<PAGE>
Rule 424(b)(3)
File No. 33-99494
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 DELIVERY OF THE FINAL PROSPECTUS
SUPPLEMENT. THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING 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 FEBRUARY 9, 1996
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED DECEMBER 21, 1995)
$146,190,000
LEHMAN HOME EQUITY LOAN TRUST 1996-1
REVOLVING HOME EQUITY LOAN ASSET-BACKED CERTIFICATES,
SERIES 1996-1
------------------
LEHMAN ABS CORPORATION,
AS DEPOSITOR
------------------
COUNTRYWIDE FUNDING CORPORATION,
AS SELLER AND SERVICER
------------------
Each Revolving Home Equity Loan Asset-Backed Certificate, Series 1996-1
(collectively, the 'Certificates') will represent an undivided interest in the
Lehman Home Equity Loan Trust 1996-1 (the 'Trust') to be formed pursuant to a
Pooling and Servicing Agreement among Countrywide Funding Corporation
('Countrywide'), as Seller and Servicer, Lehman ABS Corporation, as Depositor,
and The First National Bank of Chicago, as Trustee. The property of the Trust
will include a pool of adjustable rate home equity 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 Mortgage Loans are secured
primarily by first and second deeds of trust or mortgages on one- to four-family
residential properties.
The aggregate undivided interest in the Trust represented by the
Certificates will, as of December 29, 1995 (the 'Cut-Off Date'), represent
approximately 98% of the outstanding principal balances of the Mortgage Loans.
The remaining undivided interest in the Trust not represented by the
Certificates (the 'Transferor Interest') will initially be equal to
$2,983,481.38, which as of the Cut-Off Date is 2% of the outstanding principal
balances of the Mortgage Loans. Only the Certificates are offered hereby.
Distributions of principal and interest on the Certificates will be made on
the fifteenth day of each month or, if such date is not a Business Day, then on
the succeeding Business Day (each, a 'Distribution Date'), commencing March 15,
1996. On each Distribution Date, holders of the Certificates will be entitled to
receive, from and to the limited extent of funds available in the Collection
Account (as defined herein), distributions with respect to interest and
principal calculated as set forth herein. The Certificates are not guaranteed by
the Depositor, Countrywide or any affiliate thereof. However, the Certificates
will be unconditionally and irrevocably guaranteed as to the payment of the
Guaranteed Distributions (as defined herein) on each Distribution Date pursuant
to the terms of a financial guaranty insurance policy (the 'Policy') to be
issued by
[LOGO]
There is currently no market for the Certificates offered hereby and there
can be no assurance that such a market will develop or if it does develop that
it will continue. See 'RISK FACTORS' herein and in the Prospectus.
------------------
PROSPECTIVE INVESTORS SHOULD REVIEW THE INFORMATION SET FORTH UNDER 'RISK
FACTORS' ON PAGE S-12 HEREIN AND ON PAGE 11 IN THE ACCOMPANYING PROSPECTUS.
THE CERTIFICATES REPRESENT INTERESTS IN THE TRUST ONLY AND DO NOT REPRESENT
INTERESTS IN OR OBLIGATIONS OF THE DEPOSITOR, COUNTRYWIDE, THE TRUSTEE OR ANY
AFFILIATE THEREOF, EXCEPT TO THE EXTENT PROVIDED HEREIN. NEITHER THE
CERTIFICATES NOR THE MORTGAGE LOANS ARE 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.
<TABLE>
<CAPTION>
PROCEEDS TO
PRICE TO UNDERWRITING THE
PUBLIC(1) DISCOUNT(2) DEPOSITOR(3)
<S> <C> <C> <C>
Per Certificate...... % % %
Total................ $ $ $
</TABLE>
(1) Plus accrued interest, if any, from February , 1996.
(2) The Depositor has agreed to indemnify the Underwriter against certain
liabilities, including liabilities under the Securities Act of 1933.
(3) Before deducting expenses, estimated to be $ .
------------------
The Certificates are offered subject to prior sale and subject to the
Underwriter's right to reject orders in whole or in part. It is expected that
delivery of the Certificates will be made in book-entry form only through the
facilities of The Depository Trust Company, CEDEL S.A. and the Euroclear System
on or about February 22, 1996 (the 'Closing Date'). The Certificates will be
offered in Europe and the United States of America.
------------------
LEHMAN BROTHERS
February , 1996
<PAGE>
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE CERTIFICATES AT
LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
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
Revolving Home Equity Loan Asset-Backed Certificates being offered by Lehman ABS
Corporation from time to time pursuant to its Prospectus dated December 21,
1995. 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:
(a) the Depositor's Annual Report on Form 10-K for the fiscal year
ended November 30, 1994;
(b) the Depositor's Quarterly Report on Form 10-Q for the period ended
August 31, 1995; and
(c) the Depositor's Current Report on Form 8-K, filed with the
Commission on February 8, 1996.
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) 526-7000.
In addition to the documents described above under 'Incorporation of
Certain Documents by Reference,' the financial statements of the Certificate
Insurer included in, or as exhibits to, the following documents, which have been
filed with the Securities and Exchange Commission by Financial Security
Assurance Holdings Ltd. ('Holdings'), are hereby incorporated by reference in
this Prospectus Supplement:
(a) Annual Report on Form 10-K for the period ended December 31, 1994;
and
(b) Quarterly Report on Form 10-Q for the period ended September 30,
1995.
All financial statements of the Certificate Insurer included in documents
filed by Holdings pursuant to Section 13(a), 13(c), 14 or 15(d) of the 1934 Act
subsequent to the date of this Prospectus Supplement and prior to the
termination of the offering of the Certificates shall be deemed to be
incorporated by reference into this Prospectus Supplement and to be a part
hereof from the respective dates of filing such documents.
The Depositor hereby undertakes that, for purposes of determining any
liability under the Securities Act of 1933, each filing of the financial
statements of the Certificate Insurer included in or as an exhibit to the
documents of Holdings referred to above and filed pursuant to Section 13(a) or
Section 15(d) of the 1934 Act that is incorporated by reference in the
Registration Statement of which this Prospectus is a part shall be deemed to be
a new registration statement relating to the Certificates offered hereby, and
the offering of such Certificates at that time shall be deemed to be the initial
bona fide offering thereof.
S-2
<PAGE>
SUMMARY
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 Index of Defined Terms herein and the
Glossary of Terms in the Prospectus for the definitions of certain capitalized
terms.
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Trust...................... Lehman Home Equity Loan Trust 1996-1 (the 'Trust')
will be formed pursuant to a pooling and servicing
agreement (the 'Agreement') to be dated as of
December 29, 1995 (the 'Cut-Off Date') among
Countrywide Funding Corporation ('Countrywide'),
as seller and servicer (together with any
successor in such capacity, the 'Seller' and the
'Servicer', respectively), Lehman ABS Corporation,
as depositor (the 'Depositor'), and The First
National Bank of Chicago, as trustee (the
'Trustee'). The property of the Trust will
include: a pool of adjustable rate home equity
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 by
either first or second 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 (exclusive of
payments in respect of accrued interest due on or
prior to the Cut-Off Date or due in the month of
January); property that secured a Mortgage Loan
which has been acquired by foreclosure or deed in
lieu of foreclosure; an irrevocable and
unconditional limited financial guaranty insurance
policy (the 'Policy'); an assignment of the
Depositor's rights under the Purchase Agreement
(as defined herein); rights under certain hazard
insurance policies covering the Mortgaged
Properties; and certain other property, as
described more fully herein.
The Trust property 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 aggregate
Cut-Off Date Principal Balance of the Mortgage
Loans is $149,174,069.06 (the 'Cut-Off Date Pool
Balance'). The 'Principal Balance' of a Mortgage
Loan (other than a Liquidated Mortgage Loan) on
any day is equal to its Cut-Off Date Principal
Balance, plus (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 (as defined herein) after final recovery of
related Liquidation Proceeds (as defined herein)
shall be zero.
Securities Offered......... Each of the Revolving Home Equity Loan
Asset-Backed Certificates, Series 1996-1 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 payments
of principal at such time and to the extent
provided below. The aggregate undivided interest
in the Trust represented by the Certificates as of
the Closing Date will equal $146,190,587.68 (the
'Original Invested Amount'), which represents 98%
of the Cut-Off Date Pool Balance. The 'Original
Certificate Principal Balance' will equal
$146,190,000.00. Following the Closing Date, the
'Invested Amount' with respect to any date will be
an amount equal to the Original Invested Amount
minus (i) the amount of Investor Principal
Collections
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S-3
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(as defined herein) previously distributed to
Certificateholders, and minus (ii) an amount equal
to the product of the Investor Floating Allocation
Percentage and the Liquidation Loss Amounts (each
as defined herein). The Transferor (as described
below) will own the remaining undivided interest
(the 'Transferor Interest') in the Mortgage Loans,
which is equal to the Pool Balance minus the
Invested Amount and will initially equal
approximately 2% of the Cut-Off Date Pool Balance.
The Transferor (the 'Transferor') as of any date
is the owner of the Transferor Interest which
initially will be Countrywide.
The Certificates will be issued pursuant to the
Agreement. The principal amount of the outstanding
Certificates (the 'Certificate Principal Balance')
on any date is equal to the Original Certificate
Principal Balance minus the aggregate of amounts
actually distributed as principal to the
Certificateholders. See 'DESCRIPTION OF THE
CERTIFICATES' herein.
Removal of Certain Mortgage
Loans; Additional
Balances................... Subject to certain conditions, on any Distribution
Date the Transferor may, but shall not be
obligated to, remove from the Trust certain
Mortgage Loans without notice to the
Certificateholders. The Transferor is permitted to
designate the Mortgage Loans to be removed.
Mortgage Loans so designated will only be removed
upon satisfaction of certain conditions specified
in the Agreement, including: (i) the Transferor
Interest as of the Transfer Date (as defined
herein) (after giving effect to such removal)
exceeds the Minimum Transferor Interest (as
defined below); (ii) the Transferor shall have
delivered to the Trustee a 'Mortgage Loan
Schedule' containing a list of all Mortgage Loans
remaining in the Trust after such removal; (iii)
the Transferor shall represent and warrant that no
selection procedures which are adverse to the
interests of the Certificateholders or the
Certificate Insurer were used by the Transferor in
selecting such Mortgage Loans; (iv) in connection
with the first such retransfer of Mortgage Loans,
the Rating Agencies (as defined herein) shall have
been notified of the proposed transfer and prior
to the Transfer Date shall not have notified the
Transferor in writing that such transfer would
result in a reduction or withdrawal of the ratings
assigned to the Certificates without regard to the
Policy; and (v) the Transferor shall have
delivered to the Trustee and the Certificate
Insurer an officer's certificate confirming the
conditions set forth in clauses (i) through (iii)
above. See 'DESCRIPTION OF THE
CERTIFICATES--Optional Transfers of Mortgage Loans
to the Transferor.'
The 'Minimum Transferor Interest' as of any date
is an amount equal to the lesser of (a) 5% of the
Pool Balance on such date and (b) the Transferor
Interest as of the Closing Date.
During the term of the Trust, all Additional
Balances will be transferred to and become
property of the Trust. The Pool Balance at any
time will generally fluctuate from day to day
because the amount of Additional Balances and the
amount of principal payments with respect to the
Mortgage Loans will usually differ from day to
day. Because the Transferor Interest is equal to
the Pool Balance minus the Invested Amount, the
amount of the Transferor Interest will fluctuate
from day to day as draws are made with respect to
the Mortgage Loans and as Principal Collections
are received.
The Mortgage Loans......... The Mortgage Loans are secured by first and second
mortgages on Mortgaged Properties located in 41
states. On the Closing Date, Countrywide will sell
the Mortgage Loans to the Depositor, pursuant to a
purchase agreement (the 'Purchase Agreement').
The percentage of the Cut-Off Date Principal
Balance of the Mortgage Loans secured primarily by
Mortgaged Properties located in the states of
California,
</TABLE>
S-4
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<TABLE>
<S> <C>
Colorado, Washington, Florida, Oregon and New York
is approximately 39.92%, 4.74%, 4.60%, 4.42%,
4.14% and 4.02%, respectively. The 'Combined
Loan-to-Value Ratio' of each Mortgage Loan is the
ratio of (A) the sum of (i) the maximum amount the
borrower was permitted to draw down under the
related Credit Line Agreement (the 'Credit Limit')
and (ii) the amounts of any related senior
mortgage loans (computed as of the date of
origination of each such Mortgage Loans) to (B)
the lesser of (i) the appraised value of the
Mortgaged Property or (ii) in the case of a
Mortgaged Property purchased within one year of
the origination of the related Mortgage Loan, the
purchase price of such Mortgaged Property. As of
the Cut-Off Date the Combined Loan-to-Value Ratios
ranged from 3.81% to 100.00% and, as of the
Cut-Off Date, the weighted average Combined
Loan-to-Value Ratio of the Mortgage Loans was
approximately 73.78%.
Interest on each Mortgage Loan is payable monthly
and computed on the related daily outstanding
Principal Balance for each day in the billing
cycle at a variable rate per annum (the 'Loan
Rate') equal at any time (subject to maximum
rates, as described herein under 'DESCRIPTION OF
THE MORTGAGE LOANS-- Mortgage Loan Terms,' and
further subject to applicable usury limitations)
to the sum of (i) the highest prime rate published
in the 'Money Rates' section of The Wall Street
Journal and (ii) a Margin within the range of
0.50% to 5.25%. As of the Cut-Off Date, the
weighted average Margin was approximately 2.06%.
Loan Rates are adjusted monthly on the first
business day of the calendar month preceding the
Due Date. As to each Mortgage Loan, the 'Due Date'
is the fifteenth day of each month. The Cut-Off
Date Principal Balances ranged from zero to
$839,999.97 and averaged approximately $23,883.14.
Credit Limits under the Mortgage Loans as of the
Cut-Off Date ranged from $9,300.00 to $840,000.00
and averaged approximately $39,538.29. Each
Mortgage Loan was originated in the period from
November 1994 to December 1995. As of the Cut-Off
Date, the maximum Credit Limit Utilization Rate
(as defined herein) was 100% and the weighted
average Credit Limit Utilization Rate was
approximately 84.09%. As of the Cut-Off Date,
approximately 6.08% by Cut-Off Date Principal
Balance of the Mortgage Loans represented first
liens on the related Mortgaged Properties, while
approximately 93.92% of the Mortgage Loans
represented second liens. As of the Cut-Off Date,
the Mortgage Loans had remaining terms to
scheduled maturity ranging from 152 months to 323
months and had a weighted average of approximately
294 months. See 'DESCRIPTION OF THE MORTGAGE
LOANS' herein.
Denominations.............. The Certificates will be offered for purchase in
denominations of $1,000 and multiples of $1 in
excess thereof. The interest in the Trust
evidenced by a Certificate (the 'Percentage
Interest') will be equal to the percentage derived
by dividing the denomination of such Certificate
by the Original Certificate Principal Balance.
Registration of
Certificates............... The Certificates will initially be issued in
book-entry form. Persons acquiring beneficial
ownership interests in the Certificates
('Certificate Owners') may elect to hold their
Certificate 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 Certificates are Book-Entry
Certificates (as defined herein), such
Certificates will be evidenced by one or more
Certificates registered in the name of Cede & Co.
('Cede'), as the nominee of DTC or one of the
relevant depositaries (collectively,
</TABLE>
S-5
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<TABLE>
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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 or
Euroclear, respectively, and each a participating
member of DTC. The Certificates will initially be
registered in the name of Cede. The interests of
the Certificateholders will be represented by book
entries on the records of DTC and participating
members thereof. No Certificate Owner will be
entitled to receive a definitive certificate
representing such person's interest, except in the
event that Definitive Certificates (as defined
herein) are issued under the limited circumstances
described herein. All references in this
Prospectus Supplement to any Certificates reflect
the rights of Certificate Owners only as such
rights may be exercised through DTC and its
participating organizations for so long as such
Certificates are held by DTC. See 'RISK
FACTORS--Book-Entry Certificates', 'DESCRIPTION OF
THE CERTIFICATES--Book-Entry Certificates' and
'ANNEX I' hereto.
Depositor.................. Lehman ABS Corporation, a Delaware corporation.
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.
Servicer of the Mortgage
Loans...................... Countrywide Funding Corporation, a New York
corporation headquartered in Pasadena, California.
The principal executive offices of the Servicer
are located at 155 North Lake Avenue, Pasadena,
California 91101 (Telephone: (818) 304-8400). See
'SERVICING OF THE MORTGAGE LOANS--The Servicer'
herein.
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
amounts collected during the related Collection
Period, including the portion of Net Liquidation
Proceeds (as defined below) allocated to interest
pursuant to the terms of the Credit Line
Agreements less Servicing Fees for the related
Collection Period.
As to any Distribution Date, 'Principal
Collections' will be equal to the sum of the
amounts collected during the related Collection
Period, including the portion of Net Liquidation
Proceeds allocated to principal pursuant to the
terms of the Credit Line Agreements.
'Net Liquidation Proceeds' with respect to a
Mortgage Loan are the proceeds (excluding amounts
drawn on the Policy) received in connection with
the liquidation of any Mortgage Loan, whether
through trustee's sale, foreclosure sale or
otherwise, reduced by related expenses, but not
including the portion, if any, of such amount that
exceeds the Principal Balance of the Mortgage Loan
plus any accrued and unpaid interest thereon to
the end of the Collection Period during which such
Mortgage Loan became a Liquidated Mortgage Loan.
With respect to any Distribution Date, the portion
of Interest Collections allocable to the
Certificates ('Investor Interest Collections')
will equal the product of (a) Interest Collections
for such Distribution Date and (b) the Investor
Floating Allocation Percentage. With respect to
any Distribution Date, the 'Investor Floating
Allocation Percentage' is the percentage
equivalent of a fraction determined by dividing
the Invested Amount at the close of business on
the preceding Distribution Date (or at the Closing
Date in the case of the first Distribution Date)
by the Pool Balance at the beginning of the
related Collection
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S-6
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Period. The remaining amount of Interest
Collections will be allocated to the Transferor
Interest as more fully described herein.
On each Distribution Date, the Investor Interest
Collections will be applied in the following order
of priority: (i) as payment to the Trustee for its
fee for services rendered pursuant to the
Agreement; (ii) as payment for the premium for the
Policy; (iii) as payment for the accrued interest
due and any overdue accrued interest (with
interest thereon) on the Certificate Principal
Balance of the Certificates; (iv) to pay any
Investor Loss Amount (as defined herein) for such
Distribution Date; (v) as payment for any Investor
Loss Amount for a previous Distribution Date that
was not previously (a) funded by Investor Interest
Collections allocable to the Certificateholders,
(b) absorbed by the Overcollateralization Amount,
(c) funded by amounts on deposit in the Spread
Account or (d) funded by draws on the Policy; (vi)
to reimburse prior draws made from the Policy
(with interest thereon); (vii) to pay principal on
the Certificates until the Invested Amount exceeds
the Certificate Principal Balance by the Required
Overcollateralization Amount, each as defined
herein (such amount, if any, paid pursuant to this
clause (vii) being referred to herein as the
'Accelerated Principal Distribution Amount');
(viii) any other amounts required to be deposited
in an account for the benefit of the Certificate
Insurer and Certificateholders pursuant to the
Agreement or amounts owed to the Certificate
Insurer pursuant to the Insurance Agreement; (ix)
certain amounts that may be required to be paid to
the Servicer pursuant to the Agreement; and (x) to
the Transferor to the extent permitted as
described herein.
Investor Interest Collections available after the
payment of interest on the Certificates may be
insufficient to cover any Investor Loss Amount. If
such insufficiency results in the Certificate
Principal Balance exceeding the Invested Amount, a
draw in an amount equal to such difference will be
made on the Policy in accordance with the terms of
the Policy.
The 'Overcollateralization Amount' on any date of
determination is the amount, if any, by which the
Invested Amount exceeds the Certificate Principal
Balance on such day. Payments to
Certificateholders pursuant to clause (iii) above
will be interest payments on the Certificates.
Payments to Certificateholders pursuant to clauses
(iv), (v) and (vii) will be principal payments on
the Certificates and will therefore reduce the
Certificate Principal Balance, however, payments
pursuant to clause (vii) will not reduce the
Invested Amount. The Accelerated Principal
Distribution Amount is not guaranteed by the
Policy.
'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. The 'Investor Loss Amount'
shall be the product of the Investor Floating
Allocation Percentage and the Liquidation Loss
Amount for such Distribution Date. See
'DESCRIPTION OF THE CERTIFICATES--Distributions on
the Certificates.'
Principal Collections will be allocated between
the Certificateholders and the Transferor
('Investor Principal Collections' and 'Transferor
Principal Collections', respectively) in
accordance with their percentage interests in the
Mortgage Loans of 98% and 2%, respectively, as of
the Cut-Off Date (the 'Fixed Allocation
Percentage'), but a lesser amount of Principal
Collections may be distributed to
Certificateholders during the Managed Amortization
Period, as described below. The 'Investor Fixed
Allocation Percentage' shall be 98%.
The Servicer will deposit Interest Collections and
Principal Collections in respect of the Mortgage
Loans in an account established for such purpose
under the
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Agreement (the 'Collection Account'). See
'DESCRIPTION OF THE CERTIFICATES--Payments on
Mortgage Loans; Deposits to Collection Account and
Distribution Account.'
Collection Period.......... As to any Distribution Date other than the first
Distribution Date, the 'Collection Period' is the
calendar month preceding the month of such
Distribution Date. As to the first Distribution
Date, the 'Collection Period' is the period
beginning after the Cut-Off Date and ending on the
last day of February 1996.
Interest................... Interest on the Certificates will be distributed
monthly on the fifteenth day of each month or, if
such day is not a Business Day, then the next
succeeding Business Day (each, a 'Distribution
Date'), commencing on March 15, 1996, at the
Certificate Rate for the related Interest Period
(as defined below). The 'Certificate Rate' for an
Interest Period will generally equal the sum of
(a) the London Interbank offered rate for
one-month Eurodollar deposits ('LIBOR') appearing
on the Telerate Screen Page 3750, as of the second
LIBOR Business Day (as defined herein) prior to
the first day of such Interest Period (or as of
two LIBOR Business Days prior to the Closing Date,
in the case of the first Interest Period) and (b)
%. Notwithstanding the foregoing, in no event
will the amount of interest required to be
distributed in respect of the Certificates on any
Distribution Date exceed a rate equal to the
weighted average of the Loan Rates (net of the
Servicing Fee Rate, the fee payable to the Trustee
and the rate at which the premium payable to the
Certificate Insurer is calculated) weighted on the
basis of the daily balance of each Mortgage Loan
during the related billing cycle prior to the
Collection Period relating to such Distribution
Date. 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 on the Certificates will be
funded from Investor Interest Collections, any
funds on deposit in the Spread Account and from
draws on the Policy. See 'DESCRIPTION OF THE
CERTIFICATES' herein.
Principal Payments from
Principal Collections...... For the period beginning on the first Distribution
Date and, unless a Rapid Amortization Event (as
defined herein) shall have earlier occurred,
ending on the Distribution Date in February 2001
(the 'Managed Amortization Period'), the amount of
Principal Collections payable to
Certificateholders as of each Distribution Date
during the Managed Amortization Period will equal,
to the extent funds are available therefor, the
Scheduled Principal Collections Distribution
Amount for such Distribution Date. On any
Distribution Date during the Managed Amortization
Period, the 'Scheduled Principal Collections
Distribution Amount' shall equal the lesser of (i)
the Maximum Principal Payment (as defined herein)
and (ii) the Alternative Principal Payment (as
defined herein). With respect to any Distribution
Date, the 'Maximum Principal Payment' will equal
the product of the Investor Fixed Allocation
Percentage and Principal Collections for such
Distribution Date. With respect to any
Distribution Date, the 'Alternative Principal
Payment' will equal the greater of (x) % of
the Certificate Principal Balance immediately
prior to such Distribution Date and (y) the
amount, but not less than zero, of Principal
Collections for such Distribution Date less the
aggregate of Additional Balances created during
the related Collection Period.
Beginning with the first Distribution Date
following the end of the Managed Amortization
Period, the amount of Principal Collections
payable to Certificateholders on each Distribution
Date will be equal to the Maximum
</TABLE>
S-8
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<TABLE>
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Principal Payment. See 'DESCRIPTION OF THE
CERTIFICATES-- Distributions on the Certificates.'
In addition, to the extent funds are available
therefor (including funds available under the
Policy), on the Distribution Date in February
2027, Certificateholders will be entitled to
receive as payment of principal an amount equal to
the outstanding Certificate Principal Balance.
Distributions of Principal Collections based upon
the Investor Fixed Allocation Percentage may
result in distributions of principal to
Certificateholders in amounts that are greater
relative to the declining Pool Balance than would
be the case if the Investor Floating Allocation
Percentage were used to determine the percentage
of Principal Collections distributed in respect of
the Invested Amount. The aggregate distributions
of principal to Certificateholders will not exceed
the Original Certificate Principal Balance.
