders described above under"--TRUSTS FOR WHICH A
PARTNERSHIP ELECTION IS MADE--Tax Consequences to Holders of the Notes" would
apply to the Noteholders.
POSSIBLE ALTERNATIVE TREATMENTS OF THE NOTES. If, contrary to the
opinion of Federal Tax Counsel, the IRS successfully asserted that one or more
classes of Notes did not represent debt for federal income tax purposes, the
class or classes of Notes might be treated as equity interests in the Trust. If
so treated, the Trust could, in the view of Federal Tax Counsel, be treated as a
publicly traded partnership that would be taxable as a corporation In this case,
the entity would be subject to federal income taxes at corporate tax rates on
its taxable income generated by Student Loans. An entity-level tax could result
in reduced distribution to Noteholders and Noteholders could be liable for a
share of the tax.
Furthermore, even if the Trust were not taxable as a corporation, the
treatment of Notes as equity interests in a partnership could have adverse tax
consequences to holders of the Notes. For example, income from classes of Notes
to tax-exempt entities (including pension funds) might be "unrelated business
taxable income", income to foreign holders may be subject to U.S. withholding
tax and U.S. tax return filing requirements, and individual holders might be
subject to limitations on their ability to deduct their share of Trust expenses.
In the event one or more classes of Notes were treated as interests in a
partnership, the consequences governing the Certificates as equity interests in
a partnership described above under"--TRUSTS FOR WHICH A PARTNERSHIP ELECTION IS
MADE--Tax Consequences to Holders of the Certificates" would apply to the
holders of the Notes.
THE FEDERAL TAX DISCUSSIONS SET FORTH ABOVE ARE INCLUDED FOR GENERAL
INFORMATION ONLY AND MAY NOT BE APPLICABLE DEPENDING UPON A NOTEHOLDER'S OR
CERTIFICATEHOLDER'S PARTICULAR TAX SITUATION. PROSPECTIVE PURCHASERS SHOULD
CONSULT THEIR TAX ADVISORS WITH RESPECT TO THE TAX CONSEQUENCES TO THEM OF THE
PURCHASE, OWNERSHIP AND DISPOSITION OF SECURITIES, INCLUDING THE TAX
CONSEQUENCES UNDER STATE, LOCAL, FOREIGN AND OTHER TAX LAWS AND THE POSSIBLE
EFFECTS OF CHANGES IN FEDERAL OR OTHER TAX LAWS.
TRUSTS FOR WHICH A GRANTOR TRUST ELECTION IS MADE
TAX CHARACTERIZATION OF THE TRUST
CHARACTERIZATION. In the case of a grantor trust, Federal Tax Counsel
will deliver its opinion that the Trust will not be classified as an association
taxable as a corporation and that the Trust will be classified as a grantor
trust under subpart E, Part I of subchapter J of the Code. In this case,
beneficial owners of certificates (referred to in this prospectus as "grantor
trust certificateholders") will be treated for federal income tax purposes as
owners of a portion of the Trust's assets as described below. The certificates
issued by a Trust that is treated as a grantor trust are referred to in this
prospectus as "grantor trust certificates".
TAXATION OF GRANTOR TRUST CERTIFICATEHOLDERS. Subject to the discussion
below under "--Stripped Certificates" and "--Subordinated certificates," each
grantor trust certificateholder will be treated as the owner of a pro rata
undivided interest in the assets of the Trust. Accordingly, and subject to the
discussion below of the recharacterization of the Servicing Fee, each grantor
trust certificateholder must include in income its pro rata share of the
interest and other income from the Student Loans, including any interest,
original issue discount, market discount, prepayment fees, assumption fees, and
late payment charges with respect to the assets, and, subject to limitations
discussed below, may deduct its pro rata share of the fees and other deductible
expenses paid by the Trust, at the same time and to the same extent as these
items would be included or deducted by the grantor trust certificateholder if
the grantor trust certificateholder held directly a pro rata interest in the
assets of the Trust and received and paid directly the amounts received and paid
by the Trust. Any amounts received by a grantor trust certificateholder in lieu
of amounts due with respect to any Student Loan because of a default or
delinquency in payment will be treated for federal income tax purposes as having
the same character as the payments they replace.
Under Sections 162 and 212 each grantor trust certificateholder will be
entitled to deduct its pro rata share of servicing fees, and other fees and
charges retained by the Servicer, provided that these amounts are reasonable
compensation for services rendered to the Trust. Grantor trust
certificateholders that are individuals, estates or trusts will be entitled to
deduct their share of expenses only to the extent these expenses plus all other
miscellaneous itemized deductions exceed two percent of the grantor trust
certificateholder's adjusted gross income, and will be allowed no deduction for
these expenses in determining their liabilities for alternative minimum tax. In
addition, Section 68 of the Code provides that the amount of itemized
deductions, including those provided for in Section 212 of the Code, otherwise
allowable for the taxable year for an individual whose adjusted gross income
exceeds a threshold amount specified in the Code, $100,000 (or $50,000 in the
case of a separate return by a married individual), adjusted for changes in the
cost of living subsequent to 1990, will be reduced by the lesser of (1) 3% of
the excess of adjusted gross income over the specified threshold amount or (2)
80% of the amount of itemized deductions otherwise allowable for the applicable
taxable year. For taxable years beginning after December 31, 1997, in the case
of a partnership that has 100 or more partners and elects to be treated as an
"electing large partnership," 70% of the partnership's miscellaneous itemized
deductions will be disallowed, although the remaining deductions will generally
be allowed at the partnership level and will not be subject to the 2% floor that
would otherwise be applicable to individual partners.
The servicing compensation to be received by the servicer may be
questioned by the IRS as exceeding a reasonable fee for the services being
performed in exchange for the servicing compensation, and a portion of the
servicing compensation could be recharacterized as an ownership interest
retained by the servicer or other party in a portion of the interest payments to
be made pursuant to the Student Loans. In this event, a Certificate might be
treated as a Stripped Certificate subject to the stripped bond rules of Section
1286 of the Code and the original issue discount provisions rather than to the
market discount and premium rules. See the discussion below under "--Stripped
Certificates". Except as discussed below under "--Stripped Certificates" or
"--Subordinated Certificates," this discussion assumes that the servicing fees
paid to the servicer do not exceed reasonable servicing compensation.
A purchaser of a grantor trust Certificate will be treated as
purchasing an interest in each Student Loan in the Trust at a price determined
by allocating the purchase price paid for the Certificate among all Student
Loans in proportion to their fair market values at the time of the purchase of
the Certificate. To the extent that the portion of the purchase price of a
grantor trust certificate allocated to a Student Loan is less than or greater
than the portion of the stated redemption price at maturity of the Student Loan,
the interest in the Student Loan will have been acquired at a discount or
premium. See "--Market Discount" and "--Premium," below.
