<PAGE>
Rule 424(b)(5)
Registration Statement No. 333-39649
PROSPECTUS SUPPLEMENT
To Prospectus dated December 15, 1997
$183,150,000 (approximate)
PROVIDENT BANK HOME EQUITY LOAN TRUST 1998-A
HOME EQUITY LOAN ASSET-BACKED NOTES, SERIES 1998-A
The Provident Bank Lehman ABS Corporation
as Seller, Transferor and Master Servicer as Depositor
<TABLE>
<CAPTION>
PROCEEDS
CLASS A PRINCIPAL NOTE PRICE TO UNDERWRITING TO THE
NOTES BALANCE RATE PUBLIC DISCOUNT DEPOSITOR(1)
- --------------- ------------ ------------ ------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
Class A-1 $100,000,000 Variable(2) 100.00% 0.35% 99.65%
Class A-2 $ 60,000,000 Variable(2) 100.00% 0.35% 99.65%
Class A-3 $ 23,150,000 Variable(2) 100.00% 0.35% 99.65%
Total for Notes $183,150,000 N/A $183,150,000 $641,025 $182,508,975
</TABLE>
- ------------------
(1) Before deducting expenses, estimated to be approximately $400,000.
(2) Subject to a maximum rate as described herein.
THE NOTES REPRESENT NON-RECOURSE OBLIGATIONS OF THE TRUST ONLY AND DO NOT
REPRESENT AN INTEREST IN OR OBLIGATION OF LEHMAN ABS CORPORATION, THE PROVIDENT
BANK, THE INDENTURE TRUSTEE, THE OWNER TRUSTEE OR ANY OF THEIR AFFILIATES.
THIS PROSPECTUS SUPPLEMENT MAY BE USED TO OFFER AND SELL THE NOTES ONLY IF
ACCOMPANIED BY THE PROSPECTUS.
The Trust
o is a Delaware business trust formed pursuant to a
trust agreement between Lehman ABS Corporation and
Wilmington Trust Company.
o will issue three classes of Notes, which are offered
hereby.
o will issue two Transferor Interests, which are not
offered hereby.
The Notes
o are principally secured by the assets of the trust,
which consist of two groups of adjustable rate home
equity revolving credit line loan agreements and
closed-end home equity loans that primarily have fixed
rates of interest.
o currently have no trading market.
o are not insured or guaranteed by any governmental
agency.
Credit Enhancement
o The spread accounts will fund shortfalls in payments
due on the Notes.
o Losses on the mortgage loans in a loan group will be
allocated to the related Transferor Interest up to
certain levels.
o An irrevocable and unconditional guaranty insurance
policy issued by MBIA Insurance Corporation will
guarantee interest and ultimate principal payments on
the Notes.
o If MBIA Insurance Corporation defaults, certain
payments to the holder of a Transferor Interest will
only be paid after payments due on the related Notes
are made.
REVIEW THE INFORMATION IN "RISK FACTORS" ON PAGE S-9 IN THIS PROSPECTUS
SUPPLEMENT AND ON PAGE 11 IN THE PROSPECTUS.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE NOTES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
---------------------------
LEHMAN BROTHERS PRUDENTIAL SECURITIES INCORPORATED
December 28, 1998
<PAGE>
For 90 days following the date of this prospectus supplement, all dealers
selling the Notes will deliver a prospectus supplement and prospectus. This is
in addition to the dealers' obligation to deliver a prospectus when acting as
underwriters of the Notes and with respect to their unsold allotments or
subscriptions.
You should rely only on the information contained or incorporated by reference
in this prospectus supplement and the accompanying prospectus. We have not
authorized anyone to provide you with different information.
We are not offering the Notes in any state where the offer is not permitted.
We do not claim that the information in this prospectus supplement and
prospectus is accurate as of any date other than the dates stated on the
respective covers.
TABLE OF CONTENTS
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PAGE
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<S> <C>
PROSPECTUS SUPPLEMENT
Summary................................................................................................. S-3
Risk Factors............................................................................................ S-9
The Insurer............................................................................................. S-13
The Trust............................................................................................... S-15
The Provident Bank...................................................................................... S-16
Description of the Mortgage Loans....................................................................... S-21
Description of the Notes................................................................................ S-42
Pool Factor............................................................................................. S-60
Maturity and Prepayment Considerations.................................................................. S-61
Description of the Agreements........................................................................... S-63
Description of the Purchase Agreement................................................................... S-71
Use of Proceeds......................................................................................... S-71
Certain Federal Income Tax Consequences................................................................. S-72
State Taxes............................................................................................. S-75
ERISA Considerations.................................................................................... S-76
Legal Investment Considerations......................................................................... S-77
Underwriting............................................................................................ S-77
Legal Matters........................................................................................... S-78
Experts................................................................................................. S-78
Ratings................................................................................................. S-78
Index of Defined Terms.................................................................................. S-79
Annex I--Global Clearance, Settlement and Tax Documentation Procedures.................................. I-1
Annex II--Auction Procedures............................................................................ II-1
Annex III--Settlement Procedures........................................................................ III-1
PROSPECTUS
Prospectus Supplement................................................................................... 2
Available Information................................................................................... 2
Reports to Holders...................................................................................... 2
Incorporation of Certain Documents by Reference......................................................... 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................................................................................ 69
ERISA Considerations.................................................................................... 69
Legal Investment........................................................................................ 71
Plan of Distribution.................................................................................... 71
Legal Matters........................................................................................... 71
Additional Information.................................................................................. 71
Glossary of Terms....................................................................................... 71
</TABLE>
S-2
<PAGE>
SUMMARY
This summary highlights selected information from this document and does
not contain all of the information that you need to consider in making your
investment decision. Please read this entire prospectus supplement and the
accompanying prospectus for additional information about the Notes.
HOME EQUITY LOAN ASSET-BACKED NOTES, SERIES 1998-A
<TABLE>
<CAPTION>
INITIAL NOTE MATURITY
CLASS/INTEREST NOTE RATE PRINCIPAL BALANCE(1) DATE(2)
- ------------------------------- -------------------- -------------- ----------
<S> <C> <C> <C>
Class A-1 Notes LIBOR + 0.55%(3) $100,000,000 12/25/2028
Class A-2 Notes LIBOR + 0.55%(3) $60,000,000 12/25/2028
Class A-3 Notes Variable(3)(4) $23,150,000 12/25/2028
Group 1 Transferor Interest(5) N.A. $1,010,426 N.A.
Group 2 Transferor Interest(5) N.A. $ 839,899 N.A.
</TABLE>
(1) This amount is subject to a variance of 5%.
(2) We expect the actual maturity date for the Notes will be
significantly earlier than the maturity date stated above.
(3) If this rate exceeds the weighted average of the net loan rate for
the related loan group on any payment date, you will receive
interest at such net loan rate. On future payment dates, you will be
entitled to any interest accrued at your note rate in excess of the
net loan rate, which amounts will not be insured by the insurance
policy. We refer you to "DESCRIPTION OF THE NOTES--Payments on the
Notes" for more information.
(4) The note rate for this class for the first payment date will be
5.75% per annum and will be recalculated nine times each year
thereafter pursuant to the auction procedures set forth in this
prospectus supplement in Annex II and Annex III.
(5) Neither Transferor Interest is being offered pursuant to this
prospectus supplement and the prospectus. The group 1 transferor
interest receives payments from loan group 1 and the group 2
transferor interest receives payments from loan group 2.
THE TRANSFEROR AND MASTER SERVICER
o The Provident Bank
o The Provident Bank maintains its principal office at One East Fourth Street,
Cincinnati, Ohio. Its telephone number is (513)579-2000.
o The master servicer will receive a monthly fee from the interest payments on
the mortgage loans equal to 0.50% per annum on the principal balance of each
mortgage loan.
We refer you to "THE PROVIDENT BANK" in this prospectus supplement for
additional information.
TRUST
o Provident Bank Home Equity Loan Trust 1998-A.
DEPOSITOR
o Lehman ABS Corporation
We refer you to "The Depositor" in the prospectus for additional information.
INDENTURE TRUSTEE
o The Chase Manhattan Bank
OWNER TRUSTEE
o Wilmington Trust Company
AUCTION AGENT
o Bankers Trust Company, a New York banking corporation
INSURER
o MBIA Insurance Corporation
We refer you to "The Insurer" in this prospectus supplement for additional
information.
CUT-OFF DATE
o For any initial mortgage loan, the cut-off date is December 1, 1998. For any
subsequent mortgage loan, the cut-off date is the date of origination for that
mortgage loan, unless the subsequent mortgage loan was originated prior to
December 1, 1998, in which case the cut-off date is December 29, 1998.
CLOSING DATE
o December 30, 1998.
PAYMENT DATE
o The 25th day of each month, or if such day is not a business day, the next
business day. The first payment date is January 25, 1999.
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<PAGE>
COLLECTION PERIOD
o The calendar month preceding the month of a payment date.
REGISTRATION OF NOTES
We will issue the Notes in book-entry form. You will hold your interests either
through a depository in the United States or through one of two depositories in
Europe. While the notes are book-entry, they will be registered in the name of
the applicable depository, or in the name of the depository's nominee.
Transfers within any depository system will be made in accordance with the usual
rules and operating procedures of that system. Cross-market transfers between
two different depository systems may be made through a third-party bank and/or
the related depositories. The limited circumstances under which definitive notes
will replace the book-entry notes are described in this prospectus supplement.
We refer you to "RISK FACTORS--Consequences on Liquidity and Payment Delay
Because of Owning Book-Entry Notes", "DESCRIPTION OF THE NOTES--Book-Entry
Notes" and "ANNEX I" in this prospectus supplement for additional information.
ASSETS OF THE TRUST
The trust's assets include:
o a pool, which is divided into two groups, of adjustable rate home equity
revolving credit line loan agreements and closed-end home equity loans that
primarily have fixed rates of interest, secured by either first or junior
deeds of trust or mortgages primarily on one- to four-family residential
properties;
o payments of interest due on the mortgage loans on and after the cut-off date
and principal payments on the mortgage loans received on and after the cut-off
date (except for certain amounts described herein);
o property that secured a mortgage loan which has been acquired by foreclosure
or deed in lieu of foreclosure and the net proceeds from the sale of a
mortgage loan;
o rights under certain hazard insurance policies covering the mortgaged
properties;
o amounts on deposit in certain accounts described in this prospectus
supplement; and
o the insurance policy for the benefit of the holders of the Class A notes.
During the life of the trust, new advances made to mortgagors under the
applicable credit line loan agreement will become assets of the trust. However,
neither the trust nor the indenture trustee shall be obligated or permitted to
fund any such future advances. Due to such advances and any principal payments
on the mortgage loans, the pool balance will generally fluctuate.
THE MORTGAGE LOANS
1. Mortgage Loan Statistics
On the closing date, the trust will acquire a pool of adjustable rate home
equity revolving credit line loan agreements (the "revolving credit-line loans")
and closed-end home equity loans that primarily have fixed rates of interest
(the "closed-end loans"), or "mortgage loans" which will be divided into two
groups. As described in this prospectus supplement, information relating to
certain attributes, such as combined loan-to-value ratio, junior mortgage ratio,
property type and occupancy type was available only for certain subsets of the
groups of mortgage loans. The initial mortgage loans will have the following
characteristics as of December 1, 1998:
o number of mortgage loans: 7,239
o number of revolving credit-line loans: 4,586
o number of closed-end loans: 2,653
o aggregate principal balance: $181,754,829.54
The mortgage loans in loan group 1 will have the following characteristics as of
December 1, 1998:
o number of mortgage loans: 4,252
o number of revolving credit-line loans: 2,666
o number of closed-end loans: 1,586
o aggregate principal balance: $101,010,425.99
o average credit limit of revolving credit-line loans: $44,176.77
o credit limits on the revolving credit-line loans range: $272.35 to $225,000.00
o average principal balance of closed-end loans: $23,761.07
o principal balances of closed-end loans range: $845.00 to $152,075.00
o mortgaged property location: 17 states
S-4
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o interest rates range: 5.99% to 14.00%
o weighted average interest rate: 8.67% (approximate)
o interest rates on the revolving credit-line loans range: 5.99% to 14.00%
o weighted average interest rate on the revolving credit-line loans: 8.31%
(approximate)
o interest rates on the closed-end loans range: 7.24% to 12.99%
o weighted average interest rate on the closed-end loans: 9.28% (approximate)
o loan age range: 0 to 138 months
o weighted average loan age: 7 months
o credit limit utilization rate range for revolving credit-line loans: 0.00% to
103.40%
o average credit limit utilization rate for revolving credit-line loans: 53.77%
o margin range for revolving credit-line loans: -1.00% to 6.25%
o weighted average margin for revolving credit-line loans: 0.59%
o combined loan-to-value ratio range 0.14% to 101.00% (approximate)
o weighted average combined loan-to-value ratio 77.21% (approximate)
o all of the revolving credit-line loans bear interest at an adjustable rate
based on the prime rate published in The Wall Street Journal.
The initial mortgage loans in loan group 2 will have the following
characteristics as of December 1, 1998:
o number of mortgage loans: 2,987
o number of revolving credit-line loans: 1,920
o number of closed-end loans: 1,067
o aggregate principal balance: $80,744,403.55
o average credit limit of revolving credit-line loans: $51,793.00
o credit limits on the revolving credit-line loans range: $20.00 to $400,000.00
o average principal balance of closed-end loans: $24,482.57
o principal balances of closed-end loans range: $150.75 to $308,250.08
o mortgaged property location: 19 states
o interest rates range: 5.99% to 16.00%
o weighted average interest rate: 8.67% (approximate)
o interest rates on the revolving credit-line loans range: 5.99% to 14.00%
o weighted average interest rate on the revolving credit-line loans: 8.40%
(approximate)
o interest rates on the closed-end loans range: 6.25% to 16.00%
o weighted average interest rate on the closed-end loans: 9.25% (approximate)
o loan age range: 0 to 143 months
o weighted average loan age: 13 months
o credit limit utilization rate range for revolving credit-line loans: 0.03% to
104.25%
o average credit limit utilization rate for revolving credit-line loans: 54.93%
o margin range for revolving credit-line loans: -0.75% to 6.25%
o weighted average margin for revolving credit-line loans: 0.63%
o combined loan-to-value ratio range 3.68% to 100.92% (approximate)
o weighted average combined loan-to-value ratio 78.57% (approximate)
o all of the revolving credit-line loans bear interest at an adjustable rate
based on the prime rate published in The Wall Street Journal.
o balloon loans with amortization schedules that do not fully amortize by their
maturity date: 1.65% (approximate).
It is expected that approximately $3,245,495 of mortgage loans will be added to
loan group 2 on the closing date. No additional mortgage loans will be added to
loan group 1.
2. Payment Terms of Mortgage Loans
A. Revolving Credit Line Loans
o Each borrower under a revolving credit-line loan may borrow amounts from time
to time up to the maximum amount of that borrower's line of credit. If
borrowed amounts are repaid, they can again be borrowed.
o Interest--Interest on each revolving credit-line loan is payable monthly on
the related outstanding principal balance for each day in the
S-5
<PAGE>
billing cycle. The loan rate is variable and is equal to the prime rate
published in The Wall Street Journal plus a margin (which, in certain cases,
may be negative).
o Principal--The revolving credit-line loans have either: (i) a one year draw
period which is renewable by Provident during which time amounts may be
borrowed under the credit line agreement, followed by a five year repayment
period during which the borrower must repay the outstanding principal of the
loan; or (ii) a ten year draw period during which time amounts may be borrowed
under the credit line agreement, followed by a ten year repayment period
during which the borrower must repay the outstanding principal of the loan.
B. Closed-End Loans
o The amount borrowed under a closed-end loan is fully disbursed on the date of
origination of the related closed-end loan and the borrower is not entitled to
future advances of cash under the related closed-end loan.
o Interest on each closed-end loan is payable monthly on the related outstanding
principal balance of the closed-end loan. The loan rate for most of the
closed-end loans is fixed at origination of the closed-end loan. The loan rate
for the remainder of the closed-end loans is variable and is equal to the
prime rate published in The Wall Street Journal plus a margin.
C. Simple Interest Loans
o All of the loans compute interest based on a simple interest method. This
means that interest is computed and charged to the borrower on the outstanding
principal balance of the loan based on the number of days elapsed between the
date through which interest was last paid on the loan through receipt of the
borrower's most current payment. The portions of each monthly payment that are
allocated to interest and principal are adjusted based on the actual amount of
interest charge on such basis.
We refer you to "DESCRIPTION OF THE MORTGAGE LOANS" in this prospectus
supplement for additional information.
MONTHLY ADVANCES
The master servicer will make cash advances to the trust to cover delinquent
mortgage loan payments through liquidation of the related mortgage loan. The
master servicer will make advances only to maintain a regular flow of scheduled
interest payments on the notes, not to guarantee or insure against losses.
We refer you to "DESCRIPTION OF THE NOTES--Monthly Advances" in this prospectus
supplement for additional information.
THE NOTES
1. General
o The Class A-1 notes will be secured by loan group 1 and holders of Class A-1
notes will receive payments from collections on loan group 1.
o The Class A-2 and Class A-3 notes will be secured by loan group 2 and holders
of the Class A-2 and Class A-3 notes will receive payments from collections on
loan group 2.
o Each month, the indenture trustee will calculate the amount you are owed.
o If you hold a note on the day immediately preceding the related payment date,
you will be entitled to receive payments on that payment date.
2. Interest Payments: Interest on the notes accrues during the period beginning
on the prior payment date (or in the case of the first payment date, beginning
on the closing date) and ending on the day before the applicable payment date.
The indenture trustee will calculate interest based on the actual number of days
in the interest period and a year assumed to consist of 360 days. On each
payment date, you will be entitled to the following amounts:
o interest at the related note rate that accrued during the interest period on
your note balance; and
o any interest that was due on a prior payment date that was not paid. In
addition, interest will have accrued on the amount of interest which was
previously due and not paid.
3. Principal Payments: From the first payment date and ending on the payment
date in December 2003 and so long as certain events causing an acceleration of
payment of principal do not occur,
S-6
<PAGE>
noteholders will be entitled to the lesser of (a) or (b):
(a) 99% of the principal collected during the prior due period on mortgage loans
in the related loan group; or
(b) the amount of principal collected on mortgage loans in the related loan
group during the prior due period minus advances made to the borrowers on
mortgage loans in the related loan group under the related credit line
agreements during that due period.
On each payment date following December 2003, or if certain events causing an
acceleration of principal occur, noteholders will be entitled to receive the
amount described in clause (a) above for the related loan group.
Payments in respect of principal on the Class A-2 and Class A-3 Notes will be
paid to such Notes pro rata based on their related note principal balances
immediately prior to such payment.
Shortfalls in collections on the mortgage loans and failure of the insurer to
perform its obligations under the insurance policy may result in a class
receiving less than what is due.
We refer you to "DESCRIPTION OF THE NOTES--Payments on the Notes" in this
prospectus supplement for additional information.
CREDIT ENHANCEMENT
1. The Insurance Policy: MBIA Insurance Corporation will issue an insurance
policy which unconditionally guarantees the payment, to the extent not covered
by principal and interest collections and amounts on deposit in the spread
accounts, of:
o accrued and unpaid interest due on the notes;
o principal losses on the mortgage loans;
o any principal amounts owed to noteholders on the maturity date; and
o any amounts distributed on the notes that are recoverable and sought to be
recovered as a voidable preference payment.
We refer you to "DESCRIPTION OF THE NOTES--The Policy" in this prospectus
supplement for additional information.
2. The Spread Accounts: A spread account will be set up for each loan group.
Amounts on deposit in each spread account will be available to the indenture
trustee to pay interest due on the related notes and to cover principal losses
on the related mortgage loans prior to a draw on the insurance policy.
We refer you to "DESCRIPTION OF THE NOTES--The Spread Accounts" in this
prospectus supplement for additional information.
3. Limited Subordination of Transferor Interests: After a spread account is
depleted and prior to a draw on the insurance policy, losses on the related
mortgage loans will be allocable to the related transferor interest up to
certain levels. In addition, if the insurer defaults, certain payments to the
holder of a transferor interest will be made after payments to the related
notes.
OPTIONAL TERMINATION
The mortgage loans in each loan group will be subject to an optional transfer to
the owner of the related transferor interest on any payment date after:
o the principal balance of the related notes is reduced to any amount less than
or equal to 5% of the original principal balance of those notes; and
o all amounts due and owing to the insurer, including unreimbursed draws on the
insurance policy, with respect to the related notes, with interest thereon
have been paid.
We refer you to "DESCRIPTION OF THE AGREEMENTS--Termination; Retirement of the
Notes" in this prospectus supplement for additional information.
FEDERAL TAX CONSIDERATIONS
For federal income tax purposes:
o Tax counsel is of the opinion that the notes will be treated as debt
instruments.
o You must agree to treat your note as indebtedness for federal, state and local
income and franchise tax purposes.
We refer you to "CERTAIN FEDERAL INCOME TAX CONSEQUENCES" in this prospectus
supplement and in the prospectus for additional information.
S-7
<PAGE>
ERISA CONSIDERATIONS
The fiduciary responsibility provisions of the Employee Retirement Income
Security Act of 1974 ("ERISA") can limit investments by certain pension and
other employee benefit plans. Pension and other employee benefit plans should be
able to purchase investments like the notes so long as they are treated as debt
under applicable state law and have no "substantial equity features." Any plan
fiduciary considering whether to purchase the notes on behalf of a plan should
consult with its counsel regarding the applicability of the provisions of ERISA
and the internal revenue code and the availability of any exemptions.
We refer you to "ERISA Considerations" in this prospectus supplement and the
prospectus for additional information.
LEGAL INVESTMENT CONSIDERATIONS
The Secondary Mortgage Market Enhancement Act of 1984 defines "mortgage related
securities" to include only securities backed by first mortgages, and not second
mortgages. Because each loan group in the pool of mortgage loans owned by the
trust includes junior mortgage loans, the notes will not be "mortgage related
securities" under that definition. Some institutions may be limited in their
legal investment authority to only first mortgages or "mortgage related
securities" and will be unable to invest in the notes.
We refer you to "LEGAL INVESTMENT CONSIDERATIONS" in this prospectus supplement
and "LEGAL INVESTMENT" in the prospectus for additional information.
NOTE RATINGS
The Trust will not issue the notes unless they receive the following ratings:
o AAA by Standard & Poor's Ratings Services, a division of The McGraw-Hill
Companies, Inc.
o Aaa by Moody's Investors Service, Inc.
A rating is not a recommendation to buy, sell or hold securities and may be
subject to revision or withdrawal by either rating agency.
We refer you to "RATINGS" and "RISK FACTORS--Note Rating Based Primarily on the
Financial Strength of the Insurer" in this prospectus supplement for additional
information.
S-8
<PAGE>
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS PRIOR TO ANY
PURCHASE OF THE NOTES. YOU SHOULD ALSO CAREFULLY CONSIDER THE INFORMATION SET
FORTH UNDER "RISK FACTORS" IN THE PROSPECTUS.
CONSEQUENCES ON LIQUIDITY AND PAYMENT DELAY BECAUSE OF OWNING BOOK-ENTRY NOTES
o Limit on Liquidity of Notes. Issuance of the notes in book-entry form may
reduce the liquidity of such notes in the secondary trading market since
investors may be unwilling to purchase notes for which they cannot obtain
physical notes.
o Limit on Ability to Transfer or Pledge. Since transactions in the
book-entry notes can be effected only through DTC, participating organizations,
indirect participants and certain banks, your ability to transfer or pledge a
book-entry note to persons or entities that do not participate in the DTC system
or otherwise to take actions in respect of such notes, may be limited due to
lack of a physical note representing the book-entry notes.
o Delays in Payments. You may experience some delay in the receipt of
payments on the book-entry notes since the payments will be forwarded by the
indenture trustee to DTC for DTC to credit the accounts of its participants
which will thereafter credit them to your account either directly or indirectly
through indirect participants, as applicable.
We refer you to "DESCRIPTION OF NOTES--Book-Entry Notes" in this prospectus
supplement.
BALLOON LOAN RISK
Balloon loans pose a risk because the borrower must pay a large lump sum
payment of principal at the end of the loan term. If the borrower is unable to
pay the lump sum or refinance such amount, you will suffer a loss if the
collateral for the loan is insufficient, the other forms of credit enhancement
are insufficient to cover the loss and the insurer fails to perform its
obligations under the insurance policy. Approximately 1.65% of the initial
mortgage loans in loan group 2 (by aggregate principal balance as of
December 1, 1998) are balloon loans.
DELAY IN RECEIPT OF LIQUIDATION PROCEEDS; LIQUIDATION PROCEEDS MAY BE LESS THAN
MORTGAGE LOAN BALANCE
Substantial delays could be encountered in connection with the liquidation
of delinquent mortgage loans. Further, liquidation expenses such as legal fees,
real estate taxes and maintenance and preservation expenses may reduce the
portion of liquidation proceeds payable to you. If a mortgaged property fails to
provide adequate security for the mortgage loan, you will incur a loss on your
investment if the insurer fails to perform its obligations under the insurance
policy and the other forms of credit enhancement are insufficient to cover the
loss.