The Certificate Insurer.... Financial Security Assurance Inc. (the
'Certificate Insurer') is a New York monoline
insurance company engaged exclusively in the
business of writing financial guaranty insurance,
principally in respect of securities offered in
domestic and foreign markets. The Certificate
Insurer's claims-paying ability is rated Aaa by
Moody's Investors Service, Inc. ('Moody's') and
AAA by Standard & Poor's Ratings Services
('Standard & Poor's'), Nippon Investors Service,
Inc. and Standard & Poor's (Australia) Pty. Ltd.
See 'THE CERTIFICATE INSURER' in this Prospectus
Supplement.
Policy..................... On or before the Closing Date, the Policy will be
issued by the Certificate Insurer pursuant to the
provisions of the Insurance and Indemnity
Agreement (the 'Insurance Agreement') to be dated
as of January 1, 1996, among the Seller, the
Depositor, the Trustee, the Servicer and the
Certificate Insurer.
The Policy will irrevocably and unconditionally
guarantee payment on each Distribution Date to the
Trustee for the benefit of the Certificateholders
the full and complete payment of (i) the
Guaranteed Principal Distribution Amount (as
defined herein) with respect to the Certificates
for such Distribution Date and (ii) accrued and
unpaid interest due on the Certificates (together,
the 'Guaranteed Distributions'), with such
Guaranteed Distributions having been calculated in
accordance with the original terms of the
Certificates or the Agreement except for
amendments or modifications to which the
Certificate Insurer has given its prior written
consent. The effect of the Policy is to guarantee
the timely payment of interest on, and the
ultimate payment of the principal amount of, all
of the Certificates.
The 'Guaranteed Principal Distribution Amount' for
any Distribution Date shall be the amount by which
the Certificate Principal Balance (after giving
effect to all other amounts distributable and
allocable to principal on the Certificates on such
Distribution Date) exceeds the Invested Amount for
such Distribution Date. In addition, the Policy
will guarantee the payment of the outstanding
Certificate Principal Balance on the Distribution
Date in February 2027 (after giving effect to all
other amounts distributable and allocable to
principal on such Distribution Date).
In accordance with the Agreement, the Trustee will
be required to establish and maintain an account
(the 'Spread Account') for the benefit of the
Certificate Insurer and the Certificateholders.
The Trustee shall deposit the amounts into the
Spread Account as required by the Agreement.
In the absence of payments under the Policy,
Certificateholders will directly bear the credit
and other risks associated with their undivided
interest in the Trust. See 'DESCRIPTION OF THE
CERTIFICATES--The Policy.'
</TABLE>
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<TABLE>
<S> <C>
Overcollateralization
Amount..................... The distribution of Accelerated Principal
Distribution Amounts, if any, to
Certificateholders may result in the Invested
Amount being greater than the Certificate
Principal Balance, thereby creating the
Overcollateralization Amount. The
Overcollateralization Amount, if any, will be
available to absorb any Investor Loss Amount not
covered by Investor Interest Collections. Payments
of Accelerated Principal Distribution Amounts are
not covered by the Policy. Any Investor Loss
Amounts not covered by such overcollateralization,
amounts on deposit in the Spread Account or
Investor Interest Collections will be covered by
draws on the Policy to the extent provided
therein.
Record Date................ The last day preceding a Distribution Date or, if
the Certificates are no longer Book-Entry
Certificates, 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 all collections
in respect of the Mortgage Loans into the
Collection Account as described herein. On the
third Business Day prior to each Distribution Date
(the 'Determination Date'), the Servicer will
calculate, and instruct the Trustee regarding the
amounts to be paid, as described herein, to the
Certificateholders on such Distribution Date. See
'DESCRIPTION OF THE CERTIFICATES--Distributions on
the Certificates.' With respect to each Collection
Period, the Servicer will receive from collections
in respect of interest on the Mortgage Loans, on
behalf of itself, a portion of such collections as
a monthly servicing fee (the 'Servicing Fee') in
the amount of approximately 0.50% 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. See 'DESCRIPTION
OF THE CERTIFICATES--Servicing Compensation and
Payment of Expenses.' 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 a
successor Servicer. See 'DESCRIPTION OF THE
CERTIFICATES--Certain Matters Regarding the
Servicer and the Transferor.'
Final Payment of Principal;
Termination................ The Trust will terminate on the Distribution Date
following the later of (A) payment in full of all
amounts owing to the Certificate Insurer and (B)
the earliest of (i) the Distribution Date on which
the Certificate Principal Balance has been reduced
to zero, (ii) the final payment or other
liquidation of the last Mortgage Loan in the
Trust, (iii) the optional retransfer to the
Transferor of the Certificates, as described below
and (iv) the Distribution Date in February 2027.
The Certificates will be subject to optional
retransfer to the Transferor on any Distribution
Date after the Certificate Principal Balance is
reduced to an amount less than or equal to
$14,619,000.00 (10% of the Original Certificate
Principal Balance) and all amounts due and owing
to the Certificate Insurer and unreimbursed draws
on the Policy, together with interest thereon, as
provided under the Insurance Agreement, have been
paid. 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-- Termination; Retirement of the
Certificates' herein and 'DESCRIPTION OF THE
SECURITIES--Optional Purchase or Termination' and
'THE AGREEMENTS--Termination' in the Prospectus.
In addition, the Trust may be liquidated as a
result of certain events of bankruptcy, insolvency
or receivership relating to the Transferor. See
'DESCRIPTION OF THE CERTIFICATES--Rapid
Amortization Events' herein.
</TABLE>
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Trustee.................... The First National Bank of Chicago, a national
banking association (the 'Trustee') will act as
Trustee on behalf of the Certificateholders.
Mandatory Retransfer of
Certain Mortgage Loans..... The Seller will make certain representations and
warranties in the Agreement with respect to the
Mortgage Loans. If the Seller breaches certain of
its representations and warranties with respect to
any Mortgage Loan and such breach materially and
adversely affects the interests of the
Certificateholders or the Certificate Insurer and
is not cured within the specified period, the
Mortgage Loan will be removed from the Trust upon
the expiration of a specified period from the date
on which the Seller becomes aware or receives
notice of such breach and will be reassigned to
the Seller. See 'DESCRIPTION OF THE
CERTIFICATES--Assignment of Mortgage Loans'
herein.
Federal Tax
Considerations............. Subject to the qualifications set forth in
'CERTAIN FEDERAL INCOME TAX CONSEQUENCES' herein,
special tax counsel to the Depositor is of the
opinion that, under existing law, a Certificate
will be treated as a debt instrument for Federal
income tax purposes as of the Closing Date. Under
the Agreement, the Transferor, the Depositor and
the Certificateholders will agree to treat the
Certificates as indebtedness for Federal income
tax purposes. See 'CERTAIN FEDERAL INCOME TAX
CONSIDERATIONS' herein and in the Prospectus for
additional information concerning the application
of Federal income tax laws.
ERISA Considerations....... The acquisition of a Certificate by a pension or
other employee benefit plan (a 'Plan') subject to
the Employee Retirement Income Security Act of
1974, as amended ('ERISA'), could, in some
instances, result in a 'prohibited transaction' or
other violation of the fiduciary responsibility
provisions of ERISA and Code Section 4975. Certain
exemptions from the prohibited transaction rules
could be applicable to the acquisition of the
Certificates. Any Plan fiduciary considering
whether to purchase any Certificate on behalf of a
Plan should consult with its counsel regarding the
applicability of the provisions of ERISA and the
Code. See 'ERISA CONSIDERATIONS' herein and in the
Prospectus.
Legal Investment
Considerations............. The Certificates will not constitute 'mortgage
related securities' for purposes of the Secondary
Mortgage Market Enhancement Act of 1984 ('SMMEA'),
because not all of the Mortgages securing the
Mortgage Loans are first mortgages. Accordingly,
many institutions with legal authority to invest
in comparably rated securities based solely on
first mortgages may not be legally authorized to
invest in the Certificates. See 'LEGAL INVESTMENT
CONSIDERATIONS' herein and 'LEGAL INVESTMENT' in
the Prospectus.
Certificate Rating......... It is a condition to the issuance of the
Certificates that they be rated 'AAA' by Standard
& Poor's and 'Aaa' by Moody's (each a 'Rating
Agency'). In general, ratings address credit risk
and do not address the likelihood of prepayments.
See 'RATINGS' herein and 'RISK FACTORS--Rating of
the Securities' in the Prospectus.
</TABLE>
S-11
<PAGE>
RISK FACTORS
Book-Entry Certificates. Issuance of the Certificates in book-entry form
may reduce the liquidity of such Certificates in the secondary trading market
since investors may be unwilling to purchase Certificates for which they cannot
obtain physical certificates. See 'DESCRIPTION OF THE CERTIFICATES--Book-Entry
Certificates' herein.
Since transactions in the Certificates can be effected only through DTC,
CEDEL, Euroclear, participating organizations, indirect participants and certain
banks, the ability of a Certificate Owner to pledge a Certificate to persons or
entities that do not participate in the DTC, CEDEL or Euroclear system or
otherwise to take actions in respect of such Certificates, may be limited due to
lack of a physical certificate representing the Certificates. See 'DESCRIPTION
OF THE CERTIFICATES--Book-Entry Certificates' herein.
Certificate Owners may experience some delay in their receipt of
distributions of interest and principal on the Certificates 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 Certificate Owners either directly or
indirectly through indirect participants. See 'DESCRIPTION OF THE
CERTIFICATES--Book-Entry Certificates' herein.
Cash Flow Considerations. Minimum monthly payments on the Mortgage Loans
will at least equal and may exceed accrued interest. Even assuming that the
Mortgaged Properties provide adequate security for the Mortgage Loans,
substantial delays could be encountered in connection with the liquidation of
Mortgage Loans that are delinquent and resulting shortfalls in distributions to
Certificateholders could occur if the Certificate Insurer were unable to perform
on its obligations under the Policy. Further, liquidation expenses (such as
legal fees, real estate taxes, and maintenance and preservation expenses) will
reduce the proceeds payable to Certificateholders 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,
Certificateholders could experience a loss if the Certificate Insurer were
unable to perform its obligations under the Policy.
Prepayment Considerations. Substantially 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 loans 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 conditions,
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. See
'DESCRIPTION OF THE CERTIFICATES' herein and 'CERTAIN LEGAL ASPECTS OF
LOANS--'Due-on-Sale' Clauses' in the Prospectus for a description of certain
provisions of the Credit Line Agreements that may affect the prepayment
experience on the Mortgage Loans.
Certificate Rating. The rating of the Certificates will depend primarily on
an assessment by the Rating Agencies of the Mortgage Loans and upon the
claims-paying ability of the Certificate Insurer. Any reduction in a rating
assigned to the claims-paying ability of the Certificate Insurer below the
rating initially given to the Certificates may result in a reduction in the
rating of the Certificates. The rating by the Rating Agencies of the
Certificates is not a recommendation to purchase, hold or sell the Certificates,
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
Certificates do not address the possibility of the imposition of United States
withholding tax with respect to non-U.S. persons.
S-12
<PAGE>
Legal Considerations. The Mortgage Loans are secured by 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 Mortgaged 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 Certificate Insurer is unable to perform its
obligations under the Policy, the Certificateholders will 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 LOANS' in the Prospectus.
Under the terms of the Agreement, so long as Countrywide's long-term senior
unsecured debt is rated at least 'BBB-' by Standard & Poor's and 'Baa2' by
Moody's, the Servicer will be entitled to maintain possession of the
documentation relating to each Mortgage Loan sold by it, including the Credit
Line Agreements and the Related Documents or other evidence of indebtedness
signed by the borrower, and the assignments of the related mortgages to the
Trust will not be required to be recorded. Failure to deliver the Related
Documents to the Trustee will have the result in most, if not all, of the states
in which the Related Documents will be held, and failure to record the
assignments of the related mortgages to the Trustee will have the result in
certain states in which the Mortgaged Properties are located, of making the sale
of the Cut-Off Date Principal Balances, Additional Balances and Related
Documents potentially ineffective against (i) any creditors of Countrywide, who
may have been fraudulently or inadvertently induced to rely on the Mortgage
Loans as assets of Countrywide, or (ii) any purchaser of a Mortgage Loan who had
no notice of the prior conveyance to the Trust Fund if such purchaser perfects
his interest in the Mortgage Loan by taking possession of the Related Documents
or other evidence of indebtedness or otherwise.
The sale of the Mortgage Loans from Countrywide to the Depositor pursuant
to the Purchase Agreement will be treated as a sale of the Mortgage Loans.
However, in the event of an insolvency of Countrywide, the receiver of
Countrywide may attempt to recharacterize the sale of the Mortgage Loans as a
borrowing by Countrywide, secured by a pledge of the applicable Mortgage Loans.
If the receiver decided to challenge such transfer, (i) if the Mortgage Loans
have not been delivered to the Trustee, the interest of the Trust in the
Mortgage Loans will be that of an unperfected security interest and (ii) even if
the Mortgage Loans have been delivered to the Trustee, delays in payments of the
Certificates and reductions in the amounts thereof could occur. The Depositor
will warrant in the Agreement that the transfer of the Mortgage Loans by it to
the Trust is either a valid transfer and assignment of such Mortgage Loans to
the Trust or the grant to the Trust of a security interest in such Mortgage
Loans.
If a conservator, receiver or trustee were appointed for the Transferor, or
if certain other events relating to the bankruptcy or insolvency of the
Transferor were to occur, Additional Balances would not be sold to the Trust. In
such an event, the Rapid Amortization Period would commence and the Trustee
would attempt to sell the Mortgage Loans (unless Certificateholders holding
Certificates evidencing undivided interests aggregating at least 51% of the
Certificate Principal Balance instruct otherwise), thereby causing early payment
of the Certificate Principal Balance. The net proceeds of such sale will first
be paid to the Certificate Insurer to the extent of unreimbursed draws under the
Policy and other amounts owing to the Certificate Insurer pursuant to the
Insurance Agreement. The Investor Fixed Allocation Percentage of remaining
amounts will be distributed to the Certificateholders and the Policy will cover
any amount by which such remaining net proceeds are insufficient to pay the
Certificate Principal Balance in full.
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
Certificateholders from appointing a successor Servicer.
Geographic Concentration. As of the Cut-Off Date, approximately 39.92% (by
Cut-Off Date Principal Balance) of the Mortgaged Properties are located in the
State of California. An overall decline in the California residential real
estate market could adversely affect the values of the Mortgaged Properties
securing such Mortgage Loans such that the Principal Balances of the related
Mortgage Loans, together with any primary financing on such Mortgaged
Properties, could equal or exceed the value of such Mortgaged Properties. As the
residential real estate market is influenced by many factors, including the
general condition of the economy and
S-13
<PAGE>
interest rates, no assurances may be given that the California residential real
estate market will not weaken. If the California residential real estate market
should experience an overall decline in property values after the dates of
origination of the Mortgage Loans, the rates of losses on the Mortgage Loans
would be expected to increase, and could increase substantially.
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 Certificateholders or
the Certificate Insurer, 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. In addition, the Agreement permits the Servicer,
within certain limitations described therein, to increase the Credit Limit of
the related Mortgage Loan or reduce the Margin for such Mortgage Loan.
Delinquent Mortgage Loans. The Trust will include Mortgage Loans which are
89 or fewer days delinquent as of the Cut-Off Date. The Cut-Off Date Principal
Balance of Mortgage Loans which are between 30 days and 89 days delinquent as of
the Cut-Off Date was $841,308.97. If there are not sufficient funds from the
Investor Interest Collections to cover the Investor Loss Amounts for any
Distribution Date, the Overcollateralization Amount and the amount on deposit in
the Spread Account have been reduced to zero, and the Certificate Insurer fails
to perform its obligations under the Policy, the aggregate amount of principal
returned to the Certificateholders may be less than the Certificate Principal
Balance on the day the Certificates are issued.
For a discussion of additional risks pertaining to the Certificates, see
'RISK FACTORS' in the Prospectus.
THE CERTIFICATE INSURER
The following information set forth in this section has been provided by
the Certificate Insurer. Accordingly, neither the Depositor nor the Servicer
makes any representation as to the accuracy and completeness of such
information.
General. Financial Security Assurance Inc. (the 'Certificate Insurer' or
'Financial Security') is a monoline insurance company incorporated in 1984 under
the laws of the State of New York. The Certificate Insurer is licensed, directly
or through its subsidiaries, to engage in financial guaranty insurance business
in all 50 states, the District of Columbia, Puerto Rico and the United Kingdom.
The Certificate Insurer and its subsidiaries are engaged exclusively in the
business of writing financial guaranty insurance, principally in respect of
securities offered in domestic and foreign markets. In general, financial
guaranty insurance consists of the issuance of a guaranty of scheduled payments
of an issuer's securities--thereby enhancing the credit rating of those
securities--in consideration for the payment of a premium to the insurer. The
Certificate Insurer and its subsidiaries principally insure asset-backed,
collateralized and municipal securities. Asset-backed securities are generally
supported by residential mortgage loans, consumer or trade receivables,
securities or other assets having an ascertainable cash flow or market value.
Collateralized securities include public utility first mortgage bonds and
sale/leaseback obligation bonds. Municipal securities consist largely of general
obligation bonds, special revenue bonds and other special obligations of state
and local governments. The Certificate Insurer insures both newly issued
securities sold in the primary market and outstanding securities sold in the
secondary market that satisfy the Certificate Insurer's underwriting criteria.
The Certificate Insurer is a wholly owned subsidiary of Financial Security
Assurance Holdings Ltd. ('Holdings'), a New York Stock Exchange listed company.
Holdings is owned approximately 50% by U S WEST Capital Corporation ('U S
WEST'), 8% by Fund American Enterprises Holdings, Inc. ('Fund American') and 6%
owned by The Tokio Marine and Fire Insurance Co., Ltd. ('Tokio Marine'). U S
WEST is a subsidiary of U S WEST, Inc., which operates businesses involved in
communications, data solutions, marketing services and capital assets, including
the provision of telephone services in 14 states in the western and midwestern
United States. Fund American is a financial services holding company whose
principal operating subsidiary is one of the nation's largest mortgage
servicers. Tokio Marine is a major Japanese property and casualty insurance
company. U S WEST has announced its intention to dispose of its remaining
interest in Holdings as part of its strategic plan to withdraw from businesses
not directly involved in telecommunications.
S-14
<PAGE>
Fund American has certain rights to acquire additional shares of Holdings from U
S WEST and Holdings. No shareholder of Holdings is obligated to pay any debt of
the Certificate Insurer or any claim under any insurance policy issued by the
Certificate Insurer or to make any additional contribution to the capital of the
Certificate Insurer.
On December 20, 1995, Capital Guaranty Corporation ('CGC') merged with a
subsidiary of Holdings and Capital Guaranty Insurance Company ('CGIC'), CGC's
principal operating subsidiary became a wholly-owned subsidiary of Financial
Security. CGIC was a financial guaranty insurer of municipal bonds in the
domestic market.
The principal executive offices of the Certificate Insurer are located at
350 Park Avenue, New York, New York 10022, and its telephone number at that
location is (212) 826-0100. At September 30, 1995, the Certificate Insurer and
its subsidiaries had 167 employees.
Reinsurance. Pursuant to an intercompany agreement, liabilities on
financial guaranty insurance written or reinsured from third parties by the
Certificate Insurer or either of its domestic operating insurance subsidiaries
are reinsured among such companies on an agreed-upon percentage substantially
proportional to their respective capital, surplus and reserves, subject to
applicable statutory risk limitations. In addition, the Certificate Insurer
reinsures a portion of its liabilities under certain of its financial guaranty
insurance policies with other reinsurers under various quota share treaties and
on a transaction-by-transaction basis. Such reinsurance is utilized by the
Certificate Insurer as a risk management device and to comply with certain
statutory and rating agency requirements; it does not alter or limit the
Certificate Insurer's obligations under any financial guaranty insurance policy.
Ratings of Claims-Paying Ability. The Certificate Insurer's claims-paying
ability is rated Aaa by Moody's and AAA by Standard & Poor's, Nippon Investors
Service Inc. and Standard & Poor's (Australia) Pty. Ltd. Such ratings reflect
only the views of the respective rating agencies, are not recommendations to
buy, sell or hold securities and are subject to revision or withdrawal at any
time by such rating agencies. See 'Ratings' in this Prospectus Supplement.
Capitalization. The following table sets forth the capitalization of the
Certificate Insurer and its wholly owned subsidiaries on the basis of generally
accepted accounting principles as of September 30, 1995 (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, 1995
--------------------
<S> <C>
Unearned Premium Reserve (net of prepaid reinsurance
premiums)............................................. $ 216,931
-----------
Shareholder's Equity:
Common Stock.......................................... 15,000
Additional Paid-In Capital............................ 497,506
Unrealized Gain on Investments (net of deferred income
taxes)............................................. 7,790
Accumulated Earnings.................................. 70,177
-----------
Total Shareholder's Equity.............................. $ 590,473
-----------
Total Unearned Premium Reserve and Shareholder's
Equity................................................ $ 807,404
-----------
-----------
</TABLE>
For further information concerning the Certificate Insurer, see the
Consolidated Financial Statements of the Certificate Insurer and Subsidiaries,
and the notes thereto, incorporated by reference herein. Copies of the statutory
quarterly and annual statements filed with the State of New York Insurance
Department by the Certificate Insurer are available upon request to the State of
New York Insurance Department.
Incorporation of Certain Documents by Reference. In addition to the
documents described above under 'Incorporation of Certain Documents by
Reference,' the consolidated financial statements of the Certificate Insurer and
Subsidiaries included (a) as an exhibit to the Annual Report on Form 10-K for
the year ending December 31, 1994, which has been filed with the Commission by
Financial Security Assurance Holdings Ltd. ('Holdings') which Report included as
an exhibit the consolidated financial statements of the Certificate Insurer and
Subsidiaries for the year ended December 31, 1994, and (b) as an exhibit to the
Quarterly Report on Form
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<PAGE>
10-Q for the quarter ended September 30, 1995, which has been filed with the
Commission by Holdings, which Report included as an exhibit the consolidated
financial statements of the Certificate Insurer and Subsidiaries for the quarter
ended September 30, 1995, are hereby incorporated by reference in this
Prospectus Supplement.
All financial statements of the Certificate Insurer included in documents
filed by Holdings pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange
Act subsequent to the date of this Prospectus Supplement and prior to the
termination of the offering of the Certificates shall be deemed to be
incorporated by reference into this Prospectus Supplement and to be a part
hereof from the respective dates of filing of such documents.
Insurance Regulation. The Certificate Insurer is licensed and subject to
regulation as a financial guaranty insurance corporation under the laws of the
State of New York, its state of domicile. In addition, the Certificate Insurer
and its insurance subsidiaries are subject to regulation by insurance laws of
the various other jurisdictions in which they are licensed to do business. As a
financial guaranty insurance corporation licensed to do business in the State of
New York, the Certificate Insurer is subject to Article 69 of the New York
Insurance Law which, among other things, limits the business of each such
insurer to financial guaranty insurance and related lines, requires that each
such insurer maintain a minimum surplus to policyholders, establishes
contingency, loss and unearned premium reserve requirements for each such
insurer, and limits the size of individual transactions ('single risks') and the
volume of transactions ('aggregate risks') that may be underwritten by each such
insurer. Other provisions of the New York Insurance Law, applicable to non-life
insurance companies such as the Certificate Insurer, regulate, among other
things, permitted investments, payment of dividends, transactions with
affiliates, mergers, consolidations, acquisitions or sales of assets and
incurrence of liability for borrowings.
The Policy is not covered by the Property/Casualty Insurance Security Fund
specified in Article 76 of the New York Insurance Law.
Financial Security does not accept any responsibility for the accuracy or
completeness of this Prospectus Supplement or any information or disclosure
contained herein, or omitted herefrom, other than with respect to the accuracy
of information regarding Financial Security set forth under the heading 'The
Certificate Insurer.'
THE SERVICER
GENERAL
The Servicer will service the Mortgage Loans in accordance with the terms
set forth in the Agreement. The Servicer may perform any of its obligations
under the Agreement through one or more subservicers. Notwithstanding any such
subservicing arrangement, the Servicer will remain liable for its servicing
duties and obligations under the Agreement as if the Servicer alone were
servicing the Mortgage Loans. As of the Closing Date, the Servicer will service
the Mortgage Loans without subservicing arrangements.
THE SERVICER
Countrywide Funding Corporation ('Countrywide'), a New York corporation and
a subsidiary of Countrywide Credit Industries, Inc., will act as Servicer for
the Mortgage Loans pursuant to the Agreement. Countrywide is engaged primarily
in the mortgage banking business, and as such, originates, purchases, sells and
services mortgage loans. Countrywide originates mortgage loans through a retail
branch system and through mortgage loan brokers and correspondents nationwide.
