As filed with the Securities and Exchange Commission on June 14, 1996
Registration No. 333-3911
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________
Amendment No. 1
to
REGISTRATION STATEMENT
on
FORM S-3
Under
THE SECURITIES ACT OF 1933
____________________________
LEHMAN ABS CORPORATION
(Depositor)
(Exact Name of Registrant as Specified in its Charter)
Delaware 13-3447441
(State of incorporation) (I.R.S. Employer Identification No.)
______________________
Three World Financial Center
200 Vesey Street
New York, New York 10285-1600
(Address of principal executive offices)
______________________
THEODORE P. JANULIS
Lehman ABS Corporation
Three World Financial Center
200 Vesey Street
New York, New York 10285-1600
(Name and address of agent for service)
______________________
Copy to:
GAIL G. WATSON, ESQ.
Brown & Wood
One World Trade Center
New York, New York 10048-0557
______________________
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, please 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./ /
CALCULATION OF REGISTRATION FEE
==============================================================================
Proposed Proposed
Maximum Maximum
Title of Each Amount Offering Aggregate Amount of
Class of Securities to to be Price Offering Registration
Be Registered Registered Per Unit* Price* Fee
- ------------------------------------------------------------------------------
Asset Backed
Securities.............. $1,000,000,000 100% $1,000,000,000 $344,827.58**
==============================================================================
* Estimated for the purpose of calculating the registration fee.
** The Registration Fee was previously paid.
Pursuant to Rule 429, this Amendment also constitutes
Post-Effective Amendment No. 3 to Registration Statement No. 333-01451,
which became effective on March 22, 1996.
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 said Section 8(a), may determine.
================================================================================
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT.
A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY
NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME
THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL
NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY
NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH
SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION
OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION DATED JUNE 14, 1996.
Version #1
PROSPECTUS SUPPLEMENT
(To Prospectus Dated ____________)
$________
LB HOME EQUITY LOAN TRUST
Home Equity Loan Asset-Backed Certificates, Series 199_
[ ]
Servicer
Lehman ABS Corporation
Depositor
Each Home Equity Loan Asset-Backed Certificate, Series 199_ (collectively,
the "Certificates") will represent an undivided interest in the LB Home Equity
Trust (the "Trust") to be formed pursuant to a Trust Agreement among Lehman ABS
Corporation, as Depositor, [ ], as Servicer, and [ ], as Trustee. The
property of the Trust will include certain home equity revolving credit line
loans (the "Mortgage Loans") secured primarily by second [deeds of trust]
[mortgages] on residential properties that are primarily one- to four-family
properties, the collections in respect of such Mortgage Loans, and certain other
property relating to such Mortgage Loans, including the benefit of a [Letter of
Credit] [Surety Bond] as described more fully herein. The Servicer will service
the Mortgage Loans, and the Depositor will own the undivided interest in the
Trust not represented by the Certificates.
Interest at the [variable] rate described herein (the "Certificate Rate")
will be distributed on the [15th] day of each month, or, if such [15th] day is
not a business day, the next succeeding business day (each a "Distribution
Date"), commencing on [ ]. Principal will be distributed on each
Distribution Date commencing on [ ], or, in certain limited
circumstances, earlier, as more fully described herein.
[The Certificates initially will be represented by physical certificates
registered in the name of Cede & Co., the nominee of The Depository Trust
Company ("DTC"). The interests of the beneficial owners of the Certificates
("Certificate Owners") will be represented by book-entries on the records of
DTC and participating members thereof. Definitive Certificates will be
available only under the limited circumstances described herein.]
Lehman Special Securities Inc., or another affiliate of Lehman Brothers
Inc. ("Lehman Brothers"), intends to make a secondary market in the
Certificates but is under no obligation to do so. There can be no assurance
that a secondary market for the Certificates will develop or, if it does
develop, that it will continue.
Potential Investors should consider, among other things, the information
set forth in "Special Considerations" herein and in the Prospectus.
THE CERTIFICATES REPRESENT INTERESTS IN THE TRUST AND DO NOT
REPRESENT INTERESTS IN OR OBLIGATIONS OF THE DEPOSITOR OR
ANY AFFILIATE THEREOF, EXCEPT TO THE EXTENT PROVIDED
HEREIN. THE MORTGAGE LOANS ARE NOT INSURED OR
GUARANTEED BY ANY GOVERNMENTAL AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
-------------
Price to Underwriting Proceeds to the
Public(1) Discount(2) Depositor(1)(3)
--------- ----------- ---------------
Per Certificate........... % %
Total..................... $ $ $
- ------------------
(1) Plus accrued interest, if any, at the Certificate Rate from
_____________, 199_.
(2) The Depositor has agreed to indemnify Lehman Brothers against certain
liabilities, including liabilities under the Securities Act of 1933.
(3) Before deducting expenses, payable by the Depositor, estimated to be
$____________.
------------
The Certificates offered by this Prospectus Supplement and the Prospectus
are offered by Lehman Brothers, subject to prior sale, to withdrawal,
cancellation or modification of the offer without notice, to delivery to and
acceptance by Lehman Brothers and certain further conditions. It is expected
that delivery of the Certificates will be made in [book-entry form through the
facilities of The Depository Trust Company] on or about _________, 199_.
------------
LEHMAN BROTHERS
______________, 199_.
Until ninety days after the date of this Prospectus Supplement, all
dealers effecting transactions in the Certificates, whether or not
participating in this distribution, may be required to deliver a Prospectus
Supplement and Prospectus. This is in addition to the obligation of dealers
acting as underwriters to deliver a Prospectus Supplement and Prospectus with
respect to their unsold allotments or subscriptions.
------------
The Certificates offered hereby constitute part of a separate series of
Asset-Backed Certificates and are being offered by Lehman ABS Corporation from
time to time pursuant to its Prospectus dated ____________. This Prospectus
Supplement does not contain complete information about the offering of the
Certificates. Additional information is contained in the Prospectus and
investors are urged to read both this Prospectus Supplement and the Prospectus
in full. Sales of the Certificates may not be consummated unless the purchaser
has received both this Prospectus Supplement and the Prospectus.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents have been filed by the Depositor with the
Commission pursuant to the Securities Exchange Act of 1934, as amended (the
"1934 Act"), and are incorporated herein by reference and made a part of this
Prospectus Supplement and Prospectus:
[Describe the documents.]
There are incorporated herein by reference all documents filed by the
Depositor with the Commission pursuant to Sections 13(a), 13(c), 14 or 15(d) of
the 1934 Act, on or subsequent to the date of this Prospectus and prior to the
termination of the offering of the Certificates made by this Prospectus
Supplement. The Depositor will provide without charge to each person to whom
this Prospectus Supplement and Prospectus are delivered, on request of such
person, a copy of any or all of the documents incorporated herein by reference
other than the exhibits to such documents (unless such exhibits are
specifically incorporated by reference in such documents). Requests should be
directed to the Corporate Secretary of Lehman ABS Corporation in writing at
Three World Financial Center, New York, New York 10285, or by telephone at
(212) 298-2000.
SUMMARY
The following summary of certain pertinent information is qualified in its
entirety by reference to the detailed information appearing elsewhere in this
Prospectus Supplement and the accompanying Prospectus. Certain capitalized
terms used in the summary are defined elsewhere in the Prospectus Supplement or
in the Prospectus. Reference is made to the Glossary of Terms in the
Prospectus for the definitions of certain capitalized terms.
Trust . . . . . . . . . . . . . . . LB Home Equity Loan Trust (the "Trust")
will be formed pursuant to a trust
agreement to be dated as of __________,
199_ (the "Agreement") among Lehman ABS
Corporation, as Depositor (the
"Depositor"), [], as Servicer (together
with any successor in such capacity, the
"Servicer"), and [], as trustee (the
"Trustee"). The property of the Trust
will include certain home equity loans
(the "Mortgage Loans") purchased by the
Depositor from Lehman [Commercial Paper
Inc.] [Capital Corporation] (the
"Seller"), an affiliate of the Company,
which either directly or through its
affiliates, acquired the Mortgage Loans in
the ordinary course of its business [from
_________, the originator of the Mortgage
Loans (the "Bank")], and secured primarily
by second [deeds of trust] [mortgages]
(the "Mortgages") on residential
properties that are primarily one to
four-family properties (the "Mortgaged
Properties"), the collections in respect
of such Mortgage Loans, the Mortgages on
the properties securing the Mortgage
Loans, including any properties acquired
by foreclosure or deed in lieu of
foreclosure or otherwise, the benefits of
the [Letter of Credit] [Surety Bond],
rights under certain hazard insurance
policies covering the Mortgaged
Properties, and certain other property
relating to the Mortgage Loans, as
described more fully herein. The Trust
property will include (i) the principal
balances (the "Loan Balances") of the
Mortgage Loans upon their transfer to the
Trust and any additions to such Loan
Balances due to new draws by the borrowers
("Additional Balances") funded by the
[Bank] [Servicer] [Seller] [Depositor]
under the home equity lines of credit (the
"HELOCs") relating to the Mortgage Loans
during the life of the Trust and (ii) the
right to receive payments on the Private
Securities. See "THE HELOCS" HEREIN AND
"THE TRUST FUNDS" in the Prospectus.
Securities Offered. . . . . . . . . Each of the Trust's Home Equity Loan
Asset-Backed Certificates offered hereby
(the "Certificates") represents an
undivided interest in the Trust. Each
Certificate represents the right to
receive payments of interest at the
[variable] rate described below (the
"Certificate Rate"), payable monthly, and
monthly payments of principal during the
Amortization Period, as defined herein,
funded from a percentage of the payments
received with respect to the Mortgage
Loans, the Private Securities or, in
certain circumstances, from draws on the
[Letter of Credit] [Surety Bond.] The
aggregate undivided interest (the
"Investor Interest") in the Trust
represented by the Certificates will
initially represent $_______ of principal
(the initial "Certificate Principal
Balance"), which will decline as
principal is paid to the
Certificateholders during the
Amortization Period, except as otherwise
provided herein. The Depositor will hold
the remaining undivided interest (the
"Depositor Interest") in the Trust not
represented by the Certificates. The
Certificates will be issued pursuant to
the Agreement. See "DESCRIPTION OF THE
CERTIFICATES" herein and in the
Prospectus.
The Mortgage Loans. . . . . . . . . The Mortgage Loans arise under HELOCs
and are secured by [deeds of trust]
[mortgages] (which are primarily second
[deeds of trust] [mortgages]) on
residential properties located primarily
in [] that are primarily one- to
four-family residential properties. As of
____________, 199_ (the "Cut-Off Date")
the aggregate of the Loan Balances of the
Mortgage Loans was $______ (the "Cut-Off
Date Pool Balance"), of which
approximately __% of the Mortgage Loans
are secured by properties located in [].
The remaining Mortgage Loans are secured
by properties located in ________ states,
with no single state accounting for more
than __% of the Cut-Off Date Pool
Balance. The combined loan-to-value
ratio of a Mortgage Loan, computed at the
maximum amount the borrower was permitted
to draw down under the HELOC (the "Credit
Limit") and taking into account the
amounts of any related senior mortgage
loans (the "Combined Loan-to-Value
Ratio"), based upon a valuation (as
described under "THE HOME EQUITY LENDING
PROGRAM") of the Mortgaged Property
obtained by the Bank at the time of
execution of the loan agreement governing
such Home Equity Credit Line, generally
did not exceed __%, subject to exceptions
deemed appropriate by the Depositor. The
weighted average Combined Loan-to-Value
Ratio of the Mortgage Loans, as described
under "THE HELOCS," was approximately __%
as of the Cut-Off Date. See "THE HOME
EQUITY LENDING PROGRAM -- Underwriting
Procedures Relating to HELOCs" herein.
Interest on each Mortgage Loan is payable
monthly and computed on the average daily
outstanding Loan Balance for each billing
cycle at a variable rate per annum
(subject to minimum and maximum rates, as
described herein under "THE HOME EQUITY
LENDING PROGRAM -- HELOC Terms," and
further subject to applicable usury
limitations) to the sum of (i) the [prime
rate published in the "Money Rates"
section of the Wall Street Journal on the
__ calendar day of each month (or, if no
rate is published on the __, then on the
next succeeding calendar day on which a
prime rate is published)] and (ii) a
margin, currently __%. See "THE HELCOS"
herein and "CERTAIN LEGAL ASPECTS OF THE
MORTGAGE LOANS -- Applicability of Usury
Laws" in the Prospectus. Principal
amounts may be drawn down by the borrower
under the HELOC from time to time,
subject to the borrower's Credit Limit.
A borrower may repay principal at any
time. The Cut-Off Date Loan Balances of
the Mortgage Loans ranged from $0.00 to
$_____ and averaged $______. Credit
Limits under the HELOCs as of the Cut-Off
Date ranged from approximately $_____ to
$____ and averaged $_______. Each HELOC
was originated in the period from ______
to __________, 199_, and, as of the
Cut-Off Date, the weighted average loan
utilization rate was approximately __%.
See "THE HOME EQUITY LENDING PROGRAM" and
"THE HELOCS" herein.
During the term of the Trust, all
Additional Balances will be property of
the Trust. The aggregate amount of the
Loan Balances at any time (the "Pool
Balance") will fluctuate from day to day
because the amount of draws by borrowers
and the amount of principal payments will
usually differ on each day. Because the
Depositor Interest represents the
interest in the Trust not represented by
the Certificates, the amount of the
Depositor Interest will fluctuate from
day to day as draws are made and
principal is paid under the Mortgage
Loans.
The aggregate undivided interest in the
Loan Balances in the Trust evidenced by
the Certificates will never exceed the
Certificate Principal Balance regardless
of the amount of the Pool Balance at any
time.
The related Prospectus Supplement will
describe certain characteristics of the
Mortgage Loans for a Series, including,
without limitation, (a) the aggregate
unpaid principal balance of the Mortgage
Loans (or the aggregate principal balance
included in the Trust Fund for the
related Series) and the average
outstanding principal balance of the
Mortgage Loans; (b) the weighted average
Mortgage Rates, the weighted average of
the adjustable Mortgage Rates as of the
Cut-Off Date; (c) the combined loan-to-
value ratios of the Mortgage Loans,
computed in the manner described in the
related Prospectus Supplement; (d) the
relative percentage (by principal balance
as of the Cut-Off Date) of Mortgage
Loans that accrue interest at adjustable
or fixed interest rates; (e) any
enhancement relating to the Mortgage
Loans; (f) the geographic dispersion of
Mortgaged Properties securing the
Mortgage Loans; (g) the use and type of
each Mortgaged Property securing a
Mortgage Loan; (h) the lien priority of
the Mortgage Loans; (i) the credit limit
utilization rates of the Mortgage Loans;
and (j) the delinquency status and year
of origination of the Mortgage Loans.
Denominations . . . . . . . . . . . The Certificates will be offered for
purchase in denominations of [$1,000] and
integral multiples thereof. The interest
evidenced by a Certificate in the
Certificateholders' undivided interest in
the Trust (the "Percentage Interest")
will be equal to the percentage derived
by dividing the denomination of such
Certificate by the Initial Certificate
Principal Balance.
Registration of Certificates. . . . [The Certificates will initially be
represented by physical certificates
registered in the name of Cede & Co.
("Cede"), as the nominee of The
Depository Trust Company ("DTC"). No
person acquiring a beneficial ownership
interest in the Certificates (a
"Certificate Owner") will be entitled to
receive a definitive certificate
representing such person's interest,
except in the event that Definitive
Certificates are issued under the limited
circumstances described herein. All
references herein to Certificateholders
shall refer to Certificate Owners, except
as otherwise specified herein. See
"Description of the Certificates ___
Registration of Certificates."]
Depositor . . . . . . . . . . . . . The Depositor of the Mortgage Loans will
be Lehman ABS Corporation. The principal
executive offices of the Depositor are
located at 200 Vesey Street, Three World
Trade Center, New York, New York 10285
(telephone (212) 298-2000). See "THE
COMPANY" in the Prospectus.
Servicer. . . . . . . . . . . . . . The Servicer of the Mortgage Loans will be
[the Bank] [] (the "Servicer"). The
principal executive offices of the
Servicer are located at _______________
(telephone (___) _______). See "SERVICING
OF MORTGAGE LOANS -- The Servicer" herein.
Collections . . . . . . . . . . . . All collections on the Mortgage Loans will
be allocated by the Servicer in accordance
with the Loan Agreements between amounts
collected in respect of interest
("Interest Collections") and amounts
collected in respect of principal
("Principal Collections"). All such
amounts will then be allocated in
accordance with the respective interests
of the Certificateholders and the
Depositor in such Interest Collections and
Principal Collections. The Servicer will
generally deposit net collections on the
Mortgage Loans allocable to the Investor
Interest and distributable to the
Certificateholders in an account
established for such purpose under the
Agreement (the "Collection Account"). See
"DESCRIPTION OF THE CERTIFICATES --
Payments on Mortgage Loans; Deposits to
Collection Account" herein and "SERVICING
OF LOANS -- Deposits to and Withdrawals
from the Collection Account" in the
Prospectus.
Interest. . . . . . . . . . . . . . Interest will be distributed monthly on
the ____ day of each month or, if such
day is not a business day, on the next
succeeding business day (each, a
"Distribution Date"), commencing on
____________, at the Certificate Rate for
the related Interest Period (as defined
below). The Certificate Rate for a
Distribution Date will equal [the
arithmetic mean of London interbank
offered quotations for one-month
Eurodollar deposits ("LIBOR") determined
as specified herein, as of the second
London business day prior to the
immediately preceding Distribution Date
(or as of ___________, 199_, in the case
of the first Distribution Date) plus 0.
of 1%, subject to a maximum rate
described under "DESCRIPTION OF THE
CERTIFICATES -- Distributions on the
Certificates" herein] [___% per annum].
Interest on the Certificates in respect
of any Distribution Date will accrue from
the preceding Distribution Date (or in
the case of the first Distribution Date,
from the date of the initial issuance of
the Certificates (the "Closing Date"))
through the day preceding such
Distribution Date (each such period, an
"Interest Period") on the basis of the
[actual number of days in the Interest
Period and a 360-day year]. Interest
payments will be funded from the portion
of the Interest Collections collected
during the immediately preceding calendar
month (or, in the case of the initial
Distribution Date, the period from
__________, 199_ through the last day of
the calendar month immediately preceding
such Distribution Date) (the "Collection
Period") allocable to the Investor
Interest and, if necessary, from draws on
the [Letter of Credit] [Surety Bond].
See "DESCRIPTION OF THE CERTIFICATES"
herein and "SPECIAL CONSIDERATIONS --
Credit Enhancement" in the Prospectus.
Revolving Period. . . . . . . . . . In order to maintain the Certificate
Principal Balance at $__________ (except
in certain limited circumstances) for a
period of approximately _____ months from
the first day of the month in which the
Certificates are issued or for such
shorter period as may result from the
occurrence of an Early Amortization
Event, as described herein (the
"Revolving Period"), Principal
Collections allocable to the Investor
Interest will be paid to the Depositor
rather than the Certificateholders so
that the Certificateholders maintain the
same Investor Interest in the Trust.
Unless earlier terminated by the
occurrence of an Early Amortization
Event, the Revolving Period will end on
___________. See "DESCRIPTION OF THE
CERTIFICATES" herein.
Principal Payments; Amortization
Period . . . . . . . . . . . . . . Unless an Early Amortization Event shall
have earlier occurred, during the period
beginning _________________ and ending
when the Certificate Principal Balance
has been reduced to zero or when the
Trust otherwise terminates (the
"Amortization Period"), Principal
Collections allocated to the Investor
Interest will no longer be paid to the
Depositor but instead will be distributed
monthly to the Certificateholders as
provided herein on each Distribution Date
beginning with the Distribution Date in
the month following the month in which
the Amortization Period commences. See
"DESCRIPTION OF THE CERTIFICATES --
Early Amortization Events" herein for a
discussion of the events which might lead
to the early commencement of the
Amortization Period. During the
Amortization Period, the amount of
Principal Collections allocable to the
Investor Interest (the "Principal
Allocation") will equal the ratio of the
Certificate Principal Balance to the Pool
Balance, in each case as of the end of
the last day of the Revolving Period (the
"Investor Percentage" for such period)
multiplied by the Principal Collections
received during the related Collection
Period.
Allocations based upon the Investor
percentage during the Amortization Period
may result in distributions of principal
with respect to any Collection Period to
Certificateholders in amounts that are
greater relative to the declining balance
of the Certificate Principal Balance than
would be the case if no fixed Investor
Percentage were used to determine the
percentage of Principal Collections
distributed in respect of the Investor
Interest. See "DESCRIPTION OF THE
CERTIFICATES -- Payments on Mortgage
Loans; Deposits to Collection Account"
herein.
[Letter of Credit] [Surety Bond]
Issuer . . . . . . . . . . . . . . ____________ (the "[Letter of Credit]
[Surety Bond] Issuer"). See "THE [LETTER
OF CREDIT] [SURETY] BOND ISSUER" herein.
[Letter of Credit] [Surety Bond]. . On the Closing Date, the [Letter of
Credit] [Surety Bond] Issuer will issue
a [letter of credit] [surety bond] (the
"[Letter of Credit] [Surety Bond]") in
favor of the Trustee on behalf of the
Trust. In the event that, on any
Distribution Date, available amounts on
deposit in the Collection Account with
respect to the preceding Collection
Period are insufficient to provide for
the payment of the amount required to be
distributed to the Certificateholders and
the Servicer on such Distribution Date,
the Trustee will draw on the [Letter of
Credit] [Surety Bond], to the extent of
the [Letter of Credit] [Surety Bond], to
the extent of the [letter of credit]
[Surety Bond] Amount for such
Distribution Date, any amounts remaining
in the Collection Account with respect to
the preceding Collection Period, after
all other distributions have been made as
described above, will be distributed to
the [Letter of Credit] [Surety Bond]
Issuer. See "DESCRIPTION OF THE
CERTIFICATES -- The [Letter of Credit]
[Surety Bond]" and "-- Distributions on
the Certificates" herein and "SPECIAL
CONSIDERATIONS -- Credit Enhancement"
and "ENHANCEMENT" in the Prospectus.
[Letter of Credit] [Surety Bond]
Amount . . . . . . . . . . . . . . The amount available under the
[Letter of Credit] [Surety Bond] (the
"[Letter of Credit] [Surety Bond]
Amount") for the initial Distribution
Date will be $__________. For each
Distribution Date thereafter, the [Letter
of Credit] [Surety Bond] Amount will
equal the lesser of (i) ___% of the Pool
Balance as of the first day of the
preceding Collection Period (after giving
effect to any amounts distributed with
respect to principal of the Mortgage
Loans on the Distribution Date occurring
in such preceding Collection Period) and
(ii) the [Letter of Credit] [Surety Bond]
Amount as of the first day of the
preceding Collection Period, minus any
amounts drawn under the [Letter of
Credit] [Surety Bond] during such
preceding Collection Period, plus any
amounts paid to the [Letter of Credit]
[Surety Bond] Issuer on the Distribution
Date occurring in such preceding
Collection Period up to the amount of any
previous draws on the [Letter of Credit]
[Surety Bond].
Record Date . . . . . . . . . . . . The last day [of the month] preceding a
Distribution Date.
Servicing . . . . . . . . . . . . . The Servicer will be responsible for
servicing, managing and making
collections on the Mortgage Loans. The
Servicer will deposit collections
allocable to the Investor Interest into
the Collection Account as described
herein. On the __________ business day,
but no later than the _______________
calendar day, of each month (the
"Determination Date"), the Servicer will
calculate, and instruct the Trustee
regarding, the amounts to be paid, as
described herein, with respect to the
related Collection Period to the
Certificateholders. See "DESCRIPTION OF
THE CERTIFICATES -- Distributions on the
Certificates" herein. The Servicer will
receive a monthly servicing fee in the
amount of ___% per annum (the "Servicing
Fee Rate"), of the related Pool Balance
and certain other amounts, as servicing
compensation from the Trust. See
"SERVICING OF MORTGAGE LOANS --
Servicing Compensation and Payment of
Expenses" herein. In certain limited
circumstances, the Servicer may resign or
be removed, in which event either the
Trustee or a third-party servicer will
be appointed as successor Servicer. See
"SERVICING OF THE LOANS -- Certain
Matters Regarding the Servicer" and "THE
TRUST AGREEMENTS -- Events of Default"
and "___ Rights Upon Events of Default"
in the Prospectus.
Final Payment of Principal;
Termination . . . . . . . . . . . . The Trust will terminate on
the Distribution Date following the
earlier of (i) the reduction of the
Certificate Principal Balance to zero and
after which there is no unreimbursed
Certificate Principal Balance Loss
Deduction Amount and (ii) the final
payment or other liquidation of the last
Mortgage Loan in the Trust. The Investor
Interest will be subject to optional
retransfer to the Depositor on any
Distribution Date after the Certificate
Principal Balance is reduced to an amount
less than or equal to $________ ([5]% of
the initial Certificate Principal
Balance). The retransfer price will be
equal to the sum of the outstanding
Certificate Principal Balance and accrued
and unpaid interest thereon at the
Certificate Rate through the day preceding
the final Distribution Date. See
"DESCRIPTION OF THE CERTIFICATES --
Optional Termination" herein and
"DESCRIPTION OF THE CERTIFICATES --
Optional Termination" and "THE TRUST
AGREEMENTS -- Termination" in the
Prospectus.
Trustee . . . . . . . . . . . . . . [ ] (the "Trustee") will
act as Trustee on behalf of the
Certificateholders.
Mandatory Retransfer of Certain
Mortgage Loans and Private
Securities . . . . . . . . . . . . The Depositor will make certain
representations and warranties in the
Agreement with respect to the Mortgage
Loans in its capacity as Depositor. If the
Depositor breaches certain of its
representations and warranties with
respect to any Mortgage Loan and such
breach, materially and adversely affects
the interests of the Trust, the
Certificateholders or the [Letter of
Credit] [Surety Bond] Issuer and is not
cured within the specified period, the
Mortgage Loan will be removed from the
Trust after the expiration of a specified
period from the date on which the
Depositor becomes aware or receives
notices of such breach and will be
reassigned to the Depositor. See
"DESCRIPTION OF THE CERTIFICATES --
Assignment of Mortgage Loans" herein.
Federal Tax Considerations. . . . . [Special tax counsel to the Depositor is
of the opinion that, under existing law,
the Certificates are properly
characterized as debt of the Depositor
for Federal income tax purposes. Under
the Agreement, the Depositor and the
Certificateholders will agree to treat
the Certificates as indebtedness of the
Depositor for Federal, state and local
income and franchise tax purposes. See
"CERTAIN FEDERAL INCOME TAX
CONSIDERATIONS" in the Prospectus for
additional information concerning the
application of Federal income tax laws.]
ERISA Considerations. . . . . . . . A fiduciary of any employee benefit plan
subject to the Employee Retirement Income
Security Act of 1974, as amended
("ERISA"), or the Code should carefully
review with its legal advisors whether
the purchase or holding of Certificates
could give rise to a transaction
prohibited or not otherwise permissible
under ERISA or the Code. See "ERISA
CONSIDERATIONS" in the Prospectus.
Certificate Rating. . . . . . . . . It is a condition to the issuance of the
Certificates that they be rated in the
[ ] highest rating category by at
least one nationally recognized
statistical rating organization (the
"Rating Agency"). See "RATING" herein
and "SPECIAL CONSIDERATIONS -- Rating of
the Securities" in the Prospectus.
SPECIAL CONSIDERATIONS
[Servicer's Ability to Change the Terms of the HELOCS. The Servicer may
permit an increase in the Credit Limit under a HELOC if the new Credit Limit
under the HELOC, plus the outstanding principal balance of any related senior
loans, does not exceed (i) __% (__% for a condominium, townhouse, duplex, or
vacation condo/house), if the market value of the Mortgaged Property is $_______
or less, or __% (__% for a condominium, townhouse, duplex, or vacation
condo/house), and if the market value of the Mortgaged Property exceeds
$_______, based upon an appraisal or the tax assessed value of the Mortgaged
Property at the time the increase was requested. An increase in the Credit
Limit under a HELOC in accordance with the previous sentence may be made without
the consent of the Trustee. Additional Balances arising under a Mortgage Loan
as a result of an increase in the Credit Limit will be treated the same as
Additional Balances arising under a Mortgage Loan for which there has been no
increase in the Credit Limit. In addition to such changes, the Servicer may
agree to other changes in the terms of a Loan Agreement, provided that such
changes (i) do not materially adversely affect the interest of the
Certificateholders, (ii) are consistent with prudent business practice, (iii)
are also being applied to the comparable segment of home equity credit lines
being held for the Servicer's own account, and (iv) do not change the terms of
the HELOC so as to change the terms for the amortization of principal. There
can be no assurance that changes in applicable law or the marketplace for home
equity loans or prudent business practice will not result in changes in the
terms of the Loan Agreements. The Servicer may also extend the period during
which draws under the HELOCS may be made.]
[Delinquent Mortgage Loans. The Trust will include Mortgage Loans which
are ___ days or fewer delinquent. As of the Cut-Off Date, the aggregate Loan
Balance of such delinquent Mortgage Loan was $______. [In addition, the
Mortgage Loans in all likelihood include obligations of borrowers who are or are
about to become bankrupt or insolvent.] If there are not sufficient funds from
Interest Collections allocated to the Investor Interest to cover the Liquidation
Loss Amount for any Collection Period and the [Letter of Credit] [Surety Bond]
Amount has been reduced to zero, the Certificate Principal Balance will be
reduced which (unless otherwise later reimbursed) would result in a reduction in
the aggregate amount of principal returned to the Certificateholders and in the
amount of Interest Collections allocable to the Investor Interest and available
to provide protection against defaults in subsequent Collection Periods.]
[Taxation. In the opinion of special tax counsel to the Depositor, the
Certificates are properly characterized as debt of the Depositor for Federal
income tax purposes. If the IRS were to contend successfully that the Certif-
icates were not debt obligations of the Depositor for Federal income tax
purposes, the arrangement among the Depositor and the Certificateholders might
be classified for Federal income tax purposes as either a partnership or an
association taxable as a corporation that owns the Mortgage Loans. See "CERTAIN
FEDERAL INCOME TAX CONSIDERATIONS" in the Prospectus.]
THE [LETTER OF CREDIT] [SURETY BOND] ISSUER
The following information with respect to _________ ______________
("___________") has been furnished by _____________.
[DESCRIPTION OF LC/SURETY ISSUER]
THE HOME EQUITY LENDING PROGRAM
GENERAL
The HELOCs were originated by ___________________ (the "Bank") under its
home equity lending program. The Bank has offered variable-rate home equity
revolving credit lines since ____________. As of ______, __, the Bank owned
approximately $_______ million aggregate principal amount of outstanding loans
originated in the State of ________ under home equity credit lines (the "Bank's
Portfolio").
UNDERWRITING PROCEDURES RELATING TO HELOCS
[Each revolving home equity line of credit is originated after a review by
the Bank in accordance with its established underwriting procedures, which are
intended to assess the applicant's ability to assume and repay such home equity
lines of credit and the adequacy of the real property which serves as collateral
for such home equity lines of credit. The maximum home equity line of credit
provided by the Bank is $________.
Each applicant for a home equity line of credit is required to complete an
application which lists the applicant's assets, liabilities, income, credit and
employment history and other demographic and personal information. If
information in the loan application demonstrates that there is sufficient income
and equity to justify making a home equity line of credit, the Bank will conduct
a further credit investigation of the applicant. This investigation includes
(i) obtaining and reviewing an independent credit bureau report on the credit
history of the borrower in order to evaluate the borrower's ability to repay;
(ii) obtaining a verification of employment from the applicant's employer; (iii)
obtaining and reviewing pay stubs, income tax returns and/or W-2 forms in order
to verify the applicant's income; and (iv) in the case of all home equity lines
of credit originated with a Credit Limit in excess of $_______ or with any
Credit Limit, if originated after _________, obtaining a drive-by appraised
value (a "Drive-By Appraised Value") of the property to be mortgaged through an
independent frontal exterior inspection and neighborhood observation (a
"Drive-By Appraisal") of the property or, in the case of home equity lines of
credit originated prior to _______ in an amount of $_______ or less, making an
estimate of the value (the "Estimated Value") of the property to be mortgaged
through, (a) in the case of home equity lines of credit originated for such
properties located in the State of _________, the use of a formula that assumed
that the then current value of the property was equal to the amount the
applicant paid for the property together with appreciation of __% of the
purchase price for each year since the applicant purchased the property and (b)
in the case of home equity lines of credit originated for such properties
located in ______________, a property tax bill which reflected a 100% assessment
on the property.
Although no complete title search of the property to be mortgaged is
required, a bring-down to the date of origination of the home equity lines of
credit of the complete title search obtained by the borrower at the time of his
original purchase of the mortgaged property must be delivered.
The Bank calculates the maximum amount of the loan that the customer may
obtain by taking ___% (or, in the case of home equity lines of credit originated
prior to ______, __%) of the Drive-By Appraised Value or Estimated Value, as the
case may be, of the property and subtracting any outstanding senior mortgage
balance. Financial insurance premiums and fees are not considered in the loan
amount when making such computation.
Applications for loans exceeding the maximum amount calculated in the
preceding paragraph require regional manager approval. Overrides of other
criteria may be authorized by branch managers up to their lending limits. Among
the reasons that the Bank grants overrides are the existence of compensating
balances of the borrower in accounts held by the Bank (which balances will not
necessarily be available in the event of a default or delinquency of any HELOC
in the Pool) and relationships between the borrower and the trust department of
the Bank.
No information is available with respect to the portio of the home equity
lines of credit in the bank's Portfolio as to which overrides of underwriting
criteria were granted.]
HELOC TERMS
[A borrower may access a home equity line of credit by writing a check
supplied by the Bank or through a check overdraft facility. On home equity
lines of credit originated prior to ________, __ in ________ ____, there is no
automatic termination of the draw-down period so long as the borrower is not in
default under the loan agreement. On all home equity lines of credit originated
in ________ and on home equity lines of credit originated after ________, ___ in
___________ ____, there is a ___ year draw down period on the lines as long as
the borrower is not in default under the loan agreement. Home equity lines of
credit bear interest at a variable rate which may change monthly. Home equity
lines of credit are subject to a maximum per annum interest rate of ___
percentage points and to applicable usury limitations. See "CERTAIN LEGAL
ASPECTS OF THE MORTGAGE LOANS ___ Applicability of Usury Laws" in the
Prospectus. The monthly periodic rate on the home equity revolving lines of
credit is 1/12th of the annual percentage rate (the "Loan Rate'), which is the
sum of the Index Rate plus a spread (the "Margin") of predominantly ____%.
Interest on a home equity line of credit is calculated at the Loan Rate
applied to the daily balance of the account for each day of the billing cycle.
A borrower is required to pay each month the amount of interest accrued on the
line during the previous month. There are no minimum principal payment
requirements for home equity lines of credit originated prior to _______, __ in
____________. For all lines of credit originated in _________________ and lines
of credit originated after _____________, __ in ______________, principal
repayments vary depending on the option selected by the borrower. A borrower
who selects an "interest only" option has no minimum principal payment during
the first ten year draw period of and thereafter has a minimum monthly principal
payment during the ten years following the draw period of 1/120th of the
principal amount outstanding on the last day of the ten year draw period. A
borrower who selects a "principal and interest" option has a minimum monthly
principal payment during the first ten year draw period of 1/200th of the
principal amount outstanding on the last day of the applicable billing cycle and
thereafter has a minimum monthly payment of 1/120th of the principal amount
outstanding on the last day of the draw period. Billing statements are mailed
monthly. The statement details all debits and credits and specifies the minimum
payment due and the available credit line. all payments are due __ days after
the billing statement is issued.
The "Index Rate" is based on the "prime rate" published in the "Money
Rates" section of The Wall Street Journal on the applicable billing date for
each HELOC (or if such day is not a banking day in ________ or ____ _____, on
the banking day immediately preceding such day), with charges becoming effective
on the first day of the next billing cycle.
If more than one prime rate is published, then the highest rate published
will be used. The Loan Agreements further provide that if publication of the
Index Rate is discontinued, the Bank will change the Index Rate upon
notification in accordance with such Loan Agreements. Except for any
amortization of principal which may occur as a result of the required monthly
minimum payments, there are no required payments of principal.
The Bank also offers a "fixed rate" loan option whereby a borrower may
repay al of a portion of the outstanding loan balance, in excess of $____, at a
fixed rate. If a borrower selects a "fixed rate" option the amount converted
will be treated as a principal payment on the line of credit and the available
line of credit will be reduced by the "fixed rate" option amount.
The Bank has the right under each HELOC originated prior to _________, with
30 days' prior written notice of the amendment or longer notice period if
applicable in accordance with Federal and applicable _____ ____ law, to change
any of its terms, including increasing the monthly periodic rate or changing the
Index Rate at any time. Unless otherwise indicated in the notice, all such
changes will apply to both new and outstanding balances. For home equity lines
of credit originated after ______, __, the Bank may make changes pre-approved by
each individual obligor and changes that are considered immaterial.
Notwithstanding the foregoing, no change shall be made to the terms of the
HELOCs after _____, __ unless, in connection with such change, the Depositor
delivers to the Trustee an opinion of counsel stating that such change will not
cause the Trust, or the arrangement by which the Certificates are issued, to be
classified as a taxable mortgage pool within the meaning of Section 701(i) of
the Internal Revenue Code of 1986, as amended.
The Bank has the right to suspend or terminate the right to obtain
additional credit, or to require the borrower to pay the entire balance due plus
all other accrued but unpaid charges immediately, if the borrower fails to make
any required payment by the due date, if the borrower's original loan
application was fraudulent or contained a material misrepresentation or if the
borrower sells or transfers the mortgaged property or acts in any way which
adversely affects the lien of the mortgage or the maintenance of the property.
The Bank has the right to suspend the right to obtain additional credit or to
reduce a borrower's credit limit, if the value of the mortgaged property
declines significantly below its appraised value, if the Bank reasonably
believes the borrower will be unable to repay the line due to a material
financial change, if the borrower is in default under the loan agreement, if
government action either impairs the Bank's security interest or prevents it
from imposing the annual percentage rate, if a regulatory agency has notified
the Bank that continued advances would institute an unsafe and unsound practice
or if the maximum annual percentage is reached.]
SERVICING OF THE MORTGAGE LOANS
THE SERVICER
[The Servicer is a ___________ [which is wholly owned by _____________.
The Servicer conducts a general banking business throughout the _________,
and, with its subsidiaries, offers a broad array of commercial and retail loan
and deposit products and services, mortgage banking and brokerage and investment
services. At _________, the Servicer had total assets of approximately $____
billion and total deposits of approximately $_____ billion.
The principal executive offices of the Servicer are located at
_________________________________ (telephone (___-___-_____).]
SERVICING OF HELOCS
[Centralized controls and standards have been established by the Servicer
for the servicing and collection of home equity lines of credit. Servicing
includes, but is not limited to, post-origination loan processing, customer
service, remittance processing, collections and liquidations.
The collection process is initiated ten days after the payment due date
with the computer generation of a late notice. To make payment arrangements, a
collector attempts to contact the borrower when the home equity line of credit
is 15 to 30 days past due.
During the period when an account is 45 to 60 days past due, a credit
bureau report is obtained, homeowner's insurance is verified, the status of
senior mortgages and property taxes is checked and a title search and "drive-by"
appraisal are ordered.
If arrangements have not been made to cure the delinquency within 61 days
of the line becoming past due, drawing privileges are cancelled. The line is
referred to outside counsel and is placed on a "non-accrual" status after 90
days of delinquency. All legal expenses are assessed to the account and become
the responsibility of the borrower. When it is determined by the Servicer that
there is no possibility of recovery from the mortgaged property or from other
leviable assets or wage attachments, the line is charged-off.
Reinstatement arrangements can be made up until the point of sale. Any
foreclosures initiated on a junior mortgage are subject to the senior mortgage
or mortgages and any outstanding property taxes. If the Servicer purchases the
property through the foreclosure action, the account is transferred to the
Servicer's REO Department which is maintained at ______________. The REO
Department is responsible for maintaining and marketing the property.
The Servicer may not foreclose on the property securing a junior mortgage
loan unless the Servicer forecloses subject to any senior mortgages, in which
case the Servicer may pay the entire amount due on the senior mortgage to the
senior mortgagees at or prior to the foreclosure sale. If a senior mortgage is
in default after the Servicer has initiated its foreclosure action, the Servicer
may advance funds to keep senior mortgages current until such time as the
Servicer satisfies such senior mortgages. In the event that foreclosure
proceedings have been instituted on a senior mortgage prior to the initiation of
the Servicer's foreclosure action, the Servicer may either satisfy the senior
mortgage at the time of the foreclosure sale or take other action to protect the
Trust's interest in the related property.]
See "SERVICING OF LOANS" in the Prospectus for additional information
regarding the Servicer's servicing of the Mortgage Loans pursuant to the
Agreement.
DELINQUENCY AND LOSS-EXPERIENCE OF THE SERVICER'S PORTFOLIO
The following tables set forth the delinquency and loss experience for each
of the periods shown for the Servicer's portfolio of home equity lines of
credit. The Servicer believes that there have been no material trends or
anomalies in the historical delinquency and loss experience as represented in
the following tables. The information in the tables below has not been adjusted
to eliminate the effect of the growth in the size of the Servicer's portfolio
during the periods shown. Accordingly, loss and delinquency as percentages of
aggregate principal balance of such loans for each period may be higher than
those shown if a group of such loans were artificially isolated at a point in
time and the information showed the activity only in that isolated group. The
data presented in the following tables are for illustrative purposes only, and
there is no assurance that the delinquency and loss experience of the HELOCs
will be similar to that set forth below.
<TABLE>
<CAPTION>
DELINQUENCY EXPERIENCE (Dollars in Thousands)
As of As of December 31,
-----------------------------------------------------------------
, 1992(1) 1991 1990 1989
----------------- ----------------- ---------------- -----------------
Number of Number of Number of Number of
Loans Amount Loans Amount Loans Amount Loans Amount
----- ------ ----- ------ ----- ------ ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Portfolio Principal
Outstanding at
Period End.............. $ $ $ $
Delinquency(1)
30-59 Days............... $ $ $ $
60-89 Days...............
90 or More Days(2).......
----- ------ ----- ------ ----- ------ ----- ------
Total Delinquencies........ $ $ $ $
Total Delinquencies
as a Percentage of
the Portfolio at
Period End............... % % % % % % % %
</TABLE>
- ----------
(1) The period of delinquency is based on the number of days payments are
contractually past due for all loans other than mortgage loans previously
charged off.
(2) Includes mortgage loans in foreclosure and not charged off.
<TABLE>
<CAPTION>
LOSS EXPERIENCE (Dollars in Thousands)
As of As of December 31,
-----------------------------------------------------------------
, 1992(1) 1991 1990 1989
----------------- ----------------- ---------------- -----------------
Number of Number of Number of Number of
Loans Amount Loans Amount Loans Amount Loans Amount
----- ------ ----- ------ ----- ------ ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Portfolio Principal
Outstanding at
Period End.............. $ $ $ $
Gross Losses............... $ $ $ $
Recoveries................. $ $ $ $
Net Losses................. $ $ $ $
Net Losses as a
Percentage of
Portfolio at
Period End............. %(2) %(2) % % % % % %
</TABLE>
- ----------
(1) Net Losses equal total principal charged off less recoveries. The customary
policy of the Bank is to charge off mortgage loans in full that are 120 days
past due unless foreclosure proceedings are planned or there are indications
that the account will be brought current. An account that is not charged
off because there are indications that payment is imminent generally will be
charged off after an additional 60 to 90 days if such payments is not
forthcoming.
(2) This percentage represents the three-month period ended ______________, 1992
annualized and is not necessarily indicative of the results which may occur
for the full year.
Servicing Compensation and Payment of Expenses
The servicing compensation to be paid to the Servicer in respect of its
servicing activities relating to the Mortgage Loans will be paid to it from
Interest Collections at the time such collections are received or from amounts
drawn on the [Letter of Credit] [Surety Bond] and will be equal to ___% per
annum, (the "Servicing Fee Rate") of the Pool Balance. The Investor Percentage
of such servicing fee (the "Investor Servicing Fee") will be paid as described
under "DESCRIPTION OF THE CERTIFICATES ___ Distribution on the Certificates ___
Distribution of Interest Collections and Draw Amounts" herein. All assumption
fees, late payment charges and other fees and charges, to the extent collected
from borrowers, will be retained by the Servicer as additional servicing
compensation.
[The Servicer will pay certain ongoing expenses associated with the Trust
and incurred by it in connection with its responsibilities under the Agreement,
including, without limitation, payment of the fees and disbursements of the
Trustee, any custodian appointed by the Trustee, the Certificate Registrar and
any paying agent.] In addition, the Servicer will be entitled to reimbursement
for certain expenses incurred by it in connection with defaulted Mortgage Loans
and in connection with the restoration of Mortgaged Properties, such right of
reimbursement being prior to the rights of Certificateholders to receive any
related Liquidation Proceeds.
THE HELOCS
The Trust will be formed in accordance with the laws of the State of New
York pursuant to the Agreement. The Depositor will transfer the Mortgage Loans
to the Trust, without recourse, in exchange for the Certificates and a
certificate to be held by it representing the Depositor's interest in the Trust
(the "Depositor Certificate"). The property of the Trust will consist of the
Mortgage Loans, all proceeds of the Mortgage Loans, all monies on deposit in the
Collection Account and the Certificate Account, the Mortgages ont he properties
securing the Mortgage Loans, including any properties acquired by foreclosure or
deed in lieu of foreclosure, the benefits of the [Letter of Credit] [Surety
Bond], and the proceeds on any insurance policies covering the Mortgage Loans or
Mortgaged Properties or any obligors on the Mortgages. [Pursuant to the
Agreement, the Depositor will be required to transfer Eligible Additional
Mortgage Loans (to the extent available) to the Trust, in order to avoid the
occurrence of any Early Amortization Event resulting from a decline in the
Depositor's Interest, and otherwise will be allowed to transfer Eligible
Additional Mortgage Loans to the Trust (subject to certain limitations and
conditions) from time to time. See "DESCRIPTION OF THE CERTIFICATES ___
Transfers of Eligible Additional Mortgage Loans to the Trust" herein.] In
addition, the Depositor may, subject to certain limitations and conditions
specified in the Agreement, cause the retransfer from the Trust to it of certain
Mortgage Loans. See "DESCRIPTION OF THE CERTIFICATES ___ Optional Retransfers
of Mortgage Loans to the Depositor" herein.
The Mortgage Loans to be transferred to the Trust (collectively, the
"Pool") are evidenced by loan agreements (each, a "Loan Agreement") secured by
credit line [deeds of trust] [mortgages] (which are primarily second [deeds of
trust] [mortgages] on Mortgaged Properties, approximately ___% of which are
located in _____________ and approximately ____% of which are located in other
states, with no single state accounting for more than ___% of the Cut-Off Date
Pool Balance[, and represent substantially all of the home equity credit lines
originated by the Bank which meet the criteria specified in the Agreement and
described below] (the "Mortgage Loans"). Because the Mortgage Loans include
the loans generated under substantially all of the HELOCs and because the Loan
Balances will include all amounts payable by borrowers under such HELOCs, some
of the Mortgage Loans will be generated under recently solicited, unseasoned
HELOCs [and the Pool will include delinquent Mortgage Loans and may include
obligations of borrowers who are or are about to become bankrupt or insolvent].
Many of the Mortgage Loans are less than the Credit Limit under the
corresponding HELOC. Additional Balances on such Mortgage Loans will be
property of the Trust and will increase the Pool Balance. The amount of the
[Letter of Credit] [Surety Bond] was determined taking into account, among other
considerations, the nature of the HELOCs and the Mortgage Loans.
Each Mortgage Loan included in the Pool was generated under a HELOC that,
as of the Cut-Off Date, was an Eligible HELOC. An "Eligible HELOC" is defined
in the Agreement as any home equity credit line that: [selection criteria of
HELOCs to be added]. Each HELOC was originated between ____ and the Cut-Off
Date [in the ordinary course of the Bank's home equity revolving credit
program]. Subject to exceptions deemed appropriate by the [Bank] as to
individual HELOCs, the [Bank's] general policy was to require that the Combined
Loan-to-Value Ratio under the HELOC at the origination not exceed 80% of the
market value of the Mortgaged property, based upon an appraisal or the tax
assessed value of the Mortgaged Property at the time the HELOC was originated,
as described under "THE HOME EQUITY LENDING PROGRAM" herein. Substantially all
of the Mortgage Properties were one- to four-family residential properties. As
of the Cut-Off Date, the weighted average loan utilization rate was
approximately ____%.
Set forth below is a description of certain additional characteristics of
the HELOC's as of the Cut-Off Date:
LOAN POOL STATISTICS
CUT-OFF DATE LOAN BALANCES
Range of Number of Aggregate % of Pool
Cut-Off Date Home Equity Loan by Aggregate
Loan Balances Credit Lines Balances Loan Balances
- ------------- ------------ -------- -------------
$ to $ ............ $ %
$ to $ ............
$ to $ ............
$ to $ ............
$ to $ ............
$ to $ ............
$ to $ ............
$ to $ ............
$ to $ ............
$ to $ ............
$ to $ ............
$ to $ ............
$ to $ ............
$ to $ ............
$ to $ ............
$ to $ ............
Total....................... $ %
============= ============ =============
CUT-OFF DATE LOAN RATES
Number of Aggregate % of Pool
Range of Home Equity Loan by Aggregate
Loan Rates Credit Lines Balances Loan Balances
- ---------- ------------ -------- -------------
% to %..................
% to %..................
% to %..................
% to %..................
% to %..................
% to %..................
Total....................... $ %
============= ============ ============
CUT-OFF DATE MARGIN RANGES - PRIME INDEXED MORTGAGE LOANS
Number of Aggregate % of Pool
Home Equity Loan by Aggregate
Margin Credit Lines Balances Loan Balances
- ------ ------------ -------- -------------
%.......................... $ %
%..........................
Total..................... $ %
============= ============ ============
CREDIT LIMIT UTILIZATION RATES
Range of Number of Aggregate % of Pool
Credit Limit Home Equity Loan by Aggregate
Utilization Rates Credit Lines Balances Loan Balances
- ----------------- ------------ -------- -------------
0.00% to 5.00%.............. $ %
5.01% to 10.00%.............
10.01% to 15.00%.............
15.01% to 20.00%.............
20.01% to 25.00%.............
25.01% to 30.00%.............
30.01% to 35.00%.............
35.01% to 40.00%.............
40.01% to 45.00%.............
45.01% to 50.00%.............
50.01% to 55.00%.............
55.01% to 60.00%.............
60.00% to 65.00%.............
65.01% to 70.00%.............
70.01% to 75.00%.............
75.00% to 80.00%.............
80.00% to 85.00%.............
85.01% to 90.00%.............
90.01% to 95.00%.............
95.01% to 100.00%............
============= ============ ============
Total...................... $ %
============= ============ ============
COMBINED LOAN-TO-VALUE RATIOS(1)
Range of
Combined Number of Aggregate % of Pool
Loan-to-Value Home Equity Loan by Aggregate
Ratios Credit Lines Balances Loan Balances
- ------ ------------ -------- -------------
0.00% to 5.00%.............. $ %
5.01% to 10.00%.............
10.01% to 15.00%.............
15.01% to 20.00%.............
20.01% to 25.00%.............
25.01% to 30.00%.............
30.01% to 35.00%.............
35.01% to 40.00%.............
40.01% to 45.00%.............
45.01% to 50.00%.............
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% and above.............
============= ============ ============
Total.................... $ %
============= ============ ============
(1) For a description of the method of calculating the Combined
Loan-to-Value Ratio, see "THE HOME EQUITY CREDIT LINES" herein. The
information in this table is as of the Cut-Off Date.
MORTGAGE LOAN INTEREST RATE FLOORS
Number of Aggregate % of Pool
Interest Home Equity Loan by Aggregate
Rate Floors Credit Lines Balances Loan Balances
- ----------- ------------ -------- -------------
None.........................
%.........................
%.........................
============= ============ ============
Total.................... $ %
============= ============ ============
MORTGAGE LOAN INTEREST RATE CEILINGS
Number of % of Pool by
Interest Home Equity Aggregate Aggregate
Rate Ceilings Credit Lines Loan Balances Loan Balances
- ------------- ------------ ------------- -------------
%...................
%...................
None......................... ------------ ------------- --------
Total............... $ %
============ ============= ========
PROPERTY USE OF MORTGAGE LOANS
Percent of
Mortgage
Loans by
Number of Aggregate Balance Principal
Property Use Mortgage Loans ------- Balance
- ------------ ------------ --------
Owner Occupied...............
Non-Owner Occupied...........
Unknown...................... ------------ ------------- --------
Total............... $ 100.00%
============ ============= ========
LIEN PRIORITY OF MORTGAGE LOANS
Percent of
Mortgage
Loans by
Number of Aggregate Balance Principal
Lien Priority Mortgage Loans ------- Balance
- ------------- -------------- -------
First Mortgage...............
Second Mortgage..............
Third Mortgage............... ------------ ------------- --------
Unknown......................
$ 100.00%
============ ============= ========
Total...............
GEOGRAPHICAL DISTRIBUTION OF MORTGAGE LOANS
Percent of
Mortgage
Loans by
Number of Aggregate Balance Principal
State Mortgage Loans ------- Balance
- ----- -------------- -------
- ---------- ...............
- ---------- ...............
Total............... $ 100.00%
============ ============= ========
PROPERTY TYPE OF MORTGAGE LOANS
Percent of
Mortgage
Loans by
Number of Aggregate Balance Principal
Number of Units Mortgage Loans ------- Balance
- --------------- -------------- -------
Single Family Detached.......
Single Family Attached.......
2-4 Family...................
Condominium..................
Cooperative..................
Unknown...................... ------------ ------------- --------
Total............... $ 100.00%
============ ============= ========
ORIGINATION YEAR OF MORTGAGE LOANS
Percent of
Loan Pool
Number of Aggregate by Aggregate
Origination Year Mortgage Loans Loan Balance Loan Balance
- ---------------- -------------- ------------ ------------
1984....................
1985....................
1986....................
1987....................
1988....................
1989....................
1990....................
1991....................
1992.................... --------- -------- ----------
Total.......... $ 100.00%
========= ======== ==========
DAYS DELINQUENT AS OF CUT-OFF DATE
Percent of
Loan Pool
Number of Aggregate by Aggregate
Days Delinquent Mortgage Loans Loan Balance Loan Balance
- --------------- -------------- ------------ ------------
30-59...................
60-89................... --------- -------- ----------
Total.......... $ 100.00%
========= ======== ==========
No assurance can be given that the values of the Mortgaged Properties as
of the dates of origination of the related HELOCs have remained or will remain
constant or have not declined. If the residential real estate market generally
or the residential real estate market in __________ should experience an overall
decline in property values such that the outstanding Loan Balances under the
HELOCs, together with any senior financing on the Mortgaged Properties, equal or
exceed the value of the Mortgaged Properties, the actual rates of delinquencies,
foreclosures and losses could be higher than those currently experienced in the
mortgage lending industry in general. For information concerning possible
declines in value of the Mortgaged Properties, see "SPECIAL CONSIDERATION ___
Certain Mortgage Loans and Mortgaged Property; Obligor Default" in the
Prospectus. In addition, adverse economic conditions (which may or may not
affect real property values) may affect the timely payment by borrowers of
scheduled payments under the Mortgage Loans and, accordingly, the actual rates
of delinquencies, foreclosures and losses with respect to the Pool. To the
extent that such losses are not covered by draws on the [Letter of Credit]
[Surety Bond], they will be borne by holders of the Certificates.
The descriptions in this Prospectus Supplement of the Pool and the
Mortgaged Properties are based upon the Pool as it is expected to be constituted
as of the close of business on the Cut-Off Date, as adjusted for the scheduled
principal and interest payments due on or before such date. Prior to the
issuance of the Certificates, Mortgage Loans may be removed from the Pool as a
result of prepayments, delinquencies, incomplete documentation, or otherwise if
the Depositor deems such removal necessary or desirable. A limited number of
other mortgage loans may be included in the Pool prior to the issuance of the
Certificates, unless including such mortgage loans would materially after the
characteristics of the Pool as described herein. The Depositor believes that
the information set forth herein will be representative of the characteristics
of the Pool as it will be constituted at the time the Certificates are issued,
although the range of Loan Rates and maturities and certain other
characteristics of the Mortgage Loans in the Pool may vary.
A Current report on Form 8-K (the "Form 8-K") containing a detailed
description of the Mortgage Loans will be available to purchasers of the
Certificates on or shortly after the Closing Date and will be filed with the
Securities and Exchange Commission within fifteen days after the Closing Date,
if there is a material difference between the description of the Pool contained
herein and the Pool as constituted on the Closing Date. The Form 8-K will
specify the precise aggregate outstanding principal balance of the Mortgage
Loans as of the Cut-Off Date and will set forth on a precise basis the other
information presented herein on an approximate basis.
MATURITY AND PREPAYMENT CONSIDERATIONS
The Agreement provides that the Certificateholders will not receive
payments of principal until the Distribution Date on ___________ (i.e., the
first Distribution Date after the first Collection Period following the end of
the Revolving Period) or, if earlier, the Distribution Date in the month after
the first Collection Period of an Early Amortization Event. During the
Amortization Period, Certificateholders will be entitled to receive on each
distribution Date the Investor Percentage described herein of the Principal
Collections received in the preceding Collection Period until the Certificate
Principal Balance is reduced to zero. Allocations of Principal Collections
based on the Investor Percentage (which is fixed for the Amortization Period to
equal the percentage derived from dividing the Certificate Principal Balance by
the Pool Balance, in each case at the end of the Revolving Period) may result in
distributions of principal to the Certificateholders greater than those that
would result from distributions of principal based upon the proportion that the
declining Certificate Principal Balance bears to the Pool Balance. [The
Agreement permits the Depositor, at its option, but subject to the satisfaction
of certain conditions specified in the Agreement, including the conditions
described herein, to remove Mortgage loans from the Trust at any time during the
life of the Trust (including the Amortization Period), so long as the Pool
Balance after such removal is not less than the Pool Balance at the Closing
Date. The Depositor may also, under certain circumstances, add Eligible
Additional Mortgage Loans to the Trust. Such removals and additions may affect
the rate at which principal is distributed to Certificateholders. See
"DESCRIPTION OF THE CERTIFICATES ___ Transfers of Eligible Additional Mortgage
Loans to the Trust" and "___ Optional Retransfers of Mortgage Loans to the
Depositor."]
All of the Mortgage Loans may be prepaid without penalty in full or in
part at any time. The prepayment experience with respect to the Mortgage Loans
will affect the life of the Certificates.
The rate of prepayment on the Mortgage Loans cannot be predicted. Home
equity credit lines such as the Mortgage Loans have been originated in
significant volume only during the past few years and the Depositor is not aware
of any publicly available studies or statistics on the rate of prepayment of
such loans. Generally, home equity credit lines are not viewed by borrowers as
permanent financing. Accordingly, the Mortgage Loans may experience a higher
rate of prepayment than traditional first mortgage loans. On the other hand,
because the Mortgage Loans will amortize as described herein, the absence of
voluntary borrower prepayments could cause rates of principal payment to be
slower than, or similar to, those of traditional full-amortizing first
mortgages. The prepayment experience of the Trust with respect to the Mortgage
loans may be affected by a wide variety of factors, including general economic
conditions, economic conditions in _____, prevailing interest rate levels, the
availability of alternative financing and homeowner mobility, the frequency and
amount of any future draws on the HELOCs and changes affecting the deductibility
for Federal income tax purposes of interest payments on home equity credit
lines. Substantially all of the Mortgage Loans contain "due-on-sale"
provisions, and the Servicer intends to enforce such provisions, unless such
enforcement is not permitted by applicable law. The enforcement of a
"due-on-sale" provision will have the same effect as a prepayment of the related
Mortgage Loan. See "CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS ___ `Due-on-sale'
Clauses" in the Prospectus. The yield to an investor who purchases the
Certificates in the secondary market at a price other than par will vary from
the anticipated yield if the rate of prepayment on the Mortgage Loans is
actually different than the rate anticipated by such investor at the time such
Certificates were purchased.
Collections on the Mortgage Loans may vary because, among other things,
borrowers may make payments during any month as low as the minimum monthly
payment for such month or as high as the entire principal outstanding balance
plus accrued interest and the fees and charges thereon. It is possible that
borrowers may fail to make scheduled payments. Collections on the Mortgage
Loans may vary due to seasonal purchasing and payment habits of borrowers.
Because the Mortgage Loans have a variable interest rate and a fixed payment,
changes in underlying interest rates will vary the allocation of payments
between interest and principal.
No assurance can be given as to the level of prepayments that will be
experienced by the Trust and it can be expected that a portion of borrowers will
not prepay their Mortgage Loans to any significant degree. See "DESCRIPTION OF
THE SECURITIES ___ Weighted Average Life of the Certificates" in the Prospectus.
DESCRIPTION OF THE CERTIFICATES
The Certificates will be issued pursuant to the Agreement. The form of
the Agreement has been filed as an exhibit to the Registration Statement of
which this Prospectus Supplement and the Prospectus is a part. The following
summaries describe certain provisions of the Agreement. The summaries do not
purport to be complete and are subject to, and are qualified in their entirety
by reference to, all of the provisions of the Agreement. Wherever particular
sections or defined terms of the Agreement are referred to, such sections or
defined terms are hereby incorporated herein by reference.
General
The Certificates will be issued in denominations of [$1,000] and integral
multiples thereof and will evidence specified undivided interests in the Trust.
[Definitive] Certificates[, if issued,] will be transferable and exchangeable at
the corporate trust office of the Trustee, which will initially act as
Certificate Registrar. See "___ Registration of Certificates" below. No
service charge will be made for any registration of exchange or transfer of
Certificates, but the Trustee may require payment of a sum sufficient to cover
any tax or other governmental charge.
The outstanding principal amount of the Certificates ("Certificate
Principal Balance") will be equal to the initial principal amount of the
Certificates, minus the amount of principal payments paid to the
Certificateholders, and minus the amount of Certificate Principal Balance Loss
deduction Amounts, if any, which have not been reimbursed as provided herein.
See "___ Distributions on the Certificates" below. Each Certificate represents
the right to receive payments of interest at the Certificate Rate and payments
of principal during the Amortization Period funded from Interest Collections and
Principal Collections, respectively, allocated to the investor interest and
draws on the [Letter of Credit] [Surety Bonds].
The Depositor will own the interest (the "Depositor Interest") not
represented by the Certificates. The Depositor Interest will represent an
undivided interest in the Trust, including the right to receive certain
percentages (the "Depositor Percentage") of Interest Collections and Principal
Collections. The initial amount of the Depositor Interest was determined, among
other factors, to be able to absorb reductions in the aggregate amount of Loan
Balances in the Trust without causing an Early Amortization Event, which would
result in the early commencement of the Amortization Period. There can be no
assurance that the Depositor Interest will be sufficient for such purpose.
While the Depositor is obligated (subject to certain conditions and limitations)
to transfer Eligible Additional Mortgage Loans (to the extent available) to the
Trust, there can be no assurance that sufficient Eligible Additional Mortgage
Loans will be available.
During the Revolving Period, the Certificate Principal Balance will remain
constant except in certain limited circumstances. See "___ Distributions on the
Certificates" below. The Pool Balance, however, will vary each day as principal
is paid on the Mortgage Loans, liquidation losses are incurred, Additional
Balances are drawn down by borrowers under the HELOCs, Mortgage Loans are
retransferred to the Depositor or Eligible Additional Mortgage Loans are
transferred to the Trust. Consequently, the amount of the Depositor Interest
will fluctuate each day to reflect the changes in the Pool Balance. During the
Amortization Period, the Certificate Principal Balance will decline and the
Investor Percentage of Principal Collections is distributed to the
Certificateholders. As a result, during the Amortization Period, the Depositor
Interest may increase each month to reflect the reductions in the certificate
Principal Balance but may change each day to reflect the variations in the Pool
Balance.
Assignment of Mortgage Loans
At the time of issuance of the Certificates, the Depositor will transfer
to the Trust all of its right, title and interest in and to each Mortgage Loan
(including any Additional Balances arising in the future) conveyed by it to the
Trust, including all principal (including Net Liquidation Proceeds) and interest
received on or with respect to each such Mortgage Loan subsequent to the Closing
Date (other than any amounts received in respect of taxes insurance premiums,
assessments and similar items, as provided in the Agreement) plus the Investor
Percentage of Interest Collections on the mortgage Loans during the period from
the Cut-Off Date to the second business day preceding the Closing Date, but not
in excess of the amount needed to distribute the required interest to
Certificateholders on the first Distribution Date and to pay the related
Investor Servicing Fee. The Trustee, concurrently with such transfer, will
deliver the Certificates and the Depositor Interest to the Depositor. Each
HELOC under which a Mortgage Loan assigned to the Trust was generated will be
identified in a schedule appearing as an exhibit to the Agreement.
The Depositor will deliver the files containing, among other things, the
Loan Agreement, the Mortgage Note and the Mortgage relating to each Mortgage
Loan (the "Mortgage Files") to the Trustee (or a custodian on its behalf) will
review each Mortgage File within ___ days of receipt thereof. If any such
document is found not to have been executed or received or to be unrelated to
the Mortgage Loan or to have not been recorded as required by the Agreement, the
Trustee (or custodian on its behalf) will notify the Depositor, which shall have
a period of ___ days after such notice to correct or cure such defect. If the
defect cannot be cured within the ___-day period, the Depositor will be
obligated to accept the retransfer of such Mortgage Loan from the Trust. Upon
such retransfer, the Loan Balance of such Mortgage Loan will be deducted from
the Pool Balance, thus reducing the amount of the Depositor Interest by the same
amount. If the deduction would cause the Depositor Interest to become less than
zero, the Depositor will be obligated to make a deposit in the Collection
Account in the amount ("Retransfer Deposit Amount") by which the Depositor
Interest is less than zero. Notwithstanding the foregoing, however, no such
retransfer shall be considered to have occurred unless such deposit is actually
made. The obligation of the Depositor to accept a retransfer of a defective
Mortgage Loan and, if applicable, pay the Retransfer Deposit Amount, is the sole
remedy regarding any defects in the Mortgage Files available to the Trustee or
the Certificateholders.
The Depositor will make certain representations and warranties as to the
accuracy in all material respects of certain information furnished to the
Trustee with respect to each Mortgage Loan on the schedule of Mortgage Loans
appearing as an exhibit to the Agreement. In addition, the Bank will represent
and warrant that, among other things: [(i) each Mortgage Loan has been
generated under an eligible HELOC; (ii) at the time of transfer to the Trust,
the Depositor has transferred all of the Depositor's right, title and interest
in each Mortgage Loan, free of any lien (subject to certain exceptions); (iii)
each Mortgage Loan was generated under a HELOC that complied, at the time of
origination, in all material respects with applicable state and Federal laws;
and (iv) as of the date of origination of the related HELOC, the related
Mortgaged Property was covered by hazard insurance in the amount at least equal
to the lesser of (a) the maximum insurable value of the improvements thereon and
(b) the combined Credit Limit under the HELOC and the unpaid principal balance
of any mortgage loan senior thereto]. Upon discovery of a breach of any such
representation and warranty which materially and adversely affects the interests
of the Trust, the Certificateholders or the [Letter of Credit] [Surety Bond]
Issuer in the related Mortgage Loan, the Depositor will have a period of ___
days after discovery or notice of the breach to effect a cure. If the breach
cannot be cured within the ___-day period, the Depositor will obligated to
accept a retransfer of the Mortgage Loan from the Trust. The same procedure and
limitations that are set forth in the preceding paragraph for the retransfer of
a Mortgage Loan respecting which there is a defect in the Mortgage File will
apply to the retransfer of a Mortgage Loan that is required to be retransferred
because of a breach of a representation or warranty in the Agreement that
materially and adversely affects the interests of the Certificateholders.
Any Mortgage Loan required to be retransferred to the Depositor as
described in the preceding two paragraphs is referred to as a "Defective
Mortgage Loan".
The Depositor may, but is not obligated to, retransfer a Defective
Mortgage Loan to the Trust within ___ days of the transfer of such Defective
Mortgage Loan to the Depositor if all defects in respect of such Defective
Mortgage Loan have been cured and such Defective Mortgage Loan satisfies the
applicable representations and warranties in the Agreement at the time of such
retransfer to the Trust.
[Transfers of Eligible Additional Mortgage Loans to the Trust
If, for each of five consecutive business days during the Revolving
Period, the Depositor Interest for each such date is less than 10% of the Pool
Balance, then not later than the first business day of the calendar month
beginning at least ten business days after such fifth business day thereafter
the Depositor will be obligated to transfer to the Trust Eligible Additional
Mortgage Loans (but only to the extent available in the [Depositor's] [Seller's]
[Bank's] portfolio), which may be generated under home equity credit lines in
any billing cycle, so that, after giving effect to such transfer, the Depositor
Interest will equal at least 10% of the Pool Balance on such date. An Eligible
Additional Mortgage Loan is a home equity loan that was originated under a HELOC
that, as of the date of notice by the Depositor to the Trustee, the Servicer and
the [Letter of Credit] [Surety Bond] Issuer of its transfer to the Trust (the
"Notice Date"), was an Eligible HELOC and that, as of the Notice Date, complies
with the representations and warranties described under "Assignment of Mortgage
Loans" above. The Depositor must satisfy the following conditions, among
others, in order to transfer Eligible Additional Mortgage Loans to the Trust:
(i) the Pool Balance, after giving effect to such transfer, will not exceed
$___________; (ii) the Mortgage Files for such Eligible Additional Mortgage
Loans shall have been delivered to the Trustee (or a custodian on its behalf);
and (iii) the Depositor shall have given notice of the proposed transfer to the
Rating Agency and the Rating Agency has not notified the Depositor in writing
prior to the transfer date that such transfer will result in a reduction or
withdrawal of its then-current rating for the Certificates.
[In addition, the Depositor may, at its election, transfer Eligible
Additional Mortgage Loans subject to satisfaction of the conditions described
above.]
[Optional Retransfers of Mortgage Loans to the Depositor
Subject to the conditions specified in the Agreement, the Depositor may,
at its option, require the retransfer of one or more Mortgage Loans (which may
have been generated under a HELOC in any billing cycle) from the Trust to it on
the last day of any Collection Period. The Pool Balance after giving effect to
such retransfer must not be less than the Pool Balance on the Closing Date. The
Depositor will be required to satisfy the following conditions, among others:
(i) the Depositor shall reasonably believe that such retransfer will not cause
an Early Amortization Event to occur; (ii) as of the fifth business day prior to
the proposed transfer, not more than 10% (based on Loan Balances) of the
Mortgage Loans (after giving effect to the proposed transfer) are delinquent
more than 30 days and the weighted average delinquency of all of the Mortgage
Loans (before and after giving effect to the proposed transfer) is not more than
60 days; (iii) the Depositor shall have represented that no selection procedures
reasonably believed by the Depositor to be adverse to the interests of the
Certificateholders or the [Letter of Credit] [Surety Bond] Issuer were used to
select the Mortgage Loans to be removed; (iv) the Depositor shall have received
evidence satisfactory to it that the reassignment will not, as of the date
thereof, prevent the transfer of the Mortgage Loans (including any Additional
Balances) to the Trust from being recognized as a sale under generally accepted
accounting principles and shall have received no evidence that such reassignment
will, as of the date thereof, prevent such transfer from being recognized as a
sale for regulatory purposes; and (v) each Rating Agency shall have been
notified of the proposed retransfer and prior to the date of retransfer has not
notified the Depositor in writing that such retransfer would result in a
reduction or withdrawal of its then-current rating of the Certificates.]
Payments on Mortgage Loans; Deposits to Collection Account
The Servicer will follow such collection procedures with respect to the
Mortgage Loans as it follows from time to time with respect to mortgage loans in
its servicing portfolio comparable to the Mortgage Loans. See "SERVICING OF THE
LOANS ___ Collection Procedures; Escrow Accounts" in the Prospectus.
The Servicer will establish and maintain a separate account in the name of
the Trustee for the benefit of the Certificateholders and the [Letter of Credit]
[Surety Bond] Issuer (the "Collection Account"). See "SERVICING OF LOANS ___
Deposits to and Withdrawals from the Collection Account" in the Prospectus.
[The Collection Account will be established initially with the trust department
of the Trustee.] Funds in the Collection Account may be invested in Eligible
Investments maturing in general not later than the business day preceding the
next Distribution Date. Eligible Investments consist of certain investments
acceptable to each Rating Agency for a structured transaction having the rating
initially assigned to the Certificates. All net income and gain realized from
any such investment will be paid to the Servicer.
Investor Percentage and Transferor Percentage. Pursuant to the Agreement,
the Servicer will allocate between the Investor Interest and the Depositor
Interest all amounts (including any Net Liquidation Proceeds) collected under
the Mortgage Loans on account of principal ("Principal Collections") and the
amount of the amount of the unrecovered Loan Balance of any Defaulted Mortgage
Loan at the end of the Collection Period in which such Defaulted Mortgage Loan
became a Defaulted Mortgage Loan (the "Liquidation Loss Amount"). A "Defaulted
Mortgage Loan" is a Mortgage Loan that has been written off as uncollectible by
the Servicer. The Collection Period for a Distribution Date is the calendar
month preceding such Distribution Date or, in the case of the first Distribution
Date, the period from the Cut-Off Date through the last day of the calendar
month preceding the month in which such Distribution Date occurs. The Servicer
will make each allocation by reference to the Investor Percentage and the
Depositor Percentage applicable in each case during a Collection Period.
For convenience, this Prospectus Supplement refers to the Investor
Percentage with respect to Interest Collections, Principal Collections and
Liquidation Loss Amounts as if the Investor Percentage were the same percentage
at all times in each case. The Investor Percentage may be a different
percentage for each Collection Period, and will vary primarily as a result of
changes in the Pool Balance.
The Investor Percentage will be calculated as follows:
Interest Collections and Liquidation Loss Amounts. When used with respect
to Interest Collections and Liquidation Loss Amounts at any time, "Investor
Percentage" means the percentage equivalent of a fraction the numerator of which
is the Certificate Principal Balance and the denominator of which is the Pool
Balance, in each case as of the end of the immediately preceding Collection
Period (or, in the case of the first Collection Period, as of the Closing Date).
Principal Collections during the Revolving Period. When used with respect
to Principal Collections during the Revolving Period, "Investor Percentage"
means the percentage equivalent of a fraction the numerator of which is the
amount of the Certificate Principal Balance and the denominator of which is the
Pool Balance, in each case as of the end of the immediately preceding Collection
Period (or in the case of the first Collection Period, as of the Closing Date).
Principal Collections during the Amortization Period. When used with
respect to Principal Collections during the Amortization Period, "Investor
Percentage" means the percentage equivalent of a fraction the numerator of which
is the amount of the Certificate Principal Balance and the denominator of which
is the Pool Balance, in each case as of the end of the Revolving Period.
The Depositor Percentage will, in all cases, be equal to 100% minus the
applicable Investor Percentage.
As a result of the calculation described above, Interest Collections in
each Collection Period will be allocated to the Certificateholders based on the
relationship of the Certificate Principal Balance to the Pool Balance (which may
fluctuate from month to month). As described above, the Investor Percentage
applied when allocating Principal Collections is expected to vary from month to
month during the Revolving Period, because the Certificate Principal Balance as
a percentage of the Pool Balance will fluctuate from month to month. During the
Amortization Period, however, the amount of Principal Collections allocated to
the Investor Interest will be determined by reference to a fixed percentage
which will be equal to the Investor Percentage with respect to Principal
Collections on the last day of the Revolving Period.
Deposits in the Collection Account and Payments to the Depositor. On the
Closing Date, the Servicer will deposit in the Collection Account funds in the
amount of the Investor Percentage of Interest Collections on the Mortgage Loans
received during the period from the Cut-Off Date to the second business day
preceding the Closing Date, but not in excess of the amount needed to distribute
the required interest on the Certificates and the Investor Servicing Fee to be
distributed on the initial Distribution Date. On and after the Closing Date,
the Servicer will, subject to the following paragraph, deposit on a daily basis
within two business days following receipt thereof (i) during each Collection
Period in the Revolving Period, the Investor Percentage of Interest Collections
and (ii) during each Collection Period in the Amortization Period, the Investor
Percentage of all Interest Collections and Principal Collections. The Servicer
will pay to the Depositor within two business days of its receipt thereof (i)
during each Collection Period in the Revolving Period, the Depositor Percentage
of all Interest Collections and, if the Depositor Interest (after giving effect
to any transfers of Additional Balances or Eligible Additional Mortgage Loans to
the Trust on such day) is equal to or greater than zero, the Depositor
Percentage of all Principal Collections and the Investor Percentage of all
Principal Collections and (ii) during each Collection Period in the Amortization
Period, the Depositor Percentage of Interest Collections and, if the Depositor
Interest (after giving effect to any transfers of Additional Balances or
Eligible Additional Mortgage Loans to the Trust on such day) is greater than
zero, the Depositor Percentage of all Principal Collections.
The Trustee will establish and maintain a separate account (the
"Distribution Account"). On the business day preceding each Distribution Date
the Servicer will transfer amounts in the Collection Account for distribution to
Certificateholders to the Distribution Account.
The Trustee will deposit in the Distribution Account any amounts drawn on
the [Letter of Credit] [Surety Bond] as described below.
Any Principal Collections not paid to the Depositor because of the
limitations described above ("Unallocated Principal Collections"), will be
deposited and retained in the Collection Account for payment to the Depositor,
during the Revolving Period, if and when the Depositor Interest is greater than
zero and, during the Amortization Period, to the Certificateholder.
Distributions on the Certificates
Beginning with the Distribution Date occurring on __________,
distributions on the Certificates will be made by the Trustee out of amounts on
deposit in the Distribution Account on each Distribution Date to the persons in
whose names such Certificates are registered at the close of business on the
[day prior to each Distribution Date] (the "Record Date"), except as provided in
"Registration of Certificates" below. The term "Distribution Date" means the
___ day of each month (or if such ___ day is not a business day the next
succeeding business day). Distributions will be made by check mailed (or upon
the request of a Certificateholder owning Certificates having denominations
aggregating at lease $___________, by wire transfer or otherwise) to the address
of the person entitled thereto [(which, in the case of Book-Entry Certificates,
will be DTC or its nominee)] as it appears on the Certificate Register in
amounts calculated as described herein on the ______ business day (but no later
than the ______ calendar day) of the month in which the related Distribution
Date occurs (the "Determination Date"). However, the final distribution in
respect of the Certificates will be made only upon presentation and surrender
thereof at the office or the agency of the Trustee specified in the notice to
Certificateholders of such final distribution.
Distributions of Interest Collections and Required Amounts. On each
Distribution Date, the Trustee, on behalf of the Trust, shall pay the following
amounts in the following order of priority to the following persons from the
Investor Interest of all Interest Collections collected during the related
Collection Period, together with the Required Amount, if any, drawn on the
[Letter of Credit] [Surety Bond] for such Distribution Date.
[(i) to the Certificateholders, interest at the Certificate Rate for the
Interest Period preceding such Distribution Date on the Certificate Principal
Balance outstanding immediately prior to such Distribution Date;
(ii) to the Certificateholders, any interest on the Certificates accrued
in accordance with clause (i) that has not been previously distributed to
Certificateholders plus, to the extent legally permissible, interest thereon at
the Certificate Rate applicable from time to time (an "Unpaid Interest
Shortfall");
(iii) to the Servicer, the Investor Servicing Fee for the related
Interest Period and all accrued and unpaid Investor Servicing Fees for previous
Interest Periods;
(iv) if such Distribution Date is in the Revolving Period, to the
Depositor, the Investor Percentage of the aggregate of all Liquidation Loss
Amounts incurred in the preceding Collection Period; provided that the Depositor
Interest (after giving effect to any transfers of Additional Balances and
Eligible Additional Mortgage Loans on such date and to the distribution of such
Liquidation Loss Amount) is equal to or greater than zero;
(v) if such Distribution Date is in the Amortization Period, to the
Certificateholders, the Investor Percentage of the aggregate of all Liquidation
Loss Amounts incurred in the preceding Collection Period;
(vi) to the Certificateholders, the aggregate of the amounts allocable
pursuant to clause (v) that were not previously distributed pursuant to such
clause (each such undistributed amount being referred to herein as a
"Certificate Principal Balance Loss Deduction Amount"); and
(vii) to the Certificateholder, accrued and unpaid interest on each
unreimbursed Certificate Principal Balance Loss Deduction Amount (such interest
being calculated at the Certificate Rate for each Interest Period during which
such unreimbursed amount was outstanding.]
Any amounts remaining in the Collection Account collected during or with
respect to the preceding Collection Period, after all other distributions have
been made, will be distributed to the [Letter of Credit] [Surety Bond] Issuer.
A Certificate Principal Balance Loss Deduction Amount represents a loss of
principal in respect of Defaulted Mortgage Loans allocable to the Investor
Interest and will arise when the Investor Percentage of Interest Collections and
the Required Amount are not sufficient to cover such loss, in accordance with
the priority of distributions described above. As described under "General"
above, any Certificate Principal Balance Loss Deduction Amounts which have not
been reimbursed, as provided herein, will reduce the Certificate Principal
Balance.
The Required Amount for each Distribution Date will be the lesser of (i)
the [Letter of Credit] [Surety Bond] Amount and (ii) the amount, if any, by
which (a) the full amount distributable on such Distribution Date pursuant to
clauses (i) through(vii) above exceeds (b) the Investor Percentage of the
Interest Collections for the related Collection Period. The Required Amount
will be drawn on the [Letter of Credit] [Surety Bond].
Distributions of Principal. On each Distribution Date after the first
Collection Period in the Amortization Period, the Trustee will distribute to the
Certificateholders the Investor Percentage of Principal Collections received in
the preceding Collection Period. In addition, the Trustee will distribute to
the Certificateholders on any Distribution Date during the Amortization Period
any Retransfer Deposit Amount (or drawn on the [Letter of Credit] [Surety Bond]
in respect thereof) received in the preceding Collection Period and any
Unallocated Principal Collections then on deposit in the Distribution Amount.
The aggregate distributions of principal to the Certificateholders will not
exceed the Initial Certificate Principal Balance.
[Calculation of Certificate Rate. With respect to the initial
Distribution Date, the Certificate Rate will be equal to ___%. Thereafter, on
each Distribution Date, the Certificate Rate will be equal to LIBOR as of the
second London Business Day (as defined below) prior to the immediately preceding
Distribution Date plus 0.___% of 1%. However, if the Certificate Rate
calculated as described in the preceding sentence for any such Distribution Date
is greater than the weighted average of the Net Loan Rates for the Mortgage
Loans for the preceding Collection Period, the Certificate Rate for any such
Distribution Date will be equal to the weighted average of the Net Loan Rates.
The Net Loan Rate for a Mortgage Loan is its Loan Rate less the Servicing Fee
Rate. Interest payable on any Distribution Date will accrue on the Certificates
from the preceding Distribution Date (or, in the case of the first Distribution
Date, from the Closing Date) through the day preceding such Distribution Date
(an ("Interest Period"). All calculations of interest accrued on the
Certificates will be made on the basis of the actual number of days in an
Interest Period and a year assumed to consist of 360 days.
The term "Certificate Principal Balance" means (i) the original principal
amount of the Certificates less (ii) all amounts previously distributed to
Certificateholders under "___ Distributions of Principal" above, less (iii) the
aggregate of all unreimbursed Certificate Principal Balance Loss Deduction
Amounts.
Calculation of LIBOR. "LIBOR" with respect to any Distribution Date will
be determined by the Trustee and will be equal to the offered rates for deposits
in United States dollars having a maturity of one month (the "Index Maturity")
commencing on the second London Business Day (as defined below) prior to the
previous Distribution Date, which appear on the Reuters Screen LIBO Page as of
approximately 11:00 A.M., London Time, on such date of calculation. If at least
two such offered rates appear on the Reuters Screen LIBO Page, LIBOR will be the
arithmetic mean (rounded upwards, if necessary, to the nearest one-sixteenth of
a percent) of such offered rates. If fewer than two such quotations appear,
LIBOR with respect to such Distribution Date will be determined at approximately
11:00 A.M., London time, on such determination date on the basis of the rate at
which deposits in United States dollars having the Index Maturity are offered to
prime banks in the London interbank market by four major banks in the London
interbank market selected by the Trustee and in a principal amount equal to an
amount of not less than U.S. $1,000,000 and that is representative for a single
transaction in such market at such time. The Trustee will request the principal
London office of each of such banks to provide a quotation of its rate. If at
least two such quotations are provided, LIBOR will be the arithmetic mean
(rounded upwards as aforesaid) of such quotations. If fewer than two quotations
are provided, LIBOR with respect to such Distribution Date will be the
arithmetic mean (rounded upwards as aforesaid) of the rates quoted at
approximately 11:00 A.M., New York City time, on such determination date by
three major banks in New York, New York selected by the Trustee for loans in
United States 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 and is
representative for a single transaction in such market at such time; provided,
however, that if the banks selected as aforesaid by the Bank are not quoting as
mentioned in this sentence, LIBOR in effect for the applicable period will be
LIBOR in effect for the previous period.]
[For purposes of calculating LIBOR, a "London Business Day" will be any
Business Day on which dealings in deposits in United States dollars are
transacted in the London interbank market and "Reuters Screen LIBO Page" will be
the display designated as page "LIBO" on the Reuters Monitor Money Rates Service
(or such other page as may replace the LIBO page on that service for the purpose
of displaying London interbank offered rates of major banks.)]
The [Letter of Credit] [Surety Bond]
On the Closing Date, the [Letter of Credit] [Surety Bond] Issuer will
issue the [Letter of Credit] [Surety Bond] in favor of the Trustee on behalf of
the Trust to support payments on the Certificates. On each Determination Date,
the Servicer will determine the amounts required to be drawn on the [Letter of
Credit] [Surety Bond], up to the [Letter of Credit] [Surety Bond] Amount, on the
related Distribution Date. On each Distribution Date, any amounts remaining in
the Collection Account with respect to the preceding Collection Period, after
all other distributions have been made as described above, will be distributed
to the [Letter of Credit] [Surety Bond] Issuer. See "Distributions on
Certificates" above.
The amount available under the [Letter of Credit] [Surety Bond] (the
"[Letter of Credit] [Surety Bond] Amount") for the initial Distribution Date
will be $ . For each Distribution Date thereafter, the [Letter of
Credit] [Surety Bond] Amount will equal the lesser of (i) __% of the Pool
Balance as of the first day of the preceding Collection Period (after giving
effect to any amounts distributed with respect to principal of the Mortgage
Loans on the Distribution Date occurring in such preceding Collection Period)
and (ii) the [Letter of Credit] [Surety Bond] Amount as of the first day of the
preceding Collection Period, minus any amounts drawn under the [Letter of
Credit] [Surety Bond] during such preceding Collection Period, plus any amounts
paid to the [Letter of Credit] [Surety Bond] Issuer on the Distribution Date
occurring in such preceding Collection Period up to the amount of any previous
draws on the [Letter of Credit] [Surety Bond].