We refer you to "CERTAIN LEGAL ASPECTS OF LOANS--Foreclosure on Mortgages"
in the prospectus.
PREPAYMENTS AFFECT TIMING AND RATE OF RETURN ON YOUR INVESTMENT
The yield to maturity on your notes will be directly related to the rate of
principal payments on the mortgage loans in the related loan group. Please
consider the following:
o Mortgagors may fully or partially prepay their mortgage loan at any
time. However, some mortgage loans require that the mortgagor pay a fee with any
prepayments in full within three or five years of origination, except that
generally no fee is required for any prepayment in full made after the
expiration of the applicable time period. This fee may result in the rate of
prepayments being slower than would otherwise be the case.
o During the period that a borrower may borrow money under a revolving
credit-line loan, the borrower may make monthly payments only for the accrued
interest or may also repay some or all of the amounts
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previously borrowed. In addition, borrowers may borrow additional amounts up to
the maximum amounts of their lines of credit. As a result, the amount the trust
receives in any month (and in turn the amount of principal paid to you) may
change significantly.
o All of the mortgage loans compute interest due on a simple interest
method. This means that the amount of each monthly payment applied to the
payment of principal and interest will vary each month depending on when the
monthly payment is received.
o All the mortgage loans contain due-on-sale provisions. Due-on-sale
provisions require the mortgagor to fully pay the mortgage loan when the
mortgaged property is sold. Generally, the master servicer will enforce the
due-on-sale provision unless prohibited by applicable law.
o The trust will acquire mortgage loans for deposit to loan group 2 from
Provident on the Closing Date which were originated after the Cut-Off Date. To
the extent that Provident has not originated sufficient mortgage loans to
satisfy the required amount of subsequent mortgage loans, the Class A-2 and
Class A-3 Noteholders may receive a portion of such amount on the first payment
date.
o The rate of principal payments on pools of mortgage loans is influenced
by a variety of factors, including general economic conditions, interest rates,
the availability of alternative financing and homeowner mobility.
o Home equity loans generally are not viewed by borrowers as permanent
financing. Accordingly, the mortgage loans may experience a higher rate of
prepayment than purchase money first lien mortgage loans.
o We cannot predict the rate at which borrowers will repay their mortgage
loans, nor are we aware of any publicly available studies or statistics on the
rate of prepayment of mortgage loans similar to the mortgage loans in the pool.
o If you purchased your note at a premium and you receive your principal
faster than expected, your yield to maturity will be lower than you anticipated.
If you purchased your note at a discount and you receive your principal slower
than expected, your yield to maturity will be lower than you anticipated.
We refer you to "MATURITY AND PREPAYMENT CONSIDERATIONS" in this prospectus
supplement.
NOTE RATING BASED PRIMARILY ON THE FINANCIAL STRENGTH OF THE INSURER
The rating on the notes depends primarily on an assessment by the rating
agencies of the mortgage loans and upon the financial strength of the insurer.
Any reduction of the rating assigned to the financial strength of the insurer
may cause a corresponding reduction in the ratings assigned to the notes. A
reduction in the rating assigned to the notes will reduce the market value of
the notes and may affect your ability to sell them. In general, the rating on
your notes addresses credit risk and does not address the likelihood of
prepayments.
We refer you to "RATINGS" in this prospectus supplement.
LIEN PRIORITY COULD RESULT IN PAYMENT DELAY AND LOSS
Most of the mortgage loans are secured by mortgages which are junior in
priority. Mortgage loans that are secured by junior mortgages will receive
proceeds from a sale of the related mortgaged property only after any senior
mortgage loans and prior statutory liens have been paid. If the remaining
proceeds are insufficient to satisfy the mortgage loan in the trust, the insurer
fails to perform its obligations under the insurance policy and the other forms
of credit enhancement are insufficient to cover the loss, then:
o there will be a delay in payments to you while a deficiency judgment
against the borrower is sought; and
o you may incur a loss if a deficiency judgment cannot be obtained or is
not realized upon.
We refer you to "CERTAIN LEGAL ASPECTS OF THE LOANS" in the prospectus.
S-10
<PAGE>
PAYMENTS TO AND RIGHTS OF INVESTORS ADVERSELY AFFECTED BY INSOLVENCY OF
PROVIDENT
The sale of the mortgage loans from Provident to the depositor will be
treated by Provident, the depositor and the trust for financial accounting
purposes as a sale of the mortgage loans. If Provident were to become insolvent,
a receiver or conservator for, or a creditor of, Provident may argue that the
transaction between Provident and the depositor is a pledge of mortgage loans as
security for a borrowing rather than a sale. Such an attempt, even if
unsuccessful, could result in delays in payments to you.
In the event of Provident's insolvency, there is a possibility that the
Federal Deposit Insurance Corporation could be appointed as a receiver or
conservator and prevent the indenture trustee or the owner trustee from taking
any action with respect to the trust. The Federal Deposit Insurance Corporation
may enforce Provident's contracts and may have the power to cause Provident to
continue to perform the master servicer's duties. This would prevent the
appointment of a successor servicer and prevent the liquidation of the mortgage
loans or the early retirement of the notes.
Provident will deliver to the indenture trustee the mortgage notes relating
to the closed-end loans on the closing date and the assignments of each mortgage
in recordable form relating to the closed-end loans within ninety days of the
closing date. However, Provident will maintain possession of all other
documentation relating to the mortgage loans and no assignment of any mortgage
is required to be recorded in the name of the indenture trustee, unless
Provident's long-term senior unsecured debt rating is reduced below "BBB" by
Standard & Poor's or "Baa2" by Moody's and upon the occurrence of certain other
events. In the event that Provident's long-term senior unsecured debt is not so
rated, or such other events occur, Provident will have 30 days to deliver the
mortgage documents to the indenture trustee and 30 days to either record the
assignments or deliver a legal opinion to the effect that recordation of such
assignments is not necessary in order to perfect the interest of the trust in
the mortgages. Prior to delivery and recording, the interest of the indenture
trustee in the mortgages, the mortgage notes and any proceeds from the mortgage
loans may be subject to the claims of creditors or to sale to a third party, as
well as to a receiver or conservator appointed in the event of the insolvency of
Provident.
In certain states in which the mortgaged properties are located, failure to
record the assignments of the related mortgages to the indenture trustee will
have the result of making the sale of the mortgage loans potentially ineffective
against:
o any creditors of Provident who may have been fraudulently or
inadvertently induced to rely on the mortgage loans as assets of Provident, or
o any purchaser of a mortgage loan who had no notice of the prior
conveyance to the trust if such purchaser perfects his interest in the mortgage
loan by taking possession of the related documents or other evidence of
indebtedness or otherwise.
In either such event, the trust would be an unsecured creditor of Provident.
INTEREST PAYMENTS ON THE MORTGAGE LOANS MAY BE REDUCED
o Prepayments of Principal May Reduce Interest Payments. If a mortgagor
prepays a mortgage loan, the mortgagor is charged interest only up to the date
of the prepayment, instead of a full month. The master servicer is obligated to
reduce its servicing fee in the month of such prepayment so that one month's
interest is paid with such prepayment in full. If the servicing fee is
insufficient to pay the interest shortfalls attributed to prepayments, a
shortfall in interest due on the notes may result. The insurer is required to
cover this shortfall. If the other credit enhancements are insufficient to cover
the loss and the insurer fails to perform its obligations under the insurance
policy, you may incur a loss.
o Certain Interest Shortfalls Are Not Covered by the Master Servicer or the
Insurance Policy. The Soldiers' and Sailors' Civil Relief Act of 1940 permits
certain modifications to the payment terms for mortgage loans, including a
reduction in the amount of interest paid by the borrower, under certain
circumstances. Neither the master servicer nor the insurer will pay for any
interest shortfalls created by the Soldiers' and Sailors' Civil Relief Act of
1940.
S-11
<PAGE>
RISK OF LOSSES AS A RESULT OF GEOGRAPHIC CONCENTRATION
The mortgaged properties relating to the mortgage loans are located in 20
states. However, 63.96% of the mortgaged properties relating to loan group 1 and
63.58% of the mortgaged properties relating to the initial mortgage loans in
loan group 2 (each by aggregate principal balance as of December 1, 1998) are
located in Ohio. If Ohio experiences in the future weaker economic conditions or
greater rates of decline in real estate values than the United States generally,
then the mortgage loans may experience higher rates of delinquencies, defaults
and foreclosures than would otherwise be the case.
NOTEHOLDERS COULD BE ADVERSELY AFFECTED IN THE ABSENCE OF YEAR 2000 COMPLIANCE
As is the case with most companies using computers in their operations, the
master servicer is faced with the task of preparing for year 2000. The year 2000
issue is the result of prior computer programs being written using two digits,
rather than four digits, to define the applicable year. Any of the master
servicer's computer programs that have time-sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000. Major computer
system failure or miscalculations may occur as a result. The master servicer is
presently engaged in various procedures to ensure that their computer systems
and software will be year 2000 compliant.
However, if the master servicer or any of its suppliers, customers, brokers
or agents do not successfully and timely achieve year 2000 compliance, the
performance of obligations of the master servicer could be materially adversely
affected. This could result in delays in processing payments on the mortgage
loans and cause a related delay in payments to you.
S-12
<PAGE>
THE INSURER
The information set forth in this section and in the financial statements
of the Insurer incorporated by reference herein as described below have been
provided by the Insurer. No representation is made by the Underwriters,
Provident, the Master Servicer, the Depositor or any of their affiliates as to
the accuracy or completeness of any such information.
The Insurer is the principal operating subsidiary of MBIA Inc., a New York
Stock Exchange listed company ("MBIA Inc."). MBIA Inc. is not obligated to pay
the debts of or claims against the Insurer. The Insurer is domiciled in the
State of New York and licensed to do business in, and is subject to regulation
under the laws of, all 50 states, the District of Columbia, the Commonwealth of
Puerto Rico, the Commonwealth of the Northern Mariana Islands, the Virgin
Islands of the United States and the Territory of Guam. The Insurer has two
European branches, one in the Republic of France and the other in the Kingdom of
Spain. New York has laws prescribing minimum capital requirements, limiting
classes and concentrations of investments and requiring the approval of policy
rates and forms. State laws also regulate the amount of both the aggregate and
individual risks that may be insured, the payment of dividends by the Insurer,
changes in control and transactions among affiliates. Additionally, the Insurer
is required to maintain contingency reserves on its liabilities in certain
amounts and for certain periods of time.
Effective February 17, 1998, MBIA Inc. acquired all of the outstanding
stock of Capital Markets Assurance Corporation ("CMAC") through a merger with
its parent CapMAC Holdings Inc. Pursuant to a reinsurance agreement, CMAC has
ceded all of its net insured risks (including any amounts due but unpaid from
third party reinsurers), as well as its unearned premiums and contingency
reserves, to the Insurer. MBIA Inc. is not obligated to pay the debts of or
claims against CMAC.
The consolidated financial statements of the Insurer, a wholly owned
subsidiary of MBIA Inc., and its subsidiaries as of December 31, 1997 and
December 31, 1996 and for each of the three years in the period ended
December 31, 1997, prepared in accordance with generally accepted accounting
principles, included in the Annual Report on Form 10-K of MBIA Inc. for the year
ended December 31, 1997, and the consolidated financial statements of the
Insurer and its subsidiaries as of September 30, 1998 and for the nine month
periods ended September 30, 1998 and September 30, 1997 included in the
Quarterly Report on Form 10-Q of MBIA Inc. for the period ended September 30,
1998, are hereby incorporated by reference into this Prospectus Supplement and
shall be deemed to be a part hereof. Any statement contained in a document
incorporated by reference herein shall be modified or superseded for the
purposes of this Prospectus Supplement to the extent that a statement contained
herein or in any other subsequently filed document which is also incorporated by
reference herein modifies or supersedes such statement. Any statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part of this Prospectus Supplement.
All financial statements of the Insurer and its subsidiaries included in
documents filed by MBIA Inc. pursuant to Section 13(a), 13(c), 14 or 15(d) of
the Securities Exchange Act of 1934, as amended, subsequent to the date of this
Prospectus Supplement and prior to the termination of the offering of the Notes
shall be deemed to be incorporated by reference into this Prospectus Supplement
and to be a part hereof from the respective dates of filing such documents.
S-13
<PAGE>
The tables below present selected financial information of the Insurer
determined in accordance with statutory accounting practices prescribed or
permitted by insurance regulatory authorities ("SAP") and generally accepted
accounting principles ("GAAP"):
<TABLE>
<CAPTION>
SAP
---------------------------------------
DECEMBER 31, 1997 SEPTEMBER 30, 1998
----------------- ------------------
(AUDITED) (UNAUDITED)
(IN MILLIONS)
<S> <C> <C>
Admitted Assets........................................ $ 5,256 $6,318
Liabilities............................................ 3,496 4,114
Capital and Surplus.................................... 1,760 2,204
<CAPTION>
GAAP
---------------------------------------
DECEMBER 31, 1997 SEPTEMBER 30, 1998
----------------- ------------------
(AUDITED) (UNAUDITED)
(IN MILLIONS)
<S> <C> <C>
Assets................................................. $ 5,988 $7,439
Liabilities............................................ 2,624 3,268
Shareholder's Equity................................... 3,364 4,171
</TABLE>
Copies of the financial statements of the Insurer incorporated by reference
herein and copies of the Insurer's 1997 year-end audited financial statements
prepared in accordance with statutory accounting practices are available,
without charge, from the Insurer. The address of the Insurer is 113 King Street,
Armonk, New York 10504. The telephone number of the Insurer is (914) 273-4545.
The Insurer does not accept any responsibility for the accuracy or
completeness of this Prospectus Supplement or any information or disclosure
contained herein, or omitted herefrom, other than with respect to the accuracy
of the information regarding the Policy and the Insurer set forth under the
headings "THE INSURER" and "DESCRIPTION OF THE NOTES--The Policy." Additionally,
the Insurer makes no representations regarding the Notes or the advisability of
investing in the Notes.
Moody's Investors Service, Inc. rates the financial strength of the Insurer
as "Aaa".
Standard & Poor's Ratings Services, a division of The McGraw-Hill
Companies, Inc., rates the financial strength of the Insurer "AAA".
Fitch IBCA, Inc. (formerly known as "Fitch Investors Service, L.P.") rates
the financial strength of the Insurer "AAA".
Each rating of the Insurer should be evaluated independently. The ratings
reflect the respective rating agency's current assessment of the
creditworthiness of the Insurer and its ability to pay claims on its policies of
insurance. Any further explanation as to the significance of the above ratings
may be obtained only from the applicable rating agency.
The above ratings are not recommendations to buy, sell or hold the Notes,
and such ratings may be subject to revision or withdrawal at any time by the
rating agencies. Any downward revision or withdrawal of any of the above ratings
may have an adverse effect on the market price of the Notes. The Insurer does
not guaranty the market price of the Notes nor does it guaranty that the ratings
on the Notes will not be revised or withdrawn.
YEAR 2000 READINESS DISCLOSURE
An area of potential risk to the Insurer's financial guarantee business
would be the inability of an issuer or its trustee or paying agent to make
payments on an Insurer-insured transaction because of their failure to be Year
2000 ready. To mitigate this risk, the Insurer has been surveying all trustees,
all paying agents and selected high volume issuers to determine their state of
readiness. While the survey is not complete, the results to date are that all
respondents are either ready or planning to be ready by late 1999. If the
Insurer is asked to pay in those situations where the issuer's system fails, it
will do so and would expect to recover any such payment in a fairly short time
period. It is not possible at this time to evaluate the extent of such payments.
The Insurer believes that it has adequate sources of liquidity to cover these
payments.
S-14
<PAGE>
THE TRUST
GENERAL
Provident Bank Home Equity Loan Trust 1998-A (the "Trust") is a business
trust formed under the laws of the State of Delaware pursuant to the Trust
Agreement dated as of December 1, 1998 (the "Trust Agreement"), between Lehman
ABS Corporation, as depositor (the "Depositor") and Wilmington Trust Company, as
owner trustee (the "Owner Trustee") for the purpose of doing the transactions
described in this Prospectus Supplement. After its formation, the Trust will not
engage in any activity other than (i) acquiring, holding and managing the
Mortgage Loans and the other assets of the Trust and proceeds therefrom,
(ii) issuing the Notes and the Transferor Interests, (iii) making payments on
the Notes and the Transferor Interests and (iv) engaging in other activities
that are necessary, suitable or convenient to accomplish the foregoing or are
incidental thereto or in connection therewith.
On the Closing Date, Provident will sell the Mortgage Loans having an
aggregate principal balance of approximately $185,000,000 as of the Cut-Off Date
(the "Cut-Off Date Pool Principal Balance") to the Depositor pursuant to the
Purchase Agreement (as defined below). The Mortgage Loans will be divided into
two groups (each, a "Loan Group"). Pursuant to a Sale and Servicing Agreement
dated as of December 1, 1998 (the "Sale and Servicing Agreement"), among the
Trust, Provident, as Master Servicer and Transferor, the Depositor and the
Indenture Trustee, the Mortgage Loans will be transferred immediately by the
Depositor to the Trust.
The assets of the Trust will consist primarily of the Mortgage Loans, which
will be secured by first- or junior-lien Mortgages on the Mortgaged Properties.
See "DESCRIPTION OF THE MORTGAGE LOANS" herein. The assets of the Trust will
also include (i) payments on the Mortgage Loans received on or after the Cut-
Off Date (exclusive of (i) certain payments in respect of interest accrued on
the Mortgage Loans during November 1998 and (ii) payments in respect of interest
on the delinquent Mortgage Loans due prior to the Cut-Off Date and received
thereafter); (ii) amounts on deposit in the Collection Accounts, the
Distribution Accounts and the Spread Accounts; (iii) certain other ancillary or
incidental funds, rights and properties related to the foregoing; (iv) all
proceeds of the foregoing and (v) the Policy.
The Trust will include the unpaid principal balance of each Mortgage Loan
as of the opening of business on the Cut-Off Date (the "Cut-Off Date Principal
Balance"). With respect to any date, the "Pool Balance" will be equal to the
aggregate Principal Balances of all Mortgage Loans as of such date.
The assets of the Trust, consisting of Loan Group 1, the related Collection
Account and the related Distribution Account, will be pledged to the Indenture
Trustee as security for the Class A-1 Notes pursuant to the Indenture dated as
of December 1, 1998 (the "Indenture"), between the Trust and the Indenture
Trustee. The assets of the Trust, also consisting of Loan Group 2, the related
Collection Account and the related Distribution Account, will be pledged to the
Indenture Trustee as security for the Class A-2 Notes and Class A-3 Notes
pursuant to the Indenture.
The Master Servicer is obligated to service the Mortgage Loans pursuant to
the Sale and Servicing Agreement (collectively with the Indenture and the Trust
Agreement, the "Agreements") and will be compensated for such services as
described under "DESCRIPTION OF THE AGREEMENTS--Servicing Compensation and
Payment of Expenses" herein.
The Trust's principal offices are located in Wilmington, Delaware, in care
of Wilmington Trust Company, as Owner Trustee, at the address set forth below.
THE OWNER TRUSTEE
Wilmington Trust Company will act as the Owner Trustee under the Trust
Agreement. Wilmington Trust Company is a Delaware banking corporation and its
principal offices are located at Rodney Square North, 1100 North Market Street,
Wilmington, Delaware 19890-0001.
S-15
<PAGE>
THE PROVIDENT BANK
GENERAL
The Provident Bank ("Provident" or the "Seller") will sell the Mortgage
Loans to Lehman ABS Corporation (the "Depositor") pursuant to the Mortgage Loan
Purchase Agreement to be dated as of December 1, 1998 (the "Purchase
Agreement"), between Provident, as seller of the two groups of Mortgage Loans,
and the Depositor, as purchaser of the two groups of Mortgage Loans. Pursuant to
the Sale and Servicing Agreement, the Mortgage Loans will be immediately
transferred by the Depositor to the Trust.
Provident (in such capacity, the "Master Servicer") will service the
Mortgage Loans in accordance with the terms set forth in the Sale and Servicing
Agreement. As of the Closing Date, the Master Servicer will service the Mortgage
Loans without subservicing arrangements. The Master Servicer may perform any of
its obligations under the Sale and Servicing Agreement through one or more
subservicers and is permitted under the Sale and Servicing Agreement to transfer
servicing to affiliates, provided such affiliate meets certain standards
specified in the Sale and Servicing Agreement. See "DESCRIPTION OF THE
AGREEMENTS--Certain Matters Regarding the Master Servicer." Notwithstanding any
subservicing arrangements, the Master Servicer will remain liable for its
servicing duties and obligations under the Sale and Servicing Agreement as if
the Master Servicer alone were servicing the Mortgage Loans.
Provident is the principal banking subsidiary of Provident Financial Group,
Inc. (formerly known as Provident Bancorp, Inc.) a Cincinnati based bank holding
company registered under the Bank Holding Company Act. Provident Financial
Group, Inc. operates throughout Ohio, Northern Kentucky, Southeastern Indiana
and Florida. As of September 30, 1998, Provident Financial Group, Inc. had total
assets of $8.3 billion, net loans and leases of $5.6 billion, deposits of
$5.1 billion and total shareholders' equity of $725.1 million. Provident
Financial Group, Inc.'s tier 1 and total risk-based capital ratios were 9.37%
and 12.18%, respectively. For the fiscal year ended December 31, 1997, Provident
Financial Group, Inc. had net earnings of $115.3 million. For the nine months
ended September 30, 1998, Provident Financial Group, Inc. had net earnings of
$94.9 million. Provident represents approximately 92% of Provident Financial
Group, Inc.'s assets.
CREDIT AND UNDERWRITING GUIDELINES
All of the Mortgage Loans were originated by Provident through its branch
offices, direct mail and telemarketing campaigns and, with respect to a small
portion of the Mortgage Loans, referrals from mortgage loan brokers. No fees
were paid by Provident to any broker for the referral of any of the Mortgage
Loans. The following is a description of the underwriting guidelines customarily
employed by Provident with respect to all of its originations of mortgage loans.
Provident believes its underwriting guidelines are consistent with those
utilized by home equity lenders generally.
Provident's underwriting guidelines require an assessment of a prospective
borrower's credit standing and repayment ability, and the value and adequacy of
the mortgaged property as collateral. Each prospective borrower is required to
complete an application that lists assets, liabilities, income, credit history,
employment history and other demographic and personal information. If the
information in the application demonstrates sufficient income and equity in the
mortgaged property to justify the making of the mortgage loan, Provident will
conduct a further credit investigation, including obtaining and reviewing an
independent credit bureau report in order to evaluate the applicant's ability to
repay.
Exceptions to Provident's underwriting guidelines are made when
compensating factors are present. Such factors include the quality and location
of the mortgaged property, length of employment, credit history, prior banking
relationships with Provident, current and pending debt obligations, payment
habits and status of past and currently existing mortgages.
Provident has historically used a debt-to-income ratio to determine whether
a prospective borrower has sufficient monthly income available to support the
payments of principal and interest on the mortgage loan in addition to any
senior mortgage loan payments (including any escrows for property taxes and
hazard insurance premiums) and other monthly credit obligations. The
"debt-to-income ratio" is the ratio of a borrower's total monthly payments to
the borrower's gross monthly income. Since December 1996, Provident has also
utilized a
S-16
<PAGE>
credit scoring procedure as an additional guideline in evaluating applications
for mortgage loans. Generally, applicants must meet a minimum score
predetermined by Provident. Scores are calculated on the basis of a scoring
model developed by Fair Isaacs & Co., which scoring model utilizes data provided
by financial institutions that originate home equity loans.
The debt-to-income ratio is reviewed in conjunction with the prospective
borrower's CLTV (defined below) and credit score. Generally, the debt-to-income
ratio does not exceed fifty percent; however, the ratio for prospective
borrowers with excellent credit scores and additional compensating factors (as
described above) may exceed that amount. A majority of the mortgage loans have
debt-to-income ratios of approximately forty-five percent. The foregoing CLTV
and debt-to-income limitations may be exceeded if one or more of the
compensating factors described above are present. In addition, these limitations
may be exceeded if specific approval is obtained from an authorized officer of
Provident.
The maximum amount permitted to be drawn (the "Credit Limit") under the
revolving credit line loan agreements generally range from a minimum of $5,000
to a maximum of $250,000. For mortgage loans with CLTVs in excess of 80%, the
portion of the Credit Limit which increases the CLTV above 80% is generally
limited to $50,000. These limitations may be exceeded if approval is obtained
from an authorized officer of Provident.
Provident requires a valuation of all mortgaged property representing
security for a loan. The mortgaged property used as collateral to secure the
mortgage loans may be either primary residential (which includes second homes
and vacation homes) or investor owned one to four-family homes, planned unit
developments and condominiums. Commercial or agricultural land is not accepted
as collateral. In some cases, the mortgage loan may be secured by the
owner-occupied residence plus additional collateral.