Countrywide's mortgage loans are principally first-lien, fixed or adjustable
rate mortgage loans secured by single-family residences. Countrywide began
servicing home equity lines of credit in October 1994.
At December 31, 1995, Countrywide provided servicing for approximately $133
billion aggregate principal amount of first-lien mortgage loans, substantially
all of which are being serviced for unaffiliated persons. At December 31, 1995,
Countrywide provided servicing for approximately $150 million aggregate
principal amount of first and second lien mortgage loans originated under home
equity lines of credit.
The principal executive offices of Countrywide are located at 155 North
Lake Avenue, Pasadena, California 91101-7139. Its telephone number is (818)
304-8400. Countrywide conducts operations from its headquarters in Pasadena and
from offices located throughout the nation.
S-16
<PAGE>
THE SELLER'S HOME EQUITY LOAN PROGRAM
UNDERWRITING PROCEDURES RELATING TO HOME EQUITY LOANS
The following is a description of the underwriting procedures customarily
employed by the Seller with respect to home equity loans. The underwriting
process is intended to assess the applicant's credit standing and repayment
ability, and the value and adequacy of the real property security as collateral
for the proposed loan. Exceptions to the Seller's underwriting guidelines will
be made when compensating factors are present. Such factors include the quality
and location of the property, the length of time the borrower has owned the
property, amount of disposable income, type of employment, length of employment,
credit history, current and pending debt obligations, payment habits and status
of past and currently existing mortgages.
Each applicant for a home equity loan 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 in the real property to justify making a home equity loan, the Seller
will conduct a further credit investigation of the applicant. This investigation
includes obtaining and reviewing an independent credit bureau report on the
credit history of the applicant in order to evaluate the applicant's ability to
repay. The credit report typically contains information relating to such matters
as credit history with local merchants and lenders, installment debt payments
and any record of delinquencies, defaults, bankruptcy, collateral repossessions,
suits or judgments.
The Seller originates or acquires mortgage loans pursuant to alternative
sets of underwriting criteria under its Alternative Documentation Loan Program
(the 'Alternative Documentation Program') and its Reduced Documentation Loan
Program (the 'Reduced Documentation Program'). The Alternative Documentation
Program permits a borrower to provide W-2 forms instead of tax returns covering
the most recent two years, permits bank statements in lieu of verifications of
deposits and permits alternative methods of employment verification. Under the
Reduced Documentation Program, relatively more emphasis is placed on property
underwriting than on credit underwriting and certain credit underwriting
documentation concerning income and employment verification therefore is waived.
Mortgage loans underwritten under the Reduced Documentation Program generally
are limited to self-employed borrowers with credit histories that demonstrate an
established ability to repay indebtedness in a timely fashion. Such
self-employed borrowers are required to have 50% of stated annual income in
reserves and a verification of assets satisfactory to the Seller.
Appraisals are generally performed on all home equity loans which at
origination had a principal balance equal to or greater than $100,000. Such
appraisals are determined on the basis of a Seller-approved, independent
third-party, fee-based appraisal completed on forms approved by Federal National
Mortgage Association ('FNMA') or Federal Home Loan Mortgage Corporation
('FHLMC'). For loans which had at origination a principal balance equal to or
less than $100,000, a drive-by evaluation is generally completed by a state
licensed, independent third-party, professional appraiser on forms approved by
either FNMA or FHLMC. The drive-by evaluation is an exterior examination of the
premises by the appraiser to determine that the property is in good condition.
The appraisal is based on various factors, including the market value of
comparable homes and the cost of replacing the improvement and generally is
required to have been made not earlier than 150 days prior to the date of
origination of the Mortgage Loan.
After obtaining all applicable employment, credit and property information,
the Seller uses a debt-to-income ratio to assist in determining whether the
prospective borrower has sufficient monthly income available to support the
payments of principal and interest on the home equity loan in addition to any
senior mortgage loan payments (including any escrows for property taxes and
hazard insurance premiums) and other monthly credit obligations. The
'debt-to-income ratio' is the ratio of the borrower's total monthly payments
(assumed to be based on the applicable fully indexed interest rate plus a margin
of 2%) to the borrower's gross monthly income. Based on the foregoing, for loans
with Combined Loan-to-Value Ratios of 90% or less, the maximum monthly
debt-to-income ratio is 45%. For loans with Combined Loan-to-Value Ratios
greater than 90%, the maximum monthly debt-to-income ratio is generally 38%.
Variations in the monthly debt-to-income ratios limits are permitted based on
compensating factors.
It is generally the Seller's policy to require a title search before it
makes a home equity loan for amounts less than or equal to $100,000. In
addition, if the home equity loan has an original principal balance of $100,000
or more, the Seller requires that the borrower obtain an American Land Title
Association ('ALTA') policy, or other assurance of title customary in the
relevant jurisdiction. In addition, ALTA title policies are generally
S-17
<PAGE>
obtained in situations where the property is on leased land or there has been a
change in title or such home equity loan is in first lien position.
SERVICING OF THE MORTGAGE LOANS
The Servicer has established standard policies for the servicing and
collection of the home equity loans. Servicing includes, but is not limited to,
(i) the collection and aggregation of payments relating to the Mortgage Loans;
(ii) the supervision of delinquent Mortgage Loans, loss mitigation efforts,
foreclosure proceedings and, if applicable, the disposition of Mortgaged
Properties; and (iii) the preparation of tax related information in connection
with the Mortgage Loans.
Billing statements are mailed monthly by the Servicer. 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 Servicer to the Mortgagor with such statements. All payments are
due by the fifteenth day of the month.
With respect to Mortgage Loans, the general policy of the Servicer is to
initiate foreclosure in the underlying property (i) after such loan is 75 days
or more delinquent and satisfactory arrangements cannot be made with the
Mortgagor; (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. Mortgage Loans to borrowers in
bankruptcy proceedings may be restructured in accordance with law and with a
view to maximizing recovery of such loans, including any deficiencies.
Once foreclosure is initiated by the Servicer, a foreclosure tracking
system is used to monitor the progress of the proceedings. The system includes
state specific parameters to monitor whether proceedings are progressing within
the time frame typical for the state in which the property is located. During
the foreclosure proceeding, the Servicer determines the amount of the
foreclosure bid and whether to liquidate the loan.
After foreclosure, if the home equity loan is secured by a first mortgage
lien, the Servicer may liquidate the Mortgaged Property and charge off the home
equity loan balance which was not recovered through liquidation proceeds. If the
Mortgaged Property was subject to a senior lien, the Servicer will either
directly manage the foreclosure sale of the property and satisfy such lien at
the time of sale or take other action as deemed necessary to protect the
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 and will not pursue any
recovery.
Servicing and charge-off policies and collection practices may change over
time in accordance with, among other things, the Servicer's business judgment,
changes in the portfolio and applicable laws and regulations.
FORECLOSURE AND DELINQUENCY EXPERIENCE
The following table summarizes the delinquency and foreclosure experience,
respectively, on the dates indicated, of home equity loans serviced by the
Servicer. Since Countrywide only began servicing home equity loans in October
1994, the delinquency and foreclosure percentages may be affected by the size
and relative lack of seasoning of the servicing portfolio because many of such
loans were not outstanding long enough to give rise to some or all of the
periods of delinquency indicated in the chart below. Accordingly, the
information should not be considered as a basis for assessing the likelihood,
amount or severity of delinquency or losses on the Mortgage Loans and no
assurances can be given that the foreclosure and delinquency experience
presented in the table below will be indicative of such experience on the
Mortgage Loans:
DELINQUENCY STATUS AS OF DECEMBER 31, 1995*
<TABLE>
<CAPTION>
DOLLARS PERCENT UNITS PERCENT
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Current............. $148,450,263 99.43% 6,235 99.71%
30-59 days.......... 303,577 0.20 12 0.19
60-89 days.......... 537,731 0.36 5 0.08
90+ days............ 13,645 0.01 1 0.02
------------ ------------ ------ ------------
TOTAL............. $149,305,216 100.00% 6,253 100.00%
------------ ------------ ------ ------------
------------ ------------ ------ ------------
</TABLE>
- ------------------
* Delinquencies are reported on a contractual basis.
S-18
<PAGE>
As of December 31, 1995, four loans with an aggregate balance of $212,516
are in bankruptcy and four loans with an aggregate balance of $288,439 are in
foreclosure. Of the loans in foreclosure, there will be a January 1996 charge
off of $58,000. In addition to this charge off, there is an anticipated charge
off of approximately $50,000 which may also be realized in January.
DESCRIPTION OF THE MORTGAGE LOANS
GENERAL
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, which are either first or second mortgages or deeds
of trust, on Mortgaged Properties located in 41 states. The Mortgaged Properties
securing the Mortgage Loans consist primarily of residential properties that are
one- to four-family properties. See '--Mortgage Loan Pool Statistics' below.
The Cut-Off Date Pool Balance is $149,174,069.06, which is equal to the
aggregate Principal Balances of the Mortgage Loans as of the Cut-Off Date. As of
the Cut-Off Date, the Mortgage Loans were not more than 89 days delinquent. The
average Cut-Off Date Principal Balance was approximately $23,883.14, the minimum
Cut-Off Date Principal Balance was zero, the maximum Cut-Off Date Principal
Balance was $839,999.97, the minimum Loan Rate and the maximum Loan Rate as of
the Cut-Off Date were 7.49% and 14.00% per annum, respectively, and the weighted
average Loan Rate as of the Cut-Off Date was approximately 10.22% per annum. As
of the Cut-Off Date, the weighted average Credit Limit Utilization Rate was
approximately 84.09%, the minimum Credit Limit Utilization Rate was zero and the
maximum Credit Limit Utilization Rate was 100%. 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 remaining
term to scheduled maturity for the Mortgage Loans as of the Cut-Off Date ranged
from 152 months to 323 months and the weighted average remaining term to
scheduled maturity was approximately 294 months. As of the Cut-Off Date, the
Combined Loan-to-Value Ratio of the Mortgage Loans ranged from 3.81% to 100.00%
and the weighted average Combined Loan-to-Value Ratio was approximately 73.78%.
The Combined Loan-to-Value Ratio for a Mortgage Loan is the ratio (expressed as
a percentage) of (A) the sum of (i) the Credit Limit of the Mortgage Loan and
(ii) any outstanding principal balances of mortgage loans senior to such
Mortgage Loan (calculated at the date of origination of the Mortgage Loan) to
(B) the lesser of (i) the appraised value of the related Mortgaged Property as
set forth in the loan files at such date of origination or (ii) in the case of a
Mortgaged Property purchased within one year of the origination of the related
Mortgage Loan, the purchase price of such Mortgaged Property. Credit Limits
under the Mortgage Loans as of the Cut-Off Date ranged from $9,300.00 to
$840,000.00 and averaged approximately $39,538.29. The weighted average second
mortgage ratio (which is the Credit Limit for the related Mortgage Loan,
provided such Mortgage Loan was in the second lien position, divided by the sum
of such Credit Limit and the outstanding principal balance of any mortgage loan
senior to the related Mortgage Loan) was approximately 26.10%. As of the Cut-Off
Date, approximately 6.08% by Cut-Off Date Principal Balance of the Mortgage
Loans represented first liens on the related Mortgaged Properties, while
approximately 93.92% of the Mortgage Loans represented second liens. As of the
Cut-Off Date, approximately 89.57% of the Mortgage Loans are secured by
Mortgaged Properties which are single-family residences and 100% were
owner-occupied. As of the Cut-Off Date, approximately 39.92%, 4.74%, 4.60%,
4.42%, 4.14% and 4.02% by Cut-Off Date Principal Balance are located in
California, Colorado, Washington, Florida, Oregon and New York, respectively.
MORTGAGE LOAN TERMS
A borrower may access a Mortgage Loan by writing a check in a minimum
amount of $250. The Mortgage Loans bear interest at a variable rate which
changes monthly on the first business day of the related month with changes in
the applicable Index Rate. The Mortgage Loans are subject to a maximum per annum
interest rate (the 'Maximum Rate') ranging from 15.90% to 18.00% per annum and
subject to applicable usury limitations. As of the Cut-Off Date, the weighted
average Maximum Rate was approximately 17.32%. See 'CERTAIN LEGAL ASPECTS OF
LOANS--Applicability of Usury Laws' in the Prospectus. The daily periodic rate
on the Mortgage Loans (the 'Loan Rate') is the sum of the Index Rate plus the
spread (the 'Margin') which generally ranges between 0.50% and 5.25% and had a
weighted average, as of the Cut-Off Date, of approximately 2.06%,
S-19
<PAGE>
divided by 365 days. The 'Index Rate' is based on the highest 'prime rate'
published in the 'Money Rates' table of The Wall Street Journal as of the first
business day of each calendar month.
Countrywide offers an introductory loan rate on home equity lines of credit
which are originated with Combined Loan-to-Value Ratios of 75% and 80%. The
introductory rate applies to any payments made during the first three months
after origination. After such three month period, the Loan Rate will adjust to
the Index plus the applicable Margin. As of the Cut-Off Date, approximately
22.52% of the Mortgage Loans by Cut-Off Date Principal Balance were subject to
an introductory rate of 7.49% per annum.
In general, the home equity loans may be drawn upon for a period (the 'Draw
Period') of either five years (which may be extendible for an additional five
years, upon Countrywide's approval) or three years. Home equity loans with an
initial Draw Period of five years, which constitute approximately 98.71% of the
Mortgage Loans by Cut-Off Date Principal Balance, are subject to a fifteen year
repayment period (the 'Repayment Period') following the end of the Draw Period
during which the outstanding principal balance of the loan will be repaid in
monthly installments equal to 1/180 of the outstanding principal balance as of
the end of the Draw Period. Mortgage Loans with a Draw Period of three years,
which constitute approximately 1.29% of the Mortgage Loans by Cut-off Date
Principal Balance, are subject to a ten year Repayment Period following the end
of the Draw Period during which the outstanding principal balance of the loan
will be paid in monthly installments equal to 1/120 of the outstanding principal
balance as of the end of the Draw Period.
The minimum payment due during the Draw Period will be equal to the finance
charges accrued on the outstanding principal balance of the home equity loan
during the related billing period. The minimum payment due during the repayment
period will be equal to the sum of the finance charges accrued on the
outstanding principal balance of the Mortgage Loan during the related billing
period and the principal payment described above.
Set forth below is a description of certain characteristics of the Mortgage
Loans as of the Cut-Off Date:
PRINCIPAL BALANCES
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF POOL
RANGE OF PRINCIPAL MORTGAGE CUT-OFF DATE BY CUT-OFF DATE
BALANCES LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- --------------------- ---------- -------------------- --------------------
<S> <C> <C> <C>
$ 0.00 to
$ 10,000.00........ 1,734 $ 7,483,394.83 5.02%
$ 10,000.01 to
$ 20,000.00........ 1,937 29,802,548.91 19.98
$ 20,000.01 to
$ 30,000.00........ 1,168 29,226,922.10 19.59
$ 30,000.01 to
$ 40,000.00........ 589 20,566,244.78 13.79
$ 40,000.01 to
$ 50,000.00........ 312 14,245,402.22 9.55
$ 50,000.01 to
$ 60,000.00........ 158 8,805,290.27 5.90
$ 60,000.01 to
$ 70,000.00........ 74 4,790,627.85 3.21
$ 70,000.01 to
$ 80,000.00........ 74 5,547,671.63 3.72
$ 80,000.01 to
$100,000.00........ 115 10,747,935.22 7.20
$100,000.01 to
$125,000.00........ 19 2,123,884.81 1.42
$125,000.01 to
$150,000.00........ 19 2,664,659.31 1.79
$150,000.01 to
$175,000.00........ 11 1,758,012.22 1.18
$175,000.01 to
$200,000.00........ 4 791,496.63 0.53
$200,000.01 to
$225,000.00........ 5 1,052,297.13 0.71
$225,000.01 to
$250,000.00........ 3 711,098.58 0.48
$250,000.01 to
$275,000.00........ 4 1,054,893.34 0.71
$275,000.01 to
$300,000.00........ 4 1,178,436.85 0.79
$300,000.01 to
$325,000.00........ 4 1,255,681.15 0.84
$325,000.01 to
$350,000.00........ 7 2,400,185.08 1.61
$350,000.01 and
over............... 5 2,967,386.15 1.99
---------- -------------------- -------
Total........... 6,246 $ 149,174,069.06 100.00%
---------- -------------------- -------
---------- -------------------- -------
</TABLE>
S-20
<PAGE>
GEOGRAPHIC DISTRIBUTION(1)
<TABLE>
<CAPTION>
PERCENT OF
POOL
BY CUT-OFF
NUMBER OF DATE
MORTGAGE CUT-OFF DATE PRINCIPAL
STATE LOANS PRINCIPAL BALANCE BALANCE
- ------------------------------- ---------- -------------------- ----------
<S> <C> <C> <C>
Alabama........................ 84 $ 1,352,424.95 0.91%
Arizona........................ 155 3,341,109.69 2.24
California..................... 2,019 59,547,266.39 39.92
Colorado....................... 287 7,076,978.08 4.74
Connecticut.................... 72 1,593,819.27 1.07
Delaware....................... 11 188,260.55 0.13
Florida........................ 299 6,586,699.56 4.42
Georgia........................ 124 2,148,015.99 1.44
Idaho.......................... 155 3,617,117.55 2.42
Illinois....................... 274 5,275,844.44 3.54
Indiana........................ 66 891,526.16 0.60
Iowa........................... 12 221,289.36 0.15
Kansas......................... 26 426,702.17 0.29
Louisiana...................... 86 1,723,160.72 1.16
Maine.......................... 5 92,749.27 0.06
Maryland....................... 116 1,995,290.36 1.34
Massachusetts.................. 107 2,616,647.16 1.75
Michigan....................... 114 1,797,890.16 1.21
Mississippi.................... 11 220,580.26 0.15
Missouri....................... 54 656,345.85 0.44
Nebraska....................... 3 46,132.90 0.03
Nevada......................... 128 3,241,502.61 2.17
New Hampshire.................. 2 28,744.95 0.02
New Jersey..................... 290 5,533,283.84 3.71
New Mexico..................... 81 1,655,843.10 1.11
New York....................... 191 6,000,875.47 4.02
North Carolina................. 83 1,241,977.70 0.83
Ohio........................... 67 1,031,969.82 0.69
Oklahoma....................... 34 748,293.67 0.50
Oregon......................... 261 6,174,072.96 4.14
Pennsylvania................... 225 3,926,439.27 2.63
Rhode Island................... 17 203,365.54 0.14
South Carolina................. 22 354,499.62 0.24
South Dakota................... 6 90,376.02 0.06
Tennessee...................... 43 692,408.29 0.46
Utah........................... 187 5,482,471.83 3.68
Vermont........................ 2 60,000.00 0.04
Virginia....................... 124 2,737,328.01 1.83
Washington..................... 326 6,859,812.54 4.60
Wisconsin...................... 41 771,291.35 0.52
Wyoming........................ 36 923,661.63 0.62
---------- -------------------- ----------
Total.......................... 6,246 $ 149,174,069.06 100.00%
---------- -------------------- ----------
---------- -------------------- ----------
</TABLE>
- ------------------
(1) Geographic location is determined by the address of the Mortgaged Property
securing the related Mortgage Loan.
S-21
<PAGE>
COMBINED LOAN-TO-VALUE RATIOS(1)
<TABLE>
<CAPTION>
PERCENT OF
POOL
BY CUT-OFF
NUMBER OF DATE
RANGE OF COMBINED MORTGAGE CUT-OFF DATE PRINCIPAL
LOAN-TO-VALUE RATIOS LOANS PRINCIPAL BALANCE BALANCE
- ------------------------------- ---------- -------------------- ----------
<S> <C> <C> <C>
0.001% to 10.000%............. 11 $ 176,912.39 0.12%
10.001% to 20.000%............. 38 817,337.20 0.55
20.001% to 30.000%............. 64 1,731,700.75 1.16
30.001% to 40.000%............. 120 3,201,339.23 2.15
40.001% to 50.000%............. 239 5,700,134.96 3.82
50.001% to 60.000%............. 420 12,485,301.49 8.37
60.001% to 70.000%............. 801 20,579,095.94 13.80
70.001% to 80.000%............. 2,660 63,360,451.95 42.47
80.001% to 90.000%............. 1,768 38,478,570.40 25.79
90.001% to 100.000%............ 125 2,643,224.75 1.77
---------- -------------------- ----------
Total..................... 6,246 $ 149,174,069.06 100.00%
---------- -------------------- ----------
---------- -------------------- ----------
</TABLE>
- ------------------
(1) The ratio (expressed as a percentage) of (A) the sum of (i) the Credit Limit
of the Mortgage Loans and (ii) any outstanding principal balances of
mortgage loans senior to the Mortgage Loans (calculated at the date of
origination of the Mortgage Loans) to (B) the lesser of (i) the appraised
value of the related Mortgaged Property as set forth in loan files at such
date of origination or (ii) in the case of a Mortgaged Property purchased
within one year of the origination of the related Mortgage Loan, the
purchase price of such Mortgaged Property.
PROPERTY TYPE
<TABLE>
<CAPTION>
PERCENT OF
POOL
BY CUT-OFF
NUMBER OF DATE
MORTGAGE CUT-OFF DATE PRINCIPAL
PROPERTY TYPE LOANS PRINCIPAL BALANCE BALANCE
- ------------------------------- ---------- -------------------- ----------
<S> <C> <C> <C>
Single Family.................. 5,652 $ 133,616,081.30 89.57%
Two- to Four-Family............ 61 1,451,372.04 0.97
Condominium.................... 99 1,930,539.41 1.29
PUD............................ 434 12,176,076.31 8.16
---------- -------------------- ----------
Total..................... 6,246 $ 149,174,069.06 100.00%
---------- -------------------- ----------
---------- -------------------- ----------
</TABLE>
LIEN PRIORITY
<TABLE>
<CAPTION>
PERCENT OF
POOL
BY CUT-OFF
NUMBER OF DATE
MORTGAGE CUT-OFF DATE PRINCIPAL
LIEN PRIORITY LOANS PRINCIPAL BALANCE BALANCE
- ------------------------------- ---------- -------------------- ----------
<S> <C> <C> <C>
First Lien..................... 171 $ 9,067,678.85 6.08%
Second Lien.................... 6,075 140,106,390.21 93.92
---------- -------------------- ----------
Total..................... 6,246 $ 149,174,069.06 100.00%
---------- -------------------- ----------
---------- -------------------- ----------
</TABLE>
S-22
<PAGE>
LOAN RATES (1)
<TABLE>
<CAPTION>
PERCENT OF POOL
RANGE OF NUMBER OF CUT-OFF DATE BY CUT-OFF DATE
LOAN RATES MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------------------------------------------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
7.251% to 7.500%......................................... 1,612 $ 33,591,208.35 22.52%
9.001% to 9.250%......................................... 5 150,839.06 0.10
9.251% to 9.500%......................................... 1 16,094.66 0.01
9.501% to 9.750%......................................... 300 10,613,466.99 7.11
9.751% to 10.000%......................................... 104 5,987,124.68 4.01
10.001% to 10.250%......................................... 1,389 34,841,126.61 23.36
10.251% to 10.500%......................................... 208 7,052,267.13 4.73
10.501% to 10.750%......................................... 430 10,087,164.60 6.76
10.751% to 11.000%......................................... 268 4,559,734.35 3.06
11.001% to 11.250%......................................... 24 878,695.84 0.59
11.251% to 11.500%......................................... 230 4,459,758.93 2.99
11.501% to 11.750%......................................... 4 167,360.51 0.11
11.751% to 12.000%......................................... 366 10,036,112.22 6.73
12.001% to 12.250%......................................... 495 11,115,269.17 7.45
12.251% to 12.500%......................................... 286 5,156,861.25 3.46
12.501% to 12.750%......................................... 409 8,209,735.88 5.50
12.751% to 13.000%......................................... 34 692,247.42 0.46
13.001% to 13.250%......................................... 26 530,894.51 0.36
13.251% to 13.500%......................................... 4 74,124.09 0.05
13.501% to 13.750%......................................... 48 913,982.81 0.61
13.751% to 14.000%......................................... 3 40,000.00 0.03
------ ----------------- -------
Total................................................. 6,246 $ 149,174,069.06 100.00%
------ ----------------- -------
------ ----------------- -------
</TABLE>
- ------------------
(1) Approximately 22.52% of the Mortgage Loans by Cut-off Date Principal Balance
are subject to an introductory rate of 7.49% per annum.