Early Amortization Events
As described above, the Revolving Period will continue until the close of
business on the last day of ______ unless an Early Amortization Event occurs
prior thereto. The term "Early Amortization Event" refers to any of the
following events:
[(a) failure on the part of the Servicer or the Depositor (i) to make
any payment or deposit on the date required under the Agreement within five
business days after such payment or deposit is required to be made, (ii) to
observe or perform in any material respect certain covenants of the Servicer or
the Depositor or (iii) to observe or perform in amy material respect any other
covenants or agreements of the Servicer or the Depositor set forth in the
Agreement, which failure, in each case, materially and adversely affects the
interests of the Certificateholders and which, in the case of clause (iii),
continues unremedied for a period of 60 days after written notice and continues
to materially and adversely affect the interests of the Certificateholders for
such period;
(b) any representation or warranty made by the Servicer or the Depositor
in the Agreement proves to have been incorrect in any material respect when
made, as a result of which the interests of the Certificateholders are
materially and adversely affected, which continues to be incorrect in any
material respect for a period of 60 days after written notice and which
continues to materially and adversely affect the interests of the
Certificateholders for such period; provided, however, that an Early
Amortization Event shall not be deemed to occur thereunder if the Depositor has
accepted retransfer of the related Mortgage Loan or all such Mortgage Loans, if
applicable, during such period (or such longer period (not to exceed an
additional 60 days) as the Trustee may specify) in accordance with the
provisions of the Agreement;
(c) the Trust becomes subject to registration as an investment company
under the Investment Company Act of 1940, as amended;
(d) if the Depositor fails to transfer to the Trust Eligible Additional
Mortgage Loans by the time it is required to do so;
(e) an Event of Default under the Trust Agreement (as described in the
Prospectus under "THE TRUST AGREEMENTS ___ Events of Default") occurs;
(f) the [Letter of Credit] [Surety Bond] Amount is less than % of the
Certificate Principal Balance; or
(g) if the average of the Investor Percentage of Interest Collections
for any three consecutive Collection Periods is less than the amounts to be
distributed to Certificateholders as set forth in subsections (i) through (vii)
under "Distributions on the Certificates ___ Distributions of Interest
Collections and Required Amounts" above for the three Distribution Dates
relating to such Collection Periods.]
[In the case of any event described in clauses (a), (b) or (e), an Early
Amortization Event will be deemed to have occurred only if, after the expiration
of the applicable grace period, if any, described in such clauses, either the
Trustee or holders of Certificates evidencing Percentage Interests aggregating
more than 51% or the [Letter of Credit] [Surety Bond] Issuer (but only if the
[Letter of Credit] [Surety Bond] is outstanding or the [Letter of Credit]
[Surety Bond] Issuer has not been fully reimbursed for all amounts paid to the
Trust by the [Letter of Credit] [Surety Bond] Issuer), by written notice to the
Depositor and the Servicer (and to the Trustee if given by the
Certificateholders or the [Letter of Credit] [Surety Bond] Issuer) declare that
an Early Amortization Event has occurred as of the date of such notice. In the
case of any event described in clauses (c), (d), (e) or (f), an Early
Amortization Event will be deemed to have occurred without any notice or other
action on the part of the Trustee or the Certificateholders or the [Letter of
Credit] [Surety Bond] Issuer immediately upon the occurrence of such event. On
the date on which an Early Amortization Event is deemed to have occurred, the
Amortization Period will commence. In such event, distributions of principal to
the Certificateholders will begin on the first Distribution Date following the
month in which the Early Amortization Date occurs. If, because of the
occurrence of an Early Amortization Event, the Amortization Period begins
earlier than _______, the date on which the Amortization Period is scheduled to
commence, Certificateholders will begin receiving distributions of principal
earlier than they would otherwise have under the Agreement, which may shorten
the final maturity of the Certificates.]
Optional Termination
The Depositor may effect a retransfer of the Certificateholders' interest
in each Mortgage Loan, and all property acquired in respect of any Mortgage
Loan, remaining in the Trust for an amount equal to the sum of the Certificate
Principal Balance plus accrued and unpaid interest thereon at the applicable
Certificate Rate through the day preceding the final Distribution Date if the
Certificate Principal Balance immediately prior to the final Distribution Date
is less than or equal to 5% of the original Certificate Principal Balance. The
purchase price will be distributed to the Certificateholders in lieu of the
amount that would otherwise be distributed if such options were not exercised,
which will be applied as provided in the Agreement.
[Registration of Certificates
The Certificates will initially be registered in the name of Cede, the
nominee 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 Exchange Act. DTC accepts securities for deposit from its
participating organizations ("Participants") and facilities the clearance and
settlement of securities transactions between Participants in such securities
through electronic book-entry changes in accounts of Participants, thereby
eliminating the need for physical movement of certificates. Participants
include securities brokers and dealers, banks and trust companies and clearing
corporations and may include certain 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
Participant, either directly or indirectly ("Indirect Participants").
Certificate Owners who are not Participants but desire to purchase, sell
or otherwise transfer ownership of the Certificates may do so only through
Participants (unless and until Definitive Certificates are issued). In
addition, Certificate Owners will receive all distributions of principal of and
interest on the Certificates from the Trustee through Participants. Certificate
Owners will not receive or be entitled to receive certificates representing
their respective interests in the Certificates, except under the limited
circumstances described below.
Unless and until Definitive Certificates are issued, it is anticipated
that the only Certificateholder of the Certificates will be Cede, as nominee of
DTC, Certificate Owners will not be Certificateholders as that term is used in
the Agreement. Certificate Owners are only permitted to exercise the rights of
Certificateholders indirectly through Participants.
While the Certificates are outstanding (except under the circumstances
described below), under the rules, regulations and procedures creating and
affecting DTC and its operations (the "Rules"), DTC is required to make
book-entry transfers among Participants on whose behalf it acts with respect to
the Certificates and is required to receive and transmit distributions of
principal of and interest on the Certificates. Participants with whom
Certificate Owners have accounts with respect to Certificates are similarly
required to make book-entry transfers and receive and transmit such
distributions on behalf of their respective Certificate Owners. Accordingly,
although Certificate Owners will not possess certificates, the rules provide a
mechanism by which Certificate Owners will receive distributions and will be
able to transfer their interests.
Unless and until Definitive Certificates are issued, Certificate Owners
who are not Participants may transfer ownership of Certificates only through
Participants by instructing such Participants to transfer Certificates, by book-
entry transfer, through DTC for the account of the purchasers of such
Certificates, which account is maintained with their respective Participants.
Under the Rules and in accordance with DTC's normal procedures, transfers of
ownership of Certificates will be executed through DTC and the accounts of the
respective Participants at DTC will be debited and credited. Similarly, the
respective Participants will make debits or credits, as the case may be, on
their records on behalf of the selling and purchasing Certificate Owners.
Because DTC can only act on behalf of Participants, who in turn act on
behalf of Indirect Participants and certain banks, the ability of a
Certificateholder to pledge Certificates to persons or entities that do not
participate in the DTC system, or otherwise take actions in respect of such
Certificates, may be limited due to the lack of a physical certificate for such
Certificates.
Certificates will be issued in registered form to Certificate Owners, or
their nominees, rather than to DTC (such Certificates being referred to herein
as "Definitive Certificates"), only if (i) DTC or the Servicer advises the
Trustee in writing that DTC is no longer willing or able to discharge properly
its responsibilities as depository with respect to the Certificates and the
Servicer or the Trustee is unable to locate a qualified successor, (ii) the
Servicer, at its sole option, advises the Trustee in writing that it elects to
terminate the book-entry system through DTC or (iii) after the occurrence of an
Event of Servicing Termination, DTC, at the direction of Certificate Owners
owning Certificates evidencing Percentage Interests aggregating at lease 51%,
advises the Trustee in writing that the continuation of a book-entry system
through DTC (or a successor thereto) to the exclusion of any physical
certificates being issued to Certificate Owners is no longer in the best
interests of Certificate Owners. Upon the issuance of Definitive Certificates
to Certificate Owners, such Certificates will be transferable directly (and not
exclusively on a book-entry basis) and registered holders will deal directly
with the Trustee with respect to transfers, notices and distributions. If
Definitive Certificates are issued, the Record Date may be changed to the last
day of the month immediately preceding the related Distribution Date.
DTC has advised the Servicer and the Trustee that, unless and until
Definitive Certificates are issued, DTC will take any action permitted to be
taken by a Certificateholder under the Agreement only at the direction of one or
more Participants to whose accounts with DTC the Certificates are credited. DTC
has advised the Servicer that DTC will take such action with respect to any
Percentage Interests of the Certificates only at the direction of and on behalf
of such Participants with respect to such Percentage Interests of the
Certificates. DTC may take actions, at the direction of the related
Participants, with respect to some Certificates which conflict with actions
taken with respect to other Certificates.]
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 Mortgage Loans. The
Mortgage Loans will have been acquired by the Depositor from [LCPI] [Lehman
Capital Corporation] in a privately negotiated transaction.
LEGAL INVESTMENT CONSIDERATIONS
Although, as a condition to their issuance, the Certificates will be rated
in the [highest] rating category of the Rating Agency, the Certificates will not
constitute "mortgage related securities" for purposes of the Secondary Mortgage
Market Enhancement Act of 1984 ("SMMEA"), because most of the Mortgages securing
the Mortgage Loans are not first mortgages. Accordingly, many institutions with
legal authority to invest in comparably rated securities based on first mortgage
loans may not be legally authorized to invest in the Certificates, which because
they evidence interests in a pool that includes junior mortgage loans are not
"mortgage related securities" under SMMEA. See "LEGAL INVESTMENT" in the
Prospectus.
UNDERWRITING
Subject to the terms and conditions set forth in the underwriting
agreement, dated _________, and the Terms Agreement relating to the
Certificates, dated ________ (collectively the "Underwriting Agreement'),
between the Depositor and Lehman Brothers, an affiliate of the Depositor, the
Depositor has agreed to sell to Lehman Brothers, and Lehman Brothers has agreed
to purchase from the Depositor, all of the Certificates.
The Underwriting Agreement provides that Lehman Brothers' obligations
hereunder are subject to certain conditions precedent, and that Lehman Brothers
will be obligated to purchase all of the Certificates if any are purchased.
The distribution of the Certificates by Lehman Brothers will be effected
from time to time in one or more negotiated transactions or otherwise at varying
prices to be determined, in each case, at the time of sale. Lehman Brothers may
effect such transactions by selling the Certificates to or through dealers, and
such dealers may receive from Lehman Brothers compensation in the form of
underwriting discounts, concessions or commissions. Lehman brothers and any
dealers that participate with Lehman Brothers in the distribution of the
Certificates may be deemed to be underwriters, and any discounts, commissions or
concessions received by them, and any profit on the resale of the Certificates
purchased by them, may be deemed to be underwriting discounts and commissions
under the Securities Act of 1933, as amended (the "Act").
The Underwriting Agreement provides that the Depositor will indemnify
Lehman Brothers against certain civil liabilities, including liabilities under
the Act.
LEGAL MATTERS
Certain legal matters with respect to the Certificates will be passed upon
for the Depositor by [ ] and for Lehman Brothers by [ ].
RATING
It is a condition to issuance that each Class of the Certificates be rated
not lower than Investors Service Inc. by Standard & Poor's Corporation and
_______ by Moody's Investors Service Inc.
A securities rating addresses the likelihood of the receipt by
Certificateholders of distributions on the Mortgage Loans. The rating takes
into consideration the characteristics of the Mortgage Loans and the structural,
legal and tax aspects associated with the Certificates. The ratings on the
Certificates do not, however, constitute statements regarding the likelihood or
frequency of prepayments on the Mortgage Loans or the possibility that
Certificateholders might realize a lower than anticipated yield.
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.
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT.
A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY
NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME
THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL
NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY
NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH
SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION
OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED JUNE 14, 1996.
Version #2
PROSPECTUS SUPPLEMENT
(To Prospectus dated _____________ __, 199__)
$_____________
LEHMAN HOME EQUITY LOAN TRUST 199___
$___________ HOME EQUITY LOAN ASSET-BACKED NOTES, SERIES 199_-_
$__________ HOME EQUITY LOAN ASSET-BACKED CERTIFICATES, SERIES 199_-_
The Lehman Home Equity Loan Trust 199__ (the "Trust") will be formed
pursuant to a trust agreement to be dated as of ______, 199_ (the "Trust
Agreement") and entered into by Lehman ABS Corporation (the
"Depositor"), ________________ and _____________, as owner trustee (the
"Owner Trustee"). The Trust will issue $___________ aggregate principal
amount of Home Equity Loan Asset-Backed Notes (the "Notes"). The Notes
will be issued pursuant to an indenture to be dated as of __________ __,
199_ (the "Indenture"), between the Trust and ____________, as indenture
trustee (the "Indenture Trustee"). The Trust will also issue
$____________ aggregate principal amount of Home Equity Loan
Asset-Backed Certificates, Series 199_-_ (the "Certificates" and,
together with the Notes, the "Securities").
The Trust will consist of certain [adjustable rate] [fixed rate] home
equity revolving credit line loans made or to be made in the future (the
"Mortgage Loans") secured primarily by second deeds of trust or
mortgages on residential properties that are primarily one- to
four-family properties, the collections in respect of such Mortgage
Loans, and certain other property relating to such mortgage loans. In
addition, the Securities will have the benefit of an irrevocable and
unconditional limited financial guaranty insurance policy (the "Policy")
issued by ______________ (the "Certificate Insurer") covering
[describe].
Distributions of principal and interest on the Notes will be made on the
_________ day of each month or, if such date is not a Business Day, then
on the succeeding Business Day (each a "Distribution Date"), commencing
on ________, 199_ to the extent described herein. Interest will accrue
on the Notes at a rate (the "Note Rate") equal to ___% per annum from
the Closing Date to the first Distribution Date and at [a floating rate
equal to LIBOR (as defined herein) plus ___% per annum] [___% per annum]
thereafter.
The Certificates will represent fractional undivided interests in the
Trust. Distribution of principal and interest on the Certificates will
be made on each Distribution Date to the extent described herein.
Interest will accrue on the Certificates at a rate (the "Pass-Through
Rate") equal to ___% per annum from the Closing Date to the first
Distribution Date and at [a floating rate equal to LIBOR plus ___% per
annum] [___% per annum] thereafter.
Payments of interest and principal on the Notes will have equal priority
with payments of principal and interest (and will be made pro rata) on
the Certificates.
There is currently no market for the Securities offered hereby and there
can be no assurance that such a market will develop or if it does
develop that it will continue. See "Special Considerations" herein.
____________________
THE SECURITIES REPRESENT INTERESTS IN OR OBLIGATIONS OF THE TRUST ONLY AND DO
NOT REPRESENT INTERESTS IN OR OBLIGATIONS OF THE DEPOSITOR, OWNER TRUSTEE,
INDENTURE TRUSTEE OR ANY AFFILIATE THEREOF, EXCEPT TO THE EXTENT PROVIDED
HEREIN. THE SECURITIES ARE NOT INSURED OR GUARANTEED BY ANY GOVERNMENTAL
AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The Securities offered hereby will be purchased by Lehman Brothers Inc.
[and ] ([collectively,] the "Underwriter") from the Depositor and
will, in each case, be offered by the Underwriter from time to time to
the public in negotiated transactions or otherwise at varying prices to
be determined at the time of sale. The aggregate proceeds to the
Depositor from the sale of the Notes are expected to be $_____________
and from the sale of the Certificates are expected to be $__________
before deducting expenses payable by the Depositor of $_______.
The Securities are offered subject to prior sale and subject to the
Underwriters' right to reject orders in whole or in part. It is
expected that the Notes will be delivered in book-entry form through the
facilities of the Depository Trust Company, [Cedel, S.A. and the
Euroclear System] on or about _______, 199_. The Securities will be
offered in [Europe and] the United States of America.
____________________
Until ninety days after the date of this Prospectus Supplement, all
dealers effecting transactions in the Securities, whether or not
participating in this distribution, may be required to deliver a
Prospectus Supplement and Prospectus to investors. This is in addition
to the obligation of dealers acting as Underwriters to deliver a
Prospectus Supplement and Prospectus with respect to their unsold
allotments or subscriptions.
____________________
Each Series of Securities offered hereby constitute part of a separate
Series of Asset-Backed Securities being offered by Lehman ABS
Corporation from time to time pursuant to its Prospectus dated ________
__, 199_. This Prospectus Supplement does not contain complete
information about the offering of the Securities. Additional
information is contained in the Prospectus and investors are urged to
read both this Prospectus Supplement and the Prospectus in full. Sales
of the Securities may not be consummated unless the purchaser has
received both this Prospectus Supplement and the Prospectus.
____________________
LEHMAN BROTHERS
_______________, 199_
SUMMARY
The following summary of certain pertinent information is qualified in
its entirety by reference to the detailed information appearing
elsewhere in this Prospectus Supplement and in the accompanying
Prospectus. Certain capitalized terms used herein are defined elsewhere
in the Prospectus Supplement or in the Prospectus.
Trust . . . . . . . . . . . . . . . Lehman Home Equity Loan Trust 199_-_
(the "Trust" or the "Issuer"), a
Delaware business trust established
pursuant to the Trust Agreement (as
defined herein), dated as of ___,
199_ (the "Cut-Off Date"). The
property of the Trust will include: a
pool of [adjustable] [fixed] rate
home equity loan revolving credit
line loans made or to be made in the
future (the "Mortgage Loans"), under
certain home equity revolving credit
line loan agreements (the "Credit
Line Agreements") and secured
primarily by second [deeds of trust]
[mortgages] on residential properties
that are primarily one- to
four-family properties (the
"Mortgaged Properties"); the
collections in respect of the
Mortgage Loans received after the
Cut-Off Date; property that secured a
Mortgage Loan which has been acquired
by foreclosure or deed in lieu of
foreclosure; [a surety bond or letter
of credit]; an assignment of the
Depositor's rights under the Purchase
Agreement; rights under certain
hazard insurance policies covering
the Mortgaged Properties; and certain
other property, as described more
fully herein.
The Trust will include the unpaid
principal balance of each Mortgage
Loan as of the Cut-Off Date (the
"Cut-Off Date Principal Balance")
plus any additions thereto as a
result of new advances made pursuant
to the applicable Credit Line
Agreement (the "Additional Balances")
during the life of the Trust. With
respect to any date, the "Pool
Balance" will be equal to the
aggregate of the Principal Balances
of all Mortgage Loans as of such
date. The "Principal Balance" of a
Loan (other than a Liquidated Loan)
on any day is equal to its Cut-Off
Date Principal Balance, plus (i) any
Additional Balances in respect of
such Mortgage Loan, minus (ii) all
collections credited against the
Principal Balance of such Mortgage
Loan in accordance with the related
Credit Line Agreement prior to such
day. The Principal Balance of a
Liquidated Loan after the final
recovery of related Liquidation
Proceeds shall be zero.
Securities Offered. . . . . . . . . . (i) Home Equity Loan Asset-Backed
Notes, (the "Notes"); and (ii) Home
Equity Loan Asset-Backed Certificates
(the "Certificates" and, together
with the Notes, the "Securities").
Each Security represents the right to
receive payments of interest at the
variable rate described below,
payable monthly, and payments of
principal at such time and to the
extent provided below.
Depositor . . . . . . . . . . . . . . Lehman ABS Corporation, a Delaware
corporation (the "Depositor"). The
principal executive offices of the
Depositor are located at 200 Vesey
Street, Three World Financial Center,
New York, New York 10285. See "THE
COMPANY" in the Prospectus.
Servicer. . . . . . . . . . . . . . . __________ (the "Servicer").
The Servicer will service the
Mortgage Loans pursuant to a
Servicing Agreement dated _________
1, 199_ between the Issuer and the
Servicer.
Indenture . . . . . . . . . . . . . . The Notes will be issued pursuant
to an indenture dated as of
_________, 199_ (the "Indenture")
between the Trust and
________________________ in its
capacity as indenture trustee (the
"Indenture Trustee"). The Indenture
Trustee will allocate distributions
of principal and interest to holders
of the Notes (the "Noteholders") in
accordance with the Indenture.
Trust Agreement . . . . . . . . . . . Pursuant to a trust agreement dated
as of ________ 1, 199_ (the "Trust
Agreement"), among the Depositor,
________ and _________________ in its
capacity as owner trustee (the "Owner
Trustee"), the Trust will issue the
Certificates in an initial aggregate
amount of $__________. The
Certificates will represent
fractional undivided interests in the
Trust.
The Mortgage Loans. . . . . . . . . .The Mortgage Loans are primarily secured
by second deeds of trust or mortgages
on Mortgaged Properties. The
Mortgage Loans were originated by [
] and on or prior to the Closing
Date, [ ] will sell the Mortgage
Loans to the Depositor pursuant to a
purchase agreement (the "Purchase
Agreement"). The aggregate Cut-Off
Date Principal Balance of the
Mortgage loans is $___________ (the
"Cut-Off Date Pool Balance").
The combined loan-to-value ratio of
each Mortgage Loan, computed using
the maximum amount the borrower was
permitted to draw down under the
related Credit Line Agreement (the
"Credit Limit") and taking into
account the amounts of any related
senior mortgage loans (the "Combined
Loan-to-Value Ratio") did not exceed
__% as of the Cut-Off Date. The
weighted average Combined
Loan-to-Value Ratio of the Mortgage
Loans was ____% as of the Cut-Off
Date. See "THE HOME EQUITY LENDING
PROGRAM--Underwriting Procedures
Relating to the Mortgage Loans"
herein.
Interest on each Mortgage Loan is
payable monthly and computed on the
related average daily outstanding
Principal Balance for each billing
cycle at a variable rate per annum
(the "Loan Rate") equal at any time
(subject to minimum and maximum
rates, as described herein under "THE
HOME EQUITY LENDING PROGRAM--Mortgage
Loan Terms," and further subject to
applicable usury limitations) to the
sum of (i) [the prime rate published
in the "Money Rates" section of The
Wall Street Journal generally on the
Monday of the week in which such Loan
Rate adjust (or, if no rate is
published on such day, then on the
next succeeding calendar day on which
a prime rate is published), rounded
to the nearest [ ] percent] and
(ii) a margin generally within the
range of ___% to ___%. The Loan Rate
is subject to adjustment [ ].
With respect to each Mortgage Loan, a
"billing cycle" is the calendar month
preceding a Due Date. Interest
accrued at such rate will be due on
the Due Date in the month following
the close of the billing cycle. As
to each Mortgage Loan, the Due Date
is the __th day of the month. The
Cut-Off Date Principal Balances
ranged from zero to $_______ and
averaged $_______. Credit Limits
under the Mortgage Loans as of the
Cut-Off ranged from approximately
$_____ to $______ and averaged
$______. Each Mortgage Loan was
originated in the period from _______
to _________, and, as of the cut-Off
Date, the weighted average Credit
Limit Utilization Rate (as defined
herein) was approximately ___%. See
"THE HOME EQUITY LENDING PROGRAM" and
"DESCRIPTION OF THE MORTGAGE LOANS"
herein.
Collections . . . . . . . . . . . . . All collections on the Mortgage Loans
will be allocated by the Servicer in
accordance with the Loan Agreements
between amounts collected in respect
of interest ("Interest Collec-
tions") and amounts collected in
respect of principal ("Principal
Collections" and collectively with
Interest Collections, the
"Collections"). The Servicer will
generally deposit Collections
distributable to the Holders in an
account established for such purpose
under the Servicing Agreement (the
"Collection Account"). See
"DESCRIPTION OF THE SECURITIES--
Payments on Mortgage Loans;
Deposits to Collection Account"
herein and "SERVICING OF LOANS --
Deposits to and Withdrawals from
the Collection Account" in the
Prospectus.
Description of the Securities . . . .
A. Distributions. . . . . . . . . On each Distribution Date, collections
on the Mortgage Loans will be applied
in the following order of priority:
(i) to the Servicer, the Servicing
Fee;
(ii) as payment for the accrued
interest due and any overdue
accrued interest (with interest
thereon) on the respective
Security Balance of the Notes and
the Certificates;
(iii) as principal on the Securities,
the excess of Principal
Collections over Additional
Balances created during the
preceding Collection Period, such
amount to be allocated between the
Notes and Certificate, pro rata,
based on their respective
Principal Balances;
(iv) as principal on the Securities,
as payment for any Liquidation
Loss Amounts on the Mortgage
Loans;
(v) as payment for the premium on the
Policy;
(vi) to reimburse prior draws made on
the Policy; and
(vii) any remaining amounts to the
Depositor.
As to any Distribution Date, the
"Collection Period" is the calendar
month preceding the month of such
Distribution Date.
"Liquidation Loss Amount" means with
respect to any Liquidated Mortgage
Loan, the unrecovered Principal
Balance thereof at the end of the
related Collection Period in which
such Mortgage Loan became a
Liquidated Mortgage Loan after giving
effect to the Net Liquidation
Proceeds in connection therewith.
B. Note Rate. . . . . . . . . . . Interest will accrue on the unpaid
Principal Balance of the Notes at the
per annum rate (the "Note Rate")
equal to ___% per annum from the
Closing Date to the first
Distribution Date and thereafter
interest will accrue on the Notes
from and including the preceding
Distribution Date to but excluding
such current Distribution Date (each,
an "Interest Accrual Period") at [a
floating rate equal to LIBOR (as
defined herein) plus ___%] [___%].
[Interest will be calculated on the
basis of the actual number of days in
each Interest Accrual Period divided
by 360.] A failure to pay interest
on any Notes on any Distribution Date
that continues for five days
constitutes an Event of Default under
the Indenture.
C. Pass-Through Rate. . . . . . . Interest will accrue on the unpaid
Principal Balance of the Certificates
at the per annum rate (the
"Pass-Through Rate") equal to ___%
per annum from the Closing Date to
the first Distribution Date and
thereafter interest will accrue on
the Certificates for each Interest
Accrual Period at [a floating rate
equal to LIBOR (as defined herein)
plus ___%] [___%]. [Interest will be
calculated on the basis of the actual
number of days in each Interest
Accrual Period divided by 360.] A
failure to pay interest on any
Certificates on any Distribution Date
that continues for five days
constitutes an Event of Default under
the Trust Agreement.
D. Distribution Date. . . . . . . The ____ day of each month or, if
such day is not a Business Day, the
next succeeding Business Day,
commencing with _______, 199_. A
"Business Day" is any day other than
a Saturday or Sunday or another day
on which banking institutions in New
York, New York [and ____________] are
authorized or obligated by law,
regulations or executive order to be
closed.
E. Record Date. . . . . . . . . . The last day preceding a Distribution
Date or, if the Securities are no
longer Book-Entry Securities, the
last day of the month preceding a
Distribution Date.
F. Final Scheduled
Distribution Dates . . . . . . With respect to the Certificates,
___________________. To the extent
not previously paid, the Principal
Balance of the Notes will be due on
the Distribution Date in _______,
199_. Failure to pay the full
principal balance of Notes on or
before the applicable final scheduled
payment dates constitutes an Event of
Default under the Indenture.
G. Form and Registration. . . . . The Securities will initially be
delivered in book-entry form
("Book-Entry Notes"). Holders of
such Notes may elect to hold their
interests through The Depository
Trust Company ("DTC"), [in the United
States, or Centrale de Livraison de
Valeurs Mobilieres S.A. ("Cedel") or
the Euroclear System ("Euroclear"),
in Europe]. Transfers within DTC [,
Cedel or Euroclear, as the case may
be,] will be in accordance with the
usual rules and operating procedures
of the relevant system. So long as
the Notes are Book-Entry Notes, such
Notes will be evidenced by one or
more securities registered in the
name of Cede & Co. ("Cede"), as the
nominee of DTC [or one of the
relevant depositaries (collectively,
the "European Depositaries")].
Cross-market transfers between
persons holding directly or
indirectly through DTC[, on the one
hand, and counterparties holding
directly or indirectly through Cedel
or Euroclear, on the other,] will be
effected in DTC through Citibank
N.A. ("Citibank") or Morgan Guaranty
Trust Company of New York
("Morgan"), the relevant depositaries
of Cedel and Euroclear, respectively,
and each a participating member of
DTC. The Notes will initially be
registered in the name of Cede. The
interests of such Holders will be
represented by book entries on the
records of DTC and participating
members thereof. No Holder of a Note
will be entitled to receive a
definitive note representing such
person's interest, except in the
event that Notes in fully registered,
certificated form ("Definitive
Notes") are issued under the limited
circumstances described in
"DESCRIPTION OF THE SECURITIES--
Definitive Certificates" in the
Prospectus. All references in this
Prospectus Supplement to Notes
reflect the rights of Holders of such
Notes only as such rights may be
exercised through DTC and its
participating organizations for so
long as such Notes are held by DTC.
See "SPECIAL CONSIDERATIONS--
Book-Entry Securities".
H. Denominations. . . . . . . . . The Securities will be issued in
minimum denominations of $100,000 and
integral multiples of $1,000 in
excess thereof.
[Letter of Credit]
[Surety Bond]
Issuer. . . . . . . . . . . . . . _________________ (the "[Letter of
Credit] [Surety Bond] Issuer"). See
"THE [LETTER OF CREDIT] [SURETY BOND]
ISSUER" herein.
[Letter of Credit]
[Surety Bond]. . . . . . . . . . . On the Closing Date, the [Letter of
Credit] [Surety Bond] Issuer will
issue a [letter of credit] [surety
bond] (the "[Letter of Credit]
[Surety Bond]") in favor of the
Trustee on behalf of the Trust. In
the event that, on any Distribution
Date, available amounts on deposit in
the Collection Account with respect
to the preceding Collection Period
are insufficient to provide for the
payment of the amount required to be
distributed to the Holders and the
Servicer on such Distribution Date,
the Trustee will draw on the [Letter
of Credit] [Surety Bond], to the
extent of the [Letter of Credit]
[Surety Bond] Amount for such
Distribution Date, in an amount equal
to such deficiency. See "DESCRIPTION
OF THE SECURITIES--The [Letter of
Credit] [Surety Bond] and "--
Distributions on the Securities"
herein and "ENHANCEMENT" in the
Prospectus.
[[Letter of Credit]
[Surety Bond]
Amount. . . . . . . . . . . . . . The amount available under the
[Letter of Credit] [Surety Bond] (the
"[Letter of Credit] [Surety Bond]
Amount") for the initial Distribution
Date will be $ . For each
Distribution Date thereafter, the
[Letter of Credit] [Surety Bond]
Amount will equal the lesser of (i)
% of the Pool Balance as of the first
day of the preceding Collection
Period (after giving effect to any
amounts distributed with respect to
principal of the Mortgage Loans on
the Distribution Date occurring in
such preceding Collection Period) and
(ii) the [Letter of Credit] [Surety
Bond] Amount as of the first day of
the preceding Collection Period,
minus any amounts drawn under the
[Letter of Credit] [Surety Bond]
during such preceding Collection
Period, plus any amounts paid to the
[Letter of Credit] [Surety Bond]
Issuer on the Distribution Date
occurring in such preceding
Collection Period up to the amount of
any previous draws on the [Letter of
Credit] [Surety Bond].]
Servicing . . . . . . . . . . . . . . The Servicer will be responsible for
servicing, managing and making
collections on the Mortgage Loans.
On the ________ business day, but no
later than the ________ calendar day,
of each month (the "Determination
Date"), the Servicer will calculate,
and instruct the Trustee regarding,
the amounts to be paid, as described
herein, with respect to the related
Collection Period to the Holders.
See "DESCRIPTION OF THE SECURITIES--
Distributions on the Securities"
herein. The Servicer will receive a
monthly servicing fee in the amount
of ____% per annum (the "Servicing
Fee Rate"), of the related Pool
Balance and certain other amounts, as
servicing compensation from the
Trust. See "SERVICING OF MORTGAGE
LOANS--Servicing Compensation and
Payment of Expenses" herein. In
certain limited circumstances, the
Servicer may resign or be removed, in
which event either the Trustee or a
third- party servicer will be
appointed as successor Servicer. See
"SERVICING OF THE LOANS--Certain
Matters Regarding the Servicer" and
"THE AGREEMENTS--Events of Default"
and "--Rights Upon Events of
Default" in the Prospectus.
[Final Payment of Principal;
Termination. . . . . . . . . . . . The Trust will terminate on the
Distribution Date following the
earlier of (i)
_________________________ and (ii)
the final payment or other
liquidation of the last Mortgage Loan
in the Trust. The Mortgage Loans
will be subject to optional
repurchase by the Servicer on any
Distribution Date after the Principal
Balance is reduced to an amount less
than or equal to $ ([5]% of
the initial Principal Balance). The
repurchase price will be equal to the
sum of the out- standing Principal
Balance and accrued and unpaid
interest thereon at the weighted
average of the Loan Rates through the
day preceding the final Distribution
Date. See "DESCRIPTION OF THE
SECURITIES-- Optional Termination"
herein and "DESCRIPTION OF THE
SECURITIES-- Optional Termination"
and "THE AGREEMENTS--Termination" in
the Prospectus.]
Certain Federal Income Tax
Consequences. . . . . . . . . . . . . In the opinion of Tax Counsel (as
defined herein), for federal income
tax purposes, the Securities will be
characterized as indebtedness, and
the Trust should be characterized as
an owner trust and will not be
characterized as an association (or
publicly traded partnership) taxable
as a corporation. Each holder of a
Security, by the acceptance of a
Security, will agree to treat the
Security as indebtedness and the
Trust as an owner trust for federal,
state and local income and franchise
tax purposes. See "Certain Federal
Income Tax Consequences" and "State
Tax Consequences" herein and "Certain
Federal Income Tax Considerations"
and "State Tax Considerations" in the
Prospectus concerning the application
of federal, state and local tax laws.
Legal Investment. . . . . . . . . . . Institutions whose investment
activities are subject to legal
investment laws and regulations or to
review by certain regulatory
authorities may be subject to
restrictions on investment in the
Securities. See "Legal Investment
Considerations" herein.
ERISA . . . . . . . . . . . . . . . . Generally, plans that are subject to
the requirements of ERISA and the
Code are permitted to purchase
instruments like the Notes that are
debt under applicable state law and
have no "substantial equity features"
without reference to the prohibited
transaction requirements of ERISA and
the Code. In the opinion of ERISA
Counsel (as defined herein), the
Notes will be classified as
indebtedness without substantial
equity features for ERISA purposes.
However, if the Notes are deemed to
be equity interests and no statutory,
regulatory or administrative
exemption applies, the Trust will
hold plan assets by reason of a
Plan's investment in the Notes.
Accordingly, any Plan fiduciary
considering whether to purchase the
Notes on behalf of a Plan should
consult with its counsel regarding
the applicability of the provisions
of ERISA and the Code and the
availability of any exemptions.
Under current law the purchase and
holding of the Certificates by or on
behalf of any employee benefit plan
(a "Plan") subject to the fiduciary
responsibility provisions of the
Employee Retirement Income Security
Act of 1974, as amended ("ERISA"),
may result in a "prohibited
transaction" within the meaning of
ERISA and the Code or other violation
of the fiduciary responsibility
provisions of ERISA and Section 4975
of the Code. [Consequently,
Certificates may not be transferred
to a proposed transferee that is a
Plan subject to ERISA or that is
described in Section 4975(e)(1) of
the Code, or a person acting on
behalf of any such Plan or using the
assets of such plan unless the Owner
Trustee and the Depositor receive the
opinion of counsel reasonably
satisfactory to the Owner Trustee and
the Depositor to the effect that the
purchase and holding of such
Certificate will not result in the
assets of the Trust being deemed to
be "plan assets" for ERISA purposes
and will not be a prohibited
transaction under ERISA or Section
4975 of the Code.] See "ERISA
Considerations" herein and in the
Prospectus.
Rating. . . . . . . . . .. . . . . . It is a condition to the issuance of the
Securities that they be rated in the
highest rating category by at least
two nationally recognized statistical
rating organizations (each a "Rating
Agency"). In general, ratings
address credit risk and do not
address the likelihood. A security
rating is not a recommendation to
buy, sell or hold securities.
SPECIAL CONSIDERATIONS
Book-Entry Securities. Issuance of the Securities in book-entry form may
reduce the liquidity of such Securities in the secondary trading market since
investors may be unwilling to purchase Securities for which they cannot obtain
physical securities. See "DESCRIPTION OF THE SECURITIES--Book-Entry Securities"
herein.
Since transactions in the Securities can be effected only through DTC,
CEDEL, Euroclear, participating organizations, indirect participants and certain
banks, the ability of a Certificate Owner to pledge a Security to persons or
entities that do not participate in the DTC, CEDEL or Euroclear system or
otherwise to take actions in respect of such Securities, may be limited due to
lack of a physical security representing the Securities. See "DESCRIPTION OF
THE SECURITIES--Book-Entry Securities" herein.
Security Owners may experience some delay in their receipt of distributions
of interest and principal on the Securities since such distributions will be
forwarded by the Trustee to DTC and DTC will credit such distributions to the
accounts of its Participants (as defined herein) which will thereafter credit
them to the accounts of Security Owners either directly or indirectly through
indirect participants. See 'DESCRIPTION OF THE SECURITIES--Book-Entry
Securities" herein.
Cash Flow Considerations. During the first [ ]-year draw down period
under the related Credit Line Agreements fort the Mortgage Loans, collections on
such Mortgage Loans may vary because, among other things, borrowers are not
required to make monthly payments of principal. With respect to some of the
Mortgage Loans, during the second [ ]-year draw down period, no monthly
payments of principal are required. Collections on the Mortgage Loans may also
vary due to seasonal purchasing and payment habits of borrowers.
General credit risk may also be greater to Holders than to holders of
instruments representing interests in level payment first mortgage loans since
no payment of principal generally is required until after either a five- or
ten-year interest only period under the related Credit Line Agreements. Minimum
monthly payments will at least equal and may exceed accrued interest. Even
assuming that the Mortgaged Properties provide adequate security for the
Mortgage Loans, substantial delay could be encountered in connection with the
liquidation of Mortgage Loans that are delinquent and corresponding delays in
the receipt of related proceeds by Holders could occur if the [Letter of Credit]
[Surety Bond] provider were unable to perform on its obligations under the
[Letter of Credit] [Surety Bond]. Further, liquidation expenses (such as legal
fees, real estate taxes, and maintenance and preservation expenses) will reduce
the proceeds payable to Holders and thereby reduce the security for the Mortgage
Loans. In the event any of the Mortgaged Properties fail to provide adequate
security for the related Mortgage Loans, Holders could experience a loss if the
[Letter of Credit] [Surety Bond] provider were unable to perform its obligations
under the [Letter of Credit] [Surety Bond].
Prepayment Considerations. All of the Mortgage Loans may be prepaid in
whole or in part at any time without penalty. Home equity loans, such as the
Mortgage Loans, have been originated in significant volume only during the past
few years and neither the Depositor nor the Servicer is aware of any publicly
available studies or statistics on the rate of prepayment of such loans.
Generally, home equity loan are not viewed by borrowers as permanent financing.
Accordingly, the Mortgage Loans may experience a higher rate of prepayment than
traditional loans. The Trust's prepayment experience may be affected by a wide
variety of factors, including general economic condition, interest rates, the
availability of alternative financing and homeowner mobility. In addition,
substantially all of the Mortgage Loans contain due-on-sale provisions and the
Servicer intends to enforce such provisions unless (i) such enforcement is not
permitted by applicable law or (ii) the Servicer, in a manner consistent with
reasonable commercial practice, permits the purchaser of the related Mortgaged
Property to assume the Mortgage Loan. To the extent permitted by applicable
law, such assumption will not release the original borrower from its obligation
under any such Mortgage Loan.
Security Rating. The rating of the Securities will depend primarily on an
assessment by the Rating Agencies of the Mortgage Loans [and upon the
claims-paying ability of the [Letter of Credit] [Surety Bond] provider]. [Any
reduction in a rating assigned to the claims-paying ability of the [Letter of
Credit] [Surety Bond] provider below the rating initially given to the
Securities may result in a reduction in the rating of the Securities.] The
rating by the Rating Agencies of the Securities is not a recommendation to
purchase, hold or sell the Securities, inasmuch as such rating does not comment
as to the market price or suitability for a particular investor. There is no
assurance that the ratings will remain in place for any given period of time or
that the ratings will not be lowered or withdrawn by the Rating Agencies. In
general, the ratings address credit risk and do not address the likelihood of
prepayments. The ratings of the Securities do not address the possibility of
the imposition of United States withholding tax with respect to non-U.S.
persons.
Legal Considerations. The Mortgage Loans are secured by deeds of trust or
mortgages (which generally are second mortgages). With respect to Mortgage
Loans that are secured by first mortgages, the Servicer has the power under
certain circumstances to consent to a new mortgage lien on the Mortgaged
Property having priority over such Mortgage Loan. Mortgage Loans secured by
second mortgages are entitled to proceeds that remain from the sale of the
related Mortgage Property after any related senior mortgage loan and prior
statutory liens have been satisfied. In the event that such proceeds are
insufficient to satisfy such loans and prior liens in the aggregate [and the
[Letter of Credit] [Surety Bond] provider is unable to perform its obligations
under the [Letter of Credit] [Surety Bond] or if the coverage under the [Letter
of Credit] [Surety Bond] is exhausted] the Trust and, accordingly, the Holders,
bear (i) the risk of delay in distributions while a deficiency judgment against
the borrower is obtained and (ii) the risk of loss if the deficiency judgment
cannot be obtained or is not realized upon. See "CERTAIN LEGAL ASPECTS OF THE
MORTGAGE LOANS" herein.
The sale of the Mortgage Loans from the Seller to the Depositor pursuant to
the Purchase Agreement will be treated as a sale of the Mortgage Loans. The
Seller will warrant that such transfer is either a sale of its interest in the
Mortgage Loans or a grant of a first priority perfected security interest
therein. In the event of an insolvency of the Seller, the receiver of the
Seller may attempt to recharacterize the sale of the Mortgage Loans as a
borrowing by the Seller secured by a pledge of the Mortgage Loans. If the
receiver decided to challenge such transfer, delays in payments of the
Securities and possible reductions in the amount thereof could occur. The
Depositor will warrant in the Trust Agreement that the transfer of its interest
in the Mortgage Loans to the Trust is a valid transfer and assignment of such
interest.
If a conservator, receiver or trustee were appointed for the Seller, or if
certain other events relating to the bankruptcy or insolvency of the Seller were
to occur, Additional Balances would not be transferred by the Seller to the
Trust pursuant to the Purchase Agreement (as assigned by the Depositor to the
Trust). In such an event, an Event of Default under the Pooling and Servicing
Agreement and Indenture would commence and the Owner Trustee would attempt to
sell the Mortgage Loans (unless Holders holding Securities evidencing undivided
interests aggregating at least 51% of each of the Security Balance of the Notes
and the Certificates instruct otherwise), thereby causing early payment of the
Security Balance of the Notes and the Certificates.
In the event of a bankruptcy or insolvency of the Servicer, the bankruptcy
trustee or receiver may have the power to prevent the Trustee or the Holders
from appointing a successor Servicer.
Servicer's Ability to Change the Terms of the Mortgage Loans. The Servicer
may agree to changes in the terms of a Credit Line Agreement, provided that such
changes (i) do not adversely affect the interest of the Holders, and (ii) are
consistent with prudent business practice. There can be no assurance that
changes in applicable law or the marketplace for home equity loans or prudent
business practice will not result in changes in the terms of the Mortgage Loans.
[Delinquent Mortgage Loans. The Trust will include Mortgage Loans which
are 89 or fewer days delinquent. The Cut-Off Date Principal Balance of such
delinquent Mortgage Loans was $______________. If there are not sufficient
funds form the Holders' Floating Allocation Percentage of Interest Collections
to cover the Liquidation Loss Amounts for any Distribution Date have been
reduced to zero, the aggregate amount of principal returned to the Holders may
be less than the Principal Balance on the day the Securities are issued.]
THE TRUST
GENERAL
The Issuer, Lehman Home Equity Loan Trust 199_, 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. The Trust Agreement
constitutes the "governing instrument" under the laws of the State of Delaware
relating to business trusts. After its formation, the Issuer will not engage in
any activity other than (i) acquiring, holding and managing the Mortgage Loans
and the other assets of the Trust and proceeds therefrom, (ii) issuing the Notes
and the Certificates, (iii) making payments on the Notes and the Certificates
and (iv) engaging in other activities that are necessary, suitable or convenient
to accomplish the foregoing or are incidental thereto or connected therewith.
The property of the Trust will consist of: (i) each of the Mortgage Loans
that are _________; (ii) collections on the Mortgage Loans received after the
Cut-Off Date; (iii) Mortgaged Properties relating to the Mortgage Loans that are
acquired by foreclosure or deed in lieu of foreclosure; (iv) the Collection
Account and the Distribution Account (excluding net earnings thereon); (v) the
[Letter of Credit] [Surety Bond]; and (vi) an assignment of the Depositor's
rights under the Purchase Agreement, including all rights of the Depositor to
purchase Additional Balances.
The Trust's principal offices are in __________, Delaware, in care of
________________________, as Owner Trustee, at [ ].
THE [LETTER OF CREDIT][SURETY BOND] ISSUER
The following information with respect to _________ ("_______") has been
furnished by __________.
[Description of Letter of Credit/Surety Issuer]
THE HOME EQUITY LENDING PROGRAM
The information set forth below concerning [_______] and its underwriting
policies has been provided by [_______]. The Depositor does not make any
representation as to the accuracy or completeness of such information.
GENERAL
All of the Mortgage Loans were originated by
[_____________________________], (the "Seller" or the "Servicer") under its home
equity lending program. The Seller first offered adjustable rate home equity
revolving credit line loans ("home equity loans") in 19__. As of
[_____________], [____________] owned and serviced approximately $__________
aggregate principal amount of outstanding home equity loans secured by
properties located in __________ under home equity credit lines (the "Seller
Portfolio").
UNDERWRITING PROCEDURES RELATING TO THE MORTGAGE LOANS
Each home equity loan was originated after a review by the Seller in
accordance with its established underwriting procedures, which were intended to
assess the applicant's ability to assume and repay such home equity loans and
the adequacy of the real property which serves as collateral for such home
equity loans. The maximum Credit Limit for a home equity loan provided by the
Seller was $__________.
Each applicant for a home equity loan was required to complete an
application which listed the applicant's assets, liabilities, income, credit and
employment history and other demographic and personal information. If
information in the loan application demonstrated that there was sufficient
income and equity to justify making a home equity loan and the Seller (a)
received a satisfactory independent credit bureau report on the credit history
of the borrower and (b) obtained, in the case of all home equity loans
originated prior to __________ a drive-by appraisal of the related Mortgaged
Property or for all home equity loans originated as of __________, a
satisfactory appraisal completed on forms approved by FNMA, and if such
information met the Seller's underwriting standards, the Seller issued a
commitment subject to satisfaction of certain other conditions. These
conditions included: (i) obtaining and reviewing pay stubs, income tax returns
or a verification of employment from the applicant's employer; (ii) obtaining
and reviewing a verification of deposit; and (iii) obtaining and reviewing a
verification of the loan in the first lien position when the home equity loan
was to be in a second lien position.
Appraisals of the Mortgaged Properties were performed by a qualified
appraiser or an independent third-party, fee-based appraiser who had been
previously approved for such assignment by the Seller.
It is the Seller's policy to require a title policy insuring tile mortgage
in accordance with the intended lien position. Regardless of Combined
Loan-to-Value Ratios, it is the Seller's policy not to accept a position junior
to any mortgage lien other than a first mortgage.
Generally, a home equity loan needed a Combined Loan-to-Value Ratio of __%
for loans which the Seller obtained full documentary support and was __% for
loans for which limited documentary support was obtained.
After obtaining all applicable employment, credit and property information,
the Seller determined whether sufficient unencumbered equity in the property
existed and whether the prospective borrower had sufficient monthly income
available to support the payments of interest at the current prime rate plus the
applicable margin based on the credit limit in addition to any senior mortgage
loan payments (including any escrows for property taxes and hazard insurance
premiums) and other monthly credit obligations based on the prospective
borrower's debt-to-gross income ratio. The "debt-to-gross income ratio" is the
ratio of (a) certain of the borrower's debt obligations which include: (i) the
monthly first mortgage payment plus taxes; (ii) monthly installment debt
payments with a term of more than ten months; (iii) five percent of the total
revolving obligations; (iv) monthly alimony and child support obligations; and
(v) the payment on the home equity loan calculated at the Credit Limit and
current prime rate plus margin for such home equity loan to (b) the borrower's
gross verifiable monthly income. The debt-to-gross income ratio generally did
not exceed [________%].
When the commitment conditions had been satisfied, the home equity loan was
completed by signing a Credit Line Agreement, rescission statement, and mortgage
which secured the repayment of principal of and interest on the related home
equity loan. The original mortgage was then recorded in the appropriate county
government office.
MORTGAGE LOAN TERMS
A borrower may access a home equity loan by writing a check. On all home
equity loans, there is [a ten-year] draw down period as long as the borrower is
not in default under the loan agreement. Home equity loans bear interest at a
variable rate which may change bi-weekly. Home equity loans may be subject to a
maximum per annum interest rate (the "Maximum Rate") of % per annum and in
all cases, are subject to applicable usury limitations. See "CERTAIN LEGAL
ASPECTS OF THE MORTGAGE LOANS--Applicability of Usury Laws" in the Prospectus.
The daily periodic rate on the home equity loans (the "Loan Rate") is the sum of
the Index Rate plus a spread (the "Margin") which generally ranges between ____%
and ____%, divided by 365 days or 366 days, as applicable.
The "Index Rate" is based on [the "prime rate" published in The Wall Street
Journal every second Monday rounded to the nearest one-eighth of one percent or
if not published on any such date, as next published in the Wall Street
Journal.] The annual percentage rate for any bi-weekly period will be based on
the Prime Rate in effect the Monday on which the rate may change. [If a prime
rate range is published in The Wall Street Journal, then the midpoint (average)
of that range will be used.] There are no limitations on increases or decreases
(except for those home equity loans which have Maximum Rates). Only the home
equity loans that have Maximum Rates of ____% also have annual adjustment caps
of __% as to both increases and decreases in their Loan Rates.
Billing statements are mailed monthly. The statement details all debits
and credits and specifies the minimum payment due and the available credit
line. Notice of changes in the applicable Loan Rate are provided by the Seller
to the Borrower with such statements. All payments are due by the tenth day
after the date the billing statement is issued.
The Credit Line Agreements and Disclosure Statement further provide that if
publication of the Index Rate is discontinued, the Index Rate will be changed
upon notification in accordance with such Credit Line Agreements and Disclosure
Statements.
The right to obtain additional credit may be suspended or terminated or the
borrower may be required to pay the entire balance due plus all other accrued
but unpaid charges immediately, if the borrower fails to make any required
payment by the due date, if the total outstanding principal balance including
all charges payable exceeds the Credit Limit, if the borrower made any statement
or signature on any document which is fraudulent or contained a material
misrepresentation, if the borrower dies or becomes incompetent, if the borrower
becomes bankrupt or insolvent, if the borrower becomes subject to any judgment,
lien, attachment or execution is issued against the Mortgaged Property, the
borrower fails to obtain and maintain required property insurance or if the
borrower sells or transfers the Mortgaged Property or does not maintain the
property. In addition, the right to obtain additional credit may be suspended
or a borrower's Credit Limit may be reduced, if the value of the Mortgaged
Property decreases for any reason to less than 80% of the original appraised
value, if the borrower is in default under the home equity loan, if government
action impairs the Seller's lien priority or if a regulatory agency has notified
the Seller that continued advances would constitute an unsafe and unsound
practice.
DELINQUENCY AND LOSS EXPERIENCE OF THE SERVICER'S PORTFOLIO
The following tables set forth the delinquency and loss experience for each
of the periods shown for the home equity loans indicated on the table. The
Servicer believes that there have been no material trends or anomalies in the
historical delinquency and loss experience as represented in the following
tables. The data presented in the following tables are for illustrative
purposes only, and there is no assurance that the delinquency and loss
experience of the Mortgage Loans will be similar to that set forth below.
DELINQUENCY EXPERIENCE
(Dollars in Thousands)
As of _________
----------------------------------------
-----
----------------------------------------
Number of
Loans Amount
------------------ ----------------
Amount Outstanding at
Period End..............................
Delinquency
30-59 Days.............................. $
60-89 Days..............................
90 or More Days.........................
Foreclosures and Bankruptcies........... _________
Total Delinquencies....................... $
==========
30-59 Days Percentage..................... %
60-89 Days Percentage..................... %
90 or More Days Percentage................ %
Foreclosures and Bankruptcies.............
LOSS EXPERIENCE
(Dollars in Thousands)
For the Year
Ending ________
--------------------
Average Amount
Outstanding................................ $
Gross Charge-Offs............................ $
Recoveries................................... $
Net Losses as a Percentage
of Average Amount Outstanding.............. %
SERVICING OF THE MORTGAGE LOANS
The information set forth below concerning the Servicer and its servicing
policies has been provided by the Servicer. The Depositor does not make any
representation as to the accuracy or completeness of such information.
Servicing of Mortgage Loans
The Servicer will be responsible for servicing the Mortgage Loans as agent
for the Trust in accordance with the Servicer's policies and procedures for
servicing home equity loans and in accordance with the terms of the Servicing
Agreement.
With respect to real estate secured loans, the general policy of the
Servicer is to initiate foreclosure on the underlying property (i) after such
loan is 90 days or more delinquent; (ii) if a notice of default on a senior lien
is received by the Servicer; or (iii) if circumstances are discovered by the
Servicer which would indicate that a potential for loss exists. Foreclosure
proceedings may be terminated if the delinquency is cured. However, under
certain circumstances, the Servicer may elect not to commence foreclosure or
stay the foreclosure proceeding if the borrower's default is due to special
circumstances which are temporary and are not expected to last beyond a
specified period. The loans to borrowers in bankruptcy proceedings will be
restructured in accordance with law and with a view to maximizing recovery of
such home equity loans, including any deficiencies. Additionally, any time
during foreclosure, a forbearance, short sale, deed-in-lieu or a payment plan
can be authorized.
After foreclosure, if the home equity loan is secured by a first mortgage
lien, title to the related Mortgaged Property will pass to the Servicer, or a
wholly-owned subsidiary of the Servicer, who will liquidate the Mortgaged
Property and charge-off the balance of the home equity loan balance which was
not recovered by the liquidation proceeds. If the Mortgaged Property was
subject to a senior lien position, the Servicer will either satisfy such lien at
the time of foreclosure sale or take other action as deemed necessary to protect
the Servicer's interest in the Mortgaged Property. If in the judgment of the
Servicer, the cost of maintaining or purchasing the senior lien position exceeds
the economic benefit of such action, the Servicer will generally charge-off the
entire home equity loan, seek a money judgment against the borrower or will not
pursue any recovery.
Servicing and charge-off policies and collection practices may change over
time in accordance with the Servicer's business judgment, changes in the
Servicer's real estate secured revolving credit line loans and applicable laws
and regulations, and other considerations.
Servicing Compensation and Payment of Expenses
With respect to each Collection Period, other than the first Collection
Period, the servicing compensation to be paid to the Servicer in respect of its
servicing activities relating to the Mortgage Loans will be paid to it from
interest collections in respect of the Mortgage Loans and will be equal to ____%
per annum (the "Servicing Fee Rate") on the aggregate Principal Balances of the
Mortgage Loans as of the first day of each such Collection Period (the
"Servicing Fee"). With respect to the first Collection Period, the Servicer
will receive from such collections ___ of the amount calculated in the preceding
sentence. All assumption fees, late payment charges and other fees and charges,
to the extent collected from borrowers, will be retained by the Servicer as
additional servicing compensation.
The Servicer will pay certain ongoing expenses associated with the Trust
and incurred by it in connection with its responsibilities under the Servicing
Agreement, including, without limitation, payment of the fees and disbursements
of the Trustee, any custodian appointed by the Trustee, the Registrar and any
paying agent. In addition, the Servicer will be entitled to reimbursement for
certain expenses incurred by it in connection with defaulted Mortgage Loans and
in connection with the restoration of Mortgaged Properties related thereto, such
right of reimbursement being prior to the rights of Holders to receive any
related Liquidation Proceeds.
DESCRIPTION OF THE MORTGAGE LOANS
Mortgage Loans
The Mortgage Loans were originated pursuant to loan agreements and
disclosure statements (the "Credit Line Agreements") and are secured by
mortgages or deeds of trust, most of which are second mortgages or second deeds
of trust, on Mortgage Properties. The Mortgaged Properties securing the
Mortgage Loans consist primarily of residential properties that are one to
four-family properties. All of the Mortgaged Properties are owner occupied.
See"--Mortgage Loan Pool Statistics" below.
The Cut-Off Date Pool Balance is $___________, which is equal to the
aggregate Principal Balances of the Mortgage Loans as of ______, 199_ (the
"Cut-Off Date"). As of the _______, the Mortgage Loans were not more than 89
days delinquent and had a Loan Rate of at least ____% per annum. The average
Cut-Off Date Principal Balance was $_______, the minimum Mortgage Cut-Off Date
Principal Balance was zero, the maximum Cut-Off Date Principal Balance was
$_________, the minimum Loan Rate and the maximum Loan Rate on the Cut-Off Date
were ____% and ____% per annum, respectively, and the weighted average Loan Rate
on the Cut-Off Date was ____% per annum. As of the Cut-Off Date, the weighted
average Credit Limit Utilization Rate was ____%, the minimum Credit Limit
Utilization Rate was zero and the maximum Credit Limit Utilization Rate was
______%. The "Credit Limit Utilization Rate" is determined by dividing the Cut-
Off Date Principal Balance of a Mortgage Loan by the Credit Limit of the related
Credit Line Agreement. The weighted average Combined Loan-to-Value Ratio of the
Mortgage Loans was ____% as of the Cut-Off Date.
Mortgage Loan Pool Statistics
The Depositor has compiled the following additional information as of the
Cut-Off Date with respect to the Mortgage Loans to be included in the Trust.
[TABULAR INFORMATION]
Assignment of Mortgage Loans
At the time of issuance of the Securities, the Depositor will transfer to
the Trust all of its right, title and interest in and to each Mortgage Loan
(including its right to purchase any Additional Balances arising in the future),
related Credit Line Agreements, mortgages and other related documents
(collectively, the "Related Documents"), including all collections received on
or with respect to each such Mortgage Loan on or after the Cut-Off Date pursuant
to an assignment of the Depositor's rights and obligations under the Purchase
Agree- ment. The Owner Trustee, concurrently with such transfer, will deliver
the Securities. Each Mortgage Loan transferred to the Owner Trust will be
identified on a schedule (the "Mortgage Loan Schedule") delivered to the Owner
Trustee pursuant to the Purchase Agreement. Such schedule will include
information as to the Cut-Off Date Principal Balance of each Mortgage Loan, as
well as information with respect to the Loan Rate.
The Purchase Agreement will require that, within the time period specified
therein, the Seller deliver to the Owner Trustee (or a custodian, as the Owner
Trustee's agent for such purpose) the Mortgage Loans endorsed in blank and the
Related Documents. In lieu of delivery of original mortgages, the Seller may
deliver trust and correct copies thereof which have been certified as to
authenticity by the appropriate county recording office where such mortgage is
recorded.
Under the terms of the Purchase Agreement, the Seller, acting at the
Depositor's request, will have [__ days after the Closing Date] to prepare and
record assignments of the mortgages related to each Mortgage Loan in favor of
the Owner Trustee (unless opinions of counsel satisfactory to the Rating
Agencies and the Certificate Insurer are delivered to the Owner Trustee and the
Certificate Insurer to the effect that recordation of such assignments is not
required in the relevant jurisdictions to protect the interests of the Owner
Trustee in the Mortgage Loans).
Within 90 days of the Closing Date, the Owner Trustee will review the
Mortgage Loans and the Related Documents and if any Mortgage Loan or Related
Document is found to be defective in any material respect and such defect is not
cured within 90 days following notification thereof to the Seller and the
Depositor by the Trustee, the Seller will be obligated to repurchase the
Mortgage Loan and to deposit the Repurchase Price into the Collection Account.
Upon such retransfer, the Principal Balance of such Mortgage Loan will be
deducted from the Pool Balance. In lieu of any such repurchase, the Seller may
substitute an Eligible Substitute Mortgage Loan. Any such repurchase or
substitution will be considered a payment in full of such Mortgage Loan. The
obligation of the Seller to accept a transfer of a Defective Mortgage Loan is
the sole remedy regarding any defects in the Mortgage Loans and Related
Documents available to the Owner Trustee or the Holders.
With respect to any Mortgage Loan, the "Repurchase Price" is equal to the
Principal Balance of such Mortgage Loan at the time of any transfer described
above plus accrued and unpaid interest thereon to the date of repurchase.
An "Eligible Substitute Mortgage Loan" is a mortgaged loan substituted by
the Seller for a Defective Mortgage Loan which must, on the date of such
substitution, (i) have an outstanding Principal Balance (or in the case of a
substitution of more than one Mortgage Loan for a Defective Mortgage Loan, an
aggregate Principal Balance), not 5% more or less than the Principal Balance
relating to such Defective Mortgage Loan; (ii) have a Loan Rate not less than
the Loan Rate of the Defective Mortgage Loan and not more than 1% in excess of
the Loan Rate of such Defective Mortgage Loan; (iii) have a Loan Rate based on
the same Index with adjustments to such Loan Rate made on the same Interest Rate
Adjustment Date as that of the Defective Mortgage Loan; (iv) have a Margin that
is not less than the Margin of the Defective Mortgage Loan and not more than 100
basis points higher than the Margin for the Defective Mortgage Loan; (v) have a
mortgage of the same or higher level of priority as the mortgage relating to the
Defective Mortgage Loan; (vi) have a remaining term to maturity not more than
six months earlier and not later than the remaining term to maturity of the
Defective Mortgage Loan; (vii) comply with each representation and warranty as
to the Mortgage Loans set forth in the Purchase Agreement (deemed to be made as
of the date of substitution); and (viii) satisfy certain other conditions
specified in the Purchase Agreement. To the extent the Principal Balance of an
Eligible Substitute Mortgage Loan is less than the Principal Balance of the
related Defective Mortgage Loan, the Seller will be required to make a deposit
to the Collection Account equal to such difference ("Substitution Adjustment
Amounts").
The Seller will make certain representations and warranties as to the
accuracy in all material respects of certain information furnished to the Owner
Trustee with respect to each Mortgage Loan (e.g., Cut-Off Date Principal Balance
and the Loan Rate). In addition, the Seller will represent and warrant, on the
Closing Date, that, among other things: (i) at the time of transfer to the
Depositor, the Seller has transferred or assigned all of its right, title and
interest in each Mortgage Loan and the Related Documents, free of any lien
(subject to certain exceptions); and (ii) each Mortgage Loan was generated under
a Credit Line Agreement that complied, at the time of origination, in all
material respects with applicable state and federal laws. Upon discovery of a
breach of any such representation and warranty which materially and adversely
affects the interests of the Holders in the Related Mortgage Loan and Related
Documents, the Seller will have a period of 60 days after discovery or notice of
the breach to effect a cure. If the breach cannot be cured within the 60-day
period, the Seller will be obligated to repurchase or substitute the Defective
Mortgage Loan from the Trust. The same procedure and limitations that are set
forth above for the repurchase or substitution of Defective Mortgage Loans will
apply to the transfer of a Mortgage Loan that is required to be repurchased or
substituted because of a breach of a representation or warranty in the Purchase
Agreement that materially and adversely affects the interests of the Holders.
Mortgage Loans required to be transferred to the Seller as described in the
preceding paragraphs are referred to as "Defective Mortgage Loans."
DESCRIPTION OF THE SERVICING AGREEMENT
The Servicer shall establish and maintain on behalf of the Owner Trustee an
account (the "Collection Account") for the benefit of the Holders. The
Collection Account will be an Eligible Account (as defined herein). Subject to
the investment provision described in the following paragraphs, upon receipt by
the Servicer of amounts in respect of the Mortgage Loans (excluding amounts
representing administrative charges, annual fees, taxes, assessments, credit
insurance charges, insurance proceeds to be applied to the restoration or repair
of a Mortgaged Property or similar items), the Servicer will deposit such
amounts in the Collection Account. Amounts so deposited may be invested in
Eligible Investments (as described in the Servicing Agree- ment) maturing no
later than one Business Day prior to the date on which the amount on deposit
therein is required to be deposited in the Distribution Account or on such
Distribution Date if approved by the Rating Agencies. Not later than the fifth
Business Day prior to each Distribution Date (the "Determination Date"), the
Servicer will notify the Owner Trustee and the Indenture Trustee of the amount
of such deposit to be included in funds available for the related Distribution
Date.
The Owner Trustee and the Indenture Trustee will establish one or more
accounts (the "Distribution Account") into which will be deposited amounts
withdrawn from the Collection Account for distribution to Holders on a
Distribution Date. The Distribution Account will be an Eligible Account.
Amounts on deposit therein will be invested in Eligible Investments maturing on
or before the Business Day prior to the related Distribution Date.
An "Eligible Account" is an account that is (i) maintained with a
depository institution whose debt obligations at the time of any deposit therein
have the highest short-term debt rating by the Rating Agencies, (ii) one or more
accounts with a depository institution which accounts are fully insured by
either the Savings Association Insurance Fund ("SAIF") or the Bank Insurance
Fund ("BIF") of the Federal Deposit Insurance Corporation established by such
fund with a minimum long-term unsecured debt rating of Baa3, (iii) a segregated
trust account maintained with the Owner Trustee or an Affiliate of the Owner
Trustee in its fiduciary capacity or (iv) otherwise acceptable to each Rating
Agency as evidenced by a letter from each Rating Agency to the Owner Trustee,
without reduction or withdrawal of their then current ratings of the Securities.
Eligible Investments are specified in the Servicing Agreement and are
limited to investments which meet the criteria of the Rating Agencies from time
to time as being consistent with their then current ratings of the Securities.
Allocations and Collections
All collections on the Mortgage Loans will generally be allocated in
accordance with the Credit Line Agreements between amounts collected in respect
of interest and amounts collected in respect of principal. As to any
Distribution Date, "Interest Collections" will be equal to the aggregate of the
amounts collected during the related Collection Period, including Net
Liquidation Proceeds (as defined below), allocated to interest pursuant to the
terms of the Credit Line Agreements.
As to any Distribution Date, "Principal Collections" will be equal to the
sum of (i) the amounts collected during the related Collection Period, including
Net Liquidation Proceeds, and allocated to principal pursuant to the terms of
the Credit Line Agreements and (ii) any Substitution Adjustment Amounts. "Net
Liquidation Proceeds" with respect to a Mortgage Loan are equal to the aggregate
of all amounts received upon liquidation of such Mortgage Loan, including,
without limitation, insurance proceeds, reduced by related expenses, but not
including the portion, if any, of such amount that exceeds the Principal Balance
of the Mortgage Loan at the end of the Collection Period immediately preceding
the Collection Period in which such Mortgage Loan became a Liquidated Mortgage
Loan plus accrued and unpaid interest thereon through the date of liquidation.
With respect to any date, the "Pool Balance" will be equal to the aggregate
of the Principal Balances of all Mortgage Loans as of such date. The Principal
Balance of a Mortgage Loan (other than a Liquidated Mortgage Loan) on any day is
equal to the Cut-Off Date Principal Balance thereof, plus (i) any Additional
Balances in respect of such Mortgage Loan minus (ii) all collections credited
against the Principal Balance of such Mortgage Loan in accordance with the
related Credit Line Agreement prior to such day. The Principal Balance of a
Liquidated Mortgage Loan after final recovery of related Liquidation Proceeds
shall be zero.
Hazard Insurance
The Servicing Agreement provides that the Servicer maintain certain hazard
insurance on the Mortgaged Properties relating to the Mortgage Loans. While the
terms of the related Credit Line Agreements generally require borrowers to
maintain certain hazard insurance, the Servicer will not monitor the maintenance
of such insurance.
The Servicing Agreement requires the Servicer to maintain for any Mortgaged
Property relating to a Mortgage Loan acquired upon foreclosure of a Mortgage
Loan, or by deed in lieu of such foreclosure, hazard insurance with extended
coverage in an amount equal to the lesser of (a) the maximum insurable value of
such Mortgaged Property or (b) the outstanding balance of such Mortgage Loan
plus the outstanding balance on any mortgage loan senior to such Mortgage Loan
at the time of foreclosure or deed in lieu of foreclosure, plus accrued interest
and the Servicer's good faith estimate of the related liquidation expenses to be
incurred in connection therewith. The Servicing Agreement provides that the
Servicer may satisfy its obligation to cause hazard policies to be maintained by
maintaining a blanket policy insuring against losses on such Mortgaged
Properties. If such blanket policy contains a deductible clause, the Servicer
will be obligated to deposit in the Collection Account the sums which would have
been deposited therein but for such clause. The Servicer will initially satisfy
these requirements by maintaining a blanket policy. As set forth above, all
amounts collected by the Servicer (net of any reimbursements to the Servicer)
under any hazard policy (except for amounts to be applied to the restoration or
repair of the Mortgaged Property) will ultimately be deposited in the Collection
Account.
In general, the standard form of fire and extended coverage policy covers
physical damage to or destruction of the improvements on the property by fire,
lightning, explosion, smoke, windstorm and hail, and the like, strike and civil
commotion, subject to the conditions and exclusions specified in each policy.
Although the policies relating to the Mortgage Loans will be underwritten by
different insurers and therefore will not contain identical terms and
conditions, the basic terms thereof are dictated by state laws and most of such
policies typically do not cover any physical damage resulting from the
following: war, revolution, governmental actions, floods and other
water-related causes, earth movement (including earthquakes, landslides and
mudflows), nuclear reactions, wet or dry rot, vermin, rodents, insects or
domestic animals, theft and, in certain cases vandalism. The foregoing list is
merely indicative of certain kinds of uninsured risks and is not intended to be
all-inclusive or an exact description of the insurance policies relating to the
Mortgaged Properties.
Realization Upon Defaulted Mortgage Loans
The Servicer will foreclose upon or otherwise comparably convert to
ownership Mortgaged Properties securing such of the Mortgage Loans as come into
default when in accordance with applicable servicing procedures under the
Servicing Agreement, no satisfactory arrangements can be made for the collection
of delinquent payments. In connection with such foreclosure or other
conversion, the Servicer will follow such practices as it deems necessary or
advisable and as are in keeping with its general subordinate mortgage servicing
activities, provided the Servicer will not be required to expend its own funds
in connection with foreclosure or other conversion, correction of default on a
related senior mortgage loan or restoration of any property unless, in its sole
judgment, such foreclosure, correction or restoration will increase net
Liquidation Proceeds. The Servicer will be reimbursed out of Liquidation
Proceeds for advances of its own funds as liquidation expenses before any Net
Liquidation Proceeds are distributed to Holders or the Transferor. "Net
Liquidation Proceeds" with respect to a Mortgage Loan is the amount received
upon liquidation of such Mortgage Loan reduced by related expenses, which may
include the amount advanced in respect of a senior mortgage, up to the unpaid
Principal Balance of the Mortgage Loan plus accrued and unpaid interest thereon.
Servicing Compensation and Payment of Expenses
With respect to each Collection Period, other than the first Collection
Period, the Servicer will receive from interest collections in respect of the
Mortgage Loan a portion of such interest collections as a monthly Servicing Fee
in the amount equal to ___% per annum ("Servicing Fee Rate") on the aggregate
Principal Balances of the Mortgage Loans as of the first day of each such
Collection Period. All assumption fees, late payment charges and other fees and
charges, to the extent collected from borrowers, will be retained by the
Servicer as additional servicing compensation.
The Servicer will pay certain ongoing expenses associated with the Trust
and incurred by it in connection with its responsibilities under the Servicing
Agreement, including, without limitation, payment of the fees and disbursements
of the Trustee, any custodian appointed by the Trustee, the Registrar and any
paying agent. In addition, the Servicer will be entitled to reimbursement for
certain expenses incurred by it in connection with defaulted Mortgage Loans and
in connection with the restoration of Mortgaged Properties, such right of
reimbursement being prior to the rights of Holders to receive any related Net
Liquidation Proceeds.
DESCRIPTION OF THE SECURITIES
General
The Notes will be issued pursuant to the Indenture dated as of ___________,
199_, between the Trust and _______________, as Indenture Trustee. The
Certificates will be issued pursuant to the Trust Agreement dated as of
______________, 199_, among the Depositor, __________, and ______________, as
Owner Trustee. The following summaries describe certain provisions of the
Securities, Indenture and Trust Agreement. The summaries do not purport to be
complete and are subject to, and qualified in their entirety by reference to,
the provisions of the applicable agreement. As used herein, "Agreement" shall
mean either the Trust Agreement or the Indenture, as the context requires.
The Securities will be issued in fully registered, certificated form only.
The Securities will be freely transferrable and exchangeable at the corporate
trust office of the Owner Trustee, with respect to the Certificates or the
Indenture Trustee with respect to the Notes.
Book-Entry Securities
The Securities will be book-entry Securities (the "Book-Entry Securities").
Persons acquiring beneficial ownership interests in the Securities ("Security
Owners") may elect to hold their Securities through the Depository Trust Company
("DTC") in the United States, or CEDEL or Euroclear (in Europe) if they are
participants of such systems, or indirectly through organizations which are
participants in such systems. The Book-Entry Securities will be issued in one
or more certificates which equal the aggregate principal balance of the
Securities and will initially be registered in the name of Cede & Co., the
nominee of DTC. CEDEL and Euroclear will hold omnibus positions on behalf of
their participants through customers' securities accounts in CEDEL's and
Euroclear's names on the books of their respective depositaries which in turn
will hold such positions in customers' securities accounts in the depositaries'
names on the books of DTC. Citibank will act as depositary for CEDEL and Morgan
will act as depositary or Euroclear (in such capacities, individually the
"Relevant Depositary" and collectively the "European Depositaries"). Investors
may hold such beneficial interests in the Book-Entry Securities in minimum
denominations representing Security Principal Balances of $1,000 and in integral
multiples in excess thereof. Except as described below, no person acquiring a
Book-Entry Securities (each, a "beneficial owner") will be entitled to receive a
physical certificate representing such Security (a "Definitive Security").
Unless and until Definitive Securities are issued, it is anticipated that the
only "Holder" of the Securities will be Cede & Co., as nominee of DTC. Security
Owners will not be Holders as that term is used in the Agreement. Security
Owners are only permitted to exercise their rights indirectly through
Participants and DTC.
The beneficial owner's ownership of a Book-Entry Security will be recorded
on the records of the brokerage firm, bank, thrift institution or other
financial intermediary (each, a "Financial Intermediary") that maintains the
beneficial owner's account for such purpose. In turn, the Financial
Intermediary's ownership of such Book-Entry Security will be recorded on the
records of DTC (or of a participating firm that acts as agent for the Financial
Intermediary, whose interest will in turn be recorded on the records of DTC, if
the beneficial owner's Financial Intermediary is not a DTC participant and on
the records of CEDEL or Euroclear, as appropriate).
Security Owners will receive all distributions of principal of, and
interest on, the Securities from the Trustee through DTC and DTC participants.
While the Securities are outstanding (except under the circum- stances described
below), under the rules, regulations and procedures creating and affecting DTC
and its operations (the "Rules"), DTC is required to' make book-entry transfers
among Participants on whose behalf it acts with respect to the Securities and is
required to receive and transmit distributions of principal of, and interest on,
the Securities. Participants and indirect participants with whom Security
Owners have accounts with respect to Securities are similarly required to make
book-entry transfers and receive and transmit such distributions on behalf of
their respective Security Owners. Accordingly, although Security Owners will
not possess certificates, the Rules provide a mechanism by which Security Owners
will receive distributions and will be able to transfer their interest.
Security Owners will not receive or be entitled to receive Securities
representing their respective interests in the Securities, except under the
limited circumstances described below. Unless and until Definitive Securities
are issued, Security Owners who are not Participants may transfer ownership of
Securities only through Participants and indirect participants by instructing
such Participants and indirect participants to transfer Securities, by
book-entry transfer, through DTC for the account of the purchasers of such
Securities, which account is maintained with their respective Participants.
Under the Rules and in accordance with DTC's normal procedures, transfers of
ownership of Securities will be executed through DTC and the accounts of the
respective Participants at DTC will be debited and credited. Similarly, the
Participants and indirect participants will make debits or credits, as the case
may be, on their records on behalf of the selling and purchasing Security
Owners.
Because of time zone differences, credits of securities received in CEDEL
or Euroclear as a result of a transaction with a Participant will be made during
subsequent securities settlement processing and dated the business day following
the DTC settlement date. Such credits or any transactions in such securities
settled during _such processing will be reported to the relevant Euroclear or
CEDEL Participants on such business day. Cash received in CEDEL or Euroclear as
a result of sales of securities by or through a CEDEL Participant (as defined
below) or Euroclear Participant (as defined below) to a DTC Participant will be
received with value on the DTC settlement date but will be available in the
relevant CEDEL or Euroclear cash account only as of the business day following
settlement in DTC. For information with respect to tax documentation procedures
relating to the Securities.
Transfers between Participants will occur in accordance with DTC rules.
Transfers between CEDEL Participants and Euroclear Participants will occur in
accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through CEDEL
Participants or Euroclear Participants, on the other, will be effected in DTC in
accordance with DTC rules on behalf of the relevant European international
clearing system by the Relevant Depositary; however, such cross market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in such system in accordance
with its rules and procedures and within its established deadlines (European
time). The relevant European international clearing system will, if the
transaction meets its settlement requirements, deliver instructions to the
Relevant Depositary to take action to effect final settlement on its behalf by
delivering or receiving securities in DTC, and making or receiving payment in
accordance with normal procedures for same day funds settlement applicable to
DTC. CEDEL Participants and Euroclear Participants may not deliver instructions
directly to the European Depositaries.
DTC which is a New York-chartered limited purpose trust company, performs
services for its participants, some of which (and/or their representatives) own
DTC. In accordance with its normal procedures, DTC is expected to record the
positions held by each DTC participant in the Book-Entry Securities, whether
held for its own account or as a nominee for another person. In general,
beneficial ownership of Book-Entry Securities will be subject to the rules,
regulations and procedures governing DTC and DTC participants as in effect from
time to time.
CEDEL is incorporated under the laws of Luxembourg as a professional
depository. CEDEL holds securities for its participating organizations ("CEDEL
Participants") and facilitates the clearance and settlement of securities
transactions between CEDEL Participants through electronic book-entry changes
in accounts of CEDEL Participants, thereby eliminating the need for physical
movement of certificates. Transactions may be settled in CEDEL in any of 28
currencies, including United States dollars. CEDEL provides to its CEDEL
Participants, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. CEDEL interfaces with domestic markets in several
countries. As a professional depository, CEDEL is subject to regulation by the
Luxembourg Monetary Institute. CEDEL participants are recognized financial
institutions around the world, including underwriters, securities brokers and
dealers, banks, trust companies, checkering corporations and certain other
organizations. Indirect access to CEDEL is also available to others, such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a CEDEL Participant, either directly or indirectly.
Euroclear was created in 1968 to hold securities for participants of
Euroclear ("Euroclear Participants") and to clear and settle transactions
between Euroclear Participants through simultaneous electronic book-entry
delivery against payment, thereby eliminating the need for physical movement of
certificates and any risk from lack of simultaneous transfers of securities and
cash. Transactions may now be settled in any of 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
co-operative corporation (the "Cooperative"). All operations are conducted by
the Euroclear Operator, and all Euroclear securities clearance accounts and
Euroclear cash accounts are accounts with the Euroclear Operator, not the
Cooperative. The Cooperative establishes policy for Euroclear on behalf of
Euroclear Participants. Euroclear Participants include banks (including
central banks), securities brokers and dealers and other professional financial
intermediaries. Indirect access to Euroclear is also available to other firms
that clear through or maintain a custodial relationship with a Euroclear
Participant, either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it
is regulated and examined by the Board of Governors of the Federal Reserve
System and the New York State Banking Department, as well as the Belgian
Banking Commission. Securities clearance accounts and cash accounts with the
Euroclear Operator are governed by the Terms and Conditions Governing Use of
Euroclear and the related Operating Procedures of the Euroclear System and
applicable Belgian law (collectively, the "Terms and Conditions"). The Terms
and Conditions govern transfers of securities and cash within Euroclear,
withdrawals of securities and cash from Euroclear, and receipts of payments
with respect to securities in Euroclear. All securities in Euroclear are held
on a fungible basis without attribution of specific certificates to specific
securities clearance accounts. The Euroclear Operator acts under the Terms and
Conditions only on behalf of Euroclear Participants, and has no record of or
relationship with persons holding through Euroclear Participants.
Distributions on the Book-Entry Securities will be made on each
Distribution Date by the Trustee to DTC. DTC will be responsible for crediting
the amount of such payments to the accounts of the applicable DTC participants
in accordance with DTC's normal procedures. Each DTC participant will be
responsible for disbursing such payments to the beneficial owners of the
Book-Entry Securities that it represents and to each Financial Intermediary for
which it acts as agent. Each such Financial Intermediary will be responsible
for disbursing funds to the beneficial owners of the Book-Entry Securities that
it represents.
Under a book-entry format, beneficial owners of the Book-Entry Securities
may experience some delay in their receipt of payments, since such payments
will be forwarded by the Trustee to Cede. Distributions with respect to
Securities held through CEDEL or Euroclear will bc credited to the cash
accounts of CEDEL Participants or Euroclear Participants in accordance with the
relevant system's rules and procedures, to the extent received by the Relevant
Depositary. Such distributions will be subject to tax reporting in accordance
with relevant United States tax laws and regulations. Because DTC can only act
on behalf of Financial Intermediaries, the ability of a beneficial owner to
pledge Book-Entry Securities to persons or entities that do not participate in
the Depository system, or otherwise take actions in respect of such Book Entry
Securities, may be limited due to the lack of physical certificates for such
Book-Entry Securities. In addition, issuance of the Book-Entry Securities in
book-entry form may reduce the liquidity of such Certificates in the secondary
market since certain potential investors may be unwilling to purchase
Securities for which they cannot obtain physical certificates.
Monthly and annual reports on the Trust provided by the Servicer to CEDE,
as nominee of DTC, may be made available to beneficial owners upon request, in
accordance with the rules, regulations and procedures creating and affecting
the Depository, and to the Financial Intermediaries to whose DTC accounts the
Book Entry Securities of such beneficial owners are credited.
DTC has advised the Transferor and the Trustee that, unless and until
Definitive Securities are issued, SDTC will take any action permitted to be
taken by the holders of the Book-Entry Securities under the Agreement only at
the direction of one or more Financial Intermediaries to whose DTC accounts the
Book-Entry Securities are credited, to the extent that such actions are taken
on behalf of Financial Intermediaries whose holdings include such Book-Entry
Securities. CEDEL or the Euroclear Operator, as the case may be, will take any
other action permitted to be taken by Holder under the Agreement on behalf of a
CEDEL Participant or Euroclear Participant only in accordance with its relevant
rules and procedures and subject to the ability of the Relevant Depositary to
effect such actions on its behalf through DTC. DTC may take actions, at the
direction of the related Participants, with respect to some Securities which
conflict with actions taken with respect to other Securities.
Definitive Securities will be issued to beneficial owners of the
Book-Entry Securities, or their nominees, rather than to DTC, only if (a) DTC
or the Transferor advises the Trustee in writing that DTC is no longer willing,
qualified or able to discharge properly its responsibilities as nominee and
depository with respect to the Book-Entry Securities and the Transferor or the
Trustee is unable to locate a qualified successor, (b) the Transferor, at its
sole option, elects to terminate a book-entry system through DTC or (c) after
the occurrence of an Event of Servicing Termination (as deemed herein),
beneficial owners having Percentage Interests aggregating not less than 51% of
the Certificate Principal Balance of the Book-Entry Securities advise the
Trustee and DTC through the Financial Intermediaries and the DTC participants
in writing that the continuation of a book-entry system through DTC (or a
successor thereto) is no longer in the best interests of beneficial owners.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Trustee will be required to notify all beneficial
owners of the occurrence of such event and the availability through DTC of
Definitive Securities. Upon surrender by DTC of the global certificate or
certificates representing the Book Entry Securities and instructions for
re-registration, the Trustee will issue Definitive Securities, and thereafter
the Trustee will recognize the holders of such Definitive Securities as Holders
under the Trust Agreement.
Although DTC, CEDEL and Euroclear have agreed to the foregoing procedures
in order to facilitate transfers of Securities among participants of DTC, CEDEL
and Euroclear, they are under no obligation to perform or continue to perform
such procedures and such procedures may be discontinued at any time.
Distributions
On each Distribution Date, collections on the Mortgage Loans will be
applied in the following order of priority:
(i) to the Servicer, the Servicing Fee;
(ii) as payment for the accrued interest due and any overdue
accrued interest (with interest thereon) on the respective Security
Balance of the Notes and the Certificates;
(iii) as principal on the Securities, the excess of Principal
Collections over Additional Balances created during the preceding
Collection Period, such amount to be allocated between the Notes
and Certificates pro rata, based on their respective Security Balances;
(iv) as principal on the Securities, as payment for any
Liquidation Loss Amounts on the Mortgage Loans;
(v) as payment for the premium for the Policy;
(vi) to reimburse prior draws made on the Policy; and
(vii) any remaining amounts to the Depositor.
As to any Distribution Date, the "Collection Period" is the calendar month
preceding the month of such Distribution Date.
"Liquidation Loss Amount" means with respect to any Liquidated Mortgage
Loan, the unrecovered Principal Balance thereof at the end of the Collection
Period in which such Mortgage Loan became a Liquidated Mortgage Loan after
giving effect to the Net Liquidation Proceeds in connection therewith.
Interest
Note Rate. Interest will accrue on the unpaid Principal Balance of the
Notes at the per annum rate (the "Note Rate") equal to __% per annum from the
Closing Date to the first Distribution Date and thereafter interest will accrue
on the Notes from and including the preceding Distribution Date to but
excluding such current Distribution Date (each, an "Interest Accrual Period")
at [a floating rate equal to LIBOR (as defined herein) plus __%] [__%].
[Interest will be calculated on the basis of the actual number of days in each
Interest Accrual Period by 360.] A failure to pay interest on any Notes on any
Distribution Date that continues for five days constitutes an Event of Default
under the Indenture.
Pass-Through Rate. Interest will accrue on the unpaid Principal Balance
of the Certificates at the per annum rate (the "Pass-Through Rate") equal to
__% per annum from the Closing Date to the first Distribution Date and
thereafter interest will accrue on the Certificates for each Interest Accrual
Period at [a floating rate equal to LIBOR (as defined herein) plus __%] [__%].
[Interest will be calculated on the basis of the actual number of days in each
Interest Accrual Period divided by 360.] A failure to pay interest on any
Certificates on any Distribution Date that continues for five days constitutes
an Event of Default under the Trust Agreement.
Optional Termination
The Trust will terminate on the Distribution Date following the earlier of
(i) _________________________ and (ii) the final payment or other liquidation
of the last Mortgage Loan in the Trust. The Mortgage Loans will be subject to
optional repurchase by the Servicer on any Distribution Date after the Principal
Balance is reduced to an amount less than or equal to $ ([5]% of the
initial Principal Balance). The repurchase price will be equal to the sum of
the outstanding Principal Balance and accrued and unpaid interest thereon at the
weighted average of the Loan Rates through the day preceding the final
Distribution Date.
THE DEPOSITOR
Lehman ABS Corporation (the "Depositor") was incorporated in the State of
Delaware on January 29, 1988. As of January 4, 1993, the Depositor is a wholly
owned, special purpose subsidiary of Lehman Commercial Paper Inc. ("LCPI"),
which is itself a wholly owned subsidiary of Lehman Brothers Inc. ("Lehman
Brothers"), which is a wholly owned subsidiary of Lehman Brothers Holdings Inc.
("Holdings"). None of Lehman Brothers, LCPI, Holdings or the Depositor, nor
any affiliate of the foregoing, has guaranteed or is otherwise obligated with
respect to the Securities. The principal executive offices of the Depositor
are located at 200 Vesey Street, Three World Financial Center, New York, New
York 10285 (Telephone: (212) 526-7000). See "The Depositor" in the Prospectus.
THE INDENTURE
The following summary describes certain terms of the Indenture. The
summary does not purport to be complete and is subject to, and qualified in its
entirety by reference to, the provisions of the Indenture. Whenever particular
sections or defined terms of the Indenture are referred to, such sections or
defined terms are thereby incorporated herein by reference. See "Description
of the Notes" herein for a summary of certain additional terms of the
Indenture.
Reports to Noteholders
The Indenture Trustee will mail to each Noteholder, at such Noteholder's
request, at its address listed on the Note Register maintained with the
Indenture Trustee a report setting forth certain amounts relating to the Notes.