The treatment of any discount on a Student Loan will depend on whether
the discount represents original issue discount or market discount. Except as
indicated otherwise in the applicable prospectus supplement, we do not expect
that any Student Loan will have original issue discount (except as discussed
below under "--Stripped Certificates" or "--Subordinated Certificates"). For the
rules governing original issue discount, see "Trusts for Which a Partnership
Election is Made--Tax Consequences to Holders of Notes--Original Issue Discount"
above.
The information provided to grantor trust certificateholders will not
include information necessary to compute the amount of discount or premium, if
any, at which an interest in each Student Loan is acquired.
MARKET DISCOUNT. A grantor trust certificateholder that acquires an
undivided interest in Student Loans may be subject to the market discount rules
of Sections 1276 through 1278 to the extent an undivided interest in a Student
Loan is considered to have been purchased at a "market discount". For a
discussion of the market discount rules under the Code, see "Trusts for Which a
Partnership Election is Made--Classification as a Partnership--Discount and
Premium" above.
PREMIUM. To the extent a grantor trust certificateholder is considered
to have purchased an undivided interest in a Student Loan for an amount that is
greater than the stated redemption price at maturity of the interest, the
grantor trust certificateholder will be considered to have purchased the
interest in the Student Loan with "amortizable bond premium" equal in amount to
the excess. For a discussion of the rules applicable to amortizable bond
premium, see "Trusts for Which a Partnership Election is Made--Classification as
a Partnership--Discount and Premium" above.
STRIPPED CERTIFICATES. Some classes of certificates may be subject to
the stripped bond rules of Section 1286 of the Code and for purposes of this
discussion will be referred to as "Stripped Certificates." In general, a
Stripped Certificate will be subject to the stripped bond rules where there has
been a separation of ownership of the right to receive some or all of the
principal payments on a Student Loan from ownership of the right to receive some
or all of the related interest payments. In general, where a separation has
occurred, under the stripped bond rules of Section 1286 of the Code the holder
of a right to receive a principal or interest payment on the bond is required to
accrue into income, on a constant yield basis under rules governing original
issue discount, the difference between the holder's initial purchase price for
the right to receive and the principal or interest payment to be received with
respect to that right.
Certificates will constitute Stripped Certificates and will be subject
to these rules under various circumstances, including the following:
o if any servicing compensation is deemed to exceed a reasonable;
o if the company or any other party retains a retained yield with
respect to the Student Loans held by the Trust;
o if two or more classes of certificates are issued representing the
right to non-pro rata percentages of the interest or principal
payments on the Student Loans; or
o if certificates are issued which represent the right to
interest-only payments or principal-only payments.
The tax treatment of the Stripped Certificates with respect to the
application of the original issue discount provisions of the Code is currently
unclear. However, the trustee intends to treat each Stripped Certificate as a
single debt instrument issued on the day it is purchased for purposes of
calculating any original issue discount. Original issue discount with respect to
a Stripped Certificate must be included in ordinary gross income for federal
income tax purposes as it accrues in accordance with the constant yield method
that takes into account the compounding of interest and this accrual of income
may be in advance of the receipt of any cash attributable to that income. For
purposes of applying the original issue discount provisions of the Code, the
issue price of a Stripped Certificate will be the purchase price paid by each
holder of the Stripped Certificate and the stated redemption price at maturity
may include the aggregate amount of all payments to be made with respect to the
Stripped Certificate whether or not denominated as interest. The amount of
original issue discount with respect to a Stripped Certificate may be treated as
zero under the original issue discount DE MINIMIS rules described above.
SUBORDINATED CERTIFICATES. In the event the Trust issues two classes of
grantor trust certificates that are identical except that one class is a
subordinate class, with a relatively high certificate pass through rate, and the
other is a senior class, with a relatively low certificate pass through rate
(referred to in this prospectus as the "Subordinate Certificates" and "Senior
Certificates", respectively), the grantor trust certificateholders will be
deemed to have acquired the following assets: (1) the principal portion of each
Student Loan plus a portion of the interest due on each Student Loan (the "Trust
Stripped Bond"), and (2) a portion of the interest due on each Student Loan
equal to the difference between the certificate pass through rate on the
Subordinate Certificates and the certificate pass through rate on the Senior
Certificates, if any, which difference is then multiplied by the Subordinate
Class Percentage (the "Trust Stripped Coupon"). The "Subordinate Class
Percentage" equals the initial aggregate principal amount of the Subordinate
Certificates divided by the sum of the initial aggregate principal amount of the
Subordinate Certificates and the Senior Certificates. The "Senior Class
Percentage" equals the initial aggregate principal amount of the Senior
Certificates divided by the sum of the initial aggregate principal amount of the
Subordinate Certificates and the Senior Certificates.
The Senior Certificateholders in the aggregate will own the Senior
Class Percentage of the Trust Stripped Bond and accordingly each Senior
Certificateholder will be treated as owning its pro rata share of each asset.
The Senior Certificateholders will not own any portion of the Trust Stripped
Coupon. The Subordinate Certificateholders in the aggregate own both the
Subordinate Class Percentage of the Trust Stripped Bond plus 100% of the Trust
Stripped Coupon, if any, and accordingly each Subordinate Certificateholder will
be treated as owning its pro rata share in both assets. The Trust Stripped Bond
will be treated as a "stripped bond" and the Trust Stripped Coupon will be
treated as "stripped coupons" within the meaning of Section 1286 of the Code.
Because the purchase price paid by each Subordinate Certificateholder will be
allocated between that certificateholder's interest in the Trust Stripped Bond
and the Trust Stripped Coupon based on the relative fair market value of each
asset on the date the Subordinate Certificate is purchased, the Trust Stripped
Bond may be issued with original issue discount.
Except to the extent modified below, the income of the Trust Stripped
Bond represented by a Certificate will be reported in the same manner as
described generally above for holders of certificates. The interest income on
the Subordinate Certificates at the Senior Certificate pass-through rate and the
portion of the Servicing Fee that does not constitute excess servicing will be
treated as qualified stated interest.
Income of the holder of the Trust Stripped Coupon will be reported by
treating the Trust Stripped Coupon as a single debt instrument with original
issue discount equal to the excess of the total amount payable with respect to
the Trust Stripped Coupon, based on the prepayment assumption used in pricing
the certificates, over the portion of the purchase price allocated to the Trust
Stripped Coupon. The sum of the daily portions of original issue discount on the
Trust Stripped Coupon for each day during a year in which the Subordinate
Certificateholder holds the Trust Stripped Coupon will be included in the
Subordinate Certificateholder's income.