MARGIN
<TABLE>
<CAPTION>
PERCENT OF POOL
RANGE OF NUMBER OF CUT-OFF DATE BY CUT-OFF DATE
MARGINS MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------------------------------------------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
0.251% to 0.500%........................................... 243 $ 6,661,519.48 4.47%
0.501% to 0.750%........................................... 1 16,094.66 0.01
0.751% to 1.000%........................................... 515 15,646,922.71 10.49
1.001% to 1.250%........................................... 105 6,014,106.40 4.03
1.251% to 1.500%........................................... 2,127 48,936,762.27 32.81
1.501% to 1.750%........................................... 259 8,444,833.18 5.66
1.751% to 2.000%........................................... 746 15,586,692.19 10.45
2.001% to 2.250%........................................... 303 5,204,834.94 3.49
2.251% to 2.500%........................................... 33 1,148,643.20 0.77
2.501% to 2.750%........................................... 238 4,532,072.17 3.04
2.751% to 3.000%........................................... 4 167,360.51 0.11
3.001% to 3.250%........................................... 366 10,036,112.22 6.73
3.251% to 3.500%........................................... 495 11,115,269.17 7.45
3.501% to 3.750%........................................... 286 5,156,861.25 3.46
3.751% to 4.000%........................................... 410 8,254,735.88 5.53
4.001% to 4.250%........................................... 34 692,247.42 0.46
4.251% to 4.500%........................................... 26 530,894.51 0.36
4.501% to 4.750%........................................... 4 74,124.09 0.05
4.751% to 5.000%........................................... 48 913,982.81 0.61
5.001% to 5.250%........................................... 3 40,000.00 0.03
------ ----------------- -------
Total................................................. 6,246 $ 149,174,069.06 100.00%
------ ----------------- -------
------ ----------------- -------
</TABLE>
S-23
<PAGE>
CREDIT LIMIT UTILIZATION RATES
<TABLE>
<CAPTION>
PERCENT OF POOL
RANGE OF CREDIT LIMIT NUMBER OF CUT-OFF DATE BY CUT-OFF DATE
UTILIZATION RATES MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------------------------------------------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
0.00% to 10.00%.......................................... 847 $ 731,050.62 0.49%
10.01% to 20.00%.......................................... 243 2,174,195.90 1.46
20.01% to 30.00%.......................................... 234 2,778,106.91 1.86
30.01% to 40.00%.......................................... 350 5,068,506.47 3.40
40.01% to 50.00%.......................................... 344 5,664,613.49 3.80
50.01% to 60.00%.......................................... 343 7,053,545.58 4.73
60.01% to 70.00%.......................................... 410 10,756,858.49 7.21
70.01% to 80.00%.......................................... 415 11,113,769.22 7.45
80.01% to 90.00%.......................................... 439 13,120,975.19 8.80
90.01% to 100.00%.......................................... 2,621 90,712,447.19 60.81
------ ----------------- -------
Total................................................. 6,246 $ 149,174,069.06 100.00%
------ ----------------- -------
------ ----------------- -------
</TABLE>
CREDIT LIMITS
<TABLE>
<CAPTION>
PERCENT OF POOL
NUMBER OF CUT-OFF DATE BY CUT-OFF DATE
RANGE OF CREDIT LIMITS MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------------------------------------------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
$ 0.01 to $ 10,000.00................................. 120 $ 921,958.36 0.62%
$ 10,000.01 to $ 20,000.00................................. 1,818 21,704,311.76 14.55
$ 20,000.01 to $ 30,000.00................................. 1,558 27,585,259.59 18.49
$ 30,000.01 to $ 40,000.00................................. 919 21,874,449.45 14.66
$ 40,000.01 to $ 50,000.00................................. 674 17,698,014.20 11.86
$ 50,000.01 to $ 60,000.00................................. 300 9,716,202.01 6.51
$ 60,000.01 to $ 70,000.00................................. 171 5,582,024.76 3.74
$ 70,000.01 to $ 80,000.00................................. 176 7,641,946.61 5.12
$ 80,000.01 to $ 90,000.00................................. 71 3,156,360.35 2.12
$ 90,000.01 to $100,000.00................................. 248 11,982,046.24 8.03
$100,000.01 to $125,000.00................................. 43 2,489,056.36 1.67
$125,000.01 to $150,000.00................................. 44 3,712,599.87 2.49
$150,000.01 to $175,000.00................................. 20 1,148,321.01 0.77
$175,000.01 to $200,000.00................................. 21 1,816,257.09 1.22
$200,000.01 to $225,000.00................................. 7 664,870.55 0.45
$225,000.01 to $250,000.00................................. 15 1,571,010.81 1.05
$250,000.01 to $275,000.00................................. 4 574,825.92 0.39
$275,000.01 to $300,000.00................................. 8 1,648,034.09 1.10
$300,000.01 to $325,000.00................................. 3 940,874.10 0.63
$325,000.01 to $350,000.00................................. 12 3,269,508.70 2.19
$350,000.01 and over....................................... 14 3,476,137.23 2.33
------ ----------------- -------
Total................................................. 6,246 $ 149,174,069.06 100.00%
------ ----------------- -------
------ ----------------- -------
</TABLE>
S-24
<PAGE>
MAXIMUM RATES
<TABLE>
<CAPTION>
PERCENT OF POOL
NUMBER OF CUT-OFF DATE BY CUT-OFF DATE
MAXIMUM RATES MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------------------------------------------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
15.90%..................................................... 1,550 $ 42,402,046.36 28.42%
16.00%..................................................... 77 1,144,600.05 0.77
17.00%..................................................... 451 10,382,320.24 6.96
18.00%..................................................... 4,168 95,245,102.41 63.85
------ ----------------- -------
Total................................................. 6,246 $ 149,174,069.06 100.00%
------ ----------------- -------
------ ----------------- -------
</TABLE>
MONTHS REMAINING TO SCHEDULED MATURITY(1)
<TABLE>
<CAPTION>
PERCENT OF POOL
RANGE OF MONTHS NUMBER OF CUT-OFF DATE BY CUT-OFF DATE
REMAINING TO SCHEDULED MATURITY MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------------------------------------------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
151 to 155................................................. 65 $ 1,277,976.75 0.86%
156 to 160................................................. 30 644,628,29 0.43
286 to 290................................................. 298 11,851,102.40 7.94
291 to 295................................................. 2,303 56,753,856.42 38.05
296 to 300................................................. 3,429 74,520,084.02 49.96
301 to 305................................................. 51 813,663.43 0.55
306 to 310................................................. 61 2,965,291.75 1.99
311 to 315................................................. 4 114,975.20 0.08
316 to 320................................................. 4 152,497.63 0.10
321 to 325................................................. 1 79,993.17 0.05
------ ----------------- -------
Total................................................. 6,246 $ 149,174,069.06 100.00%
------ ----------------- -------
------ ----------------- -------
</TABLE>
- ------------------
(1) Assumes that the Draw Period for Mortgage Loans with five year Draw Periods
will be extended for an additional five years.
ORIGINATION YEAR
<TABLE>
<CAPTION>
PERCENT OF POOL
NUMBER OF CUT-OFF DATE BY CUT-OFF DATE
ORIGINATION YEAR MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------------------------------------------------- ----------------- ----------------- -----------------
<S> <C> <C> <C>
1994....................................................... 67 $ 2,278,812.59 1.53%
1995....................................................... 6,179 146,895,256.47 98.47
------ ----------------- -------
Total................................................. 6,246 $ 149,174,069.06 100.00%
------ ----------------- -------
------ ----------------- -------
</TABLE>
DELINQUENCY STATUS
<TABLE>
<CAPTION>
PERCENT OF POOL
NUMBER OF CUT-OFF DATE BY CUT-OFF DATE
NUMBER OF DAYS DELINQUENT MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------------------------------------------------- ----------------- ----------------- -----------------
<S> <C> <C> <C>
0 to 29................................................... 6,229 $ 148,332,760.09 99.44%
30 to 59................................................... 12 303,577.48 0.20
60 to 89................................................... 5 537,731.49 0.36
------ ----------------- -------
Total................................................. 6,246 $ 149,174,069.06 100.00%
------ ----------------- -------
------ ----------------- -------
</TABLE>
S-25
<PAGE>
MATURITY AND PREPAYMENT CONSIDERATIONS
The Agreement, except as otherwise described herein, provides that the
Certificateholders will be entitled to receive on each Distribution Date
distributions of principal, in the amounts described herein, until the
Certificate Principal Balance is reduced to zero. During the Managed
Amortization Period, Certificateholders will receive amounts from Principal
Collections based upon their Fixed Allocation Percentage subject to reduction as
described below. During the Rapid Amortization Period, Certificateholders will
receive amounts from Principal Collections based solely upon their Fixed
Allocation Percentage. Because prior distributions of Principal Collections to
Certificateholders serve to reduce the Investor Floating Allocation Percentage
but do not change their Fixed Allocation Percentage, allocations of Principal
Collections based on the Fixed Allocation Percentage may result in distributions
of principal to the Certificateholders in amounts that are, in most cases,
greater relative to the declining balance of the Mortgage Loans than would be
the case if the Investor Floating Allocation Percentage were used to determine
the percentage of Principal Collections distributed to Certificateholders. This
is especially true during the Rapid Amortization Period when the
Certificateholders are entitled to receive Investor Principal Collections and
not a lesser amount. In addition, Investor Interest Collections may be
distributed as principal to Certificateholders in connection with the
Accelerated Principal Distribution Amount, if any. Moreover, to the extent of
losses allocable to the Certificateholders, Certificateholders may also receive
as payment of principal the amount of such losses either from Investor Interest
Collections or, in some instances, draws under the Policy. The level of losses
may therefore affect the rate of payment of principal on the Certificates.
To the extent obligors make more draws than principal payments, the
Transferor Interest may grow. Because during the Rapid Amortization Period the
Certificateholders share of Principal Collections is based upon its Fixed
Allocation Percentage (without reduction), an increase in the Transferor
Interest due to additional draws may also result in Certificateholders receiving
principal at a greater rate. The Agreement permits the Transferor, at its
option, but subject to the satisfaction of certain conditions specified in the
Agreement, including the conditions described below, to remove certain Mortgage
Loans from the Trust at any time during the life of the Trust, so long as the
Transferor Interest (after giving effect to such removal) is not less than the
Minimum Transferor Interest. Such removals may affect the rate at which
principal is distributed to Certificateholders by reducing the overall Pool
Balance and thus the amount of Principal Collections. See 'DESCRIPTION OF THE
CERTIFICATES--Optional Retransfers of Mortgage Loans to the Transferor.'
All of the Mortgage Loans may be prepaid in full or in part at any time.
However, Mortgage Loans secured by Mortgaged Properties in California are
subject to an account termination fee equal to the lesser of $350 and six months
interest on the amount prepaid, to the extent the prepaid amount exceeds 20% of
the unpaid principal balance, if the account is terminated on or before its
fifth year anniversary. In addition, Mortgage Loans secured by Mortgaged
Properties in other jurisdictions may be subject to account termination fees to
the extent permitted by law. In general, such account termination fees do not
exceed $350 and do not apply to accounts terminated subsequent to a date
designated in the related Mortgage Note which, depending on the jurisdiction,
ranges between 6 months and five years following origination. The prepayment
experience with respect to the Mortgage Loans will affect the weighted average
life of the Certificates.
The rate of prepayment on the Mortgage Loans cannot be predicted. Neither
the Depositor nor the Servicer is aware of any publicly available studies or
statistics on the rate of prepayment of such Mortgage Loans. Generally, home
equity revolving 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 amortize as described herein, rates of principal payment on the
Mortgage Loans will generally be slower than those of traditional
fully-amortizing first mortgages in the absence of prepayments on such Mortgage
Loans. 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, prevailing interest rate levels, the availability of alternative
financing, homeowner mobility, the frequency and amount of any future draws on
the Credit Line Agreements 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,
with respect to the Mortgage Loans, 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
S-26
<PAGE>
same effect as a prepayment of the related Mortgage Loan. See 'CERTAIN LEGAL
ASPECTS OF 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 outstanding principal 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.
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.
POOL FACTOR AND TRADING INFORMATION
The 'Pool Factor' is a seven-digit decimal which the Servicer will compute
monthly expressing the Certificate Principal Balance of the Certificates as of
each Distribution Date (after giving effect to any distribution of principal on
such Distribution Date) as a proportion of the Original Certificate Principal
Balance. On the Closing Date, the Pool Factor will be 1.0000000. See
'DESCRIPTION OF THE CERTIFICATES-- Distributions on the Certificates.'
Thereafter, the Pool Factor will decline to reflect reductions in the related
Certificate Principal Balance resulting from distributions of principal to the
Certificates and the Invested Amount of any unreimbursed Liquidation Loss
Amounts.
Pursuant to the Agreement, monthly reports concerning the Invested Amount,
the Pool Factor and various other items of information will be made available to
the Certificateholders. In addition, within 60 days after the end of each
calendar year, beginning with the 1997 calendar year, information for tax
reporting purposes will be made available to each person who has been a
Certificateholder of record at any time during the preceding calendar year. See
'DESCRIPTION OF THE CERTIFICATES--Book-Entry Certificates' and '--Reports to
Certificateholders' herein.
S-27
<PAGE>
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 multiples of
$1 in excess thereof and will evidence specified undivided interests in the
Trust. (Section 6.01) The property of the Trust will consist of, to the extent
provided in the Agreement: (i) each of the Mortgage Loans that from time to time
are subject to the Agreement; (ii) collections on the Mortgage Loans received
after the Cut-Off Date (exclusive of payments in respect of accrued interest due
on or prior to the Cut-Off Date or due in the month of January); (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 Policy; (vi) the Spread
Account (for the benefit of the Certificate Insurer and the Certificateholders);
and (vii) an assignment of the Depositor's rights under the Purchase Agreement.
(Section 2.01) Definitive Certificates (as defined below), if issued, will be
transferable and exchangeable at the corporate trust office of the Trustee,
which will initially act as Certificate Registrar. See '--Book-Entry
Certificates' below. No service charge will be made for any registration of
exchange or transfer of Certificates, but the Trustee may require payment of a
sum sufficient to cover any tax or other governmental charge. (Section 6.02)
The aggregate undivided interest in the Trust represented by the
Certificates as of the Closing Date will equal $146,190,587.68 (the 'Original
Invested Amount'), which represents 98% of the Cut-Off Date Pool Balance. The
'Original Certificate Principal Balance' will equal $146,190,000.00. Following
the Closing Date, the 'Invested Amount' with respect to any Distribution Date
will be an amount equal to the Original Invested Amount minus (i) the amount of
Investor Principal Collections previously distributed to Certificateholders, and
minus (ii) an amount equal to the product of the Investor Floating Allocation
Percentage and the Liquidation Loss Amounts (each as defined herein). The
principal amount of the outstanding Certificates (the 'Certificate Principal
Balance') on any Distribution Date is equal to the Original Certificate
Principal Balance minus the aggregate of amounts actually distributed as
principal to the Certificateholders. See '--Distributions on the Certificates'
below. Each Certificate represents the right to receive payments of interest at
the Certificate Rate and payments of principal as described below.
The Transferor will own the remaining undivided interest in the Mortgage
Loans (the 'Transferor Interest'), which is equal to the Pool Balance less the
Invested Amount. The Transferor Interest will initially equal $2,983,481.38,
which represents 2% of the Cut-Off Date Pool Balance. The Transferor as of any
date is the owner of the Transferor Interest which initially will be the Seller.
In general, the Pool Balance will vary each day as principal is paid on the
Mortgage Loans, liquidation losses are incurred, Additional Balances are drawn
down by borrowers and Mortgage Loans are transferred to the Trust.
The Transferor has the right to sell or pledge the Transferor Interest at
any time, provided (i) the Rating Agencies (as defined herein) have notified the
Transferor and the Trustee in writing that such action will not result in the
reduction or withdrawal of the ratings assigned to the Certificates, and (ii)
certain other conditions specified in the Agreement are satisfied.
BOOK-ENTRY CERTIFICATES
The Certificates will be book-entry Certificates (the 'Book-Entry
Certificates'). Persons acquiring beneficial ownership interests in the
Certificates ('Certificate Owners') may elect to hold their Certificates 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
Certificates will be issued in one or more certificates which equal the
aggregate principal balance of the Certificates 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
S-28
<PAGE>
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 for Euroclear (in such
capacities, individually the 'Relevant Depositary' and collectively the
'European Depositaries'). Investors may hold such beneficial interests in the
Book-Entry Certificates in minimum denominations representing Certificate
Principal Balances of $1,000 and in multiples of $1 in excess thereof. Except as
described below, no person acquiring a Book-Entry Certificate (each, a
'beneficial owner') will be entitled to receive a physical certificate
representing such Certificate (a 'Definitive Certificate'). Unless and until
Definitive Certificates are issued, it is anticipated that the only
'Certificateholder' of the Certificates will be Cede & Co., as nominee of DTC.
Certificate Owners will not be Certificateholders as that term is used in the
Agreement. Certificate Owners are only permitted to exercise their rights
indirectly through Participants and DTC.
The beneficial owner's ownership of a Book-Entry Certificate will be
recorded on the records of the brokerage firm, bank, thrift institution or other
financial intermediary (each, a 'Financial Intermediary') that maintains the
beneficial owner's account for such purpose. In turn, the Financial
Intermediary's ownership of such Book-Entry Certificate will be recorded on the
records of DTC (or of a participating firm that acts as agent for the Financial
Intermediary, whose interest will in turn be recorded on the records of DTC, if
the beneficial owner's Financial Intermediary is not a DTC participant and on
the records of CEDEL or Euroclear, as appropriate).
Certificate Owners will receive all distributions of principal of, and
interest on, the Certificates from the Trustee through DTC and DTC 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 and indirect 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 interest.
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, Certificate Owners who are not Participants may transfer ownership
of Certificates only through Participants and indirect participants by
instructing such Participants and indirect 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 Participants and indirect participants will make debits
or credits, as the case may be, on their records on behalf of the selling and
purchasing Certificate Owners.
Because of time zone differences, credits of securities received in CEDEL
or Euroclear as a result of a transaction with a Participant will be made during
subsequent securities settlement processing and dated the business day following
the DTC settlement date. Such credits or any transactions in such securities
settled during such processing will be reported to the relevant Euroclear or
CEDEL Participants on such business day. Cash received in CEDEL or Euroclear as
a result of sales of securities by or through a CEDEL Participant (as defined
below) or Euroclear Participant (as defined below) to a DTC Participant will be
received with value on the DTC settlement date but will be available in the
relevant CEDEL or Euroclear cash account only as of the business day following
settlement in DTC. For information with respect to tax documentation procedures
relating to the Certificates, see 'CERTAIN FEDERAL INCOME TAX
CONSEQUENCES--Foreign Investors' and '-- Backup Witholding' herein and 'GLOBAL
CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES--Certain U.S. Federal
Income Tax Documentation Requirements' in Annex I hereto.
Transfers between Participants will occur in accordance with DTC rules.
Transfers between CEDEL Participants and Euroclear Participants will occur in
accordance with their respective rules and operating procedures.
S-29
<PAGE>
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 Certificates, whether
held for its own account or as a nominee for another person. In general,
beneficial ownership of Book-Entry Certificates will be subject to the rules,
regulations and procedures governing DTC and DTC participants as in effect from
time to time.
CEDEL is incorporated under the laws of Luxembourg as a professional
depository. CEDEL holds securities for its participating organizations ('CEDEL
Participants') and facilitates the clearance and settlement of securities
transactions between CEDEL Participants through electronic book-entry changes in
accounts of CEDEL Participants, thereby eliminating the need for physical
movement of certificates. Transactions may be settled in CEDEL in any of 28
currencies, including United States dollars. CEDEL provides to its CEDEL
Participants, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. CEDEL interfaces with domestic markets in several
countries. As a professional depository, CEDEL is subject to regulation by the
Luxembourg Monetary Institute. CEDEL participants are recognized financial
institutions around the world, including underwriters, securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations. Indirect access to CEDEL is also available to others, such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a CEDEL Participant, either directly or indirectly.
Euroclear was created in 1968 to hold securities for 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 32 currencies, including United
States dollars. Euroclear includes various other services, including securities
lending and borrowing and interfaces with domestic markets in several countries
generally similar to the arrangements for cross-market transfers with DTC
described above. Euroclear is operated by the Brussels, Belgium office of Morgan
Guaranty Trust Company of New York (the 'Euroclear Operator'), under contract
with Euroclear Clearance Systems S.C., a Belgian cooperative corporation (the
'Cooperative'). All operations are conducted by the Euroclear Operator, and all
Euroclear securities clearance accounts and Euroclear cash accounts are accounts
with the Euroclear Operator, not the Cooperative. The Cooperative establishes
policy for Euroclear on behalf of Euroclear Participants. Euroclear Participants
include banks (including central banks), securities brokers and dealers and
other professional financial intermediaries. Indirect access to Euroclear is
also available to other firms that clear through or maintain a custodial
relationship with a Euroclear Participant, either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
Commission.
Securities clearance accounts and cash accounts with the Euroclear Operator
are governed by the Terms and Conditions Governing Use of Euroclear and the
related Operating Procedures of the Euroclear System and applicable Belgian law
(collectively, the 'Terms and Conditions'). The Terms and Conditions govern
transfers of securities and cash within Euroclear, withdrawals of securities and
cash from Euroclear, and receipts of payments with respect to securities in
Euroclear. All securities in Euroclear are held on a fungible basis without
attribution of specific certificates to specific securities clearance accounts.
The Euroclear Operator acts under the
S-30
<PAGE>
Terms and Conditions only on behalf of Euroclear Participants, and has no record
of or relationship with persons holding through Euroclear Participants.
Distributions on the Book-Entry Certificates will be made on each
Distribution Date by the Trustee to DTC. DTC will be responsible for crediting
the amount of such payments to the accounts of the applicable DTC participants
in accordance with DTC's normal procedures. Each DTC participant will be
responsible for disbursing such payments to the beneficial owners of the
Book-Entry Certificates that it represents and to each Financial Intermediary
for which it acts as agent. Each such Financial Intermediary will be responsible
for disbursing funds to the beneficial owners of the Book-Entry Certificates
that it represents.
Under a book-entry format, beneficial owners of the Book-Entry Certificates
may experience some delay in their receipt of payments, since such payments will
be forwarded by the Trustee to Cede. Distributions with respect to Certificates
held through CEDEL or Euroclear will be credited to the cash accounts of CEDEL
Participants or Euroclear Participants in accordance with the relevant system's
rules and procedures, to the extent received by the Relevant Depositary. Such
distributions will be subject to tax reporting in accordance with relevant
United States tax laws and regulations. See 'CERTAIN FEDERAL INCOME TAX
CONSEQUENCES--Foreign Investors' and '--Backup Withholding' herein. Because DTC
can only act on behalf of Financial Intermediaries, the ability of a beneficial
owner to pledge Book-Entry Certificates to persons or entities that do not
participate in the Depository system, or otherwise take actions in respect of
such Book-Entry Certificates, may be limited due to the lack of physical
certificates for such Book-Entry Certificates. In addition, issuance of the
Book-Entry Certificates in book-entry form may reduce the liquidity of such
Certificates in the secondary market since certain potential investors may be
unwilling to purchase Certificates for which they cannot obtain physical
certificates.
Monthly and annual reports on the Trust 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 Certificates of such beneficial owners are credited.
DTC has advised the Transferor and the Trustee that, unless and until
Definitive Certificates are issued, DTC will take any action permitted to be
taken by the holders of the Book-Entry Certificates under the Agreement only at
the direction of one or more Financial Intermediaries to whose DTC accounts the
Book-Entry Certificates are credited, to the extent that such actions are taken
on behalf of Financial Intermediaries whose holdings include such Book-Entry
Certificates. CEDEL or the Euroclear Operator, as the case may be, will take any
other action permitted to be taken by a Certificateholder under the Agreement on
behalf of a 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
Certificates which conflict with actions taken with respect to other
Certificates.
Definitive Certificates will be issued to beneficial owners of the
Book-Entry Certificates, or their nominees, rather than to DTC, only if (a) DTC
or 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 Certificates 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 defined herein),
beneficial owners having Percentage Interests aggregating not less than 51% of
the Certificate Principal Balance of the Book-Entry Certificates advise the
Trustee and DTC through the Financial Intermediaries and the DTC participants in
writing that the continuation of a book-entry system through DTC (or a successor
thereto) is no longer in the best interests of beneficial owners.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Trustee will be required to notify all beneficial
owners of the occurrence of such event and the availability through DTC of
Definitive Certificates. Upon surrender by DTC of the global certificate or
certificates representing the Book-Entry Certificates and instructions for
re-registration, the Trustee will issue Definitive Certificates, and thereafter
the Trustee will recognize the holders of such Definitive Certificates as
Certificateholders under the Agreement.
Although DTC, CEDEL and Euroclear have agreed to the foregoing procedures
in order to facilitate transfers of Certificates among participants of DTC,
CEDEL and Euroclear, they are under no obligation to perform or continue to
perform such procedures and such procedures may be discontinued at any time.