Events of Default; Rights Upon Event of Default
With respect to the Notes, "Events of Default" under the Indenture will
consist of: (i) a default for five days or more in the payment of any interest
on any Note; (ii) 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;
(iii) a default in the observance or performance of any covenant or agreement
of the Trust made in the Indenture and the continuation of any such default for
a period of 30 days after notice thereof is given to the Trust by the Indenture
Trustee or to the Trust and the Indenture Trustee by the holders of at least
25% in principal amount of the Notes then outstanding; (iv) any representation
or warranty made by the Trust in the 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 such breach not having been cured within 30
days after notice thereof is given to the Trust by the Indenture Trustee or to
the Trust and the Indenture Trustee by the holders of at least 25% in principal
amount of Notes then outstanding; or (v) certain events of bankruptcy,
insolvency, receivership or liquidation of the Trust. [The amount of principal
required to be paid to Noteholders under the Indenture will generally be
limited to amounts available to be deposited in the Collection Account.
Therefore, the failure to pay principal on the Notes generally will not result
in the occurrence of an Event of Default until the final scheduled Distribution
Date for such Notes.] If there is an Event of Default with respect to a Note
due to late payment or nonpayment of interest due on a Note, additional
interest will accrue on such unpaid interest at the interest rate on the Note
(to the extent lawful) until such interest is paid. Such additional interest
on unpaid interest shall be due at the time such interest is paid. If there is
an Event of Default due to late payment or nonpayment of principal on a Note,
interest will continue to accrue on such principal at the interest rate on the
Note until such principal is paid. If an Event of Default should occur and be
continuing with respect to the Notes, the Indenture Trustee or holders of a
majority in principal amount of Notes then outstanding may declare the
principal of such Notes to be immediately due and payable. Such declaration
may, under certain circumstances, be rescinded by the holders of a majority in
principal amount of the Notes then outstanding. If the Notes are due and
payable following an Event of Default with respect thereto, the Indenture
Trustee may institute proceedings to collect amounts due or foreclose on Trust
property or exercise remedies as a secured party. If an Event of Default
occurs and is continuing with respect to the 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
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 such request. Subject to the provisions for indemnification and
certain limitations contained in the Indenture, the holders of a majority in
principal amount of the outstanding Notes 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 certain cases, waive any default with respect
thereto, except a default in the payment of principal or interest or a default
in respect of a covenant or provision of the Indenture that cannot be modified
without the waiver or consent of all the holders of the outstanding Notes. No
holder of a Note will have the right to institute any proceeding with respect
to the Indenture, unless (i) such holder previously has given the Indenture
Trustee written notice of a continuing Event of Default, (ii) the holders of
not less than 25% in principal amount of the outstanding Notes have made
written request to the Indenture Trustee to institute such proceeding in its
own name as Indenture Trustee, (iii) such holder or holders have offered the
Indenture Trustee reasonable indemnity, (iv) the Indenture Trustee has for 60
days failed to institute such proceeding and (v) no direction inconsistent with
such 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 Notes. In
addition, the Indenture Trustee and the Noteholders, by accepting the Notes,
will covenant that they will not at any time institute against the Trust any
bankruptcy, reorganization or other proceeding under any federal or state
bankruptcy or similar law. With respect to the Trust, neither the Indenture
Trustee nor the Owner Trustee in its individual capacity, nor any holder of a
Certificate representing an ownership interest in the Trust nor any of their
respective owners, 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 Notes or for the agreements of the Trust contained in the
Indenture.
Certain Covenants
The Indenture will provide that the Trust may not consolidate with or
merge into any other entity, unless (i) the entity formed by or surviving such
consolidation or merger is organized under the laws of the United States, any
state or the District of Columbia, (ii) such entity expressly assumes the
Trust's obligation to make due and punctual payments upon the Notes and the
performance or observance of any agreement and covenant of the Trust under the
Indenture, (iii) no Event of Default shall have occurred and be continuing
immediately after such merger or consolidation, (iv) the Trust has been advised
that the ratings of the Securities then in effect would not be reduced or
withdrawn by any Rating Agency as a result of such merger or consolidation and
(v) the Trust has received an opinion of counsel to the effect that such
consolidation or merger would have no material adverse tax consequence to the
Trust or to any Noteholder or Certificateholder. The Trust will not, among
other things, (i) except as expressly permitted by the Indenture, sell,
transfer, exchange or otherwise dispose of any of the assets of the Trust, (ii)
claim any credit on or make any deduction from the principal and interest
payable in respect of the Notes (other than amounts withheld under the 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 Trust,
(iii) dissolve or liquidate in whole or in part, (iv) permit the validity or
effectiveness of the Indenture to be impaired 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 thereby or (v) 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 thereof, or any interest therein or the proceeds thereof.
The Trust may not engage in any activity other than as specified under "The
Trust" herein. The Trust will not incur, assume or guarantee any indebtedness
other than indebtedness incurred pursuant to the Notes and the Indenture.
Annual Compliance Statement
The Trust will be required to file annually with the Indenture Trustee a
written statement as to the fulfillment of its obligations under the Indenture.
Indenture Trustee's Annual Report
The Indenture Trustee will be required to mail each year to all
Noteholders a report relating to any change in its eligibility and
qualification to continue as Indenture Trustee under the Indenture, any amounts
advanced by it under the Indenture, the amount, interest rate and maturity date
of any indebtedness owing by the Trust to the Indenture Trustee in its
individual capacity, any change in the property and funds physically held by
the Indenture Trustee as such and any action taken by it that materially
affects the Notes and that has not been previously reported, but if no such
changes have occurred, then no report shall be required.
Satisfaction and Discharge of Indenture
The Indenture will be discharged with respect to the collateral securing
the Notes upon the delivery to the 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 the Notes.
Modification of Indenture
With the consent of the holders of a majority of the outstanding Notes,
the Trust and the Indenture Trustee may execute a supplemental indenture to add
provisions to, change in any manner or eliminate any provisions of, the
Indenture, or modify (except as provided below) in any manner the rights of the
Noteholders. Without the consent of the holder of each outstanding Note
affected thereby, however, no supplemental indenture will: (i) 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; (ii) impair the
right to institute suit for the enforcement of certain provisions of the
Indenture regarding payment; (iii) 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 certain provisions of the
Indenture or of certain defaults thereunder and their consequences as provided
for in the Indenture; (iv) modify or alter the provisions of the Indenture
regarding the voting of Notes held by the Trust, the Depositor or an affiliate
of any of them; (v) decrease the percentage of the aggregate principal amount
of Notes required to amend the sections of the Indenture which specify the
applicable percentage of aggregate principal amount of the Notes necessary to
amend the Indenture or certain other related agreements; or (vi) 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 such collateral or deprive the holder of any Note of the
security afforded by the lien of the Indenture. The Trust and the Indenture
Trustee may also enter into supplemental indentures, without obtaining the
consent of the Noteholders, for the purpose of, among other things, adding any
provisions to or changing in any manner or eliminating any of the provisions of
the Indenture or of modifying in any manner the rights of the Noteholders;
provided that such action will not materially and adversely affect the interest
of any Noteholder.
Voting Rights
At all times, the voting rights of Noteholders under the Indenture will be
allocated among the Notes pro rata in accordance with their outstanding
principal balances.
Certain Matters Regarding the Indenture Trustee and the Depositor
Neither the Depositor, the Indenture Trustee nor any director, officer or
employee of the Depositor or the Indenture Trustee will be under any liability
to the Trust or the related Noteholders for any action taken or for refraining
from the taking of any action in good faith pursuant to the Indenture or for
errors in judgment; provided, however, that none of the Indenture Trustee, the
Depositor and any director, officer or employee thereof will be protected
against any liability which would otherwise be imposed by reason of willful
malfeasance, bad faith or negligence in the performance of duties or by reason
of reckless disregard of obligations and duties under the Indenture. Subject
to certain limitations set forth in the Indenture, the Indenture Trustee and
any director, officer, employee or agent of the Indenture Trustee shall be
indemnified by the Trust and held harmless against any loss, liability or
expense incurred in connection with investigating, preparing to defend or
defending any legal action, commenced or threatened, relating to the Indenture
other than any loss, liability or expense incurred by reason of willful
malfeasance, bad faith or gross negligence in the performance of its duties
under such Indenture or by reason of reckless disregard of its obligations and
duties under the Indenture. Any such indemnification by the Trust will reduce
the amount distributable to the Noteholders. All persons into which the
Indenture Trustee may be merged or with which it may be consolidated or any
person resulting from such merger or consolidation shall be the successor of
the Indenture Trustee under each Indenture.
THE TRUST AGREEMENT
The following summary describes certain terms of the Trust Agreement. The
summary does not purport to be complete and is subject to, and qualified in its
entirety by reference to, the provisions of the Trust Agreement. Whenever
particular sections or defined terms of the Trust Agreement are referred to,
such sections or defined terms are thereby incorporated herein by reference.
See "Description of the Securities" herein for a summary of certain additional
terms of the Trust Agreement.
Reports to Holders
Concurrently with each distribution to the Holders of the Certificates,
the Servicer will forward to the Owner Trustee for mailing to such Holder a
statement setting forth other items:
(i) the amount of interest included in such distribution and the
related Certificate Rate;
(ii) the amount, if any, of overdue accrued interest included in
such distribution (and the amount of interest thereon);
(iii) the amount, if any, of the remaining overdue accrued
interest after giving effect to such distribution;
(iv) the amount, if any, of principal included in such
distribution;
(v) the amount, if any, of the reimbursement of previous
Liquidation Loss Amounts included in such distribution;
(vi) the amount, if any, of the aggregate unreimbursed
Liquidation Loss Amounts after giving effect to such distribution;
(vii) the Servicing Fee for such Distribution Date;
(viii) the Pool Balance as of the end of the preceding
Collection Period;
(ix) the number and aggregate Principal Balances of the Mortgage
Loans as to which the minimum monthly payment is delinquent for 30-59 days,
60-89 days and 90 or more days, respectively, as of the end of the
preceding Collection Period; and
(x) the book value of any real estate which is acquired by the
Trust through foreclosure or grant of deed in lieu of foreclosure.
In the case of information furnished pursuant to clauses (iii), (iv) and
(v) above, the amounts shall be expressed as a dollar amount per Security with
a $1,000 denomination.
Within 60 days after the end of each calendar year, the Servicer will be
required to forward to the Trustee a statement containing the information set
forth in clauses (iii) and (viii) above aggregated for such calendar year.
Amendment
The Trust Agreement may be amended by the Depositor and the Owner Trustee,
without consent of the Holders, to cure any ambiguity, to correct or supplement
any provision or for the purpose of adding any provisions to or changing in any
manner or eliminating any of the provisions thereof or of modifying in any
manner the rights of such Holders; provided, however, that such action will
not, as evidenced by an opinion of counsel satisfactory to the Owner Trustee,
adversely affect in any material respect the interests of any Holders. The
Trust Agreement may also be amended by the Depositor and the Owner Trustee with
the consent of the holders of Notes evidencing at least a majority in principal
amount of then outstanding Notes and Holders owning Voting Interests (as herein
defined) aggregating not less than a majority of the aggregate Voting Interests
for the purpose of adding any provisions to or changing in any manner or
eliminating any of the provisions of the Trust Agreement or modifying in any
manner the rights of the Holders.
Insolvency Event
"Insolvency Event" means, with respect to any Person, any of the following
events or actions; certain events of insolvency, readjustment of debt,
marshalling of assets and liabilities or similar proceedings with respect to
such Person and certain actions by such Person indicating its insolvency,
reorganization pursuant to bankruptcy proceedings or inability to pay its
obligations. Upon termination of the Trust, the Owner Trustee shall direct the
Indenture Trustee promptly to sell the assets of the Trust (other than the
Collection Account) in a commercially reasonable manner and on commercially
reasonable terms. The proceeds from any such sale, disposition or liquidation
of the Mortgage Loans will be treated as collections on the Mortgage Loans and
deposited in the Collection Account. The Trust Agreement will provide that the
Owner Trustee does not have the power to commence a voluntary proceeding in
bankruptcy with respect to the Trust without the unanimous prior approval of
all Holders (including the Depositor) of the Trust and the delivery to the
Owner Trustee by each Holder (including the Depositor) of a certificate
certifying that the Holder reasonably believes that the Trust is insolvent.
Liability of the Depositor
Under the Trust Agreement, the Depositor will agree to be liable directly
to an injured party for the entire amount of any losses, claims, damages or
liabilities (other than those incurred by a Noteholder or a Holder in the
capacity of an investor with respect to the Trust) arising out of or based on
the arrangement created by the Trust Agreement.
Voting Interests
As of any date, the aggregate principal balance of all Certificates
outstanding will constitute the voting interest of the Issuer (the "Voting
Interests"), except that, for purposes of determining Voting Interests,
Certificates owned by the Issuer or its affiliates (other than the Depositor)
will be disregarded and deemed not to be outstanding, and except that, in
determining whether the Owner Trustee is protected in relying upon any such
request, demand, authorization, direction, notice, consent or waiver, only
Certificates that the Owner Trustee knows to be so owned will be so
disregarded. Certificates so owned that have been pledged in good faith may be
regarded as outstanding if the pledgee establishes to the satisfaction of the
Owner Trustee the pledgor's right so to act with respect to such Certificates
and that the pledgee is not the Issuer or its affiliates.
Certain Matters Regarding the Owner Trustee and the Depositor
Neither the Depositor, the Owner Trustee nor any director, officer or
employee of the Depositor or the Owner Trustee will be under any liability to
the Trust or the related Holders for any action taken or for refraining from
the taking of any action in good faith pursuant to the Trust Agreement or for
errors in judgment; provided, however, that none of the Owner Trustee, the
Depositor and any director, officer or employee thereof will be protected
against any liability which would otherwise be imposed by reason of willful
malfeasance, bad faith or negligence in the performance of duties or by reason
of reckless disregard of obligations and duties under the Trust Agreement.
Subject to certain limitations set forth in the Trust Agreement, the Owner
Trustee and any director, officer, employee or agent of the Owner Trustee shall
be indemnified by the Trust and held harmless against any loss, liability or
expense incurred in connection with investigating, preparing to defend or
defending any legal action, commenced or threatened, relating to the Trust
Agreement other than any loss, liability or expense incurred by reason of
willful malfeasance, bad faith or gross negligence in the performance of its
duties under such Trust Agreement or by reason of reckless disregard of its
obligations and duties under the Trust Agreement. Any such indemnification by
the Trust will reduce the amount distributable to the Holders. All persons
into which the Owner Trustee may be merged or with which it may be consolidated
or any person resulting from such merger or consolidation shall be the
successor of the Owner Trustee under each Trust Agreement.
ADMINISTRATION AGREEMENT
The _________________, in its capacity as Administrator, will enter into
the Administration Agreement with the Trust and the Owner Trustee pursuant to
which the Administrator will agree, to the extent provided in such
Administration Agreement, to provide notices and perform other administrative
obligations required by the Indenture and the Trust Agreement.
THE INDENTURE TRUSTEE
[ ] is the Indenture Trustee under the Indenture. The mailing address
of the Indenture Trustee is [ ], Attention: Corporate Trust Department.
THE OWNER TRUSTEE
[ ] is the Owner Trustee under the Trust Agreement. The mailing address
of the Owner Trustee is [ ], Attention: Corporate Trust Administration.
USE OF PROCEEDS
The net proceeds from the sale of the Securities, which are expected to be
$_________________, will be applied by the Depositor on the Closing Date
towards the purchase price of the Mortgage Loans, the payment of expenses
related to such sale and the purchase of the Mortgage Loans and other corporate
purposes.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
On January 27, 1994, the Internal Revenue Service issued final regulations
("final OID regulations") relating to original issue discount ("OID"). The
discussion under "Certain Federal Income Tax Consequences ___ Taxation of Debt
Securities" in the Prospectus applies with respect to the final OID
regulations.
Prospective purchasers should see "Certain Federal Income Tax
Consequences" in the Prospectus for a discussion of the application of certain
federal income and state tax laws to the Trust Fund and the Securities.
STATE TAX CONSEQUENCES
In addition to the federal income tax consequences described in "Certain
Federal Income Tax Consequences" herein, potential investors should consider
the state income tax consequences of the acquisition, ownership, and
disposition of the Securities offered hereunder. State income tax law may
differ substantially from the corresponding federal tax 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
advisors with respect to the various tax consequences of investments in the
Securities offered hereunder.
ERISA CONSIDERATIONS
General
The Employee Retirement Income Security Act of 1974, as amended ("ERISA")
and Section 4975 of the Code impose certain restrictions on employee benefit
plans subject to ERISA or plans or arrangements subject to Section 4975 of the
Code ("Plans") and on persons who are parties in interest or disqualified
persons ("parties in interest") with respect to such Plans. Certain employee
benefit plans, such as governmental plans and church plans (if no election has
been made under section 410(d) of the Code), are not subject to the
restrictions of ERISA, and assets of such plans may be invested in the
Securities without regard to the ERISA considerations described below, subject
to other applicable federal and state law. However, any such governmental or
church plan which is qualified under section 401(a) of the Code and exempt from
taxation under section 501(a) of the Code is subject to the prohibited
transaction rules set forth in section 503 of the Code. Any Plan fiduciary
which proposes to cause a Plan to acquire any of the Securities 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 Securities. See
"ERISA Considerations" in the Prospectus. Investments by Plans are also
subject to ERISA's general fiduciary requirements, including the requirement of
investment prudence and diversification and the requirement that a Plan's
investments be made in accordance with the documents governing the Plan.
Prohibited Transactions
General
Section 406 of ERISA prohibits parties in interest with respect to a Plan
from engaging in certain transactions (including loans) involving a Plan and
its assets unless a statutory or administrative exemption applies to the
transaction. Section 4975 of the Code imposes certain excise taxes (or, in
some cases, a civil penalty may be assessed pursuant to section 502(i) of
ERISA) on parties in interest which engage in non-exempt prohibited
transactions.
Plan Asset Regulation
The United States Department of Labor ("Labor") has issued final
regulations concerning the definition of what constitutes the assets of a Plan
for purposes of ERISA and the prohibited transaction provisions of the Code
(the "Plan Asset Regulation"). The Plan Asset Regulation describes the
circumstances under which the assets of an entity in which a Plan invests will
be considered to be "plan assets" such that any person who exercises control
over such assets would be subject to ERISA's fiduciary standards. Under the
Plan Asset Regulation, generally when a Plan invests in another entity, the
Plan's assets do not include, solely by reason of such investment, any of the
underlying assets of the entity. However, the Plan Asset Regulation provides
that, if a Plan acquires an "equity interest" in an entity that is neither a
"publicly-offered security" (as defined therein) nor a security issued by an
investment company registered under the Investment Company Act of 1940, the
assets of the entity will be treated as assets of the Plan investor unless
certain exceptions apply. If the [Notes/Certificates] were deemed to be equity
interests and no statutory, regulatory or administrative exemption applies, the
Trust could be considered to hold plan assets by reason of a Plan's investment
in the Notes. Such plan assets would include an undivided interest in any
assets held by the Trust. In such an event, the Trustee and other persons, in
providing services with respect to the Trust's assets, may be parties in
interest with respect to such Plans, subject to the fiduciary responsibility
provisions of Title I of ERISA, including the prohibited transaction provisions
of Section 406 of ERISA, and Section 4975 of the Code with respect to
transactions involving the Trust's assets. [Under the Plan Asset Regulation,
the term "equity interest" is defined as any interest in an entity other than
an instrument that is treated as indebtedness under "applicable local law" and
which has no 'substantial equity features." Although the Plan Assets Regulation
is silent with respect to the question of which law constitutes "applicable
local law" for this purpose, Labor has stated that these determinations should
be made under the state law governing interpretation of the instrument in
question. In the preamble to the Plan Assets Regulation, Labor declined to
provide a precise definition of what features are equity features or the
circumstances under which such features would be considered 'substantial,"
noting that the question of whether a plan's interest has substantial equity
features is an inherently factual one, but that in making a determination it
would be appropriate to take into account whether the equity features are such
that a Plan's investment would be a practical vehicle for the indirect
provision of investment management services. Brown & Wood ("ERISA Counsel")
has rendered its opinion that the Notes will be classified as indebtedness
without substantial equity features for ERISA purposes. ERISA Counsel's
opinion is based upon the terms of the Notes, the opinion of Tax Counsel that
the Notes will be classified as debt instruments for federal income tax
purposes and the ratings which have been assigned to the Notes. However, if
contrary to ERISA Counsel's opinion the Notes are deemed to be equity interests
in the Trust and no statutory, regulatory or administrative exemption applies,
the Trust could be considered to hold plan assets by reason of a Plan's
investment in the Notes.]
The Underwriter's Exemption
Labor has granted to Lehman Brothers Inc. (the "Underwriter") an
administrative exemption (Prohibited Transaction Exemption 91-14 (the
"Exemption")) which exempts from the application of the prohibited transaction
rules of ERISA and the related excise tax provisions of Section 4975 of the
Code transactions relating to: (i) the acquisition, sale and holding by Plans
of certificates representing an undivided interest in certain asset-backed
pass-through trusts with respect to which the Underwriter or any of its
affiliates is the sole underwriter or the manager or co-manager of the
underwriting syndicate; and (ii) the servicing, operation and management of
such asset-backed pass-through trusts, provided that the general conditions and
certain other conditions set forth in the Exemption are satisfied. The
Exemption will apply to the acquisition, holding and resale of the
[Notes/Certificates] by a Plan provided that certain conditions (some of which
are described below) are met.
Among the conditions that must be satisfied for the Exemption to apply are
the following:
(1) the acquisition of the [Notes/Certificates] by a Plan is
on terms (including the price for the [Notes/Certificates]) that are
at least as favorable to the Plan as they would be in an arm's
length transaction with an unrelated party;
(2) the rights and interest evidenced by the
[Notes/Certificates] acquired by the Plan are not subordinated to the
rights and interests evidenced by other [Notes/Certificates] of
the trust;
(3) the [Notes/Certificates] acquired by the Plan have
received a rating at the time of such acquisition that is one of the
three highest generic rating categories from either Standard & Poor's
Corporation, Moody's Investors Service, Inc, Duff & Phelps Inc. or
Fitch Investors Service, Inc.;
(4) the trustee must not be an affiliate of the Underwriter,
the Trustee, any Servicer, any obligor with respect to assets held in
the Trust Fund constituting more than five percent of the aggregate
unamortized principal balance of the assets in the Trust;
(5) the sum of all payments made to and retained by the
Underwriters in connection with the distribution of the
[Notes/Certificates] represents not more than reasonable compensation
for underwriting the [Notes/Certificates]; the sum of all payments made
to and retain by the Issuer pursuant to the assignment of the Mortgage
Loans to the Trust Fund represents not more than the fair market value
of such Mortgage Loans; the sum of all payments made to and retained
by the servicer represents not more than reasonable compensation
for such person's services under a pooling and servicing agreement
and reimbursements of such person's reasonable expenses in connection
therewith; and
(6) the Plan investing in the [Notes/Certificates] is an
"accredited investor" as defined in Rule 501(a)(1) of Regulation D of
the Securities and Exchange Commission under the Securities Act of 1933.
The Underwriter believes that the Exemption will apply to the acquisition
and holding of the [Notes/Certificates] by Plans and that all conditions of the
Exemption other than those within the control of the investors will be met.
Review by Plan Fiduciaries
Any Plan fiduciary considering whether to purchase any
[Notes/Certificates] on behalf of a Plan should consult with its counsel
regarding the applicability of the fiduciary responsibility and prohibited
transaction provisions of ERISA and the Code to such investment. Among other
things, before purchasing any [Notes/Certificates], a fiduciary of a Plan
should make its own determination as to whether the Trust, as obligor on the
[Notes/Certificates], is a party in interest with respect to the Plan, the
availability of the exemptive relief provided in the Plan Asset Regulations and
the availability of any other prohibited transaction exemptions. In
particular, purchasers that are insurance companies should consult with their
counsel with respect to the recent United States Supreme Court case, John
Hancock Mutual Life Insurance Co. v. Harris Bank and Trust (decided December
13, 1993). In John Hancock, the Supreme Court ruled that assets held in an
insurance company's general account may be deemed to be "plan assets" for ERISA
purposes under certain circumstances. Purchasers should analyze whether the
decision may have an impact with respect to purchases of the
[Notes/Certificates].
LEGAL INVESTMENT CONSIDERATIONS
The appropriate characterization of the Securities under various legal
investment restrictions, and thus the ability of investors subject to these
restrictions to purchase Securities, may be subject to significant interpretive
uncertainties. All investors whose investment authority is subject to legal
restrictions should consult their own legal advisors to determine whether, and
to what extent, the Securities will constitute legal investments for them. The
Depositor makes no representation as to the proper characterization of the
Securities for legal investment or financial institution regulatory 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.
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting
Agreement, the Depositor has agreed to sell to Lehman Brothers Inc. (the
"Underwriter"), and the Underwriter has agreed to purchase from the Depositor,
the Securities. The Underwriter is obligated to purchase all the Securities
offered hereby if any are purchased. The Depositor has been advised by the
Underwriter that it presently intends to make a market in the Securities
offered hereby; however, it is not obligated to do so, any market-making may be
discontinued at any time, and there can be no assurance that an active public
market for the Securities will develop. Distribution of the Securities will be
made by the Underwriter from time to time in negotiated transactions or
otherwise at varying prices to be determined at the time of sale. Proceeds to
the Depositor are expected to be $________________ from the sale of the Notes
and $___________ from the sale of the Certificates, before deducting expenses
payable by the Depositor of $_________. In connection with the purchase and
sale of the Securities, the Underwriter may be deemed to have received
compensation from the Depositor in the form of underwriting discounts,
concessions or commissions.
The Underwriting Agreement provides that the Depositor will indemnify the
Underwriter against certain liabilities, including liabilities under the
Securities Act of 1933, or contribute payments the Underwriter may be required
to make in respect thereof. [The Depositor, which is a wholly owned subsidiary
of the Underwriter, will own at least ___% of the outstanding principal amount
of the Notes at all times prior to their payment in full.] The Underwriter is
an affiliate of the Depositor.
LEGAL MATTERS
Certain legal matters with respect to the Securities will be passed upon
for the Depositor by Brown & Wood, New York, New York and for the Underwriter
by Brown & Wood, New York, New York.
RATING
It is a condition to issuance that each Class of the Notes be rated be
rated not lower than _________ by [ ] and _______ by [ ]. It is a
condition to issuance that the Certificates be rated at least "___" by [ ]
and "___" by [ ]. A securities rating addresses the likelihood of the
receipt by Certificateholders and Noteholders of distributions on the Mortgage
Loans. The rating takes into consideration the structural, legal and tax
aspects associated with the Certificates and Notes. The ratings on the
Securities do not, however, constitute statements regarding the possibility
that Certificateholders or Noteholders might realize a lower than anticipated
yield. 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.
================================================================================
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN
AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS
SUPPLEMENT OR THE PROSPECTUS AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
DEPOSITOR OR LEHMAN BROTHERS. THIS PROSPECTUS
SUPPLEMENT AND THE PROSPECTUS DO NOT CONSTITUTE AN
OFFER OF ANY SECURITIES OTHER THAN THOSE TO WHICH
THEY RELATE OR AN OFFER TO SELL, OR A SOLICITATION OF
AN OFFER TO BUY, TO ANY PERSON IN ANY JURISDICTION
WHERE SUCH AN OFFER OR SOLICITATION WOULD BE
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS
SUPPLEMENT AND THE PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THEIR
RESPECTIVE DATES.
------------------
TABLE OF CONTENTS
PAGE
PROSPECTUS SUPPLEMENT
Summary. . . . . . . . . . . . . . . . . . . S-2
Special Considerations . . . . . . . . . . . S-8
The Trust. . . . . . . . . . . . . . . . . . S-8
Description of the Notes . . . . . . . . . . S-9
Description of the Certificates. . . . . . . S-11
Description of the CABS. . . . . . . . . . . S-13
The Depositor. . . . . . . . . . . . . . . . S-18
The Indenture. . . . . . . . . . . . . . . . S-18
The Trust Agreement. . . . . . . . . . . . . S-22
Administration Agreement . . . . . . . . . . S-24
The Indenture Trustee. . . . . . . . . . . . S-24
The Owner Trustee. . . . . . . . . . . . . . S-25
Use of Proceeds. . . . . . . . . . . . . . . S-25
Certain Federal Income Tax Consequences. . . S-25
State Tax Consequences . . . . . . . . . . . S-31
ERISA Considerations . . . . . . . . . . . . S-32
Legal Investment Considerations. . . . . . . S-33
Underwriting . . . . . . . . . . . . . . . . S-33
Legal Matters. . . . . . . . . . . . . . . . S-34
Rating . . . . . . . . . . . . . . . . . . . S-34
Index of Defined Terms . . . . . . . . . . . S-35
PROSPECTUS
Prospectus Supplement. . . . . . . . . . . . 2
Available Information. . . . . . . . . . . . 2
Incorporation of Certain Documents by Reference 2
Reports to Holders . . . . . . . . . . . . . 2
Summary of Terms . . . . . . . . . . . . . . 3
Special Considerations . . . . . . . . . . . 12
Description of the Certificates. . . . . . . 15
Trust Assets . . . . . . . . . . . . . . . . 21
Enhancement. . . . . . . . . . . . . . . . . 25
Servicing of Receivables . . . . . . . . . . 27
The Agreements . . . . . . . . . . . . . . . 29
Certain Legal Aspects of the Receivables . . 35
The Depositor. . . . . . . . . . . . . . . . 38
Use of Proceeds. . . . . . . . . . . . . . . 39
Certain Federal Income Tax Considerations. . 39
State Tax Considerations . . . . . . . . . . 46
ERISA Considerations . . . . . . . . . . . . 46
Plan of Distribution . . . . . . . . . . . . 47
Legal Matters. . . . . . . . . . . . . . . . 47
Experts. . . . . . . . . . . . . . . . . . . 47
Additional Information . . . . . . . . . . . 47
Glossary of Terms. . . . . . . . . . . . . . 48
Annex I. . . . . . . . . . . . . . . . . . . I-1
$__,___,___,___
LEHMAN HOME EQUITY LOAN TRUST
199___
$______ [FIXED] [FLOATING] RATE
ASSET-BACKED NOTES
$______ [FIXED] [FLOATING] RATE
ASSET-BACKED CERTIFICATES,
LEHMAN ABS CORPORATION
(DEPOSITOR)
- ---------------------------
PROSPECTUS SUPPLEMENT
[ , 199 ]
- ---------------------------
LEHMAN BROTHERS
===========================
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT.
A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY
NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME
THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL
NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY
NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH
SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION
OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED JUNE 14, 1996.
PROSPECTUS
LEHMAN ABS CORPORATION
ASSET-BACKED CERTIFICATES
ASSET-BACKED NOTES
(ISSUABLE IN SERIES)
Lehman ABS Corporation (the 'Depositor') may offer from time to time under
this Prospectus and related Prospectus Supplements the Asset-Backed Notes (the
'Notes') and the Asset-Backed Certificates (the 'Certificates' and, together
with the Notes, the 'Securities') which may be sold from time to time in one or
more series (each, a 'Series').
As specified in the related Prospectus Supplement, the Certificates of a
Series will evidence undivided interests in certain assets deposited into a
trust (each, a 'Trust Fund') by the Depositor pursuant to a Pooling and
Servicing Agreement or a Trust Agreement, as described herein. As specified in
the related Prospectus Supplement, the Notes of a Series will be issued and
secured pursuant to an Indenture and will represent indebtedness of the related
Trust Fund. The Trust Fund for a Series of Securities will include assets
purchased from the seller or sellers specified in the related Prospectus
Supplement (the 'Seller') composed of (a) Primary Assets, which may include one
or more pools of (i) closed-end and/or revolving home equity loans or certain
balances thereof (collectively, the 'Mortgage Loans'), secured by mortgages
primarily on one- to four-family residential properties, unless otherwise
specified in the related Prospectus Supplement and (ii) home improvement
installment sales contracts and installment loan agreements (the 'Home
Improvement Contracts') which are either unsecured or secured by mortgages
primarily on one-to-four family residential properties, unless otherwise
specified in the related Prospectus Supplement, or by purchase money security
interests in the home improvements financed thereby (the 'Home Improvements'),
(b) all monies due thereunder net, if and as provided in the related Prospectus
Supplement, of certain amounts payable to the servicer of the Mortgage Loans
and/or Home Improvement Contracts (collectively, the 'Loans'), which servicer
may also be the Seller, specified in the related Prospectus Supplement (the
'Servicer'), and (c) certain funds, Enhancement (as defined herein) and other
assets as described herein and in the related Prospectus Supplement.
Each Series of Securities will be issued in one or more classes (each, a
'Class'). Interest on and principal of the Securities of a Series will be
payable on each Distribution Date specified in the related Prospectus
Supplement, at the times, at the rates, in the amounts and in the order of
priority set forth in the related Prospectus Supplement.
If a Series includes multiple Classes, such Classes may vary with respect to
the amount, percentage and timing of distributions of principal, interest or
both and one or more Classes may be subordinated to other Classes with respect
to distributions of principal, interest or both as described herein and in the
related Prospectus Supplement. If so specified in the related Prospectus
Supplement, the Primary Assets and other assets comprising the Trust Fund may be
divided into one or more Asset Groups and each Class of the related Series will
evidence beneficial ownership of the corresponding Asset Group, as applicable.
The rate of reduction of the aggregate principal balance of each Class of a
Series may depend principally upon the rate of payment (including prepayments)
with respect to the Loans. A rate of prepayment lower or higher than anticipated
will affect the yield on the Securities of a Series in the manner described
herein and in the related Prospectus Supplement. Under certain limited
circumstances described herein and in the related Prospectus Supplement, a
Series of Securities may be subject to termination or redemption under the
circumstances described herein and in the related Prospectus Supplement.
If specified in the related Prospectus Supplement, an election may be made
to treat certain assets comprising the Trust Fund for a Series as a 'real estate
mortgage investment conduit' (a 'REMIC') for federal income tax purposes. See
'CERTAIN FEDERAL INCOME TAX CONSIDERATIONS' herein.
FOR A DISCUSSION OF CERTAIN RISKS ASSOCIATED WITH AN INVESTMENT IN
THE CERTIFICATES, SEE PAGE 11.
NOTES OF A GIVEN SERIES REPRESENT OBLIGATIONS OF, AND CERTIFICATES OF A SERIES
EVIDENCE BENEFICIAL INTERESTS IN THE RELATED TRUST FUND ONLY AND ARE NOT
GUARANTEED BY ANY GOVERNMENTAL AGENCY OR BY THE DEPOSITOR, THE SELLER,
THE TRUSTEE, THE SERVICER OR BY ANY OF THEIR RESPECTIVE AFFILIATES
OR, UNLESS OTHERWISE SPECIFIED IN THE RELATED PROSPECTUS
SUPPLEMENT, BY ANY OTHER PERSON OR ENTITY. THE DEPOSITOR'S
ONLY OBLIGATIONS WITH RESPECT TO ANY SERIES OF SECURITIES
WILL BE PURSUANT TO CERTAIN REPRESENTATIONS AND
WARRANTIES SET FORTH IN THE RELATED AGREEMENT AS
DESCRIBED HEREIN OR IN THE RELATED PROSPECTUS
SUPPLEMENT. SEE 'SPECIAL CONSIDERATIONS'
FOR CERTAIN FACTORS TO BE
CONSIDERED IN PURCHASING THE
SECURITIES.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS OR THE
PROSPECTUS SUPPLEMENT. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------
The Securities offered by this Prospectus and by the related Prospectus
Supplement are offered by Lehman Brothers and the other underwriters set forth
in the related Prospectus Supplement, if any, subject to prior sale, to
withdrawal, cancellation or modification of the offer without notice, to
delivery to and acceptance by Lehman Brothers and the other underwriters, if
any, and certain further conditions. Retain this Prospectus for future
reference. This Prospectus may not be used to consummate sales of the Securities
offered hereby unless accompanied by a Prospectus Supplement.
------------------------
LEHMAN BROTHERS
, 199_
<PAGE>
PROSPECTUS SUPPLEMENT
The Prospectus Supplement relating to a Series of Securities to be offered
hereunder will, among other things, set forth with respect to such Series of
Securities: (i) the aggregate principal amount, interest rate, and authorized
denominations of each Class of such Securities; (ii) certain information
concerning the Primary Assets, the Seller and any Servicer; (iii) the terms of
any Enhancement with respect to such Series; (iv) the terms of any insurance
related to the Primary Assets; (v) information concerning any other assets in
the related Trust Fund, including any Reserve Fund; (vi) the Final Scheduled
Distribution Date of each Class of such Securities; (vii) the method to be used
to calculate the amount of principal required to be applied to the Securities of
each Class of such Series on each Distribution Date, the timing of the
application of principal and the order of priority of the application of such
principal to the respective Classes and the allocation of principal to be so
applied; (viii) the Distribution Dates and any Assumed Reinvestment Rate (as
defined herein); (ix) additional information with respect to the plan of
distribution of such Securities; and (x) whether a REMIC election will be made
with respect to some or all of the Trust Fund for such Series. To the extent
that the terms of this Prospectus conflict or are otherwise inconsistent with
the terms of any Prospectus Supplement, the terms of such Prospectus Supplement
shall govern.
AVAILABLE INFORMATION
The Depositor is subject to the informational requirements of the
Securities Exchange Act of 1934 and in accordance therewith files reports and
other information with the Securities and Exchange Commission (the
'Commission'). Such reports and other information 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 its Regional Offices located as
follows: Chicago Regional Office, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661; and New York Regional Office, 75 Park Place, Room 1102, New
York, New York 10007. Copies of such material can also be obtained from the
Public Reference Section of the Commission, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549, at prescribed rates.
REPORTS TO HOLDERS
Periodic and annual reports concerning the related Trust Fund for a Series
of Securities are required under the related Agreement to be forwarded to
Holders. Unless otherwise specified in the related Prospectus Supplement, such
reports will not be examined and reported on by an independent public
accountant. See 'THE AGREEMENTS--Reports to Holders' herein.
2
<PAGE>
SUMMARY OF TERMS
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus and by reference to
the information with respect to each Series of Securities contained in the
Prospectus Supplement to be prepared and delivered in connection with the
offering of Securities of such Series. Capitalized terms used and not otherwise
defined herein or in the related Prospectus Supplement shall have the meanings
set forth in the 'GLOSSARY OF TERMS' herein.
<TABLE>
<S> <C>
SECURITIES OFFERED......... Asset-Backed Certificates (the 'Certificates') and
Asset-Backed Notes (the 'Notes'). Certificates
are issuable from time to time in Series
pursuant to a Pooling and Servicing Agreement or
Trust Agreement. Each Certificate of a Series
will evidence an interest in the Trust Fund for
such Series, or in an Asset Group specified in
the related Prospectus Supplement. Notes are
issuable from time to time in Series pursuant to
an Indenture. Each Series of Securities will
consist of one or more Classes, one or more of
which may be Classes of Compound Interest
Securities, Planned Amortization Class ('PAC')
Securities, Variable Interest Securities, Zero
Coupon Securities, Principal Only Securities,
Interest Only Securities, Participating
Securities, Senior Securities or Subordinate
Securities. Each Class may differ in, among
other things, the amounts allocated to and the
priority of principal and interest payments,
Final Scheduled Distribution Dates, Distribution
Dates and interest rates. The Securities of each
Class will be issued in fully registered form in
the denominations specified in the related
Prospectus Supplement. If so specified in the
related Prospectus Supplement, the Securities or
certain Classes of such Securities offered
thereby may be available in book-entry form
only.
DEPOSITOR.................. Lehman ABS Corporation (the 'Depositor') was
incorporated in the State of Delaware on January
29, 1988, and is a wholly-owned, special purpose
subsidiary of Lehman Commercial Paper Inc.
('LCPI'), which itself is a wholly-owned
subsidiary of Lehman Brothers Inc. ('Lehman
Brothers'), which is a wholly-owned subsidiary
of Lehman Brothers Holdings Inc. ('Holdings').
None of Lehman Brothers, LCPI, Holdings nor any
other affiliate of the Depositor, the Servicer,
the Trustee or the Seller has guaranteed or is
otherwise obligated with respect to the
Securities of any Series. See 'THE DEPOSITOR.'
INTEREST PAYMENTS.......... Interest payments on the Securities of a Series
entitled by their terms to receive interest will
be made on each Distribution Date, to the extent
set forth in, and at the applicable rate
specified in (or determined in the manner set
forth in), the related Prospectus Supplement.
The interest rate on Securities of a Series may
be variable or change with changes in the rates
of interest on the related Loans and/or as
prepayments occur with respect to such Loans.
Interest Only Securities may be assigned a
'Notional Amount' set forth in the related
Prospectus Supplement which is used solely for
convenience in expressing the calculation of
interest and for certain other purposes and does
not represent the right to receive any
distributions allocable to principal. Principal
Only Securities may not be entitled to receive
any interest payments or may be entitled to
receive only nominal interest payments. 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
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Supplement. See 'DESCRIPTION OF THE SECURITIES--
Payments of Interest.'
PRINCIPAL PAYMENTS......... All payments of principal of a Series of
Securities will be made in an aggregate amount
determined as set forth in the related
Prospectus Supplement and will be paid at the
times and will be allocated among the Classes of
such Series in the order and amounts, and will
be applied either on a pro rata or a random lot
basis among all Securities of any such Class,
all as specified in the related Prospectus
Supplement.
FINAL SCHEDULED
DISTRIBUTION DATE
OF THE SECURITIES........ The Final Scheduled Distribution Date with respect
to each Class of Notes is the date no later than
which principal thereof will be fully paid and
with respect to each Class of Certificates is
the date after which no Certificates of such
Class are expected to remain outstanding, in
each case calculated on the basis of the
assumptions applicable to such Series described
in the related Prospectus Supplement. The Final
Scheduled Distribution Date of a Class may equal
the maturity date of the Primary Asset in the
related Trust Fund which has the latest stated
maturity or will be determined as described
herein and in the related Prospectus Supplement.
The actual final Distribution Date of the
Securities of a Series will depend primarily
upon the rate of payment (including prepayments,
liquidations due to default, the receipt of
proceeds from casualty insurance policies and
repurchases) of the Loans in the related Trust
Fund. Unless otherwise specified in the related
Prospectus Supplement, the actual final
Distribution Date of any Security is likely to
occur earlier and may occur substantially
earlier or may occur later than its Final
Scheduled Distribution Date as a result of the
application of prepayments to the reduction of
the principal balances of the Securities and as
a result of defaults on the Primary Assets. The
rate of payments on the Loans in the Trust Fund
for a Series will depend on a variety of
factors, including certain characteristics of
such Loans and the prevailing level of interest
rates from time to time, as well as on a variety
of economic, demographic, tax, legal, social and
other factors. No assurance can be given as to
the actual prepayment experience with respect to
a Series. See 'RISK FACTORS--Prepayment and
Yield Considerations' and 'DESCRIPTION OF THE
SECURITIES--Weighted Average Life of the
Securities' herein.
OPTIONAL TERMINATION....... One or more Classes of Securities of any Series
may be redeemed or repurchased in whole or in
part, at the Depositor's or the Servicer's
option, at such time and under the circumstances
specified in the related Prospectus Supplement,
at the price set forth therein. If so specified
in the related Prospectus Supplement for a
Series of Securities, the Depositor, the
Servicer, or such other entity that is specified
in the related Prospectus Supplement, may, at
its option, cause an early termination of the
related Trust Fund by repurchasing all of the
Primary Assets remaining in the Trust Fund on or
after a specified date, or on or after such time
as the aggregate principal balance of the
Securities of the Series or the Primary Assets
relating to such Series, as specified in the
related Prospectus Supplement, is less
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than the amount or percentage specified in the
related Prospectus Supplement. See 'DESCRIPTION
OF THE SECURITIES--Optional Purchase or
Termination.'
In addition, the Prospectus Supplement may provide
other circumstances under which Holders of
Securities of a Series could be fully paid
significantly earlier than would otherwise be
the case if payments or distributions were
solely based on the activity of the related
Primary Assets.
THE TRUST FUND............. The Trust Fund for a Series of Securities will
consist of one or more of the assets described
below, as described in the related Prospectus
Supplement.
A. PRIMARY ASSETS..... The Primary Assets for a Series may consist of any
combination of the following assets, to the
extent and as specified in the related
Prospectus Supplement. The Primary Assets will
be purchased from the Seller or may be purchased
by the Depositor in the open market or in
privately negotiated transactions, including
transactions with entities affiliated with the
Depositor.
Primary Assets for a Series will consist, in whole
or in part, of Loans. Some Loans may be
delinquent or non-performing as specified in the
related Prospectus Supplement. Loans may be
originated by or acquired from an affiliate of
the Depositor and an affiliate of the Depositor
may be an obligor with respect to any such Loan.
To the extent provided in the related Prospectus
Supplement, additional Loans may be periodically
added to the Trust Fund, or may be removed from
time to time if certain asset value tests are
met, as described in the related Prospectus
Supplement.
The 'Loans' for a Series will consist of (i)
closed-end and/or revolving home equity loans or
certain balances thereof (collectively,
'Mortgage Loans') and (ii) home improvement
installment sales contracts and installment loan
agreements (the 'Home Improvement Contracts').
The Mortgage Loans and the Home Improvement
Contracts are collectively referred to herein as
the 'Loans.' Loans may, as specified in the
related Prospectus Supplement, have various
payment characteristics, including balloon or
other irregular payment features, and may accrue
interest at a fixed rate or an adjustable rate.
As specified in the related Prospectus Supplement,
the Loans will and the Home Improvement
Contracts may be secured by mortgages or deeds
of trust or other similar security instruments
creating a lien on a Mortgaged Property, which
may be subordinated to one or more senior liens
on the Mortgaged Property, as described in the
related Prospectus Supplement. As specified in
the related Prospectus Supplement, Home
Improvement Contracts may be unsecured or
secured by purchase money security interests in
the Home Improvements financed thereby. The
Mortgaged Properties and the Home Improvements
are collectively referred to herein as the
'Properties.'
The related Prospectus Supplement will describe
certain characteristics of the Loans for a
Series, including, without limitation, and to
the extent relevant: (a) the aggregate unpaid
principal balance of the Loans (or the aggregate
unpaid principal balance included in the Trust
Fund for the related Series) and the average
outstanding principal balance of the Loans; (b)
the weighted average Loan Rate on the Loans as
of the Cut-off Date; (c) the Combined
Loan-to-Value Ratios or Loan-to-Value Ratios, as
applicable, of the Loans, computed in the manner
described
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in the related Prospectus Supplement; (d) the
percentage (by principal balance as of the
Cut-off Date) of Loans that accrue interest at
adjustable or fixed interest rates; (e) any
enhancement relating to the Loans; (f) the
percentage (by principal balance as of the
Cut-off Date) of Loans that are secured by
Mortgaged Properties, Home Improvement Loans or
are unsecured; (g) the geographic distribution
of any Mortgaged Properties securing the Loans;
(h) the use and type of each Mortgaged Property
securing a Loan; (i) the lien priority of the
Loans; (j) the credit limit utilization rates of
any Revolving Credit Line Loans; and (k) the
delinquency status and year of origination of
the Loans.
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B. COLLECTION AND
DISTRIBUTION
ACCOUNTS......... Unless otherwise provided in the related
Prospectus Supplement, all payments on or with
respect to the Primary Assets for a Series will
be remitted directly to an account (the
'Collection Account') to be established for such
Series with the Trustee or the Servicer, in the
name of the Trustee. Unless otherwise provided
in the related Prospectus Supplement, the
Trustee shall be required to apply a portion of
the amount in the Collection Account, together
with reinvestment earnings from eligible
investments specified in the related Prospectus
Supplement, to the payment of certain amounts
payable to the Servicer under the related
Agreement and any other person specified in the
Prospectus Supplement, and to deposit a portion
of the amount in the Collection Account into a
separate account (the 'Distribution Account') to
be established for such Series, each in the
manner and at the times established in the
related Prospectus Supplement. All amounts
deposited in such Distribution Account will be
available, unless otherwise specified in the
related Prospectus Supplement, for (i)
application to the payment of principal of and
interest on such Series of Securities on the
next Distribution Date, (ii) the making of
adequate provision for future payments on
certain Classes of Securities and (iii) any
other purpose specified in the related
Prospectus Supplement. After applying the funds
in the Collection Account as described above,
any funds remaining in the Collection Account
may be paid over to the Servicer, the Depositor,
any provider of Enhancement with respect to such
Series (an 'Enhancer') or any other person
entitled thereto in the manner and at the times
established in the related Prospectus
Supplement.
ENHANCEMENT................ If stated in the Prospectus Supplement relating to
a Series, the Depositor will obtain an
irrevocable letter of credit, surety bond,
certificate insurance policy, insurance policy
or other form of credit support (collectively,
'Enhancement') in favor of the Trustee on behalf
of the Holders of such Series and any other
person specified in such Prospectus Supplement
from an institution acceptable to the rating
agency or agencies identified in the related
Prospectus Supplement as rating such Series of
Securities (collectively, the 'Rating Agency')
for the purposes specified in such Prospectus
Supplement. The Enhancement will support the
payments on the Securities and may be used for
other purposes, to the extent and under the
conditions specified in such Prospectus
Supplement. See 'ENHANCEMENT.'
Enhancement for a Series may include one or more
of the following types of Enhancement, or such
other type of Enhancement specified in the
related Prospectus Supplement.
A. SUBORDINATE
SECURITIES....... If stated in the related Prospectus Supplement,
Enhancement for a Series may consist of one or
more Classes of Subordinate Securities. The
rights of Holders of such Subordinate Securities
to receive distributions on any Distribution
Date will be subordinate in right and priority
to the rights of holders of Senior Securities of
the Series, but only to the extent described in
the related Prospectus Supplement.
B. INSURANCE.......... If stated in the related Prospectus Supplement,
Enhancement for a Series may consist of special
hazard insurance policies, bankruptcy bonds and
other types of insurance supporting payments on
the Securities.
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C. RESERVE FUNDS...... If stated in the Prospectus Supplement, the
Depositor may deposit cash, a letter or letters
of credit, short-term investments, or other
instruments acceptable to the Rating Agency in
one or more reserve funds to be established in
the name of the Trustee (each, a 'Reserve
Fund'), which will be used, as specified in such
Prospectus Supplement, by the Trustee to make
required payments of principal of or interest on
the Securities of such Series, to make adequate
provision for future payments on such Securities
or for any other purpose specified in the
Agreement, with respect to such Series, to the
extent that funds are not otherwise available.
In the alternative or in addition to such
deposit, a Reserve Fund for a Series may be
funded through application of all or a portion
of the excess cash flow from the Primary Assets
for such Series, to the extent described in the
related Prospectus Supplement.
D. MINIMUM PRINCIPAL
PAYMENT
AGREEMENT........ If stated in the Prospectus Supplement relating to
a Series of Securities, the Depositor will enter
into a minimum principal payment agreement (the
'Minimum Principal Payment Agreement') with an
entity meeting the criteria of the Rating
Agency, pursuant to which such entity will
provide funds in the event that aggregate
principal payments on the Primary Assets for
such Series are not sufficient to make certain
payments, as provided in the related Prospectus
Supplement. See 'ENHANCEMENT--Minimum Principal
Payment Agreement.'
E. DEPOSIT
AGREEMENT........ If stated in the Prospectus Supplement, the
Depositor and the Trustee will enter into a
guaranteed investment contract or an investment
agreement (the 'Deposit Agreement') pursuant to
which all or a portion of amounts held in the
Collection Account, the Distribution Account or
in any Reserve Fund will be invested with the
entity specified in such Prospectus Supplement.
The Trustee will be entitled to withdraw amounts
so invested, plus interest at a rate equal to
the Assumed Reinvestment Rate, in the manner
specified in the Prospectus Supplement. See
'ENHANCEMENT--Deposit Agreement.'
SERVICING.................. The Servicer will be responsible for servicing,
managing and making collections on the Loans for
a Series. In addition, the Servicer, if so
specified in the related Prospectus Supplement,
will act as custodian and will be responsible
for maintaining custody of the Loans and related
documentation on behalf of the Trustee. Advances
with respect to delinquent payments of principal
or interest on a Loan will be made by the
Servicer only to the extent described in the
related Prospectus Supplement. Such advances
will be intended to provide liquidity only and,
unless otherwise specified in the related
Prospectus Supplement, reimbursable to the
Servicer from scheduled payments of principal
and interest, late collections, or from the
proceeds of liquidation of the related Loans or
from other recoveries relating to such Loans
(including any insurance proceeds or payments
from other credit support). In performing these
functions, the Servicer will exercise the same
degree of skill and care that it customarily
exercises with respect to similar receivables or
Loans owned or serviced by it. Under certain
limited circumstances, the Servicer may resign
or be removed, in which event either the Trustee
or a third-party servicer will be appointed as
successor servicer. The Servicer will receive a
periodic fee as servicing compensation (the
'Servicing Fee') and may, as specified herein
and in the related Prospectus Supplement,
receive certain additional compensation. See
'SERVICING OF LOANS--Servicing Compensation and
Payment of Expenses' herein.
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FEDERAL INCOME
TAX CONSIDERATIONS
A. DEBT SECURITIES AND
REMIC RESIDUAL
SECURITIES....... If (i) an election is made to treat all or a
portion of a Trust Fund for a Series as a 'real
estate mortgage investment conduit' (a 'REMIC')
or (ii) so provided in the related Prospectus
Supplement, a Series of Securities will include
one or more Classes of taxable debt obligations
under the Internal Revenue Code of 1986, as
amended (the 'Code'). Stated interest with
respect to such Classes of Securities will be
reported by a Holder in accordance with the
Holder's method of accounting except that, in
the case of Securities constituting 'regular
interests' in a REMIC ('Regular Interests'),
such interest will be required to be reported on
the accrual method regardless of a Holder's
usual method of accounting. Securities that are
Compound Interest Securities, Zero Coupon
Securities or Interest Only Securities will, and
certain other Classes of Securities may, be
issued with original issue discount that is not
de minimis. In such cases, the Holder will be
required to include original issue discount in
gross income as it accrues, which may be prior
to the receipt of cash attributable to such
income. If a Security is issued at a premium,
the holder may be entitled to make an election
to amortize such premium on a constant yield
method.
In the case of a REMIC election, a Class of
Securities may be treated as REMIC 'residual
interests' ('Residual Interests'). A holder of a
Residual Interest will be required to include in
its income its pro rata share of the taxable
income of the REMIC. In certain circumstances,
the holder of a Residual Interest may have REMIC
taxable income or tax liability attributable to
REMIC taxable income for a particular period in
excess of cash distributions for such period or
have an after-tax return that is less than the
after-tax return on comparable debt instruments.
In addition, a portion (or, in some cases, all)
of the income from a Residual Interest (i)
except in certain circumstances with respect to
a Holder classified as a thrift institution
under the Code, may not be subject to offset by
losses from other activities, (ii) for a Holder
that is subject to tax under the Code on
unrelated business taxable income, may be
treated as unrelated business taxable income and
(iii) for a foreign holder, may not qualify for
exemption from or reduction of withholding. In
addition, (i) Residual Interests are subject to
transfer restrictions and (ii) certain transfers
of Residual Interests will not be recognized for
federal income tax purposes. Further, individual
holders are subject to limitations on the
deductibility of expenses of the REMIC. See
'CERTAIN FEDERAL INCOME TAX CONSIDERATIONS.'
B. NON-REMIC
PASS-THROUGH
SECURITIES....... If so specified in the related Prospectus
Supplement, the Trust Fund for a Series will be
treated as a grantor trust and will not be
classified as an association taxable as a
corporation for federal income tax purposes and
Holders of Securities of such Series
('Pass-Through Securities') will be treated as
owning directly rights to receive certain
payments of interest or principal, or both, on
the Primary Assets held in the Trust Fund for
such Series. All income with respect to a
Stripped Security (as defined herein) will be
accounted for as original issue discount and,
unless otherwise specified in the related
Prospectus Supplement, will
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be reported by the Trustee on an accrual basis,
which may be prior to the receipt of cash
associated with such income.
The holder of a Pass-Through Security must include
in income its share of all income of the Trust
Fund to the extent such income is allocable to
it and may, subject to certain limitations for
individual Holders, deduct its share of all
expenses of the Trust Fund. See 'CERTAIN FEDERAL
INCOME TAX CONSIDERATIONS.'
C. OWNER TRUST
SECURITIES....... If so specified in the Prospectus Supplement, the
Trust Fund will be treated as a partnership for
purposes of federal and state income tax. Each
Noteholder, by the acceptance of a Note of a
given series, will agree to treat such Note as
indebtedness, and each Certificateholder, by the
acceptance of a Certificate of a given series,
will agree to treat the related Trust as a
partnership in which such Certificateholder is a
partner for federal income and state tax
purposes. Alternative characterizations of such
Trust and such Certificates are possible, but
would not result in materially adverse tax
consequences to Certificateholders. See 'CERTAIN
FEDERAL INCOME TAX CONSIDERATIONS.'
ERISA CONSIDERATIONS....... A fiduciary of any employee benefit plan subject
to the Employee Retirement Income Security Act
of 1974, as amended ('ERISA'), or the Code
should carefully review with its own legal
advisors whether the purchase or holding of
Securities could give rise to a transaction
prohibited or otherwise impermissible under
ERISA or the Code. See 'ERISA CONSIDERATIONS.'
LEGAL INVESTMENT........... Unless otherwise specified in the related
Prospectus Supplement, Securities of each Series
offered by this Prospectus and the related
Prospectus Supplement will not constitute
'mortgage related securities' under the
Secondary Mortgage Market Enhancement Act of
1984 ('SMMEA'). Investors whose investment
authority is subject to legal restrictions
should consult their own legal advisors to
determine whether and to what extent the
Securities constitute legal investments for
them. See 'LEGAL INVESTMENT.'
USE OF PROCEEDS............ The Depositor will use the net proceeds from the
sale of each Series for one or more of the
following purposes: (i) to purchase the related
Primary Assets, (ii) to repay indebtedness which
has been incurred to obtain funds to acquire
such Primary Assets, (iii) to establish any
Reserve Funds described in the related
Prospectus Supplement and (iv) to pay costs of
structuring and issuing such Securities,
including the costs of obtaining Enhancement, if
any. If so specified in the related Prospectus
Supplement, the purchase of the Primary Assets
for a Series may be effected by an exchange of
Securities with the Seller of such Primary
Assets. See 'USE OF PROCEEDS.'
RATINGS.................... It will be a requirement for issuance of any
Series that the Securities offered by this
Prospectus and the related Prospectus Supplement
be rated by at least one Rating Agency in one of
its four highest applicable rating categories.
The rating or ratings applicable to Securities
of each Series offered hereby and by the related
Prospectus Supplement will be as set forth in
the related Prospectus Supplement. A securities
rating should be evaluated independently of
similar ratings on different types of
securities. A securities rating does not address
the effect that the rate of prepayments on Loans
for a Series may have on the yield to investors
in the Securities of such Series. See 'RISK
FACTORS--Rating of Securities.'
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RISK FACTORS
Investors should consider, among other things, the following factors in
connection with the purchase of the Securities.
Limited Liquidity. There will be no market for the Securities of any
Series prior to the issuance thereof, and there can be no assurance that a
secondary market will develop or, if it does develop, that it will provide
Holders with liquidity of investment or will continue for the life of the
Securities of such Series. Lehman Brothers, through one or more of its
affiliates, and the other underwriters, if any, specified in the related
Prospectus Supplement, presently expect to make a secondary market in the
Securities, but have no obligation to do so.
Limited Assets. 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 such Securities. 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. Further, unless otherwise stated in
the related Prospectus Supplement, at the times set forth in the related
Prospectus Supplement, certain Primary Assets and/or any balance remaining in
the Collection Account or Distribution Account immediately after making all
payments due on the Securities of such Series and other payments specified in
the related Prospectus Supplement, may be promptly released or remitted to the
Depositor, the Servicer, the Enhancer or any other person entitled thereto and
will no longer be available for making payments to Holders. Consequently,
holders of Securities of each Series must rely solely upon payments with respect
to the Primary Assets and the other assets constituting the Trust Fund for a
Series of Securities, including, if applicable, any amounts available pursuant
to any Enhancement for such Series, for the payment of principal of and interest
on the Securities of such Series.
Holders of Notes will be required under the Indenture to proceed only
against the Primary Assets and other assets constituting the related Trust Fund
in the case of a default with respect to such Notes and may not proceed against
any assets of the Depositor. If payments with respect to the Primary Assets and
such other assets securing a Series of Notes, including any Enhancement, were to
become insufficient to make payments on such Notes, no other assets would be
available for payment of the deficiency.
The only obligations, if any, of the Depositor with respect to the
Securities of any Series will be pursuant to certain representations and
warranties. See 'THE AGREEMENTS--Assignment of Primary Assets' herein. 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 Primary
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 Primary
Asset, its only sources of funds to make such repurchase would be from funds
obtained from the enforcement of a corresponding obligation, if any, on the part
of the originator of the Primary Assets, the Servicer or the Seller, as the case
may be, or from a Reserve Fund established to provide funds for such
repurchases.
Enhancement. Although such Enhancement is intended to reduce the risk of
delinquent payments or losses to holders of Securities entitled to the benefit
thereof, the amount of such Enhancement will be limited, as set forth in the
related Prospectus Supplement, and will decline and could be depleted under
certain circumstances prior to the payment in full of the related Series of
Securities, and as a result Holders may suffer losses. See 'ENHANCEMENT.'
Prepayment and Yield Considerations. The yield to maturity experienced by
a holder of Securities may be affected by the rate of payment of principal of
the Loans. The timing of principal payments of the Securities of a Series will
be affected by a number of factors, including the following: (i) the extent of
prepayments of the Loans, which prepayments may be influenced by a variety of
factors, (ii) the manner of allocating principal payments among the Classes of
Securities of a Series as specified in the related Prospectus Supplement and
(iii) the exercise by the party entitled thereto of any right of optional
termination. See 'DESCRIPTION OF THE SECURITIES--Weighted Average Life of
Securities.' Prepayments may also result from repurchases of Loans due to
material breaches of the Seller's or the Depositor's warranties.
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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. See 'DESCRIPTION OF THE SECURITIES--Payments of
Interest.'
Nature of Mortgages; Properties. Since the Mortgages are primarily junior
liens subordinate to the rights of the mortgagee under the related senior
mortgage or mortgages, the proceeds from any liquidation, insurance or
condemnation proceedings will be available to satisfy the outstanding balance of
such junior mortgage only to the extent that the claims of such senior
mortgagees have been satisfied in full, including any related foreclosure costs.
In addition, a junior mortgagee may not foreclose on the Property securing a
junior mortgage unless it forecloses subject to the senior mortgages, in which
case it must either pay the entire amount due on the senior mortgages to the
senior mortgagees at or prior to the foreclosure sale or undertake the
obligation to make payments on the senior mortgages in the event the mortgagor
is in default thereunder. The Trust Fund will not have any source of funds to
satisfy the senior mortgages or make payments due to the senior mortgagees.
There are several factors that could adversely affect the value of
Properties such that the outstanding balance of the related Loan, together with
any senior financing on the Properties, would equal or exceed the value of the
Properties. Among the factors that could adversely affect the value of the
Properties are an overall decline in the residential real estate market in the
areas in which the Properties are located or a decline in the general condition
of the Properties as a result of failure of borrowers to maintain adequately the
Properties or of natural disasters that are not necessarily covered by
insurance, such as earthquakes and floods. Any such decline could extinguish the
value of a junior interest in Property before having any effect on the related
senior interest therein. If such a decline occurs, the actual rates of
delinquencies, foreclosure and losses on the junior Loans could be higher than
those currently experienced in the mortgage lending industry in general.
Environmental Risks. Real property pledged as security to a lender may be
subject to certain environmental risks. Under the laws of certain states,
contamination of a property may give rise to a lien on the property to assure
the costs of clean-up. In several states, such a lien has priority over the lien
of an existing mortgage or owner's interest against such property. In addition,
under the laws of some states and under the federal Comprehensive Environmental
Response, Compensation, and Liability Act of 1980 ('CERCLA'), a lender may be
liable, as an 'owner' or 'operator,' for costs of addressing releases or
threatened releases of hazardous substances that require remedy at a property,
if agents or employees of the lender have become sufficiently involved in the
operations of the borrower, regardless of whether or not the environmental
damage or threat was caused by a prior owner. A lender also risks such liability
on foreclosure of the Mortgaged Property.
Certain Other Legal Considerations Regarding the Loans. Applicable state
laws generally regulate interest rates and other charges and require certain
disclosures. In addition, other state laws, public policy and general principles
of equity relating to the protection of consumers, unfair and deceptive
practices and debt collection practices may apply to the origination, servicing
and collection of the Loans. Depending on the provisions of the applicable law
and the specific facts and circumstances involved, violations of these laws,
policies and principles may limit the ability of the Servicer to collect all or
part of the principal of or interest on the Loans, may entitle the borrower to a
refund of amounts previously paid and, in addition, could subject the owner of
the Loan to damages and administrative enforcement.
The Loans are also subject to Federal laws, including:
(i) the Federal Truth in Lending Act and Regulation Z promulgated
thereunder, which require certain disclosures to the borrowers regarding
the terms of the Loans;
(ii) the Equal Credit Opportunity Act and Regulation B promulgated
thereunder, which prohibit discrimination on the basis of age, race, color,
sex, religion, marital status, national origin, receipt of public
assistance or the exercise of any right under the Consumer Credit
Protection Act, in the extension of credit; and
(iii) the Fair Credit Reporting Act, which regulates the use and
reporting of information related to the borrower's credit experience.
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Violations of certain provisions of these Federal laws may limit the
ability of the Servicer to collect all or part of the principal of or interest
on the Loans and in addition could subject the Trust Fund to damages and
administrative enforcement. The Loans may be subject to the Home Ownership and
Equity Protection Act of 1994 (the 'Act') which amended the Truth in Lending Act
as it applies to mortgages subject to the Act. The Act requires certain
additional disclosures, specifies the timing of such disclosures and limits or
prohibits inclusion of certain provisions in mortgages subject to the Act. The
Act also provides that any purchaser or assignee of a mortgage covered by the
Act is subject to all of the claims and defenses which the borrower could assert
against the original lender. The maximum damages that may be recovered under the
Act from an assignee is the remaining amount of indebtedness plus the total
amount paid by the borrower in connection with the Loan. If the Trust Fund
includes Loans subject to the Act, it will be subject to all of the claims and
defenses which the borrower could assert against the Seller. Any violation of
the Act which would result in such liability would be a breach of the Seller's
representations and warranties, and the Seller would be obligated to cure,
repurchase or, if permitted by the Agreement, substitute for the Loan in
question. See 'CERTAIN LEGAL ASPECTS OF THE MORTGAGE LOANS' herein.
The Home Improvement Contracts are also subject to the Preservation of
Consumers' Claims and Defenses regulations of the Federal Trade Commission and
other similar federal and state statutes and regulations (collectively, the
'Holder in Due Course Rules'), which protect the homeowner from defective
craftsmanship or incomplete work by a contractor. These laws permit the obligor
to withhold payment if the work does not meet the quality and durability
standards agreed to by the homeowner and the contractor. The Holder in Due
Course Rules have the effect of subjecting any assignee of the seller in a
consumer credit transaction to all claims and defenses which the obligor in the
credit sale transaction could assert against the seller of the goods.
Rating of the Securities. It will be a condition to the issuance of a
Series of Securities that they be rated in one of the four highest rating
categories by the Rating Agency identified in the related Prospectus Supplement.
Any such rating would be based on, among other things, the adequacy of the value
of the Primary Assets and any Enhancement with respect to such Series. Such
rating should not be deemed a recommendation to purchase, hold or sell
Securities, inasmuch as it does not address market price or suitability for a
particular investor. There is also no assurance that any such rating will remain
in effect for any given period of time or may not be lowered or withdrawn
entirely by the Rating Agency if in its judgment circumstances in the future so
warrant. In addition to being lowered or withdrawn due to any erosion in the
adequacy of the value of the Primary Assets, such rating might also be lowered
or withdrawn, among other reasons, because of an adverse change in the financial
or other condition of an Enhancer or a change in the rating of such Enhancer's
long term debt.
Other Considerations. There is no assurance that the market value of the
Primary Assets or any other assets for a Series will at any time be equal to or
greater than the aggregate principal amount of the Securities of such Series
then outstanding, plus accrued interest thereon. Moreover, upon an event of
default under the Indenture for a Series of Notes and a sale of the assets in
the Trust Fund or upon a sale of the assets of a Trust Fund for a Series of
Certificates, the Trustee, the Servicer, if any, the Enhancer and any other
service provider specified in the related Prospectus Supplement generally will
be entitled to receive the proceeds of any such sale to the extent of unpaid
fees and other amounts owing to such persons under the related Agreement prior
to distributions to holders of Securities. Upon any such sale, the proceeds
thereof may be insufficient to pay in full the principal of and interest on the
Securities of such Series.
Liquidation expenses with respect to defaulted loans do not vary directly
with the outstanding principal balance of the loan at the time of default.
Therefore, assuming that a servicer took the same steps in realizing upon a
defaulted loan having a small remaining principal balance as it would in the
case of a defaulted loan having a larger principal balance, the amount realized
after expenses of liquidation would be smaller as a percentage of the
outstanding principal balance of the smaller loan than would be the case with a
larger loan. Because the average outstanding principal balances of the Loans are
small relative to the size of the loans in a typical pool of first mortgages,
realizations net of liquidation expenses on defaulted Loans may also be smaller
as a percentage of the principal amount of the Loans than would such net
realizations in the case of a typical pool of first mortgage loans.
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DESCRIPTION OF THE SECURITIES
GENERAL
Each Series of Notes will be issued pursuant to an indenture (the
'Indenture') between the related Trust Fund and the entity named in the related
Prospectus Supplement as trustee (the 'Trustee') with respect to such Series. A
form of Indenture has been filed as an exhibit to the Registration Statement of
which this Prospectus forms a part. The Certificates will also be issued in
Series pursuant to separate agreements (each, a 'Pooling and Servicing
Agreement' or a 'Trust Agreement') among the Depositor, the Servicer and the
Trustee. A form of Pooling and Servicing Agreement has been filed as an exhibit
to the Registration Statement of which this Prospectus forms a part. A Series
may consist of both Notes and Certificates.
The Seller may agree to reimburse the Depositor for certain fees and
expenses of the Depositor incurred in connection with the offering of the
Securities.
The following summaries describe certain provisions in the Agreements
common to each Series of Securities. The summaries do not purport to be complete
and are subject to, and are qualified in their entirety by reference to, the
provisions of the Agreements and the Prospectus Supplement relating to each
Series of Securities. Where particular provisions or terms used in the
Agreements are referred to, the actual provisions (including definitions of
terms) are incorporated herein by reference as part of such summaries.
Each Series of Securities will consist of one or more Classes of
Securities, one or more of which may be Compound Interest Securities, Variable
Interest Securities, PAC Securities, Zero Coupon Securities, Principal Only
Securities, Interest Only Securities or Participating Securities. A Series may
also include one or more Classes of Subordinate Securities. The Securities of
each Series will be issued only in fully registered form, without coupons, in
the authorized denominations for each Class specified in the related Prospectus
Supplement. Upon satisfaction of the conditions, if any, applicable to a Class
of a Series, as described in the related Prospectus Supplement, the transfer of
the Securities may be registered and the Securities may be exchanged at the
office of the Trustee specified in the Prospectus Supplement without the payment
of any service charge other than any tax or governmental charge payable in
connection with such registration of transfer or exchange. If specified in the
related Prospectus Supplement, one or more Classes of a Series may be available
in book-entry form only.
Unless otherwise provided in the related Prospectus Supplement, payments of
principal of and interest on a Series of Securities will be made on the
Distribution Dates specified in the Prospectus Supplement relating to such
Series by check mailed to Holders of such Series, registered as such at the
close of business on the record date specified in the related Prospectus
Supplement applicable to such Distribution Dates at their addresses appearing on
the security register, except that (a) payments may be made by wire transfer (at
the expense of the Holder requesting payment by wire transfer) in certain
circumstances described in the related Prospectus Supplement and (b) final
payments of principal in retirement of each Security will be made only upon
presentation and surrender of such Security at the office of the Trustee
specified in the Prospectus Supplement. Notice of the final payment on a
Security will be mailed to the holder of such Security before the Distribution
Date on which the final principal payment on any Security is expected to be made
to the holder of such Security.
Payments of principal of and interest on the Securities will be made by the
Trustee, or a paying agent on behalf of the Trustee, as specified in the related
Prospectus Supplement. Unless otherwise provided in the related Prospectus
Supplement, all payments with respect to the Primary Assets for a Series,
together with reinvestment income thereon, amounts withdrawn from any Reserve
Fund, and amounts available pursuant to any other Enhancement will be deposited
directly into the Collection Account and, net, if and as provided in the related
Prospectus Supplement, of certain amounts payable to the related Servicer and
any other person specified in the Prospectus Supplement, will thereafter be
deposited into the Distribution Account and will be available to make payments
on Securities of such Series on the next Distribution Date, as the case may be.
See 'THE TRUST FUNDS--Collection and Distribution Accounts.'
VALUATION OF THE PRIMARY ASSETS
If specified in the related Prospectus Supplement for a Series of Notes,
each Primary Asset included in the related Trust Fund for a Series will be
assigned an initial 'Asset Value.' Unless otherwise specified in the related
Prospectus Supplement, at any time the Asset Value of the Primary Assets will be
equal to the product of
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the Asset Value Percentage as set forth in the Indenture and the lesser of (a)
the stream of remaining regularly scheduled payments on the Primary Assets, net,
unless otherwise provided in the related Prospectus Supplement, of certain
amounts payable as expenses, together with income earned on each such scheduled
payment received through the day preceding the next Distribution Date at the
Assumed Reinvestment Rate, if any, discounted to present value at the highest
interest rate on the Notes of such Series over periods equal to the interval
between payments on the Notes, and (b) the then principal balance of the Primary
Assets. Unless otherwise specified in the related Prospectus Supplement, the
initial Asset Value of the Primary Assets will be at least equal to the
principal amount of the Notes of the related Series at the date of issuance
thereof.
The 'Assumed Reinvestment Rate', if any, for a Series will be the highest
rate permitted by the Rating Agency or a rate insured by means of a surety bond,
guaranteed investment contract, Deposit Agreement or other arrangement
satisfactory to the Rating Agency. If the Assumed Reinvestment Rate is so
insured, the related Prospectus Supplement will set forth the terms of such
arrangement.
PAYMENTS OF INTEREST
The Securities of each Class by their terms entitled to receive interest
will bear interest (calculated, unless otherwise specified in the related
Prospectus Supplement, on the basis of a 360-day year of twelve 30-day months)
from the date and at the rate per annum specified, or calculated in the method
described, in the related Prospectus Supplement. Interest on such Securities of
a Series will be payable on the Distribution Date specified in the related
Prospectus Supplement. The rate of interest on Securities of a Series may be
variable or may change with changes in the annual percentage rates of the Loans
included in the related Trust Fund and/or as prepayments occur with respect to
such Loans. Principal Only Securities may not be entitled to receive any
interest distributions or may be entitled to receive only nominal interest
distributions. Any interest on Zero Coupon Securities that is not paid on the
related Distribution Date will accrue and be added to the principal thereof on
such Distribution Date.
Interest payable on the Securities 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 preceding a
Distribution Date, the effective yield to Holders will be reduced from the yield
that would otherwise be obtainable if interest payable on the Securities were to
accrue through the day immediately preceding such Distribution Date.
PAYMENTS OF PRINCIPAL
On each Distribution Date for a Series, principal payments will be made to
the holders of the Securities of such Series on which principal is then payable,
to the extent set forth in the related Prospectus Supplement. Such payments will
be made in an aggregate amount determined as specified in the related Prospectus
Supplement and will be allocated among the respective Classes of a Series in the
manner, at the times and in the priority (which may, in certain cases, include
allocation by random lot) set forth in the related Prospectus Supplement.
FINAL SCHEDULED DISTRIBUTION DATE
The Final Scheduled Distribution Date with respect to each Class of Notes
is the date no later than which principal thereof will be fully paid and with
respect to each Class of a Series of Certificates will be the date on which the
entire aggregate principal balance of such Class is expected to be reduced to
zero, in each case calculated on the basis of the assumptions applicable to such
Series described in the related Prospectus Supplement. The Final Scheduled
Distribution Date for each Class of a Series will be specified in the related
Prospectus Supplement. Since payments on the Primary Assets will be used to make
distributions in reduction of the outstanding principal amount of the
Securities, it is likely that the actual final Distribution Date of any such
Class will occur earlier, and may occur substantially earlier, than its Final
Scheduled Distribution Date. Furthermore, with respect to a Series of
Certificates, unless otherwise specified in the related Prospectus Supplement,
as a result of delinquencies, defaults and liquidations of the Primary Assets in
the Trust Fund, the actual final Distribution Date of any Certificate may occur
later than its Final Scheduled Distribution Date. No assurance can be given as
to the actual prepayment experience with respect to a Series. See 'Weighted
Average Life of the Securities' below.
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SPECIAL REDEMPTION
If so specified in the Prospectus Supplement relating to a Series of
Securities having other than monthly Distribution Dates, one or more Classes of
Securities of such Series may be subject to special redemption, in whole or in
part, on the day specified in the related Prospectus Supplement (a 'Special
Redemption Date') if, as a consequence of prepayments on the Loans relating to
such Securities or low yields then available for reinvestment, the entity
specified in the related Prospectus Supplement determines, based on assumptions
specified in the applicable Agreement, that the amount available for the payment
of interest that will have accrued on such Securities (the 'Available Interest
Amount') through the designated interest accrual date specified in the related
Prospectus Supplement is less than the amount of interest that will have accrued
on such Securities to such date. In such event and as further described in the
related Prospectus Supplement, the Trustee will redeem a principal amount of
outstanding Securities of such Series as will cause the Available Interest
Amount to equal the amount of interest that will have accrued through such
designated interest accrual date for such Series of Securities outstanding
immediately after such redemption.
OPTIONAL REDEMPTION, PURCHASE OR TERMINATION
The Depositor or the Servicer may, at its option, redeem, in whole or in
part, one or more Classes of Notes or purchase one or more Classes of
Certificates of any Series, on any Distribution Date under the circumstances, if
any, specified in the Prospectus Supplement relating to such Series.
Alternatively, if so specified in the related Prospectus Supplement for a Series
of Certificates, the Depositor, the Servicer, or another entity designated in
the related Prospectus Supplement may, at its option, cause an early termination
of a Trust Fund by repurchasing all of the Primary Assets from such Trust Fund
on or after a date specified in the related Prospectus Supplement, or on or
after such time as the aggregate outstanding principal amount of the
Certificates or Primary Assets, as specified in the related Prospectus
Supplement, is less than the amount or percentage specified in the related
Prospectus Supplement. Notice of such redemption, purchase or termination must
be given by the Depositor or the Trustee prior to the related date. The
redemption, purchase or repurchase price will be set forth in the related
Prospectus Supplement. If specified in the related Prospectus Supplement, in the
event that a REMIC election has been made, the Trustee shall receive a
satisfactory opinion of counsel that the optional redemption, purchase or
termination will be conducted so as to constitute a 'qualified liquidation'
under Section 860F of the Code.
In addition, the Prospectus Supplement may provide other circumstances
under which Holders of Securities of a Series could be fully paid significantly
earlier than would otherwise be the case if payments or distributions were
solely based on the activity of the related Primary Assets.
WEIGHTED AVERAGE LIFE OF THE SECURITIES
Weighted average life refers to the average amount of time that will elapse
from the date of issue of a security until each dollar of principal of such
security will be repaid to the investor. Unless otherwise specified in the
related Prospectus Supplement, the weighted average life of the Securities of a
Class will be influenced by the rate at which the amount financed under the
Loans included in the Trust Fund for a Series is paid, which may be in the form
of scheduled amortization or prepayments.
Prepayments on loans and other receivables can be measured relative to a
prepayment standard or model. The Prospectus Supplement for a Series of
Securities will describe the prepayment standard or model, if any, used and may
contain tables setting forth the projected weighted average life of each Class
of Securities of such Series and the percentage of the original principal amount
of each Class of Securities of such Series that would be outstanding on
specified Distribution Dates for such Series based on the assumptions stated in
such Prospectus Supplement, including assumptions that prepayments on the Loans
included in the related Trust Fund are made at rates corresponding to various
percentages of the prepayment standard or model specified in such Prospectus
Supplement.
There is, however, no assurance that prepayment of the Loans included in
the related Trust Fund will conform to any level of any prepayment standard or
model specified in the related Prospectus Supplement. The rate of principal
prepayments on pools of loans is influenced by a variety of economic,
demographic, geographic, legal, tax, social and other factors.
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The rate of prepayments of conventional housing loans and other receivables
has fluctuated significantly in recent years. In general, however, if prevailing
interest rates fall significantly below the interest rates on the Loans for a
Series, such loans are likely to prepay at rates higher than if prevailing
interest rates remain at or above the interest rates borne by such loans. In
this regard, it should be noted that the Loans for a Series may have different
interest rates. In addition, the weighted average life of the Securities may be
affected by the varying maturities of the Loans. If any Loans for a Series have
actual terms-to-stated maturity of less than those assumed in calculating the
Final Scheduled Distribution Date of the related Securities, one or more Classes
of the Series may be fully paid prior to their respective Final Scheduled
Distribution Dates, even in the absence of prepayments and a reinvestment return
higher than the Assumed Reinvestment Rate.
THE TRUST FUNDS
GENERAL
The Notes of each Series will be secured by the pledge of the assets of the
related Trust Fund, and the Certificates of each Series will represent interests
in the assets of the related Trust Fund. The Trust Fund of each Series will
include assets purchased from the Seller composed of (i) the Primary Assets,
(ii) amounts available from the reinvestment of payments on such Primary Assets
at the Assumed Reinvestment Rate, if any, specified in the related Prospectus
Supplement, (iii) any Enhancement, (iv) any Property that secured a Loan but
which is acquired by foreclosure or deed in lieu of foreclosure or repossession
and (v) the amount, if any, initially deposited in the Collection Account or
Distribution Account for a Series as specified in the related Prospectus
Supplement.
The Securities will be non-recourse obligations of the related Trust Fund.
The assets of the Trust Fund specified in the related Prospectus Supplement for
a Series of Securities, unless otherwise specified in the related Prospectus
Supplement will serve as collateral only for that Series of Securities. Holders
of a Series of Notes may only proceed against such collateral securing such
Series of Notes in the case of a default with respect to such Series of Notes
and may not proceed against any assets of the Depositor or the related Trust
Fund not pledged to secure such Notes.
The Primary Assets for a Series will be sold by the Seller to the Depositor
or purchased by the Depositor in the open market or in privately negotiated
transactions, which may include transactions with affiliates and will be
transferred by the Depositor to the Trust Fund. Loans relating to a Series will
be serviced by the Servicer, which may be the Seller, specified in the related
Prospectus Supplement, pursuant to a Pooling and Servicing Agreement, with
respect to a Series of Certificates or a servicing agreement (each, a 'Servicing
Agreement') between the Trust Fund and Servicer, with respect to a Series of
Notes.
As used herein, 'Agreement' means, with respect to a Series of
Certificates, the Pooling and Servicing Agreement or Trust Agreement, and with
respect to a Series of Notes, the Indenture and the Servicing Agreement, as the
context requires.
If so specified in the related Prospectus Supplement, a Trust Fund relating
to a Series of Securities may be a business trust formed under the laws of the
state specified in the related Prospectus Supplement pursuant to a trust
agreement (each, a 'Trust Agreement') between the Depositor and the trustee of
such Trust Fund specified in the related Prospectus Supplement.
With respect to each Trust Fund, prior to the initial offering of the
related Series of Securities, the Trust Fund will have no assets or liabilities.
No Trust Fund is expected to engage in any activities other than acquiring,
managing and holding the related Primary Assets and other assets contemplated
herein and in the related Prospectus Supplement and the proceeds thereof,
issuing Securities and making payments and distributions thereon and certain
related activities. No Trust Fund is expected to have any source of capital
other than its assets and any related Enhancement.
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THE LOANS
Mortgage Loans. The Primary Assets for a Series may consist, in whole or
in part, of closed-end and/or revolving home equity loans or certain balances
thereof (the 'Closed-End Loans' and 'Revolving Credit Line Loans' and
collectively, the 'Mortgage Loans') secured by mortgages primarily on Single
Family Properties which may be subordinated to other mortgages on the same
Mortgaged Property. The Mortgage Loans may have fixed interest rates or
adjustable interest rates and may provide for other payment characteristics as
described below and in the related Prospectus Supplement.
As more fully described in the related Prospectus Supplement, interest on
each Revolving Credit Line Loan, excluding introductory rates offered from time
to time during promotional periods, may be computed and payable monthly on the
average daily outstanding principal balance of such loan. Principal amounts on
the Revolving Credit Line Loans 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. If specified in the related Prospectus
Supplement, new draws by borrowers under the Revolving Credit Line Loans will
automatically become part of the Trust Fund for a Series. As a result, the
aggregate balance of the Revolving Credit Line Loans will fluctuate from day to
day as new draws by borrowers are added to the Trust Fund and principal payments
are applied to such balances and such amounts will usually differ each day, as
more specifically described in the related Prospectus Supplement. Unless
otherwise described in the related Prospectus Supplement, the full principal
amount of a Closed-End 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 such loan at its stated maturity. As more fully
described in the related Prospectus Supplement, interest on each Closed-End Loan
is calculated on the basis of the outstanding principal balance of such loan
multiplied by the Loan Rate thereon and further multiplied by 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 such loan. Unless otherwise
described in the related Prospectus Supplement, the original terms to stated
maturity of Closed-End Loans will not exceed 360 months. Under certain
circumstances, under either a Revolving Credit Line Loan or a Closed-End Loan, a
borrower may choose an interest only payment option and is obligated to pay only
the amount of interest which accrues on the loan during the billing cycle. An
interest only payment option may be available for a specified period before the
borrower must begin paying at least the minimum monthly payment of a specified
percentage of the average outstanding balance of the loan.
The Mortgaged Properties will include primarily Single Family Property
(i.e., one- to four-family residential housing, including Condominium Units and
Cooperative Dwellings). The Mortgaged Properties may consist of detached
individual dwellings, individual condominiums, townhouses, duplexes, row houses,
individual units in planned unit developments and other attached dwelling units.
Each Single Family Property will be located on land owned in fee simple by the
borrower or on land leased by the borrower for a term at least ten years (unless
otherwise provided in the related Prospectus Supplement) greater than the term
of the related Loan. Attached dwellings may include owner-occupied structures
where each borrower owns the land upon which the unit is built, with the
remaining adjacent land owned in common or dwelling units subject to a
proprietary lease or occupancy agreement in a cooperatively owned apartment
building.
Unless otherwise specified in the related Prospectus Supplement, Mortgages
on Cooperative Dwellings consist of a lien on the shares issued by such
Cooperative Dwelling and the proprietary lease or occupancy agreement relating
to such Cooperative Dwelling.
The aggregate principal balance of Loans secured by Mortgaged Properties
that are owner-occupied will be disclosed in the related Prospectus Supplement.
Unless otherwise specified in the Prospectus Supplement, the sole basis for a
representation that a given percentage of the Loans are secured by Single Family
Property that is owner-occupied will be either (i) the making of a
representation by the Mortgagor at origination of the Loan either that the
underlying Mortgaged Property will be used by the Mortgagor for a period of at
least six months every year or that the Mortgagor intends to use the Mortgaged
Property as a primary residence, or (ii) a finding that the address of the
underlying Mortgaged Property is the Mortgagor's mailing address as reflected in
the Servicer's records. To the extent specified in the related Prospectus
Supplement, the Mortgaged Properties may include non-owner occupied investment
properties and vacation and second homes.
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Unless otherwise specified in the related Prospectus Supplement, the
initial Combined Loan-to-Value Ratio of a Loan is computed in the manner
described in the related Prospectus Supplement, taking into account the amounts
of any related senior mortgage loans.