If the Subordinate Certificateholders receive distribution of less than
their share of the Trust's receipts of principal or interest (the "Shortfall
Amount") because of the subordination of the Subordinate Certificates, holders
of Subordinate Certificates would probably be treated for federal income tax
purposes as if they had
o received as distributions their full share of receipts,
o paid over to the Senior Certificateholders an amount equal to the
Shortfall Amount and
o retained the right to reimbursement of the relevant amounts to the
extent these amounts are otherwise available as a result of
collections on the Student Loans or amounts available from a
Reserve Account or other form of credit enhancement, if any.
Under this analysis,
o Subordinate Certificateholders would be required to accrue as
current income any interest income or original issue discount of
the Trust that was a component of the Shortfall Amount, even
though that amount was in fact paid to the Senior
Certificateholders,
o a loss would only be allowed to the Subordinate Certificateholders
when their right to receive reimbursement of the Shortfall Amount
became worthless (i.e., when it becomes clear that amount will not
be available from any source to reimburse the loss) and
o reimbursement of the Shortfall Amount prior to a claim of
worthlessness would not be taxable income to Subordinate
Certificateholders because the amount was previously included in
income.
Those results should not significantly affect the inclusion of income for
Subordinate Certificateholders on the accrual method of accounting, but could
accelerate inclusion of income to Subordinate Certificateholders on the cash
method of accounting by, in effect, placing them on the accrual method.
Moreover, the character and timing of loss deductions are unclear. Subordinate
Certificateholders are strongly urged to consult their own tax advisors
regarding the appropriate timing, amount and character of any losses sustained
with respect to the Subordinate Certificates including any loss resulting from
the failure to recover previously accrued interest or discount income.
ELECTION TO TREAT ALL INTEREST AS ORIGINAL ISSUE DISCOUNT. The OID
regulations permit a grantor trust certificateholder to elect to accrue all
interest, discount, including DE MINIMIS market or original issue discount,
reduced by any premium, in income as interest, based on a constant yield method.
If an election were to be made with respect to an interest in a Student Loan
with market discount, the Certificate Owner would be deemed to have made an
election to include in income currently market discount with respect to all
other debt instruments having market discount that the grantor trust
certificateholder acquires during the year of the election or afterward. See
"--Market Discount" above. Similarly, a grantor trust certificateholder that
makes this election for an interest in a Student Loan that is acquired at a
premium will be deemed to have made an election to amortize bond premium with
respect to all debt instruments having amortizable bond premium that the grantor
trust certificateholder owns at the beginning of the first taxable year to which
the election applies or acquires afterward. See "--Premium" above. The election
to accrue interest, discount and premium on a constant yield method with respect
to a grantor trust Certificate is irrevocable.
PREPAYMENTS. The Taxpayer Relief Act of 1997 (the "1997 Act") contains
a provision requiring original issue discount on any pool of debt instruments
the yield on which may be affected by reason of prepayments be calculated taking
into account the prepayment assumption and requiring the discount to be taken
into income on the basis of a constant yield to assumed maturity taking account
of actual prepayments. The legislative history to the 1986 Act states that
similar rules apply with respect to market discount and amortizable bond premium
on debt instruments.
SALE OR EXCHANGE OF A GRANTOR TRUST CERTIFICATE. Sale or exchange of a
grantor trust certificate prior to its maturity will result in gain or loss
equal to the difference, if any, between the amount realized, exclusive of
amounts attributable to accrued and unpaid interest, which will be treated as
ordinary income, allocable to the Student Loan and the owner's adjusted basis in
the grantor trust certificate. The adjusted basis generally will equal the
seller's cost for the grantor trust certificate, increased by the original issue
discount and any market discount included in the seller's gross income with
respect to the grantor trust certificate, and reduced, but not below zero, by
any premium amortized by the seller and by principal payments on the grantor
trust certificate previously received by the seller. The gain or loss will,
except as discussed below, be capital gain or loss to an owner for which the
Student Loans represented by a grantor trust certificate are "capital assets"
within the meaning of Section 1221, except that gain will be treated in whole or
in part as ordinary interest income to the extent of the seller's interest in
accrued market discount not previously taken into income on underlying Student
Loans having a fixed maturity date of more than one year from the date of
origination. A capital gain or loss will be long-term or short-term depending on
whether or not the grantor trust certificate has been owned for the long-term
capital gain holding period, currently more than one year.
Notwithstanding the foregoing, any gain realized on the sale or
exchange of a grantor trust certificate will be ordinary income to the extent of
the seller's interest in accrued market discount on Student Loans not previously
taken into income. See "--Market Discount," above.
NON-UNITED STATES GRANTOR TRUST CERTIFICATE OWNERS. Amounts paid to
Non-United States Owners of grantor trust certificates will be treated as
interest for purposes of United States withholding tax. The interest
attributable to the underlying Student Loans will not be subject to the normal
30%, or any lower rate provided for by an applicable tax treaty, withholding tax
imposed on these amounts provided that (1) the Non-U.S. Certificate Owner does
not own, directly or indirectly, 10% or more of, and is not a controlled foreign
corporation, within the definition of Section 957, related to any of the issuers
of the Student Loans and (2) the Certificate Owner fulfills specific
certification requirements. Under these requirements, the Certificate Owner must
certify, under penalty of perjury, that it is not a "United States person" and
must provide its name and address. "United States person" means a citizen or
resident of the United States, a corporation, partnership or other entity
created or organized in or under the laws of the United States or any political
subdivision of the United States, or an estate or trust the income of which is
includable in gross income for United States federal income tax purposes,
without regard to its source. If, however, interest or gain is effectively
connected to the conduct of a trade or business within the United States by the
Certificate Owner, the owner will be subject to United States federal income tax
on the interest or gain at graduated rates and, in the case of a corporation, to
a possible branch profits tax, and will not be subject to withholding tax
provided that the owner meets applicable documentation requirements. Potential
investors who are not United States persons should consult their own tax
advisors regarding the specific tax consequences of owning a Certificate.
On October 6, 1997, final Treasury Regulations (the "1997 Withholding
Regulations") were issued which affect the United States taxation of Non-United
States Owners of grantor trust certificates. The 1997 Withholding Regulations
are generally effective for payments after December 31, 1999, regardless of the
issue date of the Student Loans with respect to which payments are made, subject
to particular transition rules.