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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), 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 after the Cut-Off Date (exclusive of payments in respect of
accrued interest due on or prior to the Cut-Off Date or due in the month of
January) (Section 2.01) The Trustee, concurrently with such transfer, will
deliver the Certificates to the Depositor and the Transferor Certificate (as
defined in the Agreement) to the Transferor. (Section 2.07) Each Mortgage Loan
transferred to the Trust will be identified on a schedule (the 'Mortgage Loan
Schedule') delivered to the Trustee pursuant to the Agreement. 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. (Article
I).
The Agreement will permit the Seller to maintain possession of the Related
Documents and certain other documents relating to the Mortgage Loans (the
'Mortgage Files') and assignments of the Mortgage Loans to the Trustee will not
be required to be recorded for so long as the long-term senior unsecured debt of
Countrywide is rated at least 'BBB-' by Standard & Poor's and 'Baa2' by Moody's.
In the event that Countrywide's long-term senior unsecured debt rating does not
satisfy the above-described standards (an 'Assignment Event'), Countrywide will
have 90 days to record assignments of the mortgages for each such Mortgage Loan
in favor of the Trustee and 60 days to deliver the Mortgage Files pertaining to
each such Mortgage Loan to the Trustee (unless opinions of counsel satisfactory
to the Rating Agencies and the Certificate Insurer to the effect that
recordation of such assignments or delivery of such documentation is not
required in the relevant jurisdiction to protect the interest of Countrywide and
the Trustee in the Mortgage Loans). In lieu of delivery of original
documentation, Countrywide may deliver documents which have been imaged
optically upon delivery of an opinion of counsel that such documents do not
impair the enforceability of the transfer to the Trust of the Mortgage Loans.
Within 90 days of an Assignment Event, the 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 accept the transfer of such
Mortgage Loan from the Trust. Upon such transfer, the Principal Balance of such
Mortgage Loan will be deducted from the Pool Balance, thus reducing the amount
of the Transferor Interest. If the deduction would cause the Transferor Interest
to become less than the Minimum Transferor Interest at such time (a 'Transfer
Deficiency'), the Seller will be obligated to either substitute an Eligible
Substitute Mortgage Loan or make a deposit into the Collection Account in the
amount (the 'Transfer Deposit Amount') equal to the amount by which the
Transferor Interest would be reduced to less than the Minimum Transferor
Interest at such time. Any such deduction, substitution or deposit, will be
considered a payment in full of such Mortgage Loan. Notwithstanding the
foregoing, however, prior to all required deposits to the Collection Account
being made no such transfer shall be considered to have occurred unless such
deposit is actually made. 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 Trustee or the Certificateholders.
(Section 2.02)
An 'Eligible Substitute Mortgage Loan' is a mortgage loan substituted by
the Depositor 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 10% more or less than the Transfer Deficiency
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 more than 60 months 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 Agreement (deemed to be
made as of the date of substitution); (viii) in general, have an original
Combined
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Loan-to-Value Ratio not greater than that of the Defective Mortgage Loan; and
(ix) satisfy certain other conditions specified in the 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 and to the extent that
the Transferor Interest would be reduced below the Minimum Transferor Interest,
the Seller will be required to make a deposit to the Collection Account equal to
such difference.
The Seller 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 (e.g., Cut-Off Date Principal Balance
and the Loan Rate). In addition, the Seller will represent and warrant on the
Closing Date that at the time of transfer to the Depositor, the Seller has
transferred or assigned all of its rights, title and interest in each Mortgage
Loan and the Related Documents, free of any lien (subject to certain
exceptions). Upon discovery of a breach of any such representation and warranty
which materially and adversely affects the interests of the Certificateholders
or the Certificate Insurer in the related Mortgage Loan and Related Documents,
the Seller will have a period of 90 days after discovery or notice of the breach
to effect a cure. If the breach cannot be cured within the 90-day period, the
Seller will be obligated to accept a transfer of the Defective Mortgage Loan
from the Trust. The same procedure and limitations that are set forth in the
second preceding paragraph for the transfer of Defective Mortgage Loans will
apply to the transfer of a Mortgage Loan that is required to be transferred
because of such breach of a representation or warranty in the Agreement that
materially and adversely affects the interests of the Certificateholders.
(Section 2.04)
Mortgage Loans required to be transferred to the Seller as described in the
preceding paragraphs are referred to as 'Defective Mortgage Loans.'
Pursuant to the Agreement, the Servicer will service and administer the
Mortgage Loans as more fully set forth above.
AMENDMENTS TO CREDIT LINE AGREEMENTS
Subject to applicable law, the Servicer may change the terms of the Credit
Line Agreements at any time provided that such changes (i) do not adversely
affect the interest of the Certificateholders or the Certificate Insurer, and
(ii) are consistent with prudent business practice. In addition, the Agreement
permits the Servicer, within certain limitations described therein, to increase
the Credit Limit of the related Mortgage Loan or reduce the Margin for such
Mortgage Loan.
OPTIONAL TRANSFERS OF MORTGAGE LOANS TO THE TRANSFEROR
Subject to the conditions specified in the Agreement, on any Distribution
Date the Transferor may, but shall not be obligated to, remove on such
Distribution Date (the 'Transfer Date') from the Trust, certain Mortgage Loans
without notice to the Certificateholders. The Transferor is permitted to
designate the Mortgage Loans to be removed. Mortgage Loans so designated will
only be removed upon satisfaction of certain conditions specified in the
Agreement, including: (i) the Transferor Interest as of such Transfer Date
(after giving effect to such removal) exceeds the Minimum Transferor Interest;
(ii) the Transferor shall have delivered to the Trustee a 'Mortgage Loan
Schedule' containing a list of all Mortgage Loans remaining in the Trust after
such removal; (iii) the Transferor shall represent and warrant that no selection
procedures which the Transferor reasonably believes are adverse to the interests
of the Certificateholders or the Certificate Insurer were used by the Transferor
in selecting such Mortgage Loans; (iv) in connection with the first such
retransfer of Mortgage Loans, the Rating Agencies shall have been notified of
the proposed transfer and prior to the Transfer Date shall not have notified the
Transferor in writing that such transfer would result in a reduction or
withdrawal of the ratings assigned to the Certificates without regard to the
Policy; and (v) the Transferor shall have delivered to the Trustee and the
Certificate Insurer an officer's certificate confirming the conditions set forth
in clauses (i) through (iii) above. (Section 2.06)
As of any date of determination, the 'Minimum Transferor Interest' is an
amount equal to the lesser of (a) 5% of the Pool Balance on such date and (b)
the Transferor Interest as of the Closing Date.
PAYMENTS ON MORTGAGE LOANS; DEPOSITS TO COLLECTION ACCOUNT
The Trustee shall establish and maintain on behalf of the Servicer an
account (the 'Collection Account') for the benefit of the Certificateholders and
the Transferor, as their interests may appear. The Collection Account will be an
Eligible Account (as defined herein). Subject to the investment provision
described in the following
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paragraphs, within two days of 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 Agreement) 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
Collection Account or on such Distribution Date if approved by the Rating
Agencies and the Certificate Insurer. Not later than the third Business Day
prior to each Distribution Date (the 'Determination Date'), the Servicer will
notify the Trustee of the amount of such deposit to be included in funds
available for 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 by Moody's and
'BBB-' by Standard & Poor's, (iii) a segregated trust account maintained with
the Trustee or an Affiliate of the Trustee in its fiduciary capacity or (iv)
otherwise acceptable to each Rating Agency and the Certificate Insurer as
evidenced by a letter from each Rating Agency and the Certificate Insurer to the
Trustee, without reduction or withdrawal of their then current ratings of the
Certificates.
Eligible Investments are specified in the 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 Certificates.
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 amounts collected
during the related Collection Period, including such portion of Net Liquidation
Proceeds allocated to interest pursuant to the terms of the Credit Line
Agreements less Servicing Fees for the related Collection Period.
As to any Distribution Date, 'Principal Collections' will be equal to the
sum of (i) the amounts collected during the related Collection Period, including
such portion of Net Liquidation Proceeds allocated to principal pursuant to the
terms of the Credit Line Agreements and (ii) any Transfer Deposit Amounts. 'Net
Liquidation Proceeds' with respect to a Mortgage Loan are equal to the
Liquidation Proceeds, reduced by related expenses, but not including the
portion, if any, of such amount that exceeds the Principal Balance of the
Mortgage Loan plus accrued and unpaid interest thereon to the end of the
Collection Period during which such Mortgage Loan became a Liquidated Mortgage
Loan. 'Liquidation Proceeds' are the proceeds (excluding any amounts drawn on
the Policy) received in connection with the liquidation of any Mortgage Loan,
whether through trustee's sale, foreclosure sale or otherwise.
With respect to any Distribution Date, the portion of Interest Collections
allocable to the Certificates ('Investor Interest Collections') will equal the
product of (a) Interest Collections for such Distribution Date and (b) the
Investor Floating Allocation Percentage. With respect to any Distribution Date,
the 'Investor Floating Allocation Percentage' is the percentage equivalent of a
fraction determined by dividing the Invested Amount at the close of business on
the preceeding Distribution Date (or the Closing Date in the case of the first
Distribution Date) by the Pool Balance at the beginning of the related
Collection Period. The remaining amount of Interest Collections will be
allocated to the Transferor Interest.
Principal Collections will be allocated between the Certificateholders and
the Transferor ('Investor Principal Collections' and 'Transferor Principal
Collections', respectively) as described herein.
The Trustee will deposit any amounts drawn under the Policy into the
Collection Account.
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.
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DISTRIBUTIONS ON THE CERTIFICATES
Beginning with the first Distribution Date (which will occur on March 15,
1996), distributions on the Certificates will be made by the Trustee or the
Paying Agent 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 or, if the Certificates are no longer Book-Entry Certificates,
at the close of business on the last day of the month preceding such
Distribution Date (the 'Record Date'). The term 'Distribution Date' means the
fifteenth day of each month or, if such day is not a Business Day, then the next
succeeding Business Day. Distributions will be made by check or money order
mailed (or upon the request of a Certificateholder owning Certificates having
denominations aggregating at least $1,000,000, by wire transfer or otherwise) to
the address of the person entitled thereto (which, in the case of Book-Entry
Certificates, will be DTC or its nominee) as it appears on the Certificate
Register in amounts calculated as described herein on 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. (Sections 5.01 and 10.01) For purposes of the Agreement, a
'Business Day' is any day other than (i) a Saturday or Sunday or (ii) a day on
which banking institutions in New York State are required or authorized by law
to be closed.
Application of Interest Collections. On each Distribution Date, the Trustee
or the Paying Agent will apply the Investor Interest Collections in the
following manner and order of priority:
(i) as payment to the Trustee for its fee for services rendered
pursuant to the Agreement;
(ii) as payment for the premium for the Policy;
(iii) as payment for the accrued interest due and any overdue accrued
interest (with interest thereon to the extent permitted by law) on the
Certificate Principal Balance of the Certificates;
(iv) to pay Certificateholders the Investor Loss Amount for such
Distribution Date;
(v) as payment for any Investor Loss Amount for a previous
Distribution Date that was not previously (a) funded by Investor Interest
Collections, (b) absorbed by the Overcollateralization Amount, (c) funded
by amounts on deposit in the Spread Account or (d) funded by draws on the
Policy;
(vi) to reimburse prior draws made from the Policy (with interest
thereon);
(vii) to pay principal on the Certificates until the Invested Amount
exceeds the Certificate Principal Balance by the Required
Overcollateralization Amount (such amount so paid, the 'Accelerated
Principal Distribution Amount');
(viii) any other amounts required to be deposited in an account for
the benefit of the Certificate Insurer or owed to the Certificate Insurer
pursuant to the Insurance Agreement;
(ix) certain amounts that may be required to be paid to the Servicer
pursuant to the Agreement; and
(x) to the Transferor to the extent permitted as described herein.
Payments to Certificateholders pursuant to clause (iii) will be interest
payments on the Certificates. Payments to Certificateholders pursuant to clauses
(iv), (v) and (vii) will be principal payments on the Certificates and will
therefore reduce the Certificate Principal Balance, however, payments pursuant
to clause (vii) will not reduce the Invested Amount. The Accelerated Principal
Distribution Amount is not guaranteed by the Policy.
To the extent that Investor Interest Collections are applied to pay the
interest on the Certificates, Investor Interest Collections may be insufficient
to cover Investor Loss Amounts. If such insufficiency results in the Certificate
Principal Balance exceeding the Invested Amount, a draw will be made on the
Policy in accordance with the terms of the Policy.
The 'Required Overcollateralization Amount' shall be an amount set forth in
the Agreement. 'Liquidation Loss Amount' means with respect to any Liquidated
Mortgage Loan, the unrecovered Principal Balance thereof during the Collection
Period in which such Mortgage Loan became a Liquidated Mortgage Loan, after
giving effect to the Net Liquidation Proceeds in connection therewith. The
'Investor Loss Amount' shall be the product of the Investor Floating Allocation
Percentage and the Liquidation Loss Amount for such Distribution Date.
A 'Liquidated Mortgage Loan' means, as to any Distribution Date, any
Mortgage Loan in respect of which the Servicer has determined, based on the
servicing procedures specified in the Agreement, as of the end of the preceding
Collection Period that all Liquidation Proceeds which it expects to recover with
respect to the
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disposition of the related Mortgaged Property have been recovered. The Investor
Loss Amount will be allocated to the Certificateholders.
As to any Distribution Date other than the first Distribution Date, the
'Collection Period' is the calendar month preceding each Distribution Date. As
to the first Distribution Date, the 'Collection Period' is the period beginning
after the Cut-Off Date and ending on the last day of February 1996.
Interest will be distributed on each Distribution Date at the Certificate
Rate for the related Interest Period (as defined below). The 'Certificate Rate'
for a Distribution Date will generally equal the sum of (a) LIBOR, determined as
specified herein, as of the second LIBOR Business Day prior to the immediately
preceding Distribution Date (or as of two LIBOR Business Days prior to the
Closing Date, in the case of the first Distribution Date) plus (b) % per
annum. Notwithstanding the foregoing, in no event will the amount of interest
required to be distributed in respect of the Certificates on any Distribution
Date exceed a rate equal to the weighted average of the Loan Rates (net of the
Servicing Fee Rate, the fee payable to the Trustee and the rate at which the
premium payable to the Certificate Insurer is calculated) weighted on the basis
of the daily balance of each Mortgage Loan during the related billing cycle
prior to the Collection Period relating to such Distribution Date.
Interest on the Certificates in respect of any Distribution Date will
accrue on the Certificate Principal Balance 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 on the Certificates will be funded from Investor Interest Collections
and, if necessary, from draws on the Policy.
Calculation of the LIBOR Rate. On each Distribution Date, LIBOR shall be
established by the Trustee and as to any Interest Period, LIBOR will equal the
rate for United States dollar deposits for one month which appears on the
Telerate Screen Page 3750 as of 11:00 A.M., London time, on the second LIBOR
Business Day prior to the first day of such Interest Period. 'Telerate Screen
Page 3750' means the display designated as page 3750 on the Telerate Service (or
such other page as may replace page 3750 on that service for the purpose of
displaying London interbank offered rates of major banks). If such rate does not
appear on such page (or such other page as may replace that page on that
service, or if such service is no longer offered, such other service for
displaying LIBOR or comparable rates as may be selected by the Depositor after
consultation with the Trustee), the rate will be the Reference Bank Rate. The
'Reference Bank Rate' will be determined on the basis of the rates at which
deposits in U.S. Dollars are offered by the reference banks (which shall be
three major banks that are engaged in transactions in the London interbank
market, selected by the Depositor after consultation with the Trustee) as of
11:00 A.M., London time, on the day that is two LIBOR Business Days prior to the
immediately preceding Distribution Date to prime banks in the London interbank
market for a period of one month in amounts approximately equal to the principal
amount of the Certificates then outstanding. The Trustee will request the
principal London office of each of the reference banks to provide a quotation of
its rate. If at least two such quotations are provided, the rate will be the
arithmetic mean of the quotations. If on such date fewer than two quotations are
provided as requested, the rate will be the arithmetic mean of the rates quoted
by one or more major banks in New York City, selected by the Depositor after
consultation with the Trustee, as of 11:00 A.M., New York City time, on such
date for loans in U.S. Dollars to leading European banks for a period of one
month in amounts approximately equal to the principal amount of the Certificates
then outstanding. If no such quotations can be obtained, the rate will be LIBOR
for the prior Distribution Date. 'LIBOR Business Day' means any day other than
(i) a Saturday or a Sunday or (ii) a day on which banking institutions in the
State of New York or in the city of London, England are required or authorized
by law to be closed.
Transferor Collections. Collections allocable to the Transferor Interest
that are not distributed to Certificateholders will be distributed to the
Transferor only to the extent that such distribution will not reduce the amount
of the Transferor Interest as of the related Distribution Date below the Minimum
Transferor Interest. Amounts not distributed to the Transferor because of such
limitations will be retained in the Collection Account until the Transferor
Interest exceeds the Mimimum Transferor Interest, at which time such excess
shall be released to the Transferor. If any such amounts are still retained in
the Collection Account upon the commencement of the Rapid Amortization Period,
such amounts will be paid to the Certificateholders as a reduction of the
Certificate Principal Balance.
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Overcollateralization. The distribution of the aggregate Accelerated
Principal Distribution Amount, if any, to Certificateholders may result in the
Invested Amount being greater than the Certificate Principal Balance, thereby
creating overcollateralization. The Overcollateralization Amount, if any, will
be available to absorb any Investor Loss Amount that is not covered by Investor
Interest Collections.
Distributions of Principal Collections. For the period beginning on the
first Distribution Date and, unless a Rapid Amortization Event shall have
earlier occurred, ending on the Distribution Date in February 2001 (the 'Managed
Amortization Period'), the amount of Principal Collections payable to
Certificateholders as of each Distribution Date during the Managed Amortization
Period will equal, to the extent funds are available therefor, the Scheduled
Principal Collections Distribution Amount for such Distribution Date. On any
Distribution Date during the Managed Amortization Period, the 'Scheduled
Principal Collections Distribution Amount' shall equal the lesser of (i) the
Maximum Principal Payment (as defined herein) and (ii) the Alternative Principal
Payment (as defined herein). With respect to any Distribution Date, the 'Maximum
Principal Payment' will equal the product of the Investor Fixed Allocation
Percentage and Principal Collections for such Distribution Date. With respect to
any Distribution Date, the 'Alternative Principal Payment' will equal the
greater of (x) % of the Certificate Principal Balance immediately prior to
such Distribution Date and (y) the amount, but not less than zero, of Principal
Collections for such Distribution Date less the aggregate of Additional Balances
created during the related Collection Period.
Beginning with the first Distribution Date following the end of the Managed
Amortization Period, the amount of Principal Collections payable to
Certificateholders on each Distribution Date will be equal to the Maximum
Principal Payment.
The amount of Principal Collections to be distributed to Certificateholders
on the first Distribution Date will reflect Principal Collections and Additional
Balances during the first Collection Period which is the period beginning after
the Cut-Off Date through the last day of February 1996.
Distributions of Principal Collections based upon the Investor Fixed
Allocation Percentage may result in distributions of principal to
Certificateholders in amounts that are greater relative to the declining Pool
Balance than would be the case if the Investor Floating Allocation Percentage
were used to determine the percentage of Principal Collections distributed in
respect of the Invested Amount. Principal Collections not allocated to the
Certificateholders will be allocated to the Transferor Interest. The aggregate
distributions of principal to the Certificateholders will not exceed the
Original Certificate Principal Balance.
In addition, to the extent of funds available therefor (including funds
available under the Policy), on the Distribution Date in February 2027,
Certificateholders will be entitled to receive as a payment of principal an
amount equal to the outstanding Certificate Principal Balance.
The Paying Agent. The Paying Agent shall initially be the Trustee, together
with any successor thereto in such capacity (the 'Paying Agent'). The Paying
Agent shall have the revocable power to withdraw funds from the Collection
Account for the purpose of making distributions to the Certificateholders.
RAPID AMORTIZATION EVENTS
As described above, the Managed Amortization Period will continue through
the Distribution Date in February 2001, unless a Rapid Amortization Event occurs
prior to such date in which case the Rapid Amortization Period will commence
prior to such date. 'Rapid Amortization Event' refers to any of the following
events:
(a) failure on the part of the Seller (i) to make a payment or deposit
required under the Agreement within three Business Days after the date such
payment or deposit is required to be made or (ii) to observe or perform in
any material respect any other covenants or agreements of the Seller set
forth in the Agreement, which failure continues unremedied for a period of
60 days after written notice;
(b) any representation or warranty made by the Seller in the Agreement
proves to have been incorrect in any material respect when made and
continues to be incorrect in any material respect for a period of 60 days
after written notice and as a result of which the interests of the
Certificateholders are materially and adversely affected; provided,
however, that a Rapid Amortization Event shall not be deemed to occur if
the Seller has purchased or made a substitution for the related Mortgage
Loan or Mortgage Loans if applicable during such period (or within an
additional 60 days with the consent of the Trustee) in accordance with the
provisions of the Agreement;
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(c) the occurrence of certain events of bankruptcy, insolvency or
receivership relating to the Transferor;
(d) the Trust becomes subject to regulation by the Securities and
Exchange Commission as an investment company within the meaning of the
Investment Company Act of 1940, as amended; or
(e) the aggregate of all draws under the Policy exceeds 1% of the
Cut-Off Date Pool Balance.
In the case of any event described in clause (a) or (b), a Rapid
Amortization Event will be deemed to have occurred only if, after the applicable
grace period, if any, described in such clauses, either the Trustee or
Certificateholders holding Certificates evidencing more than 51% of the
Percentage Interests or the Certificate Insurer (so long as there is no default
by the Certificate Insurer in the performance of its obligations under the
Policy), by written notice to the Depositor and the Servicer (and to the
Trustee, if given by the Certificateholders) declare that a Rapid Amortization
Event has occurred as of the date of such notice. In the case of any event
described in clause (c), (d) or (e), a Rapid Amortization Event will be deemed
to have occurred without any notice or other action on the part of the Trustee
or the Certificateholders immediately upon the occurrence of such event.
In addition to the consequences of a Rapid Amortization Event discussed
above, if the Transferor voluntarily files a bankruptcy petition or goes into
liquidation or any person is appointed a receiver or bankruptcy trustee of the
Transferor, on the day of any such filing or appointment no further Additional
Balances will be transferred to the Trust, the Transferor will immediately cease
to transfer Additional Balances to the Trust and the Transferor will promptly
give notice to the Trustee of any such filing or appointment. Within 15 days,
the Trustee will publish a notice of the liquidation or the filing or
appointment stating that the Trustee intends to sell, dispose of or otherwise
liquidate the Mortgage Loans in a commercially reasonable manner and to the best
of its ability. Unless otherwise instructed within a specified period by
Certificateholders representing undivided interests aggregating more than 51% of
the aggregate principal amount of the Certificates, the Trustee will sell,
dispose of or otherwise liquidate the Mortgage Loans in a commercially
reasonable manner and on commercially reasonable terms. Any proceeds will be
treated as collections allocable to the Certificateholders and the Investor
Fixed Allocation Percentage of such remaining proceeds and will be distributed
to the Certificateholders on the date such proceeds are received (the
'Dissolution Distribution Date'). If the portion of such proceeds allocable to
the Certificateholders are not sufficient to pay in full the remaining amount
due on the Certificates, the Policy will cover such shortfall.
Notwithstanding the foregoing, if a conservator, receiver or
trustee-in-bankruptcy is appointed for the Transferor and no Rapid Amortization
Event exists other than such conservatorship, receivership or insolvency of the
Transferor, the conservator, receiver or trustee-in-bankruptcy may have the
power to prevent the commencement of the Rapid Amortization Period or the sale
of Mortgage Loans described above.
THE POLICY
On or before the Closing Date, the Policy will be issued by the Certificate
Insurer pursuant to the provisions of the Agreement and the Insurance and
Indemnity Agreement (the 'Insurance Agreement') to be dated as of January 1,
1996, among the Seller, the Depositor, the Servicer, the Trustee and the
Certificate Insurer.
The Policy will irrevocably and unconditionally guarantee payment on each
Distribution Date to the Trustee for the benefit of the Certificateholders the
full and complete payment of (i) the Guaranteed Principal Distribution Amount
(as defined herein) with respect to the Certificates for such Distribution Date
and (ii) accrued and unpaid interest due on the Certificates (together, the
'Guaranteed Distributions'), with such Guaranteed Distributions having been
calculated in accordance with the original terms of the Certificates or the
Agreement except for amendments or modifications to which the Certificate
Insurer has given its prior written consent. The effect of the Policy is to
guarantee the timely payment of interest on, and the ultimate payment of the
principal amount of, all of the Certificates.