Provident personnel decide whether property value will be determined by a
full appraisal, a "drive-by" appraisal, an appraisal based on tax assessment
valuation, or an alternative valuation. A "drive-by" appraisal consists of:
(i) the appraiser reviewing appropriate records concerning the tax valuation of
the mortgaged property and the recent sale prices of homes in the same
neighborhood; and (ii) an inspection of the exterior of the mortgaged property.
If such exterior inspection indicates that the mortgaged property is well
maintained, the appraiser determines a market value based upon the available
records; if such exterior inspection reveals signs of improper maintenance,
Provident requires a full appraisal, which includes an interior inspection of
the mortgaged property. In some cases, an alternative valuation has been used to
obtain the value of the property. This valuation is obtained from Trans Union
and consists of an analysis of multiple listing service data, Fannie Mae
appraisal information and tax assessment data to determine the value of the
mortgaged property. An alternative valuation is only used for prospective loans
that meet certain defined credit score and loan amount guidelines.
A current-owner title search of the mortgaged property is also obtained by
Provident in addition to an appraisal. In connection with originating a mortgage
loan which is in a junior lien position, Provident typically assumes that the
first mortgage lender has obtained an ALTA title insurance policy although
Provident does not independently verify whether such title insurance policy has
been obtained. Provident does not require borrowers to obtain title insurance.
Applicants are required to secure property insurance in an amount
sufficient to cover the new loan and any prior mortgage. If the sum of the
outstanding first mortgage, if any, and the mortgage loan originated by
Provident exceeds replacement value, insurance equal to replacement value may be
accepted. Provident ensures that its name and address is properly added to the
"Mortgage Clause" of the insurance policy. In the event Provident's name is
added to a "Loss Payee Clause" and the policy does not provide for written
notice of policy changes or cancellation, an endorsement adding such provision
is obtained.
As a part of Provident's loan application process, each mortgage applicant
is typically required to provide personal financial information. Applicants who
are salaried employees may be required to provide current employment information
in addition to two recent years of employment history and Provident may verify
this information. Verifications are based on the two most recent pay stubs, the
two most recent years' W-2 tax forms or the two most recent years' complete
federal income tax returns (including schedules). Self-employed applicants
should be self-employed in the same field of work for a minimum of two years.
Self-employed
S-17
<PAGE>
applicants are typically required to provide signed copies of complete federal
income tax returns (including schedules) filed for the most recent two years.
Credit reports are obtained from independent credit reporting agencies
reflecting each applicant's credit history. Credit reports usually reflect all
delinquencies of 30 days or more, repossessions, judgments, foreclosures,
garnishments, bankruptcies, divorce actions and other adverse credit events that
can be discovered by a search of public records. If a credit report is obtained
more than 60 days prior to the loan closing, Provident may obtain an updated
credit report to verify that the reported information has not changed.
Verification is obtained of any first mortgage balance if not reported in the
credit report.
Any applicable rescission period must have expired prior to funding any
mortgage loan. The rescission period may not be waived by the applicant except
as permitted by law.
DELINQUENCY AND CHARGE-OFF EXPERIENCE
The following tables set forth Provident's delinquency and charge-off
experience on its servicing portfolio of home equity lines of credit and
closed-end home equity loans similar to and including the Mortgage Loans for the
periods indicated. Provident has serviced all of the Mortgage Loans since their
origination. There can be no assurance that the delinquency and charge-off
experience on the Mortgage Loans will be consistent with the historical
information provided below. Accordingly, this information should not be
considered to reflect the credit quality of the Mortgage Loans included in the
Trust, or a basis of assessing the likelihood, amount of losses on the Mortgage
Loans. The statistical data in the tables set forth below are based on all of
the home equity loans in Provident's servicing portfolio.
Delinquency as a percentage of aggregate principal balance of mortgage
loans serviced for each period would be higher than those shown if a group of
mortgage loans were artificially isolated at a point in time and the information
showed the activity only in that isolated group.
DELINQUENCY EXPERIENCE OF THE MASTER SERVICER'S PORTFOLIO OF
OPEN-END HOME EQUITY LINES OF CREDIT
The following table sets forth information relating to the delinquency
experience of mortgage loans similar to and including the Revolving Credit-Line
Loans for the nine months ended September 30, 1998, and the years ended December
31, 1997, December 31, 1996 and December 31, 1995.
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
---------------------------------------------------------------------- ------------------
DECEMBER 31, 1995 DECEMBER 31, 1996 DECEMBER 31, 1997 SEPTEMBER 30, 1998
---------------------- ---------------------- ---------------------- ------------------
NUMBER DOLLAR NUMBER DOLLAR NUMBER DOLLAR NUMBER DOLLAR
OF LOANS AMOUNT OF LOANS AMOUNT OF LOANS AMOUNT OF LOANS AMOUNT
-------- ------------ -------- ------------ -------- ------------ -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Portfolio (4)................ (3) $160,226,000 7,496 $173,670,000 7,845 $195,838,000 9,233 $226,522,000
Delinquency Percentage (1)
30-59 days................. (3) (3) 0.45% 0.40% 0.25% 0.17% 0.18% 0.09%
60-89 days................. (3) (3) 0.08% 0.11% 0.09% 0.06% 0.06% 0.04%
90 days or more (2)........ (3) (3) 0.21% 0.23% 0.18% 0.16% 0.15% 0.13%
Total........................ (3) 0.25% 0.74% 0.74% 0.52% 0.39% 0.40% 0.26%
</TABLE>
- ------------------
(1) The delinquency percentage represents the number and principal balance of
mortgage loans with monthly payments which are contractually past due.
Mortgage loans for which the related borrower has declared bankruptcy are
not included unless or until such loans are delinquent pursuant to their
repayment terms.
(2) Includes the principal balance of loans currently in process of foreclosure
and loans acquired through foreclosure or deed in lieu of foreclosure.
(3) Insufficient information available.
(4) Dollar amounts rounded to the nearest $1,000.
S-18
<PAGE>
DELINQUENCY EXPERIENCE OF THE MASTER SERVICER'S PORTFOLIO
OF CLOSED-END HOME EQUITY LOANS
The following table sets forth information relating to the delinquency
experience of mortgage loans similar to and including the Closed-End Loans for
the nine months ended September 30, 1998, and the years ended December 31, 1997,
December 31, 1996 and December 31, 1995.
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
-------------------------------------------------------------------- ------------------
DECEMBER 31, 1995 DECEMBER 31, 1996 DECEMBER 31, 1997 SEPTEMBER 30, 1998
--------------------- ---------------------- --------------------- ------------------
NUMBER DOLLAR NUMBER DOLLAR NUMBER DOLLAR NUMBER DOLLAR
OF LOANS AMOUNT OF LOANS AMOUNT OF LOANS AMOUNT OF LOANS AMOUNT(4)
-------- ----------- -------- ------------ -------- ----------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Portfolio (3).................... 4,681 $86,538,000 5,455 $104,444,000 5,262 $92,264,000 4,947 $96,262,000
Delinquency percentage (1)
30-59 days..................... 0.36% 0.19% 0.66% 0.62% 0.67% 0.55% 0.44% 0.29%
60-89 days..................... 0.21% 0.05% 0.31% 0.21% 0.27% 0.17% 0.12% 0.13%
90 days or more (2)............ 0.34% 0.51% 0.46% 0.34% 0.49% 0.46% 0.20% 0.17%
Total............................ 0.91% 0.75% 1.43% 1.17% 1.43% 1.19% 0.77% 0.59%
</TABLE>
- ------------------
(1) The delinquency percentage represents the number and principal balance of
mortgage loans with monthly payments which are contractually past due.
Mortgage loans for which the related borrower has declared bankruptcy are
not included unless or until such loans are delinquent pursuant to their
repayment terms.
(2) includes the principal balance of loans currently in process of foreclosure
and loans acquired through foreclosure or deed in lieu of foreclosure.
(3) Dollar amounts rounded to nearest $1,000.
CHARGE-OFF EXPERIENCE OF THE MASTER SERVICER'S PORTFOLIO
OF OPEN-END HOME EQUITY LINES OF CREDIT
The following table sets forth information relating to the loan charge-off
experience of mortgage loans similar to and including the Revolving Credit-Line
loans for the nine months ended September 30, 1998, and the years ended
December 31, 1997, December 31, 1996 and December 31, 1995.
<TABLE>
<CAPTION>
NINE
YEAR ENDED MONTHS ENDED
--------------------------------------------------------- ------------------
DECEMBER 31, 1995 DECEMBER 31, 1996 DECEMBER 31, 1997 SEPTEMBER 30, 1998
----------------- ----------------- ----------------- ------------------
<S> <C> <C> <C> <C>
Average Portfolio Balance (1)................. $ 148,011,000 $ 166,948,000 $ 184,754,000 $211,180,000
Charge-Offs (2)............................... $ 10,488 $ 162,385 $ 126,763 $ 241,897
Charge-Offs as a % of Average
Portfolio Balance........................... 0.01% 0.10% 0.07% 0.15%(3)
</TABLE>
- ------------------
(1) "Average Portfolio Balance" during the period is the arithmetic average of
the principal balances of the mortgage loans outstanding on the first and
last days of each period. The Average Portfolio Balance has been rounded to
the nearest $1,000.
(2) "Charge-Offs" are amounts which have been determined by Provident to be
uncollectable relating to the mortgage loans for each respective period and
do not include any amount of collections or recoveries received by Provident
subsequent to charge-off dates. Provident's policy regarding charge-offs
provides that mortgaged properties are reappraised when a mortgage loan has
been delinquent for 120 days and based upon such appraisals, a decision is
then made concerning the amounts determined to be uncollectable.
(3) Annualized.
S-19
<PAGE>
CHARGE-OFF EXPERIENCE OF THE MASTER SERVICER'S PORTFOLIO
OF CLOSED-END HOME EQUITY LOANS
The following table sets forth information relating to the loan charge-off
experience of mortgage loans similar to and including the Closed-End Loans for
the nine months ended September 30, 1998, and the years ended December 31, 1997,
December 31, 1996 and December 31, 1995.
<TABLE>
<CAPTION>
NINE
YEAR ENDED MONTHS ENDED
--------------------------------------------------------- ------------------
DECEMBER 31, 1995 DECEMBER 31, 1996 DECEMBER 31, 1997 SEPTEMBER 30, 1998
----------------- ----------------- ----------------- ------------------
DOLLAR DOLLAR DOLLAR DOLLAR
AMOUNT AMOUNT AMOUNT AMOUNT
----------------- ----------------- ----------------- ------------------
<S> <C> <C> <C> <C>
Average Portfolio Balance (1)................... $77,818,000 $95,491,000 $98,354,000 $ 94,263,000
Charge-offs (2)................................. $ 2,661 $ 165,050 $ 197,988 $ 290,842
Charge-offs as a Percentage of Average
Amount Outstanding............................ 0.00% 0.17% 0.20% 0.41%(3)
</TABLE>
- ------------------
(1) "Average Portfolio Balance" during the period is the arithmetic average of
the principal balances of the mortgage loans outstanding on the first and
last days of each period. The Average Portfolio Balance has been rounded to
the nearest $1,000.
(2) "Charge-Offs" are amounts which have been determined by Provident to be
uncollectable relating to mortgage loans for each respective period and do
not include any amount of collections or recoveries received by Provident
subsequent to charge-off dates. Provident's policy regarding charge-offs
provides that mortgaged properties are reappraised when a mortgage loan has
been delinquent for 120 days and based upon such appraisals, a decision is
than made concerning the amounts determined to be uncollectable.
(3) Annualized.
S-20
<PAGE>
DESCRIPTION OF THE MORTGAGE LOANS
GENERAL
As of the Cut-Off Date, the property of the Trust includes, among other
things, a pool of mortgage loans (the "Mortgage Pool") consisting of 7,239
Mortgage Loans with an aggregate Cut-Off Date Pool Principal Balance of
approximately $181,754,829.54. The Mortgage Loans are divided into two loan
groups (the "Loan Groups"). "Loan Group 1" consists of 2,666 Revolving
Credit-Line Loans and 1,586 Closed-End Loans as of the Cut-Off Date (the
"Group 1 Loans"). As of the Cut-Off Date, "Loan Group 2" consists of 1,920
Revolving Credit-Line Loans and 1,067 Closed-End Loans as of the Cut-Off Date
(the "Group 2 Initial Loans"). As of any date, the aggregate Principal Balance
of the Mortgage Loans in a Loan Group is referred to herein as its "Loan Group
Balance".
Set forth below is information as of the Cut-Off Date regarding the
Group 1 Loans and Group 2 Initial Loans. Prior to the Closing Date, Mortgage
Loans may be removed from either Loan Group and other Mortgage Loans with
similar characteristics may be substituted therefor. Provident believes that the
information set forth herein with respect to the Mortgage Loans as presently
constituted is representative of the Mortgage Loans as they will be constituted
at the Closing Date, although certain characteristics of such Mortgage Loans may
vary but any such variance will not be material.
MORTGAGE LOAN TERMS
Revolving Credit-Line Loans. The adjustable rate revolving home equity
lines of credit (the "Revolving Credit-Line Loans") were originated pursuant to
loan agreements (the "Credit Line Agreements"). Under the Credit Line
Agreements, the borrowers may receive advances (an "Additional Balance" or a
"Draw") at any time during a specified period (the "Draw Period"); provided,
however, neither the Trust nor the Indenture Trustee shall be obligated or
permitted to fund any such Draws. The minimum amount of any Draw on a One-Year
Draw Period Loan (as defined below) that a borrower may receive is $100. There
is no minimum Draw for a Ten-Year Draw Period Loan (as defined below). The
maximum amount of each Draw with respect to any Revolving Credit-Line Loan is
equal to the excess, if any, of the Credit Limit over the Principal Balance
outstanding under such Credit Line Agreement at the time of such Draw.
Approximately 32.03% (by Cut-Off Date Loan Group 1 Principal Balance) of
the Group 1 Loans and approximately 39.60% (by Cut-Off Date Loan Group 2 Initial
Principal Balance) of the Group 2 Initial Loans (together, the "One-Year Draw
Period Loans") have original terms of six years, consisting of a Draw Period of
one year and an "Amortization Period" of five years. However, the Draw Period
under each Credit Line Agreement for the One-Year Draw Period Loans
automatically renews for an unlimited number of successive terms of one year
each unless Provident notifies the borrower of its election to terminate its
obligation to make Draws. After the Draw Period has so ended, the five-year
"Amortization Period" begins during which the borrower is obligated to make
monthly payments equal to the sum of 1/60 of the unpaid balance of the Mortgage
Loan at the end of the Draw Period plus accrued finance charges. Minimal monthly
principal payments may be required to be made by the borrowers during the Draw
Period, but such payments will not be sufficient to fully amortize the Mortgage
Loan during the Draw Period. Notwithstanding the foregoing, Provident has agreed
in the Sale and Servicing Agreement not to terminate its obligation to make
Draws with respect to any Mortgage Loan during the 48-month period beginning on
the Closing Date, unless the borrower is in default of any material obligation
under the related Credit Line Agreement, the appraised value of the related
Mortgaged Property has declined significantly or Provident reasonably believes
the borrower will be unable to fulfill its payment obligations under the Credit
Line Agreement because of a material change in the borrower's financial
circumstances.
Approximately 30.67% (by Cut-Off Date Loan Group 1 Principal Balance) of
the Group 1 Loans and approximately 28.04% (by Cut-Off Date Loan Group 2 Initial
Principal Balance) of the Group 2 Initial Loans (together, the "Ten-Year Draw
Period Loans") have original terms of 20 years, consisting of a Draw Period of
10 years and an Amortization Period of 10 years. During the Amortization Period,
the borrower is obligated to make monthly payments equal to the sum of 1/120 of
the unpaid balance of the Mortgage Loan at the end of the Draw Period plus
accrued finance charges. Minimal monthly principal payments may be required to
be made by
S-21
<PAGE>
the borrowers during the Draw Period, but such payments will not be sufficient
to fully amortize the Mortgage Loan during the Draw Period.
The borrower's right to make a Draw under a Revolving Credit-Line Loan may
be suspended, or the Credit Limit may be reduced under a number of
circumstances, including, but not limited to, a material adverse change in the
borrower's financial circumstances, a significant decline in the appraised value
of the Mortgaged Property or a default by the borrower of any material
obligation under the Credit Line Agreement. Generally, such suspension or
reduction will not affect the payment terms for previously drawn balances. In
the event of default under a Revolving Credit-Line Loan, the right of the
borrower to make a Draw may be terminated and the entire outstanding Principal
Balance of such Revolving Credit-Line Loan may be declared immediately due and
payable. A "default" includes, but is not limited to, the borrower's failure to
make any payment as required, any action or inaction by the borrower that
adversely affects the Mortgaged Property or the rights in the Mortgaged Property
or any fraud or material misrepresentation by the borrower in connection with
the Revolving Credit-Line Loan. The Credit Limit may also be increased, upon
completion of satisfactory underwriting review, as described below.
Interest (the "Finance Charge") accrues on each Revolving Credit-Line Loan,
payable monthly, on the related average daily outstanding Principal Balance for
each Billing Cycle at a rate (each, a "Loan Rate"). The Loan Rate for each
Billing Cycle is adjusted quarterly as of the first day of January, April, July
and October (except for the Ten-Year Draw Period Loans which are adjusted as of
the first day of each month) and is equal to the Index on the last day of the
immediately preceding month (or, for the Ten-Year Draw Period Loans, the
twentieth day of the prior month) (such date, the "Adjustment Date") plus a
fixed percentage amount (the "Margin") specified in the related Credit Line
Agreement, computed on the basis of a 365 day year times actual days elapsed.
The "Billing Cycle" for each Revolving Credit-Line Loan is the calendar month
preceding each Due Date.
The "Due Date" for payments under each Revolving Credit-Line Loan is the
fifth, tenth, fifteenth, twentieth, twenty-fifth or thirtieth day of each month.
Certain Revolving Credit-Line Loans originated in June 1998 and thereafter
bear interest at a promotional rate of either 6.99% or 7.99% per annum for the
first six months following the first Draw thereunder. After the expiration of
the six-month promotional period, the interest rate on such Revolving
Credit-Line Loans will be the Loan Rate described above.
The Finance Charge accrued each month with respect to each Revolving
Credit-Line Loan is calculated based on the "Prime rate" as published in the
"Money Rates" table in The Wall Street Journal (the "Index"). The Margins for
the Group 1 Revolving Credit-Line Loans as of the Cut-Off Date ranged from
- -1.00% to 6.25% and the weighted average Margins as of the Cut-Off Date for the
Group 1 Revolving Credit-Line Loans was 0.59%. The Margins for the Group 2
Initial Revolving Credit-Line Loans as of the Cut-Off Date ranged from -0.75% to
6.25% and the weighted average Margins as of the Cut-Off Date for the Group 2
Initial Revolving Credit-Line Loans was 0.63%. Substantially all of the
Revolving Credit-Line Loans are subject to a maximum Loan Rate of at least 19%
per annum. The Revolving Credit-Line Loans have a minimum Loan Rate equal to the
Margin. No Revolving Credit-Line Loan is subject to a periodic rate cap.
Payments made by or on behalf of the borrower for each Revolving
Credit-Line Loan are generally required to be applied, first, to any unpaid
Finance Charges and second, to the Principal Balance outstanding with respect to
such Mortgage Loan.
Revolving Credit-Line Loans are subject to a $250 termination fee to the
extent the related borrower prepays such loan within either a three or five year
period following origination, as indicated in the related Credit Line Agreement.
Closed-End Loans. The closed-end home equity loans (the "Closed-End Loans")
are evidenced by installment loan contracts (the "Mortgage Notes") and accrue
interest at both fixed and adjustable rates of interest and are secured by deeds
of trust or mortgages on the related Mortgaged Properties. Approximately 36.31%
(by Cut-Off Date Loan Group 1 Principal Balance) of the Group 1 Loans and
approximately 31.05% (by Cut-Off Date Loan Group 2 Initial Principal Balance) of
the Group 2 Initial Loans bear interest at Loan Rates that are fixed. The
Closed-End Loans have Due Dates that occur on different days during each month.
Interest is
S-22
<PAGE>
computed on the "simple interest basis" and charged to the borrower on the
outstanding Principal Balance of the related Closed-End Loan based on the number
of days elapsed between the date through which interest was last paid on the
Closed-End Loan through receipt of the borrower's most current monthly payment,
and the portions of each monthly payment that are allocated to interest and
principal are adjusted based on the actual amount of interest charged on such
basis. Interest accrues on the Closed-End Loans during the calendar month
preceding each Due Date, computed on the basis of a 365 day year times actual
days elapsed.
Approximately 1.00% (by Cut-Off Date Loan Group 1 Principal Balance) of the
Group 1 Loans and approximately 1.30% (by Cut-Off Date Loan Group 2 Initial
Principal Balance) of the Group 2 Initial Loans bear interest at a Loan Rate
based on the Index plus a Margin, adjusted quarterly. The Adjustment Date for
each such loan is the first day of January, April, July or October based upon
the Index as of the last day of the prior month. In connection with each
adjustment, the monthly payment is adjusted to an amount sufficient to fully
amortize the mortgage loan over its remaining term. The Margins for the
adjustable rate Group 1 Closed-End Loans as of the Cut-Off Date ranged from
0.50% to 1.50% and the weighted average Margins as of the Cut-Off Date for the
adjustable rate Group 1 Closed-End Loans was 0.91%. The Margins for the
adjustable rate Group 2 Initial Closed-End Loans as of the Cut-Off Date ranged
from -0.50% to 2.50% and the weighted average Margins as of the Cut-Off Date for
the adjustable rate Group 2 Initial Closed-End Loans was 1.26%. Substantially
all of the adjustable rate Closed-End Loans are subject to a maximum Loan Rate
of at least 18% per annum. The adjustable rate Closed-End Loans have a minimum
Loan Rate equal to the Margin. No adjustable rate Closed-End Loan is subject to
a periodic rate cap.
LOAN GROUP 1 STATISTICS
Unless otherwise specified, all percentages set forth herein with respect
to the Group 1 Loans are percentages of the Cut-Off Date Loan Group 1 Principal
Balance. All weighted averages described below are weighted on the basis of the
Cut-Off Date Principal Balance of the Group 1 Loans included in the Trust unless
otherwise indicated.
Approximately 37.31% of the Group 1 Loans are Closed-End Loans (such
Mortgage Loans, the "Group 1 Closed-End Loans"). 28 Group 1 Loans (representing
approximately 1.00% of the Cut-Off Date Loan Group 1 Principal Balance) accrue
interest at an adjustable rate. Approximately 62.69% of the Group 1 Loans are
Revolving Credit-Line Loans (such Mortgage Loans, the "Group 1 Revolving
Credit-Line Loans").
All Group 1 Loans were originated between May 1987 and November 1998. The
aggregate Cut-Off Date Principal Balance of the Group 1 Loans was
$101,010,425.99 (the "Cut-Off Date Loan Group 1 Principal Balance"), which is
equal to the aggregate Principal Balances of the Group 1 Loans as of the close
of business on December 1, 1998 (the "Cut-Off Date"). Approximately 25.66% of
the Group 1 Loans were secured by a first Mortgage on the related Mortgaged
Property and 74.34% of the Group 1 Loans were secured by second Mortgages. No
Group 1 Loan had a Combined Loan-to-Value Ratio greater than 101%. Approximately
63.96%, 14.40% and 5.74% of the Group 1 Loans were secured by Mortgaged
Properties in Ohio, Kentucky and Pennsylvania, respectively. Approximately 0.06%
of the Group 1 Loans were contractually delinquent 30 days or more. No Group 1
Loan was delinquent more than 60 days as of the Cut-Off Date.
With respect to each Group 1 Loan in the first lien position, the maximum
original principal balance was $227,150. No Group 1 Loan which was secured by a
second lien on the related Mortgaged Property had an original principal balance
of more than $113,575. With respect to each Group 1 Loan in the second lien
position at origination, the sum of the unpaid principal balances of the first
and second liens on the related Mortgaged Property as of such origination did
not exceed $227,150.
The minimum Principal Balance of the Group 1 Loans as of the Cut-Off Date
was $0.02, the maximum Principal Balance of the Group 1 Loans as of the Cut-Off
Date was $152,852.17, and the average Principal Balance of the Group 1 Loans as
of the Cut-Off Date was $23,755.98. As of the Cut-Off Date, the weighted average
Loan Rate with respect to the Group 1 Revolving Credit-Line Loans and the
Group 1 Closed-End Loans is 8.31% per annum and 9.28% per annum, respectively.
The average Credit Limit Utilization Rate (defined below) of the Group 1
Revolving Credit-Line Loans was 53.77% as of the Cut-Off Date. The weighted
average Combined Loan-to-Value Ratio of the Group 1 Loans was 77.21% as of the
Cut-Off Date and the weighted average junior mortgage ratio of the Group 1
Revolving Credit-Line Loans (computed by dividing the greater of
S-23
<PAGE>
the Credit Limit and the Cut-Off Date Principal Balance for each Group 1
Revolving Credit-Line Loan, provided such Group 1 Revolving Credit-Line Loan was
in a junior lien position, by the sum of such Credit Limit or Cut-Off Date
Principal Balance, as applicable and the outstanding balances at the time such
Group 1 Revolving Credit-Line Loan was originated of all senior mortgage loans
affecting the Mortgaged Property) was approximately 44.04%.