BACKUP WITHHOLDING. Distributions made on the grantor trust
certificates and proceeds from the sale of the grantor trust certificates will
be subject to a "backup" withholding tax of 31% if, in general, the grantor
trust certificateholder fails to comply with particular identification
procedures, unless the holder is an exempt recipient under applicable provisions
of the Code.
CERTAIN STATE TAX CONSEQUENCES
Because of the variation in each state's tax laws based in whole or in
part upon income, it is not feasible to predict tax consequences to holders of
Notes and Certificates in all of the state taxing jurisdictions in which they
are already subject to tax. Noteholders and Certificateholders are urged to
consult their own tax advisors with respect to state tax consequences arising
out of the purchase, ownership and disposition of Notes and Certificates.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended
("ERISA"), and the Code impose requirements on employee benefit plans and on
other retirement plans and arrangements, including individual retirement
accounts and annuities and collective investment funds and separate accounts
(and, as applicable, insurance company general accounts) in which the plans,
accounts or arrangements are invested that are subject to the fiduciary
responsibility and prohibited transaction provisions of ERISA and Section 4975
of the Code ("Plans") and on persons who are fiduciaries with respect to the
Plans in connection with the investment of Plan assets. Certain employee benefit
plans, including governmental plans (as defined in ERISA Section 3(32)), and, if
no election has been made under Section 410(d) of the Code, church plans (as
defined in Section 3(33) of ERISA) are not subject to ERISA requirements.
Accordingly, assets of the plans may be invested in Notes without regard to the
ERISA considerations described below, subject to the provisions of other
applicable federal and state law. Any plan which is qualified and exempt from
taxation under Sections 401(a) and 501(a) of the Code, however, is subject to
the exclusive benefit rule under Section 401(a)(2) of ERISA and the prohibited
transaction rules set forth in Section 503 of the Code.
ERISA generally imposes on Plan fiduciaries general fiduciary
requirements, including those of investment prudence and diversification and the
requirement that a Plan's investments be made in accordance with the documents
governing the Plan. In addition, Section 406 of ERISA and Section 4975 of the
Code prohibit a broad range of transactions involving assets of Plan and persons
(parties in interest under ERISA and disqualified persons under the Code,
collectively, "Parties in Interest") who have specified relationships to the
Plan unless a statutory, regulatory or administrative exemption is available.
Certain Parties in Interest that participate in a prohibited transaction may be
subject to an excise tax imposed pursuant to Section 4975 of the Code or a
penalty imposed pursuant to Section 502(i) of ERISA, unless a statutory or
administrative exemption is available. These prohibited transactions generally
are set forth in Section 406 of ERISA and Section 4975 of the Code.
THE NOTES
Unless otherwise specified in the related prospectus supplement, the
Notes of each series may be purchased by a Plan. The Issuer, the Company, any
underwriter, the Eligible Lender Trustee, the Indenture Trustee, the Servicer,
the Administrator, any provider of credit support or any of their affiliates may
be considered to be or may become Parties in Interest with respect to specified
Plans. Prohibited transactions under Section 406 of ERISA and Section 4975 of
the Code may arise if a Note is acquired by a Plan with respect to which the
persons are Parties in Interest unless the transactions are subject to one or
more statutory or administrative exemptions, including: Prohibited Transaction
Class Exemption ("PTCE") 96-23, which exempts specified transactions effected on
behalf of a Plan by an "in-house asset manager"; PTCE 90-1, which exempts
specified transactions between insurance company separate accounts and Parties
in Interest; PTCE 91-38, which exempts specified transactions between bank
collective investment funds and Parties in Interest; PTCE 95-60, which exempts
specified transactions between insurance company general accounts and Parties in
Interest; or PTCE 84-14, which exempts specified transactions effected on behalf
of a Plan by a "qualified professional asset manager". There can be no assurance
that any of these class exemptions will apply with respect to any particular
Plan investment in Notes or, even if it were deemed to apply, that any exemption
would apply to all prohibited transactions that may occur in connection with the
investment. Accordingly, prior to making an investment in the Notes, investing
Plans should determine whether the Issuer, the Company, any underwriter, the
Eligible Lender Trustee, the Indenture Trustee, the Servicer, the Administrator,
or any provider of credit support or any of their affiliates is a Party in
Interest with respect to the Plan and, if so, whether the transaction is subject
to one or more statutory, regulatory or administrative exemptions.
Any Plan fiduciary considering whether to invest in Notes on behalf of
a Plan should consult with its counsel regarding the applicability of the
fiduciary responsibility and prohibited transaction provisions of ERISA and the
Code to the investment. Each Plan fiduciary also should determine whether, under
the general fiduciary standards of investment prudence and diversification, an
investment in the Notes is appropriate for the Plan, considering the overall
investment policy of the Plan and the composition of the Plan's investment
portfolio, as well as whether the investment is permitted under the governing
Plan instruments.
THE CERTIFICATES
Unless otherwise specified in the prospectus supplement, the
Certificates of each series may not be purchased by a Plan or by any entity
whose underlying assets include plan assets by reason of a plan's investment in
the entity (each, a "Benefit Plan"). The purchase of an equity interest in the
Trust will result in the assets of the Trust being deemed assets of a Benefit
Plan for the purposes of ERISA and the Code and specified transactions involving
the Trust may then be deemed to constitute prohibited transactions under Section
406 of ERISA and Section 4975 of the Code. A violation of the "prohibited
transaction" rules may result in an excise tax or other penalties and
liabilities under ERISA and the Code for the persons.
By its acceptance of a Certificate, each Certificateholder will be
deemed to have represented and warranted that it is not a Benefit Plan.
If a given series of Certificates may be acquired by a Benefit Plan
because of the application of an exception contained in a regulation or
administrative exemption issued by the United States Department of Labor, the
exception will be discussed in the related prospectus supplement.
* * *
A PLAN FIDUCIARY CONSIDERING THE PURCHASE OF SECURITIES OF A GIVEN
SERIES SHOULD CONSULT ITS TAX AND/OR LEGAL ADVISORS REGARDING WHETHER THE ASSETS
OF THE RELATED TRUST WOULD BE CONSIDERED PLAN ASSETS, THE POSSIBILITY OF
EXEMPTIVE RELIEF FROM THE PROHIBITED TRANSACTION RULES AND OTHER ISSUES AND
THEIR POTENTIAL CONSEQUENCES.
PLAN OF DISTRIBUTION
On the terms and conditions set forth in an underwriting agreement with
respect to the Notes of a given series and an underwriting agreement with
respect to the Certificates of the series (collectively, the "Underwriting
Agreements"), the Depositor will agree to cause the related Trust to sell to the
underwriters named in the Underwriting Agreement and in the related prospectus
supplement, and each of the underwriters will severally agree to purchase, the
principal amount of each class of Notes and Certificates, as the case may be, of
the related series set forth in the Underwriting Agreement and in the related
prospectus supplement.