Home Improvement Contracts. The Primary Assets for a Series may consist,
in whole or part, of home improvement installment sales contracts and
installment loan agreements (the 'Home Improvement Contracts') originated by a
home improvement contractor in the ordinary course of business. As specified in
the related Prospectus Supplement, the Home Improvement Contracts will either be
unsecured or secured by the Mortgages primarily on Single Family Properties
which are generally subordinate to other mortgages on the same Mortgaged
Property or by purchase money security interest in the Home Improvements
financed thereby. Unless otherwise specified in the applicable Prospectus
Supplement, the Home Improvement Contracts will be fully amortizing and may have
fixed interest rates or adjustable interest rates and may provide for other
payment characteristics as described below and in the related Prospectus
Supplement.
Unless otherwise specified in the related Prospectus Supplement, the home
improvements (the 'Home Improvements') securing the Home Improvement Contracts
include, but are not limited to, replacement windows, house siding, new roofs,
swimming pools, satellite dishes, kitchen and bathroom remodeling goods and
solar heating panels.
Unless otherwise specified in the related Prospectus Supplement, the
initial Loan-to-Value Ratio of a Home Improvement Contract is computed in the
manner described in the related Prospectus Supplement.
Additional Information. The selection criteria which shall apply with
respect to the Loans, including, but not limited to, the Combined Loan-to-Value
Ratios or Loan-to-Value Ratios, as applicable, original terms to maturity and
delinquency information, will be specified in the related Prospectus Supplement.
The Loans for a Series may include Loans that do not amortize their entire
principal balance by their stated maturity in accordance with their terms and
require a balloon payment of the remaining principal balance at maturity, as
specified in the related Prospectus Supplement. As further described in the
related Prospectus Supplement, the Loans for a Series may include Loans that do
not have a specified stated maturity.
The related Prospectus Supplement for each Series will provide information
with respect to the Loans that are Primary Assets as of the Cut-off Date,
including, among other things, and to the extent relevant (a) the aggregate
unpaid principal balance of the Loans (or the aggregate unpaid principal balance
included in the Trust Fund for the related Series); (b) the range and weighted
average Loan Rate on the Loans, and, in the case of adjustable rate Loans, the
range and weighted average of the current Loan Rates and the Lifetime Rate Caps,
if any; (c) the range and average outstanding principal balance of the Loans;
(d) the weighted average original and remaining term-to-stated maturity of the
Loans and the range of original and remaining terms-to-stated maturity, if
applicable; (e) the range and weighted average of Combined Loan-to-Value Ratios
or Loan-to-Value Ratios for the Loans, as applicable; (f) the percentage (by
outstanding principal balance as of the Cut-off Date) of Loans that accrue
interest at adjustable or fixed interest rates; (g) any special hazard insurance
policy or bankruptcy bond or other enhancement relating to the Loans; (h) the
percentage (by principal balance as of the Cut-off Date) of Loans that are
secured by Mortgaged Properties, Home Improvements or are unsecured; (i) the
geographic distribution of any Mortgaged Properties securing the Loans; (j) the
percentage of Loans (by principal balance as of the Cut-off Date) that are
secured by Single Family Properties, shares relating to Cooperative Dwellings,
Condominium Units, investment property and vacation or second homes; (k) the
lien priority of the Loans; (l) the credit limit utilization rate of any
Revolving Credit Line Loans; and (m) the delinquency status and year of
origination of the Loans. The related Prospectus Supplement will also specify
any other limitations on the types or characteristics of Loans for a Series.
If information of the nature described above respecting the Loans is not
known to the Depositor at the time the Securities are initially offered,
approximate or more general information of the nature described above will be
provided in the Prospectus Supplement and additional information will be set
forth in a Current Report on Form 8-K to be available to investors on the date
of issuance of the related Series and to be filed with the Commission within 15
days after the initial issuance of such Securities.
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COLLECTION AND DISTRIBUTION ACCOUNTS
A separate Collection Account will be established by the Trustee or the
Servicer, in the name of the Trustee, for each Series of Securities for receipt
of the amount of cash, if any, specified in the related Prospectus Supplement to
be initially deposited therein by the Depositor, all amounts received on or with
respect to the Primary Assets and, unless otherwise specified in the related
Prospectus Supplement, income earned thereon. Certain amounts on deposit in such
Collection Account and certain amounts available pursuant to any Enhancement, as
provided in the related Prospectus Supplement, will be deposited in a related
Distribution Account, which will also be established by the Trustee for each
such Series of Securities, for distribution to the related Holders. Unless
otherwise specified in the related Prospectus Supplement, the Trustee will
invest the funds in the Collection and Distribution Accounts in Eligible
Investments maturing, with certain exceptions, not later, in the case of funds
in the Collection Account, than the day preceding the date such funds are due to
be deposited in the Distribution Account or otherwise distributed and, in the
case of funds in the Distribution Account, than the day preceding the next
Distribution Date for the related Series of Securities. Eligible Investments
include, among other investments, obligations of the United States and certain
agencies thereof, federal funds, certificates of deposit, commercial paper,
demand and time deposits and banker's acceptances, certain repurchase agreements
of United States government securities and certain guaranteed investment
contracts, in each case, acceptable to the Rating Agency.
Notwithstanding any of the foregoing, amounts may be deposited and
withdrawn pursuant to any Deposit Agreement or Minimum Principal Payment
Agreement as specified in the related Prospectus Supplement.
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ENHANCEMENT
If stated in the Prospectus Supplement relating to a Series of Securities,
simultaneously with the Depositor's assignment of the Primary Assets to the
Trustee, the Depositor will obtain an irrevocable letter of credit, surety bond
or insurance policy, issue Subordinate Securities or obtain any other form of
enhancement or combination thereof (collectively, 'Enhancement') in favor of the
Trustee on behalf of the holders of the related Series or designated Classes of
such Series from an institution or by other means acceptable to the Rating
Agency. The Enhancement will support the payment of principal and interest on
the Securities, and may be applied for certain other purposes to the extent and
under the conditions set forth in such Prospectus Supplement. Enhancement for a
Series may include one or more of the following forms, or such other form as may
be specified in the related Prospectus Supplement. If so specified in the
related Prospectus Supplement, any of such Enhancement may be structured so as
to protect against losses relating to more than one Trust Fund, in the manner
described therein.
SUBORDINATE SECURITIES
If specified in the related Prospectus Supplement, Enhancement for a Series
may consist of one or more Classes of Subordinate Securities. The rights of
holders of such Subordinate Securities to receive distributions on any
Distribution Date will be subordinate in right and priority to the rights of
holders of Senior Securities of the Series, but only to the extent described in
the related Prospectus Supplement.
INSURANCE
If stated in the related Prospectus Supplement, Enhancement for a Series
may consist of special hazard insurance policies, bankruptcy bonds and other
types of insurance relating to the Primary Assets, as described below and in the
related Prospectus Supplement.
Pool Insurance Policy. If so specified in the Prospectus Supplement
relating to a Series of Securities, the Depositor will obtain a pool insurance
policy for the Loans in the related Trust Fund. The pool insurance policy will
cover any loss (subject to the limitations described in a related Prospectus
Supplement) by reason of default, but will not cover the portion of the
principal balance of any Loan that is required to be covered by any primary
mortgage insurance policy. The amount and terms of any such coverage will be set
forth in the related Prospectus Supplement.
Special Hazard Insurance Policy. Although the terms of such policies vary
to some degree, a special hazard insurance policy typically provides that, where
there has been damage to Property securing a defaulted or foreclosed Loan (title
to which has been acquired by the insured) and to the extent such damage is not
covered by the standard hazard insurance policy or any flood insurance policy,
if applicable, required to be maintained with respect to such Property, or in
connection with partial loss resulting from the application of the coinsurance
clause in a standard hazard insurance policy, the special hazard insurer will
pay the lesser of (i) the cost of repair or replacement of such Property or (ii)
upon transfer of such Property to the special hazard insurer, the unpaid
principal balance of such Loan at the time of acquisition of such Property by
foreclosure or deed in lieu of foreclosure, plus accrued interest to the date of
claim settlement and certain expenses incurred by the Servicer with respect to
such Property. If the unpaid principal balance plus accrued interest and certain
expenses is paid by the special hazard insurer, the amount of further coverage
under the special hazard insurance policy will be reduced by such amount less
any net proceeds from the sale of such Property. Any amount paid as the cost of
repair of such Property will reduce coverage by such amount. Special hazard
insurance policies typically do not cover losses occasioned by war, civil
insurrection, certain governmental actions, errors in design, faulty workmanship
or materials (except under certain circumstances), nuclear reaction, flood (if
the mortgaged property is in a federally designated flood area), chemical
contamination and certain other risks.
Restoration of the Property with the proceeds described under (i) above is
expected to satisfy the condition under any pool insurance policy that such
Property be restored before a claim under such pool insurance policy may be
validly presented with respect to the defaulted Loan secured by such Property.
The payment described under (ii) above will render unnecessary presentation of a
claim in respect of such Loan under any pool insurance policy. Therefore, so
long as such pool insurance policy remains in effect, the payment by the special
hazard insurer of the cost of repair or of the unpaid principal balance of the
related Loan plus accrued interest and certain expenses will not affect the
total insurance proceeds paid to holders of the Securities, but will affect the
relative amounts of coverage remaining under the special hazard insurance policy
and pool insurance policy.
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Bankruptcy Bond. In the event of a bankruptcy of a borrower, the
bankruptcy court may establish the value of the Property securing the related
Loan at an amount less than the then outstanding principal balance of such Loan.
The amount of the secured debt could be reduced to such value, and the holder of
such Loan thus would become an unsecured creditor to the extent the outstanding
principal balance of such Loan exceeds the value so assigned to the Property by
the bankruptcy court. In addition, certain other modifications of the terms of a
Loan can result from a bankruptcy proceeding. See 'CERTAIN LEGAL ASPECTS OF
LOANS.' If so provided in the related Prospectus Supplement, the Depositor or
other entity specified in the related Prospectus Supplement will obtain a
bankruptcy bond or similar insurance contract (the 'bankruptcy bond') covering
losses resulting from proceedings with respect to borrowers under the Bankruptcy
Code. The bankruptcy bond will cover certain losses resulting from a reduction
by a bankruptcy court of scheduled payments of principal of and interest on a
Loan or a reduction by such court of the principal amount of a Loan and will
cover certain unpaid interest on the amount of such a principal reduction from
the date of the filing of a bankruptcy petition.
The bankruptcy bond will provide coverage in the aggregate amount specified
in the related Prospectus Supplement for all Loans in the Trust Fund for such
Series. Such amount will be reduced by payments made under such bankruptcy bond
in respect of such Loans, unless otherwise specified in the related Prospectus
Supplement, and will not be restored.
RESERVE FUNDS
If so specified in the Prospectus Supplement relating to a Series of
Securities, the Depositor will deposit into one or more funds to be established
with the Trustee as part of the Trust Fund for such Series or for the benefit of
any Enhancer with respect to such Series (the 'Reserve Funds') cash, a letter or
letters of credit, cash collateral accounts, Eligible Investments, or other
instruments meeting the criteria of the Rating Agency rating any Series of the
Securities in the amount specified in such Prospectus Supplement. In the
alternative or in addition to such deposit, a Reserve Fund for a Series may be
funded over time through application of all or a portion of the excess cash flow
from the Primary Assets for such Series, to the extent described in the related
Prospectus Supplement. If applicable, the initial amount of the Reserve Fund and
the Reserve Fund maintenance requirements for a Series of Securities will be
described in the related Prospectus Supplement.
Amounts withdrawn from any Reserve Fund will be applied by the Trustee to
make payments on the Securities of a Series, to pay expenses, to reimburse any
Enhancer or for any other purpose, in the manner and to the extent specified in
the related Prospectus Supplement.
Amounts deposited in a Reserve Fund will be invested by the Trustee, in
Eligible Investments maturing no later than the day specified in the related
Prospectus Supplement.
MINIMUM PRINCIPAL PAYMENT AGREEMENT
If stated in the Prospectus Supplement relating to a Series of Securities,
the Depositor will enter into a Minimum Principal Payment Agreement with an
entity meeting the criteria of the Rating Agency pursuant to which such entity
will provide certain payments on the Securities of such Series in the event that
aggregate scheduled principal payments and/or prepayments on the Primary Assets
for such Series are not sufficient to make certain payments on the Securities of
such Series, as provided in the Prospectus Supplement.
DEPOSIT AGREEMENT
If specified in a Prospectus Supplement, the Depositor and the Trustee for
such Series of Securities will enter into a Deposit Agreement with the entity
specified in such Prospectus Supplement on or before the sale of such Series of
Securities. The purpose of a Deposit Agreement would be to accumulate available
cash for investment so that such cash, together with income thereon, can be
applied to future distributions on one or more Classes of Securities. The
Prospectus Supplement for a Series of Securities pursuant to which a Deposit
Agreement is used will contain a description of the terms of such Deposit
Agreement.
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SERVICING OF LOANS
GENERAL
Customary servicing functions with respect to Loans comprising the Primary
Assets in the Trust Fund will be provided by the Servicer directly pursuant to
the related Servicing Agreement or Pooling and Servicing Agreement, as the case
may be, with respect to a Series of Securities.
COLLECTION PROCEDURES; ESCROW ACCOUNTS
The Servicer will make reasonable efforts to collect all payments required
to be made under the Loans and will, consistent with the terms of the related
Agreement for a Series and any applicable Enhancement, follow such collection
procedures as it follows with respect to comparable loans held in its own
portfolio. Consistent with the above, the Servicer may, in its discretion, (i)
waive any assumption fee, late payment charge, or other charge in connection
with a Loan and (ii) to the extent provided in the related Agreement, arrange
with an obligor a schedule for the liquidation of delinquencies by extending the
Due Dates for Scheduled Payments on such Loan.
If specified in the related Prospectus Supplement, the Servicer, to the
extent permitted by law, will establish and maintain escrow or impound accounts
('Escrow Accounts') with respect to Loans in which payments by obligors to pay
taxes, assessments, mortgage and hazard insurance premiums, and other comparable
items will be deposited. Loans may not require such payments under the loan
related documents, in which case the Servicer would not be required to establish
any Escrow Account with respect to such Loans. Withdrawals from the Escrow
Accounts are to be made to effect timely payment of taxes, assessments and
mortgage and hazard insurance, to refund to obligors amounts determined to be
overages, to pay interest to obligors on balances in the Escrow Account to the
extent required by law, to repair or otherwise protect the property securing the
related Loan and to clear and terminate such Escrow Account. The Servicer will
be responsible for the administration of the Escrow Accounts and generally will
make advances to such account when a deficiency exists therein.
DEPOSITS TO AND WITHDRAWALS FROM THE COLLECTION ACCOUNT
Unless otherwise specified in the related Prospectus Supplement, the
Trustee or the Servicer will establish a separate account (the 'Collection
Account') in the name of the Trustee. Unless otherwise indicated in the related
Prospectus Supplement, the Collection Account will be an account maintained (i)
at a depository institution, the long-term unsecured debt obligations of which
at the time of any deposit therein are rated by each Rating Agency rating the
Securities of such Series at levels satisfactory to each Rating Agency or (ii)
in an account or accounts the deposits in which are insured to the maximum
extent available by the FDIC or which are secured in a manner meeting
requirements established by each Rating Agency.
Unless otherwise specified in the related Prospectus Supplement, the funds
held in the Collection Account may be invested, pending remittance to the
Trustee, in Eligible Investments. If so specified in the related Prospectus
Supplement, the Servicer will be entitled to receive as additional compensation
any interest or other income earned on funds in the Collection Account.
Unless otherwise specified in the related Prospectus Supplement, the
Servicer, the Depositor, the Trustee or the Seller, as appropriate, will deposit
into the Collection Account for each Series on the Business Day following the
Closing Date any amounts representing Scheduled Payments due after the related
Cut-off Date but received by the Servicer on or before the Closing Date, and
thereafter, within two business days after the date of receipt thereof, the
following payments and collections received or made by it (other than, unless
otherwise provided in the related Prospectus Supplement, in respect of principal
of and interest on the related Primary Assets due on or before such Cut-off
Date):
(i) All payments on account of principal, including prepayments, on
such Primary Assets;
(ii) All payments on account of interest on such Primary Assets after
deducting therefrom, at the discretion of the Servicer but only to the
extent of the amount permitted to be withdrawn or withheld from the
Collection Account in accordance with the related Agreement, the Servicing
Fee in respect of such Primary Assets;
(iii) All amounts received by the Servicer in connection with the
liquidation of Primary Assets or property acquired in respect thereof,
whether through foreclosure sale, repossession or otherwise, including
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payments in connection with such Primary Assets received from the obligor,
other than amounts required to be paid or refunded to the obligor pursuant
to the terms of the applicable loan documents or otherwise pursuant to law
('Liquidation Proceeds'), exclusive of, in the discretion of the Servicer,
but only to the extent of the amount permitted to be withdrawn from the
Collection Account in accordance with the related Agreement, the Servicing
Fee, if any, in respect of the related Primary Asset;
(iv) All proceeds under any title insurance, hazard insurance or other
insurance policy covering any such Primary Asset, other than proceeds to be
applied to the restoration or repair of the related Property or released to
the obligor in accordance with the related Agreement;
(v) All amounts required to be deposited therein from any applicable
Reserve Fund for such Series pursuant to the related Agreement;
(vi) All Advances made by the Servicer required pursuant to the
related Agreement; and
(vii) All repurchase prices of any such Primary Assets repurchased by
the Depositor, the Servicer or the Seller pursuant to the related
Agreement.
Unless otherwise specified in the related Prospectus Supplement, the
Servicer is permitted, from time to time, to make withdrawals from the
Collection Account for each Series for the following purposes:
(i) to reimburse itself for Advances for such Series made by it
pursuant to the related Agreement; the Servicer's right to reimburse itself
is limited to amounts received on or in respect of particular Loans
(including, for this purpose, Liquidation Proceeds and amounts representing
proceeds of insurance policies covering the related Property) which
represent late recoveries of Scheduled Payments respecting which any such
Advance was made;
(ii) to the extent provided in the related Agreement, to reimburse
itself for any Advances for such Series that the Servicer determines in
good faith it will be unable to recover from amounts representing late
recoveries of Scheduled Payments respecting which such Advance was made or
from Liquidation Proceeds or the proceeds of insurance policies;
(iii) to reimburse itself from Liquidation Proceeds for liquidation
expenses and for amounts expended by it in good faith in connection with
the restoration of damaged Property and, in the event deposited in the
Collection Account and not previously withheld, and to the extent that
Liquidation Proceeds after such reimbursement exceed the outstanding
principal balance of the related Loan, together with accrued and unpaid
interest thereon to the Due Date for such Loan next succeeding the date of
its receipt of such Liquidation Proceeds, to pay to itself out of such
excess the amount of any unpaid Servicing Fee and any assumption fees, late
payment charges, or other charges on the related Loan;
(iv) in the event it has elected not to pay itself the Servicing Fee
out of the interest component of any Scheduled Payment, late payment or
other recovery with respect to a particular Loan prior to the deposit of
such Scheduled Payment, late payment or recovery into the Collection
Account, to pay to itself the Servicing Fee, as adjusted pursuant to the
related Agreement, from any such Scheduled Payment, late payment or such
other recovery, to the extent permitted by the related Agreement;
(v) to reimburse itself for expenses incurred by and recoverable by or
reimbursable to it pursuant to the related Agreement;
(vi) to pay to the applicable person with respect to each Primary
Asset or REO Property acquired in respect thereof that has been repurchased
or removed from the Trust Fund by the Depositor, the Servicer or the Seller
pursuant to the related Agreement, all amounts received thereon and not
distributed as of the date on which the related repurchase price was
determined;
(vii) to make payments to the Trustee of such Series for deposit into
the Distribution Account, if any, or for remittance to the Holders of such
Series in the amounts and in the manner provided for in the related
Agreement; and
(viii) to clear and terminate the Collection Account pursuant to the
related Agreement.
In addition, if the Servicer deposits in the Collection Account for a
Series any amount not required to be deposited therein, it may, at any time,
withdraw such amount from such Collection Account.
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ADVANCES AND LIMITATIONS THEREON
The related Prospectus Supplement will describe the circumstances, if any,
under which the Servicer will make Advances with respect to delinquent payments
on Loans. If specified in the related Prospectus Supplement, the Servicer will
be obligated to make Advances, and such obligations may be limited in amount, or
may not be activated until a certain portion of a specified Reserve Fund is
depleted. Advances are intended to provide liquidity and, except to the extent
specified in the related Prospectus Supplement, not to guarantee or insure
against losses. Accordingly, any funds advanced are recoverable by the Servicer
out of amounts received on particular Loans which represent late recoveries of
principal or interest, proceeds of insurance policies or Liquidation Proceeds
respecting which any such Advance was made. If an Advance is made and
subsequently determined to be nonrecoverable from late collections, proceeds of
insurance policies, or Liquidation Proceeds from the related Loan, the Servicer
may be entitled to reimbursement from other funds in the Collection Account or
Distribution Account, as the case may be, or from a specified Reserve Fund as
applicable, to the extent specified in the related Prospectus Supplement.
MAINTENANCE OF INSURANCE POLICIES AND OTHER SERVICING PROCEDURES
Standard Hazard Insurance; Flood Insurance. Except as otherwise specified
in the related Prospectus Supplement, the Servicer will be required to maintain
or to cause the obligor on each Loan to maintain a standard hazard insurance
policy providing coverage of the standard form of fire insurance with extended
coverage for certain other hazards as is customary in the state in which the
related Property is located. The standard hazard insurance policies will provide
for coverage at least equal to the applicable state standard form of fire
insurance policy with extended coverage for property of the type securing the
related Loans. In general, the standard form of fire and extended coverage
policy will cover physical damage to or destruction of, the related 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 Loans
will be underwritten by different hazard insurers and will cover Properties
located in various states, such policies will not contain identical terms and
conditions. The basic terms, however, generally will be determined by state law
and generally will be similar. Most such policies typically will not cover any
physical damage resulting from 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 certain cases, vandalism. The foregoing list is
merely indicative of certain kinds of uninsured risks and is not intended to be
all inclusive. Uninsured risks not covered by a special hazard insurance policy
or other form of Enhancement will adversely affect distributions to Holders.
When a Property securing a Loan is located in a flood area identified by HUD
pursuant to the Flood Disaster Protection Act of 1973, as amended, the Servicer
will be required to cause flood insurance to be maintained with respect to such
Property, to the extent available.
The standard hazard insurance policies covering Properties securing Loans
typically will contain a 'coinsurance' clause which, in effect, will require the
insured at all times to carry hazard insurance of a specified percentage
(generally 80% to 90%) of the full replacement value of the Property, including
the improvements on any Property, in order to recover the full amount of any
partial loss. If the insured's coverage falls below this specified percentage,
such clause will provide that the hazard insurer's liability in the event of
partial loss will not exceed the greater of (i) the actual cash value (the
replacement cost less physical depreciation) of the Property, including the
improvements, if any, damaged or destroyed or (ii) such 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 such Property and
improvements. Since the amount of hazard insurance to be maintained on the
improvements securing the Loans declines as the principal balances owing thereon
decrease, and since the value of the Properties will fluctuate in value over
time, the effect of this requirement in the event of partial loss may be that
hazard insurance proceeds will be insufficient to restore fully the damage to
the affected Property.
Unless otherwise specified in the related Prospectus Supplement, coverage
will be in an amount at least equal to the greater of (i) the amount necessary
to avoid the enforcement of any co-insurance clause contained in the policy or
(ii) the outstanding principal balance of the related Loan. Unless otherwise
specified in the related Prospectus Supplement, the Servicer will also maintain
on REO Property that secured a defaulted Loan and that
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has been acquired upon foreclosure, deed in lieu of foreclosure, or
repossession, a standard hazard insurance policy in an amount that is at least
equal to the maximum insurable value of such REO Property. No earthquake or
other additional insurance will be required of any obligor or will be maintained
on REO Property acquired in respect of a defaulted Loan, other than pursuant to
such applicable laws and regulations as shall at any time be in force and shall
require such additional insurance.
Any amounts collected by the Servicer under any such policies of insurance
(other than amounts to be applied to the restoration or repair of the Property,
released to the obligor in accordance with normal servicing procedures or used
to reimburse the Servicer for amounts to which it is entitled to reimbursement)
will be deposited in the Collection Account. In the event that the Servicer
obtains and maintains a blanket policy insuring against hazard losses on all of
the Loans, written by an insurer then acceptable to each Rating Agency which
assigns a rating to such Series, it will conclusively be deemed to have
satisfied its obligations to cause to be maintained a standard hazard insurance
policy for each Loan or related REO Property. This blanket policy may contain a
deductible clause, in which case the Servicer will, in the event that there has
been a loss that would have been covered by such policy absent such deductible
clause, deposit in the Collection Account the amount not otherwise payable under
the blanket policy because of the application of such deductible clause.
REALIZATION UPON DEFAULTED LOANS
The Servicer will use its reasonable best efforts to foreclose upon,
repossess or otherwise comparably convert the ownership of the Properties
securing the related Loans as come into and continue in default and as to which
no satisfactory arrangements can be made for collection of delinquent payments.
In connection with such foreclosure or other conversion, the Servicer will
follow such practices and procedures as it deems necessary or advisable and as
are normal and usual in its servicing activities with respect to comparable
loans serviced by it. However, the Servicer will not be required to expend its
own funds in connection with any foreclosure or towards the restoration of the
Property unless it determines that: (i) such restoration or foreclosure will
increase the Liquidation Proceeds in respect of the related Loan available to
the Holders after reimbursement to itself for such expenses and (ii) such
expenses will be recoverable by it either through Liquidation Proceeds or the
proceeds of insurance. Notwithstanding anything to the contrary herein, in the
case of a Trust Fund for which a REMIC election has been made, the Servicer
shall liquidate any Property acquired through foreclosure within two years after
the acquisition of the beneficial ownership of such Property. While the holder
of a Property acquired through foreclosure can often maximize its recovery by
providing financing to a new purchaser, the Trust Fund, if applicable, will have
no ability to do so and neither the Servicer nor the Depositor will be required
to do so.
The Servicer may arrange with the obligor on a defaulted Loan, a
modification of such Loan (a 'Modification') to the extent provided in the
related Prospectus Supplement. Such Modifications may only be entered into if
they meet the underwriting policies and procedures employed by the Servicer in
servicing receivables for its own account and meet the other conditions set
forth in the related Prospectus Supplement.
ENFORCEMENT OF DUE-ON-SALE CLAUSES
Unless otherwise specified in the related Prospectus Supplement for a
Series, when any Property is about to be conveyed by the obligor, the Servicer
will, to the extent it has knowledge of such prospective conveyance and prior to
the time of the consummation of such conveyance, exercise its rights to
accelerate the maturity of the related Loan under the applicable 'due-on-sale'
clause, if any, unless it reasonably believes that such clause is not
enforceable under applicable law or if the enforcement of such clause would
result in loss of coverage under any primary mortgage insurance policy. In such
event, the Servicer is authorized to accept from or enter into an assumption
agreement with the person to whom such property has been or is about to be
conveyed, pursuant to which such person becomes liable under the Loan and
pursuant to which the original obligor is released from liability and such
person is substituted as the obligor and becomes liable under the Loan. Any fee
collected in connection with an assumption will be retained by the Servicer as
additional servicing compensation. The terms of a Loan may not be changed in
connection with an assumption.
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SERVICING COMPENSATION AND PAYMENT OF EXPENSES
Except as otherwise provided in the related Prospectus Supplement, the
Servicer will be entitled to a periodic fee as servicing compensation (the
'Servicing Fee') in an amount to be determined as specified in the related
Prospectus Supplement. The Servicing Fee may be fixed or variable, as specified
in the related Prospectus Supplement. In addition, unless otherwise specified in
the related Prospectus Supplement, the Servicer will be entitled to servicing
compensation in the form of assumption fees, late payment charges and similar
items, or excess proceeds following disposition of property in connection with
defaulted Loans.
Unless otherwise specified in the related Prospectus Supplement, the
Servicer will pay certain expenses incurred in connection with the servicing of
the Loans, including, without limitation, the payment of the fees and expenses
of the Trustee and independent accountants, payment of insurance policy premiums
and the cost of credit support, if any, and payment of expenses incurred in
preparation of reports to Holders.
When an obligor makes a principal prepayment in full between Due Dates on
the related Loan, the obligor will generally be required to pay interest on the
amount prepaid only to the date of prepayment. If and to the extent provided in
the related Prospectus Supplement, in order that one or more Classes of the
Holders of a Series will not be adversely affected by any resulting shortfall in
interest, the amount of the Servicing Fee may be reduced to the extent necessary
to include in the Servicer's remittance to the Trustee for deposit into the
Distribution Account an amount equal to one month's interest on the related Loan
(less the Servicing Fee). If the aggregate amount of such shortfalls in a month
exceeds the Servicing Fee for such month, a shortfall to Holders may occur.
Unless otherwise specified in the related Prospectus Supplement, the
Servicer will be entitled to reimbursement for certain expenses incurred by it
in connection with the liquidation of defaulted Loans. The related Holders will
suffer no loss by reason of such expenses to the extent expenses are covered
under related insurance policies or from excess Liquidation Proceeds. If claims
are either not made or paid under the applicable insurance policies or if
coverage thereunder has been exhausted, the related Holders will suffer a loss
to the extent that Liquidation Proceeds, after reimbursement of the Servicer's
expenses, are less than the outstanding principal balance of and unpaid interest
on the related Loan which would be distributable to Holders. In addition, the
Servicer will be entitled to reimbursement of expenditures incurred by it in
connection with the restoration of property securing a defaulted Loan, such
right of reimbursement being prior to the rights of the Holders to receive any
related proceeds of insurance policies, Liquidation Proceeds or amounts derived
from other Enhancement. The Servicer is generally also entitled to reimbursement
from the Collection Account for Advances.
Unless otherwise specified in the related Prospectus Supplement, the rights
of the Servicer to receive funds from the Collection Account for a Series,
whether as the Servicing Fee or other compensation, or for the reimbursement of
Advances, expenses or otherwise, are not subordinate to the rights of Holders of
such Series.
EVIDENCE AS TO COMPLIANCE
If so specified in the related Prospectus Supplement, the applicable
Agreement for each Series will provide that each year, a firm of independent
public accountants will furnish a statement to the Trustee to the effect that
such firm has examined certain documents and records relating to the servicing
of the Loans by the Servicer and that, on the basis of such examination, such
firm is of the opinion that the servicing has been conducted in compliance with
such Agreement, except for (i) such exceptions as such firm believes to be
immaterial and (ii) such other exceptions as are set forth in such statement.
If so specified in the related Prospectus Supplement, the applicable
Agreement for each Series will also provide for delivery to the Trustee for such
Series of an annual statement signed by an officer of the Servicer to the effect
that the Servicer has fulfilled its obligations under such Agreement, throughout
the preceding calendar year.
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CERTAIN MATTERS REGARDING THE SERVICER
The Servicer for each Series will be identified in the related Prospectus
Supplement. The Servicer may be an affiliate of the Depositor and may have other
business relationships with the Depositor and its affiliates.
In the event of an Event of Default under either a Servicing Agreement or a
Pooling and Servicing Agreement, the Servicer may be replaced by the Trustee or
a successor Servicer. Unless otherwise specified in the related Prospectus
Supplement, such Events of Default and the rights of the Trustee upon such a
default under the Agreement for the related Series will be substantially similar
to those described under 'THE AGREEMENTS--Events of Default; Rights Upon Events
of Default--Pooling and Servicing Agreement; Servicing Agreement' herein.
Unless otherwise specified in the related Prospectus Supplement, the
Servicer does not have the right to assign its rights and delegate its duties
and obligations under the related Agreement for each Series unless the successor
Servicer accepting such assignment or delegation (i) services similar loans in
the ordinary course of its business, (ii) is reasonably satisfactory to the
Trustee for the related Series, (iii) has a net worth of not less than the
amount specified in the related Prospectus Supplement, (iv) would not cause any
Rating Agency's rating of the Securities for such Series in effect immediately
prior to such assignment, sale or transfer to be qualified, downgraded or
withdrawn as a result of such assignment, sale or transfer and (v) executes and
delivers to the Trustee an agreement, in form and substance reasonably
satisfactory to the Trustee, which contains an assumption by such Servicer of
the due and punctual performance and observance of each covenant and condition
to be performed or observed by the servicer under the related Agreement from and
after the date of such agreement. No such assignment will become effective until
the Trustee or a successor Servicer has assumed the servicer's obligations and
duties under the related Agreement. To the extent that the Servicer transfers
its obligations to a wholly-owned subsidiary or affiliate, such subsidiary or
affiliate need not satisfy the criteria set forth above; however, in such
instance, the assigning Servicer will remain liable for the servicing
obligations under the related Agreement. Any entity into which the Servicer is
merged or consolidated or any successor corporation resulting from any merger,
conversion or consolidation will succeed to the Servicer's obligations under the
related Agreement, provided that such successor or surviving entity meets the
requirements for a successor Servicer set forth above.
Except to the extent otherwise provided therein, each Agreement will
provide that neither the Servicer, nor any director, officer, employee or agent
of the Servicer, will be under any liability to the related Trust Fund, the
Depositor or the Holders for any action taken or for failing to take any action
in good faith pursuant to the related Agreement, or for errors in judgment;
provided, however, that neither the Servicer nor any such person will be
protected against any breach of warranty or representations made under such
Agreement, or the failure to perform its obligations in compliance with any
standard of care set forth in such Agreement, or liability which would otherwise
be imposed by reason of willful misfeasance, bad faith or negligence in the
performance of their duties or by reason of reckless disregard of their
obligations and duties thereunder. Each Agreement will further provide that the
Servicer and any director, officer, employee or agent of the Servicer is
entitled to indemnification from the related Trust Fund and will be held
harmless against any loss, liability or expense incurred in connection with any
legal action relating to the Agreement or the Securities, other than any loss,
liability or expense incurred by reason of willful misfeasance, bad faith or
negligence in the performance of duties thereunder or by reason of reckless
disregard of obligations and duties thereunder. In addition, the related
Agreement will provide 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 such Agreement which, in its opinion, may
involve it in any expense or liability. The Servicer may, in its discretion,
undertake any such action which it may deem necessary or desirable with respect
to the related Agreement and the rights and duties of the parties thereto and
the interests of the Holders thereunder. In such event, the legal expenses and
costs of such action and any liability resulting therefrom may be expenses,
costs, and liabilities of the Trust Fund and the Servicer may be entitled to be
reimbursed therefor out of the Collection Account.
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THE AGREEMENTS
The following summaries describe certain provisions of the Agreements. The
summaries do not purport to be complete and are subject to, and qualified in
their entirety by reference to, the provisions of the Agreements. Where
particular provisions or terms used in the Agreements are referred to, such
provisions or terms are as specified in the related Agreements.
ASSIGNMENT OF PRIMARY ASSETS
General. At the time of issuance of the Securities of a Series, the
Depositor will transfer, convey and assign to the Trust Fund all right, title
and interest of the Depositor in the Primary Assets and other property to be
transferred to the Trust Fund for a Series. Such assignment will include all
principal and interest due on or with respect to the Primary Assets after the
Cut-off Date specified in the related Prospectus Supplement (except for any
Retained Interests). The Trustee will, concurrently with such assignment,
execute and deliver the Securities.
Assignment of Loans. Unless otherwise specified in the related Prospectus
Supplement, the Depositor will, as to each Loan, deliver or cause to be
delivered to the Trustee, or, as specified in the related Prospectus Supplement,
a custodian on behalf of the Trustee (the 'Custodian'), the Mortgage Note
endorsed without recourse to the order of the Trustee or in blank, the original
Mortgage with evidence of recording indicated thereon (except for any Mortgage
not returned from the public recording office, in which case a copy of such
Mortgage will be delivered, together with a certificate that the original of
such Mortgage was delivered to such recording office) and an assignment of the
Mortgage in recordable form. The Trustee, or, if so specified in the related
Prospectus Supplement, the Custodian, will hold such documents in trust for the
benefit of the Holders.
Unless otherwise specified in the related Prospectus Supplement, the
Depositor will as to each Home Improvement Contract, deliver or cause to be
delivered to the Trustee (or the Custodian) the original Home Improvement
Contract and copies of documents and instruments related to each Home
Improvement Contract and, other than in the case of unsecured Home Improvement
Contracts, the security interest in the property securing such Home Improvement
Contract. In order to give notice of the right, title and interest of
Securityholders to the Home Improvement Contracts, the Depositor will cause a
UCC-1 financing statement to be executed by the Depositor or the Seller
identifying the Trustee as the secured party and identifying all Home
Improvement Contracts as collateral. Unless otherwise specified in the related
Prospectus Supplement, the Home Improvement Contracts will not be stamped or
otherwise marked to reflect their assignment to the Trust. Therefore, if,
through negligence, fraud or otherwise, a subsequent purchaser were able to take
physical possession of the Home Improvement Contracts without notice of such
assignment, the interest of Securityholders in the Home Improvement Contracts
could be defeated. See 'CERTAIN LEGAL ASPECTS OF THE LOANS--The Home Improvement
Contracts.'
With respect to Loans secured by Mortgages, if so specified in the related
Prospectus Supplement, the Depositor will, at the time of issuance of the
Securities, cause assignments to the Trustee of the Mortgages relating to the
Loans for a Series to be recorded in the appropriate public office for real
property records, except in states where, in the opinion of counsel acceptable
to the Trustee, such recording is not required to protect the Trustee's interest
in the related Loans. If specified in the related Prospectus Supplement, the
Depositor will cause such assignments to be so recorded within the time after
issuance of the Securities as is specified in the related Prospectus Supplement,
in which event, the Agreement may, as specified in the related Prospectus
Supplement, require the Depositor to repurchase from the Trustee any Loan the
related Mortgage of which is not recorded within such time, at the price
described below with respect to repurchases by reason of defective
documentation. Unless otherwise provided in the related Prospectus Supplement,
the enforcement of the repurchase obligation would constitute the sole remedy
available to the Holders or the Trustee for the failure of a Mortgage to be
recorded.
Each Loan will be identified in a schedule appearing as an exhibit to the
related Agreement (the 'Loan Schedule'). Such Loan Schedule will specify with
respect to each Loan: the original principal amount and unpaid principal balance
as of the Cut-off Date; the current interest rate; the current Scheduled Payment
of principal and interest; the maturity date, if any, of the related Mortgage
Note; if the Loan is an adjustable rate Loan, the Lifetime Rate Cap, if any, and
the current index.
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Repurchase and Substitution of Non-Conforming Primary Assets. Unless
otherwise provided in the related Prospectus Supplement, if any document in the
file relating to the Primary Assets delivered by the Depositor to the Trustee
(or Custodian) is found by the Trustee within 90 days of the execution of the
related Agreement (or promptly after the Trustee's receipt of any document
permitted to be delivered after the Closing Date) to be defective in any
material respect and the Depositor or Seller does not cure such defect within 90
days, or within such other period specified in the related Prospectus
Supplement, the Depositor or Seller will, not later than 90 days or within such
other period specified in the related Prospectus Supplement, after the Trustee's
notice to the Depositor or the Seller, as the case may be, of the defect,
repurchase the related Primary Asset or any property acquired in respect thereof
from the Trustee at a price equal to, unless otherwise specified in the related
Prospectus Supplement, (a) the lesser of (i) the outstanding principal balance
of such Primary Asset and (ii) the Trust Fund's federal income tax basis in the
Primary Asset and (b) accrued and unpaid interest to the date of the next
scheduled payment on such Primary Asset at the rate set forth in the related
Agreement (less any unreimbursed Advances respecting such Primary Asset),
provided, however, the purchase price shall not be limited in (i) above to the
Trust Fund's federal income tax basis if the repurchase at a price equal to the
outstanding principal balance of such Primary Asset will not result in any
prohibited transaction tax under Section 860F(a) of the Code.
If provided in the related Prospectus Supplement, the Depositor or Seller,
as the case may be, may, rather than repurchase the Primary Asset as described
above, remove such Primary Asset from the Trust Fund (the 'Deleted Primary
Asset') and substitute in its place one or more other Primary Assets (each, a
'Qualifying Substitute Primary Asset') provided, however, that (i) with respect
to a Trust Fund for which no REMIC election is made, such substitution must be
effected within 120 days of the date of initial issuance of the Securities and
(ii) with respect to a Trust Fund for which a REMIC election is made, after a
specified time period, the Trustee must have received a satisfactory opinion of
counsel that such substitution will not cause the Trust Fund to lose its status
as a REMIC or otherwise subject the Trust Fund to a prohibited transaction tax.
Unless otherwise specified in the related Prospectus Supplement, any
Qualifying Substitute Primary Asset will have, on the date of substitution, (i)
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 Primary Asset (the amount of any shortfall to be deposited to the
Certificate Account in the month of substitution for distribution to Holders),
(ii) an interest rate not less than (and not more than 2% greater than) the
interest rate of the Deleted Primary Asset, (iii) a remaining term-to-stated
maturity not greater than (and not more than two years less than) that of the
Deleted Primary Asset, and will comply with all of the representations and
warranties set forth in the applicable agreement as of the date of substitution.
Unless otherwise provided in the related Prospectus Supplement, the
above-described cure, repurchase or substitution obligations constitute the sole
remedies available to the Holders or the Trustee for a material defect in a
document for a Primary Asset.
The Depositor or another entity will make representations and warranties
with respect to Primary Assets for a Series. If the Depositor or such entity
cannot cure a breach of any such representations and warranties in all
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material respects within the time period specified in the related Prospectus
Supplement after notification by the Trustee of such breach, and if such breach
is of a nature that materially and adversely affects the value of such Primary
Asset, the Depositor or such entity is obligated to repurchase the affected
Primary Asset or, if provided in the related Prospectus Supplement, provide a
Qualifying Substitute Primary Asset therefor, subject to the same conditions and
limitations on purchases and substitutions as described above.
The Depositor's only source of funds to effect any cure, repurchase or
substitution will be through the enforcement of the corresponding obligations of
the responsible originator or Seller of such Primary Assets. See 'RISK
FACTORS--Limited Assets.'
No Holder of Securities of a Series, solely by virtue of such Holder's
status as a Holder, will have any right under the applicable Agreement for such
Series to institute any proceeding with respect to such Agreement, unless such
Holder previously has given to the Trustee for such Series written notice of
default and unless the Holders of Securities evidencing not less than 51% of the
aggregate voting rights of the Securities for such Series have made written
request upon the Trustee to institute such proceeding in its own name as Trustee
thereunder and have offered to the Trustee reasonable indemnity, and the Trustee
for 60 days has neglected or refused to institute any such proceeding.
REPORTS TO HOLDERS
The Trustee or other entity specified in the related Prospectus Supplement
will prepare and forward to each Holder on each Distribution Date, or as soon
thereafter as is practicable, a statement setting forth, to the extent
applicable to any Series, among other things:
(i) the amount of principal distributed to holders of the related
Securities and the outstanding principal balance of such Securities
following such distribution;
(ii) the amount of interest distributed to holders of the related
Securities and the current interest on such Securities;
(iii) the amounts of (a) any overdue accrued interest included in such
distribution, (b) any remaining overdue accrued interest with respect to
such Securities or (c) any current shortfall in amounts to be distributed
as accrued interest to holders of such Securities;
(iv) the amounts of (a) any overdue payments of scheduled principal
included in such distribution, (b) any remaining overdue principal amounts
with respect to such Securities, (c) any current shortfall in receipt of
scheduled principal payments on the related Primary Assets or (d) any
realized losses or Liquidation Proceeds to be allocated as reductions in
the outstanding principal balances of such Securities;
(v) the amount received under any related Enhancement, and the
remaining amount available under such Enhancement;
(vi) the amount of any delinquencies with respect to payments on the
related Primary Assets;
(vii) the book value of any REO Property acquired by the related Trust
Fund; and
(viii) such other information as specified in the related Agreement.
In addition, within a reasonable period of time after the end of each
calendar year the Trustee, unless otherwise specified in the related Prospectus
Supplement, will furnish to each Holder of record at any time during such
calendar year: (a) the aggregate of amounts reported pursuant to (i), (ii), and
(iv)(d) above for such calendar year and (b) such information specified in the
related Agreement to enable Holders to prepare their tax returns including,
without limitation, the amount of original issue discount accrued on the
Securities, if applicable. Information in the Distribution Date and annual
statements provided to the Holders will not have been examined and reported upon
by an independent public accountant. However, the Servicer will provide to the
Trustee a report by independent public accountants with respect to the
Servicer's servicing of the Loans. See 'SERVICING OF LOANS--Evidence as to
Compliance' herein.
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EVENTS OF DEFAULT; RIGHTS UPON EVENT OF DEFAULT
Pooling and Servicing Agreement; Servicing Agreement. Unless otherwise
specified in the related Prospectus Supplement, Events of Default under the
Pooling and Servicing Agreement for each Series of Certificates include (i) any
failure by the Servicer to deposit amounts in the Collection Account and
Distribution Account to enable the Trustee to distribute to Holders of such
Series any required payment, which failure continues unremedied for the number
of days specified in the related Prospectus Supplement after the giving of
written notice of such failure to the Servicer by the Trustee for such Series,
or to the Servicer and the Trustee by the Holders of such Series evidencing not
less than 25% of the aggregate voting rights of the Holders for such Series,
(ii) any failure by the Servicer duly to observe or perform in any material
respect any other of its covenants or agreements in the applicable Agreement
which continues unremedied for the number of days specified in the related
Prospectus Supplement after the giving of written notice of such failure to the
Servicer by the Trustee, or to the Servicer and the Trustee by the Holders of
such Series evidencing not less than 25% of the aggregate voting rights of the
Holders and (iii) certain events of insolvency, readjustment of debt,
marshalling of assets and liabilities or similar proceedings and certain actions
by the Servicer indicating its insolvency, reorganization or inability to pay
its obligations.
So long as an Event of Default remains unremedied under the applicable
Agreement for a Series of Securities, unless otherwise specified in the related
Prospectus Supplement, the Trustee for such Series or Holders of Securities of
such Series evidencing not less than 51% of the aggregate voting rights of the
Securities for such Series may terminate all of the rights and obligations of
the Servicer as servicer under the applicable Agreement (other than its right to
recovery of other expenses and amounts advanced pursuant to the terms of such
Agreement which rights the Servicer will retain under all circumstances),
whereupon the Trustee will succeed to all the responsibilities, duties and
liabilities of the Servicer under such Agreement and will be entitled to
reasonable servicing compensation not to exceed the applicable servicing fee,
together with other servicing compensation in the form of assumption fees, late
payment charges or otherwise as provided in such Agreement.
In the event that the Trustee is unwilling or unable so to act, it may
select, or petition a court of competent jurisdiction to appoint, a finance
institution, bank or loan servicing institution with a net worth specified in
the related Prospectus Supplement to act as successor Servicer under the
provisions of the applicable Agreement. The successor Servicer would be entitled
to reasonable servicing compensation in an amount not to exceed the Servicing
Fee as set forth in the related Prospectus Supplement, together with the other
servicing compensation in the form of assumption fees, late payment charges or
otherwise, as provided in such Agreement.
During the continuance of any Event of Default of a Servicer under an
Agreement for a Series of Securities, the Trustee for such Series will have the
right to take action to enforce its rights and remedies and to protect and
enforce the rights and remedies of the Holders of such Series, and, unless
otherwise specified in the related Prospectus Supplement, Holders of Securities
evidencing not less than 51% of the aggregate voting rights of the Securities
for such Series may direct the time, method and place of conducting any
proceeding for any remedy available to the Trustee or exercising any trust or
power conferred upon that Trustee. However, the Trustee will not be under any
obligation to pursue any such remedy or to exercise any of such trusts or powers
unless such Holders have offered the Trustee reasonable security or indemnity
against the cost, expenses and liabilities which may be incurred by the Trustee
therein or thereby. Also, the Trustee may decline to follow any such direction
if the Trustee determines that the action or proceeding so directed may not
lawfully be taken or would involve it in personal liability or be unjustly
prejudicial to the nonassenting Holders.
Indenture. Unless otherwise specified in the related Prospectus
Supplement, Events of Default under the Indenture for each Series of Notes
include: (i) a default for thirty (30) days or more in the payment of any
principal of or interest on any Note of such Series; (ii) failure to perform any
other covenant of the Depositor or the Trust Fund in the Indenture which
continues for a period of sixty (60) days after notice thereof is given in
accordance with the procedures described in the related Prospectus Supplement;
(iii) any representation or warranty made by the Depositor or the Trust Fund in
the Indenture or in any certificate or other writing delivered pursuant thereto
or in connection therewith with respect to or affecting such Series having been
incorrect in a material respect as of the time made, and such breach is not
cured within sixty (60) days after notice thereof is given in accordance with
the procedures described in the related Prospectus Supplement; (iv) certain
events of
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bankruptcy, insolvency, receivership or liquidation of the Depositor or the
Trust Fund; or (v) any other Event of Default provided with respect to Notes of
that Series.
If an Event of Default with respect to the Notes of any Series at the time
outstanding occurs and is continuing, either the Trustee or the holders of a
majority of the then aggregate outstanding amount of the Notes of such Series
may declare the principal amount (or, if the Notes of that Series are Zero
Coupon Securities, such portion of the principal amount as may be specified in
the terms of that Series, as provided in the related Prospectus Supplement) of
all the Notes of such Series to be due and payable immediately. Such declaration
may, under certain circumstances, be rescinded and annulled by the holders of a
majority in aggregate outstanding amount of the Notes of such Series.
If, following an Event of Default with respect to any Series of Notes, the
Notes of such Series have been declared to be due and payable, the Trustee may,
in its discretion, notwithstanding such acceleration, elect to maintain
possession of the collateral securing the Notes of such Series and to continue
to apply distributions on such collateral as if there had been no declaration of
acceleration if such collateral continues to provide sufficient funds for the
payment of principal of and interest on the Notes of such Series as they would
have become due if there had not been such a declaration. In addition, the
Trustee may not sell or otherwise liquidate the collateral securing the Notes of
a Series following an Event of Default, other than a default in the payment of
any principal or interest on any Note of such Series for thirty (30) days or
more, unless (a) the holders of 100% of the then aggregate outstanding amount of
the Notes of such Series consent to such sale, (b) the proceeds of such sale or
liquidation are sufficient to pay in full the principal of and accrued interest,
due and unpaid, on the outstanding Notes of such Series at the date of such sale
or (c) the Trustee determines that such collateral would not be sufficient on an
ongoing basis to make all payments on such Notes as such payments would have
become due if such Notes had not been declared due and payable, and the Trustee
obtains the consent of the holders of 66 2/3% of the then aggregate outstanding
amount of the Notes of such Series.
In the event that the Trustee liquidates the collateral in connection with
an Event of Default involving a default for thirty (30) days or more in the
payment of principal of or interest on the Notes of a Series, the Indenture
provides that the Trustee will have a prior lien on the proceeds of any such
liquidation for unpaid fees and expenses. As a result, upon the occurrence of
such an Event of Default, the amount available for distribution to the
Noteholders would be less than would otherwise be the case. However, the Trustee
may not institute a proceeding for the enforcement of its lien except in
connection with a proceeding for the enforcement of the lien of the Indenture
for the benefit of the Noteholders after the occurrence of such an Event of
Default.
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 holders of any such Notes issued at a discount from par may
be entitled to receive no more than an amount equal to the unpaid principal
amount thereof less the amount of such discount which is unamortized.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, in case an Event of Default shall occur and be continuing with respect
to a Series of Notes, the Trustee shall be under no obligation to exercise any
of the rights or powers under the Indenture at the request or direction of any
of the holders of Notes of such Series, unless such holders offered to the
Trustee security or indemnity satisfactory to it against the costs, expenses and
liabilities which might be incurred by it in complying with such request or
direction. Subject to such provisions for indemnification and certain
limitations contained in the Indenture, the holders of a majority of the then
aggregate outstanding amount of the Notes of such Series shall have the right to
direct the time, method and place of conducting any proceeding for any remedy
available to the Trustee or exercising any trust or power conferred on the
Trustee with respect to the Notes of such Series, and the holders of a majority
of the then aggregate outstanding amount of the Notes of such Series may, in
certain cases, waive any default with respect thereto, except a default in the
payment of principal or interest or a default in respect of a covenant or
provision of the Indenture that cannot be modified without the waiver or consent
of all the holders of the outstanding Notes of such Series affected thereby.
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THE TRUSTEE
The identity of the commercial bank, savings and loan association or trust
company named as the Trustee for each Series of Securities will be set forth in
the related Prospectus Supplement. The entity serving as Trustee may have normal
banking relationships with the Depositor or the Servicer. In addition, for the
purpose of meeting the legal requirements of certain local jurisdictions, the
Trustee will have the power to appoint co-trustees or separate trustees of all
or any part of the Trust Fund relating to a Series of Securities. In the event
of such appointment, all rights, powers, duties and obligations conferred or
imposed upon the Trustee by the Agreement relating to such Series will be
conferred or imposed upon the Trustee and each such separate trustee or
co-trustee jointly, or, in any jurisdiction in which the Trustee shall be
incompetent or unqualified to perform certain acts, singly upon such separate
trustee or co-trustee who shall exercise and perform such rights, powers, duties
and obligations solely at the direction of the Trustee. The Trustee may also
appoint agents to perform any of the responsibilities of the Trustee, which
agents shall have any or all of the rights, powers, duties and obligations of
the Trustee conferred on them by such appointment; provided that the Trustee
shall continue to be responsible for its duties and obligations under the
Agreement.
DUTIES OF THE TRUSTEE
The Trustee makes no representations as to the validity or sufficiency of
the Agreement, the Securities or of any Primary Asset or related documents. If
no Event of Default (as defined in the related Agreement) has occurred, the
Trustee is required to perform only those duties specifically required of it
under the Agreement. Upon receipt of the various certificates, statements,
reports or other instruments required to be furnished to it, the Trustee is
required to examine them to determine whether they are in the form required by
the related Agreement; however, the Trustee will not be responsible for the
accuracy or content of any such documents furnished by it or the Holders to the
Servicer under the Agreement.
The Trustee may be held liable for its own negligent action or failure to
act, or for its own misconduct; provided, however, that the Trustee will not be
personally liable with respect to any action taken, suffered or omitted to be
taken by it in good faith in accordance with the direction of the Holders in an
Event of Default. The Trustee is not required to expend or risk its own funds or
otherwise incur any financial liability in the performance of any of its duties
under the Agreement, or in the exercise of any of its rights or powers, if it
has reasonable grounds for believing that repayment of such funds or adequate
indemnity against such risk or liability is not reasonably assured to it.
RESIGNATION OF TRUSTEE
The Trustee may, upon written notice to the Depositor, resign at any time,
in which event the Depositor will be obligated to use its best efforts to
appoint a successor Trustee. If no successor Trustee has been appointed and has
accepted the appointment within 30 days after giving such notice of resignation,
the resigning Trustee may petition any court of competent jurisdiction for
appointment of a successor Trustee. The Trustee may also be removed at any time
(i) if the Trustee ceases to be eligible to continue as such under the
Agreement, (ii) if the Trustee becomes insolvent or (iii) by the Holders of
Securities evidencing over 50% of the aggregate voting rights of the Securities
in the Trust Fund upon written notice to the Trustee and to the Depositor. 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.
AMENDMENT OF AGREEMENT
Unless otherwise specified in the Prospectus Supplement, the Agreement for
each Series of Securities may be amended by the Depositor, the Servicer (with
respect to a Series relating to Loans), and the Trustee with respect to such
Series, without notice to or consent of the Holders (i) to cure any ambiguity,
(ii) to correct any defective provisions or to correct or supplement any
provision therein, (iii) to add to the duties of the Depositor, the Trust Fund
or Servicer, (iv) to add any other provisions with respect to matters or
questions arising under such Agreement or related Enhancement, (v) to add or
amend any provisions of such Agreement as required by a Rating Agency in order
to maintain or improve the rating of the Securities, or (vi) to comply with any
requirements imposed by the Code; provided that any such amendment except
pursuant to clause (vi) above will not adversely affect in any material respect
the interests of any Holders of such Series, as evidenced by an
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opinion of counsel. Any such amendment except pursuant to clause (vi) of the
preceding sentence shall be deemed not to adversely affect in any material
respect the interests of any Holder if the Trustee receives written confirmation
from each Rating Agency rating such Securities that such amendment will not
cause such Rating Agency to reduce the then current rating thereof. Unless
otherwise specified in the Prospectus Supplement, the Agreement for each Series
may also be amended by the Trustee, the Servicer, if applicable, and the
Depositor with respect to such Series with the consent of the Holders possessing
not less than 66 2/3% of the aggregate outstanding principal amount of the
Securities of such Series or, if only certain Classes of such Series are
afffected by such amendment, 66 2/3% of the aggregate outstanding principal
amount of the Securities of each Class of such Series affected thereby, for the
purpose of adding any provisions to or changing in any manner or eliminating any
of the provisions of such Agreement or modifying in any manner the rights of
Holders of such Series; provided, however, that no such amendment may (a) reduce
the amount or delay the timing of payments on any Security without the consent
of the Holder of such Security; or (b) reduce the aforesaid percentage of the
aggregate outstanding principal amount of Securities of each Class, the Holders
of which are required to consent to any such amendment without the consent of
the Holders of 100% of the aggregate outstanding principal amount of each Class
of Securities affected thereby.
VOTING RIGHTS
The related Prospectus Supplement will set forth the method of determining
allocation of voting rights with respect to a Series.
LIST OF HOLDERS
Upon written request of three or more Holders of record of a Series for
purposes of communicating with other Holders with respect to their rights under
the Agreement, which request is accompanied by a copy of the communication which
such Holders propose to transmit, the Trustee will afford such Holders access
during business hours to the most recent list of Holders of that Series held by
the Trustee.
No Agreement will provide for the holding of any annual or other meeting of
Holders.
REMIC ADMINISTRATOR
For any Series with respect to which a REMIC election is made, preparation
of certain reports and certain other administrative duties with respect to the
Trust Fund may be performed by a REMIC administrator, who may be an affiliate of
the Depositor.
TERMINATION
Pooling and Servicing Agreement; Trust Agreement. The obligations created
by the Pooling and Servicing Agreement or Trust Agreement for a Series will
terminate upon the distribution to Holders of all amounts distributable to them
pursuant to such Agreement after the earlier of (i) the later of (a) the final
payment or other liquidation of the last Primary Asset remaining in the Trust
Fund for such Series and (b) the disposition of all property acquired upon
foreclosure or deed in lieu of foreclosure or repossession in respect of any
Primary Asset or (ii) the repurchase, as described below, by the Servicer or
other entity specified in the related Prospectus Supplement from the Trustee for
such Series of all Primary Assets and other property at that time subject to
such Agreement. The Agreement for each Series permits, but does not require, the
Servicer or other entity specified in the related Prospectus Supplement to
purchase from the Trust Fund for such Series all remaining Primary Assets at a
price equal to, unless otherwise specified in the related Prospectus Supplement,
100% of the aggregate Principal Balance of such Primary Assets plus, with
respect to any property acquired in respect of a Primary Asset, if any, the
outstanding Principal Balance of the related Primary Asset at the time of
foreclosure, less, in either case, related unreimbursed Advances (in the case of
the Primary Assets, only to the extent not already reflected in the computation
of the aggregate Principal Balance of such Primary Assets) and unreimbursed
expenses (that are reimbursable pursuant to the terms of the Pooling and
Servicing Agreement) plus, in either case, accrued interest thereon at the
weighted average rate on the related Primary Assets through the last day of the
Due Period in which such repurchase occurs; provided, however, that if an
election is made for treatment as a REMIC under the Code, the repurchase price
may equal the greater of (a) 100% of the aggregate Principal Balance of such
Primary Assets, plus accrued interest thereon at the applicable net rates on the
Primary Assets
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through the last day of the month of such repurchase and (b) the aggregate fair
market value of such Primary Assets plus the fair market value of any property
acquired in respect of a Primary Asset and remaining in the Trust Fund. The
exercise of such right will effect early retirement of the Securities of such
Series, but such entity's right to so purchase is subject to the aggregate
Principal Balance of the Primary Assets at the time of repurchase being less
than a fixed percentage, to be set forth in the related Prospectus Supplement,
of the aggregate Principal Balance of the Primary Assets as of the Cut-off Date.
In no event, however, will the trust created by the Agreement continue beyond
the expiration of 21 years from the death of the last survivor of certain
persons identified therein. For each Series, the Servicer or the Trustee, as
applicable, will give written notice of termination of the Agreement to each
Holder, 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 for a Series,
the Depositor or another entity may effect an optional termination of the Trust
Fund under the circumstances described in such Prospectus Supplement. See
'DESCRIPTION OF THE SECURITIES--Optional Purchase or Termination' herein.
Indenture. The Indenture will be discharged with respect to a Series of
Notes (except with respect to certain continuing rights specified in the
Indenture) upon the delivery to the Trustee for cancellation of all the Notes of
such Series or, with certain limitations, upon deposit with the Trustee of funds
sufficient for the payment in full of all of the Notes of such Series.
In addition to such discharge with certain limitations, the Indenture will
provide that, if so specified with respect to the Notes of any Series, the
related Trust Fund will be discharged from any and all obligations in respect of
the Notes of such Series (except for certain obligations relating to temporary
Notes and exchange of Notes, to register the transfer of or exchange Notes of
such Series, to replace stolen, lost or mutilated Notes of such Series, to
maintain paying agencies and to hold monies for payment in trust) upon the
deposit with the Trustee, in trust, of money and/or direct obligations of or
obligations guaranteed by the United States of America which through the payment
of interest and principal in respect thereof in accordance with their terms will
provide money in an amount sufficient to pay the principal of and each
installment of interest on the Notes of such Series on the Last Scheduled
Distribution Date for such Notes and any installment of interest on such Notes
in accordance with the terms of the Indenture and the Notes of such Series. In
the event of any such defeasance and discharge of Notes of such Series, holders
of Notes of such Series would be able to look only to such money and/or direct
obligations for payment of principal and interest, if any, on their Notes until
maturity.
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CERTAIN LEGAL ASPECTS OF LOANS
The following discussion contains summaries of certain legal aspects of
mortgage loans, home improvement installment sales contracts and home
improvement installment loan agreements which are general in nature. Because
certain of such legal aspects are governed by applicable state law (which laws
may differ substantially), the summaries do not purport to be complete nor
reflect the laws of any particular state, nor encompass the laws of all states
in which the properties securing the Loans are situated. The summaries are
qualified in their entirety by reference to the applicable federal and state
laws governing the Loans.
MORTGAGES
The Loans for a Series will and certain Home Improvement Contracts for a
Series may be secured by either mortgages or deeds of trust or deeds to secure
debt (such Mortgage Loans and Home Improvement Contracts are hereinafter
referred to in this section as 'mortgage loans'), depending upon the prevailing
practice in the state in which the property subject to a mortgage loan 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 such 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
and may also be subject to other liens pursuant to the laws of the jurisdiction
in which the Mortgaged Property is located. Priority with respect to such
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/property owner or the land trustee (as described below), and the
mortgagee, who is the lender. Under the mortgage instrument, the mortgagor
delivers to the mortgagee a note or bond and the mortgage. In the case of a land
trust, there are three parties because title to the property is held by a land
trustee under a land trust agreement of which the borrower/property owner is the
beneficiary; at origination of a mortgage loan, the borrower executes a separate
undertaking to make payments on the mortgage note. A deed of trust transaction
normally has three parties, the trustor, who is the borrower/property owner; the
beneficiary, who is the lender, and the trustee, a third-party grantee. Under a
deed of trust, the trustor grants the property, irrevocably until the debt is
paid, in trust, generally with a power of sale, to the trustee to secure payment
of the obligation. The mortgagee's authority under a mortgage and the trustee's
authority under a deed of trust are governed by the law of the state in which
the real property is located, the express provisions of the mortgage or deed of
trust, and, in some cases, in deed of trust transactions, the directions of the
beneficiary.
FORECLOSURE ON MORTGAGES
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 and expensive. 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.
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 which authorizes
the trustee to sell the property upon any default by the borrower under the
terms of the note or deed of trust. In certain states, such foreclosure also may
be accomplished by judicial action in the manner provided for foreclosure of
mortgages. In 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 in
some states must provide notice to any other individual having an interest in
the real property, including any junior lienholders. If the deed of trust is not
reinstated within any applicable cure period, a notice of sale must be posted in
a public place and, in most states, published for a specified period of time in
one or more newspapers. In addition, some state laws require that a
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copy of the notice of sale be posted on the property and sent to all parties
having an interest of record in the property. The trustor, borrower, or any
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. Generally,
state law controls the amount of foreclosure expenses and costs, including
attorney's fees, which may be recovered by a lender. If the deed of trust is not
reinstated, 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, recorded and sent to all parties having an interest in the real
property.
An action to foreclose a mortgage is an action to recover the mortgage debt
by enforcing the mortgagee's rights under the mortgage. It is regulated by
statutes and rules and subject throughout to the court's equitable powers.
Generally, a mortgagor is bound by the terms of the related mortgage note and
the mortgage as made and cannot be relieved from his default if the mortgagee
has exercised his rights in a commercially reasonable manner. However, since a
foreclosure action historically was equitable in nature, the court may exercise
equitable powers to relieve a mortgagor of a default and deny the mortgagee
foreclosure on proof that either the mortgagor's default was neither willful nor
in bad faith or the mortgagee's action established a waiver, fraud, bad faith,
or oppressive or unconscionable conduct such as to warrant a court of equity to
refuse affirmative relief to the mortgagee. Under certain circumstances a court
of equity may relieve the mortgagor from an entirely technical default where
such default was not willful.
A foreclosure action is subject to most of the delays and expenses of other
lawsuits if defenses or counter-claims are interposed, sometimes requiring up to
several years to complete. Moreover, a non-collusive, regularly conducted
foreclosure sale may be challenged as a fraudulent conveyance, regardless of the
parties' intent, if a court determines that the sale was for less than fair
consideration and such sale occurred while the mortgagor was insolvent and
within one year (or within the state statute of limitations if the trustee in
bankruptcy elects to proceed under state fraudulent conveyance law) of the
filing of bankruptcy. Similarly, a suit against the debtor on the related
mortgage note may take several years and, generally, is a remedy alternative to
foreclosure, the mortgagee being precluded from pursuing both at the same time.
In the case of foreclosure under either a mortgage or a deed of trust, the
sale by the referee or other designated officer or by the trustee is a public
sale. However, because of the difficulty potential third party purchasers at the
sale have in determining the exact status of title and because 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 a
foreclosure sale. Rather, it is common for the lender to purchase the property
from the trustee or referee for an amount which may be equal to the unpaid
principal amount of the mortgage note secured by the mortgage or deed of trust
plus accrued and unpaid interest and the expenses of foreclosure, in which event
the mortgagor's debt will be extinguished or the lender may purchase for a
lesser amount in order to preserve its right against a borrower to seek a
deficiency judgment in states where such a judgment is available. Thereafter,
subject to the right of the borrower in some states to remain in possession
during the redemption period, the lender will assume the burdens of ownership,
including obtaining hazard insurance, paying taxes and making such repairs at
its own expense as are necessary to render the property suitable for sale. The
lender will commonly obtain the services of a real estate broker and pay the
broker's commission in connection with the sale of the property. Depending upon
market conditions, the ultimate proceeds of the sale of the property may not
equal the lender's investment in the property. Any loss may be reduced by the
receipt of any mortgage guaranty insurance proceeds.
RIGHTS OF REDEMPTION
In some states, after sale pursuant to a deed of trust or foreclosure of a
mortgage, the trustor or mortgagor and foreclosed junior lienors are given a
statutory period in which to redeem the property from the foreclosure sale. The
right of redemption should be distinguished from the equity of redemption, which
is a non-statutory right that must be exercised prior to the foreclosure sale.
In some states, redemption may occur only upon payment of the entire principal
balance of the loan, accrued interest and expenses of foreclosure. In other
states, redemption may be authorized if the former borrower pays only a portion
of the sums due. The effect of a statutory right of redemption is to diminish
the ability of the lender to sell the foreclosed property. The exercise
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of a right of redemption would defeat the title of any purchaser at a
foreclosure sale, or of any purchaser from the lender subsequent to foreclosure
or sale under a deed of trust. Consequently the practical effect of a right of
redemption is to force the lender to retain the property and pay the expenses of
ownership until the redemption period has run. In some states, there is no right
to redeem property after a trustee's sale under a deed of trust.
JUNIOR MORTGAGES; RIGHTS OF SENIOR MORTGAGES
The mortgage loans included in the Trust Fund for a Series will be secured
by mortgages or deeds of trust which may be second or more junior mortgages to
other mortgages held by other lenders or institutional investors. The rights of
the Trust Fund (and therefore the Holders), as mortgagee under a junior
mortgage, are subordinate to those of the mortgagee under the senior mortgage,
including the prior rights of the senior mortgagee to receive hazard insurance
and condemnation proceeds and to cause the property securing the mortgage loan
to be sold upon default of the mortgagor, thereby extinguishing the junior
mortgagee's lien unless the junior mortgagee asserts its subordinate interest in
the property in foreclosure litigation and, possibly, satisfies the defaulted
senior mortgage. A junior mortgagee may satisfy a defaulted senior loan in full
and, in some states, may cure such default and bring the senior loan current, in
either event adding the amounts expended to the balance due on the junior loan.
In most states, absent a provision in the mortgage or deed of trust, no notice
of default is required to be given to a junior mortgagee.
The standard form of the mortgage used by most institutional lenders
confers on the mortgagee the right both to receive all proceeds collected under
any hazard insurance policy and all awards made in connection with condemnation
proceedings, and to apply such proceeds and awards to any indebtedness secured
by the mortgage, in such order as the mortgagee may determine. Thus, in the
event improvements on the property are damaged or destroyed by fire or other
casualty, or in the event the property is taken by condemnation, the mortgagee
or beneficiary under underlying senior mortgages will have the prior right to
collect any insurance proceeds payable under a hazard insurance policy and any
award of damages in connection with the condemnation and to apply the same to
the indebtedness secured by the senior mortgages. Proceeds in excess of the
amount of senior mortgage indebtedness, in most cases, may be applied to the
indebtedness of a junior mortgage.
Another provision sometimes found in the form of the mortgage or deed of
trust used by institutional lenders obligates the mortgagor to pay before
delinquency all taxes and assessments on the property and, when due, all
encumbrances, charges and liens on the property which appear prior to the
mortgage or deed of trust, to provide and maintain fire insurance on the
property, to maintain and repair the property and not to commit or permit any
waste thereof, and to appear in and defend any action or proceeding purporting
to affect the property or the rights of the mortgagee under the mortgage. Upon a
failure of the mortgagor to perform any of these obligations, the mortgagee is
given the right under certain mortgages to perform the obligation itself, at its
election, with the mortgagor agreeing to reimburse the mortgagee for any sums
expended by the mortgagee on behalf of the mortgagor. All sums so expended by
the mortgagee become part of the indebtedness secured by the mortgage.
The form of credit line trust deed or mortgage used by most institutional
lenders which make revolving home equity loans typically contains a 'future
advance' clause, which provides, in essence, that additional amounts advanced to
or on behalf of the borrower by the beneficiary or lender are to be secured by
the deed of trust or mortgage. The priority of the lien securing any advance
made under the clause may depend in most states on whether the deed of trust or
mortgage is called and recorded as a credit line deed of trust or mortgage. If
the beneficiary or lender advances additional amounts, the advance is entitled
to receive the same priority as amounts initially advanced under the trust deed
or mortgage, notwithstanding the fact that there may be junior trust deeds or
mortgages and other liens which intervene between the date of recording of the
trust deed or mortgage and the date of the future advance, and notwithstanding
that the beneficiary or lender had actual knowledge of such intervening junior
trust deeds or mortgages and other liens at the time of the advance. In most
states, the trust deed or mortgage lien securing mortgage loans of the type
which includes revolving home equity credit lines applies retroactively to the
date of the original recording of the trust deed or mortgage, provided that the
total amount of advances under the home equity credit line does not exceed the
maximum specified principal amount of the recorded trust deed or mortgage,
except as to advances made after receipt by the lender of a written notice of
lien from a judgment lien creditor of the trustor.
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ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
Certain states have imposed statutory prohibitions which 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 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 net amount realized
upon the public sale of the real property and the amount due to the lender.
Other statutes require the beneficiary or mortgagee to exhaust the security
afforded under a deed of trust or mortgage by foreclosure in an attempt to
satisfy the full debt before bringing a personal action against the borrower. In
certain other states, the lender has the option of bringing a personal action
against the borrower on the debt without first exhausting such security;
however, in some of these states, the lender, following judgment on such
personal action, may be deemed to have elected a remedy and may be precluded
from exercising remedies with respect to the security. Consequently, the
practical effect of the election requirement, when applicable, is that lenders
will usually proceed first against the security rather than bringing a personal
action against the borrower. Finally, other statutory provisions limit any
deficiency judgment against the former borrower following a foreclosure sale to
the excess of the outstanding debt over the fair market value of the property at
the time of the public sale. The purpose of these statutes is generally to
prevent a beneficiary or a mortgagee from obtaining a large deficiency judgment
against the former borrower as a result of low or no bids at the foreclosure
sale.
In addition to laws limiting or prohibiting deficiency judgments, numerous
other statutory provisions, including the federal bankruptcy laws, the Federal
Soldiers' and Sailors' Relief Act, and state laws affording relief to debtors,
may interfere with or affect the ability of the secured lender to realize upon
collateral and/or enforce a deficiency judgment. For example, with respect to
federal bankruptcy law, the filing of a petition acts as a stay against the
enforcement of remedies for collection of a debt. Moreover, a court with federal
bankruptcy jurisdiction may permit a debtor through a Chapter 13 Bankruptcy Code
rehabilitative plan to cure a monetary default with respect to a loan on a
debtor's residence by paying arrearages within a reasonable time period and
reinstating the original loan payment schedule even though the lender
accelerated the loan and the lender has taken all steps to realize upon his
security (provided no sale of the property has yet occurred) prior to the filing
of the debtor's Chapter 13 petition. Some courts with federal bankruptcy
jurisdiction have approved plans, based on the particular facts of the
reorganization case, that effected the curing of a loan default by permitting
the obligor to pay arrearages over a number of years.
Courts with federal bankruptcy jurisdiction have also indicated that the
terms of a mortgage loan may be modified if the borrower has filed a petition
under Chapter 13. These courts have suggested that such modifications may
include reducing the amount of each monthly payment, changing the rate of
interest, altering the repayment schedule and reducing the lender's security
interest to the value of the residence, thus leaving the lender a general
unsecured creditor for the difference between the value of the residence and the
outstanding balance of the loan. Federal bankruptcy law and limited case law
indicate that the foregoing modifications could not be applied to the terms of a
loan secured by property that is the principal residence of the debtor. In all
cases, the secured creditor is entitled to the value of its security plus
post-petition interest, attorney's fees and costs to the extent the value of the
security exceeds the debt.
In a Chapter 11 case under the Bankruptcy Code, the lender is precluded
from foreclosing without authorization from the bankruptcy court. The lender's
lien may be transferred to other collateral and/or be limited in amount to the
value of the lender's interest in the collateral as of the date of the
bankruptcy. The loan term may be extended, the interest rate may be adjusted to
market rates and the priority of the loan may be subordinated to bankruptcy
court-approved financing. The bankruptcy court can, in effect, invalidate
due-on-sale clauses through confirmed Chapter 11 plans of reorganization.
The Bankruptcy Code provides priority to certain tax liens over the
lender's security. This may delay or interfere with the enforcement of rights in
respect of a defaulted Loan. In addition, substantive requirements are imposed
upon lenders in connection with the organization and the servicing of mortgage
loans by numerous federal and some state consumer protection laws. The 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 impose specific
statutory liabilities upon lenders who
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originate loans and who fail to comply with the provisions of the law. In some
cases, this liability may affect assignees of the loans.
DUE-ON-SALE CLAUSES IN MORTGAGE LOANS
Due-on-sale clauses permit the lender to accelerate the maturity of the
loan if the borrower sells or transfers, whether voluntarily or involuntarily,
all or part of the real property securing the loan without the lender's prior
written consent. The enforceability of these clauses has been the subject of
legislation or litigation in many states, and in some cases, typically involving
single family residential mortgage transactions, their enforceability has been
limited or denied. In any event, 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 certain exceptions. As a result, due-on-sale clauses have become generally
enforceable except in those states whose legislatures exercised their authority
to regulate the enforceability of such clauses with respect to mortgage loans
that were (i) originated or assumed during the 'window period' under the
Garn-St. Germain Act which ended in all cases not later than October 15, 1982,
and (ii) originated by lenders other than national banks, federal savings
institutions and federal credit unions. FHLMC has taken the position in its
published mortgage servicing standards that, out of a total of eleven 'window
period states,' five states (Arizona, Michigan, Minnesota, New Mexico and Utah)
have enacted statutes extending, on various terms and for varying periods, the
prohibition on enforcement of due-on-sale clauses with respect to certain
categories of window period loans. Also, the Garn-St. Germain Act does
'encourage' lenders to permit assumption of loans at the original rate of
interest or at some other rate less than the average of the original rate and
the market rate.
In addition, under federal bankruptcy law, due-on-sale clauses may not be
enforceable in bankruptcy proceedings and may, under certain circumstances, be
eliminated in any modified mortgage resulting from such bankruptcy proceeding.
ENFORCEABILITY OF PREPAYMENT AND LATE PAYMENT FEES
Forms of notes, mortgages and deeds of trust used by lenders may contain
provisions obligating the borrower to pay a late charge if payments are not
timely made, and in some circumstances may provide for prepayment fees or
penalties if the obligation is paid prior to maturity. In certain states, there
are or may be specific limitations upon the late charges which a lender may
collect from a borrower for delinquent payments. Certain states also limit the
amounts that a lender may collect from a borrower as an additional charge if the
loan is prepaid. Late charges and prepayment fees are typically retained by
servicers as additional servicing compensation.
EQUITABLE LIMITATIONS ON REMEDIES
In connection with lenders' attempts to realize upon their security, courts
have invoked general equitable principles. The equitable principles are
generally designed to relieve the borrower from the legal effect of his defaults
under the loan documents. Examples of judicial remedies that have been fathomed
include judicial requirements that the lender undertake affirmative and
expensive actions to determine the causes of 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 that lenders reinstate loans or recast payment schedules in order to
accommodate borrowers who are suffering from temporary financial disability. In
other cases, courts have limited the right of a lender to realize upon his
security if the default under the security agreement is not monetary, such as
the borrower's failure to adequately maintain the property or the borrower's
execution of secondary financing affecting the property. Finally, some courts
have been faced with the issue of whether or not federal or state constitutional
provisions reflecting due process concerns for adequate notice require that
borrowers under security agreements receive notices in addition to the
statutorily-prescribed minimums. For the most part, these cases have upheld the
notice provisions as being reasonable or have found that, in cases involving the
sale by a trustee under a deed of trust or by a mortgagee under a mortgage
having a power of sale, there is insufficient state action to afford
constitutional protections to the borrower.
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Most conventional single-family mortgage loans may be prepaid in full or in
part without penalty. The regulations of the Federal Home Loan Bank Board
prohibit the imposition of a prepayment penalty or equivalent fee for or in
connection with the acceleration of a loan by exercise of a due-on-sale clause.
A mortgagee to whom a prepayment in full has been tendered may be compelled to
give either a release of the mortgage or an instrument assigning the existing
mortgage. The absence of a restraint on prepayment, particularly with respect to
mortgage loans having higher mortgage rates, may increase the likelihood of
refinancing or other early retirements of such mortgage loans.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980, enacted in March 1980 ('Title V'), provides that state usury
limitations shall not apply to certain types of residential first mortgage loans
originated by certain lenders after March 31, 1980. Similar federal statutes
were in effect with respect to mortgage loans made during the first three months
of 1980. The Federal Home Loan Bank Board is authorized to issue rules and
regulations and to publish interpretations governing implementation of Title V.
Title V authorizes any state to reimpose interest rate limits by adopting,
before April 1, 1983, a state law, or by certifying that the voters of such
state have voted in favor of any provision, constitutional or otherwise, which
expressly rejects an application of the federal law. Fifteen states adopted such
a law prior to the April 1, 1983 deadline. In addition, even where Title V is
not so rejected, any state is authorized by the law to adopt a provision
limiting discount points or other charges on mortgage loans covered by Title V.
THE HOME IMPROVEMENT CONTRACTS
General
The Home Improvement Contracts, other than those Home Improvement Contracts
that are unsecured or secured by mortgages on real estate (such Home Improvement
Contracts are hereinafter referred to in this section as 'contracts') generally
are 'chattel paper' or constitute 'purchase money security interests' each as
defined in the Uniform Commercial Code (the 'UCC'). 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 related Agreement, the Depositor will
transfer physical possession of the contracts to the Trustee or a designated
custodian or may retain possession of the contracts as custodian for the
Trustee. In addition, the Depositor 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. 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 Trustee. Therefore, if through
negligence, fraud or otherwise, a subsequent purchaser were able to take
physical possession of the contracts without notice of such assignment, the
Trustee's interest in the contracts could be defeated.
Security Interests in Home Improvements
The contracts that are secured by the Home Improvements financed thereby
grant to the originator of such contracts a purchase money security interest in
such Home Improvements to secure all or part of the purchase price of such Home
Improvements and related services. A financing statement generally is not
required to be filed to perfect a purchase money security interest in consumer
goods. Such purchase money security interests are assignable. In general, a
purchase money security interest grants to the holder a security interest that
has priority over a conflicting security interest in the same collateral and the
proceeds of such collateral. However, to the extent that the collateral subject
to a purchase money security interest becomes a fixture, in order for the
related purchase money security interest to take priority over a conflicting
interest in the fixture, the holder's interest in such Home Improvement must
generally be perfected by a timely fixture filing. In general, under the UCC, a
security interest does not exist under the UCC in ordinary building material
incorporated into an improvement on land. Home Improvement Contracts that
finance lumber, bricks, other types of ordinary building material or other goods
that are deemed to lose such characterization, upon incorporation of such
materials into the related property, will not be secured by a purchase money
security interest in the Home Improvement being financed.
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Enforcement of Security Interest in Home Improvements
So long as the Home Improvement has not become subject to the real estate
law, a creditor can repossess a Home Improvement 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 such a sale. The law in most
states also requires that the debtor be given notice of any sale prior to resale
of the unit that the debtor may redeem it at or before such resale.
Under the laws applicable in most states, a creditor is entitled to obtain
a deficiency judgement from a debtor for any deficiency on repossession and
resale of the property securing the debtor's loan. However, some states impose
prohibitions or limitations on deficiency judgements, and in many cases the
defaulting borrower would have no assets with which to pay a judgement.
Certain 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
certain related lenders and assignees) to transfer such contract free of notice
of claims by the debtor thereunder. The effect of this rule is to subject the
assignee of such 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
by the Trustee against such 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.
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 contract which is
secured by a first lien on certain kinds of consumer goods. The contracts would
be covered if they satisfy certain 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 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 which expressly rejects application of the federal law. Fifteen states
adopted such a law prior to the April 1, 1983 deadline. In addition, even where
Title V was not so rejected, any state is authorized by the law to adopt a
provision limiting discount points or other charges on loans covered by Title V.
INSTALLMENT CONTRACTS
The Loans may also consist of installment contracts. Under an installment
contract ('Installment Contract') the seller (hereinafter referred to in this
section as the 'lender') retains legal title to the property and enters into an
agreement with the purchaser (hereinafter referred to in this section as the
'borrower') for the payment of the
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purchase price, plus interest, over the term of such contract. Only after full
performance by the borrower of the contract is the lender obligated to convey
title to the property to the purchaser. As with mortgage or deed of trust
financing, during the effective period of the Installment Contract, the borrower
is generally responsible for maintaining the property in good condition and for
paying real estate taxes, assessments and hazard insurance premiums associated
with the property.
The method of enforcing the rights of the lender under an Installment
Contract varies on a state-by-state basis depending upon the extent to which
state courts are willing, or able pursuant to state statute, to enforce the
contract strictly according to the terms. The terms of Installment Contracts
generally provide that upon a default by the borrower, the borrower loses his or
her right to occupy the property, the entire indebtedness is accelerated, and
the buyer's equitable interest in the property is forfeited. The lender in such
a situation does not have to foreclose in order to obtain title to the property,
although in some cases a quiet title action is in order if the borrower has
filed the Installment Contract in local land records and an ejectment action may
be necessary to recover possession. In a few states, particularly in cases of
borrower default during the early years of an Installment Contract, the courts
will permit ejectment of the buyer and a forfeiture of his or her interest in
the property. However, most state legislatures have enacted provisions by
analogy to mortgage law protecting borrowers under Installment Contracts from
the harsh consequences of forfeiture. Under such statutes, a judicial or
nonjudicial foreclosure may be required, the lender may be required to give
notice of default and the borrower may be granted some grace period during which
the Installment Contract may be reinstated upon full payment of the default
amount and the borrower may have a post-foreclosure statutory redemption right.
In other states, courts in equity may permit a borrower with significant
investment in the property under an Installment Contract for the sale of real
estate to share in the proceeds of sale of the property after the indebtedness
is repaid or may otherwise refuse to enforce the forfeiture clause.
Nevertheless, generally speaking, the lender's procedures for obtaining
possession and clear title under an Installment Contract in a given state are
simpler and less time-consuming and costly than are the procedures for
foreclosing and obtaining clear title to a property subject to one or more
liens.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF 1940
Under the Soldiers' and Sailors' Civil Relief Act of 1940, members of all
branches of the military on active duty, including draftees and reservists in
military service, (i) are entitled to have interest rates reduced and capped at
6% per annum, on obligations (including Loans) incurred prior to the
commencement of military service for the duration of military service, (ii) may
be entitled to a stay of proceedings on any kind of foreclosure or repossession
action in the case of defaults on such obligations entered into prior to
military service for the duration of military service and (iii) may have the
maturity of such obligations incurred prior to military service extended, the
payments lowered and the payment schedule readjusted for a period of time after
the completion of military service. However, the benefits of (i), (ii), or (iii)
above are subject to challenge by creditors and if, in the opinion of the court,
the ability of a person to comply with such obligations is not materially
impaired by military service, the court may apply equitable principles
accordingly. If a borrower's obligation to repay amounts otherwise due on a Loan
included in a Trust Fund for a Series is relieved pursuant to the Soldiers' and
Sailors' Civil Relief Act of 1940, none of the Trust Fund, the Servicer, the
Depositor nor the Trustee will be required to advance such amounts, and any loss
in respect thereof may reduce the amounts available to be paid to the holders of
the Certificates of such Series. Unless otherwise specified in the related
Prospectus Supplement, any shortfalls in interest collections on Loans
included in a Trust Fund for a Series resulting from application of the
Soldiers' and Sailors' Civil Relief Act of 1940 will be allocated to each Class
of Securities of such Series that is entitled to receive interest in respect of
such Loans in proportion to the interest that each such Class of Securities
would have otherwise been entitled to receive in respect of such Loans had such
interest shortfall not occurred.
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THE DEPOSITOR
GENERAL
The Depositor was incorporated in the State of Delaware on January 29,
1988, and is a wholly-owned subsidiary of LCPI, which is a wholly-owned
subsidiary of Lehman Brothers, a wholly-owned subsidiary of Holdings. The
Depositor's principal executive offices are located at Three World Financial
Center, New York, New York 10285. Its telephone number is (212) 298-2000.
The Depositor will not engage in any activities other than to authorize,
issue, sell, deliver, purchase and invest in (and enter into agreements in
connection with), and/or to engage in the establishment of one or more trusts
which will issue and sell, bonds, notes, debt or equity securities, obligations
and other securities and instruments ('Depositor Securities') collateralized or
otherwise secured or backed by, or otherwise representing an interest in, among
other things, receivables or pass through certificates, or participations or
certificates of participation or beneficial ownership in one or more pools of
receivables, and the proceeds of the foregoing, that arise in connection with
(i) the sale or lease of automobiles, trucks or other motor vehicles, equipment,
merchandise and other personal property, (ii) credit card purchases or cash
advances, (iii) the sale, licensing or other commercial provision of services,
rights, intellectual properties and other intangibles, (iv) trade financings,
(v) loans secured by certain first or junior mortgages on real estate, (vi)
loans to employee stock ownership plans and (vii) any and all other commercial
transactions and commercial, sovereign, student or consumer loans or
indebtedness and, in connection therewith or otherwise, purchasing, acquiring,
owning, holding, transferring, conveying, servicing, selling, pledging,
assigning, financing and otherwise dealing with such receivables, pass-through
certificates, or participations or certificates of participation or beneficial
ownership. Article Third of the Depositor's Certificate of Incorporation limits
the Depositor's activities to the above activities and certain related
activities, such as credit enhancement with respect to such Depositor
Securities, and to any activities incidental to and necessary or convenient for
the accomplishment of such purposes. The Certificate of Incorporation of the
Depositor provides that any Depositor Securities, except for subordinated
Depositor Securities, must be rated in one of the four highest categories by a
nationally recognized rating agency.