The "Combined Loan-to-Value Ratio" or "CLTV" of each Revolving Credit-Line
Loan is the ratio, expressed as a percentage, of (a) the sum of (i) the greater
of the Credit Limit and the current balance as of the Cut-Off Date and (ii) the
principal balance of any senior mortgage loan as of the origination of such
Mortgage Loan, over (b) the value (based on an appraised value or other
acceptable valuation method) for the related Mortgaged Property determined in
the origination of such Mortgage Loan. The "Combined Loan-to-Value Ratio" or
"CLTV" of each Closed-End Loan is the ratio, expressed as a percentage, of
(i) the sum of (a) the original principal balance of such Closed-End Loan at the
date of origination plus (b) the remaining principal balance of the senior
lien(s), if any, at the date of origination of such Closed-End Loan divided by
(ii) the value of the related Mortgaged Property, based upon the appraisal made
at the time of origination of such Closed-End Loan or other acceptable valuation
method. The average "Credit Limit Utilization Rate" of each Revolving
Credit-Line Loan as of the Cut-Off Date is determined by dividing the sum of the
Cut-Off Date Principal Balance of such Mortgage Loan by the sum of the Credit
Limit of such Mortgage Loans.
Provident has computed the following additional information as of the
Cut-Off Date with respect to the Group 1 Loans. The following tables are based
on the Cut-Off Date Principal Balances of all Group 1 Loans.
S-24
<PAGE>
LOAN GROUP 1
COMBINED LOAN-TO-VALUE RATIOS
<TABLE>
<CAPTION>
PERCENT BY
NUMBER OF CUT-OFF DATE
GROUP 1 CUT-OFF DATE LOAN GROUP 1
COMBINED LOAN-TO-VALUE RATIOS LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------------------------------------------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
[Less than or equal to] 50.00%............................ 517 $ 10,986,201.80 10.88%
50.01%- 55.00%............................................ 103 2,962,927.59 2.93
55.01%- 60.00%............................................ 130 3,545,411.54 3.51
60.01%- 65.00%............................................ 138 3,462,388.77 3.43
65.01%- 70.00%............................................ 169 4,174,162.55 4.13
70.01%- 75.00%............................................ 248 6,348,230.11 6.28
75.01%- 80.00%............................................ 1,100 26,656,798.55 26.39
80.01%- 85.00%............................................ 308 7,925,596.05 7.85
85.01%- 90.00%............................................ 386 8,319,558.43 8.24
90.01%- 95.00%............................................ 289 6,455,351.07 6.39
95.01%-100.00%............................................ 642 15,033,486.17 14.88
100.01%-105.00%............................................ 222 5,140,313.36 5.09
------ --------------- -------
Total................................................. 4,252 $101,010,425.99 100.00%
------ --------------- -------
------ --------------- -------
</TABLE>
LOAN GROUP 1
GEOGRAPHIC DISTRIBUTION(1)
<TABLE>
<CAPTION>
PERCENT BY
NUMBER OF CUT-OFF DATE
GROUP 1 CUT-OFF DATE LOAN GROUP 1
STATE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ---------------------------------------------------------------- --------- ----------------- -----------------
<S> <C> <C> <C>
Ohio............................................................ 2,750 $ 64,607,389.36 63.96%
Kentucky........................................................ 687 14,541,944.24 14.40
Pennsylvania.................................................... 200 5,801,085.17 5.74
Michigan........................................................ 181 5,000,105.77 4.95
Illinois........................................................ 141 3,895,964.15 3.86
Indiana......................................................... 153 3,685,782.46 3.65
Florida......................................................... 64 1,494,047.86 1.48
West Virginia................................................... 30 928,300.79 0.92
Texas........................................................... 23 551,733.43 0.55
North Carolina.................................................. 10 258,238.44 0.26
Georgia......................................................... 6 122,113.55 0.12
Minnesota....................................................... 1 40,075.00 0.04
Missouri........................................................ 2 30,935.42 0.03
California...................................................... 1 15,298.68 0.02
Wisconsin....................................................... 1 14,622.90 0.01
Kansas.......................................................... 1 12,467.65 0.01
Connecticut..................................................... 1 10,321.12 0.01
----- --------------- -------
Total...................................................... 4,252 $101,010,425.99 100.00%
----- --------------- -------
----- --------------- -------
</TABLE>
- ------------------
(1) Geographic location is determined by address of Mortgaged Property securing
each Group 1 Loan.
S-25
<PAGE>
LOAN GROUP 1
PRINCIPAL BALANCES
<TABLE>
<CAPTION>
PERCENT BY
NUMBER OF CUT-OFF DATE
GROUP 1 CUT-OFF DATE LOAN GROUP 1
PRINCIPAL BALANCES LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------------------------------------------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
$ 0.01-$ 2,500.00.................................... 129 $ 132,380.40 0.13%
$ 2,500.01-$ 5,000.00.................................... 203 784,812.47 0.78
$ 5,000.01-$ 7,500.00.................................... 256 1,611,532.53 1.60
$ 7,500.01-$ 10,000.00.................................... 332 2,933,778.57 2.90
$ 10,000.01-$ 15,000.00.................................... 647 8,137,960.26 8.06
$ 15,000.01-$ 20,000.00.................................... 601 10,545,709.65 10.44
$ 20,000.01-$ 30,000.00.................................... 946 23,468,186.27 23.23
$ 30,000.01-$ 40,000.00.................................... 511 17,712,100.81 17.53
$ 40,000.01-$ 50,000.00.................................... 303 13,634,987.34 13.50
$ 50,000.01-$ 60,000.00.................................... 145 7,907,187.00 7.83
$ 60,000.01-$ 70,000.00.................................... 69 4,506,511.55 4.46
$ 70,000.01-$ 80,000.00.................................... 54 4,034,815.59 3.99
$ 80,000.01-$ 90,000.00.................................... 19 1,609,091.10 1.59
$ 90,000.01-$100,000.00.................................... 20 1,887,943.60 1.87
$100,000.01-$150,000.00.................................... 15 1,798,501.68 1.78
$150,000.01-$200,000.00.................................... 2 304,927.17 0.30
------ --------------- -------
Total................................................. 4,252 $101,010,425.99 100.00%
------ --------------- -------
------ --------------- -------
</TABLE>
LOAN GROUP 1 REVOLVING CREDIT-LINE LOANS
CREDIT LIMITS
<TABLE>
<CAPTION>
PERCENT BY
NUMBER CUT-OFF DATE
OF GROUP 1 REVOLVING CUT-OFF DATE LOAN GROUP 1
CREDIT LIMITS CREDIT-LINE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------------------------------------------ -------------------- ----------------- -----------------
<S> <C> <C> <C>
$ 0.01-$ 2,500.00............................... 1 $ 272.35 0.00%
$ 2,500.01-$ 5,000.00............................... 14 55,413.06 0.09
$ 5,000.01-$ 7,500.00............................... 19 89,601.65 0.14
$ 7,500.01-$ 10,000.00............................... 50 338,471.09 0.53
$ 10,000.01-$ 15,000.00............................... 169 1,591,759.04 2.51
$ 15,000.01-$ 20,000.00............................... 251 3,227,106.51 5.10
$ 20,000.01-$ 30,000.00............................... 493 9,145,890.04 14.44
$ 30,000.01-$ 40,000.00............................... 384 8,620,280.97 13.61
$ 40,000.01-$ 50,000.00............................... 535 14,142,818.61 22.33
$ 50,000.01-$ 60,000.00............................... 195 6,055,113.81 9.56
$ 60,000.01-$ 70,000.00............................... 145 4,655,014.59 7.35
$ 70,000.01-$ 80,000.00............................... 161 5,422,174.68 8.56
$ 80,000.01-$ 90,000.00............................... 66 2,502,022.24 3.95
$ 90,000.01-$100,000.00............................... 119 4,354,612.71 6.88
$100,000.01-$150,000.00............................... 56 2,585,810.62 4.08
$150,000.01-$200,000.00............................... 6 435,722.65 0.69
$200,000.01-$250,000.00............................... 2 103,291.09 0.16
------ --------------- -------
Total............................................ 2,666 $ 63,325,375.71 100.00%
------ --------------- -------
------ --------------- -------
</TABLE>
S-26
<PAGE>
LOAN GROUP 1 REVOLVING CREDIT-LINE LOANS
CREDIT LIMIT UTILIZATION RATES
<TABLE>
<CAPTION>
NUMBER OF PERCENT BY
GROUP 1 CUT-OFF DATE
REVOLVING CUT-OFF DATE LOAN GROUP 1
CREDIT LIMIT UTILIZATION RATES CREDIT-LINE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ---------------------------------------------------------- ----------------- ----------------- -----------------
<S> <C> <C> <C>
0.00%- 10.00%........................................... 213 $ 599,005.02 0.95%
10.00%- 20.00%........................................... 208 1,801,843.67 2.85
20.01%- 30.00%........................................... 196 2,671,239.65 4.22
30.01%- 40.00%........................................... 229 4,327,409.50 6.83
40.01%- 50.00%........................................... 199 4,247,513.20 6.71
50.01%- 60.00%........................................... 191 4,425,448.67 6.99
60.01%- 70.00%........................................... 211 5,428,139.70 8.57
70.01%- 80.00%........................................... 206 6,182,879.08 9.76
80.01%- 85.00%........................................... 124 3,985,454.66 6.29
85.01%- 90.00%........................................... 144 4,535,445.05 7.16
90.01%- 95.00%........................................... 199 6,445,570.57 10.18
95.01%-100.00%........................................... 494 16,989,391.36 26.83
100.01%-105.00%........................................... 52 1,686,035.58 2.66
----- --------------- -------
Total................................................ 2,666 $ 63,325,375.71 100.00%
----- --------------- -------
----- --------------- -------
</TABLE>
LOAN GROUP 1
LOAN AGE
<TABLE>
<CAPTION>
PERCENT BY
NUMBER OF CUT-OFF DATE
GROUP 1 CUT-OFF DATE LOAN GROUP 1
LOAN AGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ---------------------------------------------------------------- --------- ----------------- -----------------
<S> <C> <C> <C>
0 months.................................................... 306 $ 7,855,251.59 7.78%
1-12 months.................................................... 3,336 81,567,694.02 80.75
13-24 months.................................................... 447 8,621,148.13 8.53
25-36 months.................................................... 121 1,944,150.08 1.92
37-48 months.................................................... 9 282,277.35 0.28
49-60 months.................................................... 9 224,195.64 0.22
61-72 months.................................................... 10 148,701.10 0.15
73-84 months.................................................... 6 66,136.57 0.07
Greater than or equal to 85 months.............................. 8 300,871.51 0.30
----- --------------- -------
Total...................................................... 4,252 $101,010,425.99 100.00%
----- --------------- -------
----- --------------- -------
</TABLE>
S-27
<PAGE>
LOAN GROUP 1 CLOSED-END LOANS
REMAINING MONTHS TO STATED MATURITY
<TABLE>
<CAPTION>
PERCENT BY
NUMBER OF CUT-OFF DATE
REMAINING TERM TO GROUP 1 CUT-OFF DATE LOAN GROUP 1
STATED MATURITY LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------------------------------------------------ -------------- ----------------- -----------------
<S> <C> <C> <C>
1- 12..................................................... 7 $ 32,712.31 0.09%
13- 24..................................................... 27 135,580.59 0.36
25- 36..................................................... 56 464,024.82 1.23
37- 48..................................................... 96 1,115,776.29 2.96
49- 60..................................................... 170 2,282,945.53 6.06
61- 72..................................................... 42 716,907.09 1.90
73- 84..................................................... 65 1,336,124.27 3.55
85- 96..................................................... 33 815,415.26 2.16
97-108..................................................... 164 3,766,821.51 10.00
109-120..................................................... 500 11,744,061.22 31.16
121-132..................................................... 2 66,307.17 0.18
133-144..................................................... 1 44,732.00 0.12
145-156..................................................... 1 24,567.39 0.07
157-168..................................................... 15 501,305.84 1.33
169-180..................................................... 329 10,181,228.27 27.02
181-192..................................................... 1 35,060.85 0.09
229-240..................................................... 77 4,421,479.87 11.73
------ --------------- -------
Total.................................................. 1,586 $ 37,685,050.28 100.00%
------ --------------- -------
------ --------------- -------
</TABLE>
S-28
<PAGE>
LOAN GROUP 1 REVOLVING CREDIT-LINE LOANS
LOAN RATES
<TABLE>
<CAPTION>
PERCENT BY
NUMBER OF CUT-OFF DATE
GROUP 1 CUT-OFF DATE LOAN GROUP 1
LOAN RATES LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------------------------------------------------------- --------- ----------------- -----------------
<S> <C> <C> <C>
5.501%- 6.000%.................................................. 1 $ 39,419.94 0.06%
6.501%- 7.000%.................................................. 510 12,467,502.79 19.69
7.001%- 7.500%.................................................. 101 2,688,682.84 4.25
7.501%- 8.000%.................................................. 762 19,646,641.73 31.02
8.001%- 8.500%.................................................. 341 8,706,812.55 13.75
8.501%- 9.000%.................................................. 326 8,638,513.56 13.64
9.001%- 9.500%.................................................. 306 5,664,760.54 8.95
9.501%-10.000%.................................................. 53 939,144.63 1.48
10.001%-10.500%.................................................. 66 1,110,243.91 1.75
10.501%-11.000%.................................................. 34 649,429.89 1.03
11.001%-11.500%.................................................. 42 702,432.85 1.11
11.501%-12.000%.................................................. 110 1,879,796.96 2.97
12.001%-12.500%.................................................. 1 30,834.71 0.05
12.501%-13.000%.................................................. 10 104,129.84 0.16
13.501%-14.000%.................................................. 3 57,028.97 0.09
----- --------------- -------
Total....................................................... 2,666 $ 63,325,375.71 100.00%
----- --------------- -------
----- --------------- -------
</TABLE>
LOAN GROUP 1 REVOLVING CREDIT-LINE LOANS(1)
MARGINS
<TABLE>
<CAPTION>
PERCENT BY
NUMBER OF CUT-OFF DATE
GROUP 1 CUT-OFF DATE LOAN GROUP 1
MARGIN LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------------------------------------------------------- --------- ----------------- -----------------
<S> <C> <C> <C>
- -1.499%- -1.000%................................................. 1 $ 15,495.26 0.02%
- -0.999%- -0.500%................................................. 119 3,121,286.98 4.93
- -0.499%- 0.000%................................................. 1,110 28,824,064.42 45.52
0.001%- 0.500%................................................. 535 14,893,939.94 23.52
0.501%- 1.000%................................................. 416 7,784,644.85 12.29
1.001%- 1.500%................................................. 62 1,119,831.95 1.77
1.501%- 2.000%................................................. 86 1,279,422.54 2.02
2.001%- 2.500%................................................. 52 1,246,455.99 1.97
2.501%- 3.000%................................................. 63 1,188,496.23 1.88
3.001%- 3.500%................................................. 127 2,174,232.04 3.43
3.501%- 4.000%................................................. 35 744,510.83 1.18
4.001%- 4.500%................................................. 13 233,341.72 0.37
4.501%- 5.000%................................................. 10 104,129.84 0.16
5.001%- 5.500%................................................. 6 83,033.93 0.13
5.501%- 6.000%................................................. 3 57,028.97 0.09
6.001%- 6.500%................................................. 28 455,460.22 0.72
----- --------------- -------
Total....................................................... 2,666 $ 63,325,375.71 100.00%
----- --------------- -------
----- --------------- -------
</TABLE>
- ------------------
(1) Each Group 1 Revolving Credit-Line Loan is subject to a minimum Loan Rate
equal to the greater of zero and the Margin.
S-29
<PAGE>
LOAN GROUP 1 CLOSED-END LOANS
LOAN RATES
<TABLE>
<CAPTION>
PERCENT BY
NUMBER OF CUT-OFF DATE
GROUP 1 CUT-OFF DATE LOAN GROUP 1
LOAN RATES LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------------------------------------------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
7.001%- 7.500%............................................ 10 $ 393,009.42 1.04%
7.501%- 8.000%............................................ 148 6,474,855.41 17.18
8.001%- 8.500%............................................ 141 3,177,652.75 8.43
8.501%- 9.000%............................................ 258 6,309,530.09 16.74
9.001%- 9.500%............................................ 306 5,609,849.81 14.89
9.501%-10.000%............................................ 442 9,618,769.89 25.52
10.001%-10.500%............................................ 162 3,186,834.84 8.46
10.501%-11.000%............................................ 66 1,569,772.73 4.17
11.001%-11.500%............................................ 23 773,907.66 2.05
11.501%-12.000%............................................ 24 480.344.73 1.27
12.001%-12.500%............................................ 2 29,708.78 0.08
12.501%-13.000%............................................ 4 60,814.17 0.16
------ --------------- -------
Total................................................. 1,586 $ 37,685,050.28 100.00%
------ --------------- -------
------ --------------- -------
</TABLE>
S-30
<PAGE>
LIEN PRIORITY
LOAN GROUP 1
<TABLE>
<CAPTION>
PERCENT BY
NUMBER OF CUT-OFF DATE
GROUP 1 CUT-OFF DATE LOAN GROUP 1
LIEN PRIORITY LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ---------------------------------------------------------------- --------- ----------------- -----------------
<S> <C> <C> <C>
1............................................................... 854 $ 25,923,055.90 25.66%
2............................................................... 3,398 75,087,370.09 74.34
----- --------------- -------
Total...................................................... 4,252 $101,010,425.99 100.00%
----- --------------- -------
----- --------------- -------
</TABLE>
LOAN GROUP 1 SAMPLE POOL STATISTICS
Certain information concerning the Group 1 Loans is not readily available,
including information with respect to (i) the property type and (ii) occupancy
status. As a result, in order to compile certain of the data in this section
information was manually collected from loan files constituting a random sample
(the "Group 1 Sample Pool") of 461 Group 1 Loans (the "Sample Pool Group 1
Loans"), constituting 10.56% of the Group 1 Loans by Cut-Off Date Loan Group 1
Principal Balance. ALL AVERAGES AND TOTALS SET FORTH IN THIS SECTION HAVE BEEN
CALCULATED BASED UPON THE SAMPLE POOL GROUP 1 LOANS AS OF THE CUT-OFF DATE. NO
ASSURANCE CAN BE GIVEN THAT THE CHARACTERISTICS OF THE SAMPLE POOL GROUP 1 LOANS
ARE REPRESENTATIVE OF THE GROUP 1 LOANS IN THE AGGREGATE.
The Sample Pool Group 1 Loans consisted of 461 loans with an aggregate
Cut-Off Date Principal Balance of $10,669,044.07 (the "Cut-Off Date Loan
Group 1 Sample Pool Balance"). The Cut-Off Date Principal Balances of the Sample
Pool Group 1 Loans ranged from $50.00 to $121,497.26, and the average Cut-Off
Date Principal Balance of the Sample Pool Group 1 Loans was $23,143.26. The sum
of certain percentages set forth in the following tables may not equal exactly
100% due to differences in the rounding of percentages.
Set forth below is a description of certain characteristics of the Sample
Pool Group 1 Loans.
SAMPLE POOL GROUP 1 LOANS
PROPERTY TYPE
<TABLE>
<CAPTION>
PERCENT BY
CUT-OFF DATE
NUMBER OF CUT-OFF DATE LOAN GROUP 1
PROPERTY TYPE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------------------------------------------------ -------------- ----------------- -----------------
<S> <C> <C> <C>
Single-Family............................................... 440 $ 10,216,383.57 95.76%
Condominium................................................. 8 223,643.93 2.10
Two-to-Four Family.......................................... 9 186,661.66 1.75
Other....................................................... 4 42,354.91 0.40
---- --------------- -------
Total.................................................. 461 $ 10,669,044.07 100.00%
---- --------------- -------
---- --------------- -------
</TABLE>
SAMPLE POOL GROUP 1 LOANS
OWNER OCCUPANCY STATUS
<TABLE>
<CAPTION>
PERCENT BY
CUT-OFF DATE
NUMBER OF CUT-OFF DATE LOAN GROUP 1
OWNER OCCUPANCY STATUS MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------------------------------------------------ -------------- ----------------- -----------------
<S> <C> <C> <C>
Owner Occupied.............................................. 457 $ 10,585,711.17 99.22%
Non-Owner Occupied.......................................... 4 83,332.90 0.78
---- --------------- -------
Total.................................................. 461 $ 10,669,044.07 100.00%
---- --------------- -------
---- --------------- -------
</TABLE>
S-31
<PAGE>
LOAN GROUP 2 STATISTICS
Unless otherwise specified, all percentages set forth herein with respect
to the Group 2 Initial Loans are percentages as of the Cut-Off Date Loan
Group 2 Initial Principal Balance. All weighted averages described below are
weighted on the basis of the Cut-Off Date Principal Balance of the Group 2
Initial Loans included in the Trust unless otherwise indicated.
Approximately 32.35% of the Group 2 Initial Loans are Closed-End Loans
(such Mortgage Loans, the "Group 2 Initial Closed-End Loans"). 28 Group 2
Initial Loans (representing approximately 1.30% of the Cut-Off Date Loan
Group 2 Initial Principal Balance) accrue interest at an adjustable rate.
Approximately 67.65% of the Group 2 Initial Loans are Revolving Credit-Line
Loans (such Mortgage Loans, the "Group 2 Initial Revolving Credit-Line Loans").
All Group 2 Initial Loans were originated between December 1986 and
November 1998. The aggregate Cut-Off Date Principal Balance of the Group 2
Initial Loans was $80,744,403.55 (the "Cut-Off Date Loan Group 2 Initial
Principal Balance"), which is equal to the aggregate Principal Balances of the
Group 2 Initial Loans as of the close of business on the Cut-Off Date.
Approximately 20.06% of a subset of the Group 2 Initial Loans were secured by a
first Mortgage on the related Mortgaged Property and 79.94% of a subset of the
Group 2 Initial Loans were secured by second Mortgages. No Group 2 Initial Loan
had a Combined Loan-to-Value Ratio greater than 101%. Approximately 63.58%,
16.00% and 4.93% of the Group 2 Initial Loans were secured by Mortgaged
Properties in Ohio, Kentucky and Michigan, respectively. Approximately 0.07% of
the Group 2 Initial Loans were contractually delinquent 30 days or more. No
Group 2 Initial Loan was delinquent more than 60 days as of the Cut-Off Date.
The minimum Principal Balance of the Group 2 Initial Loans as of the
Cut-Off Date was $20.00, the maximum Principal Balance of the Group 2 Initial
Loans as of the Cut-Off Date was $400,000.00, and the average Principal Balance
of the Group 2 Initial Loans as of the Cut-Off Date was $27,031.94. As of the
Cut-Off Date, the weighted average Loan Rate with respect to the Group 2 Initial
Revolving Credit-Line Loans and Group 2 Initial Closed-End Loans was 8.40% per
annum and 9.25% per annum, respectively. The average Credit Limit Utilization
Rate of the Group 2 Initial Revolving Credit-Line Loans was 54.93% as of the
Cut-Off Date. The weighted average Combined Loan-to-Value Ratio of the Group 2
Initial Loans was 78.57% as of the Cut-Off Date and the weighted average junior
mortgage ratio of the Group 2 Initial Revolving Credit-Line Loans (computed by
dividing the greater of the Credit Limit and the Cut-Off Date Principal Balance
for each Group 2 Initial Revolving Credit-Line Loan, provided such Group 2
Initial Revolving Credit-Line Loan was in a junior lien position, by the sum of
such Credit Limit or Cut-Off Date Principal Balance, as applicable and the
outstanding balances at the time such Group 2 Initial Revolving Credit-Line Loan
was originated of all senior mortgage loans affecting the Mortgaged Property)
was approximately 41.15%
Approximately 1.65% of the Group 2 Initial Loans provide for monthly
payments insufficient to amortize such loans by maturity and require balloon
payments at maturity (collectively "Balloon Loans"). The amortization terms on
the Balloon Loans included in Loan Group 2 ranged from 38 months to 240 months
and had a weighted average of 134 months as of the Cut-Off Date.
Provident has computed the following additional information as of the
Cut-Off Date with respect to the Group 2 Initial Loans. The following tables are
based on the Cut-Off Date Principal Balances of all Group 2 Initial Loans.