In each of the Underwriting Agreements with respect to any given series
of Securities, the several underwriters will agree, subject to the terms and
conditions set forth in the Underwriting Agreement, to purchase all the Notes
and Certificates, as the case may be, described in the Underwriting Agreement
which are offered hereby and by the related prospectus supplement if any of the
Notes and Certificates, as the case may be, are purchased.
Each prospectus supplement will either (1) set forth the price at which
each class of Notes and Certificates, as the case may be, being offered thereby
will be offered to the public and any concessions that may be offered to dealers
participating in the offering of the Notes and Certificates, as the case may be,
or (2) specify that the related Notes and Certificates, as the case may be, are
to be resold by the underwriters in negotiated transactions at varying prices to
be determined at the time of the sale. After the initial public offering of any
Notes and Certificates, as the case may be, the public offering prices and the
concessions may be changed.
Until the distribution of the Securities is completed, rules of the
Commission may limit the ability of the underwriters and selling group members
to bid for and purchase the Securities. As an exception to these rules, the
underwriters are permitted to engage in transactions that stabilize the price of
the Securities. The transactions consist of bids or purchases for the purpose of
pegging, fixing or maintaining the price of the Securities.
If an underwriter creates a short position in the Securities in
connection with the offering (i.e., if it sells more Securities than are set
forth on the cover page of the related prospectus supplement), the underwriter
may reduce that short position by purchasing Securities in the open market.
An underwriter may also impose a penalty bid on underwriters and
selling group members. This means that if the underwriter purchases Securities
in the open market to reduce the underwriters' short position or to stabilize
the price of the Securities, it may reclaim the amount of the selling concession
from the underwriters and selling group members who sold those Securities as
part of the offering.
In general, purchases of a security for the purpose of stabilization or
to reduce a short position could cause the price of the security to be higher
than it might be in the absence of the purchases. The imposition of a penalty
bid might also have an effect on the price of a security to the extent that it
discourages resales of the security.
Neither the Depositor nor the underwriters make any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the prices of the Securities. In addition, neither
the Depositor nor the underwriters make any representation that the underwriters
will engage in the transactions or that the transactions, once commenced, will
not be discontinued without notice.
Each Underwriting Agreement will provide that the Depositor will
indemnify the underwriters against civil liabilities, including liabilities
under the Securities Act, or contribute to payments the several underwriters may
be required to make in respect thereof.
Each Trust may, from time to time, invest the funds in its Trust
Accounts in Eligible Investments acquired from the underwriters.
Pursuant to each of the Underwriting Agreements with respect to a given
series of Securities, the closing of the sale of any class of Securities subject
to either thereof will be conditioned on the closing of the sale of all other
the classes subject to either thereof.
The place and time of delivery for the Securities in respect of which
this Prospectus is delivered will be set forth in the related prospectus
supplement.
If and to the extent required by applicable law or regulation, this
prospectus and the prospectus supplement will also be used by the underwriter
after the completion of the offering in connection with offers and sales related
to market-making transactions in the Securities in which the underwriter acts as
principal. The underwriter may also act as agent in these transactions. Sales
will be made at negotiated prices determined at the time of sale.
LEGAL MATTERS
Certain legal matters relating to the Securities of any series will be
passed upon for the related Trust and for the underwriters for the series by
Stroock & Stroock & Lavan LLP, New York, New York or other counsel specified in
the related prospectus supplement.
AVAILABLE INFORMATION
The Depositor, as originator of each trust, has filed with the
Securities and Exchange Commission (the "Commission") a Registration Statement
(together with all amendments and exhibits thereto, the "Registration
Statement") under the Securities Act of 1933, as amended (the "Securities Act"),
with respect to the securities offered hereby. This prospectus, which forms part
of the Registration Statement, does not contain all the information contained in
the Registration Statement. For further information, reference is made to the
Registration Statement which may be inspected and copied at the public reference
facilities maintained by the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549; and at the Commission's regional offices at Seven World Trade
Center, New York, New York 10048, and 500 West Madison Street, 14th Floor,
Chicago, Illinois 60661. Copies of the Registration Statement may be obtained
from the Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. The Commission maintains a Web site
at http://www.sec.gov containing registration statements and other information
regarding registrants, including the Depositor, that file electronically with
the Commission.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents filed by the Depositor, as originator of any trust,
pursuant to Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of
1934, as amended, subsequent to the date of this prospectus and prior to the
termination of the offering of the securities shall be deemed to be incorporated
by reference in this prospectus. Any statement contained in this prospectus or
in a document incorporated or deemed to be incorporated by reference in this
prospectus shall be deemed to be modified or superseded for purposes of this
prospectus to the extent that a statement contained in this prospectus or in any
subsequently filed document which also is to be incorporated by reference in
this prospectus modifies or supersedes the statement. Any statement so modified
or superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this prospectus.
The Depositor will provide without charge to each person, including any
beneficial owner of securities, to whom a copy of this prospectus is delivered,
on the written or oral request of any person, a copy of any or all of the
documents incorporated in this prospectus or in any related prospectus
supplement by reference, except the exhibits to the documents (unless the
exhibits are specifically incorporated by reference in the documents). Requests
for the copies should be directed to Secretary, Asset Backed Securities
Corporation, 11 Madison Avenue, New York, New York 10010, telephone, (212)
325-2000.