USE OF PROCEEDS
The Depositor will apply all or substantially all of the net proceeds from
the sale of each Series of Securities for one or more of the following purposes:
(i) to purchase the related Primary Assets, (ii) to repay indebtedness which has
been incurred to obtain funds to acquire such Primary Assets, (iii) to establish
any Reserve Funds described in the related Prospectus Supplement and (iv) to pay
costs of structuring and issuing such Securities, including the costs of
obtaining Enhancement, if any. If so specified in the related Prospectus
Supplement, the purchase of the Primary Assets for a Series may be effected by
an exchange of Securities with the Seller of such Primary Assets.
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CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
GENERAL
The following is a summary of certain anticipated federal income tax
consequences of the purchase, ownership, and disposition of the Securities and
is based on advise of Brown & Wood, special counsel to the Depositor. The
summary is based upon the provisions of the Code, the regulations promulgated
thereunder, including, where applicable, proposed regulations, and the judicial
and administrative rulings and decisions now in effect, all of which are subject
to change or possible differing interpretations. The statutory provisions,
regulations, and interpretations on which this interpretation is based are
subject to change, and such a change could apply retroactively.
The summary does not purport to deal with all aspects of federal income
taxation that may affect particular investors in light of their individual
circumstances, nor with certain types of investors subject to special treatment
under the federal income tax laws. This summary focuses primarily upon investors
who will hold Securities as 'capital assets' (generally, property held for
investment) within the meaning of Section 1221 of the Code, but much of the
discussion is applicable to other investors as well. Prospective Investors are
advised to consult their own tax advisers concerning the federal, state, local
and any other tax consequences to them of the purchase, ownership and
disposition of the Securities.
The federal income tax consequences to Holders will vary depending on
whether (i) the Securities of a Series are classified as indebtedness; (ii) an
election is made to treat the Trust Fund relating to a particular Series of
Securities as a real estate mortgage investment conduit ('REMIC') under the
Internal Revenue Code of 1986, as amended (the 'Code'); (iii) the Securities
represent an ownership interest in some or all of the assets included in the
Trust Fund for a Series or (iv) an election is made to treat the Trust Fund
relating to a particular Series of Certificates as a partnership. The Prospectus
Supplement for each Series of Securities will specify how the Securities will be
treated for federal income tax purposes and will discuss whether a REMIC
election, if any, will be made with respect to such Series.
TAXATION OF DEBT SECURITIES
Status as Real Property Loans. Except to the extent provided otherwise in
a Supplement as to each Series of Securities Brown & Wood will have advised the
Depositor that: (i) Securities held by a mutual savings bank or domestic
building and loan association will represent interests in 'qualifying real
property loans' within the meaning of Code section 593(d); (ii) Securities held
by a domestic building and loan association will constitute 'loans . . . secured
by an interest in real property' within the meaning of Code section
7701(a)(19)(C)(v); and (iii) Securities held by a real estate investment trust
will constitute 'real estate assets' within the meaning of Code section
856(c)(5)(A) and interest on Securities will be considered 'interest on
obligations secured by mortgages on real property or on interests in real
property' within the meaning of Code section 856(c)(3)(B).
Interest and Acquisition Discount. Securities representing regular
interests in a REMIC ('Regular Interest Securities') are generally taxable to
holders in the same manner as evidences of indebtedness issued by the REMIC.
Stated interest on the Regular Interest Securities will be taxable as ordinary
income and taken into account using the accrual method of accounting, regardless
of the Holder's normal accounting method. Interest (other than original issue
discount) on Securities (other than Regular Interest Securities) that are
characterized as indebtedness for federal income tax purposes will be includible
in income by holders thereof in accordance with their usual methods of
accounting. Securities characterized as debt for federal income tax purposes and
Regular Interest Securities will be referred to hereinafter collectively as
'Debt Securities.'
Debt Securities that are Compound Interest Securities will, and certain of
the other Debt Securities may, be issued with 'original issue discount' ('OID').
The following discussion is based in part on the rules governing OID which are
set forth in Sections 1271-1275 of the Code and the Treasury regulations issued
thereunder on February 2, 1994 (the 'OID Regulations'). A Holder should be
aware, however, that the OID Regulations do not adequately address certain
issues relevant to prepayable securities, such as the Debt Securities.
In general, OID, if any, will equal the difference between the stated
redemption price at maturity of a Debt Security and its issue price. A holder of
a Debt Security must include such OID in gross income as ordinary
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interest income as it accrues under a method taking into account an economic
accrual of the discount. In general, OID must be included in income in advance
of the receipt of the cash representing that income. The amount of OID on a Debt
Security will be considered to be zero if it is less than a de minimis amount
determined under the Code.
The issue price of a Debt Security is the first price at which a
substantial amount of Debt Securities of that class are sold to the public
(excluding bond houses, brokers, underwriters or wholesalers). If less than a
substantial amount of a particular class of Debt Securities is sold for cash on
or prior to the Closing Date, the issue price for such class will be treated as
the fair market value of such class on the Closing Date. The issue price of a
Debt Security also includes the amount paid by an initial Debt Security holder
for accrued interest that relates to a period prior to the issue date of the
Debt Security. The stated redemption price at maturity of a Debt Security
includes the original principal amount of the Debt Security, but generally will
not include distributions of interest if such distributions constitute
'qualified stated interest.'
Under the OID Regulations, qualified stated interest generally means
interest payable at a single fixed rate or qualified variable rate (as described
below) provided that such interest payments are unconditionally payable at
intervals of one year or less during the entire term of the Debt Security. The
OID Regulations state that interest payments are unconditionally payable only if
a late payment or nonpayment is expected to be penalized or reasonable remedies
exist to compel payment. Certain Debt Securities may provide for default
remedies in the event of late payment or nonpayment of interest. The interest on
such Debt Securities will be unconditionally payable and constitute qualified
stated interest, not OID. However, absent clarification of the OID Regulations,
where Debt Securities do not provide for default remedies, the interest payments
will be included in the Debt Security's stated redemption price at maturity and
taxed as OID. Interest is payable at a single fixed rate only if the rate
appropriately takes into account the length of the interval between payments.
Distributions of interest on Debt Securities with respect to which deferred
interest will accrue, will not constitute qualified stated interest payments, in
which case the stated redemption price at maturity of such Debt Securities
includes all distributions of interest as well as principal thereon. Where the
interval between the issue date and the first Distribution Date on a Debt
Security is either longer or shorter than the interval between subsequent
Distribution Dates, all or part of the interest foregone, in the case of the
longer interval, and all of the additional interest, in the case of the shorter
interval, will be included in the stated redemption price at maturity and tested
under the de minimis rule described below. In the case of a Debt Security with a
long first period which has non-de minimis OID, all stated interest in excess of
interest payable at the effective interest rate for the long first period will
be included in the stated redemption price at maturity and the Debt Security
will generally have OID. Holders of Debt Securities should consult their own tax
advisors to determine the issue price and stated redemption price at maturity of
a Debt Security.
Under the de minimis rule, OID on a Debt Security will be considered to be
zero if such OID is less than 0.25% of the stated redemption price at maturity
of the Debt Security multiplied by the weighted average maturity of the Debt
Security. For this purpose, the weighted average maturity of the Debt Security
is computed as the sum of the amounts determined by multiplying the number of
full years (i.e., rounding down partial years) from the issue date until each
distribution in reduction of stated redemption price at maturity is scheduled to
be made by a fraction, the numerator of which is the amount of each distribution
included in the stated redemption price at maturity of the Debt Security and the
denominator of which is the stated redemption price at maturity of the Debt
Security. Holders generally must report de minimis OID pro rata as principal
payments are received, and such income will be capital gain if the Debt Security
is held as a capital asset. However, accrual method holders may elect to accrue
all de minimis OID as well as market discount under a constant interest method.
Debt Securities may provide for interest based on a qualified variable
rate. Under the OID Regulations, interest is treated as payable at a qualified
variable rate and not as contingent interest if, generally, (i) such interest is
unconditionally payable at least annually, (ii) the issue price of the debt
instrument does not exceed the total noncontingent principal payments and (iii)
interest is based on a 'qualified floating rate,' an 'objective rate,' or a
combination of 'qualified floating rates' that do not operate in a manner that
significantly accelerates or defers interest payments on such Debt Security. In
the case of Compound Interest Securities, certain Interest Weighted Securities,
and certain of the other Debt Securities, none of the payments under the
instrument will be considered qualified stated interest, and thus the aggregate
amount of all payments will be included in the stated redemption price.
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The holder of a Debt Security issued with OID must include in gross income,
for all days during its taxable year on which it holds such Debt Security, the
sum of the 'daily portions' of such original issue discount. The amount of OID
includible in income by a holder will be computed by allocating to each day
during a taxable year a pro rata portion of the original issue discount that
accrued during the relevant accrual period. In the case of a Debt Security that
is not a Regular Interest Security and the principal payments on which are not
subject to acceleration resulting from prepayments on the Loans, the amount of
OID includible in income of a Holder for an accrual period (generally the period
over which interest accrues on the debt instrument) will equal the product of
the yield to maturity of the Debt Security and the adjusted issue price of the
Debt Security, reduced by any payments of qualified stated interest. The
adjusted issue price is the sum of its issue price plus prior accruals or OID,
reduced by the total payments made with respect to such Debt Security in all
prior periods, other than qualified stated interest payments.
The amount of OID to be included in income by a holder of a debt
instrument, such as certain Classes of the Debt Securities, that is subject to
acceleration due to prepayments on other debt obligations securing such
instruments (a 'Pay-Through Security'), is computed by taking into account the
anticipated rate of prepayments assumed in pricing the debt instrument (the
'Prepayment Assumption'). The amount of OID that will accrue during an accrual
period on a Pay-Through Security is the excess (if any) of the sum of (a) the
present value of all payments remaining to be made on the Pay-Through Security
as of the close of the accrual period and (b) the payments during the accrual
period of amounts included in the stated redemption price of the Pay-Through
Security, over the adjusted issue price of the Pay-Through Security at the
beginning of the accrual period. The present value of the remaining payments is
to be determined on the basis of three factors: (i) the original yield to
maturity of the Pay-Through Security (determined on the basis of compounding at
the end of each accrual period and properly adjusted for the length of the
accrual period), (ii) events which have occurred before the end of the accrual
period and (iii) the assumption that the remaining payments will be made in
accordance with the original Prepayment Assumption. The effect of this method is
to increase the portions of OID required to be included in income by a Holder to
take into account prepayments with respect to the Loans at a rate that exceeds
the Prepayment Assumption, and to decrease (but not below zero for any period)
the portions of original issue discount required to be included in income by a
Holder of a Pay-Through Security to take into account prepayments with respect
to the Loans at a rate that is slower than the Prepayment Assumption. Although
original issue discount will be reported to Holders of Pay-Through Securities
based on the Prepayment Assumption, no representation is made to Holders that
Loans will be prepaid at that rate or at any other rate.
The Depositor may adjust the accrual of OID on a Class of Regular Interest
Securities (or other regular interests in a REMIC) in a manner that it believes
to be appropriate, to take account of realized losses on the Loans, although the
OID Regulations do not provide for such adjustments. If the Internal Revenue
Service were to require that OID be accrued without such adjustments, the rate
of accrual of OID for a Class of Regular Interest Securities could increase.
Certain classes of Regular Interest Securities may represent more than one
class of REMIC regular interests. Unless the applicable Prospectus Supplement
specifies otherwise, the Trustee intends, based on the OID Regulations, to
calculate OID on such Securities as if, solely for the purposes of computing
OID, the separate regular interests were a single debt instrument.
A subsequent holder of a Debt Security will also be required to include OID
in gross income, but such a holder who purchases such Debt Security for an
amount that exceeds its adjusted issue price will be entitled (as will an
initial holder who pays more than a Debt Security's issue price) to offset such
OID by comparable economic accruals of portions of such excess.
Effects of Defaults and Delinquencies. Holders will be required to report
income with respect to the related Securities under an accrual method without
giving effect to delays and reductions in distributions attributable to a
default or delinquency on the Loans, except possibly to the extent that it can
be established that such amounts are uncollectible. As a result, the amount of
income (including OID) reported by a holder of such a Security in any period
could significantly exceed the amount of cash distributed to such holder in that
period. The holder will eventually be allowed a loss (or will be allowed to
report a lesser amount of income) to the extent that the aggregate amount of
distributions on the Securities is reduced as a result of a Loan default.
However, the timing
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and character of such losses or reductions in income are uncertain and,
accordingly, holders of Securities should consult their own tax advisors on this
point.
Interest Weighted Securities. It is not clear how income should be accrued
with respect to Regular Interest Securities or Stripped Securities (as defined
under '--Tax Status as a Grantor Trust; General' herein) the payments on which
consist solely or primarily of a specified portion of the interest payments on
qualified mortgages held by the REMIC ('Interest Weighted Securities'). The
Depositor intends to take the position that all of the income derived from an
Interest Weighted Security should be treated as OID and that the amount and rate
of accrual of such OID should be calculated by treating the Interest Weighted
Security as a Compound Interest Security. However, in the case of Interest
Weighted Securities that are entitled to some payments of principal and that are
Regular Interest Securities the Internal Revenue Service could assert that
income derived from an Interest Weighted Security should be calculated as if the
Security were a security purchased at a premium equal to the excess of the price
paid by such holder for such Security over its stated principal amount, if any.
Under this approach, a holder would be entitled to amortize such premium only if
it has in effect an election under Section 171 of the Code with respect to all
taxable debt instruments held by such holder, as described below. Alternatively,
the Internal Revenue Service could assert that an Interest Weighted Security
should be taxable under the rules governing bonds issued with contingent
payments. Such treatment may be more likely in the case of Interest Weighted
Securities that are Stripped Securities as described below. See '--Tax Status as
a Grantor Trust--Discount or Premium on Pass-Through Securities.'
Variable Rate Debt Securities. In the case of Debt Securities bearing
interest at a rate that varies directly, according to a fixed formula, with an
objective index, it appears that (i) the yield to maturity of such Debt
Securities and (ii) in the case of Pay-Through Securities, the present value of
all payments remaining to be made on such Debt Securities, should be calculated
as if the interest index remained at its value as of the issue date of such
Securities. Because the proper method of adjusting accruals of OID on a variable
rate Debt Security is uncertain, holders of variable rate Debt Securities should
consult their own tax advisers regarding the appropriate treatment of such
Securities for federal income tax purposes.
Market Discount. A purchaser of a Security may be subject to the market
discount rules of Sections 1276-1278 of the Code. A Holder that acquires a Debt
Security with more than a prescribed de minimis amount of 'market discount'
(generally, the excess of the principal amount of the Debt Security over the
purchaser's purchase price) will be required to include accrued market discount
in income as ordinary income in each month, but limited to an amount not
exceeding the principal payments on the Debt Security received in that month
and, if the Securities are sold, the gain realized. Such market discount would
accrue in a manner to be provided in Treasury regulations but, until such
regulations are issued, such market discount would in general accrue either (i)
on the basis of a constant yield (in the case of a Pay-Through Security, taking
into account a prepayment assumption) or (ii) in the ratio of (a) in the case of
Securities (or in the case of a Pass-Through Security, as set forth below, the
Loans underlying such Security) not originally issued with original issue
discount, stated interest payable in the relevant period to total stated
interest remaining to be paid at the beginning of the period or (b) in the case
of Securities (or, in the case of a Pass-Through Security, as described below,
the Loans underlying such Security) originally issued at a discount, OID in the
relevant period to total OID remaining to be paid.
Section 1277 of the Code provides that, regardless of the origination date
of the Debt Security (or, in the case of a Pass-Through Security, the Loans
underlying such Security), the excess of interest paid or accrued to purchase or
carry a Security (or, in the case of a Pass-Through Security, as described
below, the underlying Loans) with market discount over interest received on such
Security is allowed as a current deduction only to the extent such excess is
greater than the market discount that accrued during the taxable year in which
such interest expense was incurred. In general, the deferred portion of any
interest expense will be deductible when such market discount is included in
income, including upon the sale, disposition, or repayment of the Security (or
in the case of a Pass-Through Security, an underlying Loan). A holder may elect
to include market discount in income currently as it accrues, on all market
discount obligations acquired by such holder during the taxable year such
election is made and thereafter, in which case the interest deferral rule will
not apply.
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Premium. A holder who purchases a Debt Security (other than an Interest
Weighted Security to the extent described above) at a cost greater than its
stated redemption price at maturity, generally will be considered to have
purchased the Security at a premium, which it may elect to amortize as an offset
to interest income on such Security (and not as a separate deduction item) on a
constant yield method. Although no regulations addressing the computation of
premium accrual on securities similar to the Securities have been issued, the
legislative history of the 1986 Act indicates that premium is to be accrued in
the same manner as market discount. Accordingly, it appears that the accrual of
premium on a Class of Pay-Through Securities will be calculated using the
prepayment assumption used in pricing such Class. If a holder makes an election
to amortize premium on a Debt Security, such election will apply to all taxable
debt instruments (including all REMIC regular interests and all pass-through
certificates representing ownership interests in a trust holding debt
obligations) held by the holder at the beginning of the taxable year in which
the election is made, and to all taxable debt instruments acquired thereafter by
such holder, and will be irrevocable without the consent of the Internal Revenue
Service. Purchasers who pay a premium for the Securities should consult their
tax advisers regarding the election to amortize premium and the method to be
employed.
Election to Treat All Interest as Original Issue Discount. The OID
Regulations permit a holder of a Debt Security to elect to accrue all interest,
discount (including de minimis market or original issue discount) and premium in
income as interest, based on a constant yield method for Debt Securities
acquired on or after April 4, 1994. If such an election were to be made with
respect to a Debt Security with market discount, the holder of the Debt Security
would be deemed to have made an election to include in income currently market
discount with respect to all other debt instruments having market discount that
such holder of the Debt Security acquires during the year of the election or
thereafter. Similarly, a holder of a Debt Security that makes this election for
a Debt Security that is acquired at a premium will be deemed to have made an
election to amortize bond premium with respect to all debt instruments having
amortizable bond premium that such holder owns or acquires. The election to
accrue interest, discount and premium on a constant yield method with respect to
a Debt Security is irrevocable.
TAXATION OF THE REMIC AND ITS HOLDERS
General. In the opinion of Brown & Wood, special counsel to the Depositor,
if a REMIC election is made with respect to a Series of Securities, then the
arrangement by which the Securities of that Series are issued will be treated as
a REMIC as long as all of the provisions of the applicable Agreement are
complied with and the statutory and regulatory requirements are satisfied.
Securities will be designated as 'Regular Interests' or 'Residual Interests' in
a REMIC, as specified in the related Prospectus Supplement.
Except to the extent specified otherwise in a Prospectus Supplement, if a
REMIC election is made with respect to a Series of Securities, (i) Securities
held by a mutual savings bank or domestic building and loan association will
represent interests in 'qualifying real property loans' within the meaning of
Code Section 593(d) (assuming that at least 95% of the REMIC's assets are
'qualifying real property loans'); (ii) Securities held by a domestic building
and loan association will constitute 'a regular or a residual interest in a
REMIC' within the meaning of Code Section 7701(a)(19)(C)(xi) (assuming that at
least 95% of the REMIC's assets consist of cash, government securities, 'loans
secured by an interest in real property,' and other types of assets described in
Code Section 7701(a)(19)(C)); and (iii) Securities held by a real estate
investment trust will constitute 'real estate assets' within the meaning of Code
Section 856(c)(6)(B), and income with respect to the Securities will be
considered 'interest on obligations secured by mortgages on real property or on
interests in real property' within the meaning of Code Section 856(c)(3)(B)
(assuming, for both purposes, that at least 95% of the REMIC's assets are
qualifying assets). If less than 95% of the REMIC's assets consist of assets
described in (i), (ii) or (iii) above, then a Security will qualify for the tax
treatment described in (i), (ii) or (iii) in the proportion that such REMIC
assets are qualifying assets.
REMIC EXPENSES; SINGLE CLASS REMICS
As a general rule, all of the expenses of a REMIC will be taken into
account by holders of the Residual Interest Securities. In the case of a 'single
class REMIC,' however, the expenses will be allocated, under Treasury
regulations, among the holders of the Regular Interest Securities and the
holders of the Residual Interest Securities on a daily basis in proportion to
the relative amounts of income accruing to each Holder on that day. In
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the case of a holder of a Regular Interest Security who is an individual or a
'pass-through interest holder' (including certain pass-through entities but not
including real estate investment trusts), such expenses will be deductible only
to the extent that such expenses, plus other 'miscellaneous itemized deductions'
of the Holder, exceed 2% of such Holder's adjusted gross income. In addition,
for taxable years beginning after December 31, 1990, the amount of itemized
deductions otherwise allowable for the taxable year for an individual whose
adjusted gross income exceeds the applicable amount (which amount will be
adjusted for inflation for taxable years beginning after 1990) will be reduced
by the lesser of (i) 3% of the excess of adjusted gross income over the
applicable amount, or (ii) 80% of the amount of itemized deductions otherwise
allowable for such taxable year. The reduction or disallowance of this deduction
may have a significant impact on the yield of the Regular Interest Security to
such a Holder. In general terms, a single class REMIC is one that either (i)
would qualify, under existing Treasury regulations, as a grantor trust if it
were not a REMIC (treating all interests as ownership interests, even if they
would be classified as debt for federal income tax purposes) or (ii) is similar
to such a trust and which is structured with the principal purpose of avoiding
the single class REMIC rules. Unless otherwise stated in the applicable
Prospectus Supplement, the expenses of the REMIC will be allocated to holders of
the related residual interest securities.
TAXATION OF THE REMIC
General. Although a REMIC is a separate entity for federal income tax
purposes, a REMIC is not generally subject to entity-level tax. Rather, the
taxable income or net loss of a REMIC is taken into account by the holders of
residual interests. As described above, the regular interests are generally
taxable as debt of the REMIC.
Calculation of REMIC Income. The taxable income or net loss of a REMIC is
determined under an accrual method of accounting and in the same manner as in
the case of an individual, with certain adjustments. In general, the taxable
income or net loss will be the difference between (i) the gross income produced
by the REMIC's assets, including stated interest and any original issue discount
or market discount on loans and other assets, and (ii) deductions, including
stated interest and original issue discount accrued on Regular Interest
Securities, amortization of any premium with respect to Loans, and servicing
fees and other expenses of the REMIC. A holder of a Residual Interest Security
that is an individual or a 'pass-through interest holder' (including certain
pass-through entities, but not including real estate investment trusts) will be
unable to deduct servicing fees payable on the loans or other administrative
expenses of the REMIC for a given taxable year, to the extent that such
expenses, when aggregated with such holder's other miscellaneous itemized
deductions for that year, do not exceed two percent of such holder's adjusted
gross income.
For purposes of computing its taxable income or net loss, the REMIC should
have an initial aggregate tax basis in its assets equal to the aggregate fair
market value of the regular interests and the residual interests on the Startup
Day (generally, the day that the interests are issued). That aggregate basis
will be allocated among the assets of the REMIC in proportion to their
respective fair market values.
The OID provisions of the Code apply to loans of individuals originated on
or after March 2, 1984, and the market discount provisions apply to loans
originated after July 18, 1984. Subject to possible application of the de
minimis rules, the method of accrual by the REMIC of OID income on such loans
will be equivalent to the method under which holders of Pay-Through Securities
accrue original issue discount (i.e., under the constant yield method taking
into account the Prepayment Assumption). The REMIC will deduct OID on the
Regular Interest Securities in the same manner that the holders of the Regular
Interest Securities include such discount in income, but without regard to the
de minimis rules. See 'Taxation of Debt Securities' above. However, a REMIC that
acquires loans at a market discount must include such market discount in income
currently, as it accrues, on a constant interest basis.
To the extent that the REMIC's basis allocable to loans that it holds
exceeds their principal amounts, the resulting premium, if attributable to
mortgages originated after September 27, 1985, will be amortized over the life
of the loans (taking into account the Prepayment Assumption) on a constant yield
method. Although the law is somewhat unclear regarding recovery of premium
attributable to loans originated on or before such date, it is possible that
such premium may be recovered in proportion to payments of loan principal.
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Prohibited Transactions and Contributions Tax. The REMIC will be subject
to a 100% tax on any net income derived from a 'prohibited transaction.' For
this purpose, net income will be calculated without taking into account any
losses from prohibited transactions or any deductions attributable to any
prohibited transaction that resulted in a loss. In general, prohibited
transactions include: (i) subject to limited exceptions, the sale or other
disposition of any qualified mortgage transferred to the REMIC; (ii) subject to
a limited exception, the sale or other disposition of a cash flow investment;
(iii) the receipt of any income from assets not permitted to be held by the
REMIC pursuant to the Code; or (iv) the receipt of any fees or other
compensation for services rendered by the REMIC. It is anticipated that a REMIC
will not engage in any prohibited transactions in which it would recognize a
material amount of net income. In addition, subject to a number of exceptions, a
tax is imposed at the rate of 100% on amounts contributed to a REMIC after the
close of the three-month period beginning on the Startup Day. The holders of
Residual Interest Securities will generally be responsible for the payment of
any such taxes imposed on the REMIC. To the extent not paid by such holders or
otherwise, however, such taxes will be paid out of the Trust Fund and will be
allocated pro rata to all outstanding Classes of Securities of such REMIC.
TAXATION OF HOLDERS OF RESIDUAL INTEREST SECURITIES
The holder of a Certificate representing a residual interest (a 'Residual
Interest Security') will take into account the 'daily portion' of the taxable
income or net loss of the REMIC for each day during the taxable year on which
such holder held the Residual Interest Security. The daily portion is determined
by allocating to each day in any calendar quarter its ratable portion of the
taxable income or net loss of the REMIC for such quarter, and by allocating that
amount among the holders (on such day) of the Residual Interest Securities in
proportion to their respective holdings on such day.
The holder of a Residual Interest Security must report its proportionate
share of the taxable income of the REMIC whether or not it receives cash
distributions from the REMIC attributable to such income or loss. The reporting
of taxable income without corresponding distributions could occur, for example,
in certain REMIC issues in which the loans held by the REMIC were issued or
acquired at a discount, since mortgage prepayments cause recognition of discount
income, while the corresponding portion of the prepayment could be used in whole
or in part to make principal payments on REMIC Regular Interests issued without
any discount or at an insubstantial discount. (If this occurs, it is likely that
cash distributions will exceed taxable income in later years.) Taxable income
may also be greater in earlier years of certain REMIC issues as a result of the
fact that interest expense deductions, as a percentage of outstanding principal
on REMIC Regular Interest Securities, will typically increase over time as lower
yielding Securities are paid, whereas interest income with respect to loans will
generally remain constant over time as a percentage of loan principal.
In any event, because the holder of a residual interest is taxed on the net
income of the REMIC, the taxable income derived from a Residual Interest
Security in a given taxable year will not be equal to the taxable income
associated with investment in a corporate bond or stripped instrument having
similar cash flow characteristics and pretax yield. Therefore, the after-tax
yield on the Residual Interest Security may be less than that of such a bond or
instrument.
Limitation on Losses. The amount of the REMIC's net loss that a holder may
take into account currently is limited to the holder's adjusted basis at the end
of the calendar quarter in which such loss arises. A holder's basis in a
Residual Interest Security will initially equal such holder's purchase price,
and will subsequently be increased by the amount of the REMIC's taxable income
allocated to the holder, and decreased (but not below zero) by the amount of
distributions made and the amount of the REMIC's net loss allocated to the
holder. Any disallowed loss may be carried forward indefinitely, but may be used
only to offset income of the REMIC generated by the same REMIC. The ability of
holders of Residual Interest Securities to deduct net losses may be subject to
additional limitations under the Code, as to which such holders should consult
their tax advisers.
Distributions. Distributions on a Residual Interest Security (whether at
their scheduled times or as a result of prepayments) will generally not result
in any additional taxable income or loss to a holder of a Residual Interest
Security. If the amount of such payment exceeds a holder's adjusted basis in the
Residual Interest Security, however, the holder will recognize gain (treated as
gain from the sale of the Residual Interest Security) to the extent of such
excess.
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Sale or Exchange. A holder of a Residual Interest Security will recognize
gain or loss on the sale or exchange of a Residual Interest Security equal to
the difference, if any, between the amount realized and such holder's adjusted
basis in the Residual Interest Security at the time of such sale or exchange.
Except to the extent provided in regulations, which have not yet been issued,
any loss upon disposition of a Residual Interest Security will be disallowed if
the selling holder acquires any residual interest in a REMIC or similar mortgage
pool within six months before or after such disposition.
Excess Inclusions. The portion of the REMIC taxable income of a holder of
a Residual Interest Security consisting of 'excess inclusion' income may not be
offset by other deductions or losses, including net operating losses, on such
holder's federal income tax return. An exception applies to organizations to
which Code Section 593 applies (generally, certain thrift institutions);
however, such exception will not apply if the aggregate value of the Residual
Interest Securities is not considered to be 'significant,' as described below.
Further, if the holder of a Residual Interest Security is an organization
subject to the tax on unrelated business income imposed by Code Section 511,
such holder's excess inclusion income will be treated as unrelated business
taxable income of such holder. In addition, under Treasury regulations yet to be
issued, if a real estate investment trust, a regulated investment company, a
common trust fund, or certain cooperatives were to own a Residual Interest
Security, a portion of dividends (or other distributions) paid by the real
estate investment trust (or other entity) would be treated as excess inclusion
income. If a Residual Security is owned by a foreign person excess inclusion
income is subject to tax at a rate of 30% which may not be reduced by treaty, is
not eligible for treatment as 'portfolio interest' and is subject to certain
additional limitations. See 'Tax Treatment of Foreign Investors.' Regulations
provide that a Residual Interest Security has significant value only if (i) the
aggregate issue price of the Residual Interest Security is at least 2% of the
aggregate of the issue prices of all Regular Interest Securities and Residual
Interest Securities in the REMIC and (ii) the anticipated weighted average life
(determined as specified in the Proposed Regulations) of the Residual Interest
Securities is at least 20% of the weighted average life of the REMIC.
The excess inclusion portion of a REMIC's income is generally equal to the
excess, if any, of REMIC taxable income for the quarterly period allocable to a
Residual Interest Security, over the daily accruals for such quarterly period of
(i) 120% of the long term applicable federal rate on the Startup Day multiplied
by (ii) the adjusted issue price of such Residual Interest Security at the
beginning of such quarterly period. The adjusted issue price of a Residual
Interest at the beginning of each calendar quarter will equal its issue price
(calculated in a manner analogous to the determination of the issue price of a
Regular Interest), increased by the aggregate of the daily accruals for prior
calendar quarters, and decreased (but not below zero) by the amount of loss
allocated to a holder and the amount of distributions made on the Residual
Interest Security before the beginning of the quarter. The long-term federal
rate, which is announced monthly by the Treasury Department, is an interest rate
that is based on the average market yield of outstanding marketable obligations
of the United States government having remaining maturities in excess of nine
years.
Under the REMIC Regulations, in certain circumstances, transfers of
Residual Securities may be disregarded. See '--Restrictions on Ownership and
Transfer of Residual Interest Securities' and '--Tax Treatment of Foreign
Investors' below.
Restrictions on Ownership and Transfer of Residual Interest Securities. As
a condition to qualification as a REMIC, reasonable arrangements must be made to
prevent the ownership of a REMIC residual interest by any 'Disqualified
Organization.' Disqualified Organizations include the United States, any State
or political subdivision thereof, any foreign government, any international
organization, or any agency or instrumentality of any of the foregoing, a rural
electric or telephone cooperative described in Section 1381(a)(2)(C) of the
Code, or any entity exempt from the tax imposed by Sections 1-1399 of the Code,
if such entity is not subject to tax on its unrelated business income.
Accordingly, the applicable Pooling and Servicing Agreement will prohibit
Disqualified Organizations from owning a Residual Interest Security. In
addition, no transfer of a Residual Interest Security will be permitted unless
the proposed transferee shall have furnished to the Trustee an affidavit
representing and warranting that it is neither a Disqualified Organization nor
an agent or nominee acting on behalf of a Disqualified Organization.
If a Residual Interest Security is transferred to a Disqualified
Organization after March 31, 1988 (in violation of the restrictions set forth
above), a substantial tax will be imposed on the transferor of such Residual
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Interest Security at the time of the transfer. In addition, if a Disqualified
Organization holds an interest in a pass-through entity after March 31, 1988
(including, among others, a partnership, trust, real estate investment trust,
regulated investment company, or any person holding as nominee), that owns a
Residual Interest Security, the pass-through entity will be required to pay an
annual tax on its allocable share of the excess inclusion income of the REMIC.
Under the REMIC Regulations, if a Residual Interest Security is a
'noneconomic residual interest,' as described below, a transfer of a Residual
Interest Security to a United States person will be disregarded for all Federal
tax purposes unless no significant purpose of the transfer was to impede the
assessment or collection of tax. A Residual Interest Security is a 'noneconomic
residual interest' unless, at the time of the transfer (i) the present value of
the expected future distributions on the Residual Interest Security at least
equals the product of the present value of the anticipated excess inclusions and
the highest rate of tax for the year in which the transfer occurs, and (ii) the
transferor reasonably expects that the transferee will receive distributions
from the REMIC at or after the time at which the taxes accrue on the anticipated
excess inclusions in an amount sufficient to satisfy the accrued taxes. If a
transfer of a Residual Interest is disregarded, the transferor would be liable
for any Federal income tax imposed upon taxable income derived by the transferee
from the REMIC. The REMIC Regulations provide no guidance as to how to determine
if a significant purpose of a transfer is to impede the assessment or collection
of tax. A similar type of limitation exists with respect to certain transfers of
residual interests by foreign persons to United States persons. See '--Tax
Treatment of Foreign Investors.'
Mark to Market Rules. Prospective purchasers of a REMIC Residual Interest
Security should be aware that on December 28, 1993, the Internal Revenue Service
released temporary regulations (the 'Temporary Mark to Market Regulations')
relating to the requirement that a securities dealer mark-to-market securities
held for sale to customers. This mark-to-market requirement applies to all
securities of a dealer, except to the extent that the dealer has specifically
identified a security as held for investment. The Temporary Mark to Market
Regulations provide that for purposes of this mark-to-market requirement, a
'negative value' REMIC residual interest is not treated as a security and thus
may not be marked to market. In addition, a dealer is not required to identify
such REMIC Residual Interest Security as held for investment. In general, a
REMIC Residual Interest Security has negative value if, as of the date a
taxpayer acquires the REMIC Residual Interest Security, the present value of the
tax liabilities associated with holding the REMIC Residual Interest Security
exceeds the sum of (i) the present value of the expected future distributions on
the REMIC Residual Interest Security, and (ii) the present value of the
anticipated tax savings associated with holding the REMIC Residual Interest
Security as the REMIC generates losses. The amounts and present values of the
anticipated tax liabilities, expected future distributions and anticipated tax
savings are all to be determined using (i) the prepayment and reinvestment
assumptions adopted under Section 1272(a)(6), or that would have been adopted
had the REMIC's regular interests been issued with OID, (ii) any required or
permitted clean up calls, or required qualified liquidation provided for in the
REMIC's organizational documents and (iii) a discount rate equal to the
'applicable Federal rate' (as specified in Section 1274(d)(1) that would apply
to a debt instrument issued on the date of acquisition of the REMIC Residual
Interest Security. Furthermore, the Temporary Mark to Market Regulations provide
the IRS with the authority to treat any REMIC Residual Interest Security having
substantially the same economic effect as a 'negative value' residual interest
as a 'negative value' residual interest. The IRS could issue subsequent
regulations, which could apply retroactively, providing additional or different
requirements with respect to such deemed negative value residual interests.
Prospective purchasers of a REMIC Residual Interest Security should consult
their tax advisors regarding the possible application of the Temporary Mark to
Market Regulations.
ADMINISTRATIVE MATTERS
The REMIC's books must be maintained on a calendar year basis and the REMIC
must file an annual federal income tax return. The REMIC will also be subject to
the procedural and administrative rules of the Code applicable to partnerships,
including the determination of any adjustments to, among other things, items of
REMIC income, gain, loss, deduction, or credit, by the Internal Revenue Service
in a unified administrative proceeding.
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TAX STATUS AS A GRANTOR TRUST
General. As specified in the related Prospectus Supplement if a REMIC or
partnership election is not made, in the opinion of Brown & Wood, special
counsel to the Depositor, the Trust Fund relating to a Series of Securities will
be classified for federal income tax purposes as a grantor trust under Subpart
E, Part 1 of Subchapter J of the Code and not as an association taxable as a
corporation (the Securities of such Series, 'Pass-Through Securities'). In some
Series there will be no separation of the principal and interest payments on the
Loans. In such circumstances, a Holder will be considered to have purchased a
pro rata undivided interest in each of the Loans. In other cases ('Stripped
Securities'), sale of the Securities will produce a separation in the ownership
of all or a portion of the principal payments from all or a portion of the
interest payments on the Loans.
Each Holder must report on its federal income tax return its share of the
gross income derived from the Loans (not reduced by the amount payable as fees
to the Trustee and the Servicer and similar fees (collectively, the 'Servicing
Fee')), at the same time and in the same manner as such items would have been
reported under the Holder's tax accounting method had it held its interest in
the Loans directly, received directly its share of the amounts received with
respect to the Loans, and paid directly its share of the Servicing Fees. In the
case of Pass-Through Securities other than Stripped Securities, such income will
consist of a pro rata share of all of the income derived from all of the Loans
and, in the case of Stripped Securities, such income will consist of a pro rata
share of the income derived from each stripped bond or stripped coupon in which
the Holder owns an interest. The holder of a Security will generally be entitled
to deduct such Servicing Fees under Section 162 or Section 212 of the Code to
the extent that such Servicing Fees represent 'reasonable' compensation for the
services rendered by the Trustee and the Servicer (or third parties that are
compensated for the performance of services). In the case of a noncorporate
holder, however, Servicing Fees (to the extent not otherwise disallowed, e.g.,
because they exceed reasonable compensation) will be deductible in computing
such holder's regular tax liability only to the extent that such fees, when
added to other miscellaneous itemized deductions, exceed 2% of adjusted gross
income and may not be deductible to any extent in computing such holder's
alternative minimum tax liability. In addition, for taxable years beginning
after December 31, 1990, the amount of itemized deductions otherwise allowable
for the taxable year for an individual whose adjusted gross income exceeds the
applicable amount (which amount will be adjusted for inflation in taxable years
beginning after 1990) will be reduced by the lesser of (i) 3% of the excess of
adjusted gross income over the applicable amount or (ii) 80% of the amount of
itemized deductions otherwise allowable for such taxable year.
Discount or Premium on Pass-Through Securities. The holder's purchase
price of a Pass-Through Security is to be allocated among the Loans in
proportion to their fair market values, determined as of the time of purchase of
the Securities. In the typical case, the Trustee (to the extent necessary to
fulfill its reporting obligations) will treat each Loan as having a fair market
value proportional to the share of the aggregate principal balances of all of
the Loans that it represents, since the Securities, unless otherwise specified
in the applicable Prospectus Supplement, will have a relatively uniform interest
rate and other common characteristics. To the extent that the portion of the
purchase price of a Pass-Through Security allocated to a Loan (other than to a
right to receive any accrued interest thereon and any undistributed principal
payments) is less than or greater than the portion of the principal balance of
the Loan allocable to the Security, the interest in the Loan allocable to the
Pass-Through Security will be deemed to have been acquired at a discount or
premium, respectively.
The treatment of any discount will depend on whether the discount
represents OID or market discount. In the case of a Loan with OID in excess of a
prescribed de minimis amount or a Stripped Security, a holder of a Security will
be required to report as interest income in each taxable year its share of the
amount of OID that accrues during that year in the manner described above. OID
with respect to a Loan could arise, for example, by virtue of the financing of
points by the originator of the Loan, or by virtue of the charging of points by
the originator of the Loan in an amount greater than a statutory de minimis
exception, in circumstances under which the points are not currently deductible
pursuant to applicable Code provisions. Any market discount or premium on a Loan
will be includible in income, generally in the manner described above, except
that in the case of Pass-Through Securities, market discount is calculated with
respect to the Loans underlying the Certificate, rather than with respect to the
Security. A Holder that acquires an interest in a Loan originated after July 18,
1984 with more than a de minimis amount of market discount (generally, the
excess of the principal amount of the Loan over the purchaser's allocable
purchase price) will be required to include accrued market discount in income in
the manner set forth above. See '--Taxation of Debt Securities; Market Discount'
and '--Premium' above.
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In the case of market discount on a Pass-Through Security attributable to
Loans originated on or before July 18, 1984, the holder generally will be
required to allocate the portion of such discount that is allocable to a loan
among the principal payments on the Loan and to include the discount allocable
to each principal payment in ordinary income at the time such principal payment
is made. Such treatment would generally result in discount being included in
income at a slower rate than discount would be required to be included in income
using the method described in the preceding paragraph.
Stripped Securities. A Stripped Security may represent a right to receive
only a portion of the interest payments on the Loans, a right to receive only
principal payments on the Loans, or a right to receive certain payments of both
interest and principal. Certain Stripped Securities ('Ratio Strip Securities')
may represent a right to receive differing percentages of both the interest and
principal on each Loan. Pursuant to Section 1286 of the Code, the separation of
ownership of the right to receive some or all of the interest payments on an
obligation from ownership of the right to receive some or all of the principal
payments results in the creation of 'stripped bonds' with respect to principal
payments and 'stripped coupons' with respect to interest payments. Section 1286
of the Code applies the OID rules to stripped bonds and stripped coupons. For
purposes of computing original issue discount, a stripped bond or a stripped
coupon is treated as a debt instrument issued on the date that such stripped
interest is purchased with an issue price equal to its purchase price or, if
more than one stripped interest is purchased, the ratable share of the purchase
price allocable to such stripped interest.
Servicing fees in excess of reasonable servicing fees ('excess servicing')
will be treated under the stripped bond rules. If the excess servicing fee is
less than 100 basis points (i.e. 1% interest on the Loan principal balance) or
the Securities are initially sold with a de minimis discount (assuming no
prepayment assumption is required), any non-de minimis discount arising from a
subsequent transfer of the Securities should be treated as market discount. The
IRS appears to require that reasonable servicing fees be calculated on a Loan by
Loan basis, which could result in some Loans being treated as having more than
100 basis points of interest stripped off.
The Code, OID Regulations and judicial decisions provide no direct guidance
as to how the interest and original issue discount rules are to apply to
Stripped Securities and other Pass-Through Securities. Under the method
described above for Pay-Through Securities (the 'Cash Flow Bond Method'), a
prepayment assumption is used and periodic recalculations are made which take
into account with respect to each accrual period the effect of prepayments
during such period. However, the 1986 Act does not, absent Treasury regulations,
appear specifically to cover instruments such as the Stripped Securities which
technically represent ownership interests in the underlying Loans, rather than
being debt instruments 'secured by' those loans. Nevertheless, it is believed
that the Cash Flow Bond Method is a reasonable method of reporting income for
such Securities, and it is expected that OID will be reported on that basis
unless otherwise specified in the related Prospectus Supplement. In applying the
calculation to Pass-Through Securities, the Trustee will treat all payments to
be received by a holder with respect to the underlying Mortgage Loans as
payments on a single installment obligation. The Internal Revenue Service could,
however, assert that original issue discount must be calculated separately for
each Loan underlying a Security.
Under certain circumstances, if the Loans prepay at a rate faster than the
Prepayment Assumption, the use of the Cash Flow Bond Method may accelerate a
Holder's recognition of income. If, however, the Mortgage Loans prepay at a rate
slower than the Prepayment Assumption, in some circumstances the use of this
method may decelerate a Holder's recognition of income.
In the case of a Stripped Security that is an Interest Weighted Security,
the Trustee intends, absent contrary authority, to report income to Security
holders as OID, in the manner described above for Interest Weighted Securities.
Possible Alternative Characterizations. The characterizations of the
Stripped Securities described above are not the only possible interpretations of
the applicable Code provisions. Among other possibilities, the Internal Revenue
Service could contend that (i) in certain Series, each non-Interest Weighted
Security is composed of an unstripped undivided ownership interest in Mortgage
Loans and an installment obligation consisting of stripped principal payments;
(ii) the non-Interest Weighted Securities are subject to the contingent payment
provisions of the Proposed Regulations; or (iii) each Interest Weighted Stripped
Security is composed of an unstripped undivided ownership interest in Loans and
an installment obligation consisting of stripped interest payments.
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Given the variety of alternatives for treatment of the Stripped Securities
and the different federal income tax consequences that result from each
alternative, potential purchasers are urged to consult their own tax advisers
regarding the proper treatment of the Securities for federal income tax
purposes.
Character as Qualifying Loans. In the case of Stripped Securities there is
no specific legal authority existing regarding whether the character of the
Securities, for federal income tax purposes, will be the same as the Loans. The
IRS could take the position that the Loans' character is not carried over to the
Securities in such circumstances. Pass-Through Securities will be, and, although
the matter is not free from doubt, Stripped Securities should be considered to
represent 'qualifying real property loans' within the meaning of Section 593(d)
of the Code, 'real estate assets' within the meaning of Section 856(c)(6)(B) of
the Code, and 'loans secured by an interest in real property' within the meaning
of Section 7701(a)(19)(C)(v) of the Code; and interest income attributable to
the Securities should be considered to represent 'interest on obligations
secured by mortgages on real property or on interests in real property' with the
meaning of Section 856(c)(3)(B) of the Code. Reserves or funds underlying the
Securities may cause a proportionate reduction in the above-described qualifying
status categories of Securities.
SALE OR EXCHANGE
Subject to the discussion below with respect to Trust Funds as to which a
partnership election is made, a Holder's tax basis in its Security is the price
such holder pays for a Security, plus amounts of original issue or market
discount included in income and reduced by any payments received (other than
qualified stated interest payments) and any amortized premium. Gain or loss
recognized on a sale, exchange, or redemption of a Security, measured by the
difference between the amount realized and the Security's basis as so adjusted,
will generally be capital gain or loss, assuming that the Security is held as a
capital asset. In the case of a Security held by a bank, thrift, or similar
institution described in Section 582 of the Code, however, gain or loss realized
on the sale or exchange of a Regular Interest Security will be taxable as
ordinary income or loss. In addition, gain from the disposition of a Regular
Interest Security that might otherwise be capital gain will be treated as
ordinary income to the extent of the excess, if any, of (i) the amount that
would have been includible in the holder's income if the yield on such Regular
Interest Security had equaled 110% of the applicable federal rate as of the
beginning of such holder's holding period, over the amount of ordinary income
actually recognized by the holder with respect to such Regular Interest
Security. For taxable years beginning after December 31, 1993, the maximum tax
rate on ordinary income for individual taxpayers is 39.6% and the maximum tax
rate on long-term capital gains reported after December 31, 1990 for such
taxpayers is 28%. The maximum tax rate on both ordinary income and long-term
capital gains of corporate taxpayers is 35%.
MISCELLANEOUS TAX ASPECTS
Backup Withholding. Subject to the discussion below with respect to Trust
Funds as to which a partnership election is made, a Holder, other than a holder
of a REMIC Residual Security, may, under certain circumstances, be subject to
'backup withholding' at a rate of 31% with respect to distributions or the
proceeds of a sale of certificates to or through brokers that represent interest
or original issue discount on the Securities. This withholding generally applies
if the holder of a Security (i) fails to furnish the Trustee with its taxpayer
identification number ('TIN'); (ii) furnishes the Trustee an incorrect TIN;
(iii) fails to report properly interest, dividends or other 'reportable
payments' as defined in the Code; or (iv) under certain circumstances, fails to
provide the Trustee or such holder's securities broker with a certified
statement, signed under penalty of perjury, that the TIN provided is its correct
number and that the holder is not subject to backup withholding. Backup
withholding will not apply, however, with respect to certain payments made to
Holders, including payments to certain exempt recipients (such as exempt
organizations) and to certain Nonresidents (as defined below). Holders should
consult their tax advisers as to their qualification for exemption from backup
withholding and the procedure for obtaining the exemption.
The Trustee will report to the Holders and to the Servicer for each
calendar year the amount of any 'reportable payments' during such year and the
amount of tax withheld, if any, with respect to payments on the Securities.
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TAX TREATMENT OF FOREIGN INVESTORS
Subject to the discussion below with respect to Trust Funds as to which a
partnership election is made, under the Code, unless interest (including OID)
paid on a Security (other than a Residual Interest Security) is considered to be
'effectively connected' with a trade or business conducted in the United States
by a nonresident alien individual, foreign partnership or foreign corporation
('Nonresidents'), such interest will normally qualify as portfolio interest
(except where (i) the recipient is a holder, directly or by attribution, of 10%
or more of the capital or profits interest in the issuer, or (ii) the recipient
is a controlled foreign corporation to which the issuer is a related person) and
will be exempt from federal income tax. Upon receipt of appropriate ownership
statements, the issuer normally will be relieved of obligations to withhold tax
from such interest payments. These provisions supersede the generally applicable
provisions of United States law that would otherwise require the issuer to
withhold at a 30% rate (unless such rate were reduced or eliminated by an
applicable tax treaty) on, among other things, interest and other fixed or
determinable, annual or periodic income paid to Nonresidents. Holders of
Pass-Through Securities and Stripped Securities, including Ratio Strip
Securities, however, may be subject to withholding to the extent that the Loans
were originated on or before July 18, 1984.
Interest and OID of Holders who are foreign persons are not subject to
withholding if they are effectively connected with a United States business
conducted by the Holder. They will, however, generally be subject to the regular
United States income tax.
Payments to holders of Residual Interest Securities who are foreign persons
will generally be treated as interest for purposes of the 30% (or lower treaty
rate) United States withholding tax. Holders should assume that such income does
not qualify for exemption from United States withholding tax as 'portfolio
interest.' It is clear that, to the extent that a payment represents a portion
of REMIC taxable income that constitutes excess inclusion income, a holder of a
Residual Interest Security will not be entitled to an exemption from or
reduction of the 30% (or lower treaty rate) withholding tax rule. If the
payments are subject to United States withholding tax, they generally will be
taken into account for withholding tax purposes only when paid or distributed
(or when the Residual Interest Security is disposed of). The Treasury has
statutory authority, however, to promulgate regulations which would require such
amounts to be taken into account at an earlier time in order to prevent the
avoidance of tax. Such regulations could, for example, require withholding prior
to the distribution of cash in the case of Residual Interest Securities that do
not have significant value. Under the REMIC Regulations, if a Residual Interest
Security has tax avoidance potential, a transfer of a Residual Interest Security
to a Nonresident will be disregarded for all Federal tax purposes. A Residual
Interest Security has tax avoidance potential unless, at the time of the
transfer the transferor reasonably expects that the REMIC will distribute to the
transferee residual interest holder amounts that will equal at least 30% of each
excess inclusion, and that such amounts will be distributed at or after the time
at which the excess inclusions accrue and not later than the calendar year
following the calendar year of accrual. If a Nonresident transfers a Residual
Interest Security to a United States person, and if the transfer has the effect
of allowing the transferor to avoid tax on accrued excess inclusions, then the
transfer is disregarded and the transferor continues to be treated as the owner
of the Residual Interest Security for purposes of the withholding tax provisions
of the Code. See '--Excess Inclusions.'
TAX CHARACTERIZATION OF THE TRUST AS A PARTNERSHIP
Brown & Wood, special counsel to the Depositor, will deliver its opinion
that a Trust Fund for which a partnership election is made will not be an
association (or publicly traded partnership) taxable as a corporation for
federal income tax purposes. This opinion will be based on the assumption that
the terms of the Trust Agreement and related documents will be complied with,
and on counsel's conclusions that (1) the Trust Fund will not have certain
characteristics necessary for a business trust to be classified as an
association taxable as a corporation and (2) the nature of the income of the
Trust Fund will exempt it from the rule that certain publicly traded
partnerships are taxable as corporations or the issuance of the Certificates has
been structured as a private placement under an IRS safe harbor, so that the
Trust Fund will not be characterized as a publicly traded partnership taxable as
a corporation.
If the Trust Fund were taxable as a corporation for federal income tax
purposes, the Trust Fund would be subject to corporate income tax on its taxable
income. The Trust Fund's taxable income would include all its income, possibly
reduced by its interest expense on the Notes. Any such corporate income tax
could materially reduce cash available to make payments on the Notes and
distributions on the Certificates, and Certificateholders could be liable for
any such tax that is unpaid by the Trust Fund.
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TAX CONSEQUENCES TO HOLDERS OF THE NOTES
Treatment of the Notes as Indebtedness. The Trust Fund will agree, and the
Noteholders will agree by their purchase of Notes, to treat the Notes as debt
for federal income tax purposes. Special counsel to the Depositor will, except
as otherwise provided in the related Prospectus Supplement, advise the Depositor
that the Notes will be classified as debt for federal income tax purposes. The
discussion below assumes this characterization of the Notes is correct.
OID, Indexed Securities, etc. The discussion below assumes that all
payments on the Notes are denominated in U.S. dollars, and that the Notes are
not Indexed Securities or Strip Notes. Moreover, the discussion assumes that the
interest formula for the Notes meets the requirements for 'qualified stated
interest' under the OID regulations, and that any OID on the Notes (i.e., any
excess of the principal amount of the Notes over their issue price) does not
exceed a de minimis amount (i.e., 1/4% of their principal amount multiplied by
the number of full years included in their term), all within the meaning of the
OID regulations. If these conditions are not satisfied with respect to any given
series of Notes, additional tax considerations with respect to such Notes will
be disclosed in the applicable Prospectus Supplement.
Interest Income on the Notes. Based on the above assumptions, except as
discussed in the following paragraph, the Notes will not be considered issued
with OID. The stated interest thereon will be taxable to a Noteholder as
ordinary interest income when received or accrued in accordance with such
Noteholder's method of tax accounting. Under the OID regulations, a holder of a
Note issued with a de minimis amount of OID must include such OID in income, on
a pro rata basis, as principal payments are made on the Note. It is believed
that any prepayment premium paid as a result of a mandatory redemption will be
taxable as contingent interest when it becomes fixed and unconditionally
payable. A purchaser who buys a Note for more or less than its principal amount
will generally be subject, respectively, to the premium amortization or market
discount rules of the Code.
A holder of a Note that has a fixed maturity date of not more than one year
from the issue date of such Note (a 'Short-Term Note') may be subject to special
rules. An accrual basis holder of a Short-Term Note (and certain cash method
holders, including regulated investment companies, as set forth in Section 1281
of the Code) generally would be required to report interest income as interest
accrues on a straight-line basis over the term of each interest period. Other
cash basis holders of a Short-Term Note would, in general, be required to report
interest income as interest is paid (or, if earlier, upon the taxable
disposition of the Short-Term Note). However, a cash basis holder of a
Short-Term Note reporting interest income as it is paid may be required to defer
a portion of any interest expense otherwise deductible on indebtedness incurred
to purchase or carry the Short-Term Note until the taxable disposition of the
Short-Term Note. A cash basis taxpayer may elect under Section 1281 of the Code
to accrue interest income on all nongovernment debt obligations with a term of
one year or less, in which case the taxpayer would include interest on the
Short-Term Note in income as it accrues, but would not be subject to the
interest expense deferral rule referred to in the preceding sentence. Certain
special rules apply if a Short-Term Note is purchased for more or less than its
principal amount.
Sale or Other Disposition. If a Noteholder sells a Note, the holder will
recognize gain or loss in an amount equal to the difference between the amount
realized on the sale and the holder's adjusted tax basis in the Note. The
adjusted tax basis of a Note to a particular Noteholder will equal the holder's
cost for the Note, increased by any market discount, acquisition discount, OID
and gain previously included by such Noteholder in income with respect to the
Note and decreased by the amount of bond premium (if any) previously amortized
and by the amount of principal payments previously received by such Noteholder
with respect to such Note. Any such gain or loss will be capital gain or loss if
the Note was held as a capital asset, except for gain representing accrued
interest and accrued market discount not previously included in income. Capital
losses generally may be used only to offset capital gains.
Foreign Holders. Interest payments made (or accrued) to a Noteholder who
is a nonresident alien, foreign corporation or other non-United States person (a
'foreign person') generally will be considered 'portfolio interest', and
generally will not be subject to United States federal income tax and
withholding tax, if the interest is not effectively connected with the conduct
of a trade or business within the United States by the foreign person and the
foreign person (i) is not actually or constructively a '10 percent shareholder'
of the Trust or the Seller (including a holder of 10% of the outstanding
Certificates) or a 'controlled foreign corporation' with respect to which the
Trust or the Seller is a 'related person' within the meaning of the Code and
(ii) provides the Owner Trustee or other person who is otherwise required to
withhold U.S. tax with respect to the Notes with an appropriate statement (on
Form W-8 or a similar form), signed under penalties of perjury, certifying that
the beneficial owner of the Note is a foreign person and providing the foreign
person's name and address. If a Note is
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held through a securities clearing organization or certain other financial
institutions, the organization or institution may provide the relevant signed
statement to the withholding agent; in that case, however, the signed statement
must be accompanied by a Form W-8 or substitute form provided by the foreign
person that owns the Note. If such interest is not portfolio interest, then it
will be subject to United States federal income and withholding tax at a rate of
30 percent, unless reduced or eliminated pursuant to an applicable tax treaty.
Any capital gain realized on the sale, redemption, retirement or other
taxable disposition of a Note by a foreign person will be exempt from United
States federal income and withholding tax, provided that (i) such gain is not
effectively connected with the conduct of a trade or business in the United
States by the foreign person and (ii) in the case of an individual foreign
person, the foreign person is not present in the United States for 183 days or
more in the taxable year.
Backup Withholding. Each holder of a Note (other than an exempt holder
such as a corporation, tax-exempt organization, qualified pension and
profit-sharing trust, individual retirement account or nonresident alien who
provides certification as to status as a nonresident) will be required to
provide, under penalties of perjury, a certificate containing the holder's name,
address, correct federal taxpayer identification number and a statement that the
holder is not subject to backup withholding. Should a nonexempt Noteholder fail
to provide the required certification, the Trust Fund will be required to
withhold 31 percent of the amount otherwise payable to the holder, and remit the
withheld amount to the IRS as a credit against the holder's federal income tax
liability.
Possible Alternative Treatments of the Notes. If, contrary to the opinion
of special counsel to the Company, 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 Fund. If so treated, the
Trust Fund might be taxable as a corporation with the adverse consequences
described above (and the taxable corporation would not be able to reduce its
taxable income by deductions for interest expense on Notes recharacterized as
equity). Alternatively, and most likely in the view of special counsel to the
Depositor, the Trust Fund might be treated as a publicly traded partnership that
would not be taxable as a corporation because it would meet certain qualifying
income tests. Nonetheless, treatment of the Notes as equity interests in such a
publicly traded partnership could have adverse tax consequences to certain
holders. For example, income to certain tax-exempt entities (including pension
funds) would be 'unrelated business taxable income', income to foreign holders
generally would be subject to U.S. tax and U.S. tax return filing and
withholding requirements, and individual holders might be subject to certain
limitations on their ability to deduct their share of the Trust Fund's expenses.
TAX CONSEQUENCES TO HOLDERS OF THE CERTIFICATES
Treatment of the Trust Fund as a Partnership. The Trust Fund and the
Servicer will agree, and the Certificateholders will agree by their purchase of
Certificates, to treat the Trust Fund as a partnership for purposes of federal
and state income tax, franchise tax and any other tax measured in whole or in
part by income, with the assets of the partnership being the assets held by the
Trust Fund, the partners of the partnership being the Certificateholders, and
the Notes being debt of the partnership. However, the proper characterization of
the arrangement involving the Trust Fund, the Certificates, the Notes, the Trust
Fund and the Servicer is not clear because there is no authority on transactions
closely comparable to that contemplated herein.
A variety of alternative characterizations are possible. For example,
because the Certificates have certain features characteristic of debt, the
Certificates might be considered debt of the Trust Fund. Any such
characterization would not result in materially adverse tax consequences to
Certificateholders as compared to the consequences from treatment of the
Certificates as equity in a partnership, described below. The following
discussion assumes that the Certificates represent equity interests in a
partnership.
Indexed Securities, etc. The following discussion assumes that all
payments on the Certificates are denominated in U.S. dollars, none of the
Certificates are Indexed Securities or Strip Certificates, and that a Series of
Securities includes a single class of Certificates. If these conditions are not
satisfied with respect to any given Series of Certificates, additional tax
considerations with respect to such Certificates will be disclosed in the
applicable Prospectus Supplement.
Partnership Taxation. As a partnership, the Trust Fund will not be subject
to federal income tax. Rather, each Certificateholder will be required to
separately take into account such holder's allocated share of income, gains,
losses, deductions and credits of the Trust Fund. The Trust Fund's income will
consist primarily of interest and finance charges earned on the Loans (including
appropriate adjustments for market discount, OID and bond premium) and any gain
upon collection or disposition of Loans. The Trust Fund's deductions will
consist primarily of interest accruing with respect to the Notes, servicing and
other fees, and losses or deductions upon collection or disposition of Loans.
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The tax items of a partnership are allocable to the partners in accordance
with the Code, Treasury regulations and the partnership agreement (here, the
Trust Agreement and related documents). The Trust Agreement will provide, in
general, that the Certificateholders will be allocated taxable income of the
Trust Fund for each month equal to the sum of (i) the interest that accrues on
the Certificates in accordance with their terms for such month, including
interest accruing at the Pass Through Rate for such month and interest on
amounts previously due on the Certificates but not yet distributed; (ii) any
Trust Fund income attributable to discount on the Loans that corresponds to any
excess of the principal amount of the Certificates over their initial issue
price; (iii) prepayment premium payable to the Certificateholders for such
month; and (iv) any other amounts of income payable to the Certificateholders
for such month. Such allocation will be reduced by any amortization by the Trust
Fund of premium on Loans that corresponds to any excess of the issue price of
Certificates over their principal amount. All remaining taxable income of the
Trust Fund will be allocated to the Company. Based on the economic arrangement
of the parties, this approach for allocating Trust Fund income should be
permissible under applicable Treasury regulations, although no assurance can be
given that the IRS would not require a greater amount of income to be allocated
to Certificateholders. Moreover, even under the foregoing method of allocation,
Certificateholders may be allocated income equal to the entire Pass Through Rate
plus the other items described above even though the Trust Fund might not have
sufficient cash to make current cash distributions of such amount. Thus, cash
basis holders will in effect be required to report income from the Certificates
on the accrual basis and Certificateholders may become liable for taxes on Trust
Fund income even if they have not received cash from the Trust Fund to pay such
taxes. In addition, because tax allocations and tax reporting will be done on a
uniform basis for all Certificateholders but Certificateholders may be
purchasing Certificates at different times and at different prices,
Certificateholders may be required to report on their tax returns taxable income
that is greater or less than the amount reported to them by the Trust Fund.
All of the taxable income allocated to a Certificateholder that is a
pension, profit sharing or employee benefit plan or other tax-exempt entity
(including an individual retirement account) will constitute 'unrelated business
taxable income' generally taxable to such a holder under the Code.
An individual taxpayer's share of expenses of the Trust Fund (including
fees to the Servicer but not interest expense) would be miscellaneous itemized
deductions. Such deductions might be disallowed to the individual in whole or in
part and might result in such holder being taxed on an amount of income that
exceeds the amount of cash actually distributed to such holder over the life of
the Trust Fund.
The Trust Fund intends to make all tax calculations relating to income and
allocations to Certificateholders on an aggregate basis. If the IRS were to
require that such calculations be made separately for each Loan, the Trust Fund
might be required to incur additional expense but it is believed that there
would not be a material adverse effect on Certificateholders.
Discount and Premium. It is believed that the Loans were not issued with
OID, and, therefore, the Trust should not have OID income. However, the purchase
price paid by the Trust Fund for the Loans may be greater or less than the
remaining principal balance of the Loans at the time of purchase. If so, the
Loan will have been acquired at a premium or discount, as the case may be. (As
indicated above, the Trust Fund will make this calculation on an aggregate
basis, but might be required to recompute it on a Loan by Loan basis.)
If the Trust Fund acquires the Loans at a market discount or premium, the
Trust Fund will elect to include any such discount in income currently as it
accrues over the life of the Loans or to offset any such premium against
interest income on the Loans. As indicated above, a portion of such market
discount income or premium deduction may be allocated to Certificateholders.
Section 708 Termination. Under Section 708 of the Code, the Trust Fund
will be deemed to terminate for federal income tax purposes if 50% or more of
the capital and profits interests in the Trust Fund are sold or exchanged within
a 12-month period. If such a termination occurs, the Trust Fund will be
considered to distribute its assets to the partners, who would then be treated
as recontributing those assets to the Trust Fund as a new partnership. The Trust
Fund will not comply with certain technical requirements that might apply when
such a constructive termination occurs. As a result, the Trust Fund may be
subject to certain tax penalties and may incur additional expenses if it is
required to comply with those requirements. Furthermore, the Trust Fund might
not be able to comply 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.
A Certificateholder's tax basis in a Certificate will generally equal the
holder's cost increased by the holder's share of Trust Fund income (includible
in income) and decreased by any distributions received with respect to such
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Certificate. In addition, both the tax basis in the Certificates and the amount
realized on a sale of a Certificate would include the holder's share of the
Notes and other liabilities of the Trust Fund. A holder acquiring Certificates
at different prices may be required to maintain a single aggregate adjusted tax
basis in such Certificates, and, upon sale or other disposition of some of the
Certificates, allocate a portion of such aggregate tax basis to the Certificates
sold (rather than maintaining a separate tax basis in each Certificate for
purposes of computing gain or loss on a sale of that Certificate).
Any gain on the sale of a Certificate attributable to the holder's share of
unrecognized accrued market discount on the Receivables would generally be
treated as ordinary income to the holder and would give rise to special tax
reporting requirements. The Trust Fund does not expect to have any other assets
that would give rise to such special reporting requirements. Thus, to avoid
those special reporting requirements, the Trust Fund will elect to include
market discount in income as it accrues.
If a Certificateholder is required to recognize an aggregate amount of
income (not including income attributable to disallowed itemized deductions
described above) over the life of the Certificates that exceeds the aggregate
cash distributions with respect thereto, such excess will generally give rise to
a capital loss upon the retirement of the Certificates.
Allocations Between Transferors and Transferees. In general, the Trust
Fund's taxable income and losses will be determined monthly and the tax items
for a particular calendar month will be apportioned among the Certificateholders
in proportion to the principal amount of Certificates owned by them as of the
close of the last day of such month. As a result, a holder purchasing
Certificates may be allocated tax items (which will affect its tax liability and
tax basis) attributable to periods before the actual transaction.
The use of such a monthly convention may not be permitted by existing
regulations. If a monthly convention is not allowed (or only applies to
transfers of less than all of the partner's interest), taxable income or losses
of the Trust Fund might be reallocated among the Certificateholders. The Trust
Fund's method of allocation between transferors and transferees may be revised
to conform to a method permitted by future regulations.
Section 754 Election. In the event that a Certificateholder sells its
Certificates at a profit (loss), the purchasing Certificateholder will have a
higher (lower) basis in the Certificates than the selling Certificateholder had.
The tax basis of the Trust Fund's assets will not be adjusted to reflect that
higher (or lower) basis unless the Trust Fund were to file an election under
Section 754 of the Code. In order to avoid the administrative complexities that
would be involved in keeping accurate accounting records, as well as potentially
onerous information reporting requirements, the Trust Fund will not make such
election. As a result, Certificateholders might be allocated a greater or lesser
amount of Trust Fund income than would be appropriate based on their own
purchase price for Certificates.
Administrative Matters. The Owner Trustee is required to keep or have kept
complete and accurate books of the Trust Fund. Such books will be maintained for
financial reporting and tax purposes on an accrual basis and the fiscal year of
the Trust will be the calendar year. The Trustee will file a partnership
information return (IRS Form 1065) with the IRS for each taxable year of the
Trust Fund and will report each Certificateholder's allocable share of items of
Trust Fund income and expense to holders and the IRS on Schedule K-1. The Trust
Fund will provide the Schedule K-1 information to nominees that fail to provide
the Trust Fund with the information statement described below and such nominees
will be required to forward such information to the beneficial owners of the
Certificates. Generally, holders must file tax returns that are consistent with
the information return filed by the Trust Fund or be subject to penalties unless
the holder notifies the IRS of all such inconsistencies.
Under Section 6031 of the Code, any person that holds Certificates as a
nominee at any time during a calendar year is required to furnish the Trust Fund
with a statement containing certain information on the nominee, the beneficial
owners and the Certificates so held. Such information includes (i) the name,
address and taxpayer identification number of the nominee and (ii) as to each
beneficial owner (x) the name, address and identification number of such person,
(y) whether such person is a United States person, a tax-exempt entity or a
foreign government, an international organization, or any wholly owned agency or
instrumentality of either of the foregoing, and (z) certain information on
Certificates that were held, bought or sold on behalf of such person throughout
the year. In addition, brokers and financial institutions that hold Certificates
through a nominee are required to furnish directly to the Trust Fund information
as to themselves and their ownership of Certificates. A clearing agency
registered under Section 17A of the Exchange Act is not required to furnish any
such information statement to the Trust Fund. The information referred to above
for any calendar year must be furnished to the
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Trust Fund on or before the following January 31. Nominees, brokers and
financial institutions that fail to provide the Trust Fund with the information
described above may be subject to penalties.
The Company will be designated as the tax matters partner in the related
Trust Agreement and, as such, will be responsible for representing the
Certificateholders in any dispute with the IRS. The Code provides for
administrative examination of a partnership as if the partnership were a
separate and distinct taxpayer. Generally, the statute of limitations for
partnership items does not expire before three years after the date on which the
partnership information return is filed. Any adverse determination following an
audit of the return of the Trust Fund by the appropriate taxing authorities
could result in an adjustment of the returns of the Certificateholders, and,
under certain circumstances, a Certificateholder may be precluded from
separately litigating a proposed adjustment to the items of the Trust Fund. An
adjustment could also result in an audit of a Certificateholder's returns and
adjustments of items not related to the income and losses of the Trust Fund.
Tax Consequences to Foreign Certificateholders. It is not clear whether
the Trust Fund would be considered to be engaged in a trade or business in the
United States for purposes of federal withholding taxes with respect to non-U.S.
persons because there is no clear authority dealing with that issue under facts
substantially similar to those described herein. Although it is not expected
that the Trust Fund would be engaged in a trade or business in the United States
for such purposes, the Trust Fund will withhold as if it were so engaged in
order to protect the Trust Fund from possible adverse consequences of a failure
to withhold. The Trust Fund expects to withhold on the portion of its taxable
income that is allocable to foreign Certificateholders pursuant to Section 1446
of the Code, as if such income were effectively connected to a U.S. trade or
business, at a rate of 35% for foreign holders that are taxable as corporations
and 39.6% for all other foreign holders. Subsequent adoption of Treasury
regulations or the issuance of other administrative pronouncements may require
the Trust to change its withholding procedures. In determining a holder's
withholding status, the Trust Fund may rely on IRS Form W-8, IRS Form W-9 or the
holder's certification of nonforeign status signed under penalties of perjury.
Each foreign holder might be required to file a U.S. individual or
corporate income tax return (including, in the case of a corporation, the branch
profits tax) on its share of the Trust Fund's income. Each foreign holder must
obtain a taxpayer identification number from the IRS and submit that number to
the Trust on Form W-8 in order to assure appropriate crediting of the taxes
withheld. A foreign holder generally would be entitled to file with the IRS a
claim for refund with respect to taxes withheld by the Trust Fund taking the
position that no taxes were due because the Trust Fund was not engaged in a U.S.
trade or business. However, interest payments made (or accrued) to a
Certificateholder who is a foreign person generally will be considered
guaranteed payments to the extent such payments are determined without regard to
the income of the Trust Fund. If these interest payments are properly
characterized as guaranteed payments, then the interest will not be considered
'portfolio interest.' As a result, Certificateholders will be subject to United
States federal income tax and withholding tax at a rate of 30 percent, unless
reduced or eliminated pursuant to an applicable treaty. In such case, a foreign
holder would only be entitled to claim a refund for that portion of the taxes in
excess of the taxes that should be withheld with respect to the guaranteed
payments.
Backup Withholding. Distributions made on the Certificates and proceeds
from the sale of the Certificates will be subject to a 'backup' withholding tax
of 31% if, in general, the Certificateholder fails to comply with certain
identification procedures, unless the holder is an exempt recipient under
applicable provisions of the Code.
STATE TAX CONSIDERATIONS
In addition to the federal income tax consequences described in 'Certain
Federal Income Tax Considerations,' potential investors should consider the
state and local income tax consequences of the acquisition, ownership, and
disposition of the Securities. State and local income tax law may differ
substantially from the corresponding federal law, and this discussion does not
purport to describe any aspect of the income tax laws of any state or locality.
Therefore, potential investors should consult their own tax advisors with
respect to the various state and local tax consequences of an investment in the
Securities.
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ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended ('ERISA')
and the Code impose certain restrictions on employee benefit plans subject to
ERISA and on plans and other arrangements subject to Section 4975 of the Code
('Plans'), and on persons who are parties in interest or disqualified persons
('parties in interest') with respect to such Plans. Certain employee benefit
plans, such as governmental plans and church plans (if no election has been made
under Section 410(d) of the Code), are not subject to the restrictions of ERISA,
and assets of such plans may be invested in the Securities without regard to the
ERISA considerations described below, subject to other applicable federal and
state law. However, any such governmental or church plan which is qualified
under Section 401(a) of the Code and exempt from taxation under Section 501(a)
of the Code is subject to the prohibited transaction rules set forth in Section
503 of the Code.
Investments by Plans are subject to ERISA's general fiduciary requirements,
including the requirement of investment prudence and diversification and the
requirement that a Plan's investments be made in accordance with the documents
governing the Plan.
Section 406 of ERISA prohibits parties in interest with respect to a Plan
from engaging in certain transactions ('prohibited transactions') involving a
Plan and its assets unless a statutory or administrative exemption applies to
the transaction. Section 4975 of the Code imposes certain excise taxes (or, in
some cases, a civil penalty may be assessed pursuant to Section 502(i) of ERISA)
on parties in interest which engage in non-exempt prohibited transactions.
The United States Department of Labor ('DOL') has issued a final regulation
(29 C.F.R. Section 2510.3-101) containing rules for determining what constitutes
the assets of a Plan. This regulation provides that, as a general rule, the
underlying assets and properties of corporations, partnerships, trusts and
certain other entities in which a Plan makes an investment in an 'equity
interest' will be deemed for purposes of ERISA to be assets of the Plan unless
certain exceptions apply.
Under the terms of the regulation, the Trust Fund may be deemed to hold
plan assets by reason of a Plan's investment in a Security; such plan assets
would include an undivided interest in the Primary Assets and any other assets
held by the Trust Fund. In such an event, persons providing services with
respect to the assets of the Trust Fund, may be parties in interest, subject to
the fiduciary responsibility provisions of Title I of ERISA, including the
prohibited transaction provisions of Section 406 of ERISA (and of Section 4975
of the Code), with respect to transactions involving such assets unless such
transactions are subject to a statutory or administrative exemption.
One such exception applies if the interest described is treated as
indebtedness under applicable local law and which has no substantial equity
features. Generally, a profits interest in a partnership, an undivided ownership
interest in property and a beneficial ownership interest in a trust are deemed
to be 'equity interests' under the final regulation. If Notes of a particular
Series were deemed to be indebtedness under applicable local law without any
substantial equity features, an investing Plan's assets would include such
Notes, but not, by reason of such purchase, the underlying assets of the Trust
Fund.
Another such exception applies if the class of equity interests in question
is: (i) 'widely held' (held by 100 or more investors who are independent of the
Depositor and each other); (ii) freely transferable; and (iii) sold as part of
an offering pursuant to (A) an effective registration statement under the
Securities Act of 1933, and then subsequently registered under the Securities
Exchange Act of 1934 or (B) an effective registration statement under Section
12(b) or 12(g) of the Securities Exchange Act of 1934 ('Publicly Offered
Securities'). In addition, the regulation provides that if at all times more
than 75% of the value of all classes of equity interests in the Depositor or the
Trust Fund are held by investors other than benefit plan investors (which is
defined as including plans subject to ERISA, government plans and individual
retirement accounts), the investing Plan's assets will not include any of the
underlying assets of the Depositor or the Trust Fund.
An additional exemption may also be available. On February 22, 1991, the
DOL granted to Lehman Brothers an administrative exemption, Prohibited
Transaction Exemption 91-14 (Application No. D-7958, 56 Fed. Reg. 75414) (the
'Exemption'), from certain of the prohibited transaction rules of ERISA with
respect to the initial purchase, the holding and the subsequent resale by Plans
of securities representing interests in asset-backed pass-through trusts that
consist of certain receivables, loans and other obligations that meet the
conditions
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and requirements of the Exemption. These securities should include the
Certificates, and depending upon the particular characteristics of a Series, may
include the Notes. The obligations covered by the Exemption include obligations
such as the Primary Assets (other than Home Improvement Contracts that are
unsecured). The Exemption will apply to the acquisition, holding and resale of
the Securities by a Plan, provided that certain conditions (certain of which are
described below) are met.
Among the conditions which must be satisfied for the Exemption to apply are
the following:
(i) The acquisition of the Securities 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;
(ii) The rights and interests evidenced by the Securities acquired by
the Plan are not subordinated to the rights and interests evidenced by
other securities of the trust;
(iii) The Securities acquired by the Plan have received a rating at
the time of such acquisition that is in one of the three highest generic
rating categories from either Standard & Poor's Ratings Group ('Standard &
Poor's'), Moody's Investors Service, Inc. ('Moody's'), Duff & Phelps Inc.
('D&P') or Fitch Investors Service, Inc. ('Fitch');
(iv) The sum of all payments made to the underwriter in connection
with the distribution of the Securities represents not more than reasonable
compensation for underwriting the Securities. The sum of all payments made
to and retained by the seller pursuant to the sale of the obligations to
the trust represents not more than the fair market value of such
obligations. The sum of all payments made to and retained by the servicer
represents not more than reasonable compensation for the servicer's
services under the related servicing agreement and reimbursement of the
servicer's reasonable expenses in connection therewith;
(v) The Trustee must not be an affiliate of any other member of the
Restricted Group (as defined below); and
(vi) The Plan investing in the Securities is an 'accredited investor'
as defined in Rule 501(a)(1) of Regulation D of the Securities and Exchange
Commission under the Securities Act of 1933.
The trust also must meet the following requirements:
(i) the corpus of the trust must consist solely of assets of the type
which have been included in other investment pools;
(ii) securities in such other investment pools must have been rated in
one of the three highest rating categories of Standard & Poor's, Moody's,
D&P or Fitch for at least one year prior to the Plan's acquisition of
securities; and
(iii) securities evidencing interests in such other investment pools
must have been purchased by investors other than Plans for at least one
year prior to any Plan's acquisition of Securities.
Moreover, the Exemption provides relief from certain self-dealing/conflict
of interest prohibited transactions that may occur when the Plan fiduciary
causes a Plan to acquire securities in a trust in which the fiduciary (or its
affiliate) is an obligor on the receivables held in the trust provided that,
among other requirements: (i) in the case of an acquisition in connection with
the initial issuance of Securities, at least fifty (50) percent of each Class of
Securities in which Plans have invested is acquired by persons independent of
the Restricted Group and at least fifty (50) percent of the aggregate interest
in the trust is acquired by persons independent of the Restricted Group; (ii)
such fiduciary (or its affiliate) is an obligor with respect to five (5) percent
or less of the fair market value of the obligations contained in the trust;
(iii) the Plan's investment in Securities does not exceed twenty-five (25)
percent of all of the Securities outstanding after the acquisition; and (iv) no
more than twenty-five (25) percent of the assets of the Plan are invested in
securities representing an interest in one or more trusts containing assets sold
or serviced by the same entity. The Exemption does not apply to Plans sponsored
by the Company, the underwriters of the Securities, the Trustee, the Servicer,
any obligor with respect to obligations included in a Trust Fund constituting
more than five (5) percent of the aggregate unamortized principal balance of the
assets in a Trust Fund, or any affiliate of such parties (the 'Restricted
Group').
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Prospective Plan investors should consult with their legal advisors
concerning the impact of ERISA and the Code, the potential application of the
Exemption to the purchase and holding of the Securities and the potential
consequences to their specific circumstances, prior to making an investment in
the Securities. Moreover, each Plan fiduciary should determine whether under the
general fiduciary standards of investment procedure and diversification an
investment in the Securities is appropriate for the Plan, taking into account
the overall investment policy of the Plan and the composition of the Plan's
investment portfolio. In this regard, purchasers that are insurance companies
should consult with their counsel with respect to the recent United States
Supreme Court case interpreting the fiduciary responsibility rules of ERISA,
John Hancock Mutual Life Insurance Co. v. Harris Trust and Savings Bank (decided
December 13, 1993). In John Hancock, the Supreme Court ruled that assets held in
an insurance company's general account may be deemed to be 'plan assets' for
purposes of ERISA under certain circumstances. Prospective purchasers should
determine whether the decision affects their ability to purchase the Securities.
LEGAL INVESTMENT
Unless otherwise specified in the related Prospectus Supplement, the
Securities will not constitute 'mortgage-related securities' within the meaning
of SMMEA. Accordingly, investors whose investment authority is subject to legal
restrictions should consult their own legal advisors to determine whether and to
what extent the Securities constitute legal investments for them.
PLAN OF DISTRIBUTION
The Depositor may offer each Series of Securities through Lehman Brothers
Inc. ('Lehman Brothers') or one or more other firms that may be designated at
the time of each offering of such Securities. The participation of Lehman
Brothers in any offering will comply with Schedule E to the By-Laws of the
National Association of Securities Dealers, Inc. The Prospectus Supplement
relating to each Series of Securities will set forth the specific terms of the
offering of such Series of Securities and of each Class within such Series, the
names of the underwriters, the purchase price of the Securities, the proceeds to
the Depositor from such sale, any securities exchange on which the Securities
may be listed, and, if applicable, the initial public offering prices, the
discounts and commissions to the underwriters and any discounts and concessions
allowed or reallowed to certain dealers. The place and time of delivery of each
Series of Securities will also be set forth in the Prospectus Supplement
relating to such Series. Lehman Brothers is an affiliate of the Depositor.
LEGAL MATTERS
Unless otherwise specified in the related Prospectus Supplement, certain
legal matters in connection with the Securities will be passed upon for the
Company by Brown & Wood, New York, New York.
ADDITIONAL INFORMATION
Copies of the Registration Statement of which this Prospectus forms a part
and the exhibits thereto are on file at the offices of the Securities and
Exchange Commission in Washington, D.C. Copies may be obtained at rates
prescribed by the Commission upon request to the Commission, and may be
inspected, without charge, at the offices of the Commission, 450 Fifth Street,
N.W., Washington, D.C. See 'Available Information.'
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GLOSSARY OF TERMS
The following are abbreviated definitions of certain capitalized terms used
in this Prospectus. Unless otherwise provided in a 'Supplemental Glossary' in
the Prospectus Supplement for a Series, such definitions shall apply to
capitalized terms used in such Prospectus Supplement. The definitions may vary
from those in the related Agreement for a Series and the related Agreement for a
Series generally provides a more complete definition of certain of the terms.
Reference should be made to the related Agreement for a Series for a more
compete definition of such terms.
'Accrual Termination Date' means, with respect to a Class of Compound
Interest Securities, the Distribution Date specified in the related Prospectus
Supplement.
'Advance' means cash advanced by the Servicer in respect of delinquent
payments of principal of and interest on a Loan, and for any other purposes
specified in the related Prospectus Supplement.
'Agreement' means, with respect to a Series of Certificates, the Pooling
and Servicing Agreement or Trust Agreement, and, with respect to a Series of
Notes, the Indenture and the Servicing Agreement, as the context requires.
'Appraised Value' means, with respect to property securing a Loan, the
lesser of the appraised value determined in an appraisal obtained at origination
of the Loan or sales price of such mortgaged property at such time.
'Asset Group' means, with respect to the Primary Assets and other assets
comprising the Trust Fund of a Series, a group of such Primary Assets and other
assets having the characteristics described in the related Prospectus
Supplement.
'Assumed Reinvestment Rate' means, with respect to a Series, the per annum
rate or rates specified in the related Prospectus Supplement for a particular
period or periods as the 'Assumed Reinvestment Rate' for funds held in any fund
or account for the Series.
'Available Distribution Amount' means the amount in the Distribution
Account (including amounts deposited therein from any reserve fund or other fund
or account) eligible for distribution to Holders on a Distribution Date.
'Bankruptcy Code' means the federal bankruptcy code, 11 United States Code
101 et seq., and related rules and regulations promulgated thereunder.
'Business Day' means a day that, in the City of New York or in the city or
cities in which the corporate trust office of the Trustee are located, is
neither a legal holiday nor a day on which banking institutions are authorized
or obligated by law, regulations or executive order to be closed.
'Certificate' means the Asset-Backed Certificates.
'Class' means a Class of Securities of a Series.
'Closing Date' means, with respect to a Series, the date specified in the
related Prospectus Supplement as the date on which Securities of such Series are
first issued.
'Code' means the Internal Revenue Code of 1986, as amended, and regulations
(including proposed regulations) or other pronouncements of the Internal Revenue
Service promulgated thereunder.
'Collection Account' means, with respect to a Series, the account
established in the name of the Servicer for the deposit by the Servicer of
payments received from the Primary Assets.
'Combined Loan-to-Value Ratio' means, with respect to a Loan, the ratio
determined as set forth in the related Prospectus Supplement taking into account
the amounts of any related senior mortgage loans on the related Mortgaged
Property.
'Commission' means the Securities and Exchange Commission.
'Compound Interest Security' means any Security of a Series on which all or
a portion of the interest accrued thereon is added to the principal balance of
such Security on each Distribution Date, through the Accrual
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Termination Date, and with respect to which no interest shall be payable until
such Accrual Termination Date, after which interest payments will be made on the
Compound Value thereof.
'Compound Value' means, with respect to a Class of Compound Interest
Securities, the original principal balance of such Class, plus all accrued and
unpaid interest, if any, previously added to the principal balance thereof and
reduced by any payments of principal previously made on such Class of Compound
Interest Securities.
'Condominium' means a form of ownership of real property wherein each owner
is entitled to the exclusive ownership and possession of his or her individual
Condominium Unit and also owns a proportionate undivided interest in all parts
of the Condominium Building (other than the individual Condominium Units) and
all areas or facilities, if any, for the common use of the Condominium Units.
'Condominium Association' means the person(s) appointed or elected by the
Condominium Unit owners to govern the affairs of the Condominium.
'Condominium Building' means a multi-unit building or buildings, or a group
of buildings whether or not attached to each other, located on property subject
to Condominium ownership.
'Condominium Loan' means a Loan secured by a Mortgage on a Condominium Unit
(together with its appurtenant interest in the common elements).
'Condominium Unit' means an individual housing unit in a Condominium
Building.
'Cooperative' means a corporation owned by tenant-stockholders who, through
the ownership of stock, shares or membership securities in the corporation,
receive proprietary leases or occupancy agreements which confer exclusive rights
to occupy specific units and which is described in Section 216 of the Code.
'Cooperative Dwelling' means an individual housing unit in a building owned
by a Cooperative.
'Cooperative Loan' means a housing loan made with respect to a Cooperative
Dwelling and secured by an assignment by the borrower (tenant-stockholder) or
security interest in shares issued by the applicable Cooperative.
'Cut-off Date' means the date designated as such in the related Prospectus
Supplement for a Series.
'Debt Securities' means Securities characterized as indebtedness for
federal income tax purposes, and Regular Interest Securities.