S-32
<PAGE>
LOAN GROUP 2
INITIAL MORTGAGE LOANS
COMBINED LOAN-TO-VALUE RATIOS(1)
<TABLE>
<CAPTION>
NUMBER OF PERCENT
GROUP 2 CUT-OFF DATE BY CUT-OFF DATE
INITIAL PRINCIPAL LOAN GROUP 2 INITIAL
COMBINED LOAN-TO-VALUE RATIOS LOANS BALANCE PRINCIPAL BALANCE
- -------------------------------------------------------------- --------- --------------- --------------------
<S> <C> <C> <C>
[Less than or equal to] 50.00%.............................. 244 $ 5,584,103.05 7.81%
50.01%- 55.00%............................................... 63 2,153,503.90 3.01
55.01%- 60.00%............................................... 67 2,297,609.76 3.21
60.01%- 65.00%............................................... 67 2,064,023.98 2.89
65.01%- 70.00%............................................... 92 3,631,879.01 5.08
70.01%- 75.00%............................................... 125 4,174,869.24 5.84
75.01%- 80.00%............................................... 649 20,132,466.90 28.16
80.01%- 85.00%............................................... 202 6,085,083.37 8.51
85.01%- 90.00%............................................... 289 7,597,028.30 10.63
90.01%- 95.00%............................................... 166 4,353,088.43 6.09
95.01%-100.00%............................................... 386 10,980,193.79 15.36
100.01%-105.00%............................................... 102 2,438,249.23 3.41
----- --------------- ------
Total.................................................... 2,452 $ 71,492,098.96 100.00%
----- --------------- ------
----- --------------- ------
</TABLE>
- ------------------
(1) Based on a subset of the Loan Group 2 Initial Mortgage Loans.
LOAN GROUP 2
INITIAL MORTGAGE LOANS
LIEN PRIORITY(1)
<TABLE>
<CAPTION>
PERCENT
NUMBER OF BY CUT-OFF DATE
GROUP 2 INITIAL CUT-OFF DATE LOAN GROUP 2 INITIAL
LIEN PRIORITY LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ---------------------------------------------------------- --------------- ----------------- --------------------
<S> <C> <C> <C>
1......................................................... 416 $ 14,337,951.11 20.06%
2......................................................... 2,036 57,154,147.85 79.94
----- --------------- ------
Total................................................ 2,452 $ 71,492,098.96 100.00%
----- --------------- ------
----- --------------- ------
</TABLE>
- ------------------
(1) Based on a subset of the Loan Group 2 Initial Mortgage Loans.
S-33
<PAGE>
LOAN GROUP 2
INITIAL MORTGAGE LOANS
GEOGRAPHIC DISTRIBUTION(1)
<TABLE>
<CAPTION>
PERCENT
NUMBER OF BY CUT-OFF DATE
GROUP 2 INITIAL CUT-OFF DATE LOAN GROUP 2 INITIAL
STATE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ---------------------------------------------------------- --------------- ----------------- --------------------
<S> <C> <C> <C>
Ohio...................................................... 1,828 $ 51,336,780.76 63.58%
Kentucky.................................................. 638 12,920,930.02 16.00
Michigan.................................................. 110 3,983,593.00 4.93
Pennsylvania.............................................. 125 3,699,562.57 4.58
Illinois.................................................. 83 2,759,035.46 3.42
Indiana................................................... 74 2,120,552.57 2.63
Texas..................................................... 48 1,511,427.88 1.87
Florida................................................... 32 830,580.15 1.03
West Virginia............................................. 22 628,325.69 0.78
North Carolina............................................ 11 362,639.26 0.45
Missouri.................................................. 2 143,534.66 0.18
Georgia................................................... 3 133,932.56 0.17
Colorado.................................................. 1 112,738.59 0.14
New York.................................................. 3 65,485.35 0.08
California................................................ 3 55,968.26 0.07
Minnesota................................................. 1 32,148.84 0.04
Kansas.................................................... 1 25,928.56 0.03
Arizona................................................... 1 19,074.46 0.02
Wisconsin................................................. 1 2,164.91 0.00
----- --------------- --------
Total................................................ 2,987 $ 80,744,403.55 100.00%
----- --------------- --------
----- --------------- --------
</TABLE>
- ------------------
(1) Geographic location is determined by address of Mortgaged Property securing
each Group 2 Initial Loan.
S-34
<PAGE>
LOAN GROUP 2
INITIAL MORTGAGE LOANS
PRINCIPAL BALANCES
<TABLE>
<CAPTION>
PERCENT
BY CUT-OFF DATE
NUMBER OF LOAN GROUP 2
GROUP 2 INITIAL CUT-OFF DATE INITIAL
PRINCIPAL BALANCES LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- --------------------------------------------------------- --------------- ----------------- --------------------
<S> <C> <C> <C>
$ 0.01-$ 2,500.00.................................. 158 $ 189,209.32 0.23%
$ 2,500.01-$ 5,000.00.................................. 156 601,544.64 0.74
$ 5,000.01-$ 7,500.00.................................. 186 1,154,142.17 1.43
$ 7,500.01-$ 10,000.00.................................. 228 2,037,629.71 2.52
$ 10,000.01-$ 15,000.00.................................. 409 5,147,855.06 6.38
$ 15,000.01-$ 20,000.00.................................. 382 6,735,436.32 8.34
$ 20,000.01-$ 30,000.00.................................. 576 14,426,446.10 17.87
$ 30,000.01-$ 00,000.00.................................. 334 11,572,558.21 14.33
$ 40,000.01-$ 50,000.00.................................. 217 9,829,370.00 12.17
$ 50,000.01-$ 60,000.00.................................. 104 5,681,187.40 7.04
$ 60,000.01-$ 70,000.00.................................. 75 4,904,682.79 6.07
$ 70,000.01-$ 80,000.00.................................. 39 2,925,712.52 3.62
$ 80,000.01-$ 90,000.00.................................. 30 2,541,643.43 3.15
$ 90,000.01-$100,000.00.................................. 22 2,080,113.69 2.58
$100,000.01-$150,000.00.................................. 48 5,632,777.95 6.98
$150,000.01-$200,000.00.................................. 12 2,038,219.62 2.52
$200,000.01-$250,000.00.................................. 4 858,601.42 1.06
$250,000.01-$300,000.00.................................. 2 552,212.84 0.68
$300,000.01-$350,000.00.................................. 1 308,250.08 0.38
$350,000.01-$400,000.00.................................. 4 1,526,810.28 1.89
----- --------------- ------
Total............................................... 2,987 $ 80,744,403.55 100.00%
----- --------------- ------
----- --------------- ------
</TABLE>
S-35
<PAGE>
LOAN GROUP 2 INITIAL REVOLVING CREDIT-LINE LOANS
CREDIT LIMITS
<TABLE>
<CAPTION>
PERCENT
NUMBER OF BY CUT-OFF DATE
GROUP 2 LOAN GROUP 2
INITIAL CUT-OFF DATE INITIAL
CREDIT LIMITS LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------------------------------------------------------- --------- ----------------- -----------------
<S> <C> <C> <C>
$0.01-$ 2,500.00.......................................... 5 $ 3,887.92 0.01%
$ 2,500.01-$ 5,000.00.......................................... 18 62,970.01 0.12
$ 5,000.01-$ 7,500.00.......................................... 11 61,344.29 0.11
$ 7,500.01-$ 10,000.00.......................................... 56 351,705.25 0.64
$ 10,000.01-$ 15,000.00.......................................... 126 1,185,982.21 2.17
$ 15,000.01-$ 20,000.00.......................................... 128 1,753,451.55 3.21
$ 20,000.01-$ 30,000.00.......................................... 330 5,612,383.33 10.28
$ 30,000.01-$ 40,000.00.......................................... 259 6,098,265.27 11.16
$ 40,000.01-$ 50,000.00.......................................... 327 8,694,980.18 15.92
$ 50,000.01-$ 60,000.00.......................................... 143 4,617,512.35 8.45
$ 60,000.01-$ 70,000.00.......................................... 124 4,358,033.50 7.98
$ 70,000.01-$ 80,000.00.......................................... 109 4,208,684.32 7.71
$ 80,000.01-$ 90,000.00.......................................... 48 2,088,834.81 3.82
$ 90,000.01-$100,000.00.......................................... 94 4,146,569.50 7.59
$100,000.01-$150,000.00.......................................... 91 5,205,365.07 9.53
$150,000.01-$200,000.00.......................................... 24 2,018,695.44 3.70
$200,000.01-$250,000.00.......................................... 14 1,150,530.53 2.11
$250,000.01-$300,000.00.......................................... 6 910,147.84 1.67
$300,000.01-$350,000.00.......................................... 2 488,014.21 0.89
$350,000.01-$400,000.00.......................................... 5 1,604,144.51 2.94
----- --------------- -------
Total....................................................... 1,920 $ 54,621,502.09 100.00%
----- --------------- -------
----- --------------- -------
</TABLE>
S-36
<PAGE>
LOAN GROUP 2 INITIAL REVOLVING CREDIT-LINE LOANS
CREDIT LIMIT UTILIZATION RATES
<TABLE>
<CAPTION>
PERCENT
NUMBER OF BY CUT-OFF DATE
GROUP 2 LOAN GROUP 2
INITIAL CUT-OFF DATE INITIAL
CREDIT LIMIT UTILIZATION RATES LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------------------------------------------------------- --------- ----------------- -----------------
<S> <C> <C> <C>
0.01%- 10.00%.................................................. 181 $ 549,986.67 1.01%
10.01%- 20.00%.................................................. 153 1,675,760.29 3.07
20.01%- 30.00%.................................................. 162 2,561,309.08 4.69
30.01%- 40.00%.................................................. 131 2,283,788.22 4.18
40.01%- 50.00%.................................................. 119 2,611,815.59 4.78
50.01%- 60.00%.................................................. 130 3,935,815.00 7.21
60.01%- 70.00%.................................................. 148 4,722,257.61 8.65
70.01%- 80.00%.................................................. 142 4,780,864.53 8.75
80.01%- 85.00%.................................................. 81 3,329,991.79 6.10
85.01%- 90.00%.................................................. 111 4,089,420.88 7.49
90.01%- 95.00%.................................................. 137 5,414,344.37 9.91
95.01%-100.00%.................................................. 392 17,061,310.49 31.24
100.01%-105.00%.................................................. 33 1,604,837.57 2.94
----- --------------- -------
Total....................................................... 1,920 $ 54,621,502.09 100.00%
----- --------------- -------
----- --------------- -------
</TABLE>
LOAN GROUP 2 INITIAL MORTGAGE LOANS
LOAN AGE
<TABLE>
<CAPTION>
PERCENT
NUMBER OF BY CUT-OFF DATE
GROUP 2 LOAN GROUP 2
INITIAL CUT-OFF DATE INITIAL
LOAN AGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------------------------------------------------------- --------- ----------------- -----------------
<S> <C> <C> <C>
0 months..................................................... 146 $ 4,518,035.18 5.60%
1-12 months..................................................... 1,967 59,299,740.83 73.44
13-24 months..................................................... 270 6,374,832.90 7.90
25-36 months..................................................... 115 2,338,219.34 2.90
37-48 months..................................................... 167 3,133,762.34 3.88
49-60 months..................................................... 136 2,175,684.65 2.69
61-72 months..................................................... 70 1,100,302.77 1.36
73-84 months..................................................... 23 347,759.15 0.43
Greater than or equal to 85 months............................... 93 1,456,066.39 1.80
----- --------------- -------
Total....................................................... 2,987 $ 80,744,403.55 100.00%
----- --------------- -------
----- --------------- -------
</TABLE>
S-37
<PAGE>
LOAN GROUP 2 INITIAL CLOSED-END LOANS
REMAINING MONTHS TO STATED MATURITY
<TABLE>
<CAPTION>
PERCENT
NUMBER OF BY CUT-OFF DATE
GROUP 2 LOAN GROUP 2
REMAINING TERM TO INITIAL CUT-OFF DATE INITIAL
STATED MATURITY LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------------------------------------------------ -------------- ----------------- -----------------
<S> <C> <C> <C>
1- 12..................................................... 53 $ 803,099.24 3.07%
13- 24..................................................... 49 691,423.24 2.65
25- 36..................................................... 65 733,024.03 2.81
37- 48..................................................... 62 746,908.64 2.86
49- 60..................................................... 89 1,349,146.78 5.16
61- 72..................................................... 37 689,162.50 2.64
73- 84..................................................... 61 1,277,944.34 4.89
85- 96..................................................... 24 548,342.89 2.10
97-108..................................................... 84 1,981,020.06 7.58
109-120..................................................... 262 6,588,041.78 25.22
133-144..................................................... 2 61,811.29 0.24
145-156..................................................... 2 125,424.61 0.48
157-168..................................................... 7 276,087.00 1.06
169-180..................................................... 225 7,583,679.90 29.03
181-192..................................................... 1 20,075.00 0.08
229-240..................................................... 44 2,647,710.16 10.14
------ --------------- -------
Total.................................................. 1,067 $ 26,122,901.46 100.00%
------ --------------- -------
------ --------------- -------
</TABLE>
S-38
<PAGE>
LOAN GROUP 2 INITIAL REVOLVING CREDIT-LINE LOANS
LOAN RATES
<TABLE>
<CAPTION>
PERCENT
NUMBER OF BY CUT-OFF DATE
GROUP 2 LOAN GROUP 2
INITIAL CUT-OFF DATE INITIAL
LOAN RATES LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------------------------------------------------------- --------- ----------------- -----------------
<S> <C> <C> <C>
5.501%- 6.000%.................................................. 1 $ 157,816.10 0.29%
6.501%- 7.000%.................................................. 302 9,651,418.15 17.67
7.001%- 7.500%.................................................. 63 2,639,065.02 4.83
7.501%- 8.000%.................................................. 430 12,932,256.91 23.68
8.001%- 8.500%.................................................. 233 8,470,106.76 15.51
8.501%- 9.000%.................................................. 280 9,888,319.81 18.10
9.001%- 9.500%.................................................. 214 4,261,903.20 7.80
9.501%-10.000%.................................................. 152 2,577,124.48 4.72
10.001%-10.500%.................................................. 123 1,485,664.82 2.72
10.501%-11.000%.................................................. 22 311,656.56 0.57
11.001%-11.500%.................................................. 23 472,925.65 0.87
11.501%-12.000%.................................................. 68 1,607,108.73 2.94
12.501%-13.000%.................................................. 5 100,126.05 0.18
13.501%-14.000%.................................................. 4 66,009.85 0.12
----- --------------- -------
Total....................................................... 1,920 $ 54,621,502.09 100.00%
----- --------------- -------
----- --------------- -------
</TABLE>
LOAN GROUP 2 INITIAL CLOSED-END LOANS
LOAN RATES
<TABLE>
<CAPTION>
PERCENT
NUMBER OF BY CUT-OFF DATE
GROUP 2 LOAN GROUP 2
INITIAL CUT-OFF DATE INITIAL
LOAN RATES LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------------------------------------------------------- --------- ----------------- -----------------
<S> <C> <C> <C>
6.001%- 6.500%.................................................. 1 $ 33,134.54 0.13%
6.501%- 7.000%.................................................. 19 285,304.83 1.09
7.001%- 7.500%.................................................. 10 38,529.81 0.15
7.501%- 8.000%.................................................. 90 4,109,761.63 15.73
8.001%- 8.500%.................................................. 121 3,128,409.62 11.98
8.501%- 9.000%.................................................. 157 4,233,553.82 16.21
9.001%- 9.500%.................................................. 176 3,715,269.49 14.22
9.501%-10.000%.................................................. 278 6,657,350.38 25.48
10.001%-10.500%.................................................. 110 1,991,990.37 7.63
10.501%-11.000%.................................................. 53 1,034,877.77 3.96
11.001%-11.500%.................................................. 18 330,226.43 1.26
11.501%-12.000%.................................................. 20 425,099.61 1.63
12.001%-12.500%.................................................. 1 6,666.80 0.03
12.501%-13.000%.................................................. 5 67,096.11 0.26
13.001%-13.500%.................................................. 3 40,728.96 0.16
13.501%-14.000%.................................................. 1 3,338.44 0.01
14.501%-15.000%.................................................. 1 1,179.23 0.00
15.501%-16.000%.................................................. 3 20,383.62 0.08
----- --------------- -------
Total....................................................... 1,067 $ 26,122,901.46 100.00%
----- --------------- -------
----- --------------- -------
</TABLE>
S-39
<PAGE>
LOAN GROUP 2 INITIAL REVOLVING CREDIT-LINE LOANS(1)
MARGINS
<TABLE>
<CAPTION>
PERCENT
NUMBER OF BY CUT-OFF DATE
GROUP 2 LOAN GROUP 2
INITIAL CUT-OFF DATE INITIAL
MARGIN LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------------------------------------------------------- --------- ----------------- -----------------
<S> <C> <C> <C>
- -0.999%- -0.500%................................................. 80 $ 3,302,038.88 6.05%
- -0.499%- -0.000%................................................. 662 22,106,708.40 40.47
0.001%- 0.500%................................................. 389 13,596,910.69 24.89
0.501%- 1.000%................................................. 298 6,881,137.23 12.60
1.001%- 1.500%................................................. 148 2,362,964.65 4.33
1.501%- 2.000%................................................. 147 1,808,401.54 3.31
2.001%- 2.500%................................................. 31 848,850.97 1.55
2.501%- 3.000%................................................. 40 912,295.06 1.67
3.001%- 3.500%................................................. 70 1,554,517.85 2.85
3.501%- 4.000%................................................. 14 305,857.62 0.56
4.001%- 4.500%................................................. 9 169,181.93 0.31
4.501%- 5.000%................................................. 5 100,126.05 0.18
5.001%- 5.500%................................................. 2 17,504.87 0.03
5.501%- 6.000%................................................. 4 66,009.85 0.12
6.001%- 6.500%................................................. 21 588,996.50 1.08
----- --------------- -------
Total....................................................... 1,920 $ 54,621,502.09 100.00%
----- --------------- -------
----- --------------- -------
</TABLE>
- ------------------
(1) Each Group 2 Initial Revolving Credit-Line Loan is subject to a minimum Loan
Rate equal to the greater of zero and the Margin.
LOAN GROUP 2 SAMPLE POOL STATISTICS
Certain information concerning the Group 2 Initial Loans is not readily
available, including information with respect to (i) the property type and
(ii) occupancy status. As a result, in order to compile certain of the data in
this section information was manually collected from loan files constituting a
random sample (the "Group 2 Initial Sample Pool") of 340 Group 2 Initial Loans
(the "Sample Pool Group 2 Initial Loans"), constituting 11.10% of the Group 2
Initial Loans by Cut-Off Date Loan Group 2 Initial Principal Balance. ALL
AVERAGES AND TOTALS SET FORTH IN THIS SECTION HAVE BEEN CALCULATED BASED UPON
THE SAMPLE POOL GROUP 2 INITIAL LOANS AS OF THE CUT-OFF DATE. NO ASSURANCE CAN
BE GIVEN THAT THE CHARACTERISTICS OF THE SAMPLE POOL GROUP 2 INITIAL LOANS ARE
REPRESENTATIVE OF THE GROUP 2 INITIAL LOANS IN THE AGGREGATE.
The Sample Pool Group 2 Initial Loans consisted of 340 loans with an
aggregate Cut-Off Date Principal Balance of $8,965,540.67 (the "Cut-Off Date
Loan Group 2 Initial Sample Pool Balance"). The Cut-Off Date Principal Balances
of the Sample Pool Group 2 Initial Loans ranged from $50.00 to $163,897.56, and
the average Cut-Off Date Principal Balance of the Sample Pool Group 2 Initial
Loans was $26,369.24. The sum of certain percentages set forth in the following
tables may not equal exactly 100% due to differences in the rounding of
percentages.
Set forth below is a description of certain characteristics of the Sample
Pool Group 2 Initial Loans.
S-40
<PAGE>
SAMPLE POOL GROUP 2 INITIAL LOANS
PROPERTY TYPE
<TABLE>
<CAPTION>
PERCENT
NUMBER OF BY CUT-OFF DATE
GROUP 2 LOAN GROUP 2
INITIAL CUT-OFF DATE INITIAL
PROPERTY TYPE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------------------------------------------------------- --------- ----------------- -----------------
<S> <C> <C> <C>
Single-Family.................................................... 326 $8,725,085.70 97.32%
Condominium...................................................... 10 148,281.81 1.65
Two-to-Four Family............................................... 4 92,173.16 1.03
----- ------------- -------
Total....................................................... 340 $8,965,540.67 100.00%
----- ------------- -------
----- ------------- -------
</TABLE>
SAMPLE POOL GROUP 2 INITIAL LOANS
OWNER OCCUPANCY STATUS
<TABLE>
<CAPTION>
PERCENT
NUMBER OF BY CUT-OFF DATE
GROUP 2 LOAN GROUP 2
INITIAL CUT-OFF DATE INITIAL
OWNER OCCUPANCY STATUS LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------------------------------------------------------- --------- ----------------- -----------------
<S> <C> <C> <C>
Owner Occupied................................................... 337 $8,910,372.89 99.38%
Non-Owner Occupied............................................... 3 55,167.78 0.62
----- ------------- -------
Total....................................................... 340 $8,965,540.67 100.00%
----- ------------- -------
----- ------------- -------
</TABLE>
CONVEYANCE OF SUBSEQUENT MORTGAGE LOANS
The Sale and Servicing Agreement permits the Trust to acquire on the
Closing Date up to approximately $3,245,495 aggregate principal balance of
additional Mortgage Loans (the "Subsequent Mortgage Loans") for Loan Group 2.
Accordingly, the statistical characteristics of the Mortgage Loans in Loan
Group 2 will vary upon the acquisition of Subsequent Mortgage Loans.
The obligation of the Trust to acquire Subsequent Mortgage Loans on the
Closing Date is subject to the following requirements, any of which requirements
may be waived or modified in any respect by the Insurer: (i) such Subsequent
Mortgage Loan may not be 30 or more days contractually delinquent as of the
related Cut-Off Date; (ii) the remaining term to stated maturity of such
Subsequent Mortgage Loan will not exceed 20 years (except for One-Year Draw
Period Loans); (iii) such Subsequent Mortgage Loan will be secured by a Mortgage
in a first or second lien position; (iv) such Subsequent Mortgage Loan will not
have a Loan Rate less than 6.99% per annum; (v) such Subsequent Mortgage Loan
will be otherwise acceptable to the Insurer; (vi) such Subsequent Mortgage Loan
shall be secured by a mortgage on property which, at the time of the origination
of such Subsequent Mortgage Loan, has an appraised value of not more than
$1,500,000; and (vii) following the purchase of such Subsequent Mortgage Loans
by the Trust, the Group 2 Loans (including such Subsequent Mortgage Loans) as of
the Closing Date: (a) will have a weighted average Loan Rate of at least 8.60%
per annum; (b) will have a weighted average remaining term to stated maturity of
no more than 240 months; (c) will have a weighted average CLTV of not more than
78.75%; (d) will have no Mortgage Loan with a Cut-Off Date Principal Balance in
excess of $400,000; (e) will not have a state concentration in excess of 64% for
any one state (by aggregate Cut-Off Date Principal Balance for Loan Group 2);
(f) will have no more than 0.75% Mortgage Loans relating to non-owner occupied
properties (by aggregate Cut-Off Date Principal Balance for Loan Group 2) and
(g) will not have more than 80% of the related Mortgage Loans secured by a
Mortgage in a second lien position (by aggregate Cut-Off Date Principal Balance
for Loan Group 2). In addition, following the purchase of such Subsequent
Mortgage Loans, no more than 32.75% of the Group 2 Loans (including such
Subsequent Mortgage Loans) will be Closed-End Loans (by aggregate Cut-Off Date
Principal Balances of the Group 2 Loans).
S-41
<PAGE>
DESCRIPTION OF THE NOTES
The Provident Bank Home Equity Loan Trust 1998-A (the "Trust") will issue
three classes of Home Equity Loan Asset-Backed Notes (the "Class A-1 Notes", the
"Class A-2 Notes" and the "Class A-3 Notes" and collectively, the "Notes")
pursuant to the Indenture to be dated as of December 1, 1998 (the "Indenture"),
between the Trust and The Chase Manhattan Bank, as Indenture Trustee (the
"Indenture Trustee"). Pursuant to the Indenture, the Class A-1 Notes will be
secured primarily by the Group 1 Loans and the Class A-2 Notes and Class A-3
Notes will be secured primarily by the Group 2 Loans. The Notes will be divided
into two groups (each, a Group): the Class A-1 Notes ("Group 1") and the
Class A-2 and Class A-3 Notes (collectively, "Group 2"). The Trust will also
issue the Group 1 Transferor Interest and the Group 2 Transferor Interest
pursuant to the Trust Agreement. The Indenture, the Trust Agreement and the Sale
and Servicing Agreement are collectively referred to as the "Agreements" herein.
The forms of the Agreements have been filed as exhibits to the Registration
Statement of which this Prospectus Supplement and the Prospectus are a part. The
following summaries describe certain provisions of the Agreements. The summaries
do not purport to be complete and are subject to, and are qualified in their
entirety by reference to, all of the provisions of the Agreements. Wherever
particular sections or defined terms of the Agreements are referred to, such
sections or defined terms are hereby incorporated herein by reference.