<PAGE>
INDEX OF PRINCIPAL TERMS
PAGE
10 percent shareholder........................................................51
1992 Amendments...............................................................15
1993 Act......................................................................15
1997 Act......................................................................61
1998 Reauthorization Bill.....................................................15
Act...........................................................................14
Additional Fundings...........................................................39
Add-on Consolidation Loans....................................................23
Administration Agreement......................................................46
Administration Fee............................................................47
Administrator.................................................................46
Administrator Default.........................................................47
Applicable Trustee............................................................36
Base Rate.....................................................................35
Benefit Plan..................................................................63
Calculation Agent.............................................................35
Cede..........................................................................35
Certificate Balance...........................................................28
Certificate Pool Factor.......................................................28
Certificates..................................................................34
Closing Date..................................................................27
Code..........................................................................49
Collateral Reinvestment Account...............................................39
Collection Account............................................................39
Collection Period.............................................................41
Commission....................................................................64
Company.......................................................................34
Controlled Foreign Corporation................................................51
Cutoff Date...................................................................12
Deferral Period...............................................................20
Definitive Certificates.......................................................36
Definitive Notes..............................................................36
Definitive Securities.........................................................37
Depositaries..................................................................36
Depositary....................................................................29
Distribution Date.............................................................29
DTC...........................................................................35
DTC's Nominee.................................................................29
Eligible Deposit Account......................................................40
Eligible Institution..........................................................40
Eligible Investments..........................................................39
Eligible Lender Trustee.......................................................12
ERISA.........................................................................62
Event of Default..............................................................31
Excess Cashflow Rights........................................................14
Family Contribution...........................................................17
FASIT.........................................................................52
FASIT Provisions..............................................................52
Federal Assistance............................................................18
Federal Consolidation Loan................................................15, 22
Federal Guarantee Agreements..................................................14
Federal Guarantee Payments....................................................14
Federal Guarantors............................................................14
Federal PLUS Loans............................................................15
Federal SLS Loans.............................................................15
Federal Stafford Loans........................................................15
Federal Student Loans.........................................................14
Federal Supplemental Loans to Students........................................15
Federal Tax Counsel...........................................................49
Federal Unsubsidized Stafford Loans...........................................15
FFELP.........................................................................14
Fixed Rate Securities.........................................................35
Floating Rate Securities......................................................35
Forbearance Period............................................................21
foreign person................................................................51
Funding Period................................................................13
Grace Period..................................................................20
Graduate Loans................................................................14
grantor trust certificateholders..............................................57
grantor trust certificates....................................................57
Guarantee Agreements..........................................................14
Guarantee Payments............................................................14
Guarantors....................................................................14
Higher Education Act..........................................................14
Indenture.....................................................................29
Indenture Trustee.............................................................29
Index Shortfall Carryover.....................................................31
Indirect Participants.........................................................36
Initial Pool Balance..........................................................46
Insolvency Event..............................................................28
Interest Period...............................................................53
Interest Rate.................................................................29
Interest Reset Period.........................................................35
Interest Subsidy Payments.....................................................18
Investment Earnings...........................................................40
IRS...........................................................................49
Issuer........................................................................12
Loan Sale Agreement...........................................................13
Loan Servicing Agreement......................................................27
Monthly Rebate Fee............................................................23
New Withholding Regulations...................................................51
Note Pool Factor..............................................................28
Notes.........................................................................29
OID...........................................................................50
OID Regulations...............................................................50
Participants..................................................................29
Parties in Interest...........................................................62
Pass-Through Rate.............................................................34
Plans.........................................................................62
Pool Balance..................................................................28
Pool Factor...................................................................28
Post-Graduate Loans...........................................................14
Pre-Funding Account...........................................................39
Pre-Funding Amount............................................................43
prepayments...................................................................27
Private Guarantee Agreements..................................................14
Private Guarantee Payments....................................................14
Private Guaranteed Loans......................................................14
Private Guarantors............................................................14
Private Student Loans.........................................................24
Private Unguaranteed Loans....................................................14
Programs......................................................................14
PTCE..........................................................................62
Purchase Amount...............................................................38
Registration Statement........................................................64
Related Documents.............................................................33
related person................................................................51
Reserve Account...............................................................42
Revolving Period..............................................................13
Rules.........................................................................36
Secretary.....................................................................24
Securities....................................................................34
Securities Act................................................................64
Seller........................................................................13
Senior Certificates...........................................................59
Senior Class Percentage.......................................................59
Servicer......................................................................13
Servicer Default..............................................................44
Servicing Fee.................................................................41
Shortfall Amount..............................................................60
Short-Term Note...............................................................50
Special Allowance Payments....................................................17
Spread........................................................................35
Spread Multiplier.............................................................35
Stripped Certificates.........................................................59
Student Loans.................................................................12
Subordinate Certificates......................................................59
Subordinate Class Percentage..................................................59
tax matters partner...........................................................55
Transfer and Servicing Agreements.............................................38
Trust.........................................................................12
Trust Accounts................................................................39
Trust Agreement...............................................................12
Trust Stripped Bond...........................................................59
Trust Stripped Coupon.........................................................59
UCC...........................................................................47
Undergraduate Loans...........................................................14
Underwriting Agreements.......................................................63
Unmet Need....................................................................17
<PAGE>
ABSC Student Loan
Trust _________-_________
$________________________
Class A-1 Floating Rate
Asset-Backed Senior Notes
$________________________
Class A-2 Floating Rate
Asset-Backed Senior Notes
Asset Backed Securities Corporation,
Depositor
PROSPECTUS SUPPLEMENT
Credit Suisse First Boston
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following is an itemized list of the estimated expenses to be
incurred in connection with the offering of the securities being offered
hereunder other than underwriting discounts and commissions:
Registration Fee $ *
Printing and Engraving Expenses *
Trustee's Fees and Expenses *
Legal Fees and Expenses *
Accountant's Fees and Expenses *
Rating Agency Fees *
Miscellaneous *
Total *
* To be filed by amendment
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
As authorized by Section 145 of the General Corporation Law of
Delaware (the "Delaware Corporation Law") and the By-Laws of the Registrant,
each director and officer of the Registrant may be indemnified by the Registrant
against expenses (including attorney's fees, judgments, fines and amounts paid
in settlement) actually and reasonably incurred in connection with the defense
or settlement of any threatened, pending or completed legal proceedings in which
he is involved by reason of the fact that he is or was a director or officer of
the Registrant if he acted in good faith and in a manner that he reasonably
believed to be in or not opposed to the best interest of the Registrant, and,
with respect to any criminal action or proceeding, if he had no reasonable cause
to believe that his conduct was unlawful. If the legal proceeding, however, is
by or in the right of the Registrant, the director or officer may not be
indemnified in respect of any claim, issue or matter as to which he shall have
been adjudged to be liable for negligence or misconduct in the performance of
his duty to the Registrant unless a court determines otherwise.