'Deferred Interest' means the excess of the interest accrued on the
outstanding principal balance of a Loan during a specified period over the
amount of interest required to be paid by an obligor on such Loan on the related
Due Date.
'Deposit Agreement' means a guaranteed investment contract or reinvestment
agreement providing for the investment of funds held in a fund or account,
guaranteeing a minimum or a fixed rate of return on the investment of moneys
deposited therein.
'Depositor' means Lehman ABS Corporation.
'Disqualified Organization' means the United States, any State or political
subdivision thereof, any possession of the United States, any foreign
government, any international organization, or any agency or instrumentality of
any of the foregoing, a rural electric or telephone cooperative described in
section 1381(a)(2)(C) of the Code, or any entity exempt from the tax imposed by
sections 1-1399 of the Code, if such entity is not subject to tax on its
unrelated business income.
'Distribution Account' means, with respect to a Series, the account
established in the name of the Trustee for the deposit of remittances received
from the Servicer with respect to the Primary Assets.
'Distribution Date' means, with respect to a Series or Class of Securities,
each date specified as a distribution date for such Series or Class in the
related Prospectus Supplement.
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'Due Date' means each date, as specified in the related Prospectus
Supplement for a Series, on which any payment of principal or interest is due
and payable by the obligor on any Primary Asset pursuant to the terms thereof.
'Eligible Investments' means any one or more of the obligations or
securities described as such in the related Agreement.
'Enhancement' means the enhancement for a Series, if any, specified in the
related Prospectus Supplement.
'Enhancer' means the provider of the Enhancement for a Series specified in
the related Prospectus Supplement.
'ERISA' means the Employee Retirement Income Security Act of 1974, as
amended.
'Escrow Account' means an account, established and maintained by the
Servicer for a Loan, into which payments by borrowers to pay taxes, assessments,
mortgage and hazard insurance premiums and other comparable items required to be
paid to the mortgagee are deposited.
'FHLMC' means the Federal Home Loan Mortgage Corporation.
'Final Scheduled Distribution Date' means, with respect to a Class of Notes
of a Series, the date no later than which principal thereof will be fully paid
and with respect to a Class of Certificates of a Series, the date after which no
Certificates of such Class will remain outstanding, in each case based on the
assumptions set forth in the related Prospectus Supplement.
'FNMA' means the Federal National Mortgage Association.
'Holder' means the person or entity in whose name a Security is registered.
'Home Improvements' means the home improvements financed by a Home
Improvement Contract.
'Home Improvement Contract' means any home improvement installment sales
contracts and installment loan agreements which may be unsecured or secured by
purchase money security interests in the Home Improvements financed thereby.
'HUD' means the United States Department of Housing and Urban Development.
'Indenture' means the indenture relating to a Series of Notes between the
Trust Fund and the Trustee.
'Index' means the index applicable to any adjustments in the Loan Rates of
any adjustable rate Loans.
'Insurance Policies' means certain mortgage insurance, hazard insurance and
other insurance policies required to be maintained with respect to Loans.
'Insurance Proceeds' means amounts paid by the insurer under any of the
Insurance Policies covering any Loan or Mortgaged Property.
'Interest Only Securities' means a Class of Securities entitled solely or
primarily to distributions of interest and which is identified as such in the
related Prospectus Supplement.
'IRS' means the Internal Revenue Service.
'LCPI' means Lehman Commercial Paper Inc.
'Lehman Brothers' means Lehman Brothers Inc.
'Lifetime Rate Cap' means the lifetime limit, if any, on the Loan Rate
during the life of each adjustable rate Loan.
'Liquidation Proceeds' means amounts received by the Servicer in connection
with the liquidation of a Loan, net of liquidation expenses.
'Loan Rate' means, unless otherwise indicated herein or in the Prospectus
Supplement, the interest rate borne by a Loan.
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'Loans' means Mortgage Loans and/or Home Improvement Contracts,
collectively. A Loan refers to a specific Mortgage Loan or Home Improvement
Contract, as the context requires.
'Loan-to-Value Ratio' means, with respect to a Loan, the ratio determined
as set forth in the related Prospectus Supplement.
'Minimum Rate' means the lifetime minimum Loan Rate during the life of each
adjustable rate Loan.
'Minimum Principal Payment Agreement' means a minimum principal payment
agreement with an entity meeting the criteria of the Rating Agencies.
'Modification' means a change in any term of a Loan.
'Mortgage' means the mortgage, deed of trust or other similar security
instrument securing a Mortgage Note.
'Mortgage Loan' means a closed-end and/or revolving home equity loan or
balance thereof secured by a Mortgaged Property.
'Mortgage Note' means the note or other evidence of indebtedness of a
Mortgagor under the Loan.
'Mortgagor' means the obligor on a Mortgage Note.
'1986 Act' means the Tax Reform Act of 1986.
'Notes' means the Asset-Backed Notes.
'Notional Amount' means the amount set forth in the related Prospectus
Supplement for a Class of Interest Only Securities.
'PAC' ('Planned Amortization Class Securities') means a Class of Securities
of a Series on which payments of principal are made in accordance with a
schedule specified in the related Prospectus Supplement, based on certain
assumptions stated therein.
'Participating Securities' means Securities entitled to receive payments of
principal and interest and an additional return on investment as described in
the related Prospectus Supplement.
'Pass-Through Security' means a security representing an undivided
beneficial interest in a pool of assets, including the right to receive a
portion of all principal and interest payments relating to those assets.
'Pay Through Security' means Regular Interest Securities and certain Debt
Securities that are subject to acceleration due to prepayments on the underlying
Primary Assets.
'Person' means any individual, corporation, partnership, joint venture,
association, joint stock company, trust (including any beneficiary thereof),
unincorporated organization, or government or any agency or political
subdivision thereof.
'Pooling and Servicing Agreement' means the pooling and servicing agreement
relating to a Series of Certificates among the Depositor, the Servicer and the
Trustee.
'Primary Assets' means the Private Securities and/or Loans, as the case may
be, which are included in the Trust Fund for such Series. A Primary Asset refers
to a specific Private Security or Loan, as the case may be.
'Principal Balance' means, with respect to a Primary Asset and as of a Due
Date, the original principal amount of the Primary Asset, plus the amount of any
Deferred Interest added to such principal amount, reduced by all payments, both
scheduled or otherwise, received on such Primary Asset prior to such Due Date
and applied to principal in accordance with the terms of the Primary Asset.
'Principal Only Securities' means a Class of Securities entitled solely or
primarily to distributions of principal and identified as such in the Prospectus
Supplement.
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'Property' means either a Home Improvement or a Mortgaged Property securing
a Loan, as the context requires.
'Qualified Insurer' means a mortgage guarantee or insurance company duly
qualified as such under the laws of the states in which the Mortgaged Properties
are located duly authorized and licensed in such states to transact the
applicable insurance business and to write the insurance provided.
'Rating Agency' means the nationally recognized statistical rating
organization (or organizations) which was (or were) requested by the Depositor
to rate the Securities upon the original issuance thereof.
'Regular Interest' means a regular interest in a REMIC.
'REMIC' means a real estate mortgage investment conduit.
'REMIC Administrator' means the Person, if any, specified in the related
Prospectus Supplement for a Series for which a REMIC election is made, to serve
as administrator of the Series.
'REMIC Provisions' means the provisions of the federal income tax law
relating to real estate mortgage investment conduits, which appear at sections
860A through 860G of Subchapter M of Chapter 1 of the Code, and related
provisions, and regulations, including proposed regulations and rulings, and
administrative pronouncements promulgated thereunder, as the foregoing may be in
effect from time to time.
'REO Property' means real property which secured a defaulted Loan,
beneficial ownership of which has been acquired upon foreclosure, deed in lieu
of foreclosure, repossession or otherwise.
'Reserve Fund' means, with respect to a Series, any Reserve Fund
established pursuant to the related Agreement.
'Residual Interest' means a residual interest in a REMIC.
'Retained Interest' means, with respect to a Primary Asset, the amount or
percentaged specified in the related Prospectus Supplement which is not included
in the Trust Fund for the related Series.
'Scheduled Payments' means the scheduled payments of principal and interest
to be made by the borrower on a Primary Asset.
'Securities' means the Notes or the Certificates.
'Seller' means the seller of the Primary Assets to the Depositor identified
in the related Prospectus Supplement for a Series.
'Senior Securityholder' means a holder of a Senior Security.
'Senior Securities' means a Class of Securities as to which the holders'
rights to receive distributions of principal and interest are senior to the
rights of holders of Subordinate Securities, to the extent specified in the
related Prospectus Supplement.
'Series' means a separate series of Securities sold pursuant to this
Prospectus and the related Prospectus Supplement.
'Servicer' means, with respect to a Series, the Person if any, designated
in the related Prospectus Supplement to service Loans for that Series, or the
successors or assigns of such Person.
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'Single Family Property' means property securing a Loan consisting of one-
to four-family attached or detached residential housing, including Cooperative
Dwellings.
'Stripped Securities' means Pass-Through Securities representing interests
in Primary Assets with respect to which all or a portion of the principal
payments have been separated from all or a portion of the interest payments.
'Subordinate Securityholder' means a Holder of a Subordinate Security.
'Subordinated Securities' means a Class of Securities as to which the
rights of holders to receive distributions of principal, interest or both is
subordinated to the rights of holders of Senior Securities, and may be allocated
losses and shortfalls prior to the allocation thereof to other Classes of
Securities, to the extent and under the circumstances specified in the related
Prospectus Supplement.
'Trustee' means the trustee under the applicable Agreement and its
successors.
'Trust Fund' means, with respect to any Series of Securities, the trust
holding all money, instruments, securities and other property, including all
proceeds thereof, which are, with respect to a Series of Certificates, held for
the benefit of the Holders by the Trustee under the Pooling and Servicing
Agreement or Trust Agreement, or, with respect to a Series of Notes, pledged to
the Trustee under the Indenture as a security for such Notes, including, without
limitation, the Primary Assets (except any Retained Interests), all amounts in
the Distribution Account, Collection Account or Reserve Funds, distributions on
the Primary Assets (net of servicing fees), and reinvestment earnings on such
net distributions and any Enhancement and all other property and interests held
by or pledged to the Trustee pursuant to the related Agreement for such Series.
'UCC' means the Uniform Commercial Code.
'Variable Interest Security' means a Security on which interest accrues at
a rate that is adjusted, based upon a predetermined index, at fixed periodic
intervals, all as set forth in the related Prospectus Supplement.
'Zero Coupon Security' means a Security entitled to receive payments of
principal only.
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INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT.
A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY
NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME
THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL
NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY
NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH
SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION
OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED JUNE 14, 1996.
PROSPECTUS
LEHMAN ABS CORPORATION
ASSET-BACKED CERTIFICATES
ASSET-BACKED NOTES
(ISSUABLE IN SERIES)
Lehman ABS Corporation (the 'Depositor') may offer from time to time under
this Prospectus and related Prospectus Supplements the Asset-Backed Notes (the
'Notes') and the Asset-Backed Certificates (the 'Certificates' and, together
with the Notes, the 'Securities') which may be sold from time to time in one or
more series (each, a 'Series').
As specified in the related Prospectus Supplement, the Certificates of a
Series will evidence undivided interests in certain assets deposited into a
trust (each, a 'Trust Fund') by the Depositor pursuant to a Pooling and
Servicing Agreement or a Trust Agreement, as described herein. As specified in
the related Prospectus Supplement, the Notes of a Series will be issued and
secured pursuant to an Indenture and will represent indebtedness of the related
Trust Fund. The Trust Fund for a Series of Securities will include assets
purchased from the seller or sellers specified in the related Prospectus
Supplement (the 'Seller') composed of (a) Primary Assets, which may include one
or more pools of (i) home improvement installment sales contracts and
installment loan agreements (the 'Home Improvement Contracts') which are either
unsecured or secured by mortgages primarily on one-to-four family residential
properties, unless otherwise specified in the related Prospectus Supplement, or
by purchase money security interests in the home improvements financed thereby
(the 'Home Improvements') and (ii) manufactured housing installment sales
contracts and installment loan agreements (the 'Manufactured Housing Contracts'
and together with the Home Improvement Contracts, the 'Contracts') secured by
either security interests in the Manufactured Homes (as defined herein) or by
mortgages on real estate on which the related Manufactured Homes are located,
(b) all monies due thereunder net, if and as provided in the related Prospectus
Supplement, of certain amounts payable to the servicer of the Contracts, which
servicer may also be the Seller, specified in the related Prospectus Supplement
(the 'Servicer'), and (c) certain funds, Enhancement (as defined herein) and
other assets as described herein and in the related Prospectus Supplement.
Each Series of Securities will be issued in one or more classes (each, a
'Class'). Interest on and principal of the Securities of a Series will be
payable on each Distribution Date specified in the related Prospectus
Supplement, at the times, at the rates, in the amounts and in the order of
priority set forth in the related Prospectus Supplement.
If a Series includes multiple Classes, such Classes may vary with respect to
the amount, percentage and timing of distributions of principal, interest or
both and one or more Classes may be subordinated to other Classes with respect
to distributions of principal, interest or both as described herein and in the
related Prospectus Supplement. If so specified in the related Prospectus
Supplement, the Primary Assets and other assets comprising the Trust Fund may be
divided into one or more Asset Groups and each Class of the related Series will
evidence beneficial ownership of the corresponding Asset Group, as applicable.
The rate of reduction of the aggregate principal balance of each Class of a
Series may depend principally upon the rate of payment (including prepayments)
with respect to the Contracts. A rate of prepayment lower or higher than
anticipated will affect the yield on the Securities of a Series in the manner
described herein and in the related Prospectus Supplement. Under certain limited
circumstances described herein and in the related Prospectus Supplement, a
Series of Securities may be subject to termination or redemption under the
circumstances described herein and in the related Prospectus Supplement.
If specified in the related Prospectus Supplement, an election may be made
to treat certain assets comprising the Trust Fund for a Series as a 'real estate
mortgage investment conduit' (a 'REMIC') for federal income tax purposes. See
'CERTAIN FEDERAL INCOME TAX CONSIDERATIONS' herein.
FOR A DISCUSSION OF CERTAIN RISKS ASSOCIATED WITH AN INVESTMENT IN THE
CERTIFICATES, SEE PAGE 12.
NOTES OF A GIVEN SERIES REPRESENT OBLIGATIONS OF, AND CERTIFICATES OF A SERIES
EVIDENCE BENEFICIAL INTERESTS IN THE RELATED TRUST FUND ONLY AND ARE NOT
GUARANTEED BY ANY GOVERNMENTAL AGENCY OR BY THE DEPOSITOR, THE SELLER, THE
TRUSTEE, THE SERVICER OR BY ANY OF THEIR RESPECTIVE AFFILIATES OR,
UNLESS OTHERWISE SPECIFIED IN THE RELATED PROSPECTUS SUPPLEMENT, BY ANY
OTHER PERSON OR ENTITY. THE DEPOSITOR'S ONLY OBLIGATIONS WITH RESPECT
TO ANY SERIES OF SECURITIES WILL BE PURSUANT TO CERTAIN
REPRESENTATIONS AND WARRANTIES SET FORTH IN THE RELATED AGREEMENT
AS DESCRIBED HEREIN OR IN THE RELATED PROSPECTUS SUPPLEMENT. SEE
'RISK FACTORS' FOR CERTAIN FACTORS TO BE CONSIDERED IN
PURCHASING THE SECURITIES.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS OR THE PROSPECTUS SUPPLEMENT.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
The Securities offered by this Prospectus and by the related Prospectus
Supplement are offered by Lehman Brothers and the other underwriters set forth
in the related Prospectus Supplement, if any, subject to prior sale, to
withdrawal, cancellation or modification of the offer without notice, to
delivery to and acceptance by Lehman Brothers and the other underwriters, if
any, and certain further conditions. Retain this Prospectus for future
reference. This Prospectus may not be used to consummate sales of the Securities
offered hereby unless accompanied by a Prospectus Supplement.
------------------------
LEHMAN BROTHERS
, 199__
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PROSPECTUS SUPPLEMENT
The Prospectus Supplement relating to a Series of Securities to be offered
hereunder will, among other things, set forth with respect to such Series of
Securities: (i) the aggregate principal amount, interest rate, and authorized
denominations of each Class of such Securities; (ii) certain information
concerning the Primary Assets, the Seller and any Servicer; (iii) the terms of
any Enhancement with respect to such Series; (iv) the terms of any insurance
related to the Primary Assets; (v) information concerning any other assets in
the related Trust Fund, including any Reserve Fund; (vi) the Final Scheduled
Distribution Date of each Class of such Securities; (vii) the method to be used
to calculate the amount of principal required to be applied to the Securities of
each Class of such Series on each Distribution Date, the timing of the
application of principal and the order of priority of the application of such
principal to the respective Classes and the allocation of principal to be so
applied; (viii) the Distribution Dates and any Assumed Reinvestment Rate (as
defined herein); (ix) additional information with respect to the plan of
distribution of such Securities; and (x) whether a REMIC election will be made
with respect to some or all of the Trust Fund for such Series. To the extent
that the terms of this Prospectus conflict or are otherwise inconsistent with
the terms of any Prospectus Supplement, the terms of such Prospectus Supplement
shall govern.
AVAILABLE INFORMATION
The Depositor is subject to the informational requirements of the
Securities Exchange Act of 1934 and in accordance therewith files reports and
other information with the Securities and Exchange Commission (the
'Commission'). Such reports and other information 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 its Regional Offices located as
follows: Chicago Regional Office, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661; and New York Regional Office, 75 Park Place, Room 1102, New
York, New York 10007. Copies of such material can also be obtained from the
Public Reference Section of the Commission, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549, at prescribed rates.
REPORTS TO HOLDERS
Periodic and annual reports concerning the related Trust Fund for a Series
of Securities are required under the related Agreement to be forwarded to
Holders. Unless otherwise specified in the related Prospectus Supplement, such
reports will not be examined and reported on by an independent public
accountant. See 'THE AGREEMENTS--Reports to Holders' herein.
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SUMMARY OF TERMS
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus and by reference to
the information with respect to each Series of Securities contained in the
Prospectus Supplement to be prepared and delivered in connection with the
offering of Securities of such Series. Capitalized terms used and not otherwise
defined herein or in the related Prospectus Supplement shall have the meanings
set forth in the 'GLOSSARY OF TERMS' herein.
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SECURITIES OFFERED................... Asset-Backed Certificates (the 'Certificates') and Asset-Backed Notes (the
'Notes'). Certificates are issuable from time to time in Series pursuant
to a Pooling and Servicing Agreement or Trust Agreement. Each
Certificate of a Series will evidence an interest in the Trust Fund for
such Series, or in an Asset Group specified in the related Prospectus
Supplement. Notes are issuable from time to time in Series pursuant to
an Indenture. Each Series of Securities will consist of one or more
Classes, one or more of which may be Classes of Compound Interest
Securities, Planned Amortization Class ('PAC') Securities, Variable
Interest Securities, Zero Coupon Securities, Principal Only Securities,
Interest Only Securities, Participating Securities, Senior Securities or
Subordinate Securities. Each Class may differ in, among other things,
the amounts allocated to and the priority of principal and interest
payments, Final Scheduled Distribution Dates, Distribution Dates and
interest rates. The Securities of each Class will be issued in fully
registered form in the denominations specified in the related Prospectus
Supplement. If so specified in the related Prospectus Supplement, the
Securities or certain Classes of such Securities offered thereby may be
available in book-entry form only.
DEPOSITOR............................ Lehman ABS Corporation (the 'Depositor') was incorporated in the State of
Delaware on January 29, 1988, and is a wholly-owned, special purpose
subsidiary of Lehman Commercial Paper Inc. ('LCPI'), which itself is a
wholly-owned subsidiary of Lehman Brothers Inc. ('Lehman Brothers'),
which is a wholly-owned subsidiary of Lehman Brothers Holdings Inc.
('Holdings'). None of Lehman Brothers, LCPI, Holdings nor any other
affiliate of the Depositor, the Servicer, the Trustee or the Seller has
guaranteed or is otherwise obligated with respect to the Securities of
any Series. See 'THE DEPOSITOR.'
INTEREST PAYMENTS.................... Interest payments on the Securities of a Series entitled by their terms to
receive interest will be made on each Distribution Date, to the extent
set forth in, and at the applicable rate specified in (or determined in
the manner set forth in), the related Prospectus Supplement. The
interest rate on Securities of a Series may be variable or change with
changes in the rates of interest on the related Contracts and/or as
prepayments occur with respect to such Contracts. Interest Only
Securities may be assigned a 'Notional Amount' set forth in the related
Prospectus Supplement which is used solely for convenience in expressing
the calculation of interest and for certain other purposes and does not
represent the right to receive any distributions allocable to principal.
Principal Only Securities may not be entitled to receive any interest
payments or may be entitled to receive only nominal interest payments.
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
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Supplement. See 'DESCRIPTION OF THE SECURITIES--Payments of Interest.'
PRINCIPAL PAYMENTS................... All payments of principal of a Series of Securities will be made in an
aggregate amount determined as set forth in the related Prospectus
Supplement and will be paid at the times and will be allocated among the
Classes of such Series in the order and amounts, and will be applied
either on a pro rata or a random lot basis among all Securities of any
such Class, all as specified in the related Prospectus Supplement.
FINAL SCHEDULED
DISTRIBUTION DATE
OF THE SECURITIES.................. The Final Scheduled Distribution Date with respect to each Class of Notes
is the date no later than which principal thereof will be fully paid and
with respect to each Class of Certificates is the date after which no
Certificates of such Class are expected to remain outstanding, in each
case calculated on the basis of the assumptions applicable to such
Series described in the related Prospectus Supplement. The Final
Scheduled Distribution Date of a Class may equal the maturity date of
the Primary Asset in the related Trust Fund which has the latest stated
maturity or will be determined as described herein and in the related
Prospectus Supplement.
The actual final Distribution Date of the Securities of a Series will
depend primarily upon the rate of payment (including prepayments,
liquidations due to default, the receipt of proceeds from casualty
insurance policies and repurchases) of the Contracts in the related
Trust Fund. Unless otherwise specified in the related Prospectus
Supplement, the actual final Distribution Date of any Security is likely
to occur earlier and may occur substantially earlier or may occur later
than its Final Scheduled Distribution Date as a result of the
application of prepayments to the reduction of the principal balances of
the Securities and as a result of defaults on the Primary Assets. The
rate of payments on the Contracts in the Trust Fund for a Series will
depend on a variety of factors, including certain characteristics of such
Contracts, and the prevailing level of interest rates from time to time,
as well as on a variety of economic, demographic, tax, legal, social and
other factors. No assurance can be given as to the actual prepayment
experience with respect to a Series. See 'RISK FACTORS--Prepayment and
Yield Considerations' and 'DESCRIPTION OF THE SECURITIES--Weighted
Average Life of the Securities' herein.
OPTIONAL TERMINATION................. One or more Classes of Securities of any Series may be redeemed or
repurchased in whole or in part, at the Depositor's or the Servicer's
option, at such time and under the circumstances specified in the
related Prospectus Supplement, at the price set forth therein. If so
specified in the related Prospectus Supplement for a Series of
Securities, the Depositor, the Servicer, or such other entity that is
specified in the related Prospectus Supplement, may, at its option,
cause an early termination of the related Trust Fund by repurchasing all
of the Primary Assets remaining in the Trust Fund on or after a
specified date, or on or after such time as the aggregate principal
balance of the Securities of the Series or the Primary Assets relating
to
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such Series, as specified in the related Prospectus Supplement, is less
than the amount or percentage specified in the related Prospectus
Supplement. See 'DESCRIPTION OF THE SECURITIES--Optional Redemption,
Purchase or Termination.'
In addition, the Prospectus Supplement may provide other circumstances
under which Holders of Securities of a Series could be fully paid
significantly earlier than would otherwise be the case if payments or
distributions were solely based on the activity of the related Primary
Assets.
THE TRUST FUND....................... The Trust Fund for a Series of Securities will consist of one or more of
the assets described below, as described in the related Prospectus
Supplement.
A. PRIMARY ASSETS............... The Primary Assets for a Series may consist of any combination of the
following assets, to the extent and as specified in the related
Prospectus Supplement. The Primary Assets will be purchased from the
Seller or may be purchased by the Depositor in the open market or in
privately negotiated transactions, including transactions with entities
affiliated with the Depositor.
Primary Assets for a Series will consist, in whole or in part, of
Contracts. Some Contracts may be delinquent or non-performing as specified
in the related Prospectus Supplement. Contracts may be originated by or
acquired from an affiliate of the Depositor and an affiliate of the
Depositor may be an obligor with respect to any such Contracts. The
Contracts will be conventional contracts or contracts incurred by the
Federal Housing Administration ('FHA') or partially guaranteed by the
Veterans Administration ('VA'). To the extent provided in the related
Prospectus Supplement, additional Contracts may be periodically added to
the Trust Fund, or may be removed from time to time if certain asset
value tests are met, as described in the related Prospectus Supplement.
The 'Contracts' for a Series will consist of (i) home improvement
installment sales contracts and installment loan agreements (the 'Home
Improvement Contracts') and (ii) manufactured housing installment sales
contracts and installment loan agreements (the 'Manufactured Housing
Contracts' and together with the Home Improvement Contracts, the
'Contracts'). Contracts may, as specified in the related Prospectus
Supplement, have various payment characteristics, including balloon or
other irregular payment features, and may accrue interest at a fixed
rate or an adjustable rate.
As specified in the related Prospectus Supplement, the Contracts may be
secured by mortgages or deeds of trust or other similar security
instruments creating a lien on a residential property (each, a
'Mortgaged Property'), which may be subordinated to one or more senior
liens on the Mortgaged Property, as described in the related Prospectus
Supplement. As specified in the related Prospectus Supplement, Contracts
may be unsecured or secured by purchase money security interests in the
Home Improvements financed thereby and the Manufactured Housing
Contracts may be secured by security interests in Manufactured Homes.
The Mortgaged Properties, the Home Improvements and the Manufactured
Homes are collectively referred to herein as the 'Properties.'
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The related Prospectus Supplement will describe certain characteristics of
the Contracts for a Series, including, without limitation, and to the
extent relevant: (a) the aggregate unpaid principal balance of the
Contracts (or the aggregate unpaid principal balance included in the
Trust Fund for the related Series) and the average outstanding principal
balance of the Contracts; (b) the weighted average Loan Rate on the
Contracts as of the Cut-off Date; (c) the Combined Loan-to-Value Ratios
or Loan-to-Value Ratios, as applicable, of the Contracts, computed in
the manner described in the related Prospectus Supplement; (d) the
percentage (by principal balance as of the Cut-off Date) of Contracts
that accrue interest at adjustable or fixed interest rates; (e) any
enhancement relating to the Contracts; (f) the percentage (by principal
balance as of the Cut-off Date) of Contracts that are secured by
Mortgaged Properties, Home Improvements, Manufactured Homes, the real
estate on which the Manufactured Homes are located or are unsecured; (g)
the geographic distribution of the Properties securing the Contracts;
(h) the use and type of each Property securing the Contracts; (i) the
lien priority of the Contracts and (j) the delinquency status and year
of origination of the Contracts.
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B. COLLECTION AND
DISTRIBUTION
ACCOUNTS................... Unless otherwise provided in the related Prospectus Supplement, all
payments on or with respect to the Primary Assets for a Series will be
remitted directly to an account (the 'Collection Account') to be
established for such Series with the Trustee or the Servicer, in the
name of the Trustee. Unless otherwise provided in the related Prospectus
Supplement, the Trustee shall be required to apply a portion of the
amount in the Collection Account, together with reinvestment earnings
from eligible investments specified in the related Prospectus
Supplement, to the payment of certain amounts payable to the Servicer
under the related Agreement and any other person specified in the
Prospectus Supplement, and to deposit a portion of the amount in the
Collection Account into a separate account (the 'Distribution Account')
to be established for such Series, each in the manner and at the times
established in the related Prospectus Supplement. All amounts deposited
in such Distribution Account will be available, unless otherwise
specified in the related Prospectus Supplement, for (i) application to
the payment of principal of and interest on such Series of Securities on
the next Distribution Date, (ii) the making of adequate provision for
future payments on certain Classes of Securities and (iii) any other
purpose specified in the related Prospectus Supplement. After applying
the funds in the Collection Account as described above, any funds
remaining in the Collection Account may be paid over to the Servicer,
the Depositor, any provider of Enhancement with respect to such Series
(an 'Enhancer') or any other person entitled thereto in the manner and
at the times established in the related Prospectus Supplement.
ENHANCEMENT.......................... If stated in the Prospectus Supplement relating to a Series, the Depositor
will obtain an irrevocable letter of credit, surety bond, certificate
insurance policy, insurance policy or other form of credit support
(collectively, 'Enhancement') in favor of the Trustee on behalf of the
Holders of such Series and any other person specified in such Prospectus
Supplement from an institution acceptable to the rating agency or
agencies identified in the related Prospectus Supplement as rating such
Series of Securities (collectively, the 'Rating Agency') for the
purposes specified in such Prospectus Supplement. The
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Enhancement will support the payments on the Securities and may be used
for other purposes, to the extent and under the conditions specified in
such Prospectus Supplement. See 'ENHANCEMENT.'
Enhancement for a Series may include one or more of the following types of
Enhancement, or such other type of Enhancement specified in the related
Prospectus Supplement.
A. SUBORDINATE
SECURITIES................. If stated in the related Prospectus Supplement, Enhancement for a Series
may consist of one or more Classes of Subordinate Securities. The rights
of Holders of such Subordinate Securities to receive distributions on
any Distribution Date will be subordinate in right and priority to the
rights of holders of Senior Securities of the Series, but only to the
extent described in the related Prospectus Supplement.
B. INSURANCE.................... If stated in the related Prospectus Supplement, Enhancement for a Series
may consist of special hazard insurance policies, bankruptcy bonds and
other types of insurance supporting payments on the Securities.
C. RESERVE FUNDS................ If stated in the Prospectus Supplement, the Depositor may deposit cash, a
letter or letters of credit, short-term investments, or other
instruments acceptable to the Rating Agency in one or more reserve funds
to be established in the name of the Trustee (each, a 'Reserve Fund'),
which will be used, as specified in such Prospectus Supplement, by the
Trustee to make required payments of principal of or interest on the
Securities of such Series, to make adequate provision for future
payments on such Securities or for any other purpose specified in the
Agreement, with respect to such Series, to the extent that funds are not
otherwise available. In the alternative or in addition to such deposit,
a Reserve Fund for a Series may be funded through application of all or
a portion of the excess cash flow from the Primary Assets for such
Series, to the extent described in the related Prospectus Supplement.
D. MINIMUM PRINCIPAL
PAYMENT AGREEMENT.......... If stated in the Prospectus Supplement relating to a Series of Securities,
the Depositor will enter into a minimum principal payment agreement (the
'Minimum Principal Payment Agreement') with an entity meeting the
criteria of the Rating Agency, pursuant to which such entity will
provide funds in the event that aggregate principal payments on the
Primary Assets for such Series are not sufficient to make certain
payments, as provided in the related Prospectus Supplement. See
'ENHANCEMENT--Minimum Principal Payment Agreement.'
E. DEPOSIT
AGREEMENT.................. If stated in the Prospectus Supplement, the Depositor and the Trustee will
enter into a guaranteed investment contract or an investment agreement
(the 'Deposit Agreement') pursuant to which all or a portion of amounts
held in the Collection Account, the Distribution Account or in any
Reserve Fund will be invested with the entity specified in such
Prospectus Supplement. The Trustee will be entitled to withdraw amounts
so invested, plus interest at a rate equal to the Assumed Reinvestment
Rate, in the manner specified in the Prospectus Supplement. See
'ENHANCEMENT--Deposit Agreement.'
SERVICING............................ The Servicer will be responsible for servicing, managing and making
collections on the Contracts for a Series. In addition, the Servicer, if
so specified in the related Prospectus Supplement, will act as custodian
and will be responsible for maintaining custody of the Contracts and
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related documentation on behalf of the Trustee. Advances with respect to
delinquent payments of principal or interest on a Contract will be made
by the Servicer only to the extent described in the related Prospectus
Supplement. Such advances will be intended to provide liquidity only
and, unless otherwise specified in the related Prospectus Supplement,
reimbursable to the Servicer from scheduled payments of principal and
interest, late collections, or from the proceeds of liquidation of the
related Contracts or from other recoveries relating to such Contracts
(including any insurance proceeds or payments from other credit
support). In performing these functions, the Servicer will exercise the
same degree of skill and care that it customarily exercises with respect
to similar receivables or Contracts owned or serviced by it. Under
certain limited circumstances, the Servicer may resign or be removed, in
which event either the Trustee or a third-party servicer will be
appointed as successor servicer. The Servicer will receive a periodic
fee as servicing compensation (the 'Servicing Fee') and may, as
specified herein and in the related Prospectus Supplement, receive
certain additional compensation. See 'SERVICING OF CONTRACTS--Servicing
Compensation and Payment of Expenses' herein.
FEDERAL INCOME
TAX CONSIDERATIONS
A. DEBT SECURITIES AND
REMIC RESIDUAL
SECURITIES................. If (i) an election is made to treat all or a portion of a Trust Fund for a
Series as a 'real estate mortgage investment conduit' (a 'REMIC') or
(ii) so provided in the related Prospectus Supplement, a Series of
Securities will include one or more Classes of taxable debt obligations
under the Internal Revenue Code of 1986, as amended (the 'Code'). Stated
interest with respect to such Classes of Securities will be reported by
a Holder in accordance with the Holder's method of accounting except
that, in the case of Securities constituting 'regular interests' in a
REMIC ('Regular Interests'), such interest will be required to be
reported on the accrual method regardless of a Holder's usual method of
accounting. Securities that are Compound Interest Securities, Zero
Coupon Securities or Interest Only Securities will, and certain other
Classes of Securities may, be issued with original issue discount that
is not de minimis. In such cases, the Holder will be required to include
original issue discount in gross income as it accrues, which may be
prior to the receipt of cash attributable to such income. If a Security
is issued at a premium, the holder may be entitled to make an election
to amortize such premium on a constant yield method.
In the case of a REMIC election, a Class of Securities may be treated as
REMIC 'residual interests' ('Residual Interests'). A holder of a
Residual Interest will be required to include in its income its pro rata
share of the taxable income of the REMIC. In certain circumstances, the
holder of a Residual Interest may have REMIC taxable income or tax
liability attributable to REMIC taxable income for a particular period
in excess of cash distributions for such period or have an after-tax
return that is less than the after-tax return on comparable debt
instruments. In addition, a portion (or, in some cases, all) of the
income from a Residual Interest (i) except in certain circumstances with
respect to a Holder classified as a thrift institution under the Code,
may not be subject to offset by losses from other activities, (ii) for a
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Holder that is subject to tax under the Code on unrelated business
taxable income, may be treated as unrelated business taxable income and
(iii) for a foreign holder, may not qualify for exemption from or
reduction of withholding. In addition, (i) Residual Interests are
subject to transfer restrictions and (ii) certain transfers of Residual
Interests will not be recognized for federal income tax purposes.
Further, individual holders are subject to limitations on the
deductibility of expenses of the REMIC. See 'CERTAIN FEDERAL INCOME TAX
CONSIDERATIONS.'
B. NON-REMIC
PASS-THROUGH
SECURITIES................. If so specified in the related Prospectus Supplement, the Trust Fund for a
Series will be treated as a grantor trust and will not be classified as
an association taxable as a corporation for federal income tax purposes
and Holders of Securities of such Series ('Pass-Through Securities')
will be treated as owning directly rights to receive certain payments of
interest or principal, or both, on the Primary Assets held in the Trust
Fund for such Series. All income with respect to a Stripped Security (as
defined herein) will be accounted for as original issue discount and,
unless otherwise specified in the related Prospectus Supplement, will be
reported by the Trustee on an accrual basis, which may be prior to the
receipt of cash associated with such income.
The holder of a Pass-Through Security must include in income its share of
all income of the Trust Fund to the extent such income is allocable to
it and may, subject to certain limitations for individual Holders,
deduct its share of all expenses of the Trust Fund. See 'CERTAIN FEDERAL
INCOME TAX CONSIDERATIONS.'
C. OWNER TRUST
SECURITIES................. If so specified in the Prospectus Supplement, the Trust Fund will be
treated as a partnership for purposes of federal and state income tax.
Each Noteholder, by the acceptance of a Note of a given series, will
agree to treat such Note as indebtedness, and each Certificateholder, by
the acceptance of a Certificate of a given series, will agree to treat
the related Trust as a partnership in which such Certificateholder is a
partner for federal income and state tax purposes. Alternative
characterizations of such Trust and such Certificates are possible, but
would not result in materially adverse tax consequences to
Certificateholders. See 'CERTAIN FEDERAL INCOME TAX CONSIDERATIONS.'
ERISA CONSIDERATIONS................. A fiduciary of any employee benefit plan subject to the Employee
Retirement Income Security Act of 1974, as amended ('ERISA'), or the
Code should carefully review with its own legal advisors whether the
purchase or holding of Securities could give rise to a transaction
prohibited or otherwise impermissible under ERISA or the Code. See
'ERISA CONSIDERATIONS.'
LEGAL INVESTMENT..................... Unless otherwise specified in the related Prospectus Supplement,
Securities of each Series offered by this Prospectus and the related
Prospectus Supplement will not constitute 'mortgage related securities'
under the Secondary Mortgage Market Enhancement Act of 1984 ('SMMEA').
Investors whose investment authority is subject to legal restrictions
should consult their own legal advisors to determine whether and to what
extent the Securities constitute legal investments for them. See 'LEGAL
INVESTMENT.'
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USE OF PROCEEDS...................... The Depositor will use the net proceeds from the sale of each Series for
one or more of the following purposes: (i) to purchase the related
Primary Assets, (ii) to repay indebtedness which has been incurred to
obtain funds to acquire such Primary Assets, (iii) to establish any
Reserve Funds described in the related Prospectus Supplement and (iv) to
pay costs of structuring and issuing such Securities, including the
costs of obtaining Enhancement, if any. If so specified in the related
Prospectus Supplement, the purchase of the Primary Assets for a Series
may be effected by an exchange of Securities with the Seller of such
Primary Assets. See 'USE OF PROCEEDS.'
RATINGS.............................. It will be a requirement for issuance of any Series that the Securities
offered by this Prospectus and the related Prospectus Supplement be
rated by at least one Rating Agency in one of its four highest
applicable rating categories. The rating or ratings applicable to
Securities of each Series offered hereby and by the related Prospectus
Supplement will be as set forth in the related Prospectus Supplement. A
securities rating should be evaluated independently of similar ratings
on different types of securities. A securities rating does not address
the effect that the rate of prepayments on Contracts for a Series may
have on the yield to investors in the Securities of such Series. See
'RISK FACTORS--Rating of Securities.'
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RISK FACTORS
Investors should consider, among other things, the following factors in
connection with the purchase of the Securities.
Limited Liquidity. There will be no market for the Securities of any
Series prior to the issuance thereof, and there can be no assurance that a
secondary market will develop or, if it does develop, that it will provide
Holders with liquidity of investment or will continue for the life of the
Securities of such Series. Lehman Brothers, through one or more of its
affiliates, and the other underwriters, if any, specified in the related
Prospectus Supplement, presently expect to make a secondary market in the
Securities, but have no obligation to do so.
Limited Assets. 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 such Securities. 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. Further, unless otherwise stated in
the related Prospectus Supplement, at the times set forth in the related
Prospectus Supplement, certain Primary Assets and/or any balance remaining in
the Collection Account or Distribution Account immediately after making all
payments due on the Securities of such Series and other payments specified in
the related Prospectus Supplement, may be promptly released or remitted to the
Depositor, the Servicer, the Enhancer or any other person entitled thereto and
will no longer be available for making payments to Holders. Consequently,
holders of Securities of each Series must rely solely upon payments with respect
to the Primary Assets and the other assets constituting the Trust Fund for a
Series of Securities, including, if applicable, any amounts available pursuant
to any Enhancement for such Series, for the payment of principal of and interest
on the Securities of such Series.
Holders of Notes will be required under the Indenture to proceed only
against the Primary Assets and other assets constituting the related Trust Fund
in the case of a default with respect to such Notes and may not proceed against
any assets of the Depositor. If payments with respect to the Primary Assets and
such other assets securing a Series of Notes, including any Enhancement, were to
become insufficient to make payments on such Notes, no other assets would be
available for payment of the deficiency.
The only obligations, if any, of the Depositor with respect to the
Securities of any Series will be pursuant to certain representations and
warranties. See 'THE AGREEMENTS--Assignment of Primary Assets' herein. 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 Primary
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 Primary
Asset, its only sources of funds to make such repurchase would be from funds
obtained from the enforcement of a corresponding obligation, if any, on the part
of the originator of the Primary Assets, the Servicer or the Seller, as the case
may be, or from a Reserve Fund established to provide funds for such
repurchases.
Enhancement. Although such Enhancement is intended to reduce the risk of
delinquent payments or losses to holders of Securities entitled to the benefit
thereof, the amount of such Enhancement will be limited, as set forth in the
related Prospectus Supplement, and will decline and could be depleted under
certain circumstances prior to the payment in full of the related Series of
Securities, and as a result Holders may suffer losses. See 'ENHANCEMENT.'
Prepayment and Yield Considerations. The yield to maturity experienced by
a holder of Securities may be affected by the rate of payment of principal of
the Contracts. The timing of principal payments of the Securities of a Series
will be affected by a number of factors, including the following: (i) the extent
of prepayments of the Contracts, which prepayments may be influenced by a
variety of factors, (ii) the manner of allocating principal payments among the
Classes of Securities of a Series as specified in the related Prospectus
Supplement and (iii) the exercise by the party entitled thereto of any right of
optional termination. See 'DESCRIPTION OF THE SECURITIES--Weighted Average Life
of Securities.' Prepayments may also result from repurchases of Contracts due to
material breaches of the Seller's or the Depositor's warranties.
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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. See 'DESCRIPTION OF THE SECURITIES--Payments of
Interest.'
Nature of Mortgages; Properties. Since the Mortgages are primarily junior
liens subordinate to the rights of the mortgagee under the related senior
mortgage or mortgages, the proceeds from any liquidation, insurance or
condemnation proceedings will be available to satisfy the outstanding balance of
such junior mortgage only to the extent that the claims of such senior
mortgagees have been satisfied in full, including any related foreclosure costs.
In addition, a junior mortgagee may not foreclose on the Mortgaged Property
securing a junior mortgage unless it forecloses subject to the senior mortgages,
in which case it must either pay the entire amount due on the senior mortgages
to the senior mortgagees at or prior to the foreclosure sale or undertake the
obligation to make payments on the senior mortgages in the event the mortgagor
is in default thereunder. The Trust Fund will not have any source of funds to
satisfy the senior mortgages or make payments due to the senior mortgagees.
There are several factors that could adversely affect the value of
Properties such that the outstanding balance of the related Contract, together
with any senior financing on the related Mortgaged Property, if applicable,
would equal or exceed the value of the Properties. Among the factors that could
adversely affect the value of the Properties are an overall decline in the
residential real estate market in the areas in which the Properties are located
or a decline in the general condition of the Properties as a result of failure
of borrowers to maintain adequately the Properties or of natural disasters that
are not necessarily covered by insurance, such as earthquakes and floods. Any
such decline could extinguish the value of a junior interest in Property before
having any effect on the related senior interest therein. If such a decline
occurs, the actual rates of delinquencies, foreclosure and losses on the junior
Contracts could be higher than those currently experienced in the mortgage
lending industry in general.
Environmental Risks. Real property pledged as security to a lender may be
subject to certain environmental risks. Under the laws of certain states,
contamination of a property may give rise to a lien on the property to assure
the costs of clean-up. In several states, such a lien has priority over the lien
of an existing mortgage or owner's interest against such property. In addition,
under the laws of some states and under the federal Comprehensive Environmental
Response, Compensation, and Liability Act of 1980 ('CERCLA'), a lender may be
liable, as an 'owner' or 'operator,' for costs of addressing releases or
threatened releases of hazardous substances that require remedy at a property,
if agents or employees of the lender have become sufficiently involved in the
operations of the borrower, regardless of whether or not the environmental
damage or threat was caused by a prior owner. A lender also risks such liability
on foreclosure of a Mortgaged Property.
Certain Other Legal Considerations Regarding the Contracts. Applicable
state laws generally regulate interest rates and other charges and require
certain disclosures. In addition, other state laws, public policy and general
principles of equity relating to the protection of consumers, unfair and
deceptive practices and debt collection practices may apply to the origination,
servicing and collection of the Contracts. Depending on the provisions of the
applicable law and the specific facts and circumstances involved, violations of
these laws, policies and principles may limit the ability of the Servicer to
collect all or part of the principal of or interest on the Contracts, may
entitle the borrower to a refund of amounts previously paid and, in addition,
could subject the owner of the Contract to damages and administrative
enforcement.
The Contracts are also subject to Federal laws, including:
(i) the Federal Truth in Lending Act and Regulation Z promulgated
thereunder, which require certain disclosures to the borrowers regarding
the terms of the Contracts;
(ii) the Equal Credit Opportunity Act and Regulation B promulgated
thereunder, which prohibit discrimination on the basis of age, race, color,
sex, religion, marital status, national origin, receipt of public
assistance or the exercise of any right under the Consumer Credit
Protection Act, in the extension of credit; and
(iii) the Fair Credit Reporting Act, which regulates the use and
reporting of information related to the borrower's credit experience.
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Violations of certain provisions of these Federal laws may limit the
ability of the Servicer to collect all or part of the principal of or interest
on the Loans and in addition could subject the Trust to damages and
administrative enforcement. The Loans may be subject to the Home Ownership and
Equity Protection Act of 1994 (the 'Act') which amended the Truth in Lending Act
as it applies to mortgages subject to the Act. The Act requires certain
additional disclosures, specifies the timing of such disclosures and limits or
prohibits inclusion of certain provisions in mortgages subject to the Act. The
Act also provides that any purchaser or assignee of a mortgage covered by the
Act is subject to all of the claims and defenses which the borrower could assert
against the original lender. The maximum damages that may be recovered under the
Act from an assignee is the remaining amount of indebtedness plus the total
amount paid by the borrower in connection with the Loan. If the Trust Fund
includes Loans subject to the Act, it will be subject to all of the claims and
defenses which the borrower could assert against the Seller. Any violation of
the Act which would result in such liability would be a breach of the Seller's
representations and warranties, and the Seller would be obligated to cure,
repurchase or, if permitted by the Agreement, substitute for the Loan in
question. See 'CERTAIN LEGAL ASPECTS OF THE MORTGAGE LOANS' herein.
The Contracts are also subject to the Preservation of Consumers' Claims and
Defenses regulations of the Federal Trade Commission and other similar federal
and state statutes and regulations (collectively, the 'Holder in Due Course
Rules'), which protect the homeowner from defective craftsmanship or incomplete
work by a contractor. These laws permit the obligor to withhold payment if the
work does not meet the quality and durability standards agreed to by the
homeowner and the contractor. The Holder in Due Course Rules have the effect of
subjecting any assignee of the seller in a consumer credit transaction to all
claims and defenses which the obligor in the credit sale transaction could
assert against the seller of the goods.
Rating of the Securities. It will be a condition to the issuance of a
Series of Securities that they be rated in one of the four highest rating
categories by the Rating Agency identified in the related Prospectus Supplement.
Any such rating would be based on, among other things, the adequacy of the value
of the Primary Assets and any Enhancement with respect to such Series. Such
rating should not be deemed a recommendation to purchase, hold or sell
Securities, inasmuch as it does not address market price or suitability for a
particular investor. There is also no assurance that any such rating will remain
in effect for any given period of time or may not be lowered or withdrawn
entirely by the Rating Agency if in its judgment circumstances in the future so
warrant. In addition to being lowered or withdrawn due to any erosion in the
adequacy of the value of the Primary Assets, such rating might also be lowered
or withdrawn, among other reasons, because of an adverse change in the financial
or other condition of an Enhancer or a change in the rating of such Enhancer's
long term debt.
Other Considerations. There is no assurance that the market value of the
Primary Assets or any other assets for a Series will at any time be equal to or
greater than the aggregate principal amount of the Securities of such Series
then outstanding, plus accrued interest thereon. Moreover, upon an event of
default under the Indenture for a Series of Notes and a sale of the assets in
the Trust Fund or upon a sale of the assets of a Trust Fund for a Series of
Certificates, the Trustee, the Servicer, if any, the Enhancer and any other
service provider specified in the related Prospectus Supplement generally will
be entitled to receive the proceeds of any such sale to the extent of unpaid
fees and other amounts owing to such persons under the related Agreement prior
to distributions to holders of Securities. Upon any such sale, the proceeds
thereof may be insufficient to pay in full the principal of and interest on the
Securities of such Series.
Liquidation expenses with respect to defaulted loans do not vary directly
with the outstanding principal balance of the loan at the time of default.
Therefore, assuming that a servicer took the same steps in realizing upon a
defaulted loan having a small remaining principal balance as it would in the
case of a defaulted loan having a larger principal balance, the amount realized
after expenses of liquidation would be smaller as a percentage of the
outstanding principal balance of the smaller loan than would be the case with a
larger loan. Because the average outstanding principal balances of the Loans are
small relative to the size of the loans in a typical pool of first mortgages,
realizations net of liquidation expenses on defaulted Loans may also be smaller
as a percentage of the principal amount of the Loans than would such net
realizations in the case of a typical pool of first mortgage loans.
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DESCRIPTION OF THE SECURITIES
GENERAL
Each Series of Notes will be issued pursuant to an indenture (the
'Indenture') between the related Trust Fund and the entity named in the related
Prospectus Supplement as trustee (the 'Trustee') with respect to such Series. A
form of Indenture has been filed as an exhibit to the Registration Statement of
which this Prospectus forms a part. The Certificates will also be issued in
Series pursuant to separate agreements (each, a 'Pooling and Servicing
Agreement' or a 'Trust Agreement') among the Depositor, the Servicer, and the
Trustee. A form of Pooling and Servicing Agreement has been filed as an exhibit
to the Registration Statement of which this Prospectus forms a part. A Series
may consist of both Notes and Certificates.
The Seller may agree to reimburse the Depositor for certain fees and
expenses of the Depositor incurred in connection with the offering of the
Securities.
The following summaries describe certain provisions in the Agreements
common to each Series of Securities. The summaries do not purport to be complete
and are subject to, and are qualified in their entirety by reference to, the
provisions of the Agreements and the Prospectus Supplement relating to each
Series of Securities. Where particular provisions or terms used in the
Agreements are referred to, the actual provisions (including definitions of
terms) are incorporated herein by reference as part of such summaries.
Each Series of Securities will consist of one or more Classes of
Securities, one or more of which may be Compound Interest Securities, Variable
Interest Securities, PAC Securities, Zero Coupon Securities, Principal Only
Securities, Interest Only Securities or Participating Securities. A Series may
also include one or more Classes of Subordinate Securities. The Securities of
each Series will be issued only in fully registered form, without coupons, in
the authorized denominations for each Class specified in the related Prospectus
Supplement. Upon satisfaction of the conditions, if any, applicable to a Class
of a Series, as described in the related Prospectus Supplement, the transfer of
the Securities may be registered and the Securities may be exchanged at the
office of the Trustee specified in the Prospectus Supplement without the payment
of any service charge other than any tax or governmental charge payable in
connection with such registration of transfer or exchange. If specified in the
related Prospectus Supplement, one or more Classes of a Series may be available
in book-entry form only.
Unless otherwise provided in the related Prospectus Supplement, payments of
principal of and interest on a Series of Securities will be made on the
Distribution Dates specified in the Prospectus Supplement relating to such
Series by check mailed to Holders of such Series, registered as such at the
close of business on the record date specified in the related Prospectus
Supplement applicable to such Distribution Dates at their addresses appearing on
the security register, except that (a) payments may be made by wire transfer (at
the expense of the Holder requesting payment by wire transfer) in certain
circumstances described in the related Prospectus Supplement and (b) final
payments of principal in retirement of each Security will be made only upon
presentation and surrender of such Security at the office of the Trustee
specified in the Prospectus Supplement. Notice of the final payment on a
Security will be mailed to the holder of such Security before the Distribution
Date on which the final principal payment on any Security is expected to be made
to the holder of such Security.
Payments of principal of and interest on the Securities will be made by the
Trustee, or a paying agent on behalf of the Trustee, as specified in the related
Prospectus Supplement. Unless otherwise provided in the related Prospectus
Supplement, all payments with respect to the Primary Assets for a Series,
together with reinvestment income thereon, amounts withdrawn from any Reserve
Fund, and amounts available pursuant to any other Enhancement will be deposited
directly into the Collection Account and, net, if and as provided in the related
Prospectus Supplement, of certain amounts payable to the related Servicer and
any other person specified in the Prospectus Supplement, will thereafter be
deposited into the Distribution Account and will be available to make payments
on Securities of such Series on the next Distribution Date, as the case may be.
See 'THE TRUST FUNDS--Collection and Distribution Accounts.'
VALUATION OF THE PRIMARY ASSETS
If specified in the related Prospectus Supplement for a Series of Notes,
each Primary Asset included in the related Trust Fund for a Series will be
assigned an initial 'Asset Value.' Unless otherwise specified in the related
Prospectus Supplement, at any time the Asset Value of the Primary Assets will be
equal to the product of
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the Asset Value Percentage as set forth in the Indenture and the lesser of (a)
the stream of remaining regularly scheduled payments on the Primary Assets, net,
unless otherwise provided in the related Prospectus Supplement, of certain
amounts payable as expenses, together with income earned on each such scheduled
payment received through the day preceding the next Distribution Date at the
Assumed Reinvestment Rate, if any, discounted to present value at the highest
interest rate on the Notes of such Series over periods equal to the interval
between payments on the Notes, and (b) the then principal balance of the Primary
Assets. Unless otherwise specified in the related Prospectus Supplement, the
initial Asset Value of the Primary Assets will be at least equal to the
principal amount of the Notes of the related Series at the date of issuance
thereof.
The 'Assumed Reinvestment Rate', if any, for a Series will be the highest
rate permitted by the Rating Agency or a rate insured by means of a surety bond,
guaranteed investment contract, Deposit Agreement or other arrangement
satisfactory to the Rating Agency. If the Assumed Reinvestment Rate is so
insured, the related Prospectus Supplement will set forth the terms of such
arrangement.
PAYMENTS OF INTEREST
The Securities of each Class by their terms entitled to receive interest
will bear interest (calculated, unless otherwise specified in the related
Prospectus Supplement, on the basis of a 360-day year of twelve 30-day months)
from the date and at the rate per annum specified, or calculated in the method
described, in the related Prospectus Supplement. Interest on such Securities of
a Series will be payable on the Distribution Date specified in the related
Prospectus Supplement. The rate of interest on Securities of a Series may be
variable or may change with changes in the annual percentage rates of the
Contracts included in the related Trust Fund and/or as prepayments occur with
respect to such Contracts. Principal Only Securities may not be entitled to
receive any interest distributions or may be entitled to receive only nominal
interest distributions. Any interest on Zero Coupon Securities that is not paid
on the related Distribution Date will accrue and be added to the principal
thereof on such Distribution Date.
Interest payable on the Securities 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 preceding a
Distribution Date, the effective yield to Holders will be reduced from the yield
that would otherwise be obtainable if interest payable on the Securities were to
accrue through the day immediately preceding such Distribution Date.
PAYMENTS OF PRINCIPAL
On each Distribution Date for a Series, principal payments will be made to
the holders of the Securities of such Series on which principal is then payable,
to the extent set forth in the related Prospectus Supplement. Such payments will
be made in an aggregate amount determined as specified in the related Prospectus
Supplement and will be allocated among the respective Classes of a Series in the
manner, at the times and in the priority (which may, in certain cases, include
allocation by random lot) set forth in the related Prospectus Supplement.
FINAL SCHEDULED DISTRIBUTION DATE
The Final Scheduled Distribution Date with respect to each Class of Notes
is the date no later than which principal thereof will be fully paid and with
respect to each Class of a Series of Certificates will be the date on which the
entire aggregate principal balance of such Class is expected to be reduced to
zero, in each case calculated on the basis of the assumptions applicable to such
Series described in the related Prospectus Supplement. The Final Scheduled
Distribution Date for each Class of a Series will be specified in the related
Prospectus Supplement. Since payments on the Primary Assets will be used to make
distributions in reduction of the outstanding principal amount of the
Securities, it is likely that the actual final Distribution Date of any such
Class will occur earlier, and may occur substantially earlier, than its Final
Scheduled Distribution Date. Furthermore, with respect to a Series of
Certificates, unless otherwise specified in the related Prospectus Supplement,
as a result of delinquencies, defaults and liquidations of the Primary Assets in
the Trust Fund, the actual final Distribution Date of any Certificate may occur
later than its Final Scheduled Distribution Date. No assurance can be given as
to the actual prepayment experience with respect to a Series. See 'Weighted
Average Life of the Securities' below.
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SPECIAL REDEMPTION
If so specified in the Prospectus Supplement relating to a Series of
Securities having other than monthly Distribution Dates, one or more Classes of
Securities of such Series may be subject to special redemption, in whole or in
part, on the day specified in the related Prospectus Supplement (a 'Special
Redemption Date') if, as a consequence of prepayments on the Contracts relating
to such Securities or low yields then available for reinvestment, the entity
specified in the related Prospectus Supplement determines, based on assumptions
specified in the applicable Agreement, that the amount available for the payment
of interest that will have accrued on such Securities (the 'Available Interest
Amount') through the designated interest accrual date specified in the related
Prospectus Supplement is less than the amount of interest that will have accrued
on such Securities to such date. In such event and as further described in the
related Prospectus Supplement, the Trustee will redeem a principal amount of
outstanding Securities of such Series as will cause the Available Interest
Amount to equal the amount of interest that will have accrued through such
designated interest accrual date for such Series of Securities outstanding
immediately after such redemption.
OPTIONAL REDEMPTION, PURCHASE OR TERMINATION
The Depositor or the Servicer may, at its option, redeem, in whole or in
part, one or more Classes of Notes or purchase one or more Classes of
Certificates of any Series, on any Distribution Date under the circumstances, if
any, specified in the Prospectus Supplement relating to such Series.
Alternatively, if so specified in the related Prospectus Supplement for a Series
of Certificates, the Depositor, the Servicer, or another entity designated in
the related Prospectus Supplement may, at its option, cause an early termination
of a Trust Fund by repurchasing all of the Primary Assets from such Trust Fund
on or after a date specified in the related Prospectus Supplement, or on or
after such time as the aggregate outstanding principal amount of the
Certificates or Primary Assets, as specified in the related Prospectus
Supplement, is less than the amount or percentage specified in the related
Prospectus Supplement. Notice of such redemption, purchase or termination must
be given by the Depositor or the Trustee prior to the related date. The
redemption, purchase or repurchase price will be set forth in the related
Prospectus Supplement. If specified in the related Prospectus Supplement, in the
event that a REMIC election has been made, the Trustee shall receive a
satisfactory opinion of counsel that the optional redemption, purchase or
termination will be conducted so as to constitute a 'qualified liquidation'
under Section 860F of the Code.
In addition, the Prospectus Supplement may provide other circumstances
under which Holders of Securities of a Series could be fully paid significantly
earlier than would otherwise be the case if payments or distributions were
solely based on the activity of the related Primary Assets.
WEIGHTED AVERAGE LIFE OF THE SECURITIES
Weighted average life refers to the average amount of time that will elapse
from the date of issue of a security until each dollar of principal of such
security will be repaid to the investor. Unless otherwise specified in the
related Prospectus Supplement, the weighted average life of the Securities of a
Class will be influenced by the rate at which the amount financed under the
Contracts included in the Trust Fund for a Series is paid, which may be in the
form of scheduled amortization or prepayments.
Prepayments on loans and other receivables can be measured relative to a
prepayment standard or model. The Prospectus Supplement for a Series of
Securities will describe the prepayment standard or model, if any, used and may
contain tables setting forth the projected weighted average life of each Class
of Securities of such Series and the percentage of the original principal amount
of each Class of Securities of such Series that would be outstanding on
specified Distribution Dates for such Series based on the assumptions stated in
such Prospectus Supplement, including assumptions that prepayments on the
Contracts included in the related Trust Fund are made at rates corresponding
to various percentages of the prepayment standard or model specified in such
Prospectus Supplement.
There is, however, no assurance that prepayment of the Contracts included
in the related Trust Fund will conform to any level of any prepayment standard
or model specified in the related Prospectus Supplement. The rate of principal
prepayments on pools of loans is influenced by a variety of economic,
demographic, geographic, legal, tax, social and other factors.
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The rate of prepayments of conventional housing loans and other receivables
has fluctuated significantly in recent years. In general, however, if prevailing
interest rates fall significantly below the interest rates on the Contracts for
a Series, such contracts are likely to prepay at rates higher than if prevailing
interest rates remain at or above the interest rates borne by such loans. In
this regard, it should be noted that the Contracts for a Series may have
different interest rates. In addition, the weighted average life of the
Securities may be affected by the varying maturities of the Contracts. If any
Contracts for a Series have actual terms-to-stated maturity of less than those
assumed in calculating the Final Scheduled Distribution Date of the related
Securities, one or more Classes of the Series may be fully paid prior to their
respective Final Scheduled Distribution Dates, even in the absence of
prepayments and a reinvestment return higher than the Assumed Reinvestment Rate.
THE TRUST FUNDS
GENERAL
The Notes of each Series will be secured by the pledge of the assets of the
related Trust Fund, and the Certificates of each Series will represent interests
in the assets of the related Trust Fund. The Trust Fund of each Series will
include assets purchased from the Seller composed of (i) the Primary Assets,
(ii) amounts available from the reinvestment of payments on such Primary Assets
at the Assumed Reinvestment Rate, if any, specified in the related Prospectus
Supplement, (iii) any Enhancement, (iv) any Property that secured a Contract but
which is acquired by foreclosure or deed in lieu of foreclosure or repossession
and (v) the amount, if any, initially deposited in the Collection Account or
Distribution Account for a Series as specified in the related Prospectus
Supplement.
The Securities will be non-recourse obligations of the related Trust Fund.
The assets of the Trust Fund specified in the related Prospectus Supplement for
a Series of Securities, unless otherwise specified in the related Prospectus
Supplement will serve as collateral only for that Series of Securities. Holders
of a Series of Notes may only proceed against such collateral securing such
Series of Notes in the case of a default with respect to such Series of Notes
and may not proceed against any assets of the Depositor or the related Trust
Fund not pledged to secure such Notes.
The Primary Assets for a Series will be sold by the Seller to the Depositor
or purchased by the Depositor in the open market or in privately negotiated
transactions, which may include transactions with affiliates and will be
transferred by the Depositor to the Trust Fund. Contracts relating to a Series
will be serviced by the Servicer, which may be the Seller, specified in the
related Prospectus Supplement, pursuant to a Pooling and Servicing Agreement,
with respect to a Series of Certificates or a servicing agreement (each, a
'Servicing Agreement') between the Trust Fund and Servicer, with respect to a
Series of Notes.
As used herein, 'Agreement' means, with respect to a Series of
Certificates, the Pooling and Servicing Agreement or Trust Agreement, and with
respect to a Series of Notes, the Indenture and the Servicing Agreement, as the
context requires.
If so specified in the related Prospectus Supplement, a Trust Fund relating
to a Series of Securities may be a business trust formed under the laws of the
state specified in the related Prospectus Supplement pursuant to a trust
agreement (each, a 'Trust Agreement') between the Depositor and the trustee of
such Trust Fund specified in the related Prospectus Supplement.
With respect to each Trust Fund, prior to the initial offering of the
related Series of Securities, the Trust Fund will have no assets or liabilities.
No Trust Fund is expected to engage in any activities other than acquiring,
managing and holding the related Primary Assets and other assets contemplated
herein and in the related Prospectus Supplement and the proceeds thereof,
issuing Securities and making payments and distributions thereon and certain
related activities. No Trust Fund is expected to have any source of capital
other than its assets and any related Enhancement.
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THE CONTRACTS
Contracts. The Primary Assets for a Series may consist, in whole or part,
of (i) conventional manufactured housing installment sales contracts and
installment loan agreements (the 'Manufactured Housing Contracts'), originated
by a manufactured housing dealer in the ordinary course of business and (ii)
home improvement installment sales contracts and installment loan agreements
(the 'Home Improvement Contracts' and together with Manufactured Housing
Contracts, the 'Contracts') originated by a home improvement contractor in the
ordinary course of business. As specified in the related Prospectus Supplement,
the Manufactured Housing Contracts will be secured by either Manufactured Homes
(as defined below), located in any of the fifty states or the District of
Columbia or by Mortgages on the real estate on which the Manufactured Homes are
located. As specified in the related Prospectus Supplement, the Home Improvement
Contracts will either be unsecured or secured by Mortgages primarily on Single
Family Properties which are generally subordinate to other mortgages on the same
Mortgaged Property or by purchase money security interest in the Home
Improvements financed thereby. The Contracts will be conventional contracts or
contracts insured by the Federal Housing Administration ('FHA') or partially
guaranteed by the Veterans Administration ('VA'). Unless otherwise specified in
the applicable Prospectus Supplement, the Contracts will be fully amortizing and
may have fixed interest rates or adjustable interest rates and may provide for
other payment characteristics as described below and in the related Prospectus
Supplement.
Unless otherwise specified in the related Prospectus Supplement, the home
improvements (the 'Home Improvements') securing the Home Improvement Contracts
include, but are not limited to, replacement windows, house siding, new roofs,
swimming pools, satellite dishes, kitchen and bathroom remodeling goods and
solar heating panels.
Unless otherwise specified in the related Prospectus Supplement, the
manufactured homes (the 'Manufactured Homes') securing the Manufactured Housing
Contracts will 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 such 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.'
Manufactured Homes, unlike Mortgaged Properties, and Home Improvements,
generally depreciate in value. Consequently, at any time after origination it is
possible, especially in the case of Contracts with high Loan-to-Value Ratios at
origination, that the market value of a Manufactured Home or Home Improvement
may be lower than the principal amount outstanding under the related Contract.
The Mortgaged Properties will include primarily Single Family Property
(i.e., one- to four-family residential housing, including Condominium Units and
Cooperative Dwellings). The Mortgaged Properties may consist of detached
individual dwellings, individual condominiums, townhouses, duplexes, row houses,
individual units in planned unit developments and other attached dwelling units.
Each Single Family Property will be located on land owned in fee simple by the
borrower or on land leased by the borrower for a term at least ten years (unless
otherwise provided in the related Prospectus Supplement) greater than the term
of the related Contract. Attached dwellings may include owner-occupied
structures where each borrower owns the land upon which the unit is built, with
the remaining adjacent land owned in common or dwelling units subject to a
proprietary lease or occupancy agreement in a cooperatively owned apartment
building.
Unless otherwise specified in the related Prospectus Supplement, Mortgages
on Cooperative Dwellings consist of a lien on the shares issued by such
Cooperative Dwelling and the proprietary lease or occupancy agreement relating
to such Cooperative Dwelling.
The aggregate principal balance of Contracts secured by Properties that are
owner-occupied will be disclosed in the related Prospectus Supplement. Unless
otherwise specified in the Prospectus Supplement, the sole basis for a
representation that a given percentage of the Contracts are secured by Single
Family Property that is owner-occupied will be either (i) the making of a
representation by the Mortgagor at origination of the
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Contract either that the underlying Mortgaged Property will be used by the
Mortgagor for a period of at least six months every year or that the Mortgagor
intends to use the Mortgaged Property as a primary residence, or (ii) a finding
that the address of the underlying Mortgaged Property is the Mortgagor's mailing
address as reflected in the Servicer's records. To the extent specified in the
related Prospectus Supplement, the Mortgaged Properties may include non-owner
occupied investment properties and vacation and second homes.
Unless otherwise specified in the related Prospectus Supplement, the
initial Loan-to-Value Ratio of a Home Improvement Contract is computed in the
manner described in the related Prospectus Supplement.
Additional Information. The selection criteria which shall apply with
respect to the Contracts, including, but not limited to, the Combined
Loan-to-Value Ratios or Loan-to-Value Ratios, as applicable, original terms to
maturity and delinquency information, will be specified in the related
Prospectus Supplement.
The Contracts for a Series may include Contracts that do not amortize their
entire principal balance by their stated maturity in accordance with their terms
and require a balloon payment of the remaining principal balance at maturity, as
specified in the related Prospectus Supplement. As further described in the
related Prospectus Supplement, the Contracts for a Series may include Contracts
that do not have a specified stated maturity.
The related Prospectus Supplement for each Series will provide information
with respect to the Contracts that are Primary Assets as of the Cut-off Date,
including, among other things, and to the extent relevant (a) the aggregate
unpaid principal balance of the Contracts (or the aggregate unpaid principal
balance included in the Trust Fund for the related Series); (b) the range and
weighted average Loan Rate on the Contracts, and, in the case of adjustable rate
Contracts, the range and weighted average of the current Loan Rates and the
Lifetime Rate Caps, if any; (c) the range and average outstanding principal
balance of the Contracts; (d) the weighted average original and remaining
term-to-stated maturity of the Contracts and the range of original and remaining
terms-to-stated maturity, if applicable; (e) the range and weighted average of
Combined Loan-to-Value Ratios or Loan-to-Value Ratios for the Contracts, as
applicable; (f) the percentage (by outstanding principal balance as of the Cut-
off Date) of Contracts that accrue interest at adjustable or fixed interest
rates; (g) any special hazard insurance policy or bankruptcy bond or other
enhancement relating to the Contracts; (h) the percentage (by principal balance
as of the Cut-off Date) of Contracts that are secured by Mortgaged Properties,
Home Improvements, Manufactured Homes, the real estate on which the Manufactured
Homes are located or are unsecured; (i) the geographic distribution of any
Mortgaged Properties securing the Contracts; (j) the percentage of Contracts (by
principal balance as of the Cut-off Date) that are secured by Single Family
Properties, shares relating to Cooperative Dwellings, Condominium Units,
investment property and vacation or second homes; (k) the lien priority of the
Contracts; and (l) the delinquency status and year of origination of the
Contracts. The related Prospectus Supplement will also specify any other
limitations on the types or characteristics of Contracts for a Series.
If information of the nature described above respecting the Contracts is
not known to the Depositor at the time the Securities are initially offered,
approximate or more general information of the nature described above will be
provided in the Prospectus Supplement and additional information will be set
forth in a Current Report on Form 8-K to be available to investors on the date
of issuance of the related Series and to be filed with the Commission within 15
days after the initial issuance of such Securities.
COLLECTION AND DISTRIBUTION ACCOUNTS
A separate Collection Account will be established by the Trustee or the
Servicer, in the name of the Trustee, for each Series of Securities for receipt
of the amount of cash, if any, specified in the related Prospectus Supplement to
be initially deposited therein by the Depositor, all amounts received on or with
respect to the Primary Assets and, unless otherwise specified in the related
Prospectus Supplement, income earned thereon. Certain amounts on deposit in such
Collection Account and certain amounts available pursuant to any Enhancement, as
provided in the related Prospectus Supplement, will be deposited in a related
Distribution Account, which will also be established by the Trustee for each
such Series of Securities, for distribution to the related Holders. Unless
otherwise specified in the related Prospectus Supplement, the Trustee will
invest the funds in the Collection and Distribution Accounts in Eligible
Investments maturing, with certain exceptions, not later, in the case of funds
in the Collection Account, than the day preceding the date such funds are due to
be deposited in the Distribution Account or otherwise distributed and, in the
case of funds in the Distribution Account, than the day preceding the next
Distribution Date for the related Series of Securities. Eligible Investments
include, among other investments, obligations of the United States and certain
agencies thereof, federal funds, certificates of deposit, commercial paper,
demand and time deposits and banker's acceptances, certain repurchase agreements
of United States government securities and certain guaranteed investment
contracts, in each case, acceptable to the Rating Agency.
Notwithstanding any of the foregoing, amounts may be deposited and
withdrawn pursuant to any Deposit Agreement or Minimum Principal Payment
Agreement as specified in the related Prospectus Supplement.
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ENHANCEMENT
If stated in the Prospectus Supplement relating to a Series of Securities,
simultaneously with the Depositor's assignment of the Primary Assets to the
Trustee, the Depositor will obtain an irrevocable letter of credit, surety bond
or insurance policy, issue Subordinate Securities or obtain any other form of
enhancement or combination thereof (collectively, 'Enhancement') in favor of the
Trustee on behalf of the holders of the related Series or designated Classes of
such Series from an institution or by other means acceptable to the Rating
Agency. The Enhancement will support the payment of principal and interest on
the Securities, and may be applied for certain other purposes to the extent and
under the conditions set forth in such Prospectus Supplement. Enhancement for a
Series may include one or more of the following forms, or such other form as may
be specified in the related Prospectus Supplement. If so specified in the
related Prospectus Supplement, any of such Enhancement may be structured so as
to protect against losses relating to more than one Trust Fund, in the manner
described therein.
SUBORDINATE SECURITIES
If specified in the related Prospectus Supplement, Enhancement for a Series
may consist of one or more Classes of Subordinate Securities. The rights of
holders of such Subordinate Securities to receive distributions on any
Distribution Date will be subordinate in right and priority to the rights of
holders of Senior Securities of the Series, but only to the extent described in
the related Prospectus Supplement.
INSURANCE
If stated in the related Prospectus Supplement, Enhancement for a Series
may consist of special hazard insurance policies, bankruptcy bonds and other
types of insurance relating to the Primary Assets, as described below and in the
related Prospectus Supplement.
Pool Insurance Policy. If so specified in the Prospectus Supplement
relating to a Series of Securities, the Depositor will obtain a pool insurance
policy for the Contracts in the related Trust Fund. The pool insurance policy
will cover any loss (subject to the limitations described in a related
Prospectus Supplement) by reason of default, but will not cover the portion of
the principal balance of any Contract that is required to be covered by any
primary mortgage insurance policy. The amount and terms of any such coverage
will be set forth in the related Prospectus Supplement.
Special Hazard Insurance Policy. Although the terms of such policies vary
to some degree, a special hazard insurance policy typically provides that, where
there has been damage to Property securing a defaulted or foreclosed Contract
(title to which has been acquired by the insured) and to the extent such damage
is not covered by the standard hazard insurance policy or any flood insurance
policy, if applicable, required to be maintained with respect to such Property,
or in connection with partial loss resulting from the application of the
coinsurance clause in a standard hazard insurance policy, the special hazard
insurer will pay the lesser of (i) the cost of repair or replacement of such
Property or (ii) upon transfer of such Property to the special hazard insurer,
the unpaid principal balance of such Contract at the time of acquisition of such
Property by foreclosure or deed in lieu of foreclosure, plus accrued interest to
the date of claim settlement and certain expenses incurred by the Servicer with
respect to such Property. If the unpaid principal balance plus accrued interest
and certain expenses is paid by the special hazard insurer, the amount of
further coverage under the special hazard insurance policy will be reduced by
such amount less any net proceeds from the sale of such Property. Any amount
paid as the cost of repair of such Property will reduce coverage by such amount.
Special hazard insurance policies typically do not cover losses occasioned by
war, civil insurrection, certain governmental actions, errors in design, faulty
workmanship or materials (except under certain circumstances), nuclear reaction,
flood (if the mortgaged property is in a federally designated flood area),
chemical contamination and certain other risks.
Restoration of the Property with the proceeds described under (i) above is
expected to satisfy the condition under any pool insurance policy that such
Property be restored before a claim under such pool insurance policy may be
validly presented with respect to the defaulted Contract secured by such
Property. The payment described under (ii) above will render unnecessary
presentation of a claim in respect of such Contract under any pool insurance
policy. Therefore, so long as such pool insurance policy remains in effect, the
payment by the special hazard insurer of the cost of repair or of the unpaid
principal balance of the related Contract plus accrued interest and certain
expenses will not affect the total insurance proceeds paid to holders of the
Securities, but will affect the relative amounts of coverage remaining under the
special hazard insurance policy and pool insurance policy.
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Bankruptcy Bond. In the event of a bankruptcy of a borrower, the
bankruptcy court may establish the value of the Property securing the related
Contract at an amount less than the then outstanding principal balance of such
Contract. The amount of the secured debt could be reduced to such value, and the
holder of such Contract thus would become an unsecured creditor to the extent
the outstanding principal balance of such Contract exceeds the value so assigned
to the Property by the bankruptcy court. In addition, certain other
modifications of the terms of a Contract can result from a bankruptcy
proceeding. See 'CERTAIN LEGAL ASPECTS OF THE CONTRACTS.' If so provided in the
related Prospectus Supplement, the Depositor or other entity specified in the
related Prospectus Supplement will obtain a bankruptcy bond or similar insurance
contract (the 'bankruptcy bond') covering losses resulting from proceedings with
respect to borrowers under the Bankruptcy Code. The bankruptcy bond will cover
certain losses resulting from a reduction by a bankruptcy court of scheduled
payments of principal of and interest on a Contract or a reduction by such court
of the principal amount of a Contract and will cover certain unpaid interest on
the amount of such a principal reduction from the date of the filing of a
bankruptcy petition.
The bankruptcy bond will provide coverage in the aggregate amount specified
in the related Prospectus Supplement for all Contracts in the Trust Fund for
such Series. Such amount will be reduced by payments made under such bankruptcy
bond in respect of such Contracts, unless otherwise specified in the related
Prospectus Supplement, and will not be restored.
RESERVE FUNDS
If so specified in the Prospectus Supplement relating to a Series of
Securities, the Depositor will deposit into one or more funds to be established
with the Trustee as part of the Trust Fund for such Series or for the benefit of
any Enhancer with respect to such Series (the 'Reserve Funds') cash, a letter or
letters of credit, cash collateral accounts, Eligible Investments, or other
instruments meeting the criteria of the Rating Agency rating any Series of the
Securities in the amount specified in such Prospectus Supplement. In the
alternative or in addition to such deposit, a Reserve Fund for a Series may be
funded over time through application of all or a portion of the excess cash flow
from the Primary Assets for such Series, to the extent described in the related
Prospectus Supplement. If applicable, the initial amount of the Reserve Fund and
the Reserve Fund maintenance requirements for a Series of Securities will be
described in the related Prospectus Supplement.
Amounts withdrawn from any Reserve Fund will be applied by the Trustee to
make payments on the Securities of a Series, to pay expenses, to reimburse any
Enhancer or for any other purpose, in the manner and to the extent specified in
the related Prospectus Supplement.
Amounts deposited in a Reserve Fund will be invested by the Trustee, in
Eligible Investments maturing no later than the day specified in the related
Prospectus Supplement.
MINIMUM PRINCIPAL PAYMENT AGREEMENT
If stated in the Prospectus Supplement relating to a Series of Securities,
the Depositor will enter into a Minimum Principal Payment Agreement with an
entity meeting the criteria of the Rating Agency pursuant to which such entity
will provide certain payments on the Securities of such Series in the event that
aggregate scheduled principal payments and/or prepayments on the Primary Assets
for such Series are not sufficient to make certain payments on the Securities of
such Series, as provided in the Prospectus Supplement.
DEPOSIT AGREEMENT
If specified in a Prospectus Supplement, the Depositor and the Trustee for
such Series of Securities will enter into a Deposit Agreement with the entity
specified in such Prospectus Supplement on or before the sale of such Series of
Securities. The purpose of a Deposit Agreement would be to accumulate available
cash for investment so that such cash, together with income thereon, can be
applied to future distributions on one or more Classes of Securities. The
Prospectus Supplement for a Series of Securities pursuant to which a Deposit
Agreement is used will contain a description of the terms of such Deposit
Agreement.
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SERVICING OF CONTRACTS
GENERAL
Customary servicing functions with respect to Contracts comprising the
Primary Assets in the Trust Fund will be provided by the Servicer directly
pursuant to the related Servicing Agreement or Pooling and Servicing Agreement,
as the case may be, with respect to a Series of Securities.
COLLECTION PROCEDURES; ESCROW ACCOUNTS
The Servicer will make reasonable efforts to collect all payments required
to be made under the Contracts and will, consistent with the terms of the
related Agreement for a Series and any applicable Enhancement, follow such
collection procedures as it follows with respect to comparable loans held in its
own portfolio. Consistent with the above, the Servicer may, in its discretion,
(i) waive any assumption fee, late payment charge, or other charge in connection
with a Contract and (ii) to the extent provided in the related Agreement,
arrange with an obligor a schedule for the liquidation of delinquencies by
extending the Due Dates for Scheduled Payments on such Contract.
If specified in the related Prospectus Supplement, the Servicer, to the
extent permitted by law, will establish and maintain escrow or impound accounts
('Escrow Accounts') with respect to Contracts in which payments by obligors to
pay taxes, assessments, mortgage and hazard insurance premiums, and other
comparable items will be deposited. Contracts may not require such payments
under the loan related documents, in which case the Servicer would not be
required to establish any Escrow Account with respect to such Contracts.
Withdrawals from the Escrow Accounts are to be made to effect timely payment of
taxes, assessments and mortgage and hazard insurance, to refund to obligors
amounts determined to be overages, to pay interest to obligors on balances in
the Escrow Account to the extent required by law, to repair or otherwise protect
the property securing the related Contract and to clear and terminate such
Escrow Account. The Servicer will be responsible for the administration of the
Escrow Accounts and generally will make advances to such account when a
deficiency exists therein.
DEPOSITS TO AND WITHDRAWALS FROM THE COLLECTION ACCOUNT
Unless otherwise specified in the related Prospectus Supplement, the
Trustee or the Servicer will establish a separate account (the 'Collection
Account') in the name of the Trustee. Unless otherwise indicated in the related
Prospectus Supplement, the Collection Account will be an account maintained (i)
at a depository institution, the long-term unsecured debt obligations of which
at the time of any deposit therein are rated by each Rating Agency rating the
Securities of such Series at levels satisfactory to each Rating Agency or (ii)
in an account or accounts the deposits in which are insured to the maximum
extent available by the FDIC or which are secured in a manner meeting
requirements established by each Rating Agency.
Unless otherwise specified in the related Prospectus Supplement, the funds
held in the Collection Account may be invested, pending remittance to the
Trustee, in Eligible Investments. If so specified in the related Prospectus
Supplement, the Servicer will be entitled to receive as additional compensation
any interest or other income earned on funds in the Collection Account.
Unless otherwise specified in the related Prospectus Supplement, the
Servicer, the Depositor, the Trustee or the Seller, as appropriate, will deposit
into the Collection Account for each Series on the Business Day following the
Closing Date any amounts representing Scheduled Payments due after the related
Cut-off Date but received by the Servicer on or before the Closing Date, and
thereafter, within two business days after the date of receipt thereof, the
following payments and collections received or made by it (other than, unless
otherwise provided in the related Prospectus Supplement, in respect of principal
of and interest on the related Primary Assets due on or before such Cut-off
Date):
(i) All payments on account of principal, including prepayments, on
such Primary Assets;
(ii) All payments on account of interest on such Primary Assets after
deducting therefrom, at the discretion of the Servicer but only to the
extent of the amount permitted to be withdrawn or withheld from the
Collection Account in accordance with the related Agreement, the Servicing
Fee in respect of such Primary Assets;
(iii) All amounts received by the Servicer in connection with the
liquidation of Primary Assets or property acquired in respect thereof,
whether through foreclosure sale, repossession or otherwise, including
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payments in connection with such Primary Assets received from the obligor,
other than amounts required to be paid or refunded to the obligor pursuant
to the terms of the applicable loan documents or otherwise pursuant to law
('Liquidation Proceeds'), exclusive of, in the discretion of the Servicer,
but only to the extent of the amount permitted to be withdrawn from the
Collection Account in accordance with the related Agreement, the Servicing
Fee, if any, in respect of the related Primary Asset;
(iv) All proceeds under any title insurance, hazard insurance or other
insurance policy covering any such Primary Asset, other than proceeds to be
applied to the restoration or repair of the related Property or released to
the obligor in accordance with the related Agreement;
(v) All amounts required to be deposited therein from any applicable
Reserve Fund for such Series pursuant to the related Agreement;
(vi) All Advances made by the Servicer required pursuant to the
related Agreement; and
(vii) All repurchase prices of any such Primary Assets repurchased by
the Depositor, the Servicer or the Seller pursuant to the related
Agreement.
Unless otherwise specified in the related Prospectus Supplement, the
Servicer is permitted, from time to time, to make withdrawals from the
Collection Account for each Series for the following purposes:
(i) to reimburse itself for Advances for such Series made by it
pursuant to the related Agreement; the Servicer's right to reimburse itself
is limited to amounts received on or in respect of particular Contracts
(including, for this purpose, Liquidation Proceeds and amounts representing
proceeds of insurance policies covering the related Property) which
represent late recoveries of Scheduled Payments respecting which any such
Advance was made;
(ii) to the extent provided in the related Agreement, to reimburse
itself for any Advances for such Series that the Servicer determines in
good faith it will be unable to recover from amounts representing late
recoveries of Scheduled Payments respecting which such Advance was made or
from Liquidation Proceeds or the proceeds of insurance policies;
(iii) to reimburse itself from Liquidation Proceeds for liquidation
expenses and for amounts expended by it in good faith in connection with
the restoration of damaged Property and, in the event deposited in the
Collection Account and not previously withheld, and to the extent that
Liquidation Proceeds after such reimbursement exceed the outstanding
principal balance of the related Contract, together with accrued and unpaid
interest thereon to the Due Date for such Contract next succeeding the date
of its receipt of such Liquidation Proceeds, to pay to itself out of such
excess the amount of any unpaid Servicing Fee and any assumption fees, late
payment charges, or other charges on the related Contract;
(iv) in the event it has elected not to pay itself the Servicing Fee
out of the interest component of any Scheduled Payment, late payment or
other recovery with respect to a particular Contract prior to the deposit
of such Scheduled Payment, late payment or recovery into the Collection
Account, to pay to itself the Servicing Fee, as adjusted pursuant to the
related Agreement, from any such Scheduled Payment, late payment or such
other recovery, to the extent permitted by the related Agreement;
(v) to reimburse itself for expenses incurred by and recoverable by or
reimbursable to it pursuant to the related Agreement;
(vi) to pay to the applicable person with respect to each Primary
Asset or REO Property acquired in respect thereof that has been repurchased
or removed from the Trust Fund by the Depositor, the Servicer or the Seller
pursuant to the related Agreement, all amounts received thereon and not
distributed as of the date on which the related repurchase price was
determined;
(vii) to make payments to the Trustee of such Series for deposit into
the Distribution Account, if any, or for remittance to the Holders of such
Series in the amounts and in the manner provided for in the related
Agreement; and
(viii) to clear and terminate the Collection Account pursuant to the
related Agreement.
In addition, if the Servicer deposits in the Collection Account for a
Series any amount not required to be deposited therein, it may, at any time,
withdraw such amount from such Collection Account.
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ADVANCES AND LIMITATIONS THEREON
The related Prospectus Supplement will describe the circumstances, if any,
under which the Servicer will make Advances with respect to delinquent payments
on Contracts. If specified in the related Prospectus Supplement, the Servicer
will be obligated to make Advances, and such obligations may be limited in
amount, or may not be activated until a certain portion of a specified Reserve
Fund is depleted. Advances are intended to provide liquidity and, except to the
extent specified in the related Prospectus Supplement, not to guarantee or
insure against losses. Accordingly, any funds advanced are recoverable by the
Servicer out of amounts received on particular Contracts which represent late
recoveries of principal or interest, proceeds of insurance policies or
Liquidation Proceeds respecting which any such Advance was made. If an Advance
is made and subsequently determined to be nonrecoverable from late collections,
proceeds of insurance policies, or Liquidation Proceeds from the related
Contract, the Servicer may be entitled to reimbursement from other funds in the
Collection Account or Distribution Account, as the case may be, or from a
specified Reserve Fund as applicable, to the extent specified in the related
Prospectus Supplement.