The 'Guaranteed Principal Distribution Amount' shall be the amount, if any,
by which the Certificate Principal Balance (after giving effect to all other
amounts distributable and allocable to principal on the Certificates) exceeds
the Invested Amount as of such Distribution Date (after giving effect to all
other amounts distributable and allocable to principal on the Certificates for
such Distribution Date). In addition, the Policy will guarantee the payment of
the outstanding Certificate Principal Balance on the Distribution Date in
February 2027 (after giving effect to all other amounts distributable and
allocable to principal on such Distribution Date).
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In accordance with the Agreement, the Trustee will be required to establish
and maintain an account (the 'Spread Account') for the benefit of the
Certificate Insurer and the Certificateholders. The Trustee shall deposit the
amounts into the Spread Account as required by the Agreement.
Payment of claims on the Policy will be made by the Certificate Insurer
following Receipt by the Certificate Insurer of the appropriate notice for
payment on the later to occur of (i) 12:00 noon, New York City time, on the
second Business Day following Receipt of such notice for payment and (ii) 12:00
noon, New York City time, on the relevant Distribution Date.
If payment of any amount guaranteed by the Certificate Insurer pursuant to
the Policy is avoided as a preference payment under applicable bankruptcy,
insolvency, receivership or similar law, the Certificate Insurer will pay such
amount out of the funds of the Certificate Insurer on the later of (a) the date
when due to be paid pursuant to the Order referred to below or (b) the first to
occur of (i) the fourth Business Day following Receipt by the Certificate
Insurer from the Trustee of (A) a certified copy of the order (the 'Order') of
the court or other governmental body which exercised jurisdiction to the effect
that the Certificateholder is required to return the amount of any Guaranteed
Distributions distributed with respect to the Certificates during the term of
the related Policy because such distributions were avoidable preference payments
under applicable bankruptcy law, (B) a certificate of the Certificateholder that
the Order has been entered and is not subject to any stay and (C) an assignment
duly executed and delivered by the Certificateholder, in such form as is
reasonably required by the Certificate Insurer and provided to the
Certificateholder by the Certificate Insurer, irrevocably assigning to the
Certificate Insurer all rights and claims of the Certificateholder relating to
or arising under the Certificates against the debtor which made such preference
payment or otherwise with respect to such preference payment, or (ii) the date
of Receipt by the Certificate Insurer from the Trustee of the items referred to
in clauses (A), (B) and (C) above if, at least four Business Days prior to such
date of Receipt, the Certificate Insurer shall have Received written notice from
the Trustee that such items were to be delivered on such date and such date was
specified in such notice. Such payment shall be disbursed to the receiver,
conservator, debtor-in-possession or trustee in bankruptcy named in the Order
and not to the Trustee or any Certificateholder directly (unless a
Certificateholder has previously paid such amount to the receiver, conservator,
debtor-in-possession or trustee in bankruptcy named in the Order in which case
such payment shall be disbursed to the Trustee for distribution to such
Certificateholder upon proof of such payment reasonably satisfactory to the
Certificate Insurer).
The terms 'Receipt' and 'Received,' with respect to the Policy, means
actual delivery to the Certificate Insurer and to its fiscal agent appointed by
the Certificate Insurer at its option, if any, prior to 12:00 noon, New York
City time, on a Business Day; delivery either on a day that is not a Business
Day or after 12:00 noon, New York City time, shall be deemed to be Receipt on
the next succeeding Business Day. If any notice or certificate given under the
Policy by the Trustee is not in proper form or is not properly completed,
executed or delivered it shall be deemed not to have been Received, and the
Certificate Insurer or the fiscal agent shall promptly so advise the Trustee and
the Trustee may submit an amended notice.
Under the Policy, 'Business Day' means any day other than (i) a Saturday or
Sunday or (ii) a day on which banking institutions in The City of New York, New
York are authorized or obligated by law or executive order to be closed.
The Certificate Insurer's obligations under the Policy in respect of
Guaranteed Distributions shall be discharged to the extent funds are transferred
to the Trustee as provided in the Policy, whether or not such funds are properly
applied by the Trustee.
The Certificate Insurer shall be subrogated to the rights of each
Certificateholder to receive payments of principal and interest, as applicable,
with respect to distributions on the Certificates to the extent of any payment
by the Certificate Insurer under the Policy. To the extent the Certificate
Insurer makes Guaranteed Distributions, either directly or indirectly (as by
paying through the Trustee), to the Certificateholders, the Certificate Insurer
will be subrogated to the rights of the Certificateholders, as applicable, with
respect to such Guaranteed Distributions, shall be deemed to the extent of the
payments so made to be a registered Certificateholder for purposes of payment
and shall receive all future Guaranteed Distributions until all such Guaranteed
Distributions by the Certificate Insurer have been fully reimbursed, provided
that the Certificateholders have received the full amount of the Guaranteed
Distributions.
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The terms of the Policy cannot be modified, altered or affected by any
other agreement or instrument, or by the merger, consolidation or dissolution of
the Seller. The Policy by its terms may not be cancelled or revoked. The Policy
is governed by the laws of the State of New York.
The Policy is not covered by the Property/Casualty Insurance Security fund
specified in Article 76 of the New York Insurance Law. The Policy is not covered
by the Florida Insurance Guaranty Association created under Part II of Chapter
631 of the Florida Insurance Code. In the event the Certificate Insurer were to
become insolvent, any claims arising under the Policy are excluded from coverage
by the California Insurance Guaranty Association, established pursuant to
Article 14.2 of Chapter 1 of part 2 of Division 1 of the California Insurance
Code.
Pursuant to the terms of the Agreement, unless a Certificate Insurer
default exists, the Certificate Insurer shall be deemed to be the Holder of the
Certificates for certain purposes (other than with respect to payment on the
Certificates), will be entitled to exercise all rights of the Certificateholders
thereunder, without the consent of such Holders and the Holders of the
Certificates may exercise such rights only with the prior written consent of the
Certificate Insurer. In addition, the Certificate Insurer will have certain
additional rights as third party beneficiary to the Agreement.
In the absence of payments under the Policy, Certificateholders will bear
directly the credit and other risks associated with their undivided interest in
the Trust.
REPORTS TO CERTIFICATEHOLDERS
Concurrently with each distribution to the Certificateholders, the Servicer
will forward to the Trustee for mailing to such Certificateholder a statement
setting forth among other items:
(i) the Investor Floating Allocation Percentage for the preceding
Collection Period;
(ii) the amount being distributed to Certificateholders;
(iii) the amount of interest included in such distribution and the
related Certificate Rate;
(iv) the amount, if any, of overdue accrued interest included in such
distribution (and the amount of interest thereon);
(v) the amount, if any, of the remaining overdue accrued interest
after giving effect to such distribution;
(vi) the amount, if any, of principal included in such distribution;
(vii) the amount, if any, of the reimbursement of previous Liquidation
Loss Amounts included in such distribution;
(viii) the amount, if any, of the aggregate unreimbursed Liquidation
Loss Amounts after giving effect to such distribution;
(ix) the Servicing Fee for such Distribution Date;
(x) the Invested Amount and the Certificate Principal Balance, each
after giving effect to such distribution;
(xi) the Pool Balance as of the end of the preceding Collection
Period;
(xii) 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;
(xiii) the book value of any real estate which is acquired by the
Trust through foreclosure or grant of deed in lieu of foreclosure; and
(xiv) the amount of any draws on the Policy.
In the case of information furnished pursuant to clauses (iii), (iv), (v),
(vi), (vii) and (viii) above, the amounts shall be expressed as a dollar amount
per Certificate with a $1,000 denomination.
Within 60 days after the end of each calendar year commencing in 1997, the
Servicer will be required to forward to the Trustee a statement containing the
information set forth in clauses (iii) and (vi) above aggregated for such
calendar year. (Section 5.03)
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COLLECTION AND OTHER SERVICING PROCEDURES ON MORTGAGE LOANS
The Servicer will make reasonable efforts to collect all payments called
for under the Mortgage Loans and will, consistent with the Agreement, follow
such collection procedures as it follows from time to time with respect to the
home equity loans in its servicing portfolio comparable to the Mortgage Loans.
Consistent with the above, the Servicer may in its discretion waive any late
payment charge or any assumption or other fee or charge that may be collected in
the ordinary course of servicing the Mortgage Loans. (Section 3.02)
With respect to the Mortgage Loans, the Servicer may arrange with a
borrower a schedule for the payment of interest due and unpaid for a period,
provided that any such arrangement is consistent with the Servicer's policies
with respect to the home equity mortgage loans it owns or services. In
accordance with the terms of the Agreement, the Servicer may consent under
certain circumstances to the placing of a subsequent senior lien in respect of a
Mortgage Loan.
HAZARD INSURANCE
The 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 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 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. (Section 3.04) 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
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.
(Section 3.06) 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 Certificateholders or the Transferor.
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OPTIONAL PURCHASE OF DEFAULTED LOANS
The Servicer may, at its option, purchase from the Trust any Mortgage Loan
which is delinquent in payment by 91 days or more. Any such purchase shall be at
a price equal to 100% of the Principal Balance of such Mortgage Loan plus
accrued interest thereon at the applicable Loan Rate from the date through which
interest was last paid by the related mortgagor to the first day of the month in
which such amount is to be distributed to Certificateholders.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
With respect to each Collection Period, the Servicer will receive from
interest collections in respect of the Mortgage Loans a portion of such interest
collections as a monthly Servicing Fee in the amount equal to approximately
0.50% per annum ('Servicing Fee Rate') on the aggregate Principal Balances of
the Mortgage Loans as of the first day of the related Collection Period (or at
the Cut-Off Date for the first 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 Agreement.
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 Net Liquidation
Proceeds.
EVIDENCE AS TO COMPLIANCE
The Agreement provides for delivery on or before May 31 in each year,
beginning in May 31, 1997, to the Trustee of an annual statement signed by an
officer of the Servicer to the effect that the Servicer has fulfilled its
material obligations under the Agreement throughout the preceding fiscal year,
except as specified in such statement. (Section 3.09)
On or before May 31 of each year, beginning May 31, 1997, the Servicer will
furnish a report prepared by a firm of nationally recognized independent public
accountants (who may also render other services to the Servicer or the
Transferor) to the Trustee, the Certificate Insurer and the Rating Agencies to
the effect that such firm has examined certain documents and the records
relating to servicing of the Mortgage Loans under the Agreement and that, on the
basis of such examination, such firm believes that such servicing was conducted
in compliance with the Agreement except for (a) such exceptions as such firm
believes to be immaterial and (b) such other exceptions as shall be set forth in
such report. (Section 3.10)
CERTAIN MATTERS REGARDING THE SERVICER AND THE TRANSFEROR
The Agreement provides that the Servicer may not resign from its
obligations and duties thereunder, except in connection with a permitted
transfer of servicing, unless (i) such duties and obligations are no longer
permissible under applicable law or are in material conflict by reason of
applicable law with any other activities of a type and nature presently carried
on by it or its affiliate or (ii) upon the satisfaction of the following
conditions: (a) the Servicer has proposed a successor servicer to the Trustee in
writing and such proposed successor servicer is reasonably acceptable to the
Trustee; (b) the Rating Agencies have confirmed to the Trustee that the
appointment of such proposed successor servicer as the Servicer will not result
in the reduction or withdrawal of the then current rating of the Certificates;
and (c) such proposed successor servicer is reasonably acceptable to the
Certificate Insurer. No such resignation will become effective until the Trustee
or a successor servicer has assumed the Servicer's obligations and duties under
the Agreement. (Section 7.04)
The Servicer may perform any of its duties and obligations under the
Agreement through one or more subservicers or delegates, which may be affiliates
of the Servicer. Notwithstanding any such arrangement, the Servicer will remain
liable and obligated to the Trustee and the Certificateholders for the
Servicer's duties and obligations under the Agreement, without any diminution of
such duties and obligations and as if the Servicer itself were performing such
duties and obligations. (Section 7.05)
The Agreement provides that the Servicer will indemnify the Trust and the
Trustee from and against any loss, liability, expense, damage or injury suffered
or sustained as a result of the Servicer's actions or omissions in connection
with the servicing and administration of the Mortgage Loans which are not in
accordance with the
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provisions of the Agreement. Under the Agreement, the Transferor will indemnify
an injured party for the entire amount of any losses, claims, damages or
liabilities arising out of or based on the Agreement (other than losses
resulting from defaults under the Mortgage Loans). In the event of an Event of
Servicing Termination (as defined below) resulting in the assumption of
servicing obligations by a successor Servicer, the successor Servicer will
indemnify the Transferor for any losses, claims, damages and liabilities of the
Transferor as described in this paragraph arising from the successor Servicer's
actions or omissions. The Agreement provides that neither the Depositor, the
Transferor nor the Servicer nor their directors, officers, employees or agents
will be under any other liability to the Trust, the Trustee, the
Certificateholders or any other person for any action taken or for refraining
from taking any action pursuant to the Agreement. However, neither the
Depositor, the Transferor nor the Servicer will be protected against any
liability which would otherwise be imposed by reason of willful misconduct, bad
faith or gross negligence of the Depositor, the Transferor or the Servicer in
the performance of its duties under the Agreement or by reason of reckless
disregard of its obligations thereunder. In addition, the Agreement provides
that the Servicer will not be under any obligation to appear in, prosecute or
defend any legal action which is not incidental to its servicing
responsibilities under the Agreement and which in its opinion may expose it to
any expense or liability. The Servicer may, in its sole discretion, undertake
any such legal action which it may deem necessary or desirable with respect to
the Agreement and the rights and duties of the parties thereto and the interest
of the Certificateholders thereunder. (Sections 7.03, 7.05, 7.06, 7.07, 7.08 and
8.02)
Any corporation into which the Servicer may be merged or consolidated, or
any corporation resulting from any merger, conversion or consolidation to which
the Servicer shall be a party, or any corporation succeeding to the business of
the Servicer shall be the successor of the Servicer hereunder, without the
execution or filing of any paper or any further act on the part of any of the
parties hereto, anything in the Agreement to the contrary notwithstanding.
(Section 7.02)
EVENTS OF SERVICING TERMINATION
'Events of Servicing Termination' will consist of: (i) any failure by the
Servicer to deposit in the Collection Account any deposit required to be made
under the Agreement, which failure continues unremedied for five Business Days
after the giving of written notice of such failure to the Servicer by the
Trustee, or to the Servicer and the Trustee by the Certificate Insurer or
Certificateholders evidencing an aggregate, undivided interest in the Trust of
at least 25% of the Certificate Principal Balance; (ii) any failure by the
Servicer duly to observe or perform in any material respect any other of its
covenants or agreements in the Agreement which, in each case, materially and
adversely affects the interests of the Certificateholders or the Certificate
Insurer and continues unremedied for 60 days after the giving of written notice
of such failure to the Servicer by the Trustee, or to the Servicer and the
Trustee by the Certificate Insurer or Certificateholders evidencing an
aggregate, undivided interest in the Trust of at least 25% of the Certificate
Principal Balance; or (iii) certain events of insolvency, readjustment of debt,
marshalling of assets and liabilities or similar proceedings relating to the
Servicer and certain actions by the Servicer indicating insolvency,
reorganization or inability to pay its obligations. Under certain other
circumstances, the Certificate Insurer with the consent of holders of Investor
Certificates evidencing an aggregate, undivided interest in the Trust of at
least 51% of the Certificate Principal Balance may deliver written notice to the
Servicer terminating all the rights and obligations of the Servicer under the
Agreement.
Notwithstanding the foregoing, a delay in or failure of performance
referred to under clause (i) above for a period of ten Business Days or referred
to under clause (ii) above for a period of 60 Business Days, shall not
constitute an Event of Servicing Termination if such delay or failure could not
be prevented by the exercise of reasonable diligence by the Servicer and such
delay or failure was caused by an act of God or other similar occurrence. Upon
the occurrence of any such event the Servicer shall not be relieved from using
its best efforts to perform its obligations in a timely manner in accordance
with the terms of the Agreement and the Servicer shall provide the Trustee, the
Depositor, the Transferor, the Certificate Insurer and the Certificateholders
prompt notice of such failure or delay by it, together with a description of its
efforts to so perform its obligations.
RIGHTS UPON AN EVENT OF SERVICING TERMINATION
So long as an Event of Servicing Termination remains unremedied, either the
Trustee, or Certificateholders evidencing an aggregate, undivided interest in
the Trust of at least 51% of the Certificate Principal Balance or the
Certificate Insurer, may terminate all of the rights and obligations of the
Servicer under the Agreement and in and
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to the Mortgage Loans, whereupon the Trustee will succeed to all the
responsibilities, duties and liabilities of the Servicer under the Agreement and
will be entitled to similar compensation arrangements. In the event that the
Trustee would be obligated to succeed the Servicer but is unwilling or unable so
to act, it may appoint, or petition a court of competent jurisdiction for the
appointment of, a housing and home finance institution or other mortgage loan or
home equity loan servicer with all licenses and permits required to perform its
obligations under the Agreement and having a net worth of at least $15,000,000
and acceptable to the Certificate Insurer to act as successor to the Servicer
under the Agreement. Pending such appointment, the Trustee will be obligated to
act in such capacity unless prohibited by law. Such successor will be entitled
to receive the same compensation that the Servicer would otherwise have received
(or such lesser compensation as the Trustee and such successor may agree).
(Sections 8.01 and 8.02) A receiver or conservator for the Servicer may be
empowered to prevent the termination and replacement of the Servicer where the
only Event of Servicing Termination that has occurred is an Insolvency Event.
AMENDMENT
The Agreement may be amended from time to time by the Seller, the Servicer,
the Depositor and the Trustee and with the consent of the Certificate Insurer,
but without the consent of the Certificateholders, to cure any ambiguity, to
correct or supplement any provisions therein which may be inconsistent with any
other provisions of the Agreement, to add to the duties of the Depositor, the
Seller, the Transferor or the Servicer or to add or amend any provisions of the
Agreement as required by the Rating Agencies in order to maintain or improve any
rating of the Certificates (it being understood that, after obtaining the
ratings in effect on the Closing Date, neither the Transferor, the Trustee nor
the Servicer is obligated to obtain, maintain, or improve any such rating) or to
add any other provisions with respect to matters or questions arising under the
Agreement which shall not be inconsistent with the provisions of the Agreement,
provided that such action will not, as evidenced by an opinion of counsel,
materially and adversely affect the interests of any Certificateholder or the
Certificate Insurer; provided, that any such amendment will not be deemed to
materially and adversely affect the Certificateholders and no such opinion will
be required to be delivered if the person requesting such amendment obtains a
letter from the Rating Agencies stating that such amendment would not result in
a downgrading of the then current rating of the Certificates. The Agreement may
also be amended from time to time by the Seller, the Servicer, the Depositor,
and the Trustee, with the consent of Certificateholders evidencing an aggregate,
undivided interest in the Trust of at least 51% of the Certificate Principal
Balance and the Certificate Insurer for the purpose of adding any provisions to
or changing in any manner or eliminating any of the provisions of the Agreement
or of modifying in any manner the rights of the Certificateholders, provided
that no such amendment will (i) reduce in any manner the amount of, or delay the
timing of, collections of payments on the Certificates or distributions or
payments under the Policy which are required to be made on any Certificate
without the consent of the holder of such Certificate or (ii) reduce the
aforesaid percentage required to consent to any such amendment, without the
consent of the holders of all Certificates then outstanding. (Section 12.01)
TERMINATION; RETIREMENT OF THE CERTIFICATES
The Trust will terminate on the Distribution Date following the later of
(A) payment in full of all amounts owing to the Certificate Insurer and (B) the
earliest of (i) the Distribution Date on which the Certificate Principal Balance
has been reduced to zero, (ii) the final payment or other liquidation of the
last Mortgage Loan in the Trust, (iii) the optional transfer to the Transferor
of the Certificates, as described below and (iv) the Distribution Date in
February 2027.
The Certificates will be subject to optional transfer to the Transferor on
any Distribution Date after the Certificate Principal Balance is reduced to an
amount less than or equal to 10% of the Original Certificate Principal Balance
and all amounts due and owing to the Certificate Insurer and unreimbursed draws
on the Policy, together with interest thereon, as provided under the Insurance
Agreement, have been paid. The transfer price will be equal to the sum of the
outstanding Certificate Principal Balance and accrued and unpaid interest
thereon at the Certificate Rate through the day preceding the final Distribution
Date. In no event, however, will the Trust created by the Agreement continue for
more than 21 years after the death of certain individuals named in the
Agreement. Written notice of termination of the Agreement will be given to each
Certificateholder, and the
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final distribution will be made only upon surrender and cancellation of the
Certificates at an office or agency appointed by the Trustee which will be
specified in the notice of termination. (Section 10.01)
In addition, the Trust may be liquidated as a result of certain events of
bankruptcy, insolvency or receivership relating to the Transferor. See '--Rapid
Amortization Events' herein.
THE TRUSTEE
The First National Bank of Chicago, a national banking association with its
principal place of business in Illinois, has been named Trustee pursuant to the
Agreement.
The commercial bank or trust company serving as Trustee may own
Certificates and have normal banking relationships with the Depositor, the
Servicer, the Seller and the Certificate Insurer and/or their affiliates.
The Trustee may resign at any time, in which event the Depositor will be
obligated to appoint a successor Trustee, as approved by the Certificate
Insurer. The Depositor may also remove the Trustee if the Trustee ceases to be
eligible to continue as such under the Agreement or if the Trustee becomes
insolvent. Upon becoming aware of such circumstances, the Depositor will be
obligated to appoint a successor Trustee, as approved by the Certificate
Insurer. Any resignation or removal of the Trustee and appointment of a
successor Trustee will not become effective until acceptance of the appointment
by the successor Trustee. (Section 9.07)
No holder of a Certificate will have any right under the Agreement to
institute any proceeding with respect to the Agreement unless such holder
previously has given to the Trustee written notice of default and unless
Certificateholders evidencing an aggregate, undivided interest in the Trust of
at least 51% of the Certificate Principal Balance have made written requests
upon the Trustee to institute such proceeding in its own name as Trustee
thereunder and have offered to the Trustee reasonable indemnity and the Trustee
for 60 days has neglected or refused to institute any such proceeding. (Section
12.03) The Trustee will be under no obligation to exercise any of the trusts or
powers vested in it by the Agreement or to make any investigation of matters
arising thereunder or to institute, conduct or defend any litigation thereunder
or in relation thereto at the request, order or direction of any of the
Certificateholders, unless such Certificateholders have offered to the Trustee
reasonable security or indemnity against the cost, expenses and liabilities
which may be incurred therein or thereby. (Sections 9.01 and 9.02)
CERTAIN ACTIVITIES
The Trust will not: (i) borrow money; (ii) make loans; (iii) invest in
securities for the purpose of exercising control; (iv) underwrite securities;
(v) except as provided in the Agreement, engage in the purchase and sale (or
turnover) of investments; (vi) offer securities in exchange for property (except
Certificates for the Mortgage Loans); or (vii) repurchase or otherwise reacquire
its securities. See '--Evidence as to Compliance' above for information
regarding reports as to the compliance by the Servicer with the terms of the
Agreement.
DESCRIPTION OF THE PURCHASE AGREEMENT
The Mortgage Loans to be transferred to the Trust by the Depositor will be
purchased by the Depositor from Countrywide pursuant to the Purchase Agreement
to be entered into between the Depositor, as purchaser of the Mortgage Loans,
and Countrywide, as Seller of the Mortgage Loans. Under the Purchase Agreement,
the Seller will agree to transfer the Mortgage Loans and related Additional
Balances to the Depositor. Pursuant to the Agreement, the Mortgage Loans will be
immediately transferred by the Depositor to the Trust, and the Depositor will
assign its rights in, to and under the Purchase Agreement to the Trust. The
following summary describes certain terms of the form of the Purchase Agreement
and is qualified in its entirety by reference to the Purchase Agreement.
TRANSFER OF MORTGAGE LOANS
Pursuant to the Purchase Agreement, the Seller will transfer and assign to
the Depositor, all of its right, title and interest in and to the Mortgage Loans
and all of the Additional Balances thereafter created. The purchase price of the
Mortgage Loans is a specified percentage of the face amount thereof as of the
time of transfer and is
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<PAGE>
payable by the Depositor in cash. The purchase price of each Additional Balance
comprising the Principal Balance of a Mortgage Loan is the amount of the related
new advance.
REPRESENTATIONS AND WARRANTIES
The Seller will represent and warrant to the Depositor that, among other
things, as of the Closing Date, it is duly organized and in good standing and
that it has the authority to consummate the transactions contemplated by the
Purchase Agreement. The Seller will also represent and warrant to the Depositor
that, among other things, immediately prior to the sale of the Mortgage Loans to
the Depositor, the Seller was the sole owner and holder of the Mortgage Loans
free and clear of any and all liens and security interests. The Seller will make
similar representations and warranties in the Agreement. The Seller will also
represent and warrant to the Depositor that, among other things, as of the
Closing Date, (a) the Purchase Agreement constitutes a legal, valid and binding
obligation of the Seller and (b) the Purchase Agreement constitutes a valid sale
to the Depositor of all right, title and interest of the Seller in and to the
Mortgage Loans and the proceeds thereof.