ITEM 16. EXHIBITS
1.1 Form of Underwriting Agreement.*
3.1 Restated Certificate of Incorporation of Asset Backed Securities
Corporation*
4.1.1 Form of Indenture. (Owner Trust, Fixed Rate Notes, Auto Receivables)*
4.1.2 Form of Indenture. (Owner Trust, Fixed Rate Notes, Auto Securities)*
4.1.3 Form of Master Indenture (Credit Card or Dealer Floorplan
Securities)***
4.1.4 Form of Indenture Supplement, including form of Notes (Credit Card or
Dealer Floorplan Securities)***
4.1.5 Form of Indenture between the Trust and the Indenture Trustee (Owner
Trust, Student Loan Securities)***
4.1.6 Form of Indenture between the Trust and the Indenture Trustee (Owner
Trust, Equipment Securities)***
4.2.1 Form of Pooling and Servicing Agreement. (Grantor Trust, Fixed Rate
Certificates, Auto Receivables)*
4.2.2 Form of Transfer and Servicing Agreement (Credit Card or Dealer
Floorplan Securities)***
4.2.3 Form of Standard Terms and Conditions of Pooling and Servicing.
(Grantor Trust/REMIC, Fixed/Floating Rate Certificates, Manufactured
Housing Contracts)*
4.2.4 Form of Standard Terms and Conditions of Pooling and Servicing.
(REMIC, Fixed/Floating Rate Certificates, Mortgage Loans)*
4.2.5 Form of Standard Terms and Conditions of Pooling and Servicing and
Reference Agreement. (REMIC, Fixed/Floating Rate Certificates,
Mortgage Loans)*
4.2.6 Form of Pooling and Servicing Agreement. (REMIC, Fixed/Floating Rate
Certificates, Mortgage Loans)*
4.2.7 Form of Loan Sale Agreement among the Seller, the Depositor, the Trust
and the Eligible Lender Trustee (Student Loan)***
4.2.8 Form of Loan Servicing Agreement among the Servicer, the Trust and the
Eligible Lender Trustee (Student Loan)***
4.2.9 Form of Administration Agreement among the Trust, the Indenture
Trustee and the Administrator (Student Loan)***
4.2.10 Form of Pooling and Servicing Agreement. (Equipment)***
4.3.1 Form of Administration Agreement (Credit Card or Dealer Floorplan
Securities)***
4.3.2 Form of Reference Agreement. (Grantor Trust, Fixed Rate Certificates,
Manufactured Housing Contracts)*
4.3.3 Form of Reference Agreement. (Grantor Trust/REMIC, Fixed Rate/Interest
Only Certificates, Manufactured Housing Contracts)*
4.3.4 Form of Reference Agreement. (Grantor Trust, Fixed Rate Certificates,
Mortgage Loans)*
4.3.5 Form of Reference Agreement. (Grantor Trust/REMIC, Fixed Rate
Certificates, Mortgage Loans)*
4.3.6 Form of Reference Agreement. (REMIC, Fixed/Floating Rate Certificates,
Mortgage Loans)*
4.4.1 Form of Trust Agreement. (Owner Trust, Auto Receivables)*
4.4.2 Form of Trust Agreement. (Owner Trust, Auto Securities)*
4.4.3 Form of Trust Agreement. (Grantor Trust, Auto Securities)*
4.4.4 Form of Trust Agreement (Credit Card or Dealer Floorplan
Securities)***
4.4.5 Form of Deposit Trust Agreement. (Grantor Trust, Fixed Rate/Interest
Only Certificates, Mortgage Certificates)*
4.4.6 Form of Trust Agreement among the Depositor, the Seller and the
Eligible Lender Trustee (Owner Trust, Student Loan Securities)***
4.4.7 Form of Trust Agreement among the Depositor, the Seller and the
Trustee (Owner Trust, Equipment Securities)***
5.1 Opinion of Stroock & Stroock & Lavan LLP as to securities offered***
8.1 Opinion of Stroock & Stroock & Lavan LLP with respect to tax matters.
(included in Exhibit 5.1)***
10.1.1 Form of Receivables Purchase Agreement. (Auto Loan Receivables)*
10.1.2 Form of Master Seller's Warranty and Servicing Agreement. (Mortgage
Loans)*
10.2.1 Form of Sale and Servicing Agreement. (Owner Trust, Auto Loan
Receivables)*
23.1 Consent of Stroock & Stroock & Lavan LLP. (included in Exhibits 5.1
and 8.1)***
24.1 Powers of Attorney of directors and officers of Asset Backed
Securities Corporation. (included in the signature pages to this
Registration Statement)
25.1 Statement of Eligibility and Qualification of Indenture Trustee****
* Incorporated by reference to Registration Statement No. 333-365.
** Incorporated by reference to Registration Statement No. 333-64351.
*** To be filed by amendment.
**** To be filed following the effectiveness of the Registration Statement.
ITEM 17. UNDERTAKINGS
(a) As to Rule 415:
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made
of the securities registered hereby, a post-effective amendment to this
Registration Statement:
(1) to include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933, as amended;
(2) to reflect in the prospectus any facts or events arising after the
effective date of this Registration Statement (or the most recent
post-effective amendment hereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in this
Registration Statement; and
(3) to include any material information with respect to the plan of
distribution not previously disclosed in this Registration Statement or any
material change to the information in this Registration Statement;
PROVIDED, HOWEVER, that the undertakings set forth in clauses (1) and (2) above
do not apply if the information required to be included in a post-effective
amendment by those clauses is contained in periodic reports filed by the
Registrant pursuant to Section 13 or Section 15(d) of the Securities Exchange
Act of 1934, as amended, that are incorporated by reference in this Registration
Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, as amended, each post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered ,
and the offering of the securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
(b) As to documents subsequently filed that are incorporated by
reference:
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, as amended, each
filing of the Registrant's annual report pursuant to Section 13(a) or Section
15(d) of the Securities Exchange Act of 1934, as amended, that is incorporated
by reference in this Registration Statement shall be deemed to be a new
registration statement relating to the securities offered in this prospectus,
and the offering of the securities at that time shall be deemed to be the
initial bona fide offering thereof.
(c) The undersigned Registrant hereby undertakes to provide to the
Underwriter at the closing specified in the Underwriting Agreements Notes and
Certificates in the denominations and registered in the names as required by the
Underwriter to permit prompt delivery to each purchaser.
(d) As to indemnification:
Insofar as indemnification for liabilities arising under the
Securities Act of 1933, as amended, may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the provisions described under
Item 15, or otherwise, the Registrant has been advised that in the opinion of
the Securities and Exchange Commission the indemnification is against public
policy as expressed in the Act and is therefore unenforceable. In the event that
a claim for indemnification against the liabilities (other than payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by the director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether the
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of the issue.
(e) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, as amended, the information omitted from the form of prospectus filed
as part of this Registration Statement in reliance upon Rule 430A and contained
in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, as amended, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new Registration Statement relating to the
securities offered, and the offering of the securities at that time shall be
deemed to be the initial bona fide offering thereof.
(f) The undersigned Registrant hereby undertakes to file an
application for the purpose of determining the eligibility of the trustee to act
under subsection (a) of Section 310 of the Trust Indenture Act of 1939, as
amended, in accordance with the rules and regulations prescribed by the
Commission under Section 305(b)(2) of the Trust Indenture Act of 1939, as
amended.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
the requirements for filing on Form S-3 and has duly caused this Amendment to
the Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of New York, State of New York, on this
19th day of July 2000.