MAINTENANCE OF INSURANCE POLICIES AND OTHER SERVICING PROCEDURES
Standard Hazard Insurance; Flood Insurance. Except as otherwise specified
in the related Prospectus Supplement, the Servicer will be required to maintain
or to cause the obligor on each Contract to maintain a standard hazard insurance
policy providing coverage of the standard form of fire insurance with extended
coverage for certain other hazards as is customary in the state in which the
related Property is located. The standard hazard insurance policies will provide
for coverage at least equal to the applicable state standard form of fire
insurance policy with extended coverage for property of the type securing the
related Contracts. In general, the standard form of fire and extended coverage
policy will cover physical damage to or destruction of, the related 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 Contracts
will be underwritten by different hazard insurers and will cover Properties
located in various states, such policies will not contain identical terms and
conditions. The basic terms, however, generally will be determined by state law
and generally will be similar. Most such policies typically will not cover any
physical damage resulting from 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 certain cases, vandalism. The foregoing list is
merely indicative of certain kinds of uninsured risks and is not intended to be
all inclusive. Uninsured risks not covered by a special hazard insurance policy
or other form of Enhancement will adversely affect distributions to Holders.
When a Mortgaged Property securing a Contract is located in a flood area
identified by HUD pursuant to the Flood Disaster Protection Act of 1973, as
amended, the Servicer will be required to cause flood insurance to be maintained
with respect to such Property, to the extent available.
The standard hazard insurance policies covering Properties securing
Contracts typically will contain a 'coinsurance' clause which, in effect, will
require the insured at all times to carry hazard insurance of a specified
percentage (generally 80% to 90%) of the full replacement value of the Property,
including the improvements on any Property, in order to recover the full amount
of any partial loss. If the insured's coverage falls below this specified
percentage, such clause will provide that the hazard insurer's liability in the
event of partial loss will not exceed the greater of (i) the actual cash value
(the replacement cost less physical depreciation) of the Property, including the
improvements, if any, damaged or destroyed or (ii) such 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 such Property and
improvements. Since the amount of hazard insurance to be maintained on the
improvements securing the Contracts declines as the principal balances owing
thereon decrease, and since the value of the Properties will fluctuate in value
over time, the effect of this requirement in the event of partial loss may be
that hazard insurance proceeds will be insufficient to restore fully the damage
to the affected Property.
Unless otherwise specified in the related Prospectus Supplement, coverage
will be in an amount at least equal to the greater of (i) the amount necessary
to avoid the enforcement of any co-insurance clause contained in the policy or
(ii) the outstanding principal balance of the related Contract. Unless otherwise
specified in the related Prospectus Supplement, the Servicer will also maintain
on REO Property that secured a defaulted
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Contract and that has been acquired upon foreclosure, deed in lieu of
foreclosure, or repossession, a standard hazard insurance policy in an amount
that is at least equal to the maximum insurable value of such REO Property. No
earthquake or other additional insurance will be required of any obligor or will
be maintained on REO Property acquired in respect of a defaulted Contract, other
than pursuant to such applicable laws and regulations as shall at any time be in
force and shall require such additional insurance.
Any amounts collected by the Servicer under any such policies of insurance
(other than amounts to be applied to the restoration or repair of the Property,
released to the obligor in accordance with normal servicing procedures or used
to reimburse the Servicer for amounts to which it is entitled to reimbursement)
will be deposited in the Collection Account. In the event that the Servicer
obtains and maintains a blanket policy insuring against hazard losses on all of
the Contracts, written by an insurer then acceptable to each Rating Agency which
assigns a rating to such Series, it will conclusively be deemed to have
satisfied its obligations to cause to be maintained a standard hazard insurance
policy for each Contract or related REO Property. This blanket policy may
contain a deductible clause, in which case the Servicer will, in the event that
there has been a loss that would have been covered by such policy absent such
deductible clause, deposit in the Collection Account the amount not otherwise
payable under the blanket policy because of the application of such deductible
clause.
REALIZATION UPON DEFAULTED LOANS
The Servicer will use its reasonable best efforts to foreclose upon,
repossess or otherwise comparably convert the ownership of the Properties
securing the related Contracts as come into and continue in default and as to
which no satisfactory arrangements can be made for collection of delinquent
payments. In connection with such foreclosure or other conversion, the Servicer
will follow such practices and procedures as it deems necessary or advisable and
as are normal and usual in its servicing activities with respect to comparable
loans serviced by it. However, the Servicer will not be required to expend its
own funds in connection with any foreclosure or towards the restoration of the
Property unless it determines that: (i) such restoration or foreclosure will
increase the Liquidation Proceeds in respect of the related Contract available
to the Holders after reimbursement to itself for such expenses and (ii) such
expenses will be recoverable by it either through Liquidation Proceeds or the
proceeds of insurance. Notwithstanding anything to the contrary herein, in the
case of a Trust Fund for which a REMIC election has been made, the Servicer
shall liquidate any Property acquired through foreclosure within two years after
the acquisition of the beneficial ownership of such Property. While the holder
of a Property acquired through foreclosure can often maximize its recovery by
providing financing to a new purchaser, the Trust Fund, if applicable, will have
no ability to do so and neither the Servicer nor the Depositor will be required
to do so.
The Servicer may arrange with the obligor on a defaulted Contract, a
modification of such Contract (a 'Modification') to the extent provided in the
related Prospectus Supplement. Such Modifications may only be entered into if
they meet the underwriting policies and procedures employed by the Servicer in
servicing receivables for its own account and meet the other conditions set
forth in the related Prospectus Supplement.
ENFORCEMENT OF DUE-ON-SALE CLAUSES
Unless otherwise specified in the related Prospectus Supplement for a
Series, when any Property is about to be conveyed by the obligor, the Servicer
will, to the extent it has knowledge of such prospective conveyance and prior to
the time of the consummation of such conveyance, exercise its rights to
accelerate the maturity of the related Contract under the applicable
'due-on-sale' clause, if any, unless it reasonably believes that such clause is
not enforceable under applicable law or if the enforcement of such clause would
result in loss of coverage under any primary mortgage insurance policy. In such
event, the Servicer is authorized to accept from or enter into an assumption
agreement with the person to whom such property has been or is about to be
conveyed, pursuant to which such person becomes liable under the Contract and
pursuant to which the original obligor is released from liability and such
person is substituted as the obligor and becomes liable under the Contract. Any
fee collected in connection with an assumption will be retained by the Servicer
as additional servicing compensation. The terms of a Contract may not be changed
in connection with an assumption.
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SERVICING COMPENSATION AND PAYMENT OF EXPENSES
Except as otherwise provided in the related Prospectus Supplement, the
Servicer will be entitled to a periodic fee as servicing compensation (the
'Servicing Fee') in an amount to be determined as specified in the related
Prospectus Supplement. The Servicing Fee may be fixed or variable, as specified
in the related Prospectus Supplement. In addition, unless otherwise specified in
the related Prospectus Supplement, the Servicer will be entitled to servicing
compensation in the form of assumption fees, late payment charges and similar
items, or excess proceeds following disposition of property in connection with
defaulted Contracts.
Unless otherwise specified in the related Prospectus Supplement, the
Servicer will pay certain expenses incurred in connection with the servicing of
the Contracts, including, without limitation, the payment of the fees and
expenses of the Trustee and independent accountants, payment of insurance policy
premiums and the cost of credit support, if any, and payment of expenses
incurred in preparation of reports to Holders.
When an obligor makes a principal prepayment in full between Due Dates on
the related Contract, the obligor will generally be required to pay interest on
the amount prepaid only to the date of prepayment. If and to the extent provided
in the related Prospectus Supplement, in order that one or more Classes of the
Holders of a Series will not be adversely affected by any resulting shortfall in
interest, the amount of the Servicing Fee may be reduced to the extent necessary
to include in the Servicer's remittance to the Trustee for deposit into the
Distribution Account an amount equal to one month's interest on the related
Contract (less the Servicing Fee). If the aggregate amount of such shortfalls in
a month exceeds the Servicing Fee for such month, a shortfall to Holders may
occur.
Unless otherwise specified in the related Prospectus Supplement, the
Servicer will be entitled to reimbursement for certain expenses incurred by it
in connection with the liquidation of defaulted Contracts. The related Holders
will suffer no loss by reason of such expenses to the extent expenses are
covered under related insurance policies or from excess Liquidation Proceeds. If
claims are either not made or paid under the applicable insurance policies or if
coverage thereunder has been exhausted, the related Holders will suffer a loss
to the extent that Liquidation Proceeds, after reimbursement of the Servicer's
expenses, are less than the outstanding principal balance of and unpaid interest
on the related Contract which would be distributable to Holders. In addition,
the Servicer will be entitled to reimbursement of expenditures incurred by it in
connection with the restoration of property securing a defaulted Contract, such
right of reimbursement being prior to the rights of the Holders to receive any
related proceeds of insurance policies, Liquidation Proceeds or amounts derived
from other Enhancement. The Servicer is generally also entitled to reimbursement
from the Collection Account for Advances.
Unless otherwise specified in the related Prospectus Supplement, the rights
of the Servicer to receive funds from the Collection Account for a Series,
whether as the Servicing Fee or other compensation, or for the reimbursement of
Advances, expenses or otherwise, are not subordinate to the rights of Holders of
such Series.
EVIDENCE AS TO COMPLIANCE
If so specified in the related Prospectus Supplement, the applicable
Agreement for each Series will provide that each year, a firm of independent
public accountants will furnish a statement to the Trustee to the effect that
such firm has examined certain documents and records relating to the servicing
of the Contracts by the Servicer and that, on the basis of such examination,
such firm is of the opinion that the servicing has been conducted in compliance
with such Agreement, except for (i) such exceptions as such firm believes to be
immaterial and (ii) such other exceptions as are set forth in such statement.
If so specified in the related Prospectus Supplement, the applicable
Agreement for each Series will also provide for delivery to the Trustee for such
Series of an annual statement signed by an officer of the Servicer to the effect
that the Servicer has fulfilled its obligations under such Agreement, throughout
the preceding calendar year.
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CERTAIN MATTERS REGARDING THE SERVICER
The Servicer for each Series will be identified in the related Prospectus
Supplement. The Servicer may be an affiliate of the Depositor and may have other
business relationships with the Depositor and its affiliates.
In the event of an Event of Default under either a Servicing Agreement or a
Pooling and Servicing Agreement, the Servicer may be replaced by the Trustee or
a successor Servicer. Unless otherwise specified in the related Prospectus
Supplement, such Events of Default and the rights of the Trustee upon such a
default under the Agreement for the related Series will be substantially similar
to those described under 'THE AGREEMENTS--Events of Default; Rights Upon Events
of Default--Pooling and Servicing Agreement; Servicing Agreement' herein.
Unless otherwise specified in the related Prospectus Supplement, the
Servicer does not have the right to assign its rights and delegate its duties
and obligations under the related Agreement for each Series unless the successor
Servicer accepting such assignment or delegation (i) services similar loans in
the ordinary course of its business, (ii) is reasonably satisfactory to the
Trustee for the related Series, (iii) has a net worth of not less than the
amount specified in the related Prospectus Supplement, (iv) would not cause any
Rating Agency's rating of the Securities for such Series in effect immediately
prior to such assignment, sale or transfer to be qualified, downgraded or
withdrawn as a result of such assignment, sale or transfer and (v) executes and
delivers to the Trustee an agreement, in form and substance reasonably
satisfactory to the Trustee, which contains an assumption by such Servicer of
the due and punctual performance and observance of each covenant and condition
to be performed or observed by the servicer under the related Agreement from and
after the date of such agreement. No such assignment will become effective until
the Trustee or a successor Servicer has assumed the servicer's obligations and
duties under the related Agreement. To the extent that the Servicer transfers
its obligations to a wholly-owned subsidiary or affiliate, such subsidiary or
affiliate need not satisfy the criteria set forth above; however, in such
instance, the assigning Servicer will remain liable for the servicing
obligations under the related Agreement. Any entity into which the Servicer is
merged or consolidated or any successor corporation resulting from any merger,
conversion or consolidation will succeed to the Servicer's obligations under the
related Agreement, provided that such successor or surviving entity meets the
requirements for a successor Servicer set forth above.
Except to the extent otherwise provided therein, each Agreement will
provide that neither the Servicer, nor any director, officer, employee or agent
of the Servicer, will be under any liability to the related Trust Fund, the
Depositor or the Holders for any action taken or for failing to take any action
in good faith pursuant to the related Agreement, or for errors in judgment;
provided, however, that neither the Servicer nor any such person will be
protected against any breach of warranty or representations made under such
Agreement, or the failure to perform its obligations in compliance with any
standard of care set forth in such Agreement, or liability which would otherwise
be imposed by reason of willful misfeasance, bad faith or negligence in the
performance of their duties or by reason of reckless disregard of their
obligations and duties thereunder. Each Agreement will further provide that the
Servicer and any director, officer, employee or agent of the Servicer is
entitled to indemnification from the related Trust Fund and will be held
harmless against any loss, liability or expense incurred in connection with any
legal action relating to the Agreement or the Securities, other than any loss,
liability or expense incurred by reason of willful misfeasance, bad faith or
negligence in the performance of duties thereunder or by reason of reckless
disregard of obligations and duties thereunder. In addition, the related
Agreement will provide 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 such Agreement which, in its opinion, may
involve it in any expense or liability. The Servicer may, in its discretion,
undertake any such action which it may deem necessary or desirable with respect
to the related Agreement and the rights and duties of the parties thereto and
the interests of the Holders thereunder. In such event, the legal expenses and
costs of such action and any liability resulting therefrom may be expenses,
costs, and liabilities of the Trust Fund and the Servicer may be entitled to be
reimbursed therefor out of the Collection Account.
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THE AGREEMENTS
The following summaries describe certain provisions of the Agreements. The
summaries do not purport to be complete and are subject to, and qualified in
their entirety by reference to, the provisions of the Agreements. Where
particular provisions or terms used in the Agreements are referred to, such
provisions or terms are as specified in the related Agreements.
ASSIGNMENT OF PRIMARY ASSETS
General. At the time of issuance of the Securities of a Series, the
Depositor will transfer, convey and assign to the Trust Fund all right, title
and interest of the Depositor in the Primary Assets and other property to be
transferred to the Trust Fund for a Series. Such assignment will include all
principal and interest due on or with respect to the Primary Assets after the
Cut-off Date specified in the related Prospectus Supplement (except for any
Retained Interests). The Trustee will, concurrently with such assignment,
execute and deliver the Securities.
Assignment of Contracts. Unless otherwise specified in the related
Prospectus Supplement, the Depositor will as to each Contract, deliver or cause
to be delivered to the Trustee (or the Custodian) the original Contract and
copies of documents and instruments related to each Contract and, other than in
the case of unsecured Contracts, the security interest in the property securing
such Contract. In order to give notice of the right, title and interest of
Securityholders to the Contracts, the Depositor will cause a UCC-1 financing
statement to be executed by the Depositor or the Seller 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 to the Trust.
Therefore, if, through negligence, fraud or otherwise, a subsequent purchaser
were able to take physical possession of the Contracts without notice of such
assignment, the interest of Securityholders in the Contracts could be defeated.
See 'CERTAIN LEGAL ASPECTS OF THE CONTRACTS--The Contracts.'
With respect to Contracts secured by Mortgages, if so specified in the
related Prospectus Supplement, the Depositor will, at the time of issuance of
the Securities, cause assignments to the Trustee of the Mortgages relating to
the Contracts for a Series to be recorded in the appropriate public office for
real property records, except in states where, in the opinion of counsel
acceptable to the Trustee, such recording is not required to protect the
Trustee's interest in the related Contracts. If specified in the related
Prospectus Supplement, the Depositor will cause such assignments to be so
recorded within the time after issuance of the Securities as is specified in the
related Prospectus Supplement, in which event, the Agreement may, as specified
in the related Prospectus Supplement, require the Depositor to repurchase from
the Trustee any Contract the related Mortgage of which is not recorded within
such time, at the price described below with respect to repurchases by reason of
defective documentation. Unless otherwise provided in the related Prospectus
Supplement, the enforcement of the repurchase obligation would constitute the
sole remedy available to the Holders or the Trustee for the failure of a
Mortgage to be recorded.
Each Contract will be identified in a schedule appearing as an exhibit to
the related Agreement (the 'Contract Schedule'). Such Contract Schedule will
specify with respect to each Contract: the original principal amount and unpaid
principal balance as of the Cut-off Date; the current interest rate; the current
Scheduled Payment of principal and interest; the maturity date, if any, of the
related Mortgage Note; if the Contract is an adjustable rate Contract, the
Lifetime Rate Cap, if any, and the current index.
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Repurchase and Substitution of Non-Conforming Primary Assets. Unless
otherwise provided in the related Prospectus Supplement, if any document in the
file relating to the Primary Assets delivered by the Depositor to the Trustee
(or Custodian) is found by the Trustee within 90 days of the execution of the
related Agreement (or promptly after the Trustee's receipt of any document
permitted to be delivered after the Closing Date) to be defective in any
material respect and the Depositor or Seller does not cure such defect within 90
days, or within such other period specified in the related Prospectus
Supplement, the Depositor or Seller will, not later than 90 days or within such
other period specified in the related Prospectus Supplement, after the Trustee's
notice to the Depositor or the Seller, as the case may be, of the defect,
repurchase the related Primary Asset or any property acquired in respect thereof
from the Trustee at a price equal to, unless otherwise specified in the related
Prospectus Supplement, (a) the lesser of (i) the outstanding principal balance
of such Primary Asset and (ii) the Trust Fund's federal income tax basis in the
Primary Asset and (b) accrued and unpaid interest to the date of the next
scheduled payment on such Primary Asset at the rate set forth in the related
Agreement (less any unreimbursed Advances respecting such Primary Asset),
provided, however, the purchase price shall not be limited in (i) above to the
Trust Fund's federal income tax basis if the repurchase at a price equal to the
outstanding principal balance of such Primary Asset will not result in any
prohibited transaction tax under Section 860F(a) of the Code.
If provided in the related Prospectus Supplement, the Depositor or Seller,
as the case may be, may, rather than repurchase the Primary Asset as described
above, remove such Primary Asset from the Trust Fund (the 'Deleted Primary
Asset') and substitute in its place one or more other Primary Assets (each, a
'Qualifying Substitute Primary Asset') provided, however, that (i) with respect
to a Trust Fund for which no REMIC election is made, such substitution must be
effected within 120 days of the date of initial issuance of the Securities and
(ii) with respect to a Trust Fund for which a REMIC election is made, after a
specified time period, the Trustee must have received a satisfactory opinion of
counsel that such substitution will not cause the Trust Fund to lose its status
as a REMIC or otherwise subject the Trust Fund to a prohibited transaction tax.
Unless otherwise specified in the related Prospectus Supplement, any
Qualifying Substitute Primary Asset will have, on the date of substitution, (i)
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 Primary Asset (the amount of any shortfall to be deposited to the
Certificate Account in the month of substitution for distribution to Holders),
(ii) an interest rate not less than (and not more than 2% greater than) the
interest rate of the Deleted Primary Asset, (iii) a remaining term-to-stated
maturity not greater than (and not more than two years less than) that of the
Deleted Primary Asset, and will comply with all of the representations and
warranties set forth in the applicable agreement as of the date of substitution.
Unless otherwise provided in the related Prospectus Supplement, the
above-described cure, repurchase or substitution obligations constitute the sole
remedies available to the Holders or the Trustee for a material defect in a
document for a Primary Asset.
The Depositor or another entity will make representations and warranties
with respect to Primary Assets for a Series. If the Depositor or such entity
cannot cure a breach of any such representations and warranties in all material
respects within the time period specified in the related Prospectus Supplement
after notification by the Trustee of such breach, and if such breach is of a
nature that materially and adversely affects the value of such Primary Asset,
the Depositor or such entity is obligated to repurchase the affected Primary
Asset or, if provided in the related Prospectus Supplement, provide a Qualifying
Substitute Primary Asset therefor, subject to the same conditions and
limitations on purchases and substitutions as described above.
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The Depositor's only source of funds to effect any cure, repurchase or
substitution will be through the enforcement of the corresponding obligations of
the responsible originator or Seller of such Primary Assets. See 'RISK
FACTORS--Limited Assets.'
No Holder of Securities of a Series, solely by virtue of such Holder's
status as a Holder, will have any right under the applicable Agreement for such
Series to institute any proceeding with respect to such Agreement, unless such
Holder previously has given to the Trustee for such Series written notice of
default and unless the Holders of Securities evidencing not less than 51% of the
aggregate voting rights of the Securities for such Series have made written
request upon the Trustee to institute such proceeding in its own name as Trustee
thereunder and have offered to the Trustee reasonable indemnity, and the Trustee
for 60 days has neglected or refused to institute any such proceeding.
REPORTS TO HOLDERS
The Trustee or other entity specified in the related Prospectus Supplement
will prepare and forward to each Holder on each Distribution Date, or as soon
thereafter as is practicable, a statement setting forth, to the extent
applicable to any Series, among other things:
(i) the amount of principal distributed to holders of the related
Securities and the outstanding principal balance of such Securities
following such distribution;
(ii) the amount of interest distributed to holders of the related
Securities and the current interest on such Securities;
(iii) the amounts of (a) any overdue accrued interest included in such
distribution, (b) any remaining overdue accrued interest with respect to
such Securities or (c) any current shortfall in amounts to be distributed
as accrued interest to holders of such Securities;
(iv) the amounts of (a) any overdue payments of scheduled principal
included in such distribution, (b) any remaining overdue principal amounts
with respect to such Securities, (c) any current shortfall in receipt of
scheduled principal payments on the related Primary Assets or (d) any
realized losses or Liquidation Proceeds to be allocated as reductions in
the outstanding principal balances of such Securities;
(v) the amount received under any related Enhancement, and the
remaining amount available under such Enhancement;
(vi) the amount of any delinquencies with respect to payments on the
related Primary Assets;
(vii) the book value of any REO Property acquired by the related Trust
Fund; and
(viii) such other information as specified in the related Agreement.
In addition, within a reasonable period of time after the end of each
calendar year the Trustee, unless otherwise specified in the related Prospectus
Supplement, will furnish to each Holder of record at any time during such
calendar year: (a) the aggregate of amounts reported pursuant to (i), (ii), and
(iv)(d) above for such calendar year and (b) such information specified in the
related Agreement to enable Holders to prepare their tax returns including,
without limitation, the amount of original issue discount accrued on the
Securities, if applicable. Information in the Distribution Date and annual
statements provided to the Holders will not have been examined and reported upon
by an independent public accountant. However, the Servicer will provide to the
Trustee a report by independent public accountants with respect to the
Servicer's servicing of the Contracts. See 'SERVICING OF CONTRACTS--Evidence as
to Compliance' herein.
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EVENTS OF DEFAULT; RIGHTS UPON EVENT OF DEFAULT
Pooling and Servicing Agreement; Servicing Agreement. Unless otherwise
specified in the related Prospectus Supplement, Events of Default under the
Pooling and Servicing Agreement for each Series of Certificates include (i) any
failure by the Servicer to deposit amounts in the Collection Account and
Distribution Account to enable the Trustee to distribute to Holders of such
Series any required payment, which failure continues unremedied for the number
of days specified in the related Prospectus Supplement after the giving of
written notice of such failure to the Servicer by the Trustee for such Series,
or to the Servicer and the Trustee by the Holders of such Series evidencing not
less than 25% of the aggregate voting rights of the Holders for such Series,
(ii) any failure by the Servicer duly to observe or perform in any material
respect any other of its covenants or agreements in the applicable Agreement
which continues unremedied for the number of days specified in the related
Prospectus Supplement after the giving of written notice of such failure to the
Servicer by the Trustee, or to the Servicer and the Trustee by the Holders of
such Series evidencing not less than 25% of the aggregate voting rights of the
Holders and (iii) certain events of insolvency, readjustment of debt,
marshalling of assets and liabilities or similar proceedings and certain actions
by the Servicer indicating its insolvency, reorganization or inability to pay
its obligations.
So long as an Event of Default remains unremedied under the applicable
Agreement for a Series of Securities, unless otherwise specified in the related
Prospectus Supplement, the Trustee for such Series or Holders of Securities of
such Series evidencing not less than 51% of the aggregate voting rights of the
Securities for such Series may terminate all of the rights and obligations of
the Servicer as servicer under the applicable Agreement (other than its right to
recovery of other expenses and amounts advanced pursuant to the terms of such
Agreement which rights the Servicer will retain under all circumstances),
whereupon the Trustee will succeed to all the responsibilities, duties and
liabilities of the Servicer under such Agreement and will be entitled to
reasonable servicing compensation not to exceed the applicable servicing fee,
together with other servicing compensation in the form of assumption fees, late
payment charges or otherwise as provided in such Agreement.
In the event that the Trustee is unwilling or unable so to act, it may
select, or petition a court of competent jurisdiction to appoint, a finance
institution, bank or loan servicing institution with a net worth specified in
the related Prospectus Supplement to act as successor Servicer under the
provisions of the applicable Agreement. The successor Servicer would be entitled
to reasonable servicing compensation in an amount not to exceed the Servicing
Fee as set forth in the related Prospectus Supplement, together with the other
servicing compensation in the form of assumption fees, late payment charges or
otherwise, as provided in such Agreement.
During the continuance of any Event of Default of a Servicer under an
Agreement for a Series of Securities, the Trustee for such Series will have the
right to take action to enforce its rights and remedies and to protect and
enforce the rights and remedies of the Holders of such Series, and, unless
otherwise specified in the related Prospectus Supplement, Holders of Securities
evidencing not less than 51% of the aggregate voting rights of the Securities
for such Series may direct the time, method and place of conducting any
proceeding for any remedy available to the Trustee or exercising any trust or
power conferred upon that Trustee. However, the Trustee will not be under any
obligation to pursue any such remedy or to exercise any of such trusts or powers
unless such Holders have offered the Trustee reasonable security or indemnity
against the cost, expenses and liabilities which may be incurred by the Trustee
therein or thereby. Also, the Trustee may decline to follow any such direction
if the Trustee determines that the action or proceeding so directed may not
lawfully be taken or would involve it in personal liability or be unjustly
prejudicial to the nonassenting Holders.
Indenture. Unless otherwise specified in the related Prospectus
Supplement, Events of Default under the Indenture for each Series of Notes
include: (i) a default for thirty (30) days or more in the payment of any
principal of or interest on any Note of such Series; (ii) failure to perform any
other covenant of the Depositor or the Trust Fund in the Indenture which
continues for a period of sixty (60) days after notice thereof is given in
accordance with the procedures described in the related Prospectus Supplement;
(iii) any representation or warranty made by the Depositor or the Trust Fund in
the Indenture or in any certificate or other writing delivered pursuant thereto
or in connection therewith with respect to or affecting such Series having been
incorrect in a material respect as of the time made, and such breach is not
cured within sixty (60) days after notice thereof is
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given in accordance with the procedures described in the related Prospectus
Supplement; (iv) certain events of bankruptcy, insolvency, receivership or
liquidation of the Depositor or the Trust Fund; or (v) any other Event of
Default provided with respect to Notes of that Series.
If an Event of Default with respect to the Notes of any Series at the time
outstanding occurs and is continuing, either the Trustee or the holders of a
majority of the then aggregate outstanding amount of the Notes of such Series
may declare the principal amount (or, if the Notes of that Series are Zero
Coupon Securities, such portion of the principal amount as may be specified in
the terms of that Series, as provided in the related Prospectus Supplement) of
all the Notes of such Series to be due and payable immediately. Such declaration
may, under certain circumstances, be rescinded and annulled by the holders of a
majority in aggregate outstanding amount of the Notes of such Series.
If, following an Event of Default with respect to any Series of Notes, the
Notes of such Series have been declared to be due and payable, the Trustee may,
in its discretion, notwithstanding such acceleration, elect to maintain
possession of the collateral securing the Notes of such Series and to continue
to apply distributions on such collateral as if there had been no declaration of
acceleration if such collateral continues to provide sufficient funds for the
payment of principal of and interest on the Notes of such Series as they would
have become due if there had not been such a declaration. In addition, the
Trustee may not sell or otherwise liquidate the collateral securing the Notes of
a Series following an Event of Default, other than a default in the payment of
any principal or interest on any Note of such Series for thirty (30) days or
more, unless (a) the holders of 100% of the then aggregate outstanding amount of
the Notes of such Series consent to such sale, (b) the proceeds of such sale or
liquidation are sufficient to pay in full the principal of and accrued interest,
due and unpaid, on the outstanding Notes of such Series at the date of such sale
or (c) the Trustee determines that such collateral would not be sufficient on an
ongoing basis to make all payments on such Notes as such payments would have
become due if such Notes had not been declared due and payable, and the Trustee
obtains the consent of the holders of 66 2/3% of the then aggregate outstanding
amount of the Notes of such Series.
In the event that the Trustee liquidates the collateral in connection with
an Event of Default involving a default for thirty (30) days or more in the
payment of principal of or interest on the Notes of a Series, the
Indenture provides that the Trustee will have a prior lien on the proceeds of
any such liquidation for unpaid fees and expenses. As a result, upon the
occurrence of such an Event of Default, the amount available for distribution to
the Noteholders would be less than would otherwise be the case. However, the
Trustee may not institute a proceeding for the enforcement of its lien except in
connection with a proceeding for the enforcement of the lien of the Indenture
for the benefit of the Noteholders after the occurrence of such an Event of
Default.
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 holders of any such Notes issued at a discount from par may
be entitled to receive no more than an amount equal to the unpaid principal
amount thereof less the amount of such discount which is unamortized.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, in case an Event of Default shall occur and be continuing with respect
to a Series of Notes, the Trustee shall be under no obligation to exercise any
of the rights or powers under the Indenture at the request or direction of any
of the holders of Notes of such Series, unless such holders offered to the
Trustee security or indemnity satisfactory to it against the costs, expenses and
liabilities which might be incurred by it in complying with such request or
direction. Subject to such provisions for indemnification and certain
limitations contained in the Indenture, the holders of a majority of the then
aggregate outstanding amount of the Notes of such Series shall have the right to
direct the time, method and place of conducting any proceeding for any remedy
available to the Trustee or exercising any trust or power conferred on the
Trustee with respect to the Notes of such Series, and the holders of a majority
of the then aggregate outstanding amount of the Notes of such Series may, in
certain cases, waive any default with respect thereto, except a default in the
payment of principal or interest or a default in respect of a covenant or
provision of the Indenture that cannot be modified without the waiver or consent
of all the holders of the outstanding Notes of such Series affected thereby.
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THE TRUSTEE
The identity of the commercial bank, savings and loan association or trust
company named as the Trustee for each Series of Securities will be set forth in
the related Prospectus Supplement. The entity serving as Trustee may have normal
banking relationships with the Depositor or the Servicer. In addition, for the
purpose of meeting the legal requirements of certain local jurisdictions, the
Trustee will have the power to appoint co-trustees or separate trustees of all
or any part of the Trust Fund relating to a Series of Securities. In the event
of such appointment, all rights, powers, duties and obligations conferred or
imposed upon the Trustee by the Agreement relating to such Series will be
conferred or imposed upon the Trustee and each such separate trustee or
co-trustee jointly, or, in any jurisdiction in which the Trustee shall be
incompetent or unqualified to perform certain acts, singly upon such separate
trustee or co-trustee who shall exercise and perform such rights, powers, duties
and obligations solely at the direction of the Trustee. The Trustee may also
appoint agents to perform any of the responsibilities of the Trustee, which
agents shall have any or all of the rights, powers, duties and obligations of
the Trustee conferred on them by such appointment; provided that the Trustee
shall continue to be responsible for its duties and obligations under the
Agreement.
DUTIES OF THE TRUSTEE
The Trustee makes no representations as to the validity or sufficiency of
the Agreement, the Securities or of any Primary Asset or related documents. If
no Event of Default (as defined in the related Agreement) has occurred, the
Trustee is required to perform only those duties specifically required of it
under the Agreement. Upon receipt of the various certificates, statements,
reports or other instruments required to be furnished to it, the Trustee is
required to examine them to determine whether they are in the form required by
the related Agreement; however, the Trustee will not be responsible for the
accuracy or content of any such documents furnished by it or the Holders to the
Servicer under the Agreement.
The Trustee may be held liable for its own negligent action or failure to
act, or for its own misconduct; provided, however, that the Trustee will not be
personally liable with respect to any action taken, suffered or omitted to be
taken by it in good faith in accordance with the direction of the Holders in an
Event of Default. The Trustee is not required to expend or risk its own funds or
otherwise incur any financial liability in the performance of any of its duties
under the Agreement, or in the exercise of any of its rights or powers, if it
has reasonable grounds for believing that repayment of such funds or adequate
indemnity against such risk or liability is not reasonably assured to it.
RESIGNATION OF TRUSTEE
The Trustee may, upon written notice to the Depositor, resign at any time,
in which event the Depositor will be obligated to use its best efforts to
appoint a successor Trustee. If no successor Trustee has been appointed and has
accepted the appointment within 30 days after giving such notice of resignation,
the resigning Trustee may petition any court of competent jurisdiction for
appointment of a successor Trustee. The Trustee may also be removed at any time
(i) if the Trustee ceases to be eligible to continue as such under the
Agreement, (ii) if the Trustee becomes insolvent or (iii) by the Holders of
Securities evidencing over 50% of the aggregate voting rights of the Securities
in the Trust Fund upon written notice to the Trustee and to the Depositor. 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.
AMENDMENT OF AGREEMENT
Unless otherwise specified in the Prospectus Supplement, the Agreement for
each Series of Securities may be amended by the Depositor, the Servicer (with
respect to a Series relating to Contracts), and the Trustee with respect to such
Series, without notice to or consent of the Holders (i) to cure any ambiguity,
(ii) to correct any defective provisions or to correct or supplement any
provision therein, (iii) to add to the duties of the Depositor, the Trust Fund
or Servicer, (iv) to add any other provisions with respect to matters or
questions arising under such Agreement or related Enhancement, (v) to add or
amend any provisions of such Agreement as required by a Rating Agency in order
to maintain or improve the rating of the Securities, or (vi) to comply with any
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requirements imposed by the Code; provided that any such amendment except
pursuant to clause (vi) above will not adversely affect in any material respect
the interests of any Holders of such Series, as evidenced by an opinion of
counsel. Any such amendment except pursuant to clause (vi) of the preceding
sentence shall be deemed not to adversely affect in any material respect the
interests of any Holder if the Trustee receives written confirmation from each
Rating Agency rating such Securities that such amendment will not cause such
Rating Agency to reduce the then current rating thereof. Unless otherwise
specified in the Prospectus Supplement, the Agreement for each Series may also
be amended by the Trustee, the Servicer, if applicable, and the Depositor with
respect to such Series with the consent of the Holders possessing not less than
66 2/3% of the aggregate outstanding principal amount of the Securities of such
Series or, if only certain Classes of such Series are afffected by such
amendment, 66 2/3% of the aggregate outstanding principal amount of the
Securities of each Class of such Series affected thereby, for the purpose of
adding any provisions to or changing in any manner or eliminating any of the
provisions of such Agreement or modifying in any manner the rights of Holders of
such Series; provided, however, that no such amendment may (a) reduce the amount
or delay the timing of payments on any Security without the consent of the
Holder of such Security; or (b) reduce the aforesaid percentage of the aggregate
outstanding principal amount of Securities of each Class, the Holders of which
are required to consent to any such amendment without the consent of the Holders
of 100% of the aggregate outstanding principal amount of each Class of
Securities affected thereby.
VOTING RIGHTS
The related Prospectus Supplement will set forth the method of determining
allocation of voting rights with respect to a Series.
LIST OF HOLDERS
Upon written request of three or more Holders of record of a Series for
purposes of communicating with other Holders with respect to their rights under
the Agreement, which request is accompanied by a copy of the communication which
such Holders propose to transmit, the Trustee will afford such Holders access
during business hours to the most recent list of Holders of that Series held by
the Trustee.
No Agreement will provide for the holding of any annual or other meeting of
Holders.
REMIC ADMINISTRATOR
For any Series with respect to which a REMIC election is made, preparation
of certain reports and certain other administrative duties with respect to the
Trust Fund may be performed by a REMIC administrator, who may be an affiliate of
the Depositor.
TERMINATION
Pooling and Servicing Agreement; Trust Agreement. The obligations created
by the Pooling and Servicing Agreement or Trust Agreement for a Series will
terminate upon the distribution to Holders of all amounts distributable to them
pursuant to such Agreement after the earlier of (i) the later of (a) the final
payment or other liquidation of the last Primary Asset remaining in the Trust
Fund for such Series and (b) the disposition of all property acquired upon
foreclosure or deed in lieu of foreclosure or repossession in respect of any
Primary Asset or (ii) the repurchase, as described below, by the Servicer or
other entity specified in the related Prospectus Supplement from the Trustee for
such Series of all Primary Assets and other property at that time subject to
such Agreement. The Agreement for each Series permits, but does not require, the
Servicer or other entity specified in the related Prospectus Supplement to
purchase from the Trust Fund for such Series all remaining Primary Assets at a
price equal to, unless otherwise specified in the related Prospectus Supplement,
100% of the aggregate Principal Balance of such Primary Assets plus, with
respect to any property acquired in respect of a Primary Asset, if any, the
outstanding Principal Balance of the related Primary Asset at the time of
foreclosure, less, in either case, related unreimbursed Advances (in the case of
the Primary Assets, only to the extent not already reflected in the computation
of the aggregate Principal Balance of such Primary Assets) and unreimbursed
expenses (that are reimbursable pursuant to the terms of the Pooling and
Servicing Agreement) plus, in either
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case, accrued interest thereon at the weighted average rate on the related
Primary Assets through the last day of the Due Period in which such repurchase
occurs; provided, however, that if an election is made for treatment as a REMIC
under the Code, the repurchase price may equal the greater of (a) 100% of the
aggregate Principal Balance of such Primary Assets, plus accrued interest
thereon at the applicable net rates on the Primary Assets through the last day
of the month of such repurchase and (b) the aggregate fair market value of such
Primary Assets plus the fair market value of any property acquired in respect of
a Primary Asset and remaining in the Trust Fund. The exercise of such right will
effect early retirement of the Securities of such Series, but such entity's
right to so purchase is subject to the aggregate Principal Balance of the
Primary Assets at the time of repurchase being less than a fixed percentage, to
be set forth in the related Prospectus Supplement, of the aggregate Principal
Balance of the Primary Assets as of the Cut-off Date. In no event, however, will
the trust created by the Agreement continue beyond the expiration of 21 years
from the death of the last survivor of certain persons identified therein. For
each Series, the Servicer or the Trustee, as applicable, will give written
notice of termination of the Agreement to each Holder, 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 for a Series, the Depositor or another entity
may effect an optional termination of the Trust Fund under the circumstances
described in such Prospectus Supplement. See 'DESCRIPTION OF THE
SECURITIES--Optional Redemption, Purchase or Termination' herein.
Indenture. The Indenture will be discharged with respect to a Series of
Notes (except with respect to certain continuing rights specified in the
Indenture) upon the delivery to the Trustee for cancellation of all the Notes of
such Series or, with certain limitations, upon deposit with the Trustee of funds
sufficient for the payment in full of all of the Notes of such Series.
In addition to such discharge with certain limitations, the Indenture will
provide that, if so specified with respect to the Notes of any Series, the
related Trust Fund will be discharged from any and all obligations in respect of
the Notes of such Series (except for certain obligations relating to temporary
Notes and exchange of Notes, to register the transfer of or exchange Notes of
such Series, to replace stolen, lost or mutilated Notes of such Series, to
maintain paying agencies and to hold monies for payment in trust) upon the
deposit with the Trustee, in trust, of money and/or direct obligations of or
obligations guaranteed by the United States of America which through the payment
of interest and principal in respect thereof in accordance with their terms will
provide money in an amount sufficient to pay the principal of and each
installment of interest on the Notes of such Series on the Last Scheduled
Distribution Date for such Notes and any installment of interest on such Notes
in accordance with the terms of the Indenture and the Notes of such Series. In
the event of any such defeasance and discharge of Notes of such Series, holders
of Notes of such Series would be able to look only to such money and/or direct
obligations for payment of principal and interest, if any, on their Notes until
maturity.
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CERTAIN LEGAL ASPECTS OF THE CONTRACTS
The following discussion contains summaries of certain legal aspects of
manufactured housing and home improvement installment sales contracts and
installment loan agreements which are general in nature. Because certain of such
legal aspects are governed by applicable state law (which laws may differ
substantially), the summaries do not purport to be complete nor reflect the laws
of any particular state, nor encompass the laws of all states in which the
properties securing the Contracts are situated. The summaries are qualified in
their entirety by reference to the applicable federal and state laws governing
the Contracts.
CONTRACTS SECURED BY MORTGAGES
Mortgages
Certain Contracts for a Series may be secured by either mortgages or deeds
of trust or deeds to secure debt (such Contracts are hereinafter referred to in
this section as 'mortgage loans'), depending upon the prevailing practice in the
state in which the property subject to a mortgage loan 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 such 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 and may
also be subject to other liens pursuant to the laws of the jurisdiction in which
the Mortgaged Property is located. Priority with respect to such 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/property owner or the land trustee (as described below), and the
mortgagee, who is the lender. Under the mortgage instrument, the mortgagor
delivers to the mortgagee a note or bond and the mortgage. In the case of a land
trust, there are three parties because title to the property is held by a land
trustee under a land trust agreement of which the borrower/property owner is the
beneficiary; at origination of a mortgage loan, the borrower executes a separate
undertaking to make payments on the mortgage note. A deed of trust transaction
normally has three parties, the trustor, who is the borrower/property owner; the
beneficiary, who is the lender, and the trustee, a third-party grantee. Under a
deed of trust, the trustor grants the property, irrevocably until the debt is
paid, in trust, generally with a power of sale, to the trustee to secure payment
of the obligation. The mortgagee's authority under a mortgage and the trustee's
authority under a deed of trust are governed by the law of the state in which
the real property is located, the express provisions of the mortgage or deed of
trust, and, in some cases, in deed of trust transactions, the directions of the
beneficiary.
Foreclosure on Mortgages
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 and expensive. 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.
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 which authorizes
the trustee to sell the property upon any default by the borrower under the
terms of the note or deed of trust. In certain states, such foreclosure also may
be accomplished by judicial action in the manner provided for foreclosure of
mortgages. In 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 in
some states must provide notice to any other individual having an interest in
the real property, including any junior lienholders. If the deed of trust is not
reinstated within any applicable cure period, a notice of sale must be posted in
a public place and, in most states, 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. The trustor, borrower, or any 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
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in enforcing the obligation. Generally, state law controls the amount of
foreclosure expenses and costs, including attorney's fees, which may be
recovered by a lender. If the deed of trust is not reinstated, 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, recorded and sent
to all parties having an interest in the real property.
An action to foreclose a mortgage is an action to recover the mortgage debt
by enforcing the mortgagee's rights under the mortgage. It is regulated by
statutes and rules and subject throughout to the court's equitable powers.
Generally, a mortgagor is bound by the terms of the related mortgage note and
the mortgage as made and cannot be relieved from his default if the mortgagee
has exercised his rights in a commercially reasonable manner. However, since a
foreclosure action historically was equitable in nature, the court may exercise
equitable powers to relieve a mortgagor of a default and deny the mortgagee
foreclosure on proof that either the mortgagor's default was neither willful nor
in bad faith or the mortgagee's action established a waiver, fraud, bad faith,
or oppressive or unconscionable conduct such as to warrant a court of equity to
refuse affirmative relief to the mortgagee. Under certain circumstances a court
of equity may relieve the mortgagor from an entirely technical default where
such default was not willful.
A foreclosure action is subject to most of the delays and expenses of other
lawsuits if defenses or counter-claims are interposed, sometimes requiring up to
several years to complete. Moreover, a non-collusive, regularly conducted
foreclosure sale may be challenged as a fraudulent conveyance, regardless of the
parties' intent, if a court determines that the sale was for less than fair
consideration and such sale occurred while the mortgagor was insolvent and
within one year (or within the state statute of limitations if the trustee in
bankruptcy elects to proceed under state fraudulent conveyance law) of the
filing of bankruptcy. Similarly, a suit against the debtor on the related
mortgage note may take several years and, generally, is a remedy alternative to
foreclosure, the mortgagee being precluded from pursuing both at the same time.
In the case of foreclosure under either a mortgage or a deed of trust, the
sale by the referee or other designated officer or by the trustee is a public
sale. However, because of the difficulty potential third party purchasers at the
sale have in determining the exact status of title and because 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 a
foreclosure sale. Rather, it is common for the lender to purchase the property
from the trustee or referee for an amount which may be equal to the unpaid
principal amount of the mortgage note secured by the mortgage or deed of trust
plus accrued and unpaid interest and the expenses of foreclosure, in which event
the mortgagor's debt will be extinguished or the lender may purchase for a
lesser amount in order to preserve its right against a borrower to seek a
deficiency judgment in states where such a judgment is available. Thereafter,
subject to the right of the borrower in some states to remain in possession
during the redemption period, the lender will assume the burdens of ownership,
including obtaining hazard insurance, paying taxes and making such repairs at
its own expense as are necessary to render the property suitable for sale. The
lender will commonly obtain the services of a real estate broker and pay the
broker's commission in connection with the sale of the property. Depending upon
market conditions, the ultimate proceeds of the sale of the property may not
equal the lender's investment in the property. Any loss may be reduced by the
receipt of any mortgage guaranty insurance proceeds.
Rights of Redemption
In some states, after sale pursuant to a deed of trust or foreclosure of a
mortgage, the trustor or mortgagor and foreclosed junior lienors are given a
statutory period in which to redeem the property from the foreclosure sale. The
right of redemption should be distinguished from the equity of redemption, which
is a non-statutory right that must be exercised prior to the foreclosure sale.
In some states, redemption may occur only upon payment of the entire principal
balance of the loan, accrued interest and expenses of foreclosure. In other
states, redemption may be authorized if the former borrower pays only a portion
of the sums due. The effect of a statutory right of redemption is to diminish
the ability of the lender to sell the foreclosed property. The exercise of a
right of redemption would defeat the title of any purchaser at a foreclosure
sale, or of any purchaser from the lender subsequent to foreclosure or sale
under a deed of trust. Consequently the practical effect of a right of
redemption is to force the lender to retain the property and pay the expenses of
ownership until the redemption period has run. In some states, there is no right
to redeem property after a trustee's sale under a deed of trust.
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Junior Mortgages; Rights of Senior Mortgages
The mortgage loans included in the Trust Fund for a Series will be secured
by mortgages or deeds of trust which may be second or more junior mortgages to
other mortgages held by other lenders or institutional investors. The rights of
the Trust Fund (and therefore the Holders), as mortgagee under a junior
mortgage, are subordinate to those of the mortgagee under the senior mortgage,
including the prior rights of the senior mortgagee to receive hazard insurance
and condemnation proceeds and to cause the property securing the mortgage loan
to be sold upon default of the mortgagor, thereby extinguishing the junior
mortgagee's lien unless the junior mortgagee asserts its subordinate interest in
the property in foreclosure litigation and, possibly, satisfies the defaulted
senior mortgage. A junior mortgagee may satisfy a defaulted senior loan in full
and, in some states, may cure such default and bring the senior loan current, in
either event adding the amounts expended to the balance due on the junior loan.
In most states, absent a provision in the mortgage or deed of trust, no notice
of default is required to be given to a junior mortgagee.
The standard form of the mortgage used by most institutional lenders
confers on the mortgagee the right both to receive all proceeds collected under
any hazard insurance policy and all awards made in connection with condemnation
proceedings, and to apply such proceeds and awards to any indebtedness secured
by the mortgage, in such order as the mortgagee may determine. Thus, in the
event improvements on the property are damaged or destroyed by fire or other
casualty, or in the event the property is taken by condemnation, the mortgagee
or beneficiary under underlying senior mortgages will have the prior right to
collect any insurance proceeds payable under a hazard insurance policy and any
award of damages in connection with the condemnation and to apply the same to
the indebtedness secured by the senior mortgages. Proceeds in excess of the
amount of senior mortgage indebtedness, in most cases, may be applied to the
indebtedness of a junior mortgage.
Another provision sometimes found in the form of the mortgage or deed of
trust used by institutional lenders obligates the mortgagor to pay before
delinquency all taxes and assessments on the property and, when due, all
encumbrances, charges and liens on the property which appear prior to the
mortgage or deed of trust, to provide and maintain fire insurance on the
property, to maintain and repair the property and not to commit or permit any
waste thereof, and to appear in and defend any action or proceeding purporting
to affect the property or the rights of the mortgagee under the mortgage. Upon a
failure of the mortgagor to perform any of these obligations, the mortgagee is
given the right under certain mortgages to perform the obligation itself, at its
election, with the mortgagor agreeing to reimburse the mortgagee for any sums
expended by the mortgagee on behalf of the mortgagor. All sums so expended by
the mortgagee become part of the indebtedness secured by the mortgage.
The form of credit line trust deed or mortgage used by most institutional
lenders which make revolving home equity loans typically contains a 'future
advance' clause, which provides, in essence, that additional amounts advanced to
or on behalf of the borrower by the beneficiary or lender are to be secured by
the deed of trust or mortgage. The priority of the lien securing any advance
made under the clause may depend in most states on whether the deed of trust or
mortgage is called and recorded as a credit line deed of trust or mortgage. If
the beneficiary or lender advances additional amounts, the advance is entitled
to receive the same priority as amounts initially advanced under the trust deed
or mortgage, notwithstanding the fact that there may be junior trust deeds or
mortgages and other liens which intervene between the date of recording of the
trust deed or mortgage and the date of the future advance, and notwithstanding
that the beneficiary or lender had actual knowledge of such intervening junior
trust deeds or mortgages and other liens at the time of the advance. In most
states, the trust deed or mortgage lien securing mortgage loans of the type
which includes revolving home equity credit lines applies retroactively to the
date of the original recording of the trust deed or mortgage, provided that the
total amount of advances under the home equity credit line does not exceed the
maximum specified principal amount of the recorded trust deed or mortgage,
except as to advances made after receipt by the lender of a written notice of
lien from a judgment lien creditor of the trustor.
Anti-Deficiency Legislation and Other Limitations on Lenders
Certain states have imposed statutory prohibitions which 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 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 net amount realized
upon the public sale of the real property and the amount due to the lender.
Other statutes require the beneficiary or mortgagee to exhaust the security
afforded under a deed of trust or mortgage by
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foreclosure in an attempt to satisfy the full debt before bringing a personal
action against the borrower. In certain other states, the lender has the option
of bringing a personal action against the borrower on the debt without first
exhausting such security; however, in some of these states, the lender,
following judgment on such personal action, may be deemed to have elected a
remedy and may be precluded from exercising remedies with respect to the
security. Consequently, the practical effect of the election requirement, when
applicable, is that lenders will usually proceed first against the security
rather than bringing a personal action against the borrower. Finally, other
statutory provisions limit any deficiency judgment against the former borrower
following a foreclosure sale to the excess of the outstanding debt over the fair
market value of the property at the time of the public sale. The purpose of
these statutes is generally to prevent a beneficiary or a mortgagee from
obtaining a large deficiency judgment against the former borrower as a result of
low or no bids at the foreclosure sale.
In addition to laws limiting or prohibiting deficiency judgments, numerous
other statutory provisions, including the federal bankruptcy laws, the Federal
Soldiers' and Sailors' Relief Act, and state laws affording relief to debtors,
may interfere with or affect the ability of the secured lender to realize upon
collateral and/or enforce a deficiency judgment. For example, with respect to
federal bankruptcy law, the filing of a petition acts as a stay against the
enforcement of remedies for collection of a debt. Moreover, a court with federal
bankruptcy jurisdiction may permit a debtor through a Chapter 13 Bankruptcy Code
rehabilitative plan to cure a monetary default with respect to a loan on a
debtor's residence by paying arrearages within a reasonable time period and
reinstating the original loan payment schedule even though the lender
accelerated the loan and the lender has taken all steps to realize upon his
security (provided no sale of the property has yet occurred) prior to the filing
of the debtor's Chapter 13 petition. Some courts with federal bankruptcy
jurisdiction have approved plans, based on the particular facts of the
reorganization case, that effected the curing of a loan default by permitting
the obligor to pay arrearages over a number of years.
Courts with federal bankruptcy jurisdiction have also indicated that the
terms of a mortgage loan may be modified if the borrower has filed a petition
under Chapter 13. These courts have suggested that such modifications may
include reducing the amount of each monthly payment, changing the rate of
interest, altering the repayment schedule and reducing the lender's security
interest to the value of the residence, thus leaving the lender a general
unsecured creditor for the difference between the value of the residence and the
outstanding balance of the loan. Federal bankruptcy law and limited case law
indicate that the foregoing modifications could not be applied to the terms of a
loan secured by property that is the principal residence of the debtor. In all
cases, the secured creditor is entitled to the value of its security plus
post-petition interest, attorney's fees and costs to the extent the value of the
security exceeds the debt.
In a Chapter 11 case under the Bankruptcy Code, the lender is precluded
from foreclosing without authorization from the bankruptcy court. The lender's
lien may be transferred to other collateral and/or be limited in amount to the
value of the lender's interest in the collateral as of the date of the
bankruptcy. The loan term may be extended, the interest rate may be adjusted to
market rates and the priority of the loan may be subordinated to bankruptcy
court-approved financing. The bankruptcy court can, in effect, invalidate
due-on-sale clauses through confirmed Chapter 11 plans of reorganization.
The Bankruptcy Code provides priority to certain tax liens over the
lender's security. This may delay or interfere with the enforcement of rights in
respect of a defaulted mortgage loan. In addition, substantive requirements are
imposed upon lenders in connection with the organization and the servicing of
mortgage loans by numerous federal and some state consumer protection laws. The
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 impose
specific statutory liabilities upon lenders who originate loans and who fail to
comply with the provisions of the law. In some cases, this liability may affect
assignees of the loans.
Due-on-Sale Clauses
Due-on-sale clauses permit the lender to accelerate the maturity of the
loan if the borrower sells or transfers, whether voluntarily or involuntarily,
all or part of the real property securing the loan without the lender's prior
written consent. The enforceability of these clauses has been the subject of
legislation or litigation in many states, and in some cases, typically involving
single family residential mortgage transactions, their enforceability has been
limited or denied. In any event, 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
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clauses and permits lenders to enforce these clauses in accordance with their
terms, subject to certain exceptions. As a result, due-on-sale clauses have
become generally enforceable except in those states whose legislatures exercised
their authority to regulate the enforceability of such clauses with respect to
mortgage loans that were (i) originated or assumed during the 'window period'
under the Garn-St. Germain Act which ended in all cases not later than October
15, 1982, and (ii) originated by lenders other than national banks, federal
savings institutions and federal credit unions. FHLMC has taken the position in
its published mortgage servicing standards that, out of a total of eleven
'window period states,' five states (Arizona, Michigan, Minnesota, New Mexico
and Utah) have enacted statutes extending, on various terms and for varying
periods, the prohibition on enforcement of due-on-sale clauses with respect to
certain categories of window period loans. Also, the Garn-St. Germain Act does
'encourage' lenders to permit assumption of loans at the original rate of
interest or at some other rate less than the average of the original rate and
the market rate.
In addition, under federal bankruptcy law, due-on-sale clauses may not be
enforceable in bankruptcy proceedings and may, under certain circumstances, be
eliminated in any modified mortgage resulting from such bankruptcy proceeding.
Enforceability of Prepayment and Late Payment Fees
Forms of notes, mortgages and deeds of trust used by lenders may contain
provisions obligating the borrower to pay a late charge if payments are not
timely made, and in some circumstances may provide for prepayment fees or
penalties if the obligation is paid prior to maturity. In certain states, there
are or may be specific limitations upon the late charges which a lender may
collect from a borrower for delinquent payments. Certain states also limit the
amounts that a lender may collect from a borrower as an additional charge if the
loan is prepaid. Late charges and prepayment fees are typically retained by
servicers as additional servicing compensation.
Equitable Limitations on Remedies
In connection with lenders' attempts to realize upon their security, courts
have invoked general equitable principles. The equitable principles are
generally designed to relieve the borrower from the legal effect of his defaults
under the loan documents. Examples of judicial remedies that have been fathomed
include judicial requirements that the lender undertake affirmative and
expensive actions to determine the causes of 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 that lenders reinstate loans or recast payment schedules in order to
accommodate borrowers who are suffering from temporary financial disability. In
other cases, courts have limited the right of a lender to realize upon his
security if the default under the security agreement is not monetary, such as
the borrower's failure to adequately maintain the property or the borrower's
execution of secondary financing affecting the property. Finally, some courts
have been faced with the issue of whether or not federal or state constitutional
provisions reflecting due process concerns for adequate notice require that
borrowers under security agreements receive notices in addition to the
statutorily-prescribed minimums. For the most part, these cases have upheld the
notice provisions as being reasonable or have found that, in cases involving the
sale by a trustee under a deed of trust or by a mortgagee under a mortgage
having a power of sale, there is insufficient state action to afford
constitutional protections to the borrower.
Most conventional single-family mortgage loans may be prepaid in full or in
part without penalty. The regulations of the Federal Home Loan Bank Board
prohibit the imposition of a prepayment penalty or equivalent fee for or in
connection with the acceleration of a loan by exercise of a due-on-sale clause.
A mortgagee to whom a prepayment in full has been tendered may be compelled to
give either a release of the mortgage or an instrument assigning the existing
mortgage. The absence of a restraint on prepayment, particularly with respect to
mortgage loans having higher mortgage rates, may increase the likelihood of
refinancing or other early retirements of such mortgage loans.
Applicability of Usury Laws
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980, enacted in March 1980 ('Title V'), provides that state usury
limitations shall not apply to certain types of residential first mortgage loans
originated by certain lenders after March 31, 1980. Similar federal statutes
were in effect with respect to mortgage loans made during the first three months
of 1980. The Federal Home Loan Bank Board is authorized to issue rules and
regulations and to publish interpretations governing implementation of Title V.
Title V authorizes any state to reimpose interest rate limits by adopting,
before April 1, 1983, a state law, or by
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certifying that the voters of such state have voted in favor of any provision,
constitutional or otherwise, which expressly rejects an application of the
federal law. Fifteen states adopted such a law prior to the April 1, 1983
deadline. In addition, even where Title V is not so rejected, any state is
authorized by the law to adopt a provision limiting discount points or other
charges on mortgage loans covered by Title V.
CONTRACTS NOT SECURED BY MORTGAGES
General
The Contracts, other than those Contracts that are unsecured or secured by
mortgages on real estate (such Contracts are hereinafter referred to in this
section as 'contracts') generally are 'chattel paper' or constitute 'purchase
money security interests' each as defined in the Uniform Commercial Code (the
'UCC'). 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 related
Agreement, the Depositor will transfer physical possession of the contracts to
the Trustee or a designated custodian or may retain possession of the contracts
as custodian for the Trustee. In addition, the Depositor 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. 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 Trustee. Therefore, if through negligence, fraud or otherwise, a subsequent
purchaser were able to take physical possession of the contracts without notice
of such assignment, the Trustee's interest in the contracts could be defeated.
Security Interests in Home Improvements
The contracts that are secured by the home improvements financed thereby
grant to the originator of such contracts a purchase money security interest in
such home improvements to secure all or part of the purchase price of such home
improvements and related services. A financing statement generally is not
required to be filed to perfect a purchase money security interest in consumer
goods. Such purchase money security interests are assignable. In general, a
purchase money security interest grants to the holder a security interest that
has priority over a conflicting security interest in the same collateral and the
proceeds of such collateral. However, to the extent that the collateral subject
to a purchase money security interest becomes a fixture, in order for the
related purchase money security interest to take priority over a conflicting
interest in the fixture, the holder's interest in such Home Improvement must
generally be perfected by a timely fixture filing. In general, under the UCC, a
security interest does not exist under the UCC in ordinary building material
incorporated into an improvement on land. Home Improvement Contracts that
finance lumber, bricks, other types of ordinary building material or other goods
that are deemed to lose such characterization, upon incorporation of such
materials into the related property, will not be secured by a purchase money
security interest in the Home Improvement being financed.
Security Interests in the Manufactured Homes
The Manufactured Homes securing the manufactured housing contracts may be
located in all 50 states. 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. As manufactured
homes have become larger and often have been attached to their sites without any
apparent intention to move them, courts in many states have held that
manufactured homes, under certain 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 manufactured home under applicable state
real estate law. In order to perfect a security interest in a manufactured home
under real estate laws, the secured party 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 home is located. These filings must be made in the
real estate records office of the county where the manufactured home is located.
If so specified in the related Prospectus Supplement, the manufactured housing
contracts may contain provisions prohibiting the borrower from permanently
attaching the Manufactured Home to its site. So long as the borrower 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 security interest in
the Manufactured Home. If, however, a Manufactured Home is permanently attached
to its site, the related lender may be required to perfect a security interest
in the Manufactured Home under applicable real estate laws.
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In the event that the owner of a Manufactured Home moves it to a state
other than the state in which such 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 such relocation and
thereafter only if and after the owner re-registers the Manufactured Home in
such state. If the owner were to relocate a Manufactured Home to another state
and not re-register the Manufactered Home in such state, and if steps are not
taken to re-perfect a security interest in such 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 secured party must surrender possession if
it holds the certificate of title to such Manufactured Home or, in the case of
Manufactured Homes registered in states which provide for notation of lien on
the certificate of title, notice of surrender would be given to the secured
party noted on the certificate of title. In states which do not require a
certificate of title for registration of a manufactured home, re-registration
could defeat perfection.
Under the laws of most states, liens for repairs performed on a
Manufactured Home and liens for personal property taxes take priority over a
perfected security interest in the Manufactured Home.
Enforcement of Security Interest in Manufactured Homes and Home
Improvements
So long as the Manufactured Home or Home Improvement has not become subject
to the real estate law, a creditor can repossess a Manufactured Home or Home
Improvement 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 such a
sale. The law in most states also requires that the debtor be given notice of
any sale prior to resale of the unit that the debtor may redeem it at or before
such resale.
Under the laws applicable in most states, a creditor is entitled to obtain
a deficiency judgement from a debtor for any deficiency on repossession and
resale of the property securing the debtor's loan. However, some states impose
prohibitions or limitations on deficiency judgements, and in many cases the
defaulting borrower would have no assets with which to pay a judgement.
Certain 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
certain related lenders and assignees) to transfer such contract free of notice
of claims by the debtor thereunder. The effect of this rule is to subject the
assignee of such 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
by the Trustee against such 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.
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 contract which is
secured by a first lien on certain kinds of consumer goods. The contracts would
be covered if they satisfy certain 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 the
related unit.
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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 which expressly rejects application of the federal law. Fifteen states
adopted such a law prior to the April 1, 1983 deadline. In addition, even where
Title V was not so rejected, any state is authorized by the law to adopt a
provision limiting discount points or other charges on loans covered by Title V.
INSTALLMENT SALES CONTRACTS
The Contracts may also consist of installment sales contracts. Under
certain types of installment sales contracts ('Installment Sales Contracts') the
seller (hereinafter referred to in this section as the 'lender') retains legal
title to the property and enters into an agreement with the purchaser
(hereinafter referred to in this section as the 'borrower') for the payment of
the purchase price, plus interest, over the term of such contract. Only after
full performance by the borrower of the contract is the lender obligated to
convey title to the property to the purchaser. As with mortgage or deed of trust
financing, during the effective period of the Installment Sales Contract, the
borrower is generally responsible for maintaining the property in good condition
and for paying real estate taxes, assessments and hazard insurance premiums
associated with the property.
The method of enforcing the rights of the lender under an Installment Sales
Contract varies on a state-by-state basis depending upon the extent to which
state courts are willing, or able pursuant to state statute, to enforce the
contract strictly according to the terms. The terms of Installment Sales
Contracts generally provide that upon a default by the borrower, the borrower
loses his or her right to occupy the property, the entire indebtedness is
accelerated, and the buyer's equitable interest in the property is forfeited.
The lender in such a situation does not have to foreclose in order to obtain
title to the property, although in some cases a quiet title action is in order
if the borrower has filed the Installment Sales Contract in local land records
and an ejectment action may be necessary to recover possession. In a few states,
particularly in cases of borrower default during the early years of an
Installment Sales Contract, the courts will permit ejectment of the buyer and a
forfeiture of his or her interest in the property. However, most state
legislatures have enacted provisions by analogy to mortgage law protecting
borrowers under Installment Sales Contracts from the harsh consequences of
forfeiture. Under such statutes, a judicial or nonjudicial foreclosure may be
required, the lender may be required to give notice of default and the borrower
may be granted some grace period during which the Installment Sales Contract may
be reinstated upon full payment of the default amount and the borrower may have
a post-foreclosure statutory redemption right. In other states, courts in equity
may permit a borrower with significant investment in the property under an
Installment Sales Contract for the sale of real estate to share in the proceeds
of sale of the property after the indebtedness is repaid or may otherwise refuse
to enforce the forfeiture clause. Nevertheless, generally speaking, the lender's
procedures for obtaining possession and clear title under an Installment Sales
Contract in a given state are simpler and less time-consuming and costly than
are the procedures for foreclosing and obtaining clear title to a property
subject to one or more liens.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF 1940
Under the Soldiers' and Sailors' Civil Relief Act of 1940, members of all
branches of the military on active duty, including draftees and reservists in
military service, (i) are entitled to have interest rates reduced and capped at
6% per annum, on obligations (including Contracts) incurred prior to the
commencement of military service for the duration of military service, (ii) may
be entitled to a stay of proceedings on any kind of foreclosure or repossession
action in the case of defaults on such obligations entered into prior to
military service for the duration of military service and (iii) may have the
maturity of such obligations incurred prior to military service extended, the
payments lowered and the payment schedule readjusted for a period of time after
the completion of military service. However, the benefits of (i), (ii), or (iii)
above are subject to challenge by creditors and if, in the opinion of the court,
the ability of a person to comply with such obligations is not materially
impaired by military service, the court may apply equitable principles
accordingly. If a borrower's obligation to repay amounts otherwise due on a
Contract included in a Trust Fund for a Series is relieved pursuant to the
Soldiers' and Sailors' Civil Relief Act of 1940, none of the Trust Fund, the
Servicer, the Depositor nor the Trustee will be required to advance such
amounts, and any loss in respect thereof may reduce the amounts available to be
paid to the holders of the Certificates of such Series. Unless otherwise
specified in the related Prospectus Supplement, any shortfalls in interest
collections on Contracts included in a Trust Fund for a Series resulting from
application of the Soldiers' and Sailors' Civil Relief Act of 1940 will be
allocated to each Class of Securities of such Series that is entitled to receive
interest in
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respect of such Contracts in proportion to the interest that each such Class of
Securities would have otherwise been entitled to receive in respect of such
Contracts had such interest shortfall not occurred.
THE DEPOSITOR
GENERAL
The Depositor was incorporated in the State of Delaware on January 29,
1988, and is a wholly-owned subsidiary of LCPI, which is a wholly-owned
subsidiary of Lehman Brothers, a wholly-owned subsidiary of Holdings. The
Depositor's principal executive offices are located at Three World Financial
Center, New York, New York 10285. Its telephone number is (212) 298-2000.
The Depositor will not engage in any activities other than to authorize,
issue, sell, deliver, purchase and invest in (and enter into agreements in
connection with), and/or to engage in the establishment of one or more trusts
which will issue and sell, bonds, notes, debt or equity securities, obligations
and other securities and instruments ('Depositor Securities') collateralized or
otherwise secured or backed by, or otherwise representing an interest in, among
other things, receivables or pass through certificates, or participations or
certificates of participation or beneficial ownership in one or more pools of
receivables, and the proceeds of the foregoing, that arise in connection with
(i) the sale or lease of automobiles, trucks or other motor vehicles, equipment,
merchandise and other personal property, (ii) credit card purchases or cash
advances, (iii) the sale, licensing or other commercial provision of services,
rights, intellectual properties and other intangibles, (iv) trade financings,
(v) loans secured by certain first or junior mortgages on real estate, (vi)
loans to employee stock ownership plans and (vii) any and all other commercial
transactions and commercial, sovereign, student or consumer loans or
indebtedness and, in connection therewith or otherwise, purchasing, acquiring,
owning, holding, transferring, conveying, servicing, selling, pledging,
assigning, financing and otherwise dealing with such receivables, pass-through
certificates, or participations or certificates of participation or beneficial
ownership. Article Third of the Depositor's Certificate of Incorporation limits
the Depositor's activities to the above activities and certain related
activities, such as credit enhancement with respect to such Depositor
Securities, and to any activities incidental to and necessary or convenient for
the accomplishment of such purposes. The Certificate of Incorporation of the
Depositor provides that any Depositor Securities, except for subordinated
Depositor Securities, must be rated in one of the four highest categories by a
nationally recognized rating agency.
USE OF PROCEEDS
The Depositor will apply all or substantially all of the net proceeds from
the sale of each Series of Securities for one or more of the following purposes:
(i) to purchase the related Primary Assets, (ii) to repay indebtedness which has
been incurred to obtain funds to acquire such Primary Assets, (iii) to establish
any Reserve Funds described in the related Prospectus Supplement and (iv) to pay
costs of structuring and issuing such Securities, including the costs of
obtaining Enhancement, if any. If so specified in the related Prospectus
Supplement, the purchase of the Primary Assets for a Series may be effected by
an exchange of Securities with the Seller of such Primary Assets.
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CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
GENERAL
The following is a summary of certain anticipated federal income tax
consequences of the purchase, ownership, and disposition of the Securities and
is based on advise of Brown & Wood, special counsel to the Depositor. The
summary is based upon the provisions of the Code, the regulations promulgated
thereunder, including, where applicable, proposed regulations, and the judicial
and administrative rulings and decisions now in effect, all of which are subject
to change or possible differing interpretations. The statutory provisions,
regulations, and interpretations on which this interpretation is based are
subject to change, and such a change could apply retroactively.
The summary does not purport to deal with all aspects of federal income
taxation that may affect particular investors in light of their individual
circumstances, nor with certain types of investors subject to special treatment
under the federal income tax laws. This summary focuses primarily upon investors
who will hold Securities as 'capital assets' (generally, property held for
investment) within the meaning of Section 1221 of the Code, but much of the
discussion is applicable to other investors as well. Prospective Investors are
advised to consult their own tax advisers concerning the federal, state, local
and any other tax consequences to them of the purchase, ownership and
disposition of the Securities.
The federal income tax consequences to Holders will vary depending on
whether (i) the Securities of a Series are classified as indebtedness; (ii) an
election is made to treat the Trust Fund relating to a particular Series of
Securities as a real estate mortgage investment conduit ('REMIC') under the
Internal Revenue Code of 1986, as amended (the 'Code'); (iii) the Securities
represent an ownership interest in some or all of the assets included in the
Trust Fund for a Series or (iv) an election is made to treat the Trust Fund
relating to a particular Series of Certificates as a partnership. The Prospectus
Supplement for each Series of Securities will specify how the Securities will be
treated for federal income tax purposes and will discuss whether a REMIC
election, if any, will be made with respect to such Series.
TAXATION OF DEBT SECURITIES
Status as Real Property Contracts. Except to the extent provided otherwise
in a Supplement as to each Series of Securities Brown & Wood will have advised
the Depositor that: (i) Securities held by a mutual savings bank or domestic
building and loan association will represent interests in 'qualifying real
property loans' within the meaning of Code section 593(d); (ii) Securities held
by a domestic building and loan association will constitute 'loans . . . secured
by an interest in real property' within the meaning of Code section
7701(a)(19)(C)(v); (iii) Securities held by a real estate investment trust will
constitute 'real estate assets' within the meaning of Code section 856(c)(5)(A)
and interest on Securities will be considered 'interest on obligations secured
by mortgages on real property or on interests in real property' within the
meaning of Code section 856(c)(3)(B) and (iv) Securities representing interests
in obligations secured by manufactured housing treated as single family
residences under Code Section 25(e)(10) will be considered interests in
'qualified mortgages' as defined in Code Section 860G(a)(3).
Interest and Acquisition Discount. Securities representing regular
interests in a REMIC ('Regular Interest Securities') are generally taxable to
holders in the same manner as evidences of indebtedness issued by the REMIC.
Stated interest on the Regular Interest Securities will be taxable as ordinary
income and taken into account using the accrual method of accounting, regardless
of the Holder's normal accounting method. Interest (other than original issue
discount) on Securities (other than Regular Interest Securities) that are
characterized as indebtedness for federal income tax purposes will be includible
in income by holders thereof in accordance with their usual methods of
accounting. Securities characterized as debt for federal income tax purposes and
Regular Interest Securities will be referred to hereinafter collectively as
'Debt Securities.'
Debt Securities that are Compound Interest Securities will, and certain of
the other Debt Securities may, be issued with 'original issue discount' ('OID').
The following discussion is based in part on the rules governing OID which are
set forth in Sections 1271-1275 of the Code and the Treasury regulations issued
thereunder on February 2, 1994 (the 'OID Regulations'). A Holder should be
aware, however, that the OID Regulations do not adequately address certain
issues relevant to prepayable securities, such as the Debt Securities.
In general, OID, if any, will equal the difference between the stated
redemption price at maturity of a Debt Security and its issue price. A holder of
a Debt Security must include such OID in gross income as ordinary interest
income as it accrues under a method taking into account an economic accrual of
the discount. In general,
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OID must be included in income in advance of the receipt of the cash
representing that income. The amount of OID on a Debt Security will be
considered to be zero if it is less than a de minimis amount determined under
the Code.
The issue price of a Debt Security is the first price at which a
substantial amount of Debt Securities of that class are sold to the public
(excluding bond houses, brokers, underwriters or wholesalers). If less than a
substantial amount of a particular class of Debt Securities is sold for cash on
or prior to the Closing Date, the issue price for such class will be treated as
the fair market value of such class on the Closing Date. The issue price of a
Debt Security also includes the amount paid by an initial Debt Security holder
for accrued interest that relates to a period prior to the issue date of the
Debt Security. The stated redemption price at maturity of a Debt Security
includes the original principal amount of the Debt Security, but generally will
not include distributions of interest if such distributions constitute
'qualified stated interest.'
Under the OID Regulations, qualified stated interest generally means
interest payable at a single fixed rate or qualified variable rate (as described
below) provided that such interest payments are unconditionally payable at
intervals of one year or less during the entire term of the Debt Security. The
OID Regulations state that interest payments are unconditionally payable only if
a late payment or nonpayment is expected to be penalized or reasonable remedies
exist to compel payment. Certain Debt Securities may provide for default
remedies in the event of late payment or nonpayment of interest. The interest on
such Debt Securities will be unconditionally payable and constitute qualified
stated interest, not OID. However, absent clarification of the OID Regulations,
where Debt Securities do not provide for default remedies, the interest payments
will be included in the Debt Security's stated redemption price at maturity and
taxed as OID. Interest is payable at a single fixed rate only if the rate
appropriately takes into account the length of the interval between payments.
Distributions of interest on Debt Securities with respect to which deferred
interest will accrue will not constitute qualified stated interest payments, in
which case the stated redemption price at maturity of such Debt Securities
includes all distributions of interest as well as principal thereon. Where the
interval between the issue date and the first Distribution Date on a Debt
Security is either longer or shorter than the interval between subsequent
Distribution Dates, all or part of the interest foregone, in the case of the
longer interval, and all of the additional interest, in the case of the shorter
interval, will be included in the stated redemption price at maturity and tested
under the de minimis rule described below. In the case of a Debt Security with a
long first period which has non-de minimis OID, all stated interest in excess of
interest payable at the effective interest rate for the long first period will
be included in the stated redemption price at maturity and the Debt Security
will generally have OID. Holders of Debt Securities should consult their own tax
advisors to determine the issue price and stated redemption price at maturity of
a Debt Security.
Under the de minimis rule, OID on a Debt Security will be considered to be
zero if such OID is less than 0.25% of the stated redemption price at maturity
of the Debt Security multiplied by the weighted average maturity of the Debt
Security. For this purpose, the weighted average maturity of the Debt Security
is computed as the sum of the amounts determined by multiplying the number of
full years (i.e., rounding down partial years) from the issue date until each
distribution in reduction of stated redemption price at maturity is scheduled to
be made by a fraction, the numerator of which is the amount of each distribution
included in the stated redemption price at maturity of the Debt Security and the
denominator of which is the stated redemption price at maturity of the Debt
Security. Holders generally must report de minimis OID pro rata as principal
payments are received, and such income will be capital gain if the Debt Security
is held as a capital asset. However, accrual method holders may elect to accrue
all de minimis OID as well as market discount under a constant interest method.
Debt Securities may provide for interest based on a qualified variable
rate. Under the OID Regulations, interest is treated as payable at a qualified
variable rate and not as contingent interest if, generally, (i) such interest is
unconditionally payable at least annually, (ii) the issue price of the debt
instrument does not exceed the total noncontingent principal payments and (iii)
interest is based on a 'qualified floating rate,' an 'objective rate,' or a
combination of 'qualified floating rates' that do not operate in a manner that
significantly accelerates or defers interest payments on such Debt Security. In
the case of Compound Interest Securities, certain Interest Weighted Securities,
and certain of the other Debt Securities, none of the payments under the
instrument will be considered qualified stated interest, and thus the aggregate
amount of all payments will be included in the stated redemption price.
The holder of a Debt Security issued with OID must include in gross income,
for all days during its taxable year on which it holds such Debt Security, the
sum of the 'daily portions' of such original issue discount. The
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amount of OID includible in income by a holder will be computed by allocating to
each day during a taxable year a pro rata portion of the original issue discount
that accrued during the relevant accrual period. In the case of a Debt Security
that is not a Regular Interest Security and the principal payments on which are
not subject to acceleration resulting from prepayments on the Contracts, the
amount of OID includible in income of a Holder for an accrual period (generally
the period over which interest accrues on the debt instrument) will equal the
product of the yield to maturity of the Debt Security and the adjusted issue
price of the Debt Security, reduced by any payments of qualified stated
interest. The adjusted issue price is the sum of its issue price plus prior
accruals or OID, reduced by the total payments made with respect to such Debt
Security in all prior periods, other than qualified stated interest payments.
The amount of OID to be included in income by a holder of a debt
instrument, such as certain Classes of the Debt Securities, that is subject to
acceleration due to prepayments on other debt obligations securing such
instruments (a 'Pay-Through Security'), is computed by taking into account the
anticipated rate of prepayments assumed in pricing the debt instrument (the
'Prepayment Assumption'). The amount of OID that will accrue during an accrual
period on a Pay-Through Security is the excess (if any) of the sum of (a) the
present value of all payments remaining to be made on the Pay-Through Security
as of the close of the accrual period and (b) the payments during the accrual
period of amounts included in the stated redemption price of the Pay-Through
Security, over the adjusted issue price of the Pay-Through Security at the
beginning of the accrual period. The present value of the remaining payments is
to be determined on the basis of three factors: (i) the original yield to
maturity of the Pay-Through Security (determined on the basis of compounding at
the end of each accrual period and properly adjusted for the length of the
accrual period), (ii) events which have occurred before the end of the accrual
period and (iii) the assumption that the remaining payments will be made in
accordance with the original Prepayment Assumption. The effect of this method is
to increase the portions of OID required to be included in income by a Holder to
take into account prepayments with respect to the Contracts at a rate that
exceeds the Prepayment Assumption, and to decrease (but not below zero for any
period) the portions of original issue discount required to be included in
income by a Holder of a Pay-Through Security to take into account prepayments
with respect to the Contracts at a rate that is slower than the Prepayment
Assumption. Although original issue discount will be reported to Holders of
Pay-Through Securities based on the Prepayment Assumption, no representation is
made to Holders that Contracts will be prepaid at that rate or at any other
rate.
The Depositor may adjust the accrual of OID on a Class of Regular Interest
Securities (or other regular interests in a REMIC) in a manner that it believes
to be appropriate, to take account of realized losses on the Contracts, although
the OID Regulations do not provide for such adjustments. If the Internal Revenue
Service were to require that OID be accrued without such adjustments, the rate
of accrual of OID for a Class of Regular Interest Securities could increase.
Certain classes of Regular Interest Securities may represent more than one
class of REMIC regular interests. Unless the applicable Prospectus Supplement
specifies otherwise, the Trustee intends, based on the OID Regulations, to
calculate OID on such Securities as if, solely for the purposes of computing
OID, the separate regular interests were a single debt instrument.
A subsequent holder of a Debt Security will also be required to include OID
in gross income, but such a holder who purchases such Debt Security for an
amount that exceeds its adjusted issue price will be entitled (as will an
initial holder who pays more than a Debt Security's issue price) to offset such
OID by comparable economic accruals of portions of such excess.
Effects of Defaults and Delinquencies. Holders will be required to report
income with respect to the related Securities under an accrual method without
giving effect to delays and reductions in distributions attributable to a
default or delinquency on the Contracts, except possibly to the extent that it
can be established that such amounts are uncollectible. As a result, the amount
of income (including OID) reported by a holder of such a Security in any period
could significantly exceed the amount of cash distributed to such holder in that
period. The holder will eventually be allowed a loss (or will be allowed to
report a lesser amount of income) to the extent that the aggregate amount of
distributions on the Securities is reduced as a result of a Contract default.
However, the timing and character of such losses or reductions in income are
uncertain and, accordingly, holders of Securities should consult their own tax
advisors on this point.
Interest Weighted Securities. It is not clear how income should be accrued
with respect to Regular Interest Securities or Stripped Securities (as defined
under '--Tax Status as a Grantor Trust; General' herein) the payments on which
consist solely or primarily of a specified portion of the interest payments on
qualified
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mortgages held by the REMIC ('Interest Weighted Securities'). The Depositor
intends to take the position that all of the income derived from an Interest
Weighted Security should be treated as OID and that the amount and rate of
accrual of such OID should be calculated by treating the Interest Weighted
Security as a Compound Interest Security. However, in the case of Interest
Weighted Securities that are entitled to some payments of principal and that are
Regular Interest Securities the Internal Revenue Service could assert that
income derived from an Interest Weighted Security should be calculated as if the
Security were a security purchased at a premium equal to the excess of the price
paid by such holder for such Security over its stated principal amount, if any.
Under this approach, a holder would be entitled to amortize such premium only if
it has in effect an election under Section 171 of the Code with respect to all
taxable debt instruments held by such holder, as described below. Alternatively,
the Internal Revenue Service could assert that an Interest Weighted Security
should be taxable under the rules governing bonds issued with contingent
payments. Such treatment may be more likely in the case of Interest Weighted
Securities that are Stripped Securities as described below. See '--Tax Status as
a Grantor Trust--Discount or Premium on Pass-Through Securities.'
Variable Rate Debt Securities. In the case of Debt Securities bearing
interest at a rate that varies directly, according to a fixed formula, with an
objective index, it appears that (i) the yield to maturity of such Debt
Securities and (ii) in the case of Pay-Through Securities, the present value of
all payments remaining to be made on such Debt Securities, should be calculated
as if the interest index remained at its value as of the issue date of such
Securities. Because the proper method of adjusting accruals of OID on a variable
rate Debt Security is uncertain, holders of variable rate Debt Securities should
consult their own tax advisers regarding the appropriate treatment of such
Securities for federal income tax purposes.
Market Discount. A purchaser of a Security may be subject to the market
discount rules of Sections 1276-1278 of the Code. A Holder that acquires a Debt
Security with more than a prescribed de minimis amount of 'market discount'
(generally, the excess of the principal amount of the Debt Security over the
purchaser's purchase price) will be required to include accrued market discount
in income as ordinary income in each month, but limited to an amount not
exceeding the principal payments on the Debt Security received in that month
and, if the Securities are sold, the gain realized. Such market discount would
accrue in a manner to be provided in Treasury regulations but, until such
regulations are issued, such market discount would in general accrue either (i)
on the basis of a constant yield (in the case of a Pay-Through Security, taking
into account a prepayment assumption) or (ii) in the ratio of (a) in the case of
Securities (or in the case of a Pass-Through Security, as set forth below, the
Contracts underlying such Security) not originally issued with original issue
discount, stated interest payable in the relevant period to total stated
interest remaining to be paid at the beginning of the period or (b) in the case
of Securities (or, in the case of a Pass-Through Security, as described below,
the Contracts underlying such Security) originally issued at a discount, OID in
the relevant period to total OID remaining to be paid.
Section 1277 of the Code provides that, regardless of the origination date
of the Debt Security (or, in the case of a Pass-Through Security, the
Contracts underlying such Security), the excess of interest paid or accrued to
purchase or carry a Security (or, in the case of a Pass-Through Security, as
described below, the Underlying Contracts) with market discount over interest
received on such Security is allowed as a current deduction only to the extent
such excess is greater than the market discount that accrued during the taxable
year in which such interest expense was incurred. In general, the deferred
portion of any interest expense will be deductible when such market discount is
included in income, including upon the sale, disposition, or repayment of the
Security (or in the case of a Pass-Through Security, an Underlying Contract). A
holder may elect to include market discount in income currently as it accrues,
on all market discount obligations acquired by such holder during the taxable
year such election is made and thereafter, in which case the interest deferral
rule will not apply.
Premium. A holder who purchases a Debt Security (other than an Interest
Weighted Security to the extent described above) at a cost greater than its
stated redemption price at maturity, generally will be considered to have
purchased the Security at a premium, which it may elect to amortize as an offset
to interest income on such Security (and not as a separate deduction item) on a
constant yield method. Although no regulations addressing the computation of
premium accrual on securities similar to the Securities have been issued, the
legislative history of the 1986 Act indicates that premium is to be accrued in
the same manner as market discount. Accordingly, it appears that the accrual of
premium on a Class of Pay-Through Securities will be calculated using the
prepayment assumption used in pricing such Class. If a holder makes an election
to amortize premium on a
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Debt Security, such election will apply to all taxable debt instruments
(including all REMIC regular interests and all pass-through certificates
representing ownership interests in a trust holding debt obligations) held by
the holder at the beginning of the taxable year in which the election is made,
and to all taxable debt instruments acquired thereafter by such holder, and will
be irrevocable without the consent of the Internal Revenue Service. Purchasers
who pay a premium for the Securities should consult their tax advisers regarding
the election to amortize premium and the method to be employed.
Election to Treat All Interest as Original Issue Discount. The OID
Regulations permit a holder of a Debt Security to elect to accrue all interest,
discount (including de minimis market or original issue discount) and premium in
income as interest, based on a constant yield method for Debt Securities
acquired on or after April 4, 1994. If such an election were to be made with
respect to a Debt Security with market discount, the holder of the Debt Security
would be deemed to have made an election to include in income currently market
discount with respect to all other debt instruments having market discount that
such holder of the Debt Security acquires during the year of the election or
thereafter. Similarly, a holder of a Debt Security that makes this election for
a Debt Security that is acquired at a premium will be deemed to have made an
election to amortize bond premium with respect to all debt instruments having
amortizable bond premium that such holder owns or acquires. The election to
accrue interest, discount and premium on a constant yield method with respect to
a Debt Security is irrevocable.
TAXATION OF THE REMIC AND ITS HOLDERS
General. In the opinion of Brown & Wood, special counsel to the Depositor,
if a REMIC election is made with respect to a Series of Securities, then the
arrangement by which the Securities of that Series are issued will be treated as
a REMIC as long as all of the provisions of the applicable Agreement are
complied with and the statutory and regulatory requirements are satisfied.
Securities will be designated as 'Regular Interests' or 'Residual Interests' in
a REMIC, as specified in the related Prospectus Supplement.
Except to the extent specified otherwise in a Prospectus Supplement, if a
REMIC election is made with respect to a Series of Securities, (i) Securities
held by a mutual savings bank or domestic building and loan association will
represent interests in 'qualifying real property loans' within the meaning of
Code Section 593(d) (assuming that at least 95% of the REMIC's assets are
'qualifying real property loans'); (ii) Securities held by a domestic building
and loan association will constitute 'a regular or a residual interest in a
REMIC' within the meaning of Code Section 7701(a)(19)(C)(xi) (assuming that at
least 95% of the REMIC's assets consist of cash, government securities, 'loans
secured by an interest in real property,' and other types of assets described in
Code Section 7701(a)(19)(C)); and (iii) Securities held by a real estate
investment trust will constitute 'real estate assets' within the meaning of Code
Section 856(c)(6)(B), and income with respect to the Securities will be
considered 'interest on obligations secured by mortgages on real property or on
interests in real property' within the meaning of Code Section 856(c)(3)(B)
(assuming, for both purposes, that at least 95% of the REMIC's assets are
qualifying assets). If less than 95% of the REMIC's assets consist of assets
described in (i), (ii) or (iii) above, then a Security will qualify for the tax
treatment described in (i), (ii) or (iii) in the proportion that such REMIC
assets are qualifying assets.