GENERAL
The Notes will be issued in minimum denominations of $1,000 and multiples
of $1 in excess thereof (other than the Class A-3 Notes, which will be issued in
denominations of $25,000 and integral multiples in excess thereof) and will
represent non-recourse obligations of the Trust. The property of the Trust will
include: (i) each of the Mortgage Loans that from time to time are subject to
the Sale and Servicing Agreement (including any Additional Balances arising
after the Cut-Off Date) and the Mortgage Files; (ii) collections on the Mortgage
Loans received on and after the Cut-Off Date (exclusive of certain payments in
respect of (i) interest accrued on the Mortgage Loans during November 1998 and
(ii) payments in respect of interest on the delinquent Mortgage Loans due prior
to the Cut-Off Date and received thereafter); (iii) Mortgaged Properties
relating to the Mortgage Loans that are acquired by foreclosure or deed in lieu
of foreclosure; (iv) the Collection Accounts, the Distribution Accounts and the
Spread Accounts; and (v) the Policy.
Definitive Notes (as defined below), if issued, will be transferable and
exchangeable at the corporate trust office of the Indenture Trustee, which will
initially act as Note Registrar. See "--Book-Entry Notes" below. No service
charge will be made for any registration of exchange or transfer of Notes, but
the Indenture Trustee may require payment of a sum sufficient to cover any tax
or other governmental charge.
As of the Closing Date the principal amount of the Class A-1 Notes will
equal $100,000,000 (the "Original Group 1 Invested Amount") which represents
approximately 99% of the Loan Group 1 Principal Balance. As of the Closing Date
the aggregate principal amount of the Class A-2 Notes and Class A-3 Notes will
equal $83,150,000 (the "Original Group 2 Invested Amount") which represents
approximately 99% of the Loan Group 2 Principal Balance and the amount, if any,
in the Pre-Funding Account as of the Closing Date. The "Original Note Principal
Balance" will equal $100,000,000, $60,000,000 and $23,150,000 for the Class A-1
Notes, the Class A-2 Notes and the Class A-3 Notes, respectively (subject to a
permitted variance in the aggregate of plus or minus 5%). Following the Closing
Date, the "Invested Amount" with respect to any Payment Date and a Group will be
an amount equal to the Original Invested Amount of such Group minus (i) the
amount of Investor Principal Collections previously distributed to the
Noteholders of the related Group, and minus (ii) an amount equal to the product
of the related Investor Floating Allocation Percentage and the Liquidation Loss
Amounts for the Mortgage Loans in the related Loan Group not allocated to the
related Transferor Interest (each, as defined herein). The principal amount of
an outstanding Class of Notes (the "Note Principal Balance") on any Payment Date
is equal to the Original Note Principal Balance of such Class minus the
aggregate of amounts actually distributed as principal to the related
Noteholders. With respect to any Payment Date and Group, the "Investor Fixed
Allocation Percentage" equals 99%. See "--Payments on the Notes" below.
The Transferor Interest with respect to each Loan Group (with respect to
Loan Group 1, the "Group 1 Transferor Interest" and with respect to Loan
Group 2, the "Group 2 Transferor Interest" and together the "Transferor
Interests") is equal to the related Loan Group Balance less the related Invested
Amount. The
S-42
<PAGE>
Group 1 Transferor Interest will initially equal approximately $1,010,426 which
represents approximately 1% of the Loan Group 1 Principal Balance as of the
Closing Date and the Group 2 Transferor Interest will initially equal
approximately $839,899 which represents approximately 1% of the Loan Group 2
Principal Balance and the amount, if any, in the Pre-Funding Account as of the
Closing Date. A "Transferor" as of any date is the owner of a Transferor
Interest, which initially will be Provident. In general, the Pool Balance and
the Loan Group 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.
BOOK-ENTRY NOTES
The Notes will be book-entry Notes (the "Book-Entry Notes"). Persons
acquiring beneficial ownership interests in the Notes ("Note Owners") may elect
to hold their Notes through The Depository Trust Company ("DTC") in the United
States, or Cedelbank ("Cedelbank") or the Euroclear System ("Euroclear") in
Europe if they are participants of such systems, or indirectly through
organizations which are participants in such systems. The Book-Entry Notes will
be issued in one or more notes which equal the aggregate principal balance of
the Notes and will initially be registered in the name of Cede & Co., the
nominee of DTC. Cedelbank and Euroclear will hold omnibus positions on behalf of
their participants through customers' securities accounts in Cedelbank's and
Euroclear's names on the books of their respective depositaries which in turn
will hold such positions in customers' securities accounts in the depositaries'
names on the books of DTC. Citibank, N.A. will act as depositary for Cedelbank
and The Chase Manhattan Bank will act as depositary for Euroclear (in such
capacities, individually the "Relevant Depositary" and collectively the
"European Depositaries"). Investors may hold such beneficial interests in the
Book-Entry Notes in minimum denominations representing Note Principal Balances
of $1,000 and in multiples of $1 in excess thereof (other than the Class A-3
Notes, which will be issued in denominations of $25,000 and integral multiples
in excess thereof). Except as described below, no person acquiring a Book-Entry
Note (each, a "beneficial owner") will be entitled to receive a physical note
representing such Note (a "Definitive Note"). Unless and until Definitive Notes
are issued, it is anticipated that the only "Noteholder" of the Notes will be
Cede & Co., as nominee of DTC. Note Owners will not be Noteholders as that term
is used in the Indenture. Note Owners are only permitted to exercise their
rights indirectly through Participants and DTC.
The beneficial owner's ownership of a Book-Entry Note 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 Note will be recorded on the records of DTC (or of
a participating firm that acts as agent for the Financial Intermediary, whose
interest will in turn be recorded on the records of DTC, if the beneficial
owner's Financial Intermediary is not a DTC participant) and on the records of
Cedelbank or Euroclear, as appropriate.
Note Owners will receive all payments of principal of, and interest on, the
Notes from the Indenture Trustee through DTC and DTC participants. While the
Notes 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 Notes and is required
to receive and transmit payments of principal of, and interest on, the Notes.
Participants and indirect participants with whom Note Owners have accounts with
respect to Notes are similarly required to make book-entry transfers and receive
and transmit such payments on behalf of their respective Note Owners.
Accordingly, although Note Owners will not possess notes, the Rules provide a
mechanism by which Note Owners will receive payments and will be able to
transfer their interest.
Note Owners will not receive or be entitled to receive Definitive Notes
representing their respective interests in the Notes, except under the limited
circumstances described below. Unless and until Definitive Notes are issued,
Note Owners who are not Participants may transfer ownership of Notes only
through Participants and indirect participants by instructing such Participants
and indirect participants to transfer Notes, by book-entry transfer, through DTC
for the account of the purchasers of such Notes, which account is maintained
with their respective Participants. Under the Rules and in accordance with DTC's
normal procedures, transfers of ownership of Notes 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 Note Owners.
S-43
<PAGE>
Because of time zone differences, credits of securities received in
Cedelbank 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 Cedelbank Participants on such business day. Cash received in
Cedelbank or Euroclear as a result of sales of securities by or through a
Cedelbank 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 Cedelbank 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 Notes, see "CERTAIN
FEDERAL INCOME TAX CONSEQUENCES--Foreign Investors" and "--Backup Withholding"
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 Cedelbank Participants and Euroclear Participants will occur
in accordance with their respective rules and operating procedures. Cross-market
transfers between persons holding directly or indirectly through DTC, on the one
hand, and directly or indirectly through Cedelbank Participants or Euroclear
Participants, on the other, will be effected in DTC in accordance with DTC rules
on behalf of the relevant European international clearing system by the Relevant
Depositary; however, 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. Cedelbank 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 Notes, whether held for
its own account or as a nominee for another person. In general, beneficial
ownership of Book-Entry Notes will be subject to the rules, regulations and
procedures governing DTC and DTC participants as in effect from time to time.
Cedelbank is incorporated under the laws of Luxembourg as a professional
depository. Cedelbank holds securities for its participating organizations
("Cedelbank Participants") and facilitates the clearance and settlement of
securities transactions between Cedelbank Participants through electronic
book-entry changes in accounts of Cedelbank Participants, thereby eliminating
the need for physical movement of notes. Transactions may be settled in
Cedelbank in any of 28 currencies, including United States dollars. Cedelbank
provides to its Cedelbank Participants, among other things, services for
safekeeping, administration, clearance and settlement of internationally traded
securities and securities lending and borrowing. Cedelbank interfaces with
domestic markets in several countries. As a professional depository, Cedelbank
is subject to regulation by the Luxembourg Monetary Institute. Cedelbank
Participants are recognized financial institutions around the world, including
underwriters, securities brokers and dealers, banks, trust companies, clearing
corporations and certain other organizations. Indirect access to Cedelbank is
also available to others, such as banks, brokers, dealers and trust companies
that clear through or maintain a custodial relationship with a Cedelbank
Participant, either directly or indirectly.
Euroclear was created in 1968 to hold securities for 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
notes 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
S-44
<PAGE>
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 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 notes to specific securities clearance accounts. The
Euroclear Operator acts under the Terms and Conditions only on behalf of
Euroclear Participants, and has no record of or relationship with persons
holding through Euroclear Participants.
Payments on the Book-Entry Notes will be made on each Payment 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 Notes 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 Notes that it represents.
Under a book-entry format, beneficial owners of the Book-Entry Notes may
experience some delay in their receipt of payments, since such payments will be
forwarded by the Trustee to Cede. Payments with respect to Notes held through
Cedelbank or Euroclear will be credited to the cash accounts of Cedelbank
Participants or Euroclear Participants in accordance with the relevant system's
rules and procedures, to the extent received by the Relevant Depositary. Such
payments 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 Notes to persons or entities that do not participate
in the Depository system, or otherwise take actions in respect of such
Book-Entry Notes, may be limited due to the lack of physical notes for such
Book-Entry Notes. In addition, issuance of the Book-Entry Notes in book-entry
form may reduce the liquidity of such Notes in the secondary market since
certain potential investors may be unwilling to purchase Notes for which they
cannot obtain physical notes.
Monthly and annual reports on the Issuer provided by the Master 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 Notes of such beneficial owners are credited.
DTC has advised the Transferor and the Indenture Trustee that, unless and
until Definitive Notes are issued, DTC will take any action permitted to be
taken by the holders of the Book-Entry Notes under the Sale and Servicing
Agreement only at the direction of one or more Financial Intermediaries to whose
DTC accounts the Book-Entry Notes are credited, to the extent that such actions
are taken on behalf of Financial Intermediaries whose holdings include such
Book-Entry Notes. Cedelbank or the Euroclear Operator, as the case may be, will
take any other action permitted to be taken by a Noteholder under the Sale and
Servicing Agreement on behalf of a Cedelbank Participant or Euroclear
Participant only in accordance with its relevant rules and procedures and
subject to the ability of the Relevant Depositary to effect such actions on its
behalf through DTC. DTC may take actions, at the direction of the related
Participants, with respect to some Notes which conflict with actions taken with
respect to other Notes.
Definitive Notes will be issued to beneficial owners of the Book-Entry
Notes, or their nominees, rather than to DTC, only if (a) DTC or the Trust
advises the Indenture 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-
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Entry Notes and the Trust or the Indenture 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 Note Principal Balance of the
Book-Entry Notes advise the Indenture 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 sentence, the Indenture Trustee will be
required to notify all beneficial owners of the occurrence of such event and the
availability through DTC of Definitive Notes. Upon surrender by DTC of the
global note or notes representing the Book-Entry Notes and instructions for re-
registration, the Indenture Trustee will issue Definitive Notes, and thereafter
the Indenture Trustee will recognize the holders of such Definitive Notes as
Noteholders under the Indenture.
Although DTC, Cedelbank and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of Notes among participants of DTC,
Cedelbank and Euroclear, they are under no obligation to perform or continue to
perform such procedures and such procedures may be discontinued at any time.
DTC management is aware that some computer applications, systems, and the
like for processing data ("Systems") that are dependent upon calendar dates,
including dates before, on, and after January 1, 2000, may encounter "Year 2000
problems." DTC has informed its Participants and other members of the financial
community (the "Industry") that it has developed and is implementing a program
so that its Systems, as the same relate to the timely payment of distributions
(including principal and income payments) to securityholders, book-entry
deliveries, and settlement of trades within DTC ("DTC Services"), continue to
function appropriately. This program includes a technical assessment and a
remediation plan, each of which is complete. Additionally, DTC's plan includes a
testing phase, which is expected to be completed within appropriate time frames.
However, DTC's ability to perform properly its services is also dependent
upon other parties, including but not limited to issuers and their agents, as
well as third party vendors from whom DTC licenses software and hardware, and
third party vendors on whom DTC relies for information or the provision of
services, including telecommunication and electrical utility service providers,
among others. DTC has informed the Industry that it is contacting (and will
continue to contact) third party vendors from whom DTC acquires services to:
(i) impress upon them the importance of such services being year 2000 compliant;
and (ii) determine the extent of their efforts for Year 2000 remediation (and,
as appropriate, testing) of their services. In addition, DTC is in the process
of developing such contingency plans as it deems appropriate.
According to DTC, the foregoing information with respect to DTC has been
provided to the Industry for informational purposes only and is not intended to
serve as a representation, warranty, or contract modification of any kind.
ASSIGNMENT OF MORTGAGE LOANS
On the Closing Date, 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 and Mortgage
Notes, as applicable, and the mortgages and other related documents
(collectively, the "Related Documents"), including all collections received on
or with respect to each such Mortgage Loan on or after the Cut-Off Date
(exclusive of certain payments in respect of (i) interest accrued on the
Mortgage Loans during November 1998 and (ii) payments in respect of interest on
the delinquent Mortgage Loans due prior to the Cut-Off Date and received
thereafter). The Trust, concurrently with such transfer, will deliver or cause
to be delivered the Notes to the Depositor and, upon the Depositor's order, the
Transferor Interests to the Transferor. Each Mortgage Loan transferred to the
Trust will be identified on a schedule (the "Mortgage Loan Schedule") which will
be attached as an exhibit to the Indenture. Such schedule will include
information as to the Cut-Off Date Principal Balance of each Mortgage Loan, as
well as information with respect to the Loan Rate.
The Sale and Servicing Agreement will permit Provident to maintain
possession of the Related Documents and certain other documents relating to the
Mortgage Loans (the "Mortgage Files") (other than the Mortgage Notes and the
assignments of each Mortgage with respect to the Closed-End Loans). Assignments
of the related mortgages to the Indenture Trustee will not be required to be
recorded so long as the long-term senior unsecured
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debt of Provident is rated at least "BBB" by each of Standard & Poor's and
"Baa2" by Moody's and certain other conditions are satisfied. In the event that
Provident's long-term senior unsecured debt is not so rated by any such entity
or any such ratings are suspended or withdrawn or certain other events specified
in the Sale and Servicing Agreement occur (an "Assignment Event"), Provident
will have 30 days with respect to the Closed-End Loans and 90 days with respect
to the Revolving Credit-Line Loans to record assignments of the mortgages for
each Mortgage Loan in favor of the Indenture Trustee and will have 30 days with
respect to the Closed-End Loans and 45 days with respect to the Revolving
Credit-Line Loans to deliver the Mortgage File (or the portion thereof held by
Provident) pertaining to each Mortgage Loan to the Indenture Trustee (unless
opinions of counsel are delivered to and satisfactory to the Rating Agencies and
the 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 Provident and the Trust in the Mortgage Loans). In lieu of delivery
of original documentation and only to the extent such original documentation is
unavailable, Provident may deliver documents which have been imaged optically
upon delivery of an opinion of counsel to the Rating Agencies and the Insurer,
satisfactory to each, that (i) such documents do not impair the enforceability
of the transfer to the Trust of the Mortgage Loans and (ii) the optical image of
such documents are enforceable in the relevant jurisdictions to the same extent
as the original documents.
With respect to each Closed-End Loan, the Indenture Trustee will review or
cause to be reviewed the Mortgage Notes within 60 days of the Closing Date and
the assignments of each Mortgage within 180 days of the Closing Date. With
respect to the Revolving Credit-Line Loans, the Indenture Trustee will review or
cause to be reviewed the Mortgage Files within 90 days of an Assignment Event.
If any Related Document is found to be defective in any material respect and
such defect is not cured within 60 days following notification thereof to
Provident by the Indenture Trustee, the Trust or the Insurer, Provident 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
related Loan Group Balance, thus reducing the amount of the related Transferor
Interest. If the deduction would cause such Transferor Interest to become less
than the applicable Minimum Transferor Interest at such time (a "Transfer
Deficiency"), Provident will be obligated to either (i) substitute an Eligible
Substitute Mortgage Loan or (ii) make a deposit into the related Collection
Account in the amount (the "Transfer Deposit Amount") equal to the Transfer
Deficiency, or a combination of both (i) and (ii) above. Any such deduction,
substitution or deposit, will be considered for the purposes of the Sale and
Servicing Agreement a payment in full of such Mortgage Loan. Any Transfer
Deposit Amount will be treated as a Principal Collection. No such transfer shall
be considered to have occurred until the required deposit to the related
Collection Account is actually made. The obligation of Provident to accept a
transfer of a Defective Mortgage Loan is the sole remedy regarding any defects
in the Mortgage File and Related Documents available to the Owner Trustee, the
Indenture Trustee or the Noteholders.
An "Eligible Substitute Mortgage Loan" is a mortgage loan substituted by
Provident 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) that is no greater than the Transfer Deficiency and
no more than 10% less than the Transfer Deficiency, if any, 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) if such Defective Mortgage Loan is an
adjustable rate Mortgage Loan (a) have a Loan Rate based on the same Index with
adjustments to such Loan Rate made on the same Adjustment Date as that of the
Defective Mortgage Loan and (b) 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; (iv) have a remaining term to
maturity not more than 6 months earlier and not later than the remaining term to
maturity of the Defective Mortgage Loan; (v) have a mortgage of the same or
higher level of priority as the mortgage relating to the Defective Mortgage
Loan; (vi) comply with each representation and warranty as to the Mortgage Loans
set forth in the Sale and Servicing Agreement (deemed to be made as of the date
of substitution); (vii) have an original Combined Loan-to-Value Ratio not
greater than that of the Defective Mortgage Loan; and (viii) satisfy certain
other conditions specified in the Sale and Servicing Agreement. To the extent
the Principal Balance of an Eligible Substitute Mortgage Loan is less than the
related Transfer Deficiency, Provident will be required to make a deposit to the
related Collection Account equal to such difference. Any such amounts will be
treated as Principal Collections.
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Provident will make certain representations and warranties as to the
accuracy in all material respects of certain information furnished to the
Indenture Trustee with respect to each Mortgage Loan (e.g., Cut-Off Date
Principal Balance and the Loan Rate). In addition, Provident will represent and
warrant on the Closing Date that, among other things: (i) at the time of
transfer to the Depositor, Provident 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) and (ii) each Mortgage Loan
complied, at the time of origination, in all material respects with applicable
state and federal laws. Upon discovery of a breach of any such representation
and warranty which materially and adversely affects the interests of the
Noteholders or the Insurer in the related Mortgage Loan and Related Documents,
Provident will have a period of 60 days after discovery or notice of the breach
to effect a cure. If the breach cannot be cured within the 60-day period,
Provident will be obligated to accept a transfer of the Defective Mortgage Loan
from the Trust. The same procedure and limitations that are set forth in the two
preceding paragraphs 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 by Provident that materially and
adversely affects the interests of the Noteholders.
Mortgage Loans required to be transferred to Provident as described in the
preceding paragraphs are referred to as "Defective Mortgage Loans."
Pursuant to the Sale and Servicing Agreement, the Master Servicer will
service and administer the Mortgage Loans as more fully set forth above.
AMENDMENTS TO CREDIT LINE AGREEMENTS
Subject to applicable law and the terms of the Sale and Servicing
Agreement, the Master Servicer may change the terms of the Credit Line
Agreements at any time provided that such changes (i) do not adversely affect
the interest of the Noteholders or the Insurer, and (ii) are consistent with
prudent business practice. In addition, the Sale and Servicing Agreement permits
the Master Servicer, within certain limitations described therein, to increase
or reduce the Credit Limit or the Combined Loan-to-Value Ratio of the related
Mortgage Loan and reduce the Margin for such Mortgage Loan.
OPTIONAL TRANSFERS OF MORTGAGE LOANS TO THE TRANSFEROR
Subject to the conditions specified in the Sale and Servicing Agreement, on
any Payment Date the Transferor may, but shall not be obligated to, remove on
such Payment Date (the "Transfer Date") from the Trust, certain Mortgage Loans
without notice to the Noteholders. The Transferor is permitted to randomly
designate the Mortgage Loans to be removed. Mortgage Loans so designated will
only be removed upon satisfaction of certain conditions specified in the Sale
and Servicing Agreement, including: (i) the related Transferor Interest as of
such Transfer Date (after giving effect to such removal) is at least equal to
its Minimum Transferor Interest; (ii) the Transferor shall have delivered to the
Indenture Trustee and the Insurer a revised Mortgage Loan Schedule containing a
list of all Mortgage Loans remaining in the Trust after such removal; (iii) the
Transferor shall represent and warrant that (A) no selection procedures which
the Transferor reasonably believes are adverse to the interests of the
Noteholders or the Insurer were used by the Transferor in selecting such
Mortgage Loans and (B) such Mortgage Loans were selected on a random basis;
(iv) in connection with each such retransfer of Mortgage Loans, the Rating
Agencies shall have been notified of the proposed transfer and prior to the
Transfer Date the Rating Agencies shall have notified the Transferor, the
Indenture Trustee, the Owner Trustee and the Insurer in writing that such
transfer will not result in a reduction or withdrawal of the ratings assigned to
the Notes without regard to the Policy; and (v) the Transferor shall have
delivered to the Indenture Trustee, the Owner Trustee and the Insurer an
officer's certificate confirming the satisfaction of the conditions set forth in
clauses (i) through (iii) above.
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As of any date of determination, the "Minimum Transferor Interest" with
respect to a Transferor Interest is an amount equal to such Transferor Interest
as of the Closing Date.
PAYMENTS ON MORTGAGE LOANS; DEPOSITS TO COLLECTION ACCOUNTS AND DISTRIBUTION
ACCOUNTS
The Master Servicer shall establish and maintain in the name of the
Indenture Trustee a separate trust account with respect to each Loan Group
(each, a "Collection Account") for the benefit of the related Noteholders, the
Transferor of the related Group and the Insurer, as their interests may appear.
The Collection Accounts will be Eligible Accounts (as defined herein). Subject
to the investment provisions described in the following paragraphs, upon receipt
by the Master Servicer of amounts in respect of the Mortgage Loans (excluding
amounts representing the Servicing Fee) the Master Servicer will deposit such
amounts in the related Collection Account. Not later than the eighteenth day of
the calendar month of each Payment Date (the "Determination Date"), the Master
Servicer will notify the Indenture Trustee of the amount of such deposit to be
included in funds available for the related Payment Date and Group. Amounts
deposited in the Collection Accounts may be invested in Eligible Investments (as
described in the Sale and Servicing Agreement) maturing no later than one
Business Day prior to the date on which amounts on deposit therein are required
to be deposited in the applicable Distribution Account.
The Indenture Trustee will establish an account with respect to each Group
(each a "Distribution Account") into which will be deposited on the
Determination Date amounts withdrawn from the related Collection Account for
payment to Noteholders. The Distribution Accounts will be Eligible Accounts.
Amounts on deposit therein may be invested in Eligible Investments maturing on
or before the Business Day prior to the related Payment Date. Net investment
earnings on amounts in the Distribution Accounts will be paid to Provident.
An "Eligible Account" is a segregated 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 and whose
accounts are fully insured by either the Savings Association Insurance Fund
("SAIF") or the Bank Insurance Fund ("BIF") of the FDIC with a minimum long-term
unsecured debt rating of "A1" by Moody's and "A" by S&P, and which is any of
(a) a federal savings and loan association duly organized, validly existing and
in good standing under the applicable banking laws of any state, (b) an
institution or association duly organized, validly existing and in good standing
under the applicable banking laws of any state, (c) a national banking
association duly organized, validly existing and in good standing under the
federal banking laws or (d) a principal subsidiary of a bank holding company,
and in each case of (a) - (d), approved in writing by the Insurer, (ii) a
segregated trust account maintained with the corporate trust department of a
federal or state chartered depository institution or trust company, having
capital and surplus of not less than $50,000,000, acting in its fiduciary
capacity or (iii) otherwise acceptable to each Rating Agency and the Insurer as
evidenced by a letter from each Rating Agency and the Insurer to the Indenture
Trustee, without reduction or withdrawal of their then current ratings of the
Notes without regard to the Policy.
Eligible Investments are specified in the Sale and Servicing Agreement and
are limited to investments which are acceptable to the Insurer and meet the
criteria of the Rating Agency from time to time as being consistent with their
then current ratings of the Notes.