ASSIGNMENT TO TRUST
The Seller expressly acknowledges and consents to the Depositor's transfer
of its rights relating to the Mortgage Loans under the Agreement to the Trust.
The Seller also agrees to perform its obligations under the Purchase Agreement
for the benefit of the Trust.
TERMINATION
The Purchase Agreement will terminate upon the termination of the Trust.
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.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following discussion, which summarizes certain U.S. federal income tax
aspects of the purchase, ownership and disposition of the Certificates, is based
on the provisions of the Internal Revenue Code of 1986, as amended (the 'Code'),
the Treasury Regulations thereunder, and published rulings and court decisions
in effect as of the date hereof, all of which are subject to change, possibly
retroactively. This discussion does not address every aspect of the U.S. federal
income tax laws which may be relevant to Certificate Owners in light of their
personal investment circumstances or to certain types of Certificate Owners
subject to special treatment under the U.S. federal income tax laws (for
example, banks and life insurance companies). Accordingly, investors should
consult their tax advisors regarding U.S. federal, state, local, foreign and any
other tax consequences to them of investing in the Certificates.
CHARACTERIZATION OF THE CERTIFICATES AS INDEBTEDNESS
Based on the application of existing law to the facts as set forth in the
Agreement and other relevant documents and assuming compliance with the terms of
the Agreement as in effect on the date of issuance of the Certificates, Brown &
Wood, special tax counsel to the Depositor ('Tax Counsel'), has advised the
Transferor that the Certificates will be treated as indebtedness of the
Transferor for U.S. federal income tax purposes as of such date. Accordingly,
upon issuance, the Certificates will be treated as 'Debt Securities' as
described in the Prospectus. See 'CERTAIN FEDERAL INCOME TAX CONSIDERATIONS' in
the Prospectus.
The Transferor and the Certificateholders express in the Agreement their
intent that, for applicable tax purposes, the Certificates will be indebtedness
secured by the Mortgage Loans. The Transferor, the Depositor and the
Certificateholders, by accepting the Certificates, and each Certificate Owner by
its acquisition of a beneficial
S-46
<PAGE>
interest in a Certificate, have agreed to treat the Certificates as indebtedness
for U.S. federal income tax purposes. However, because different criteria are
used to determine the non-tax accounting characterization of the transaction,
the Transferor intends to treat this transaction as a sale of an interest in the
Asset Balances of the Mortgage Loans for financial accounting and certain
regulatory purposes.
In general, whether for U.S. federal income tax purposes a transaction
constitutes a sale of property or a loan, the repayment of which is secured by
property, is a question of fact, the resolution of which is based upon the
economic substance of the transaction rather than its form or the manner in
which it is labeled. While the Internal Revenue Service (the 'IRS') and the
courts have set forth several factors to be taken into account in determining
whether the substance of a transaction is a sale of property or a secured loan,
the primary factor in making this determination is whether the transferee has
assumed the risk of loss or other economic burdens relating to the property and
has obtained the benefits of ownership thereof. Tax Counsel has analyzed and
relied on several factors in reaching its opinion that the weight of the
benefits and burdens of ownership of the Mortgage Loans has been retained by the
Transferor and has not been transferred to the Certificate Owners.
In some instances, courts have held that a taxpayer is bound by the
particular form it has chosen for a transaction, even if the substance of the
transaction does not accord with its form. Tax Counsel has advised that the
rationale of those cases will not apply to this transaction, because the form of
the transaction as reflected in the operative provisions of the documents either
accords with the characterization of the Certificates as debt or otherwise makes
the rationale of those cases inapplicable to this situation.
TAXATION OF INTEREST INCOME OF CERTIFICATE OWNERS
Assuming that the Certificate Owners are holders of debt obligations for
U.S. federal income tax purposes, the Certificates generally will be taxable as
Debt Securities. See 'CERTAIN FEDERAL INCOME TAX CONSIDERATIONS' in the
Prospectus.
While it is not anticipated that the Certificates will be issued at a
greater than de minimis discount, under Treasury regulations (the 'OID
Regulations') it is possible that the Certificates could nevertheless be deemed
to have been issued with original issue discount ('OID') if the interest were
not treated as 'unconditionally payable' under the OID Regulations. If such
regulations were to apply, all of the taxable income to be recognized with
respect to the Certificates would be includible in income of Certificate Owners
as OID, but would not be includible again when the interest is actually
received. See 'CERTAIN FEDERAL INCOME TAX CONSIDERATIONS--Taxation of Debt
Securities; Interest and Acquisition Discount' in the Prospectus for a
discussion of the application of the OID rules if the Certificates are in fact
issued at a greater than de minimis discount or are treated as having been
issued with OID under the OID Regulations. For purposes of calculating OID, it
is likely that the Certificates will be treated as Pay-Through Securities.
POSSIBLE CLASSIFICATION OF THE CERTIFICATES AS A PARTNERSHIP OR ASSOCIATION
TAXABLE AS A CORPORATION
The opinion of Tax Counsel is not binding on the courts or the IRS. It is
possible that the IRS could assert that, for purposes of the Code, the
transaction contemplated by this Prospectus with respect to the Certificates
constitutes a sale of the Mortgage Loans (or an interest therein) to the
Certificate Owners and that the proper classification of the legal relationship
between the Transferor and the Certificate Owners resulting from this
transaction is that of a partnership (including a publicly traded partnership),
a publicly traded partnership treated as a corporation, or an association
taxable as a corporation. Since Tax Counsel has advised that the Certificates
will be treated as indebtedness in the hands of the Certificateholders for U.S.
federal income tax purposes, the Transferor will not attempt to comply with U.S.
federal income tax reporting requirements applicable to partnerships or
corporations as such requirements would apply if the Certificates were treated
as indebtedness.
If it were determined that this transaction created an entity classified as
a corporation (including a publicly traded partnership taxable as a
corporation), the Trust would be subject to U.S. federal income tax at corporate
income tax rates on the income it derives from the Mortgage Loans, which would
reduce the amounts available for distribution to the Certificate Owners. Cash
distributions to the Certificate Owners generally would be treated as dividends
for tax purposes to the extent of such corporation's earnings and profits.
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<PAGE>
If the transaction were treated as creating a partnership between the
Certificate Owners and the Transferor, the partnership itself would not be
subject to U.S. federal income tax (unless it were to be characterized as a
publicly traded partnership taxable as a corporation); rather, the Transferor
and each Certificate Owner would be taxed individually on their respective
distributive shares of the partnership's income, gain, loss, deductions and
credits. The amount and timing of items of income and deductions of the
Certificate Owner could differ if the Certificates were held to constitute
partnership interests rather than indebtedness.
POSSIBLE CLASSIFICATION AS A TAXABLE MORTGAGE POOL
In relevant part, Section 7701(i) of the Code provides that any entity (or
a portion of an entity) that is a 'taxable mortgage pool' will be classified as
a taxable corporation and will not be permitted to file a consolidated U.S.
federal income tax return with another corporation. Subject to a grandfather
provision for existing entities, any entity (or a portion of any entity) will be
a taxable mortgage pool if (i) substantially all of its assets consist of debt
instruments, more than 50% of which are real estate mortgages, (ii) the entity
is the obligor under debt obligations with two or more maturities, and (iii)
under the terms of the entity's debt obligations (or an underlying arrangement),
payments on such debt obligations bear a relationship to the debt instruments
held by the entity.
Assuming that all of the provisions of the Agreement, as in effect on the
date of issuance, are complied with, Tax Counsel is of the opinion that the
arrangement created by the Agreement will not be a taxable mortgage pool under
Section 7701(i) of the Code because only one class of indebtedness secured by
the Mortgage Loans is being issued.
The opinion of Tax Counsel is not binding on the IRS or the courts. If the
IRS were to contend successfully (or future regulations were to provide) that
the arrangement created by the Agreement is a taxable mortgage pool, such
arrangement would be subject to U.S. federal corporate income tax on its taxable
income generated by ownership of the Mortgage Loans. Such a tax might reduce
amounts available for distributions to Certificate Owners. The amount of such a
tax would depend upon whether distributions to Certificate Owners would be
deductible as interest expense in computing the taxable income of such an
arrangement as a taxable mortgage pool.
FOREIGN INVESTORS
In general, subject to certain exceptions, interest (including OID) paid on
a Certificate to a nonresident alien individual, foreign corporation or other
non-United States person is not subject to U.S. federal income tax, provided
that such interest is not effectively connected with a trade or business of the
recipient in the United States and the Certificate Owner provides the required
foreign person information certification. See 'CERTAIN FEDERAL INCOME TAX
CONSIDERATIONS--Tax Treatment of Foreign Investors' in the Prospectus.
If the interests of the Certificate Owners were deemed to be partnership
interests, the partnership would be required, on a quarterly basis, to pay
withholding tax equal to the product, for each foreign partner, of such foreign
partner's distributive share of 'effectively connected' income of the
partnership multiplied by the highest rate of tax applicable to that foreign
partner. In addition, such foreign partner would be subject to branch profits
tax. Each non-foreign partner would be required to certify to the partnership
that it is not a foreign person. The tax withheld from each foreign partner
would be credited against such foreign partner's U.S. income tax liability.
If the Trust were taxable as a corporation, distributions to foreign
persons, to the extent treated as dividends, would generally be subject to
withholding at the rate of 30%, unless such rate were reduced by an applicable
tax treaty.
BACKUP WITHHOLDING
Certain Certificate Owners may be subject to backup withholding at the rate
of 31% with respect to interest paid on the Certificates if the Certificate
Owners, upon issuance, fail to supply the Trustee or his broker with his
taxpayer identification number, furnish an incorrect taxpayer identification
number, fail to report interest, dividends, or other 'reportable payments' (as
defined in the Code) properly, or, under certain circumstances, fail
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<PAGE>
to provide the Trustee or his broker with a certified statement, under penalty
of perjury, that he is not subject to backup withholding.
The Trustee will be required to report annually to the IRS, and to each
Certificateholder of record, the amount of interest paid (and OID accrued, if
any) on the Certificates (and the amount of interest withheld for U.S. federal
income taxes, if any) for each calendar year, except as to exempt holders
(generally, holders that are corporations, certain tax-exempt organizations or
nonresident aliens who provide certification as to their status as
nonresidents). As long as the only 'Certificateholder' of record is Cede, as
nominee for DTC, Certificate Owners and the IRS will receive tax and other
information including the amount of interest paid on the Certificates owned from
Participants and Indirect Participants rather than from the Trustee. (The
Trustee, however, will respond to requests for necessary information to enable
Participants, Indirect Participants and certain other persons to complete their
reports.) Each non-exempt Certificate Owner will be required to provide, under
penalty of perjury, a certificate on IRS Form W-9 containing his or her name,
address, correct Federal taxpayer identification number and a statement that he
or she is not subject to backup withholding. Should a nonexempt Certificate
Owner fail to provide the required certification, the Participants or Indirect
Participants (or the Paying Agent) will be required to withhold 31% of the
interest (and principal) otherwise payable to the holder, and remit the withheld
amount to the IRS as a credit against the holder's Federal income tax liability.
STATE TAXES
The Depositor makes no representations regarding the tax consequences of
purchase, ownership or disposition of the Certificates under the tax laws of any
state. Investors considering an investment in the Certificates should consult
their own tax advisors regarding such tax consequences.
ALL INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISORS REGARDING THE FEDERAL,
STATE, LOCAL OR FOREIGN INCOME TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND
DISPOSITION OF THE CERTIFICATES.
ERISA CONSIDERATIONS
Any Plan fiduciary which proposes to cause a Plan to acquire any of the
Certificates should consult with its counsel with respect to the potential
consequences under the Employee Retirement Income Security Act of 1974, as
amended ('ERISA'), and the Code, of the Plans acquisition and ownership of such
Certificates. See 'ERISA Considerations' in the Prospectus.
The U.S. Department of Labor has granted to Lehman Brothers Inc. ('Lehman
Brothers') Prohibited Transaction Exemption 91-14 (the 'Exemption') which
exempts from the application of the prohibited transaction rules transactions
relating to (1) the acquisition, sale and holding by Plans of certain
certificates representing an undivided interest in certain asset-backed
pass-through trusts, with respect to which Lehman Brothers or any of its
affiliates is the sole underwriter or the manager or co-manager of the
underwriting syndicate; and (2) the servicing, operation and management of such
asset-backed pass-through trusts, provided that the general conditions and
certain other conditions set forth in the Exemption are satisfied. The Exemption
will apply to the acquisition, holding and resale of the Certificates by a Plan
provided that certain conditions (certain of which are described below) are met.
Among the conditions which must be satisfied for the Exemption to apply are
the following:
(1) The acquisition of the Certificates by a Plan is on terms
(including the price for such Certificates) that are at least as favorable
to the investing Plan as they would be in an arm's-length transaction with
an unrelated party;
(2) The rights and interests evidenced by the Certificates acquired by
the Plan are not subordinated to the rights and interests evidenced by
other certificates of the Trust:
(3) The Certificates acquired by the Plan have received a rating at
the time of such acquisition that is in one of the three highest generic
rating categories from Standard & Poor's, Moody's, or Duff & Phelps;
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<PAGE>
(4) The sum of all payments made to and retained by the Underwriters
in connection with the distribution of the Certificates represents not more
than reasonable compensation for underwriting such Certificates; the sum of
all payments made to and retained by the Sellers pursuant to the sale of
the Mortgage Loans to the Trust represents not more than the fair market
value of such Mortgage Loans; the sum of all payments made to and retained
by the Servicers represent not more than reasonable compensation for the
Servicers' services under the Pooling Agreement and reimbursement of the
Servicer's reasonable expenses in connection therewith;
(5) The Trustee is not an affiliate of the Underwriter, the Seller,
the Servicer, the Certificate Insurer, any borrower whose obligations under
one or more Mortgage Loans constitute more than 5% of the aggregate
unamortized principal balance of the assets in the Trust, or any of their
respective affiliates (the 'Restricted Group'); and
(6) The Plan investing in the Certificates is an 'accredited investor'
as defined in Rule 501(a)(1) of Regulation D of the Securities and Exchange
Commission under the Securities Act of 1933, as amended.
The Underwriter believes that the Exemption will apply to the acquisition
and holding of the Certificates by Plans and that all conditions of the
Exemption other than those within the control of the investors will be met.
Any Plan fiduciary considering whether to purchase any 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
Certificates, a fiduciary of a Plan subject to the fiduciary responsibility
provisions of ERISA or an employee benefit plan subject to the prohibited
transaction provisions of the Code should make its own determination as to the
availability of the exemptive relief provided in the Exemption, and also
consider the availability of any other prohibited transaction exemptions.
LEGAL INVESTMENT CONSIDERATIONS
Although, as a condition to their issuance, the Certificates will be rated
in the highest rating category of the Rating Agencies, the Certificates will not
constitute 'mortgage related securities' for purposes of the Secondary Mortgage
Market Enhancement Act of 1984 ('SMMEA'), because not all of the Mortgages
securing the Mortgage Loans are first mortgages. Accordingly, many institutions
with legal authority to invest in comparably rated securities based on first
mortgage loans may not be legally authorized to invest in the 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 February , 1996 (the 'Underwriting Agreement'), among the
Depositor and Lehman Brothers Inc. (the 'Underwriter'), the Depositor has agreed
to sell to the Underwriter, and the Underwriter has agreed to purchase from the
Depositor all the Certificates. The Depositor is an affiliate of Lehman Brothers
Inc.
In the Underwriting Agreement, the Underwriter has agreed, subject to the
terms and conditions set forth therein, to purchase all the Certificates offered
hereby if any of the Certificates are purchased.
The Depositor has been advised by the Underwriter that it proposes
initially to offer the Certificates to the public in Europe and the United
States at the offering price set forth herein and to certain dealers at such
price less a discount not in excess of % of the Certificate denominations.
The Underwriter may allow and such dealers may reallow a discount not in excess
of % of the Certificate denominations to certain other dealers. After the
initial public offering, the public offering price, such concessions and such
discounts may be changed.
The Underwriting Agreement provides that the Depositor will indemnify the
Underwriter against certain civil liabilities, including liabilities under the
Act.
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<PAGE>
LEGAL MATTERS
Certain legal matters with respect to the Certificates 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.
EXPERTS
The consolidated balance sheets of Financial Security Assurance Inc. and
Subsidiaries as of December 31, 1994 and 1993 and the related consolidated
statements of income, changes in shareholder's equity, and cash flows for each
of the three years in the period ended December 31, 1994, incorporated by
reference in this Prospectus Supplement, have been incorporated herein in
reliance on the report of Coopers & Lybrand L.L.P., independent accountants,
given on the authority of that firm as experts in accounting and auditing.
RATINGS
It is a condition to issuance that the Certificates be rated 'AAA' by
Standard & Poor's and 'Aaa' by Moody's.
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.
The ratings assigned to the Certificates will depend primarily upon the
creditworthiness of the Certificate Insurer. Any reduction in a rating assigned
to the claims-paying ability of the Certificate Insurer below the ratings
initially assigned to the Certificates may result in a reduction of one or more
of the ratings assigned to the Certificates.
A securities rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning rating
organization. Each securities rating should be evaluated independently of
similar ratings on different securities.
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<PAGE>
INDEX OF DEFINED TERMS
<TABLE>
<CAPTION>
PAGE
-----------------------------------
<S> <C>
1934 Act................................ S-2
Accelerated Principal Distribution
Amount................................ S-7, S-35
Additional Balances..................... S-3
Agreement............................... S-3
Alternative Documentation Program....... S-17
Alternative Principal Payment........... S-8, S-37
ALTA.................................... S-17
Assignment Event........................ S-32
BIF..................................... S-34
Book-Entry Certificates................. S-28
Business Day............................ S-35, S-39
Cede.................................... S-5
CEDEL................................... S-5
CEDEL Participants...................... S-30
Certificate Insurer..................... Cover, S-9, S-14
Certificate Owners...................... S-5, S-28
Certificate Principal Balance........... S-4, S-28
Certificate Rate........................ S-3, S-8, S-36
Certificateholder....................... S-29, S-49
Certificates............................ Cover, S-3
CGC..................................... S-15
CGIC.................................... S-15
Citibank................................ S-6
Closing Date............................ Cover, S-8, S-36
Code.................................... S-46
Collection Account...................... S-8, S-33
Collection Period....................... S-8, S-36
Combined Loan-to-Value Ratio............ S-5
Cooperative............................. S-30
Countrywide............................. Cover, S-3, S-16
Credit Limit............................ S-5
Credit Limit Utilization Rate........... S-19
Credit Line Agreements.................. S-3, S-19
Cut-Off Date............................ Cover, S-3
Cut-Off Date Pool Balance............... S-3
Cut-Off Date Principal Balance.......... S-3
Debt Securities......................... S-47
Defective Mortgage Loans................ S-33
Definitive Certificate.................. S-29
Depositor............................... S-3
Determination Date...................... S-10, S-34
Dissolution Distribution Date........... S-38
Distribution Date....................... Cover, S-8, S-35
Draw Period............................. S-19
</TABLE>
S-52
<PAGE>
<TABLE>
<CAPTION>
PAGE
-----------------------------------
DTC..................................... S-5, S-28
<S> <C>
Due Date................................ S-5
Eligible Account........................ S-34
Eligible Substitute Mortgage Loan....... S-32
ERISA................................... S-11, S-49
Euroclear............................... S-5
Euroclear Operator...................... S-30
Euroclear Participants.................. S-30
European Depositaries................... S-5, S-29
Events of Servicing Termination......... S-43
Exemption............................... S-49
Financial Intermediary.................. S-29
FHLMC................................... S-17
Financial Security...................... S-14
FNMA.................................... S-17
Fixed Allocation Percentage............. S-7, S-34
Guaranteed Distributions................ S-9, S-38
Guaranteed Principal Distribution
Amount................................ S-9, S-38
Holdings................................ S-2, S-15, S-38
Fund American........................... S-14
Holdings................................ S-2, S-14, S-15
Index Rate.............................. S-20
Insurance Agreement..................... S-9, S-38
Interest Collections.................... S-6, S-34
Interest Period......................... S-8, S-36
Invested Amount......................... S-3, S-28
Investor Fixed Allocation Percentage.... S-7
Investor Floating Allocation
Percentage............................ S-6, S-34
Investor Interest Collections........... S-6, S-34
Investor Loss Amount.................... S-7, S-35
Investor Principal Collections.......... S-7, S-34
IRS..................................... S-47
Lehman Brothers......................... S-49
LIBOR................................... S-8
LIBOR Business Day...................... S-36
Liquidated Mortgage Loan................ S-35
Liquidation Loss Amount................. S-7, S-35
Liquidation Proceeds.................... S-34
Loan Rate............................... S-5, S-19
Managed Amortization Period............. S-8, S-37
Margin.................................. S-19
Maximum Rate............................ S-19
Maximum Principal Payment............... S-8, S-37
Minimum Transferor Interest............. S-4, S-33
Moody's................................. S-9, S-11, S-13
</TABLE>
S-53
<PAGE>
<TABLE>
<CAPTION>
PAGE
-----------------------------------
Morgan.................................. S-6
<S> <C>
Mortgage Files.......................... S-32
Mortgage Loan Schedule.................. S-4, S-32, S-33
Mortgage Loans.......................... Cover, S-3
Mortgaged Properties.................... S-3
Net Liquidation Proceeds................ S-6, S-34
OID..................................... S-47
OID Regulations......................... S-47
Order................................... S-39
Original Certificate Principal
Balance............................... S-3, S-28
Original Invested Amount................ S-3, S-28
Overcollateralization Amount............ S-7
Paying Agent............................ S-37
Percentage Interest..................... S-5
Plan.................................... S-11
Policy.................................. Cover, S-3
Pool Factor............................. S-27
Pool Balance............................ S-3, S-34
Principal Balance....................... S-3
Principal Collections................... S-6, S-34
Purchase Agreement...................... S-4
Rapid Amortization Event................ S-37
Rating Agency........................... S-11
Receipt................................. S-39
Received................................ S-39
Record Date............................. S-34
Reduced Documentation Program........... S-17
Reference Bank Rate..................... S-36
Related Documents....................... S-32
Relevant Depositary..................... S-29
Repayment Period........................ S-20
Required Overcollateralization Amount... S-35
Restricted Group........................ S-50
Rules................................... S-29
SAIF.................................... S-34
Scheduled Principal Collections
Distribution Amount................... S-8, S-37
Seller.................................. S-3
Servicer................................ S-3
Servicing Fee........................... S-10
Servicing Fee Rate...................... S-10, S-42
SMMEA................................... S-11, S-50
Spread Account.......................... S-9, S-39
Standard & Poor's....................... S-9, S-11, S-13
Tax Counsel............................. S-47
Telerate Screen Page 3750............... S-36
</TABLE>
S-54
<PAGE>
<TABLE>
<CAPTION>
PAGE
-----------------------------------
Terms and Conditions.................... S-30
<S> <C>
Tokio Marine............................ S-14
Transfer Date........................... S-33
Transfer Deficiency..................... S-32
Transfer Deposit Amount................. S-32
Transferor.............................. S-4
Transferor Interest..................... Cover, S-4, S-28
Transferor Principal Collections........ S-7, S-34
Trust................................... Cover, S-3
Trustee................................. S-3, S-11
Underwriter............................. S-49
Underwriting Agreement.................. S-50
U S West................................ S-14
</TABLE>
S-55
<PAGE>
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered Revolving
Home Equity Loan Asset-Backed Certificates, Series 1996-1 (the 'Global
Securities') will be available only in book-entry form. Investors in the Global
Securities may hold such Global Securities through any of The Depository Trust
Company ('DTC'), CEDEL or Euroclear. The Global Securities will be tradeable as
home market instruments in both the European and U.S. domestic markets. Initial
settlement and all secondary trades will settle in same-day funds.
Secondary market trading between investors holding Global Securities
through CEDEL and Euroclear will be conducted in the ordinary way in accordance
with their normal rules and operating procedures and in accordance with
conventional eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors holding Global Securities
through DTC will be conducted according to the rules and procedures applicable
to U.S. corporate debt obligations and prior Home Equity Loan Asset-Backed
Certificates issues.
Secondary cross-market trading between CEDEL or Euroclear and DTC
Participants holding Certificates will be effected on a delivery-against-payment
basis through the respective Depositaries of CEDEL and Euroclear (in such
capacity) and as DTC Participants.
Non-U.S. holders (as described below) of Global Securities will be subject
to U.S. withholding taxes unless such holders meet certain requirements and
deliver appropriate U.S. tax documents to the securities clearing organizations
or their participants.