Status of Manufactured Housing Contracts. The REMIC Regulations provide
that obligations secured by interests in manufactured housing that qualify as
'single family residences' within the meaning of Code Section 25(e)(10) may be
treated as 'qualified mortgages' of the REMIC.
Under Section 25(e)(10), the term 'single family residence' includes any
manufactured home which has a minimum of 400 square feet of living space and a
minimum width in excess of 102 inches and which is of a kind customarily used at
a fixed location.
REMIC EXPENSES; SINGLE CLASS REMICS
As a general rule, all of the expenses of a REMIC will be taken into
account by holders of the Residual Interest Securities. In the case of a 'single
class REMIC,' however, the expenses will be allocated, under Treasury
regulations, among the holders of the Regular Interest Securities and the
holders of the Residual Interest Securities on a daily basis in proportion to
the relative amounts of income accruing to each Holder on that day. In the case
of a holder of a Regular Interest Security who is an individual or a
'pass-through interest holder' (including certain pass-through entities but not
including real estate investment trusts), such expenses will be deductible only
to the extent that such expenses, plus other 'miscellaneous itemized deductions'
of the Holder, exceed 2% of such Holder's adjusted gross income. In addition,
for taxable years beginning after December 31,
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1990, the amount of itemized deductions otherwise allowable for the taxable year
for an individual whose adjusted gross income exceeds the applicable amount
(which amount will be adjusted for inflation for taxable years beginning after
1990) will be reduced by the lesser of (i) 3% of the excess of adjusted gross
income over the applicable amount, or (ii) 80% of the amount of itemized
deductions otherwise allowable for such taxable year. The reduction or
disallowance of this deduction may have a significant impact on the yield of the
Regular Interest Security to such a Holder. In general terms, a single class
REMIC is one that either (i) would qualify, under existing Treasury regulations,
as a grantor trust if it were not a REMIC (treating all interests as ownership
interests, even if they would be classified as debt for federal income tax
purposes) or (ii) is similar to such a trust and which is structured with the
principal purpose of avoiding the single class REMIC rules. Unless otherwise
stated in the applicable Prospectus Supplement, the expenses of the REMIC will
be allocated to holders of the related residual interest securities.
TAXATION OF THE REMIC
General. Although a REMIC is a separate entity for federal income tax
purposes, a REMIC is not generally subject to entity-level tax. Rather, the
taxable income or net loss of a REMIC is taken into account by the holders of
residual interests. As described above, the regular interests are generally
taxable as debt of the REMIC.
Tiered REMIC Structures. For certain series of REMIC Certificates, two or
more separate elections may be held to treat designated portions of the related
Trust Fund as REMICs ('Tiered REMICs') for federal income tax purposes. Upon the
issuance of any such series of REMIC Certificates, special counsel to the
Depositor 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, respectively, will be considered to evidence ownership of
Regular Certificates or Residual Certificates in the related REMIC within the
meaning of the REMIC Provisions.
Solely for purposes of determining whether the REMIC Certificates will be
'qualifying real property loans' under Section 593(d) of the Code, 'real estate
assets' within the meaning of Section 856(c)(5)(A) of the Code, and 'loans
secured by an interest in real property' under Section 7701(a)(19)(C) of the
Code, and whether the income on such Certificates is interest described in
Section 856(c)(3)(B) of the Code, the Tiered REMICs will be treated as one
REMIC.
Calculation of REMIC Income. The taxable income or net loss of a REMIC is
determined under an accrual method of accounting and in the same manner as in
the case of an individual, with certain adjustments. In general, the taxable
income or net loss will be the difference between (i) the gross income produced
by the REMIC's assets, including stated interest and any original issue discount
or market discount on loans and other assets, and (ii) deductions, including
stated interest and original issue discount accrued on Regular Interest
Securities, amortization of any premium with respect to Contracts, and servicing
fees and other expenses of the REMIC. A holder of a Residual Interest Security
that is an individual or a 'pass-through interest holder' (including certain
pass-through entities, but not including real estate investment trusts) will be
unable to deduct servicing fees payable on the loans or other administrative
expenses of the REMIC for a given taxable year, to the extent that such
expenses, when aggregated with such holder's other miscellaneous itemized
deductions for that year, do not exceed two percent of such holder's adjusted
gross income.
For purposes of computing its taxable income or net loss, the REMIC should
have an initial aggregate tax basis in its assets equal to the aggregate fair
market value of the regular interests and the residual interests on the Startup
Day (generally, the day that the interests are issued). That aggregate basis
will be allocated among the assets of the REMIC in proportion to their
respective fair market values.
The OID provisions of the Code apply to loans of individuals originated on
or after March 2, 1984, and the market discount provisions apply to loans
originated after July 18, 1984. Subject to possible application of the de
minimis rules, the method of accrual by the REMIC of OID income on such loans
will be equivalent to the method under which holders of Pay-Through Securities
accrue original issue discount (i.e., under the constant yield method taking
into account the Prepayment Assumption). The REMIC will deduct OID on the
Regular Interest Securities in the same manner that the holders of the Regular
Interest Securities include such discount in income, but without regard to the
de minimis rules. See 'Taxation of Debt Securities' above. However, a REMIC that
acquires loans at a market discount must include such market discount in income
currently, as it accrues, on a constant interest basis.
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To the extent that the REMIC's basis allocable to loans that it holds
exceeds their principal amounts, the resulting premium, if attributable to
mortgages originated after September 27, 1985, will be amortized over the life
of the loans (taking into account the Prepayment Assumption) on a constant yield
method. Although the law is somewhat unclear regarding recovery of premium
attributable to loans originated on or before such date, it is possible that
such premium may be recovered in proportion to payments of loan principal.
Prohibited Transactions and Contributions Tax. The REMIC will be subject
to a 100% tax on any net income derived from a 'prohibited transaction.' For
this purpose, net income will be calculated without taking into account any
losses from prohibited transactions or any deductions attributable to any
prohibited transaction that resulted in a loss. In general, prohibited
transactions include: (i) subject to limited exceptions, the sale or other
disposition of any qualified mortgage transferred to the REMIC; (ii) subject to
a limited exception, the sale or other disposition of a cash flow investment;
(iii) the receipt of any income from assets not permitted to be held by the
REMIC pursuant to the Code; or (iv) the receipt of any fees or other
compensation for services rendered by the REMIC. It is anticipated that a REMIC
will not engage in any prohibited transactions in which it would recognize a
material amount of net income. In addition, subject to a number of exceptions, a
tax is imposed at the rate of 100% on amounts contributed to a REMIC after the
close of the three-month period beginning on the Startup Day. The holders of
Residual Interest Securities will generally be responsible for the payment of
any such taxes imposed on the REMIC. To the extent not paid by such holders or
otherwise, however, such taxes will be paid out of the Trust Fund and will be
allocated pro rata to all outstanding Classes of Securities of such REMIC.
TAXATION OF HOLDERS OF RESIDUAL INTEREST SECURITIES
The holder of a Certificate representing a residual interest (a 'Residual
Interest Security') will take into account the 'daily portion' of the taxable
income or net loss of the REMIC for each day during the taxable year on which
such holder held the Residual Interest Security. The daily portion is determined
by allocating to each day in any calendar quarter its ratable portion of the
taxable income or net loss of the REMIC for such quarter, and by allocating that
amount among the holders (on such day) of the Residual Interest Securities in
proportion to their respective holdings on such day.
The holder of a Residual Interest Security must report its proportionate
share of the taxable income of the REMIC whether or not it receives cash
distributions from the REMIC attributable to such income or loss. The reporting
of taxable income without corresponding distributions could occur, for example,
in certain REMIC issues in which the loans held by the REMIC were issued or
acquired at a discount, since mortgage prepayments cause recognition of discount
income, while the corresponding portion of the prepayment could be used in whole
or in part to make principal payments on REMIC Regular Interests issued without
any discount or at an insubstantial discount. (If this occurs, it is likely that
cash distributions will exceed taxable income in later years.) Taxable income
may also be greater in earlier years of certain REMIC issues as a result of the
fact that interest expense deductions, as a percentage of outstanding principal
on REMIC Regular Interest Securities, will typically increase over time as lower
yielding Securities are paid, whereas interest income with respect to loans will
generally remain constant over time as a percentage of loan principal.
In any event, because the holder of a residual interest is taxed on the net
income of the REMIC, the taxable income derived from a Residual Interest
Security in a given taxable year will not be equal to the taxable income
associated with investment in a corporate bond or stripped instrument having
similar cash flow characteristics and pretax yield. Therefore, the after-tax
yield on the Residual Interest Security may be less than that of such a bond or
instrument.
Limitation on Losses. The amount of the REMIC's net loss that a holder may
take into account currently is limited to the holder's adjusted basis at the end
of the calendar quarter in which such loss arises. A holder's basis in a
Residual Interest Security will initially equal such holder's purchase price,
and will subsequently be increased by the amount of the REMIC's taxable income
allocated to the holder, and decreased (but not below zero) by the amount of
distributions made and the amount of the REMIC's net loss allocated to the
holder. Any disallowed loss may be carried forward indefinitely, but may be used
only to offset income of the REMIC generated by the same REMIC. The ability of
holders of Residual Interest Securities to deduct net losses may be subject to
additional limitations under the Code, as to which such holders should consult
their tax advisers.
Distributions. Distributions on a Residual Interest Security (whether at
their scheduled times or as a result of prepayments) will generally not result
in any additional taxable income or loss to a holder of a Residual Interest
Security. If the amount of such payment exceeds a holder's adjusted basis in the
Residual Interest
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Security, however, the holder will recognize gain (treated as gain from the sale
of the Residual Interest Security) to the extent of such excess.
Sale or Exchange. A holder of a Residual Interest Security will recognize
gain or loss on the sale or exchange of a Residual Interest Security equal to
the difference, if any, between the amount realized and such holder's adjusted
basis in the Residual Interest Security at the time of such sale or exchange.
Except to the extent provided in regulations, which have not yet been issued,
any loss upon disposition of a Residual Interest Security will be disallowed if
the selling holder acquires any residual interest in a REMIC or similar mortgage
pool within six months before or after such disposition.
Excess Inclusions. The portion of the REMIC taxable income of a holder of
a Residual Interest Security consisting of 'excess inclusion' income may not be
offset by other deductions or losses, including net operating losses, on such
holder's federal income tax return. An exception applies to organizations to
which Code Section 593 applies (generally, certain thrift institutions);
however, such exception will not apply if the aggregate value of the Residual
Interest Securities is not considered to be 'significant,' as described below.
Further, if the holder of a Residual Interest Security is an organization
subject to the tax on unrelated business income imposed by Code Section 511,
such holder's excess inclusion income will be treated as unrelated business
taxable income of such holder. In addition, under Treasury regulations yet to be
issued, if a real estate investment trust, a regulated investment company, a
common trust fund, or certain cooperatives were to own a Residual Interest
Security, a portion of dividends (or other distributions) paid by the real
estate investment trust (or other entity) would be treated as excess inclusion
income. If a Residual Security is owned by a foreign person excess inclusion
income is subject to tax at a rate of 30% which may not be reduced by treaty, is
not eligible for treatment as 'portfolio interest' and is subject to certain
additional limitations. See 'Tax Treatment of Foreign Investors.' Regulations
provide that a Residual Interest Security has significant value only if (i) the
aggregate issue price of the Residual Interest Security is at least 2% of the
aggregate of the issue prices of all Regular Interest Securities and Residual
Interest Securities in the REMIC and (ii) the anticipated weighted average life
(determined as specified in the Proposed Regulations) of the Residual Interest
Securities is at least 20% of the weighted average life of the REMIC.
The excess inclusion portion of a REMIC's income is generally equal to the
excess, if any, of REMIC taxable income for the quarterly period allocable to a
Residual Interest Security, over the daily accruals for such quarterly period of
(i) 120% of the long term applicable federal rate on the Startup Date multiplied
by (ii) the adjusted issue price of such Residual Interest Security at the
beginning of such quarterly period. The adjusted issue price of a Residual
Interest at the beginning of each calendar quarter will equal its issue price
(calculated in a manner analogous to the determination of the issue price of a
Regular Interest), increased by the aggregate of the daily accruals for prior
calendar quarters, and decreased (but not below zero) by the amount of loss
allocated to a holder and the amount of distributions made on the Residual
Interest Security before the beginning of the quarter. The long-term federal
rate, which is announced monthly by the Treasury Department, is an interest rate
that is based on the average market yield of outstanding marketable obligations
of the United States government having remaining maturities in excess of nine
years.
Under the REMIC Regulations, in certain circumstances, transfers of
Residual Securities may be disregarded. See '--Restrictions on Ownership and
Transfer of Residual Interest Securities' and '--Tax Treatment of Foreign
Investors' below.
Restrictions on Ownership and Transfer of Residual Interest Securities. As
a condition to qualification as a REMIC, reasonable arrangements must be made to
prevent the ownership of a REMIC residual interest by any 'Disqualified
Organization.' Disqualified Organizations include the United States, any State
or political subdivision thereof, any foreign government, any international
organization, or any agency or instrumentality of any of the foregoing, a rural
electric or telephone cooperative described in Section 1381(a)(2)(C) of the
Code, or any entity exempt from the tax imposed by Sections 1-1399 of the Code,
if such entity is not subject to tax on its unrelated business income.
Accordingly, the applicable Pooling and Servicing Agreement will prohibit
Disqualified Organizations from owning a Residual Interest Security. In
addition, no transfer of a Residual Interest Security will be permitted unless
the proposed transferee shall have furnished to the Trustee an affidavit
representing and warranting that it is neither a Disqualified Organization nor
an agent or nominee acting on behalf of a Disqualified Organization.
If a Residual Interest Security is transferred to a Disqualified
Organization after March 31, 1988 (in violation of the restrictions set forth
above), a substantial tax will be imposed on the transferor of such Residual
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Interest Security at the time of the transfer. In addition, if a Disqualified
Organization holds an interest in a pass-through entity after March 31, 1988
(including, among others, a partnership, trust, real estate investment trust,
regulated investment company, or any person holding as nominee), that owns a
Residual Interest Security, the pass-through entity will be required to pay an
annual tax on its allocable share of the excess inclusion income of the REMIC.
Under the REMIC Regulations, if a Residual Interest Security is a
'noneconomic residual interest,' as described below, a transfer of a Residual
Interest Security to a United States person will be disregarded for all Federal
tax purposes unless no significant purpose of the transfer was to impede the
assessment or collection of tax. A Residual Interest Security is a 'noneconomic
residual interest' unless, at the time of the transfer (i) the present value of
the expected future distributions on the Residual Interest Security at least
equals the product of the present value of the anticipated excess inclusions and
the highest rate of tax for the year in which the transfer occurs, and (ii) the
transferor reasonably expects that the transferee will receive distributions
from the REMIC at or after the time at which the taxes accrue on the anticipated
excess inclusions in an amount sufficient to satisfy the accrued taxes. If a
transfer of a Residual Interest is disregarded, the transferor would be liable
for any Federal income tax imposed upon taxable income derived by the transferee
from the REMIC. The REMIC Regulations provide no guidance as to how to determine
if a significant purpose of a transfer is to impede the assessment or collection
of tax. A similar type of limitation exists with respect to certain transfers of
residual interests by foreign persons to United States persons. See '--Tax
Treatment of Foreign Investors.'
Mark to Market Rules. Prospective purchasers of a REMIC Residual Interest
Security should be aware that on December 28, 1993, the Internal Revenue Service
released temporary regulations (the 'Temporary Mark to Market Regulations')
relating to the requirement that a securities dealer mark-to-market securities
held for sale to customers. This mark-to-market requirement applies to all
securities of a dealer, except to the extent that the dealer has specifically
identified a security as held for investment. The Temporary Mark to Market
Regulations provide that for purposes of this mark-to-market requirement, a
'negative value' REMIC residual interest is not treated as a security and thus
may not be marked to market. In addition, a dealer is not required to identify
such REMIC Residual Interest Security as held for investment. In general, a
REMIC Residual Interest Security has negative value if, as of the date a
taxpayer acquires the REMIC Residual Interest Security, the present value of the
tax liabilities associated with holding the REMIC Residual Interest Security
exceeds the sum of (i) the present value of the expected future distributions on
the REMIC Residual Interest Security, and (ii) the present value of the
anticipated tax savings associated with holding the REMIC Residual Interest
Security as the REMIC generates losses. The amounts and present values of the
anticipated tax liabilities, expected future distributions and anticipated tax
savings are all to be determined using (i) the prepayment and reinvestment
assumptions adopted under Section 1272(a)(6), or that would have been adopted
had the REMIC's regular interests been issued with OID, (ii) any required or
permitted clean up calls, or required qualified liquidation provided for in the
REMIC's organizational documents and (iii) a discount rate equal to the
'applicable Federal rate' (as specified in Section 1274(d)(1) that would apply
to a debt instrument issued on the date of acquisition of the REMIC Residual
Interest Security. Furthermore, the Temporary Mark to Market Regulations provide
the IRS with the authority to treat any REMIC Residual Interest Security having
substantially the same economic effect as a 'negative value' residual interest
as a 'negative value' residual interest.
On January 3, 1995, the IRS released proposed regulations under section 475
(the 'Proposed Mark-to-Market Regulations'). The Proposed Mark-to-Market
Regulations provide that any REMIC Residual Interest acquired after January 3,
1995 cannot be marked to market, regardless of the value of such REMIC residual
interest. The Temporary Mark-to-Market Regulations described above still apply
to any REMIC Residual Interest acquired on or prior to Janaury 3, 1995. Thus,
holders of positive value REMIC Residual Interests acquired on or prior to
January 3, 1995 may continue to mark such residual interests to market for the
entire economic life of such interests.
ADMINISTRATIVE MATTERS
The REMIC's books must be maintained on a calendar year basis and the REMIC
must file an annual federal income tax return. The REMIC will also be subject to
the procedural and administrative rules of the Code applicable to partnerships,
including the determination of any adjustments to, among other things, items of
REMIC income, gain, loss, deduction, or credit, by the Internal Revenue Service
in a unified administrative proceeding.
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TAX STATUS AS A GRANTOR TRUST
General. As specified in the related Prospectus Supplement if a REMIC or
partnership election is not made, in the opinion of Brown & Wood, special
counsel to the Depositor, the Trust Fund relating to a Series of Securities will
be classified for federal income tax purposes as a grantor trust under Subpart
E, Part 1 of Subchapter J of the Code and not as an association taxable as a
corporation (the Securities of such Series, 'Pass-Through Securities'). In some
Series there will be no separation of the principal and interest payments on the
Contracts. In such circumstances, a Holder will be considered to have purchased
a pro rata undivided interest in each of the Contracts. In other cases
('Stripped Securities'), sale of the Securities will produce a separation in the
ownership of all or a portion of the principal payments from all or a portion of
the interest payments on the Contracts.
Each Holder must report on its federal income tax return its share of the
gross income derived from the Contracts (not reduced by the amount payable as
fees to the Trustee and the Servicer and similar fees (collectively, the
'Servicing Fee')), at the same time and in the same manner as such items would
have been reported under the Holder's tax accounting method had it held its
interest in the Contracts directly, received directly its share of the amounts
received with respect to the Contracts, and paid directly its share of the
Servicing Fees. In the case of Pass-Through Securities other than Stripped
Securities, such income will consist of a pro rata share of all of the income
derived from all of the Contracts and, in the case of Stripped Securities, such
income will consist of a pro rata share of the income derived from each stripped
bond or stripped coupon in which the Holder owns an interest. The holder of a
Security will generally be entitled to deduct such Servicing Fees under Section
162 or Section 212 of the Code to the extent that such Servicing Fees represent
'reasonable' compensation for the services rendered by the Trustee and the
Servicer (or third parties that are compensated for the performance of
services). In the case of a noncorporate holder, however, Servicing Fees (to the
extent not otherwise disallowed, e.g., because they exceed reasonable
compensation) will be deductible in computing such holder's regular tax
liability only to the extent that such fees, when added to other miscellaneous
itemized deductions, exceed 2% of adjusted gross income and may not be
deductible to any extent in computing such holder's alternative minimum tax
liability. In addition, for taxable years beginning after December 31, 1990, the
amount of itemized deductions otherwise allowable for the taxable year for an
individual whose adjusted gross income exceeds the applicable amount (which
amount will be adjusted for inflation in taxable years beginning after 1990)
will be reduced by the lesser of (i) 3% of the excess of adjusted gross income
over the applicable amount or (ii) 80% of the amount of itemized deductions
otherwise allowable for such taxable year.
Discount or Premium on Pass-Through Securities. The holder's purchase
price of a Pass-Through Security is to be allocated among the Contracts in
proportion to their fair market values, determined as of the time of purchase of
the Securities. In the typical case, the Trustee (to the extent necessary to
fulfill its reporting obligations) will treat each Contract as having a fair
market value proportional to the share of the aggregate principal balances of
all of the Contracts that it represents, since the Securities, unless otherwise
specified in the applicable Prospectus Supplement, will have a relatively
uniform interest rate and other common characteristics. To the extent that the
portion of the purchase price of a Pass-Through Security allocated to a Contract
(other than to a right to receive any accrued interest thereon and any
undistributed principal payments) is less than or greater than the portion of
the principal balance of the Contract allocable to the Security, the interest in
the Contract allocable to the Pass-Through Security will be deemed to have been
acquired at a discount or premium, respectively.
The treatment of any discount will depend on whether the discount
represents OID or market discount. In the case of a Contract with OID in excess
of a prescribed de minimis amount or a Stripped Security, a holder of a Security
will be required to report as interest income in each taxable year its share of
the amount of OID that accrues during that year in the manner described above.
OID with respect to a Contract could arise, for example, by virtue of the
financing of points by the originator of the Loan, or by virtue of the charging
of points by the originator of the Contract in an amount greater than a
statutory de minimis exception, in circumstances under which the points are not
currently deductible pursuant to applicable Code provisions. Any market discount
or premium on a Contract will be includible in income, generally in the manner
described above, except that in the case of Pass-Through Securities, market
discount is calculated with respect to the Contracts underlying the Certificate,
rather than with respect to the Security. A Holder that acquires an interest in
a Contract originated after July 18, 1984 with more than a de minimis amount of
market discount (generally, the excess of the principal amount of the Contract
over the purchaser's allocable purchase price) will be required to include
accrued market
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discount in income in the manner set forth above. See '--Taxation of Debt
Securities; Market Discount' and '--Premium' above.
In the case of market discount on a Pass-Through Security attributable to
Contracts originated on or before July 18, 1984, the holder generally will be
required to allocate the portion of such discount that is allocable to a loan
among the principal payments on the Contract and to include the discount
allocable to each principal payment in ordinary income at the time such
principal payment is made. Such treatment would generally result in discount
being included in income at a slower rate than discount would be required to be
included in income using the method described in the preceding paragraph.
Stripped Securities. A Stripped Security may represent a right to receive
only a portion of the interest payments on the Contracts, a right to receive
only principal payments on the Contracts, or a right to receive certain payments
of both interest and principal. Certain Stripped Securities ('Ratio Strip
Securities') may represent a right to receive differing percentages of both the
interest and principal on each Contract. Pursuant to Section 1286 of the Code,
the separation of ownership of the right to receive some or all of the interest
payments on an obligation from ownership of the right to receive some or all of
the principal payments results in the creation of 'stripped bonds' with respect
to principal payments and 'stripped coupons' with respect to interest payments.
Section 1286 of the Code applies the OID rules to stripped bonds and stripped
coupons. For purposes of computing original issue discount, a stripped bond or a
stripped coupon is treated as a debt instrument issued on the date that such
stripped interest is purchased with an issue price equal to its purchase price
or, if more than one stripped interest is purchased, the ratable share of the
purchase price allocable to such stripped interest.
Servicing fees in excess of reasonable servicing fees ('excess servicing')
will be treated under the stripped bond rules. If the excess servicing fee is
less than 100 basis points (i.e. 1% interest on the Contract principal balance)
or the Securities are initially sold with a de minimis discount (assuming no
prepayment assumption is required), any non-de minimis discount arising from a
subsequent transfer of the Securities should be treated as market discount. The
IRS appears to require that reasonable servicing fees be calculated on a
Contract by Contract basis, which could result in some Contracts being treated
as having more than 100 basis points of interest stripped off.
The Code, OID Regulations and judicial decisions provide no direct guidance
as to how the interest and original issue discount rules are to apply to
Stripped Securities and other Pass-Through Securities. Under the method
described above for Pay-Through Securities (the 'Cash Flow Bond Method'), a
prepayment assumption is used and periodic recalculations are made which take
into account with respect to each accrual period the effect of prepayments
during such period. However, the 1986 Act does not, absent Treasury regulations,
appear specifically to cover instruments such as the Stripped Securities which
technically represent ownership interests in the Underlying Contracts, rather
than being debt instruments 'secured by' those loans. Nevertheless, it is
believed that the Cash Flow Bond Method is a reasonable method of reporting
income for such Securities, and it is expected that OID will be reported on that
basis unless otherwise specified in the related Prospectus Supplement. In
applying the calculation to Pass-Through Securities, the Trustee will treat all
payments to be received by a holder with respect to the underlying Contracts as
payments on a single installment obligation. The Internal Revenue Service could,
however, assert that original issue discount must be calculated separately for
each Contract underlying a Security.
Under certain circumstances, if the Contracts prepay at a rate faster than
the Prepayment Assumption, the use of the Cash Flow Bond Method may accelerate a
Holder's recognition of income. If, however, the Contracts prepay at a rate
slower than the Prepayment Assumption, in some circumstances the use of this
method may decelerate a Holder's recognition of income.
In the case of a Stripped Security that is an Interest Weighted Security,
the Trustee intends, absent contrary authority, to report income to Security
holders as OID, in the manner described above for Interest Weighted Securities.
Possible Alternative Characterizations. The characterizations of the
Stripped Securities described above are not the only possible interpretations of
the applicable Code provisions. Among other possibilities, the Internal Revenue
Service could contend that (i) in certain Series, each non-Interest Weighted
Security is composed of an unstripped undivided ownership interest in Contracts
and an installment obligation consisting of stripped principal payments; (ii)
the non-Interest Weighted Securities are subject to the contingent payment
provisions of
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the Proposed Regulations; or (iii) each Interest Weighted Stripped Security is
composed of an unstripped undivided ownership interest in Contracts and an
installment obligation consisting of stripped interest payments.
Given the variety of alternatives for treatment of the Stripped Securities
and the different federal income tax consequences that result from each
alternative, potential purchasers are urged to consult their own tax advisers
regarding the proper treatment of the Securities for federal income tax
purposes.
Character as Qualifying Contracts. In the case of Stripped Securities
there is no specific legal authority existing regarding whether the character of
the Securities, for federal income tax purposes, will be the same as the
Contracts. The IRS could take the position that the Contracts' character is not
carried over to the Securities in such circumstances. Pass-Through Securities
will be, and, although the matter is not free from doubt, Stripped Securities
should be considered to represent 'qualifying real property loans' within the
meaning of Section 593(d) of the Code, 'real estate assets' within the meaning
of Section 856(c)(6)(B) of the Code, and 'loans secured by an interest in real
property' within the meaning of Section 7701(a)(19)(C)(v) of the Code; and
interest income attributable to the Securities should be considered to represent
'interest on obligations secured by mortgages on real property or on interests
in real property' with the meaning of Section 856(c)(3)(B) of the Code. Reserves
or funds underlying the Securities may cause a proportionate reduction in the
above-described qualifying status categories of Securities.
SALE OR EXCHANGE
Subject to the discussion below with respect to Trust Funds as to which a
partnership election is made, a Holder's tax basis in its Security is the price
such holder pays for a Security, plus amounts of original issue or market
discount included in income and reduced by any payments received (other than
qualified stated interest payments) and any amortized premium. Gain or loss
recognized on a sale, exchange, or redemption of a Security, measured by the
difference between the amount realized and the Security's basis as so adjusted,
will generally be capital gain or loss, assuming that the Security is held as a
capital asset. In the case of a Security held by a bank, thrift, or similar
institution described in Section 582 of the Code, however, gain or loss realized
on the sale or exchange of a Regular Interest Security will be taxable as
ordinary income or loss. In addition, gain from the disposition of a Regular
Interest Security that might otherwise be capital gain will be treated as
ordinary income to the extent of the excess, if any, of (i) the amount that
would have been includible in the holder's income if the yield on such Regular
Interest Security had equaled 110% of the applicable federal rate as of the
beginning of such holder's holding period, over the amount of ordinary income
actually recognized by the holder with respect to such Regular Interest
Security. For taxable years beginning after December 31, 1993, the maximum tax
rate on ordinary income for individual taxpayers is 39.6% and the maximum tax
rate on long-term capital gains reported after December 31, 1990 for such
taxpayers is 28%. The maximum tax rate on both ordinary income and long-term
capital gains of corporate taxpayers is 35%.
MISCELLANEOUS TAX ASPECTS
Backup Withholding. Subject to the discussion below with respect to Trust
Funds as to which a partnership election is made, a Holder, other than a holder
of a REMIC Residual Security, may, under certain circumstances, be subject to
'backup withholding' at a rate of 31% with respect to distributions or the
proceeds of a sale of certificates to or through brokers that represent interest
or original issue discount on the Securities. This withholding generally applies
if the holder of a Security (i) fails to furnish the Trustee with its taxpayer
identification number ('TIN'); (ii) furnishes the Trustee an incorrect TIN;
(iii) fails to report properly interest, dividends or other 'reportable
payments' as defined in the Code; or (iv) under certain circumstances, fails to
provide the Trustee or such holder's securities broker with a certified
statement, signed under penalty of perjury, that the TIN provided is its correct
number and that the holder is not subject to backup withholding. Backup
withholding will not apply, however, with respect to certain payments made to
Holders, including payments to certain exempt recipients (such as exempt
organizations) and to certain Nonresidents (as defined below). Holders should
consult their tax advisers as to their qualification for exemption from backup
withholding and the procedure for obtaining the exemption.
The Trustee will report to the Holders and to the Servicer for each
calendar year the amount of any 'reportable payments' during such year and the
amount of tax withheld, if any, with respect to payments on the Securities.
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TAX TREATMENT OF FOREIGN INVESTORS
Subject to the discussion below with respect to Trust Funds as to which a
partnership election is made, under the Code, unless interest (including OID)
paid on a Security (other than a Residual Interest Security) is considered to be
'effectively connected' with a trade or business conducted in the United States
by a nonresident alien individual, foreign partnership or foreign corporation
('Nonresidents'), such interest will normally qualify as portfolio interest
(except where (i) the recipient is a holder, directly or by attribution, of 10%
or more of the capital or profits interest in the issuer, or (ii) the recipient
is a controlled foreign corporation to which the issuer is a related person) and
will be exempt from federal income tax. Upon receipt of appropriate ownership
statements, the issuer normally will be relieved of obligations to withhold tax
from such interest payments. These provisions supersede the generally applicable
provisions of United States law that would otherwise require the issuer to
withhold at a 30% rate (unless such rate were reduced or eliminated by an
applicable tax treaty) on, among other things, interest and other fixed or
determinable, annual or periodic income paid to Nonresidents. Holders of
Pass-Through Securities and Stripped Securities, including Ratio Strip
Securities, however, may be subject to withholding to the extent that the
Contracts were originated on or before July 18, 1984.
Interest and OID of Holders who are foreign persons are not subject to
withholding if they are effectively connected with a United States business
conducted by the Holder. They will, however, generally be subject to the regular
United States income tax.
Payments to holders of Residual Interest Securities who are foreign persons
will generally be treated as interest for purposes of the 30% (or lower treaty
rate) United States withholding tax. Holders should assume that such income does
not qualify for exemption from United States withholding tax as 'portfolio
interest.' It is clear that, to the extent that a payment represents a portion
of REMIC taxable income that constitutes excess inclusion income, a holder of a
Residual Interest Security will not be entitled to an exemption from or
reduction of the 30% (or lower treaty rate) withholding tax rule. If the
payments are subject to United States withholding tax, they generally will be
taken into account for withholding tax purposes only when paid or distributed
(or when the Residual Interest Security is disposed of). The Treasury has
statutory authority, however, to promulgate regulations which would require such
amounts to be taken into account at an earlier time in order to prevent the
avoidance of tax. Such regulations could, for example, require withholding prior
to the distribution of cash in the case of Residual Interest Securities that do
not have significant value. Under the REMIC Regulations, if a Residual Interest
Security has tax avoidance potential, a transfer of a Residual Interest Security
to a Nonresident will be disregarded for all Federal tax purposes. A Residual
Interest Security has tax avoidance potential unless, at the time of the
transfer the transferor reasonably expects that the REMIC will distribute to the
transferee residual interest holder amounts that will equal at least 30% of each
excess inclusion, and that such amounts will be distributed at or after the time
at which the excess inclusions accrue and not later than the calendar year
following the calendar year of accrual. If a Nonresident transfers a Residual
Interest Security to a United States person, and if the transfer has the effect
of allowing the transferor to avoid tax on accrued excess inclusions, then the
transfer is disregarded and the transferor continues to be treated as the owner
of the Residual Interest Security for purposes of the withholding tax provisions
of the Code. See '--Excess Inclusions.'
TAX CHARACTERIZATION OF THE TRUST AS A PARTNERSHIP
Brown & Wood, special counsel to the Depositor, will deliver its opinion
that a Trust Fund for which a partnership election is made will not be an
association (or publicly traded partnership) taxable as a corporation for
federal income tax purposes. This opinion will be based on the assumption that
the terms of the Trust Agreement and related documents will be complied with,
and on counsel's conclusions that (1) the Trust Fund will not have certain
characteristics necessary for a business trust to be classified as an
association taxable as a corporation and (2) the nature of the income of the
Trust Fund will exempt it from the rule that certain publicly traded
partnerships are taxable as corporations or the issuance of the Certificates has
been structured as a private placement under an IRS safe harbor, so that the
Trust Fund will not be characterized as a publicly traded partnership taxable as
a corporation.
If the Trust Fund were taxable as a corporation for federal income tax
purposes, the Trust Fund would be subject to corporate income tax on its taxable
income. The Trust Fund's taxable income would include all its income, possibly
reduced by its interest expense on the Notes. Any such corporate income tax
could materially reduce cash available to make payments on the Notes and
distributions on the Certificates, and Certificateholders could be liable for
any such tax that is unpaid by the Trust Fund.
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TAX CONSEQUENCES TO HOLDERS OF THE NOTES
Treatment of the Notes as Indebtedness. The Trust Fund will agree, and the
Noteholders will agree by their purchase of Notes, to treat the Notes as debt
for federal income tax purposes. Special counsel to the Depositor will, except
as otherwise provided in the related Prospectus Supplement, advise the Depositor
that the Notes will be classified as debt for federal income tax purposes. The
discussion below assumes this characterization of the Notes is correct.
OID, Indexed Securities, etc. The discussion below assumes that all
payments on the Notes are denominated in U.S. dollars, and that the Notes are
not Indexed Securities or Strip Notes. Moreover, the discussion assumes that the
interest formula for the Notes meets the requirements for 'qualified stated
interest' under the OID regulations, and that any OID on the Notes (i.e., any
excess of the principal amount of the Notes over their issue price) does not
exceed a de minimis amount (i.e., 0.25% of their principal amount multiplied by
the number of full years included in their term), all within the meaning of the
OID regulations. If these conditions are not satisfied with respect to any given
series of Notes, additional tax considerations with respect to such Notes will
be disclosed in the applicable Prospectus Supplement.
Interest Income on the Notes. Based on the above assumptions, except as
discussed in the following paragraph, the Notes will not be considered issued
with OID. The stated interest thereon will be taxable to a Noteholder as
ordinary interest income when received or accrued in accordance with such
Noteholder's method of tax accounting. Under the OID regulations, a holder of a
Note issued with a de minimis amount of OID must include such OID in income, on
a pro rata basis, as principal payments are made on the Note. It is believed
that any prepayment premium paid as a result of a mandatory redemption will be
taxable as contingent interest when it becomes fixed and unconditionally
payable. A purchaser who buys a Note for more or less than its principal amount
will generally be subject, respectively, to the premium amortization or market
discount rules of the Code.
A holder of a Note that has a fixed maturity date of not more than one year
from the issue date of such Note (a 'Short-Term Note') may be subject to special
rules. An accrual basis holder of a Short-Term Note (and certain cash method
holders, including regulated investment companies, as set forth in Section 1281
of the Code) generally would be required to report interest income as interest
accrues on a straight-line basis over the term of each interest period. Other
cash basis holders of a Short-Term Note would, in general, be required to report
interest income as interest is paid (or, if earlier, upon the taxable
disposition of the Short-Term Note). However, a cash basis holder of a
Short-Term Note reporting interest income as it is paid may be required to defer
a portion of any interest expense otherwise deductible on indebtedness incurred
to purchase or carry the Short-Term Note until the taxable disposition of the
Short-Term Note. A cash basis taxpayer may elect under Section 1281 of the Code
to accrue interest income on all nongovernment debt obligations with a term of
one year or less, in which case the taxpayer would include interest on the
Short-Term Note in income as it accrues, but would not be subject to the
interest expense deferral rule referred to in the preceding sentence. Certain
special rules apply if a Short-Term Note is purchased for more or less than its
principal amount.
Sale or Other Disposition. If a Noteholder sells a Note, the holder will
recognize gain or loss in an amount equal to the difference between the amount
realized on the sale and the holder's adjusted tax basis in the Note. The
adjusted tax basis of a Note to a particular Noteholder will equal the holder's
cost for the Note, increased by any market discount, acquisition discount, OID
and gain previously included by such Noteholder in income with respect to the
Note and decreased by the amount of bond premium (if any) previously amortized
and by the amount of principal payments previously received by such Noteholder
with respect to such Note. Any such gain or loss will be capital gain or loss if
the Note was held as a capital asset, except for gain representing accrued
interest and accrued market discount not previously included in income. Capital
losses generally may be used only to offset capital gains.
Foreign Holders. Interest payments made (or accrued) to a Noteholder who
is a nonresident alien, foreign corporation or other non-United States person (a
'foreign person') generally will be considered 'portfolio interest', and
generally will not be subject to United States federal income tax and
withholding tax, if the interest is not effectively connected with the conduct
of a trade or business within the United States by the foreign person and the
foreign person (i) is not actually or constructively a '10 percent shareholder'
of the Trust or the Seller (including a holder of 10% of the outstanding
Certificates) or a 'controlled foreign corporation' with respect to which the
Trust or the Seller is a 'related person' within the meaning of the Code and
(ii) provides the Owner Trustee or other person who is otherwise required to
withhold U.S. tax with respect to the Notes with an appropriate statement (on
Form W-8 or a similar form), signed under penalties of perjury, certifying that
the beneficial owner of the Note is a foreign person and providing the foreign
person's name and address. If a Note is
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held through a securities clearing organization or certain other financial
institutions, the organization or institution may provide the relevant signed
statement to the withholding agent; in that case, however, the signed statement
must be accompanied by a Form W-8 or substitute form provided by the foreign
person that owns the Note. If such interest is not portfolio interest, then it
will be subject to United States federal income and withholding tax at a rate of
30 percent, unless reduced or eliminated pursuant to an applicable tax treaty.
Any capital gain realized on the sale, redemption, retirement or other
taxable disposition of a Note by a foreign person will be exempt from United
States federal income and withholding tax, provided that (i) such gain is not
effectively connected with the conduct of a trade or business in the United
States by the foreign person and (ii) in the case of an individual foreign
person, the foreign person is not present in the United States for 183 days or
more in the taxable year.
Backup Withholding. Each holder of a Note (other than an exempt holder
such as a corporation, tax-exempt organization, qualified pension and
profit-sharing trust, individual retirement account or nonresident alien who
provides certification as to status as a nonresident) will be required to
provide, under penalties of perjury, a certificate containing the holder's name,
address, correct federal taxpayer identification number and a statement that the
holder is not subject to backup withholding. Should a nonexempt Noteholder fail
to provide the required certification, the Trust Fund will be required to
withhold 31 percent of the amount otherwise payable to the holder, and remit the
withheld amount to the IRS as a credit against the holder's federal income tax
liability.
Possible Alternative Treatments of the Notes. If, contrary to the opinion
of special counsel to the Company, 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 Fund. If so treated, the
Trust Fund might be taxable as a corporation with the adverse consequences
described above (and the taxable corporation would not be able to reduce its
taxable income by deductions for interest expense on Notes recharacterized as
equity). Alternatively, and most likely in the view of special counsel to the
Depositor, the Trust Fund might be treated as a publicly traded partnership that
would not be taxable as a corporation because it would meet certain qualifying
income tests. Nonetheless, treatment of the Notes as equity interests in such a
publicly traded partnership could have adverse tax consequences to certain
holders. For example, income to certain tax-exempt entities (including pension
funds) would be 'unrelated business taxable income', income to foreign holders
generally would be subject to U.S. tax and U.S. tax return filing and
withholding requirements, and individual holders might be subject to certain
limitations on their ability to deduct their share of the Trust Fund's expenses.
TAX CONSEQUENCES TO HOLDERS OF THE CERTIFICATES
Treatment of the Trust Fund as a Partnership. The Trust Fund and the
Servicer will agree, and the Certificateholders will agree by their purchase of
Certificates, to treat the Trust Fund as a partnership for purposes of federal
and state income tax, franchise tax and any other tax measured in whole or in
part by income, with the assets of the partnership being the assets held by the
Trust Fund, the partners of the partnership being the Certificateholders, and
the Notes being debt of the partnership. However, the proper characterization of
the arrangement involving the Trust Fund, the Certificates, the Notes, the Trust
Fund and the Servicer is not clear because there is no authority on transactions
closely comparable to that contemplated herein.
A variety of alternative characterizations are possible. For example,
because the Certificates have certain features characteristic of debt, the
Certificates might be considered debt of the Trust Fund. Any such
characterization would not result in materially adverse tax consequences to
Certificateholders as compared to the consequences from treatment of the
Certificates as equity in a partnership, described below. The following
discussion assumes that the Certificates represent equity interests in a
partnership.
Indexed Securities, etc. The following discussion assumes that all
payments on the Certificates are denominated in U.S. dollars, none of the
Certificates are Indexed Securities or Strip Certificates, and that a Series of
Securities includes a single class of Certificates. If these conditions are not
satisfied with respect to any given Series of Certificates, additional tax
considerations with respect to such Certificates will be disclosed in the
applicable Prospectus Supplement.
Partnership Taxation. As a partnership, the Trust Fund will not be subject
to federal income tax. Rather, each Certificateholder will be required to
separately take into account such holder's allocated share of income, gains,
losses, deductions and credits of the Trust Fund. The Trust Fund's income will
consist primarily of interest and finance charges earned on the Contracts
(including appropriate adjustments for market discount, OID and bond premium)
and any gain upon collection or disposition of Contracts. The Trust Fund's
deductions will consist primarily of interest accruing with respect to the
Notes, servicing and other fees, and losses or deductions upon collection or
disposition of Contracts.
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The tax items of a partnership are allocable to the partners in accordance
with the Code, Treasury regulations and the partnership agreement (here, the
Trust Agreement and related documents). The Trust Agreement will provide, in
general, that the Certificateholders will be allocated taxable income of the
Trust Fund for each month equal to the sum of (i) the interest that accrues on
the Certificates in accordance with their terms for such month, including
interest accruing at the Pass Through Rate for such month and interest on
amounts previously due on the Certificates but not yet distributed; (ii) any
Trust Fund income attributable to discount on the Contracts that corresponds to
any excess of the principal amount of the Certificates over their initial issue
price; (iii) prepayment premium payable to the Certificateholders for such
month; and (iv) any other amounts of income payable to the Certificateholders
for such month. Such allocation will be reduced by any amortization by the Trust
Fund of premium on Contracts that corresponds to any excess of the issue price
of Certificates over their principal amount. All remaining taxable income of the
Trust Fund will be allocated to the Company. Based on the economic arrangement
of the parties, this approach for allocating Trust Fund income should be
permissible under applicable Treasury regulations, although no assurance can be
given that the IRS would not require a greater amount of income to be allocated
to Certificateholders. Moreover, even under the foregoing method of allocation,
Certificateholders may be allocated income equal to the entire Pass Through Rate
plus the other items described above even though the Trust Fund might not have
sufficient cash to make current cash distributions of such amount. Thus, cash
basis holders will in effect be required to report income from the Certificates
on the accrual basis and Certificateholders may become liable for taxes on Trust
Fund income even if they have not received cash from the Trust Fund to pay such
taxes. In addition, because tax allocations and tax reporting will be done on a
uniform basis for all Certificateholders but Certificateholders may be
purchasing Certificates at different times and at different prices,
Certificateholders may be required to report on their tax returns taxable income
that is greater or less than the amount reported to them by the Trust Fund.
All of the taxable income allocated to a Certificateholder that is a
pension, profit sharing or employee benefit plan or other tax-exempt entity
(including an individual retirement account) will constitute 'unrelated business
taxable income' generally taxable to such a holder under the Code.
An individual taxpayer's share of expenses of the Trust Fund (including
fees to the Servicer but not interest expense) would be miscellaneous itemized
deductions. Such deductions might be disallowed to the individual in whole or in
part and might result in such holder being taxed on an amount of income that
exceeds the amount of cash actually distributed to such holder over the life of
the Trust Fund.
The Trust Fund intends to make all tax calculations relating to income and
allocations to Certificateholders on an aggregate basis. If the IRS were to
require that such calculations be made separately for each Contract, the Trust
Fund might be required to incur additional expense but it is believed that there
would not be a material adverse effect on Certificateholders.
Discount and Premium. It is believed that the Contracts were not issued
with OID, and, therefore, the Trust should not have OID income. However, the
purchase price paid by the Trust Fund for the Contracts may be greater or less
than the remaining principal balance of the Contracts at the time of purchase.
If so, the Contract will have been acquired at a premium or discount, as the
case may be. (As indicated above, the Trust Fund will make this calculation on
an aggregate basis, but might be required to recompute it on a Contract by
Contract basis.)
If the Trust Fund acquires the Contracts at a market discount or premium,
the Trust Fund will elect to include any such discount in income currently as it
accrues over the life of the Contracts or to offset any such premium against
interest income on the Contracts. As indicated above, a portion of such market
discount income or premium deduction may be allocated to Certificateholders.
Section 708 Termination. Under Section 708 of the Code, the Trust Fund
will be deemed to terminate for federal income tax purposes if 50% or more of
the capital and profits interests in the Trust Fund are sold or exchanged within
a 12-month period. If such a termination occurs, the Trust Fund will be
considered to distribute its assets to the partners, who would then be treated
as recontributing those assets to the Trust Fund as a new partnership. The Trust
Fund will not comply with certain technical requirements that might apply when
such a constructive termination occurs. As a result, the Trust Fund may be
subject to certain tax penalties and may incur additional expenses if it is
required to comply with those requirements. Furthermore, the Trust Fund might
not be able to comply 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.
A Certificateholder's tax basis in a Certificate will generally equal the
holder's cost increased by the holder's share
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of Trust Fund income (includible in income) and decreased by any distributions
received with respect to such Certificate. In addition, both the tax basis in
the Certificates and the amount realized on a sale of a Certificate would
include the holder's share of the Notes and other liabilities of the Trust Fund.
A holder acquiring Certificates at different prices may be required to maintain
a single aggregate adjusted tax basis in such Certificates, and, upon sale or
other disposition of some of the Certificates, allocate a portion of such
aggregate tax basis to the Certificates sold (rather than maintaining a separate
tax basis in each Certificate for purposes of computing gain or loss on a sale
of that Certificate).
Any gain on the sale of a Certificate attributable to the holder's share of
unrecognized accrued market discount on the Receivables would generally be
treated as ordinary income to the holder and would give rise to special tax
reporting requirements. The Trust Fund does not expect to have any other assets
that would give rise to such special reporting requirements. Thus, to avoid
those special reporting requirements, the Trust Fund will elect to include
market discount in income as it accrues.
If a Certificateholder is required to recognize an aggregate amount of
income (not including income attributable to disallowed itemized deductions
described above) over the life of the Certificates that exceeds the aggregate
cash distributions with respect thereto, such excess will generally give rise to
a capital loss upon the retirement of the Certificates.
Allocations Between Transferors and Transferees. In general, the Trust
Fund's taxable income and losses will be determined monthly and the tax items
for a particular calendar month will be apportioned among the Certificateholders
in proportion to the principal amount of Certificates owned by them as of the
close of the last day of such month. As a result, a holder purchasing
Certificates may be allocated tax items (which will affect its tax liability and
tax basis) attributable to periods before the actual transaction.
The use of such a monthly convention may not be permitted by existing
regulations. If a monthly convention is not allowed (or only applies to
transfers of less than all of the partner's interest), taxable income or losses
of the Trust Fund might be reallocated among the Certificateholders. The Trust
Fund's method of allocation between transferors and transferees may be revised
to conform to a method permitted by future regulations.
Section 754 Election. In the event that a Certificateholder sells its
Certificates at a profit (loss), the purchasing Certificateholder will have a
higher (lower) basis in the Certificates than the selling Certificateholder had.
The tax basis of the Trust Fund's assets will not be adjusted to reflect that
higher (or lower) basis unless the Trust Fund were to file an election under
Section 754 of the Code. In order to avoid the administrative complexities that
would be involved in keeping accurate accounting records, as well as potentially
onerous information reporting requirements, the Trust Fund will not make such
election. As a result, Certificateholders might be allocated a greater or lesser
amount of Trust Fund income than would be appropriate based on their own
purchase price for Certificates.
Administrative Matters. The Owner Trustee is required to keep or have kept
complete and accurate books of the Trust Fund. Such books will be maintained for
financial reporting and tax purposes on an accrual basis and the fiscal year of
the Trust will be the calendar year. The Trustee will file a partnership
information return (IRS Form 1065) with the IRS for each taxable year of the
Trust Fund and will report each Certificateholder's allocable share of items of
Trust Fund income and expense to holders and the IRS on Schedule K-1. The Trust
Fund will provide the Schedule K-1 information to nominees that fail to provide
the Trust Fund with the information statement described below and such nominees
will be required to forward such information to the beneficial owners of the
Certificates. Generally, holders must file tax returns that are consistent with
the information return filed by the Trust Fund or be subject to penalties unless
the holder notifies the IRS of all such inconsistencies.
Under Section 6031 of the Code, any person that holds Certificates as a
nominee at any time during a calendar year is required to furnish the Trust Fund
with a statement containing certain information on the nominee, the beneficial
owners and the Certificates so held. Such information includes (i) the name,
address and taxpayer identification number of the nominee and (ii) as to each
beneficial owner (x) the name, address and identification number of such person,
(y) whether such person is a United States person, a tax-exempt entity or a
foreign government, an international organization, or any wholly owned agency or
instrumentality of either of the foregoing, and (z) certain information on
Certificates that were held, bought or sold on behalf of such person throughout
the year. In addition, brokers and financial institutions that hold Certificates
through a nominee are required to furnish directly to the Trust Fund information
as to themselves and their ownership of Certificates. A clearing agency
registered under Section 17A of the Exchange Act is not required to furnish any
such information statement to the Trust Fund. The information referred to above
for any calendar year must be furnished to the
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Trust Fund on or before the following January 31. Nominees, brokers and
financial institutions that fail to provide the Trust Fund with the information
described above may be subject to penalties.
The Company will be designated as the tax matters partner in the related
Trust Agreement and, as such, will be responsible for representing the
Certificateholders in any dispute with the IRS. The Code provides for
administrative examination of a partnership as if the partnership were a
separate and distinct taxpayer. Generally, the statute of limitations for
partnership items does not expire before three years after the date on which the
partnership information return is filed. Any adverse determination following an
audit of the return of the Trust Fund by the appropriate taxing authorities
could result in an adjustment of the returns of the Certificateholders, and,
under certain circumstances, a Certificateholder may be precluded from
separately litigating a proposed adjustment to the items of the Trust Fund. An
adjustment could also result in an audit of a Certificateholder's returns and
adjustments of items not related to the income and losses of the Trust Fund.
Tax Consequences to Foreign Certificateholders. It is not clear whether
the Trust Fund would be considered to be engaged in a trade or business in the
United States for purposes of federal withholding taxes with respect to non-U.S.
persons because there is no clear authority dealing with that issue under facts
substantially similar to those described herein. Although it is not expected
that the Trust Fund would be engaged in a trade or business in the United States
for such purposes, the Trust Fund will withhold as if it were so engaged in
order to protect the Trust Fund from possible adverse consequences of a failure
to withhold. The Trust Fund expects to withhold on the portion of its taxable
income that is allocable to foreign Certificateholders pursuant to Section 1446
of the Code, as if such income were effectively connected to a U.S. trade or
business, at a rate of 35% for foreign holders that are taxable as corporations
and 39.6% for all other foreign holders. Subsequent adoption of Treasury
regulations or the issuance of other administrative pronouncements may require
the Trust to change its withholding procedures. In determining a holder's
withholding status, the Trust Fund may rely on IRS Form W-8, IRS Form W-9 or the
holder's certification of nonforeign status signed under penalties of perjury.
Each foreign holder might be required to file a U.S. individual or
corporate income tax return (including, in the case of a corporation, the branch
profits tax) on its share of the Trust Fund's income. Each foreign holder must
obtain a taxpayer identification number from the IRS and submit that number to
the Trust on Form W-8 in order to assure appropriate crediting of the taxes
withheld. A foreign holder generally would be entitled to file with the IRS a
claim for refund with respect to taxes withheld by the Trust Fund taking the
position that no taxes were due because the Trust Fund was not engaged in a U.S.
trade or business. However, interest payments made (or accrued) to a
Certificateholder who is a foreign person generally will be considered
guaranteed payments to the extent such payments are determined without regard to
the income of the Trust Fund. If these interest payments are properly
characterized as guaranteed payments, then the interest will not be considered
'portfolio interest.' As a result, Certificateholders will be subject to United
States federal income tax and withholding tax at a rate of 30 percent, unless
reduced or eliminated pursuant to an applicable treaty. In such case, a foreign
holder would only be entitled to claim a refund for that portion of the taxes in
excess of the taxes that should be withheld with respect to the guaranteed
payments.
Backup Withholding. Distributions made on the Certificates and proceeds
from the sale of the Certificates will be subject to a 'backup' withholding tax
of 31% if, in general, the Certificateholder fails to comply with certain
identification procedures, unless the holder is an exempt recipient under
applicable provisions of the Code.
STATE TAX CONSIDERATIONS
In addition to the federal income tax consequences described in 'Certain
Federal Income Tax Considerations,' potential investors should consider the
state and local income tax consequences of the acquisition, ownership, and
disposition of the Securities. State and local income tax law may differ
substantially from the corresponding federal law, and this discussion does not
purport to describe any aspect of the income tax laws of any state or locality.
Therefore, potential investors should consult their own tax advisors with
respect to the various state and local tax consequences of an investment in the
Securities.
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ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended ('ERISA')
and the Code impose certain restrictions on employee benefit plans subject to
ERISA and on plans and other arrangements subject to Section 4975 of the Code
('Plans'), and on persons who are parties in interest or disqualified persons
('parties in interest') with respect to such Plans. Certain employee benefit
plans, such as governmental plans and church plans (if no election has been made
under Section 410(d) of the Code), are not subject to the restrictions of ERISA,
and assets of such plans may be invested in the Securities without regard to the
ERISA considerations described below, subject to other applicable federal and
state law. However, any such governmental or church plan which is qualified
under Section 401(a) of the Code and exempt from taxation under Section 501(a)
of the Code is subject to the prohibited transaction rules set forth in Section
503 of the Code.
Investments by Plans are subject to ERISA's general fiduciary requirements,
including the requirement of investment prudence and diversification and the
requirement that a Plan's investments be made in accordance with the documents
governing the Plan.
Section 406 of ERISA prohibits parties in interest with respect to a Plan
from engaging in certain transactions ('prohibited transactions') involving a
Plan and its assets unless a statutory or administrative exemption applies to
the transaction. Section 4975 of the Code imposes certain excise taxes (or, in
some cases, a civil penalty may be assessed pursuant to Section 502(i) of ERISA)
on parties in interest which engage in non-exempt prohibited transactions.
The United States Department of Labor ('DOL') has issued a final regulation
(29 C.F.R. Section 2510.3-101) containing rules for determining what constitutes
the assets of a Plan. This regulation provides that, as a general rule, the
underlying assets and properties of corporations, partnerships, trusts and
certain other entities in which a Plan makes an investment in an 'equity
interest' will be deemed for purposes of ERISA to be assets of the Plan unless
certain exceptions apply.
Under the terms of the regulation, the Trust Fund may be deemed to hold
plan assets by reason of a Plan's investment in a Security; such plan assets
would include an undivided interest in the Primary Assets and any other assets
held by the Trust Fund. In such an event, persons providing services with
respect to the assets of the Trust Fund, may be parties in interest, subject to
the fiduciary responsibility provisions of Title I of ERISA, including the
prohibited transaction provisions of Section 406 of ERISA (and of Section 4975
of the Code), with respect to transactions involving such assets unless such
transactions are subject to a statutory or administrative exemption.
One such exception applies if the interest described is treated as
indebtedness under applicable local law and which has no substantial equity
features. Generally, a profits interest in a partnership, an undivided ownership
interest in property and a beneficial ownership interest in a trust are deemed
to be 'equity interests' under the final regulation. If Notes of a particular
Series were deemed to be indebtedness under applicable local law without any
substantial equity features, an investing Plan's assets would include such
Notes, but not, by reason of such purchase, the underlying assets of the Trust
Fund.
Another such exception applies if the class of equity interests in question
is: (i) 'widely held' (held by 100 or more investors who are independent of the
Depositor and each other); (ii) freely transferable; and (iii) sold as part of
an offering pursuant to (A) an effective registration statement under the
Securities Act of 1933, and then subsequently registered under the Securities
Exchange Act of 1934 or (B) an effective registration statement under Section
12(b) or 12(g) of the Securities Exchange Act of 1934 ('Publicly Offered
Securities'). In addition, the regulation provides that if at all times more
than 75% of the value of all classes of equity interests in the Depositor or the
Trust Fund are held by investors other than benefit plan investors (which is
defined as including plans subject to ERISA, government plans and individual
retirement accounts), the investing Plan's assets will not include any of the
underlying assets of the Depositor or the Trust Fund.
An additional exemption may also be available. On February 22, 1991, the
DOL granted to Lehman Brothers an administrative exemption, Prohibited
Transaction Exemption 91-14 (Application No. D-7958, 56 Fed. Reg. 7414) (the
'Exemption'), from certain of the prohibited transaction rules of ERISA with
respect to the initial purchase, the holding and the subsequent resale by Plans
of securities representing interests in asset-backed pass-through trusts that
consist of certain receivables, loans and other obligations that meet the
conditions and
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requirements of the Exemption. These securities should include the Certificates,
and depending upon the particular characteristics of a Series, may include the
Notes. The obligations covered by the Exemption include obligations such as the
Primary Assets (other than an agency or instrumentality thereof, or Home
Improvement Contracts that are unsecured). The Exemption will apply to the
acquisition, holding and resale of the Securities by a Plan, provided that
certain conditions (certain of which are described below) are met.
Among the conditions which must be satisfied for the Exemption to apply are
the following:
(i) The acquisition of the Securities 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;
(ii) The rights and interests evidenced by the Securities acquired by
the Plan are not subordinated to the rights and interests evidenced by
other securities of the trust;
(iii) The Securities acquired by the Plan have received a rating at
the time of such acquisition that is in one of the three highest generic
rating categories from either Standard & Poor's Ratings Group ('Standard &
Poor's'), Moody's Investors Service, Inc. ('Moody's'), Duff & Phelps Inc.
('D&P') or Fitch Investors Service, Inc. ('Fitch');
(iv) The sum of all payments made to the underwriter in connection
with the distribution of the Securities represents not more than reasonable
compensation for underwriting the Securities. The sum of all payments made
to and retained by the seller pursuant to the sale of the obligations to
the trust represents not more than the fair market value of such
obligations. The sum of all payments made to and retained by the servicer
represents not more than reasonable compensation for the servicer's
services under the related servicing agreement and reimbursement of the
servicer's reasonable expenses in connection therewith;
(v) The Trustee must not be an affiliate of any other member of the
Restricted Group (as defined below); and
(vi) The Plan investing in the Securities is an 'accredited investor'
as defined in Rule 501(a)(1) of Regulation D of the Securities and Exchange
Commission under the Securities Act of 1933.
The trust also must meet the following requirements:
(i) the corpus of the trust must consist solely of assets of the type
which have been included in other investment pools;
(ii) securities in such other investment pools must have been rated in
one of the three highest rating categories of Standard & Poor's, Moody's,
D&P or Fitch for at least one year prior to the Plan's acquisition of
securities; and
(iii) securities evidencing interests in such other investment pools
must have been purchased by investors other than Plans for at least one
year prior to any Plan's acquisition of Securities.
Moreover, the Exemption provides relief from certain self-dealing/conflict
of interest prohibited transactions that may occur when the Plan fiduciary
causes a Plan to acquire securities in a trust in which the fiduciary (or its
affiliate) is an obligor on the receivables held in the trust provided that,
among other requirements: (i) in the case of an acquisition in connection with
the initial issuance of Securities, at least fifty (50) percent of each Class of
Securities in which Plans have invested is acquired by persons independent of
the Restricted Group and at least fifty (50) percent of the aggregate interest
in the trust is acquired by persons independent of the Restricted Group; (ii)
such fiduciary (or its affiliate) is an obligor with respect to five (5) percent
or less of the fair market value of the obligations contained in the trust;
(iii) the Plan's investment in Securities does not exceed twenty-five (25)
percent of all of the Securities outstanding after the acquisition; and (iv) no
more than twenty-five (25) percent of the assets of the Plan are invested in
securities representing an interest in one or more trusts containing assets sold
or serviced by the same entity. The Exemption does not apply to Plans sponsored
by the Company, the underwriters of the Securities, the Trustee, the Servicer,
any obligor with respect to obligations included in a Trust Fund constituting
more than five (5) percent of the aggregate unamortized principal balance of the
assets in a Trust Fund, or any affiliate of such parties (the 'Restricted
Group').
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Prospective Plan investors should consult with their legal advisors
concerning the impact of ERISA and the Code, the potential application of the
Exemption to the purchase and holding of the Securities and the potential
consequences to their specific circumstances, prior to making an investment in
the Securities. Moreover, each Plan fiduciary should determine whether under the
general fiduciary standards of investment procedure and diversification an
investment in the Securities is appropriate for the Plan, taking into account
the overall investment policy of the Plan and the composition of the Plan's
investment portfolio. In this regard, purchasers that are insurance companies
should consult with their counsel with respect to the recent United States
Supreme Court case interpreting the fiduciary responsibility rules of ERISA,
John Hancock Mutual Life Insurance Co. v. Harris Trust and Savings Bank (decided
December 13, 1993). In John Hancock, the Supreme Court ruled that assets held in
an insurance company's general account may be deemed to be 'plan assets' for
purposes of ERISA under certain circumstances. Prospective purchasers should
determine whether the decision affects their ability to purchase the Securities.
LEGAL INVESTMENT
Unless otherwise specified in the related Prospectus Supplement, the
Securities will not constitute 'mortgage-related securities' within the meaning
of SMMEA. Accordingly, investors whose investment authority is subject to legal
restrictions should consult their own legal advisors to determine whether and to
what extent the Securities constitute legal investments for them.
PLAN OF DISTRIBUTION
The Depositor may offer each Series of Securities through Lehman Brothers
Inc. ('Lehman Brothers') or one or more other firms that may be designated at
the time of each offering of such Securities. The participation of Lehman
Brothers in any offering will comply with Schedule E to the By-Laws of the
National Association of Securities Dealers, Inc. The Prospectus Supplement
relating to each Series of Securities will set forth the specific terms of the
offering of such Series of Securities and of each Class within such Series, the
names of the underwriters, the purchase price of the Securities, the proceeds to
the Depositor from such sale, any securities exchange on which the Securities
may be listed, and, if applicable, the initial public offering prices, the
discounts and commissions to the underwriters and any discounts and concessions
allowed or reallowed to certain dealers. The place and time of delivery of each
Series of Securities will also be set forth in the Prospectus Supplement
relating to such Series. Lehman Brothers is an affiliate of the Depositor.
LEGAL MATTERS
Unless otherwise specified in the related Prospectus Supplement, certain
legal matters in connection with the Securities will be passed upon for the
Company by Brown & Wood, New York, New York.
ADDITIONAL INFORMATION
Copies of the Registration Statement of which this Prospectus forms a part
and the exhibits thereto are on file at the offices of the Securities and
Exchange Commission in Washington, D.C. Copies may be obtained at rates
prescribed by the Commission upon request to the Commission, and may be
inspected, without charge, at the offices of the Commission, 450 Fifth Street,
N.W., Washington, D.C. See 'Available Information.'
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GLOSSARY OF TERMS
The following are abbreviated definitions of certain capitalized terms used
in this Prospectus. Unless otherwise provided in a 'Supplemental Glossary' in
the Prospectus Supplement for a Series, such definitions shall apply to
capitalized terms used in such Prospectus Supplement. The definitions may vary
from those in the related Agreement for a Series and the related Agreement for a
Series generally provides a more complete definition of certain of the terms.
Reference should be made to the related Agreement for a Series for a more
compete definition of such terms.
'Accrual Termination Date' means, with respect to a Class of Compound
Interest Securities, the Distribution Date specified in the related Prospectus
Supplement.
'Advance' means cash advanced by the Servicer in respect of delinquent
payments of principal of and interest on a Contract and for any other purposes
specified in the related Prospectus Supplement.
'Agreement' means, with respect to a Series of Certificates, the Pooling
and Servicing Agreement or Trust Agreement, and, with respect to a Series of
Notes, the Indenture and the Servicing Agreement, as the context requires.
'Appraised Value' means, with respect to property securing a Contract, the
lesser of the appraised value determined in an appraisal obtained at origination
of the Contract or sales price of such mortgaged property at such time.
'Asset Group' means, with respect to the Primary Assets and other assets
comprising the Trust Fund of a Series, a group of such Primary Assets and other
assets having the characteristics described in the related Prospectus
Supplement.
'Assumed Reinvestment Rate' means, with respect to a Series, the per annum
rate or rates specified in the related Prospectus Supplement for a particular
period or periods as the 'Assumed Reinvestment Rate' for funds held in any fund
or account for the Series.
'Available Distribution Amount' means the amount in the Distribution
Account (including amounts deposited therein from any reserve fund or other fund
or account) eligible for distribution to Holders on a Distribution Date.
'Bankruptcy Code' means the federal bankruptcy code, 11 United States Code
101 et seq., and related rules and regulations promulgated thereunder.
'Business Day' means a day that, in the City of New York or in the city or
cities in which the corporate trust office of the Trustee are located, is
neither a legal holiday nor a day on which banking institutions are authorized
or obligated by law, regulations or executive order to be closed.
'Certificate' means the Asset-Backed Certificates.
'Class' means a Class of Securities of a Series.
'Closing Date' means, with respect to a Series, the date specified in the
related Prospectus Supplement as the date on which Securities of such Series are
first issued.
'Code' means the Internal Revenue Code of 1986, as amended, and regulations
(including proposed regulations) or other pronouncements of the Internal Revenue
Service promulgated thereunder.
'Collection Account' means, with respect to a Series, the account
established in the name of the Servicer for the deposit by the Servicer of
payments received from the Primary Assets.
'Combined Loan-to-Value Ratio' means, with respect to a Contract, the ratio
determined as set forth in the related Prospectus Supplement taking into account
the amounts of any related senior mortgage loans on the related Mortgaged
Property.
'Commission' means the Securities and Exchange Commission.
'Compound Interest Security' means any Security of a Series on which all or
a portion of the interest accrued thereon is added to the principal balance of
such Security on each Distribution Date, through the Accrual
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Termination Date, and with respect to which no interest shall be payable until
such Accrual Termination Date, after which interest payments will be made on the
Compound Value thereof.
'Compound Value' means, with respect to a Class of Compound Interest
Securities, the original principal balance of such Class, plus all accrued and
unpaid interest, if any, previously added to the principal balance thereof and
reduced by any payments of principal previously made on such Class of Compound
Interest Securities.
'Condominium' means a form of ownership of real property wherein each owner
is entitled to the exclusive ownership and possession of his or her individual
Condominium Unit and also owns a proportionate undivided interest in all parts
of the Condominium Building (other than the individual Condominium Units) and
all areas or facilities, if any, for the common use of the Condominium Units.
'Condominium Association' means the person(s) appointed or elected by the
Condominium Unit owners to govern the affairs of the Condominium.
'Condominium Building' means a multi-unit building or buildings, or a group
of buildings whether or not attached to each other, located on property subject
to Condominium ownership.
'Condominium Unit' means an individual housing unit in a Condominium
Building.
'Contracts' means Home Improvement Contracts and Manufactured Housing
Contracts, collectively.
'Cooperative' means a corporation owned by tenant-stockholders who, through
the ownership of stock, shares or membership securities in the corporation,
receive proprietary leases or occupancy agreements which confer exclusive rights
to occupy specific units and which is described in Section 216 of the Code.
'Cooperative Dwelling' means an individual housing unit in a building owned
by a Cooperative.
'Cut-off Date' means the date designated as such in the related Prospectus
Supplement for a Series.
'Debt Securities' means Securities characterized as indebtedness for
federal income tax purposes, and Regular Interest Securities.
'Deferred Interest' means the excess of the interest accrued on the
outstanding principal balance of a Contract during a specified period over the
amount of interest required to be paid by an obligor on such Contract on the
related Due Date.
'Deposit Agreement' means a guaranteed investment contract or reinvestment
agreement providing for the investment of funds held in a fund or account,
guaranteeing a minimum or a fixed rate of return on the investment of moneys
deposited therein.
'Depositor' means Lehman ABS Corporation.
'Disqualified Organization' means the United States, any State or political
subdivision thereof, any possession of the United States, any foreign
government, any international organization, or any agency or instrumentality of
any of the foregoing, a rural electric or telephone cooperative described in
section 1381(a)(2)(C) of the Code, or any entity exempt from the tax imposed by
sections 1-1399 of the Code, if such entity is not subject to tax on its
unrelated business income.
'Distribution Account' means, with respect to a Series, the account
established in the name of the Trustee for the deposit of remittances received
from the Servicer with respect to the Primary Assets.
'Distribution Date' means, with respect to a Series or Class of Securities,
each date specified as a distribution date for such Series or Class in the
related Prospectus Supplement.
'Due Date' means each date, as specified in the related Prospectus
Supplement for a Series, on which any payment of principal or interest is due
and payable by the obligor on any Primary Asset pursuant to the terms thereof.
'Eligible Investments' means any one or more of the obligations or
securities described as such in the related Agreement.
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'Enhancement' means the enhancement for a Series, if any, specified in the
related Prospectus Supplement.
'Enhancer' means the provider of the Enhancement for a Series specified in
the related Prospectus Supplement.
'ERISA' means the Employee Retirement Income Security Act of 1974, as
amended.
'Escrow Account' means an account, established and maintained by the
Servicer for a Contract, into which payments by borrowers to pay taxes,
assessments, mortgage and hazard insurance premiums and other comparable items
required to be paid to the mortgagee are deposited.
'FHLMC' means the Federal Home Loan Mortgage Corporation.
'Final Scheduled Distribution Date' means, with respect to a Class of Notes
of a Series, the date no later than which principal thereof will be fully paid
and with respect to a Class of Certificates of a Series, the date after which no
Certificates of such Class will remain outstanding, in each case based on the
assumptions set forth in the related Prospectus Supplement.
'FNMA' means the Federal National Mortgage Association.
'Holder' means the person or entity in whose name a Security is registered.
'Home Improvements' means the home improvements financed by a Home
Improvement Contract.
'Home Improvement Contract' means any home improvement installment sales
contract or installment loan agreement which may be unsecured or secured by
purchase money security interests in the Home Improvement financed thereby or by
a mortgage on the related Mortgaged Property.
'HUD' means the United States Department of Housing and Urban Development.
'Indenture' means the indenture relating to a Series of Notes between the
Trust Fund and the Trustee.
'Index' means the index applicable to any adjustments in the Loan Rates of
any adjustable rate Contracts.
'Insurance Policies' means certain mortgage insurance, hazard insurance and
other insurance policies required to be maintained with respect to Contracts.
'Insurance Proceeds' means amounts paid by the insurer under any of the
Insurance Policies covering any Contract or Mortgaged Property.
'Interest Only Securities' means a Class of Securities entitled solely or
primarily to distributions of interest and which is identified as such in the
related Prospectus Supplement.
'IRS' means the Internal Revenue Service.
'LCPI' means Lehman Commercial Paper Inc.
'Lehman Brothers' means Lehman Brothers Inc.
'Lifetime Rate Cap' means the lifetime limit, if any, on the Loan Rate
during the life of each adjustable rate Contract.
'Liquidation Proceeds' means amounts received by the Servicer in connection
with the liquidation of a Contract, net of liquidation expenses.
'Loan Rate' means, unless otherwise indicated herein or in the Prospectus
Supplement, the interest rate borne by a Contract.
'Loan-to-Value Ratio' means, with respect to a Contract, the ratio
determined as set forth in the related Prospectus Supplement.
'Manufactured Housing Contract' means any conventional manufactured housing
installment sales contract or installment loan agreement originated by a
manufactured housing dealer in the ordinary course of
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business secured either by the related Manufactured Home or by a Mortgage on the
real estate on which the Manufactured Home is located.
'Minimum Rate' means the lifetime minimum Loan Rate during the life of each
adjustable rate Contract.
'Minimum Principal Payment Agreement' means a minimum principal payment
agreement with an entity meeting the criteria of the Rating Agencies.
'Modification' means a change in any term of a Contract.
'Mortgage' means the mortgage, deed of trust or other similar security
instrument securing a Mortgage Note.
'Mortgage Note' means the note or other evidence of indebtedness of a
Mortgagor under the Contract.
'Mortgagor' means the obligor on a Mortgage Note.
'1986 Act' means the Tax Reform Act of 1986.
'Notes' means the Asset-Backed Notes.
'Notional Amount' means the amount set forth in the related Prospectus
Supplement for a Class of Interest Only Securities.
'PAC' ('Planned Amortization Class Securities') means a Class of Securities
of a Series on which payments of principal are made in accordance with a
schedule specified in the related Prospectus Supplement, based on certain
assumptions stated therein.
'Participating Securities' means Securities entitled to receive payments of
principal and interest and an additional return on investment as described in
the related Prospectus Supplement.
'Pass-Through Security' means a security representing an undivided
beneficial interest in a pool of assets, including the right to receive a
portion of all principal and interest payments relating to those assets.
'Pay Through Security' means Regular Interest Securities and certain Debt
Securities that are subject to acceleration due to prepayments on the underlying
Primary Assets.
'Person' means any individual, corporation, partnership, joint venture,
association, joint stock company, trust (including any beneficiary thereof),
unincorporated organization, or government or any agency or political
subdivision thereof.
'Pooling and Servicing Agreement' means the pooling and servicing agreement
relating to a Series of Certificates among the Depositor, the Servicer and the
Trustee.
'Principal Balance' means, with respect to a Primary Asset and as of a Due
Date, the original principal amount of the Primary Asset, plus the amount of any
Deferred Interest added to such principal amount, reduced by all payments, both
scheduled or otherwise, received on such Primary Asset prior to such Due Date
and applied to principal in accordance with the terms of the Primary Asset.
'Principal Only Securities' means a Class of Securities entitled solely or
primarily to distributions of principal and identified as such in the Prospectus
Supplement.
'Property' means either a Home Improvement, a Manufactured Home or a
Mortgaged Property securing a Contract, as the context requires.
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'Qualified Insurer' means a mortgage guarantee or insurance company duly
qualified as such under the laws of the states in which the Mortgaged Properties
are located duly authorized and licensed in such states to transact the
applicable insurance business and to write the insurance provided.
'Rating Agency' means the nationally recognized statistical rating
organization (or organizations) which was (or were) requested by the Depositor
to rate the Securities upon the original issuance thereof.
'Regular Interest' means a regular interest in a REMIC.
'REMIC' means a real estate mortgage investment conduit.
'REMIC Administrator' means the Person, if any, specified in the related
Prospectus Supplement for a Series for which a REMIC election is made, to serve
as administrator of the Series.
'REMIC Provisions' means the provisions of the federal income tax law
relating to real estate mortgage investment conduits, which appear at sections
860A through 860G of Subchapter M of Chapter 1 of the Code, and related
provisions, and regulations, including proposed regulations and rulings, and
administrative pronouncements promulgated thereunder, as the foregoing may be in
effect from time to time.
'REO Property' means real property which secured a defaulted Contract,
beneficial ownership of which has been acquired upon foreclosure, deed in lieu
of foreclosure, repossession or otherwise.
'Reserve Fund' means, with respect to a Series, any Reserve Fund
established pursuant to the related Agreement.
'Residual Interest' means a residual interest in a REMIC.
'Retained Interest' means, with respect to a Primary Asset, the amount or
percentaged specified in the related Prospectus Supplement which is not included
in the Trust Fund for the related Series.
'Scheduled Payments' means the scheduled payments of principal and interest
to be made by the borrower on a Primary Asset.
'Securities' means the Notes or the Certificates.
'Seller' means the seller of the Primary Assets to the Depositor identified
in the related Prospectus Supplement for a Series.
'Senior Securityholder' means a holder of a Senior Security.
'Senior Securities' means a Class of Securities as to which the holders'
rights to receive distributions of principal and interest are senior to the
rights of holders of Subordinate Securities, to the extent specified in the
related Prospectus Supplement.
'Series' means a separate series of Securities sold pursuant to this
Prospectus and the related Prospectus Supplement.
'Servicer' means, with respect to a Series, the Person if any, designated
in the related Prospectus Supplement to service Contracts for that Series, or
the successors or assigns of such Person.
'Single Family Property' means property securing a Contract consisting of
one- to four-family attached or detached residential housing, including
Cooperative Dwellings.
'Stripped Securities' means Pass-Through Securities representing interests
in Primary Assets with respect to which all or a portion of the principal
payments have been separated from all or a portion of the interest payments.
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'Subordinate Securityholder' means a Holder of a Subordinate Security.
'Subordinated Securities' means a Class of Securities as to which the
rights of holders to receive distributions of principal, interest or both is
subordinated to the rights of holders of Senior Securities, and may be allocated
losses and shortfalls prior to the allocation thereof to other Classes of
Securities, to the extent and under the circumstances specified in the related
Prospectus Supplement.
'Trustee' means the trustee under the applicable Agreement and its
successors.
'Trust Fund' means, with respect to any Series of Securities, the trust
holding all money, instruments, securities and other property, including all
proceeds thereof, which are, with respect to a Series of Certificates, held for
the benefit of the Holders by the Trustee under the Pooling and Servicing
Agreement or Trust Agreement, or, with respect to a Series of Notes, pledged to
the Trustee under the Indenture as a security for such Notes, including, without
limitation, the Primary Assets (except any Retained Interests), all amounts in
the Distribution Account, Collection Account or Reserve Funds, distributions on
the Primary Assets (net of servicing fees), and reinvestment earnings on such
net distributions and any Enhancement and all other property and interests held
by or pledged to the Trustee pursuant to the related Agreement for such Series.
'UCC' means the Uniform Commercial Code.
'Variable Interest Security' means a Security on which interest accrues at
a rate that is adjusted, based upon a predetermined index, at fixed periodic
intervals, all as set forth in the related Prospectus Supplement.
'Zero Coupon Security' means a Security entitled to receive payments of
principal only.
72
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuances and Distribution.*
The estimated expenses in connection with the issuance and distribution of
the securities being registered, other than underwriting compensation, are:
<TABLE>
<S> <C>
SEC Filing Fees. . . . . . . . . . . . . . . . . . . . . . $344,827.58
Legal Fees and Expenses. . . . . . . . . . . . . . . . . . 200,000.00
Accounting Fees and Expenses . . . . . . . . . . . . . . . 40,000.00
Blue Sky Fees and Expenses . . . . . . . . . . . . . . . . 25,000.00
Trustee's Fees and Expenses. . . . . . . . . . . . . . . . 12,000.00
Rating Agency Fees . . . . . . . . . . . . . . . . . . . . 128,000.00
Printing and Engraving Fees. . . . . . . . . . . . . . . . 60,000.00
Miscellaneous. . . . . . . . . . . . . . . . . . . . . . . 20,000.00
----------
Total . . . . . . . . . . . . . . . . . . . . . . . . $829,827.58
==========
</TABLE>
- ------------
* All amounts, except the SEC Filing Fee, are estimates for expenses incurred
or to be incurred in connection with the issuance and distribution of one or
more series Securities in an aggregate principal amount assumed for these
purposes to be equal to the aggregate of the $1,000,000,000 of Securities
registered hereby and the amount previously registered and currently
outstanding.
Item 15. Indemnification of Directors and Officers.
Article VIII, Section 6, of the By-Laws of the Depositor sets forth
certain rights of the directors and officers of the Depositor to
indemnification. In addition, Section 145 of the Delaware General Corporation
Law contains detailed provisions on indemnification of directors and officers
of a Delaware corporation against expenses, judgments and the like in
connection with litigation. Reference is made to Exhibit 3.2 to this
Registration Statement for the complete text of Article VIII, Section 6 of the
By-laws.
Item 16. Exhibits.
1.1- Form of Underwriting Agreement.*
1.2- Form of Underwriting Agreement.**
3.1- Restated Certificate of Incorporation of Lehman ABS Corporation.***
3.2- Form of By-Laws of Lehman ABS Corporation.+
4.1- Form of Pooling and Servicing Agreement.*
4.2- Form of Pooling Agreement.++
4.3- Form of Trust Agreement.**
4.4- Form of Master Pooling and Servicing Agreement.**
4.5- Form of Sale Agreement.**
4.6- Form of Indenture.**
4.7- Form of Trust Agreement.++++++
5.1- Opinion of Brown & Wood as to legality.*********
8.1- Opinion of Brown & Wood as to tax matters.*********
10.1- Form of Mortgage Loan Purchase Agreement.++++++
23.1- Consent of Brown & Wood (included as part of Exhibits 5.1
and 8.1).
23.3- Consent of Ernst & Young.******
23.4- Consent of Coopers & Lybrand.*****
23.5- Consent of KPMG Peat Marwick.********
24.1- Power of Attorney of Directors and Officers
of Company.++++++++++
25.1- Form T-1 Statement of Eligibility and Qualification under, and
Application to Determine Eligibility of a Trustee Pursuant to
Section 305(b)(2) of, the Trust Indenture Act of 1939 of The
Bank of New York. (separately bound)++++
25.2- Form T-1 Statement of Eligibility and Qualification under, and
Application to Determine Eligibility of a Trustee Pursuant to
Section 305(b)(2) of, the Trust Indenture Act of 1939 of The
First National Bank of Chicago (separately bound).++++++++++
99.1- Financial statements of Financial Security Assurance Inc. as of
December 31, 1994, 1993 and 1992 (audited) and as of June 30,
1995 (unaudited).*****
99.2- Form of Certificate Insurance Policy.*****
99.3- Financial statements of Capital Markets Assurance Corporation as
of December 31, 1994 and 1993 and the six-month period ended
December 31, 1992 (audited) and as of March 31, 1995
(unaudited).********
99.4- Form of Surety Bond issued by Capital Markets Assurance
Corporation.********
99.5- Financial Statements of Financial Guaranty Insurance Company as
of December 31, 1994 and 1993 (audited) and as of June 30, 1995
(unaudited).******
99.6- Form of Certificate Insurance Policy.******
99.7- Financial Statements of Municipal Bond Investors Assurance
Corporation as of December 31, 1994 and 1993 (audited) and as
of September 30, 1995 (unaudited).*******
99.8- Form of Certificate Insurance Policy.*******
- ------------
* Previously filed in Post-Effective Amendment No. 1 to Registration
Statement on Form S-3 (Reg. No. 33-67542), filed with the
Commission by the Registrant on August 17, 1993.
** Previously filed in Pre-Effective Amendment No. 1 to Registration
Statement on Form S-3 (Reg. No. 33-69720), filed with the
Commission by the Registrant on November 16, 1993.
*** Incorporated by reference to Post-Effective Amendment No. 1 to
Registration Statement on Form S-3 (Reg. No. 33-67542), filed with
the Commission by the Registrant on August 17, 1993.
+ Incorporated by reference to Post-Effective Amendment No. 1 to
Registration Statement on Form S-3 (Reg. No. 33-20084), filed with
the Commission by the Registrant on January 13, 1993.
++ Previously filed in Post-Effective Amendment No. 5 to Registration
Statement on Form S-3 (Reg. No. 33-67542), filed with the
Commission by the Registrant on February 28, 1994.
**** Previously filed in Post-Effective Amendment No. 2 to Registration
Statement on Form S-3 (Reg. No. 33- 90642), filed with the
Commission by the Registrant on July 17, 1995.
++++ Previously filed in Post-Effective Amendment No. 3 to Registration
Statement on Form S-3 (Reg. No. 33-78396), filed with the
Commission by the Registrant on May 20, 1994.
++++++ Previously filed in Registration Statement on Form S-3 (Reg. No.
33-85946) and Post-Effective Amendment No. 6 to Registration
Statement on Form S-3 (Reg No. 33-78396), filed with the Commission
by the Registrant on November 3, 1994.
++++++++ Previously filed in Registration Statement on Form S-3 (Reg. No.
33-87188), filed with the Commission on December 7, 1994.
++++++++++ Previously filed in Registration Statement on Form S-3 (Reg. No.
33-90642), filed with the Commission on March 27, 1995.
***** Previously filed in Post-Effective Amendment No. 3 to Registration
Statement on Form S-3 (Reg. No. 33-90642), filed with the
Commission on July 24, 1995.
****** Previously filed in Post-Effective Amendment No. 1 to Registration
Statement on Form S-3 (Reg. No. 33-98594), filed with the
Commission on November 9, 1995.
******* Previously filed in Post-Effective Amendment No. 2 to Registration
Statement on Form S-3 (Reg. No. 33-98594), filed with the
Commission on November 14, 1995.
******** Previously filed in Post-Effective Amendment No. 3 to Registration
Statement on Form S-3 (Reg. No. 33-98594), filed with the
Commission on November 15, 1995.
********* Previously filed in Registration Statement on Form S-3 (Reg. No.
333-3911), filed with the Commission on May 16, 1996.
Item 17. Undertakings.
A. Undertaking Pursuant to Rule 415.
The Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set
forth in the Registration Statement; and
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement
or any material change of such information in the Registration
Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933 each such post- effective amendment shall be deemed to
be a new registration statement relating to the securities offered therein, and
the offering of such 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. Filings Incorporating Subsequent Exchange Act Documents by Reference.
The Registrant hereby undertakes that, for the purposes of determining any
liability under the Securities Act of 1933, each filing of the registrant's
annual report pursuant to Section 13(a) or 15(d) of the Securities Exchange Act
of 1934 (and, where applicable, each filing of an employee benefit plan's
annual report pursuant to Section 15(d) of the Securities Exchange Act of 1934)
that is incorporated by reference in the registration statement shall be deemed
to be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
C. Undertaking in respect of indemnification.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the 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 such 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
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of 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 the
13th day of June, 1996.
LEHMAN ABS CORPORATION
By /s/ Michael J. O'Hanlon
--------------------------
Michael J. O'Hanlon
Chairman of the Board and Assistant Secretary
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed below by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
* Chairman of the Board June 13, 1996
- ----------------------- Director and
Michael J. O'Hanlon Assistant Secretary
* President (Principal June 13, 1996
- ----------------------- Executive Officer)
Theodore P. Janulis
* (Principal Financial June 13, 1996
- ----------------------- Officer)
Charles Hintz
* Controller (Principal June 13, 1996
- ----------------------- Accounting Officer)
David Goldfarb
* Director June 13, 1996
- -----------------------
James J. Sullivan
* Director June 13, 1996
- -----------------------
Brian R. Zipp
*By: /s/ Martin P. Harding
---------------------
Attorney-in-fact
</TABLE>