Asset Backed Securities Corporation
By: /s/ Joseph M. Donovan
-----------------------
Name: Joseph M. Donovan
Title: Vice President
<PAGE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each of the undersigned does
hereby constitute and appoint John McWilliams, Joseph Donovan, Carlos Onis,
Scott Ulm or Thomas Zingalli, or any of them (with full power to each of them to
act alone), his or her true and lawful attorney-in-fact and agent with full
power of substitution, for him or her and on his or her behalf to sign, execute
and file this Registration Statement and any and all amendments (including,
without limitation, post-effective amendments and any amendments increasing the
amount of securities for which registration is being sought) to this
Registration Statement, with all exhibits and any and all documents to be filed
with respect thereto, with the Securities and Exchange Commission or any
regulatory authority, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises in order to
effectuate the same as fully to all intents and purposes as he or she might or
could do if personally present, hereby ratifying and confirming all that such
attorneys-in-fact and agents, or any of them, or their substitute or
substitutes, may lawfully do or cause to be done.
Pursuant to the requirements of the Securities Act of 1933, this
Amendment to the Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated
SIGNATURE TITLE DATE
/S/ SCOTT ULM President, Chief Executive June 20, 2000
------------------------------
Scott Ulm Officer and Director
(Principal Executive Officer)
/S/ THOMAS ZINGALLI Vice President and Controller June 20, 2000
------------------------------
Thomas Zingalli (Principal Accounting Officer)
/S/ CARLOS ONIS Director June 20, 2000
------------------------------
Carlos Onis
/S/ JULIANA JOHNSON Director June 20, 2000
------------------------------
Juliana Johnson
<PAGE>
EXHIBIT INDEX
Page Number
Item 16. Exhibits
1.1 Form of Underwriting Agreement.*
3.1 Restated Certificate of Incorporation of Asset Backed Securities
Corporation*
4.1.1 Form of Indenture. (Owner Trust, Fixed Rate Notes, Auto Receivables)*
4.1.2 Form of Indenture. (Owner Trust, Fixed Rate Notes, Auto Securities)*
4.1.3 Form of Master Indenture (Credit Card or Dealer Floorplan
Securities)***
4.1.4 Form of Indenture Supplement, including form of Notes (Credit Card or
Dealer Floorplan Securities)***
4.1.5 Form of Indenture between the Trust and the Indenture Trustee (Owner
Trust, Student Loan Securities)***
4.1.6 Form of Indenture between the Trust and the Indenture Trustee (Owner
Trust, Equipment Securities)***
4.2.1 Form of Pooling and Servicing Agreement. (Grantor Trust, Fixed Rate
Certificates, Auto Receivables)*
4.2.2 Form of Transfer and Servicing Agreement (Credit Card or Dealer
Floorplan Securities)***
4.2.3 Form of Standard Terms and Conditions of Pooling and Servicing.
(Grantor Trust/REMIC, Fixed/Floating Rate Certificates, Manufactured
Housing Contracts)*
4.2.4 Form of Standard Terms and Conditions of Pooling and Servicing.
(REMIC, Fixed/Floating Rate Certificates, Mortgage Loans)*
4.2.5 Form of Standard Terms and Conditions of Pooling and Servicing and
Reference Agreement. (REMIC, Fixed/Floating Rate Certificates,
Mortgage Loans)*
4.2.6 Form of Pooling and Servicing Agreement. (REMIC, Fixed/Floating Rate
Certificates, Mortgage Loans)*
4.2.7 Form of Loan Sale Agreement among the Seller, the Depositor, the Trust
and the Eligible Lender Trustee (Student Loan)***
4.2.8 Form of Loan Servicing Agreement among the Servicer, the Trust and the
Eligible Lender Trustee (Student Loan)***
4.2.9 Form of Administration Agreement among the Trust, the Indenture
Trustee and the Administrator (Student Loan)***
4.2.10 Form of Pooling and Servicing Agreement. (Equipment)***
4.3.1 Form of Administration Agreement (Credit Card or Dealer Floorplan
Securities)***
4.3.2 Form of Reference Agreement. (Grantor Trust, Fixed Rate Certificates,
Manufactured Housing Contracts)*
4.3.3 Form of Reference Agreement. (Grantor Trust/REMIC, Fixed Rate/Interest
Only Certificates, Manufactured Housing Contracts)*
4.3.4 Form of Reference Agreement. (Grantor Trust, Fixed Rate Certificates,
Mortgage Loans)*
4.3.5 Form of Reference Agreement. (Grantor Trust/REMIC, Fixed Rate
Certificates, Mortgage Loans)*
4.3.6 Form of Reference Agreement. (REMIC, Fixed/Floating Rate Certificates,
Mortgage Loans)*
4.4.1 Form of Trust Agreement. (Owner Trust, Auto Receivables)*
4.4.2 Form of Trust Agreement. (Owner Trust, Auto Securities)*
4.4.3 Form of Trust Agreement. (Grantor Trust, Auto Securities)*
4.4.4 Form of Trust Agreement (Credit Card or Dealer Floorplan
Securities)***
4.4.5 Form of Deposit Trust Agreement. (Grantor Trust, Fixed Rate/Interest
Only Certificates, Mortgage Certificates)*
4.4.6 Form of Trust Agreement among the Depositor, the Seller and the
Eligible Lender Trustee (Owner Trust, Student Loan Securities)***
4.4.7 Form of Trust Agreement among the Depositor, the Seller and the
Trustee (Owner Trust, Equipment Securities)***
5.1 Opinion of Stroock & Stroock & Lavan LLP as to securities offered***
8.1 Opinion of Stroock & Stroock & Lavan LLP with respect to tax matters.
(included in Exhibit 5.1)***
10.1.1 Form of Receivables Purchase Agreement. (Auto Loan Receivables)*
10.1.2 Form of Master Seller's Warranty and Servicing Agreement. (Mortgage
Loans)*
10.2.1 Form of Sale and Servicing Agreement. (Owner Trust, Auto Loan
Receivables)*
23.1 Consent of Stroock & Stroock & Lavan LLP. (included in Exhibits 5.1
and 8.1)***
24.1 Powers of Attorney of directors and officers of Asset Backed
Securities Corporation. (included in the signature pages to this
Registration Statement)
25.1 Statement of Eligibility and Qualification of Indenture Trustee****
* Incorporated by reference to Registration Statement No. 333-365.
** Incorporated by reference to Registration Statement No. 333-64351.
*** To be filed by amendment.
**** To be filed following the effectiveness of the Registration Statement.