MONTHLY ADVANCES
Not later than five Business Days prior to each Payment Date, the Master
Servicer will remit to the Indenture Trustee for deposit in the Distribution
Account in respect of a particular Group an amount, to be distributed on such
Payment Date, equal to interest due but not received on each Mortgage Loan in
the related Loan Group during the previous Collection Period (net of the Master
Servicing Fee) (the "Monthly Advance"). With respect to any Balloon Loan that is
delinquent on its maturity date, the Master Servicer will continue to make
Monthly Advances with respect to such Balloon Loan in an amount equal to one
month's interest on the unpaid principal balance at the Loan Rate (net of the
Master Servicing Fee). Such obligation of the Master Servicer continues with
respect to each Mortgage Loan until such Mortgage Loan becomes a Liquidated
Mortgage Loan.
In the course of performing its servicing obligations, the Master Servicer
will pay all reasonable and customary "out-of-pocket" costs and expenses
incurred in the performance of its servicing obligations,
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including, but not limited to, the cost of (i) the preservation, restoration and
protection of the Mortgaged Properties, (ii) any enforcement or judicial
proceedings, including foreclosures, and (iii) the management and liquidation of
Mortgaged Properties acquired in satisfaction of the related Mortgage. Each such
expenditure will constitute a "Servicing Advance."
The Master Servicer's right to reimbursement for Servicing Advances is
limited to late collections on the related Mortgage Loan, including Liquidation
Proceeds, Insurance Proceeds and such other amounts as may be collected by the
Master Servicer from the related Mortgagor or otherwise relating to the Mortgage
Loan in respect of which such unreimbursed amounts are owed. The Master
Servicer's right to reimbursement for Monthly Advances shall be limited to late
collections of interest on any Mortgage Loan and to Liquidation Proceeds and
Insurance Proceeds on the related Mortgage Loan. The Master Servicer's right to
such reimbursements is prior to the rights of the Noteholders.
Notwithstanding the foregoing, the Master Servicer is not required to make
any Servicing Advance if in the good faith judgment and sole discretion of the
Master Servicer, the Master Servicer determines that such advance will not be
ultimately recoverable from collections received from the Mortgagor in respect
of the related Mortgage Loan or other recoveries in respect of such Mortgage
Loan (a "Nonrecoverable Advance"). However, if any Servicing Advance or Monthly
Advance paid by the Master Servicer is determined by the Master Servicer to be
nonrecoverable from such sources, the amount of such Nonrecoverable Advance may
be reimbursed to the Master Servicer from other amounts on deposit in the
Collection Account in respect of the related Loan Group. The Master Servicer's
right to such reimbursements is prior to the rights of the Noteholders.
SIMPLE INTEREST EXCESS SUB-ACCOUNTS
The Sale and Servicing Agreement requires that the Master Servicer
establish and maintain in the name of the Indenture Trustee a sub-account of
each Collection Account (each a "Simple Interest Excess Sub-Account") which must
be an Eligible Account. The Master Servicer will transfer to each Simple
Interest Excess Sub-Account all Net Simple Interest Excess for the related Loan
Group. "Net Simple Interest Excess" means as of any Payment Date with respect to
a Loan Group, the excess, if any, of the aggregate amount of Simple Interest
Excess for such Loan Group over the amount of Simple Interest Shortfall for such
Loan Group. "Net Simple Interest Shortfall" means as of any Payment Date with
respect to a Loan Group, the excess, if any, of the aggregate amount of Simple
Interest Shortfall for such Loan Group over the amount of Simple Interest Excess
for such Loan Group. "Simple Interest Shortfall" means as of any Payment Date
for each Simple Interest Qualifying Loan in a Loan Group, the excess, if any, of
(i) 30 days' interest on the Principal Balance of all such Mortgage Loans in a
Loan Group at the Loan Rate, over (ii) the portion of the monthly payment
received from the Mortgagor for such Mortgage Loan allocable to interest with
respect to the related Collection Period. "Simple Interest Excess" means as of
any Payment Date for each Simple Interest Qualifying Loan in a Loan Group, the
excess, if any, of (i) the portion of the monthly payment received from the
mortgagor for such Mortgage Loan allocable to interest with respect to the
related Collection Period, over (ii) 30 days' interest on the Principal Balance
of such Mortgage Loan at the Loan Rate. A "Simple Interest Qualifying Loan" as
of any Determination Date is any Mortgage Loan that was not prepaid in full
during the related Collection Period and as to which a payment was made by the
obligor in respect of the related Collection Period as of the close of business
on the Determination Date following such Collection Period.
The Master Servicer will withdraw amounts on deposit in each Simple
Interest Excess Sub-Account for deposit to the related Collection Account prior
to each Payment Date to pay Net Simple Interest Shortfalls in respect of the
related Loan Group. If the amounts on deposit in a Simple Interest Excess
Sub-Account are insufficient to pay the Net Simple Interest Shortfalls in
respect of the related Loan Group, any remaining Servicing Fee for such Loan
Group not applied to reduce Prepayment Interest Shortfalls for such Loan Group
will be available to reduce such Net Simple Interest Shortfalls.
All funds in the Simple Interest Excess Sub-Accounts may be invested in
Eligible Investments. Any investment earnings on funds held in the Simple
Interest Excess Sub-Accounts are for the account of the Master Servicer. Upon
receipt of notification of a loss on investments in a Simple Interest Excess
Sub-Account, the Master Servicer, shall promptly remit the amount of such loss
from its own funds to such Simple Interest Excess Sub-Account.
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ALLOCATIONS AND COLLECTIONS
All collections on the Mortgage Loans will generally be allocated in
accordance with the Credit Line Agreements or the Mortgage Notes, as applicable,
between amounts collected in respect of interest and amounts collected in
respect of principal. As to any Payment Date, "Interest Collections" with
respect to a Loan Group will be equal to the amounts collected during the
related Collection Period on Mortgage Loans in such Loan Group, including such
portion of Net Liquidation Proceeds allocated to interest pursuant to the terms
of the Credit Line Agreements or the Mortgage Notes, as applicable, less
Servicing Fees for the related Collection Period and as adjusted for Simple
Interest Shortfalls and Simple Interest Excess as described above under
"--Simple Interest Excess Sub-Accounts."
As to any Payment Date, "Principal Collections" for a Loan Group will be
equal to the sum of (i) the amounts collected during the related Collection
Period on Mortgage Loans in such Loan Group, including such portion of Net
Liquidation Proceeds allocated to principal pursuant to the terms of the Credit
Line Agreements or Mortgage Notes, as applicable, (ii) any Transfer Deposit
Amounts in respect of such Loan Group and (iii) with respect to Loan Group 2,
the amount, if any, on deposit in the Pre-Funding Account immediately prior to
the first Payment Date. "Liquidation Proceeds" are the proceeds (excluding any
amounts drawn on the Policy) received in connection with the liquidation of any
Mortgage Loan, whether through trustee's sale, foreclosure sale or otherwise.
"Net Liquidation Proceeds" with respect to a Mortgage Loan are equal to the
Liquidation Proceeds, reduced by related expenses, but not including the
portion, if any, of such amount that exceeds the sum of (i) the Principal
Balance of the Mortgage Loan plus (ii) accrued and unpaid interest thereon to
the end of the Collection Period during which such Mortgage Loan became a
Liquidated Mortgage Loan.
Interest Collections of each Loan Group will be allocated between the
Noteholders of the related Group ("Investor Interest Collections") and the
Transferor as described herein. With respect to any Payment Date, the portion of
Interest Collections for Loan Group 1 allocable to the Class A-1 Notes
("Class A-1 Investor Interest Collections") will equal the product of
(a) Interest Collections for Loan Group 1 for such Payment Date and (b) the
Class A-1 Investor Floating Allocation Percentage for such Payment Date. With
respect to any Payment Date, the "Class A-1 Investor Floating Allocation
Percentage" is the percentage equivalent of a fraction determined by dividing
(a) the Group 1 Invested Amount at the close of business on the preceding
Payment Date (or the Closing Date in the case of the first Payment Date) by
(b) the Loan Group Balance of Loan Group 1 at the beginning of the related
Collection Period. The remaining amount of Interest Collections for Loan
Group 1 will be allocated to the Group 1 Transferor Interest.
With respect to any Payment Date, the portion of Interest Collections for
Loan Group 2 allocable to the Class A-2 and Class A-3 Notes (the "Class A-2/A-3
Investor Interest Collections") will equal the product of (a) Interest
Collections for Loan Group 2 for such Payment Date and (b) the Class A-2/A-3
Investor Floating Allocation Percentage for such Payment Date. With respect to
any Payment Date, the "Class A-2/A-3 Investor Floating Allocation Percentage" is
the percentage equivalent of a fraction determined by dividing (a) the Group 2
Invested Amount at the close of business on the preceding Payment Date (or the
Closing Date in the case of the first Payment Date) by (b) the Loan Group
Balance of Loan Group 2 at the beginning of the related Collection Period. The
remaining amount of Interest Collections for Loan Group 2 will be allocated to
the Group 2 Transferor Interest.
Principal Collections of each Loan Group will be allocated between the
Noteholders of the related Group and the Transferor of the related Group
("Investor Principal Collections" and "Transferor Principal Collections",
respectively) as described herein.
The Indenture Trustee will deposit any amounts withdrawn from a Spread
Account or drawn under the Policy with respect to the related Loan Group into
the related Distribution 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. With respect to
any date, the "Loan Group Balance" is, with respect to Loan Group 1, the
aggregate of the Principal Balances of the Group 1 Loans and, with respect to
Loan Group 2, the sum of the amount, if any, on deposit in the Pre-Funding
Account and the aggregate of the Principal Balances of the Group 2 Loans, each
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
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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 or Mortgage Note, as applicable, prior to such
day. The Principal Balance of a Liquidated Mortgage Loan after final recovery of
related Liquidation Proceeds shall be zero.
"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 received in connection therewith. The "Investor
Loss Amount" for a Group shall be the product of the related Investor Floating
Allocation Percentage and the aggregate of the Liquidation Loss Amounts for all
Mortgage Loans in the related Loan Group for such Payment Date. A "Liquidated
Mortgage Loan" means, as to any Payment Date, any Mortgage Loan in respect of
which the Master Servicer has determined, based on the servicing procedures
specified in the Sale and Servicing Agreement, as of the end of the preceding
Collection Period that all Liquidation Proceeds which it expects to recover with
respect to the disposition of the related Mortgaged Property have been
recovered.
With respect to each Loan Group, an amount of Investor Loss Amounts for
such Loan Group equal to the amount of the related Transferor Interest as of the
Closing Date, will be allocated to such Transferor Interest after the related
Spread Account is depleted and will not reduce the related Invested Amount.
As to any Payment Date, the "Collection Period" is the calendar month
preceding each Payment Date.
PAYMENTS ON THE NOTES
Beginning with the first Payment Date (which will occur on January 25,
1999), payments on the Notes will be remitted by the Indenture Trustee or the
Paying Agent to the persons in whose names such Notes are registered at the
close of business on the day prior to each Payment Date or, if the Notes are no
longer Book-Entry Notes, at the close of business on the last day of the month
preceding such Payment Date (the "Record Date") based solely upon the
information provided to the Indenture Trustee by the Master Servicer on each
Payment Date. The term "Payment Date" means the twenty-fifth day of each month
or, if such day is not a Business Day, then the next succeeding Business Day.
Payments will be made by check or money order mailed (or upon the request of a
Noteholder owning Notes having denominations aggregating at least $1,000,000, by
wire transfer or otherwise) to the address of the person entitled thereto
(which, in the case of Book-Entry Notes, will be DTC or its nominee) as it
appears on the Note Register in amounts calculated as described herein on the
Determination Date. However, the final payment in respect of the Notes will be
made only upon presentation and surrender thereof at the office or the agency of
the Indenture Trustee specified in the notice to Noteholders of such final
payment. For purposes of the Agreements, a "Business Day" is any day other than
(i) a Saturday or Sunday or (ii) a day on which the Insurer or banking
institutions in the States of Ohio or New York are required or authorized by law
to be closed.
Application of Interest Collections. On each Payment Date, the Indenture
Trustee or the Paying Agent will apply the Class A-1 Investor Interest
Collections in the following manner and order of priority:
(i) as payment to the Indenture Trustee for its fees for services
rendered pursuant to the Sale and Servicing Agreement in respect of the
Class A-1 Notes and as payment to the Owner Trustee for its fees for
services rendered pursuant to the Trust Agreement in respect of the
Class A-1 Notes;
(ii) as payment to the Insurer for the premium for the Policy in
respect of the Class A-1 Notes; and
(iii) concurrently, as follows:
(a) to the Class A-1 Noteholders, as payment for the accrued
interest due and any overdue accrued interest (with interest thereon to
the extent permitted by law) on the Note Principal Balance of the
Class A-1 Notes; and
(b) to the holder of the Group 1 Transferor Interest, the amount to
which it is entitled in accordance with the provisions of the Sale and
Servicing Agreement, which will generally be equal to the amount accrued
on a notional balance equal to the Note Principal Balance of the
Class A-1 Notes at a rate equal to the excess of the Group 1 Net Funds
Cap over the Class A-1 Note Rate, subject to reduction as described in
the Sale and Servicing Agreement;
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provided, however, if Class A-1 Investor Interest Collections (prior to giving
effect to withdrawals from the related Spread Account or draws on the Policy) on
such Payment Date are insufficient to make the payments required to be made
pursuant to this clause (iii), then Class A-1 Investor Interest Collections will
be allocated between subclauses (a) and (b) above, pro rata, based on the amount
required to be paid pursuant to each such subclause without giving effect to any
shortfall in such Class A-1 Investor Interest Collections; provided, further,
amounts otherwise payable on any Payment Date on the Group 1 Transferor
Interest, pursuant to clause (iii) (b) above will first be paid to the
Class A-1 Noteholders in respect of any outstanding LIBOR Carryover due to the
Class A-1 Notes on such Payment Date; provided, further, that if the Insurer
defaults under the Policy the amount payable pursuant to clause (iii) (b) above
on any Payment Date thereafter will be paid to the holder of the Group 1
Transferor Interest after payment of principal and interest due on the
Class A-1 Notes are made on any such Payment Date, including any LIBOR
Carryover. The Policy does not cover any LIBOR Carryover.
On each Payment Date, the Indenture Trustee or the Paying Agent will apply
the Class A-2/Class A-3 Investor Interest Collections in the following manner
and order of priority:
(i) as payment to the Indenture Trustee for its fees for services
rendered pursuant to the Sale and Servicing Agreement in respect
of the Class A-2 and Class A-3 Notes, as payment to the Owner
Trustee for its fees for services rendered pursuant to the Trust
Agreement in respect of the Class A-2 and Class A-3 Notes, and as
payment to the Auction Agent for the Auction Agent Fee in respect
of the Class A-3 Notes;
(ii) as payment to the Insurer for the premium for the Policy in
respect of the Class A-2 and Class A-3 Notes; and
(iii) concurrently, as follows:
(a) concurrently, to the Class A-2 and Class A-3 Noteholders,
pro rata based on their respective entitlements thereto, as
payment for the accrued interest due and any overdue accrued
interest (with interest thereon to the extent permitted by
law) on the respective Note Principal Balance of the Class
A-2 and Class A-3 Notes; and
(b) to the holder of the Group 2 Transferor Interest, the amount
to which it is entitled in accordance with the provisions of
the Sale and Servicing Agreement, which will generally be
equal to the amount accrued on a notional balance equal to
the aggregate of the Note Principal Balances of the Class
A-2 and Class A-3 Notes at a rate equal to the excess of the
Group 2 Net Funds Cap over the average of the Note Rates on
the Class A-2 and Class A-3 Notes (weighted on the basis of
their respective Note Principal Balances), subject to
reduction as described in the Sale and Servicing Agreement;
provided, however, if Class A-2/A-3 Investor Interest Collections (prior to
giving effect to withdrawals from the related Spread Account or draws on the
Policy) on such Payment Date are insufficient to make the payments required to
be made pursuant to this clause (iii), then Class A-2/A-3 Investor Interest
Collections will be allocated between subclauses (a) and (b) above, pro rata,
based on the amount required to be paid pursuant to each such subclause without
giving effect to any shortfall in such Class A-2/A-3 Investor Interest
Collections; provided, further, amounts otherwise payable on any Payment Date on
the Group 2 Transferor Interest, pursuant to clause (iii) (b) above will first
be paid to the Class A-2 Noteholders and the Class A-3 Noteholders in respect of
any outstanding LIBOR Carryover due to the Class A-2 and Class A-3 Notes on such
Payment Date, such amount to be paid, pro rata, based on the amount of LIBOR
Carryover to which such Noteholders are entitled; provided, further, that if the
Insurer defaults under the Policy, the amount payable pursuant to clause
(iii) (b) above on any Payment Date thereafter will be paid to the holder of the
Group 2 Transferor Interest after payment of principal and interest due on the
Class A-2 and Class A-3 Notes are made on any such Payment Date, including any
LIBOR Carryover. The Policy does not cover any LIBOR Carryover.
Calculation of the Note Rates. Interest will be distributed on each Payment
Date to each Class of Notes at the related Note Rate for the related Interest
Period on the related Note Principal Balance as of the first day of such
Interest Period.
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The "Class A-1 Note Rate" for a Payment Date will equal the lesser of (A)
the sum of (a) LIBOR, determined as specified herein, as of the second LIBOR
Business Day prior to the immediately preceding Payment Date (or as of two LIBOR
Business Days prior to the Closing Date, in the case of the first Payment Date)
plus (b) 0.55% per annum and (B) the Group 1 Net Funds Cap. The "Class A-2 Note
Rate" for a Payment Date will equal the lesser of (A) the sum of (a) LIBOR,
determined as specified herein, as of the second LIBOR Business Day prior to the
immediately preceding Payment Date (or as of two LIBOR Business Days prior to
the Closing Date, in the case of the first Payment Date) plus (b) 0.55% per
annum and (B) the Group 2 Net Funds Cap. The "Class A-3 Note Rate" for a Payment
Date will equal the lesser of (A) the Class A-3 Formula Rate and (b) the Group 2
Net Funds Cap. The "Class A-3 Formula Rate" for the first Payment Date is 5.75%
per annum and for each Payment Date thereafter, the Auction Rate established for
the Class A-3 Notes for such Payment Date based upon the Auction Procedures
described in Annex II hereto.
The "Group 1 Net Funds Cap" for any Payment Date shall be the weighted
average of the Loan Rates of the Mortgage Loans in Loan Group 1 (net of the
Servicing Fee Rate, the rate at which the Indenture Trustee fee and the Owner
Trustee fee are paid and the rate at which the premium on the Policy is paid,
each with respect to Loan Group 1), weighted on the Principal Balance of the
Mortgage Loans in Loan Group 1 outstanding on the first day of the related
Collection Period. The "Group 2 Net Funds Cap" for any Payment Date shall be the
weighted average of the Loan Rates of the Mortgage Loans in Loan Group 2 (net of
the Servicing Fee Rate, the Auction Agent Fee Rate, the rate at which the
Indenture Trustee fee and the Owner Trustee fee are paid and the rate at which
the premium on the Policy is paid, each with respect to Loan Group 2), weighted
on the Principal Balance of the Mortgage Loans in Loan Group 2 outstanding on
the first day of the related Collection Period.
Interest on each Class of Notes in respect of any Payment Date will accrue
on the related Note Principal Balance from the preceding Payment Date (or in the
case of the first Payment Date, from the date of the initial issuance of the
Notes (the "Closing Date")) through the day preceding such Payment 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 for any Payment Date due but
not paid on such Payment Date will be due on the next succeeding Payment Date
together with additional interest on such amount at a rate equal to the
applicable Note Rate.
With respect to any Payment Date, "LIBOR Carryover" with respect to a Class
of Notes is the sum of (i) if on such Payment Date the Note Rate is based on the
related Net Funds Cap, the excess of (a) the amount of interest such Class of
Notes would otherwise be entitled to receive on such Payment Date had such rate
been calculated without regard to the related Net Funds Cap over (b) the amount
of interest payable in respect of such Notes at the related Net Funds Cap for
such Payment Date, (ii) the LIBOR Carryover for all previous Payment Dates not
previously paid, and (iii) one month's interest on the amount calculated in (ii)
at the Note Rate (without regard to the related Net Funds Cap) for such Payment
Date. Neither the Spread Accounts nor the Policy covers the payment of any LIBOR
Carryover.
"Civil Relief Act Interest Shortfalls" means for any Payment Date any
shortfall in interest collections on the Mortgage Loans during the prior
Collection Period that are attributable to the Soldiers' and Sailors' Civil
Relief Act of 1940, as amended.
Calculation of the LIBOR Rates. With respect to any Payment Date and the
Class A-1 and Class A-2 Notes, LIBOR shall be established by the Indenture
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 the related 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 Master Servicer after consultation
with the Indenture Trustee), the rate will be the Reference Bank Rate. The
"Reference Bank Rate" will be determined on the basis of the rates at which
deposits in U.S. Dollars are offered by the reference banks (which shall be
three major banks that are engaged in transactions in the London interbank
market, selected by the Master Servicer after consultation with the Indenture
Trustee) as of 11:00 A.M., London time, on the day that is two LIBOR Business
Days prior to the immediately preceding Payment Date to prime banks in the
London interbank market for a period of one month in amounts
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approximately equal to the principal amount of the Class A-1 and Class A-2 Notes
then outstanding. The Indenture Trustee will request the principal London office
of each of the reference banks to provide a quotation of its rate. If at least
two 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 two or more major
banks in New York City, selected by the Master Servicer after consultation with
the Indenture Trustee, as of 11:00 A.M., New York City time, on 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 Class A-1 and
Class A-2 Notes then outstanding. If no such quotations can be obtained, the
rate will be LIBOR for the prior Payment 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.
For a description of the one-month LIBOR rate applicable to the Class A-3
Notes on any Payment Date, see Annex II hereto.
Payments of Principal Collections. On any Payment Date during the period
beginning on the first Payment Date and, unless a Rapid Amortization Event shall
have earlier occurred, ending immediately after the Payment Date in December
2003 (such period, the "Managed Amortization Period"), the amount of Principal
Collections payable to the Noteholders of a Group will equal, to the extent
funds are available therefor, the Scheduled Principal Collections Payment Amount
for such Group for such Payment Date. The "Scheduled Principal Collections
Payment Amount" for a Group shall equal the lesser of (i) the Maximum Principal
Payment (as defined below) for such Group and (ii) the Alternative Principal
Payment (as defined below) for such Group. With respect to any Payment Date, the
"Maximum Principal Payment" for a Group will equal the product of the related
Investor Fixed Allocation Percentage and Principal Collections on Mortgage Loans
in the related Loan Group for such Payment Date. With respect to any Payment
Date, the "Alternative Principal Payment" for a Group will equal the amount, but
not less than zero, of Principal Collections on Mortgage Loans in the related
Loan Group for such Payment Date less the aggregate of Additional Balances
created on Mortgage Loans in the related Loan Group during the related
Collection Period. The "Rapid Amortization Period" for a Group is the period
beginning at the earlier of (i) the occurrence of a Rapid Amortization Event and
(ii) immediately following the Payment Date in December 2003 and continuing
until the later of when (i) the aggregate Note Principal Balance for such Group
has been reduced to zero and all amounts then due and owing to the Insurer with
respect to such Group have been paid and (ii) the Trust is terminated. See
"DESCRIPTION OF THE AGREEMENTS--Termination; Retirement of the Notes."
Beginning with the first Payment Date following the end of the Managed
Amortization Period, the amount of Principal Collections on Mortgage Loans in a
Loan Group payable to the Noteholders of the related Group, on each Payment Date
will be equal to the related Maximum Principal Payment.
On any Payment Date, principal payments due to the Noteholders of Group 2
will be made to the Class A-2 and Class A-3 Notes pro rata based on their
respective Note Principal Balances immediately prior to such Payment Date.
Payments of Principal Collections based upon the Investor Fixed Allocation
Percentage may result in payments of principal to the related Noteholders in
amounts that are greater relative to the declining Loan Group Balance than would
be the case if the related Investor Floating Allocation Percentage were used to
determine the percentage of Principal Collections distributed in respect of the
related Invested Amount. Principal Collections not allocated to the Noteholders
will be allocated to the related Transferor Interest. The aggregate payments of
principal to the Noteholders of a Group will not exceed the related Original
Note Principal Balance.
In addition, to the extent of funds available therefor (including funds
available in a Spread Account and under the Policy), on the Payment Date in
December 2028, Noteholders of a Class will be entitled to receive as a payment
of principal an amount equal to the outstanding Note Principal Balance of such
Class.
Transferor Collections. Interest Collections allocable to either Transferor
Interest will be paid to the Transferor on each Payment Date; provided, however,
if the Notes of the related Group have any outstanding LIBOR Carryover on any
Payment Date (after giving effect to the payment of the related Investor
Interest Collections), Interest Collections allocable to the related Transferor
Interest will be paid to such Noteholders in
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respect of any LIBOR Carryover. Principal Collections allocable to a Transferor
Interest will be distributed to the Transferor only to the extent that such
payment will not reduce the amount of the related Transferor Interest below its
Minimum Transferor Interest. Amounts not distributed to the Transferor because
of such limitations will be retained in the related Distribution Account until
such Transferor Interest exceeds its Minimum Transferor Interest, at which time
such excess shall be released to the Transferor.