INITIAL SETTLEMENT
All Global Securities will be held in book-entry form by DTC in the name of
Cede & Co. as nominee of DTC. Investors' interests in the Global Securities will
be represented through financial institutions acting on their behalf as direct
and indirect Participants in DTC. As a result, CEDEL and Euroclear will hold
positions on behalf of their participants through their respective Depositaries,
which in turn will hold such positions in accounts as DTC Participants.
Investors electing to hold their Global Securities through DTC will follow
the settlement practices applicable to prior Home Equity Loan Asset-Backed
Certificates issues. Investor securities custody accounts will be credited with
their holdings against payment in same-day funds on the settlement date.
Investors electing to hold their Global Securities through CEDEL or
Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global security
and no 'lock-up' or restricted period. Global Securities will be credited to the
securities custody accounts on the settlement date against payment in same-day
funds.
SECONDARY MARKET TRADING
Since the purchaser determines the place of delivery, it is important to
establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
Trading between DTC Participants. Secondary market trading between DTC
Participants will be settled using the procedures applicable to prior Home
Equity Loan Asset-Backed Certificates issues in same-day funds.
Trading between CEDEL and/or Euroclear Participants. Secondary market
trading between CEDEL Participants or Euroclear Participants will be settled
using the procedures applicable to conventional eurobonds in same-day funds.
Trading between DTC seller and CEDEL or Euroclear purchaser. When Global
Securities are to be transferred from the account of a DTC Participant to the
account of a CEDEL Participant or a Euroclear Participant, the purchaser will
send instructions to CEDEL or Euroclear through a CEDEL Participant or
S-56
<PAGE>
Euroclear Participant at least one business day prior to settlement. CEDEL or
Euroclear will instruct the respective Depositary, as the case may be, to
receive the Global Securities against payment. Payment will include interest
accrued on the Global Securities from and including the last coupon payment date
to and excluding the settlement date, on the basis of the actual number of days
in such accrual period and a year assumed to consist of 360 days. For
transactions settling on the 31st of the month, payment will include interest
accrued to and excluding the first day of the following month. Payment will then
be made by the respective Depositary of the DTC Participant's account against
delivery of the Global Securities. After settlement has been completed, the
Global Securities will be credited to the respective clearing system and by the
clearing system, in accordance with its usual procedures, to the CEDEL
Participant's or Euroclear Participant's account. The securities credit will
appear the next day (European time) and the cash debt will be back-valued to,
and the interest on the Global Securities will accrue from, the value date
(which would be the preceding day when settlement occurred in New York). If
settlement is not completed on the intended value date (i.e., the trade fails),
the CEDEL or Euroclear cash debt will be valued instead as of the actual
settlement date.
CEDEL Participants and Euroclear Participants will need to make available
to the respective clearing systems the funds necessary to process same-day funds
settlement. The most direct means of doing so is to preposition funds for
settlement, either from cash on hand or existing lines of credit, as they would
for any settlement occurring within CEDEL or Euroclear. Under this approach,
they may take on credit exposure to CEDEL or Euroclear until the Global
Securities are credited to their accounts one day later.
As an alternative, if CEDEL or Euroclear has extended a line of credit to
them, CEDEL Participants or Euroclear Participants can elect not to preposition
funds and allow that credit line to be drawn upon the finance settlement. Under
this procedure, CEDEL Participants or Euroclear Participants purchasing Global
Securities would incur overdraft charges for one day, assuming they cleared the
overdraft when the Global Securities were credited to their accounts. However,
interest on the Global Securities would accrue from the value date. Therefore,
in many cases the investment income on the Global Securities earned during that
one-day period may substantially reduce or offset the amount of such overdraft
charges, although this result will depend on each CEDEL Participant's or
Euroclear Participant's particular cost of funds.
Since the settlement is taking place during New York business hours, DTC
Participants can employ their usual procedures for sending Global Securities to
the respective European Depositary for the benefit of CEDEL Participants or
Euroclear Participants. The sale proceeds will be available to the DTC seller on
the settlement date. Thus, to the DTC Participants a cross-market transaction
will settle no differently than a trade between two DTC Participants.
Trading between CEDEL or Euroclear Seller and DTC Purchaser. Due to time
zone differences in their favor, CEDEL Participants and Euroclear Participants
may employ their customary procedures for transactions in which Global
Securities are to be transferred by the respective clearing system, through the
respective Depositary, to a DTC Participant. The seller will send instructions
to CEDEL or Euroclear through a CEDEL Participant or Euroclear Participant at
least one business day prior to settlement. In these cases CEDEL or Euroclear
will instruct the respective Depositary, as appropriate, to deliver the Global
Securities to the DTC Participant's account against payment. Payment will
include interest accrued on the Global Securities from and including the last
coupon payment to and excluding the settlement date on the basis of the actual
number of days in such accrual period and a year assumed to consist of 360 days.
For transactions settling on the 31st of the month, payment will include
interest accrued to and excluding the first day of the following month. The
payment will then be reflected in the account of the CEDEL Participant or
Euroclear Participant the following day, and receipt of the cash proceeds in the
CEDEL Participant's or Euroclear Participant's account would be back-valued to
the value date (which would be the preceding day, when settlement occurred in
New York). Should the CEDEL Participant or Euroclear Participant have a line of
credit with its respective clearing system and elect to be in debt in
anticipation of receipt of the sale proceeds in its account, the back-valuation
will extinguish any overdraft incurred over that one-day period. If settlement
is not completed on the intended value date (i.e., the trade fails), receipt of
the cash proceeds in the CEDEL Participant's or Euroclear Participant's account
would instead be valued as of the actual settlement date.
Finally, day traders that use CEDEL or Euroclear and that purchase Global
Securities from DTC Participants for delivery to CEDEL Participants or Euroclear
Participants should note that these trades would
S-57
<PAGE>
automatically fail on the sale side unless affirmative action were taken. At
least three techniques should be readily available to eliminate this potential
problem:
(a) borrowing through CEDEL or Euroclear for one day (until the purchase
side of the day trade is reflected in their CEDEL or Euroclear accounts) in
accordance with the clearing system's customary procedures;
(b) borrowing the Global Securities in the U.S. from a DTC Participant no
later than one day prior to settlement, which would give the Global Securities
sufficient time to be reflected in their CEDEL or Euroclear account in order to
settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of the trade so
that the value date for the purchase from the DTC Participant is at least one
day prior to the value date for the sale to the CEDEL Participant or Euroclear
Participant.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of Global Securities holding securities through CEDEL or
Euroclear (or through DTC if the holder has an address outside the U.S.) will be
subject to the 30% U.S. withholding tax that generally applies to payments of
interest (including original issue discount) on registered debt issued by U.S.
Persons, unless (i) each clearing system, bank or other financial institution
that holds customers' securities in the ordinary course of its trade or business
in the chain of intermediaries between such beneficial owner and the U.S. entity
required to withhold tax complies with applicable certification requirements and
(ii) such beneficial owner takes one of the following steps to obtain an
exemption or reduced tax rate:
Exemption for non-U.S. Persons (Form W-8). Beneficial owners of Global
Securities that are non-U.S. Persons can obtain a complete exemption from the
withholding tax by filing a signed Form W-8 (Certificate of Foreign Status). If
the information shown on Form W-8 changes, a new Form W-8 must be filed within
30 days of such change.
Exemption for non-U.S. Persons with effectively connected income (Form
4224). A non-U.S. Person, including a non-U.S. corporation or bank with a U.S.
branch, for which the interest income is effectively connected with its conduct
of a trade or business in the United States, can obtain an exemption from the
withholding tax by filing Form 4224 (Exemption from Withholding of Tax on Income
Effectively Connected with the Conduct of a Trade or Business in the United
States).
Exemption or reduced rate for non-U.S. Persons resident in treaty countries
(Form 1001). Non-U.S. Persons that are Certificate Owners residing in a country
that has a tax treaty with the United States can obtain an exemption or reduced
tax rate (depending on the treaty terms) by filing Form 1001 (Ownership,
Exemption or Reduced Rate Certificate). If the treaty provides only for a
reduced rate, withholding tax will be imposed at that rate unless the filer
alternatively files Form W-8. Form 1001 may be filed by the Certificate Owners
or his agent.
Exemption for U.S. Persons (Form W-9). U.S. Persons can obtain a complete
exemption from the withholding tax by filing Form W-9 (Payer's Request for
Taxpayer Identification Number and Certification).
U.S. Federal Income Tax Reporting Procedure. The Certificate Owner of a
Global Security or, in the case of a Form 1001 or a Form 4224 filer, his agent,
files by submitting the appropriate form to the person through whom it holds
(the clearing agency, in the case of persons holding directly on the books of
the clearing agency). Form W-8 and Form 1001 are effective for three calendar
years and Form 4224 is effective for one calendar year.
The term 'U.S. Person' means (i) a citizen or resident of the United
States, (ii) a corporation or partnership organized in or under the laws of the
United States or any political subdivision thereof or (iii) an estate or trust
the income of which is includible in gross income for United States tax
purposes, regardless of its source. This summary does not deal with all aspects
of U.S. Federal income tax withholding that may be relevant to foreign holders
of the Global Securities. Investors are advised to consult their own tax
advisors for specific tax advice concerning their holding and disposing of the
Global Securities.
S-58
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S-59
<PAGE>
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<PAGE>
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, (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')
and (iii) Private Securities (as defined herein), (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 or Underlying Loans relating to the Private
Securities, as applicable. 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
December 21, 1995
<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 or Underlying
Loans relating to the Private Securities, as
applicable and/or as prepayments occur with
respect to such Loans or Underlying Loans, as
applicable. 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
</TABLE>
3
<PAGE>
<TABLE>
<S> <C>
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 or Underlying Loans
relating to the Private Securities, as
applicable, 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 or Underlying Loans relating to the
Private Securities, as applicable, in the Trust
Fund for a Series will depend on a variety of
factors, including certain characteristics of
such Loans or Underlying Loans, as applicable,
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
</TABLE>
4
<PAGE>
<TABLE>
<S> <C>
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.
(1) LOANS........ 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.
(2) PRIVATE
SECURITIES..... Primary Assets for a Series may consist, in whole
or in part, of Private Securities which include
(a) pass-through certificates representing
beneficial interests in loans of the type that
would otherwise be eligible to be Loans (the
'Underlying Loans') or (b) collateralized
obligations secured by Underlying Loans. Such
pass-through certificates or collateralized
obligations will have previously been offered
and distributed to the public pursuant to an
effective registration statement. Although
individual Underlying Loans may be insured or
guaranteed by the United States or an agency or
instrumentality thereof, they need not be, and
the Private Securities themselves will not be so
insured or guaranteed. See 'THE TRUST
FUNDS--Private Securities.' Unless otherwise
specified in the Prospectus Supplement relating
to a Series of Securities, payments on the
Private Securities will be distributed directly
to the Trustee as registered owner of such
Private Securities.
The related Prospectus Supplement for a Series
will specify (such disclosure may be on an
approximate basis, as described above and will
be as of the date specified in the related
Prospectus Supplement) to the extent relevant
and to the extent such information is reasonably
available to the Depositor and the Depositor
reasonably believes such information to be
reliable: (i) the aggregate approximate
principal amount and type of any Private
Securities to be included in the Trust Fund for
such Series; (ii) certain characteristics of the
Underlying Loans including (A) the payment
features of such Underlying Loans (i.e., whether
they are fixed rate or adjustable rate and
whether they provide for fixed level payments,
negative amortization or other payment
features), (B) the approximate aggregate
principal amount of such Underlying Loans which
are insured or guaranteed by a governmental
entity, (C) the servicing fee or range of
servicing fees with respect to such Underlying
Loans, (D) the minimum and maximum stated
maturities of such Underlying Loans at
origination, (E) the lien priority and the
credit utilization rates, if any, of such
Underlying Loans, and (F) the delinquency status
and year of origination of such Underlying
Loans; (iii) the maximum original term-to-stated
maturity of the Private Securities; (iv) the
weighted average term-to-stated maturity of the
Private Securities; (v) the pass-through or
certificate rate or ranges thereof for the
Private Securities; (vi) the sponsor or
depositor of the Private Securities (the 'PS
Sponsor'), the servicer of the Private
Securities (the 'PS Servicer') and the trustee
of the Private Securities (the 'PS Trustee');
(vii) certain characteristics of enhancement, if
any, such as reserve funds, insurance policies,
letters of credit or guarantees, relating to the
Loans underlying the Private Securities, or to
such Private Securities themselves; (viii) the
terms on which the Underlying Loans may, or are
required to, be repurchased prior to stated
maturity; and (ix) the terms on which substitute
Underlying Loans may be delivered to
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replace those initially deposited with the PS
Trustee. See 'THE TRUST FUNDS--Additional
Information' herein.
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
or Underlying Loans relating to Private
Securities, as applicable, 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 or Underlying Loans relating to the Private Securities, as applicable.
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 or Underlying Loans relating to the Private Securities, as
applicable, 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 or Underlying Loans, as
applicable, 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, if the
Series relates to Loans, 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
or Underlying Loans relating to the Private Securities, as applicable included
in the related Trust Fund and/or as prepayments occur with respect to such Loans
or Underlying Loans, as applicable. 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 or Underlying
Loans, as applicable, 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 or Underlying Loans relating to the Private Securities, as applicable,
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
or Underlying Loans relating to the Private Securities, as applicable, 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 or Underlying
Loans relating to the Private Securities, as applicable, 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 or
Underlying Loans relating to the Private Securities, as applicable, 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 or Underlying Loans, as
applicable, 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 or Underlying Loans relating to the Private Securities,
as applicable. If any Loans or Underlying Loans relating to the Private
Securities, as applicable, 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.
Primary Assets included in the Trust Fund for a Series may consist of any
combination of Loans and Private Securities, to the extent and as specified in
the related Prospectus Supplement.
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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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PRIVATE SECURITIES
General. Primary Assets for a Series may consist, in whole or in part, of
Private Securities which include pass-through certificates representing
beneficial interests in loans of the type that would otherwise be eligible to be
Loans (the 'Underlying Loans') or (b) collateralized obligations secured by
Underlying Loans. Such pass-through certificates or collateralized obligations
will have previously been offered and distributed to the public pursuant to an
effective registration statement. Although individual Underlying Loans may be
insured or guaranteed by the United States or an agency or instrumentality
thereof, they need not be, and Private Securities themselves will not be so
insured or guaranteed.
Private Securities will have been issued pursuant to a pooling and
servicing agreement, a trust agreement or similar agreement (a 'PS Agreement').
The seller/servicer of the Underlying Loans will have entered into the PS
Agreement with the trustee under such PS Agreement (the 'PS Trustee'). The PS
Trustee or its agent, or a custodian, will possess the Underlying Loans.
Underlying Loans will be serviced by a servicer (the 'PS Servicer') directly or
by one or more sub-servicers who may be subject to the supervision of the PS
Servicer.
The sponsor of the Private Securities (the 'PS Sponsor') will be a
financial institution or other entity engaged generally in the business of
lending; a public agency or instrumentality of a state, local or federal
government; or a limited purpose corporation organized for the purpose of, among
other things, establishing trusts and acquiring and selling loans to such
trusts, and selling beneficial interests in such trusts. If so specified in the
Prospectus Supplement, the PS Sponsor may be an affiliate of the Depositor. The
obligations of the PS Sponsor will generally be limited to certain
representations and warranties with respect to the assets conveyed by it to the
related trust. Unless otherwise specified in the related Prospectus Supplement,
the PS Sponsor will not have guaranteed any of the assets conveyed to the
related trust or any of the Private Securities issued under the PS Agreement.
Additionally, although the Underlying Loans may be guaranteed by an agency or
instrumentality of the United States, the Private Securities themselves will not
be so guaranteed.
Distributions of principal and interest will be made on the Private
Securities on the dates specified in the related Prospectus Supplement. The
Private Securities may be entitled to receive nominal or no principal
distributions or nominal or no interest distributions. Principal and interest
distributions will be made on the Private Securities by the PS Trustee or the PS
Servicer. The PS Sponsor or the PS Servicer may have the right to repurchase the
Underlying Loans after a certain date or under other circumstances specified in
the related Prospectus Supplement.
The Underlying Loans may be fixed rate, level payment, fully amortizing
loans or adjustable rate loans or loans having balloon or other irregular
payment features. Such Underlying Loans will be secured by mortgages on
Mortgaged Properties.
Credit Support Relating to Private Securities. Credit support in the form
of Reserve Funds, subordination of other private securities issued under the PS
Agreement, guarantees, letters of credit, cash collateral accounts, insurance
policies or other types of credit support may be provided with respect to the
Underlying Loans or with respect to the Private Securities themselves. The type,
characteristics and amount of credit support will be a function of certain
characteristics of the Underlying Loans and other factors and will have been
established for the Private Securities on the basis of requirements of the
nationally recognized statistical rating organization that rated the Private
Securities.
Additional Information. The Prospectus Supplement for a Series for which
the Primary Assets includes Private Securities will specify (such disclosure may
be on an approximate basis and will be as of the date specified in the related
Prospectus Supplement), to the extent relevant and to the extent such
information is reasonably available to the Depositor and the Depositor
reasonably believes such information to be reliable, (i) the aggregate
approximate principal amount and type of the Private Securities to be included
in the Trust Fund for such Series; (ii) certain characteristics of the
Underlying Loans including (A) the payment features of such Underlying Loans
(i.e., whether they are fixed rate or adjustable rate and whether they provide
for fixed level payments or other payment features), (B) the approximate
aggregate principal balance, if known, of such Underlying Loans insured or
guaranteed by a governmental entity, (C) the servicing fee or range of servicing
fees with respect to the Underlying Loans, and (D) the minimum and maximum
stated maturities of such Underlying Loans at origination; (iii) the maximum
original term-to-stated maturity of the Private Securities; (iv) the weighted
average term-to-stated maturity of the Private Securities; (v) the pass-through
or certificate rate or ranges thereof for the Private Securities; (vi) the PS
Sponsor, the PS Servicer (if other than the PS Sponsor) and
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the PS Trustee for such Private Securities; (vii) certain characteristics of
credit support, if any, such as Reserve Funds, insurance policies, letters of
credit or guarantees relating to such Loans underlying the Private Securities or
to such Private Securities themselves; (viii) the terms on which Underlying
Loans may, or are required to, be purchased prior to their stated maturity or
the stated maturity of the Private Securities and (ix) the terms on which
Underlying Loans may be substituted for those originally underlying the Private
Securities.
If information of the nature described above representing the Private
Securities 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 the additional
information, if available, 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 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 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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Assignment of Private Securities. The Depositor will cause Private
Securities to be registered in the name of the Trustee (or its nominee or
correspondent). The Trustee (or its nominee or correspondent) will have
possession of any certificated Private Securities. Unless otherwise specified in
the related Prospectus Supplement, the Trustee will not be in possession of or
be assignee of record of any underlying assets for a Private Security. See 'THE
TRUST FUNDS--Private Securities' herein. Each Private Security will be
identified in a schedule appearing as an exhibit to the related Agreement (the
'Certificate Schedule'), which will specify the original principal amount,
outstanding principal balance as of the Cut-off Date, annual pass-through rate
or interest rate and maturity date for each Private Security conveyed to the
Trust Fund. In the Agreement, the Depositor will represent and warrant to the
Trustee regarding the Private Securities: (i) that the information contained in
the Certificate Schedule is true and correct in all material respects; (ii)
that, immediately prior to the conveyance of the Private Securities, the
Depostior had good title thereto, and was the sole owner thereof (subject to any
Retained Interest); (iii) that there has been no other sale by it of such
Private Securities; and (iv) that there is no existing lien, charge, security
interest or other encumbrance (other than any Retained Interest) on such Private
Securities.
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 relating to
Loans 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 relating to the Servicing of Loans, 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 comprising or underlying the Primary Assets 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 or
Underlying Loans relating to the Private Securities, as applicable, 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 or
Underlying Loans in proportion to the interest that each such Class of
Securities would have otherwise been entitled to receive in respect of such
Loans or Underlying 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 Mortgage 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 Mortgage 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 or on Loans underlying Pass-Through
Securities ('Interest Weighted Securities'). The Issuer intends to take the
position that all of the income derived from an Interest Weighted Security
should be treated as OID and that the amount and rate of accrual of such OID
should be calculated by treating the Interest Weighted Security as a Compound
Interest Security. However, in the case of Interest Weighted Securities that are
entitled to some payments of principal and that are Regular Interest Securities
the 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 Mortgage Loans underlying such Security) originally issued at a discount,
OID in the relevant period to total OID remaining to be paid.
Section 1277 of the Code provides that, regardless of the origination date
of the Debt Security (or, in the case of a Pass-Through Security, the Loans),
the excess of interest paid or accrued to purchase or carry a Security (or, in
the case of a Pass-Through Security, as described below, the underlying Loans)
with market discount over interest received on such Security is allowed as a
current deduction only to the extent such excess is greater than the market
discount that accrued during the taxable year in which such interest expense was
incurred. In general, the deferred portion of any interest expense will be
deductible when such market discount is included in income, including upon the
sale, disposition, or repayment of the Security (or in the case of a
Pass-Through Security, an underlying Loan). A 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 Mortgage Loan underlying a Security.
Under certain circumstances, if the Mortgage 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 Private Securities which are not insured
or guaranteed by the United States or 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.
EXPERTS
The financial statements and schedules for the fiscal years ended December
31, 1991, December 31, 1992 and December 31, 1993, audited by Ernst & Young,
independent auditors, are included or incorporated by reference in the
Depositor's Annual Report on Form 10-K for the fiscal year ended December 31,
1993 (the '1993 Form 10-K'). The 1993 Form 10-K is incorporated by reference in
this Prospectus in reliance upon the opinions of such firms appearing therein
given upon the authority of those firms as experts in accounting and auditing.
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 (if such
Series relates to Loans) 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.
'Private Security' means a participation or pass-through certificate
representing a fractional, undivided interest in Underlying Loans or
collateralized obligations secured by Underlying Loans. Such pass-through
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securities or collateralized obligations will have previously been offered and
distributed to the public pursuant to an effective registration statement.
'Property' means either a Home Improvement or a Mortgaged Property securing
a Loan, as the context requires.
'PS Agreement' means the pooling and servicing agreement, indenture, trust
agreement or similar agreement pursuant to which a Private Security is issued.
'PS Servicer' means the servicer of the Underlying Loans.
'PS Sponsor' means, with respect to Private Securities, the sponsor or
depositor under a PS Agreement.
'PS Trustee' means the trustee designated under a PS Agreement.
'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 relating to Loans, 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.
'Underlying Loans' means home equity loans of the type eligible to be Loans
underlying or securing Private Securities.
'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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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 Company
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.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
PROSPECTUS SUPPLEMENT
Incorporation of Certain Documents by
Reference.................................... S-2
Summary........................................ S-3
Risk Factors................................... S-12
The Certificate Insurer........................ S-14
The Servicer................................... S-16
The Seller's Home Equity Loan Program.......... S-17
Description of the Mortgage Loans.............. S-19
Maturity and Prepayment Considerations......... S-26
Pool Factor and Trading Information............ S-27
Description of the Certificates................ S-28
Description of the Purchase Agreement.......... S-45
Use of Proceeds................................ S-46
Certain Federal Income Tax Consequences........ S-46
State Taxes.................................... S-49
ERISA Considerations........................... S-49
Legal Investment Considerations................ S-50
Underwriting................................... S-50
Legal Matters.................................. S-51
Experts........................................ S-51
Ratings........................................ S-51
Index of Defined Terms......................... S-52
Annex I........................................ S-56
PROSPECTUS
Prospectus Supplement.......................... 2
Available Information.......................... 2
Reports to Holders............................. 2
Summary of Terms............................... 3
Risk Factors................................... 11
Description of the Securities.................. 14
The Trust Funds................................ 17
Enhancement.................................... 22
Servicing of Loans............................. 24
The Agreements................................. 30
Certain Legal Aspects of Loans................. 38
The Depositor.................................. 46
Use of Proceeds................................ 46
Certain Federal Income Tax
Considerations............................... 47
State Tax Considerations....................... 64
ERISA Considerations........................... 65
Legal Investment............................... 67
Plan of Distribution........................... 67
Legal Matters.................................. 67
Experts........................................ 67
Additional Information......................... 67
Glossary of Terms.............................. 68
</TABLE>
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LEHMAN HOME EQUITY
LOAN TRUST 1996-1
$146,190,000
REVOLVING HOME EQUITY LOAN
ASSET-BACKED CERTIFICATES
SERIES 1996-1
LEHMAN ABS CORPORATION,
AS DEPOSITOR
COUNTRYWIDE FUNDING CORPORATION,
AS SELLER AND SERVICER
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PROSPECTUS SUPPLEMENT
FEBRUARY , 1996
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LEHMAN BROTHERS
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