The Paying Agent. The Paying Agent shall initially be the Indenture
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 Distribution Accounts for the purpose of making payments to the Noteholders.
THE SPREAD ACCOUNTS
The Sale and Servicing Agreement requires the Master Servicer to establish
in the name of the Indenture Trustee on the Closing Date and to maintain two
spread accounts (with respect to Group 1, the "Group 1 Spread Account" and with
respect to Group 2, the "Group 2 Spread Account" and together, the "Spread
Accounts") for the benefit of the Insurer and the related Noteholders. On the
Closing Date, the Transferor will make a deposit to each Spread Account, as
specified in the Sale and Servicing Agreement. No additional deposits will be
required to be made to either Spread Account.
On any Payment Date prior to giving effect to any draw on the Policy,
amounts, if any, on deposit in a Spread Account will be available to cover any
shortfall in the amount required to be paid in respect of interest (other than
LIBOR Carryover) on the Notes of the related Group (after giving effect to the
payment of related Interest Collections on such Payment Date). In addition,
prior to giving effect to any draw on the Policy, amounts, if any, on deposit in
a Spread Account will be available on any Payment Date (other than the Final
Payment Date) to pay principal on the Notes of the related Group in an amount,
if any, by which the aggregate Note Principal Balance for such Group exceeds the
Invested Amount for such Group as of such Payment Date (after giving effect to
the payment of related Principal Collections on the Notes of such Group on such
Payment Date). On the Final Payment Date, prior to giving effect to any draw on
the Policy, amounts in a Spread Account will be available to pay any aggregate
outstanding Note Principal Balance for the related Group (after giving effect to
the payment of related Principal Collections on such Payment Date).
The Sale and Servicing Agreement permits reduction of the amount on deposit
in the Spread Accounts as specified in the Sale and Servicing Agreement. Any
such reduction will be dependent on the delinquency and loss performance of the
Mortgage Loans in the related Loan Group. The maximum amount required to be on
deposit at any time in a Spread Account is the "Spread Account Requirement."
The amounts on deposit in a Spread Account in excess of the Spread Account
Requirement will first be available to compensate Noteholders of the related
Group for any LIBOR Carryover then outstanding and then will be distributed to
the related Transferor. The Transferor will not be required to refund any
amounts previously and properly distributed to it, regardless of whether there
are sufficient funds on a subsequent Payment Date to make a full payment to the
holders of the related Notes on such Payment Date. Funds credited to a Spread
Account may be invested in Eligible Investments or certain other investments
specified in the Sale and Servicing Agreement that are scheduled to mature on or
prior to the next Payment Date as specified in the Sale and Servicing Agreement.
The Spread Accounts are required to be Eligible Accounts.
The Spread Accounts may be terminated or other assets, including mortgage
loans such as the Mortgage Loans or a guarantee of Provident or a letter of
credit issued on behalf of Provident, may be substituted for some or all of the
assets held therein, if any, provided that the Insurer and the Rating Agencies
consent to such action and the then current ratings of the Notes assigned by the
Rating Agencies are not lowered as a result thereof.
Amounts remaining in a Spread Account upon the payment in full of the Notes
of the related Group (including any LIBOR Carryover with respect thereto) and
the payment to the Insurer of all amounts due and owing to it in respect of such
Group, will be available, at the Insurer's directon, to cover any Deficiency
Amount in respect of the Notes in the other Group prior to a draw on the Policy.
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PRE-FUNDING ACCOUNT
On the Closing Date, it is expected that approximately $3,245,495 of
Subsequent Mortgage Loans will be transferred to the Trust for Loan Group 2. See
"DESCRIPTION OF THE MORTGAGE LOANS--Conveyance of Subsequent Mortgage Loans." In
the event that less than such amount of Subsequent Mortgage Loans is transferred
to the Trust, an aggregate cash amount equal to the excess of $3,245,495 over
the aggregate Cut-Off Date Principal Balances of the Subsequent Mortgage Loans
in Loan Group 2 will be deposited by Provident in an account which will be in
the name of, and maintained by, the Indenture Trustee on behalf of the Trust
(the "Pre-Funding Account"). Such amounts, if any, on deposit in the Pre-Funding
Account will be transferred by the Indenture Trustee on the first Payment Date
into the Distribution Account for Group 2 and will be treated as a Principal
Collection for the first Payment Date. Amounts on deposit in the Pre-Funding
Account will be invested in Eligible Investments. See "MATURITY AND PREPAYMENT
CONSIDERATIONS."
RAPID AMORTIZATION EVENTS
As described above, the Managed Amortization Period with respect to either
Group will continue through the Payment Date in December 2003, unless a Rapid
Amortization Event relating to such Group occurs prior to such date in which
case the Rapid Amortization Period for such Group will commence prior to such
date. The "Rapid Amortization Period" is the period commencing on the earlier of
(x) the end of the Managed Amortization Period and (y) the day, if any, upon
which a Rapid Amortization Event occurs and concluding upon the later of
(i) termination of the Trust and (ii) the date on which all amounts due and
owing to the Insurer and the related Noteholders have been paid. "Rapid
Amortization Event" refers to any of the following events:
(a) failure on the part of Provident (i) to make a payment or deposit
required under the Agreements or (ii) to observe or perform in any material
respect any other covenants or agreements of Provident set forth in the
Agreements, which failure materially and adversely affects the interests of
the Noteholders or the Insurer and continues unremedied for a period of
30 days after written notice;
(b) any representation or warranty made by Provident in the Agreements
proves to have been incorrect in any material respect when made and
continues to be incorrect in any material respect for a period of 30 days
after written notice and as a result of which the interests of the
Noteholders or the Insurer are materially and adversely affected; provided,
however, that a Rapid Amortization Event shall not be deemed to occur with
respect to a breach of representation and warranty relating to a Mortgage
Loan if Provident has purchased or made a substitution for the related
Mortgage Loan or Mortgage Loans if applicable during such period (or within
an additional 60 days, with the consent of the Indenture Trustee and the
Insurer) in accordance with the provisions of the Sale and Servicing
Agreement;
(c) the occurrence of certain events of bankruptcy, insolvency or
receivership relating to Provident;
(d) the Trust becomes subject to regulation by the Securities and
Exchange Commission as an investment company within the meaning of the
Investment Company Act, of 1940, as amended;
(e) the aggregate of all draws under the Policy exceeds 1% of the
related Loan Group Balance as of the Cut-Off Date; or
(f) any other events specified in the Sale and Servicing Agreement.
In the case of any event described in clause (a), (b) or (f), 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 Indenture Trustee or
Noteholders holding Notes of the affected Group evidencing more than 51% of the
Percentage Interests (in either case, with the consent of the Insurer) or the
Insurer (so long as there is no default by the Insurer in the performance of its
obligations under the Policy), by written notice to the Transferor, the
Depositor and the Master Servicer (and to the Indenture Trustee, if given by the
Noteholders) declare that a Rapid Amortization Event has occurred as of the date
of 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 Indenture Trustee, the Insurer or the
Noteholders immediately upon the occurrence of such event.
In addition to the consequences of a Rapid Amortization Event discussed
above, if the Transferor goes into liquidation or any person is appointed a
receiver of the Transferor, on the day of any such appointment no further
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Additional Balances will be transferred to the Trust, the Transferor will
immediately cease to transfer Additional Balances to the Trust and the
Transferor will promptly give notice to the Indenture Trustee and the Insurer of
any such appointment.
Notwithstanding the foregoing, if a conservator or receiver is appointed
for the Transferor and no Rapid Amortization Event exists other than such
conservatorship, receivership or insolvency of the Transferor, the conservator
or receiver may have the power to prevent the commencement of the Rapid
Amortization Period or the sale of Mortgage Loans described above.
THE POLICY
The following information has been supplied by the Insurer for inclusion in
this Prospectus Supplement. Accordingly, Provident does not make any
representation as to the accuracy and completeness of such information.
The Insurer, in consideration of the payment of the premium and subject to
the terms of the Policy, thereby unconditionally and irrevocably guarantees to
any Owner that an amount equal to each full and complete Insured Payment will be
received by the Indenture Trustee, or its successor, as trustee for the Owners
(the "Indenture Trustee"), on behalf of the Owners from the Insurer, for
distribution by the Indenture Trustee to each Owner of each Owner's
proportionate share of the Insured Payment. The Insurer's obligations under the
Policy with respect to a particular Insured Payment shall be discharged to the
extent funds equal to the applicable Insured Payment are received by the
Indenture Trustee, whether or not such funds are properly applied by the
Indenture Trustee. Insured Payments shall be made only at the time set forth in
the Policy and no accelerated Insured Payments shall be made regardless of any
acceleration of the Notes, unless such acceleration is at the sole option of the
Insurer.
Notwithstanding the foregoing paragraph, the Policy does not cover
shortfalls, if any, attributable to the liability of the Trust or the Indenture
Trustee for withholding taxes, if any (including interest and penalties in
respect of any such liability).
The Insurer will pay any Insured Payment that is a Preference Amount on the
Business Day following receipt on a Business Day by the Fiscal Agent (as
described below) of (i) a certified copy of the order requiring the return of a
preference payment, (ii) an opinion of counsel satisfactory to the Insurer that
such order is final and not subject to appeal, (iii) an assignment in such form
as is reasonably required by the Insurer, irrevocably assigning to the Insurer
all rights and claims of the Owner relating to or arising under the Notes
against the debtor that made such preference payment or otherwise with respect
to such preference payment and (iv) appropriate instruments to effect the
appointment of the Insurer as agent for such Owner in any legal proceeding
related to such preference payment, such instruments being in a form
satisfactory to the Insurer, provided that if such documents are received after
12:00 noon, New York City time, on such Business Day, they will be deemed to be
received on the following Business Day. Such payments shall be disbursed to the
receiver or trustee in bankruptcy named in the final order of the court
exercising jurisdiction on behalf of the Owner and not to any Owner directly
unless such Owner has returned principal or interest paid on the Notes to such
receiver or trustee in bankruptcy, in which case such payment shall be disbursed
to such Owner.
The Insurer will pay any other amount payable under the Policy no later
than 12:00 noon, New York City time, on the later of the Payment Date on which
the related Deficiency Amount is due or the third Business Day following receipt
in New York, New York on a Business Day by State Street Bank and Trust Company,
N.A., as Fiscal Agent for the Insurer or any successor fiscal agent appointed by
the Insurer (the "Fiscal Agent") of a Notice (as described below); provided that
if such Notice is received after 12:00 noon, New York City time, on such
Business Day, it will be deemed to be received on the following Business Day. If
any such Notice received by the Fiscal Agent is not in proper form or is
otherwise insufficient for the purpose of making claim under the Policy, it
shall be deemed not to have been received by the Fiscal Agent for purposes of
this paragraph, and the Insurer or the Fiscal Agent, as the case may be, shall
promptly so advise the Indenture Trustee and the Indenture Trustee may submit an
amended Notice.
Insured Payments due under the Policy unless otherwise stated therein will
be disbursed by the Fiscal Agent to the Indenture Trustee on behalf of the
Owners by wire transfer of immediately available funds in the amount of
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the Insured Payment less, in respect of Insured Payments related to Preference
Amounts, any amount held by the Indenture Trustee for the payment of such
Insured Payment and legally available therefor.
The Fiscal Agent is the agent of the Insurer only and the Fiscal Agent
shall in no event be liable to the Owners for any acts of the Fiscal Agent or
any failure of the Insurer to deposit or cause to be deposited, sufficient funds
to make payments due under the Policy.
Subject to the terms of the Agreement, the Insurer shall be subrogated to
the rights of each Owner to receive payments under the Notes to the extent of
any payment by the Insurer under the Policy.
As used in the Policy, the following terms shall have the following
meanings:
"Agreement" means the Sale and Servicing Agreement dated as of December 1,
1998 among the Transferor, the Master Servicer, the Trust, the Depositor and the
Indenture Trustee without regard to any amendment or supplement thereto unless
such amendment or modification has been approved in writing by the Insurer.
"Business Day" means any day other than (i) a Saturday, a Sunday or (ii) a
day on which the Insurer or banking institutions in New York City or the city in
which the corporate trust office of the Indenture Trustee under the Agreements
is authorized or obligated by law or executive order to be closed.
"Deficiency Amount" means for any Payment Date and Group the sum of
(A) the excess, if any, of (i) accrued and unpaid interest for the related
Interest Period due on the related Notes at the related Note Rate on the
applicable Note Principal Balance as of the first day of such Interest Period
(after giving effect to distributions made on such date) net of Civil Relief Act
Shortfalls allocable to such Note over (ii) amounts for the related Loan Group
on deposit in the related Distribution Account (including, without limitation,
amounts available from the related Spread Account) available to be distributed
therefor on such Payment Date and (B) the related Guaranteed Principal Amount.
"Final Payment Date" means the Payment Date in December 2028.
"Guaranteed Principal Amount" means (a) for any Payment Date and Group
(other than the Final Payment Date) the amount, if any, by which the aggregate
Note Principal Balance for such Group exceeds the Invested Amount for such Group
as of such Payment Date (after giving effect to all payments of principal on the
Notes of such Group on such Payment Date pursuant to the Agreements) and (b) on
the Final Payment Date, the outstanding aggregate Note Principal Balance for
such Group (after giving effect to all other payments of principal on the Notes
on such Payment Date pursuant to the Agreements).
"Insured Payment" means (i) as of any Payment Date, any Deficiency Amount
and (ii) any Preference Amount.
"Notice" means the telephonic or telegraphic notice, promptly confirmed in
writing by telecopy, substantially in the form of Exhibit A attached to the
Policy, the original of which is subsequently delivered by registered or
certified mail, from the Indenture Trustee specifying the Insured Payment which
shall be due and owing on the applicable Payment Date.
"Owner" means each Holder (as defined in the Agreement) who, on the
applicable Payment Date, is entitled under the terms of the applicable Notes to
payment thereunder.
"Preference Amount" means any amount previously distributed to an Owner on
the Notes that is recoverable and sought to be recovered as a voidable
preference by a trustee in bankruptcy pursuant to the United States Bankruptcy
Code (11 U.S.C.), as amended from time to time in accordance with a final
nonappealable order of a court having competent jurisdiction.
Capitalized terms used in the Policy and not otherwise defined in the
Policy shall have the respective meanings set forth in the Agreement as of the
date of execution of the Policy, without giving effect to any subsequent
amendment or modification to the Agreement unless such amendment or modification
has been approved in writing by the Insurer.
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Any notice under the Policy or service of process on the Fiscal Agent or
the Insurer may be made at the address listed below for the Fiscal Agent or the
Insurer or such other address as the Insurer shall specify in writing to the
Indenture Trustee.
The notice address of the Fiscal Agent is 61 Broadway, 15th Floor, New
York, New York 10006, Attention: Municipal Registrar and Paying Agency, or such
other address as the Fiscal Agent shall specify to the Indenture Trustee in
writing.
The Policy is being issued under and pursuant to, and shall be construed
under, the laws of the State of New York, without giving effect to the conflict
of laws principles thereof.
The insurance provided by the Policy is not covered by the
Property/Casualty Insurance Security Fund specified in Article 76 of the New
York Insurance Law.
The Policy is not cancelable for any reason. The premium on the Policy is
not refundable for any reason including payment, or provision being made for
payment, prior to the maturity of the Notes.
POOL FACTOR
The "Pool Factor" is a seven-digit decimal which the Master Servicer will
compute monthly expressing the Note Principal Balance of a Class of Notes as of
each Payment Date (after giving effect to any payment of principal on such
Payment Date) as a proportion of the Original Note Principal Balance of such
Class. On the Closing Date, the Pool Factor for each Class of Notes will be
1.0000000. See "DESCRIPTION OF THE NOTES--Payments on the Notes." Thereafter,
the Pool Factor for each Class will decline to reflect reductions in the related
Note Principal Balance resulting from payments of principal to the Notes.
Pursuant to the Sale and Servicing Agreement, monthly reports concerning
the Invested Amounts, the Pool Factors and various other items of information
will be made available to the Noteholders. In addition, within 60 days after the
end of each calendar year, beginning with the 1999 calendar year, information
for tax reporting purposes will be made available to each person who has been a
Noteholder of record at any time during the preceding calendar year. See
"DESCRIPTION OF THE NOTES--Book-Entry Notes" and "DESCRIPTION OF THE
AGREEMENTS--Reports to Noteholders" herein.
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MATURITY AND PREPAYMENT CONSIDERATIONS
The Agreements, except as otherwise described herein, provide that the
Noteholders will be entitled to receive on each Payment Date payments of
principal, in the amounts described herein, until the related Note Principal
Balance is reduced to zero. During the Managed Amortization Period, Noteholders
will receive amounts from Principal Collections on Mortgage Loans in the related
Loan Group based upon the Investor Fixed Allocation Percentage, subject to
reduction as described below. During the Rapid Amortization Period, Noteholders
will receive amounts from Principal Collections on Mortgage Loans in the related
Loan Group based solely upon the related Investor Fixed Allocation Percentage.
Because prior payments of Investor Principal Collections to related Noteholders
reduce the Investor Floating Allocation Percentage but do not change the
Investor Fixed Allocation Percentage, allocations of Principal Collections based
on the Investor Fixed Allocation Percentage may result in payments of principal
to the related Noteholders in amounts that are, in most cases, greater relative
to the declining balance of the Mortgage Loans in the related Loan Group than
would be the case if the related Investor Floating Allocation Percentage were
used to determine the percentage of related Principal Collections distributed to
Noteholders. This is especially true during the Rapid Amortization Period when
the Noteholders are entitled to receive the Investor Fixed Allocation Percentage
of Principal Collections and not a lesser amount. In addition, to the extent of
losses allocable to the Noteholders, Noteholders may also receive as payment of
principal the Investor Floating Allocation Percentage of the amount of such
losses either from the Spread Account or draws under the Policy. The level of
losses may therefore affect the rate of payment of principal on the Notes. For a
description of the defined terms used in this section, See "DESCRIPTION OF THE
NOTES."
To the extent obligors on the Revolving Credit-Line Loans in a Loan Group
make more draws than Principal Collections for such Loan Group, the related
Transferor Interest may increase. Because during the Rapid Amortization Period
the Noteholders' share of Principal Collections is based upon the Investor Fixed
Allocation Percentage (without reduction), an increase in the Transferor
Interest due to additional draws may also result in Noteholders receiving
principal at a greater rate than would otherwise occur if the Investor Floating
Allocation Percentage were used to determine the percentage of Principal
Collections distributed to Noteholders. The Sale and Servicing Agreement permits
the Transferor, at its option, but subject to the satisfaction of certain
conditions specified in the Sale and Servicing 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 related Transferor
Interest (after giving effect to such removal) is not less than its Minimum
Transferor Interest. Such removals may affect the rate at which principal is
distributed to Noteholders by reducing the Loan Group Balance and thus the
amount of Principal Collections. See "DESCRIPTION OF THE NOTES--Optional
Transfers of Mortgage Loans to the Transferor."
The prepayment experience with respect to the Mortgage Loans will affect
the weighted average life of the Notes.
The rate of prepayment on the Mortgage Loans cannot be predicted. Provident
is not aware of any publicly available studies or statistics that accurately
predict or forecast the rate of prepayment of mortgage loans such as the
Mortgage 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 first mortgage loans. Because the Revolving
Credit-Line Loans may not amortize during the Draw Period which in the case of
the One-Year Draw Period Loans may automatically renew for extended periods as
described herein, rates of principal payment on the Mortgage Loans may be slower
than those of traditional fully-amortizing first mortgages in the absence of
prepayments on 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 loans. Substantially all of the Mortgage Loans contain "due-on-sale"
provisions, and the Master Servicer intends to enforce such provisions, unless
such enforcement is not permitted by applicable law. The enforcement of a
"due-on-sale" provision will have the same effect as a prepayment of the related
Mortgage Loan. See "CERTAIN LEGAL ASPECTS OF LOANS--Due-on-Sale Clauses in
Mortgage Loans" in the Prospectus.
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As with fixed rate obligations generally, the rate of prepayment on a pool
of mortgage loans with fixed rates such as the fixed-rate Closed-End Loans is
affected by prevailing market rates for mortgage loans of a comparable term and
risk level. When the market interest rate is below the interest rate on a
mortgage loan, mortgagors may have an increased incentive to refinance their
mortgage loans. Depending on prevailing mortgage rates, the future outlook for
market rates and economic conditions generally, some mortgagors may sell or
refinance mortgaged properties in order to realize their equity in the mortgaged
properties, to meet cash flow needs or to make other investments.
The yield to an investor who purchases the Notes in the secondary market at
a price other than par will vary from the anticipated yield if the rate of
prepayment on the Mortgage Loans is actually different than the rate assumed by
such investor at the time such Notes were purchased.
Collections on the Mortgage Loans may vary because, among other things,
borrowers may make payments during any month as low as the minimum monthly
payment for such month which, in the case of the Revolving Credit-Line Loans may
be the related finance charge, or as high as the entire outstanding principal
balance plus accrued interest and the fees and charges 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 but it can be expected that a portion of borrowers will
not prepay their Mortgage Loans to any significant degree. See "DESCRIPTION OF
THE SECURITIES--Weighted Average Life of the Securities" in the Prospectus.
The yield to investors on the Notes will be sensitive to, among other
things, the level of one-month LIBOR. As described herein, the Note Rate for
each Class of Notes may in no event exceed the related Net Funds Cap, which
depends, in large part, on the net Loan Rates in the related Loan Group. It is
possible that an increased level of one-month LIBOR could occur simultaneously
with a lower level of prevailing interest rates, which may result in faster
prepayments of Mortgage Loans with relatively higher Loan Rates resulting in a
lower Net Funds Cap. Although the majority of the Mortgage Loans bears interest
at an adjustable rate, such rate is subject to a Lifetime Cap. As such, the
adjusted Loan Rate on a Mortgage Loan may not equal the Index plus the related
Margin due to the constraint of such caps. In such event, the related Loan Rate
will be less than would have been the case in the absence of such cap. In
addition, there may be a lag in time between an increase in the Index and a
corresponding increase in the Loan Rate which will slow the adjustment of the
related Net Funds Cap. See "DESCRIPTION OF THE MORTGAGE LOANS" herein.
The majority of the Loan Rates adjust less frequently than the Note Rate
for the Notes and adjust by reference to the Index or are fixed over the term of
the Mortgage Loan. Changes in the level of one-month LIBOR or the Note Rate on
the Class A-3 Notes may not correlate with changes in the Index and may not
correlate with prevailing interest rates. It is possible that an increased level
of the one-month LIBOR could occur simultaneously with a lower level of
prevailing interest rates, which would be expected to result in faster
prepayments, thereby reducing the weighted average life of the Notes.
INCREASE IN PRINCIPAL COLLECTIONS
On the Closing Date, it is expected that approximately $3,245,495 of
Subsequent Mortgage Loans will be transferred to the Trust for Loan Group 2. In
the event that less than such amount of Subsequent Mortgage Loans is transferred
to the Trust for Loan Group 2, Principal Collections for Loan Group 2 on the
first Payment Date will be increased by an amount equal to the excess of
$3,245,495 over the aggregate Cut-Off Date Principal Balances of the Subsequent
Mortgage Loans. Although no assurances can be given, Provident intends that the
principal amount of Mortgage Loans in Loan Group 2 on the Closing Date will
substantially equal the sum of the Original Class A-2 Principal Balance and the
Original Class A-3 Principal Balance divided by 99%. Accordingly, there should
be no material increase in Principal Collections due to a lack of Subsequent
Mortgage Loans.
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DESCRIPTION OF THE AGREEMENTS
The following summary describes certain terms of the Sale and Servicing
Agreement, the Trust Agreement and the Indenture. Such summary does not purport
to be complete and is subject to, and qualified in its entirety by reference to,
the respective provisions of the Sale and Servicing Agreement, the Trust
Agreement and the Indenture. Whenever particular defined terms in the Indenture
are referred to, such defined terms are thereby incorporated herein by
reference. See "The Agreements" in the Prospectus.
REPORTS TO NOTEHOLDERS
Concurrently with each payment to the Noteholders, the Master Servicer will
forward to the Indenture Trustee for mailing to such Noteholder and the Insurer
a statement setting forth among other items with respect to each Group and
related Loan Group:
(i) the Investor Floating Allocation Percentage for each Group for the
preceding Collection Period;
(ii) the amount being distributed to Noteholders of each Class;
(iii) the amount of interest included in each such payment and the
Note Rate for each Class;
(iv) the amount, if any, for each Class of overdue accrued interest
and LIBOR Carryover included in each such payment;
(v) the amount, if any, for each Class of the remaining overdue
accrued interest after giving effect to such payments;
(vi) the amount, if any, of principal included in such payment to each
Class;
(vii) the amount, if any, of the Liquidation Loss Amounts for each
Loan Group incurred during the preceding Collection Period;
(viii) the Servicing Fee with respect to each Loan Group for such
Payment Date;
(ix) the Invested Amount for each Group and the Note Principal
Balance, each after giving effect to such payment;
(x) the Pool Balance and each Loan Group Balance as of the end of the
preceding Collection Period;
(xi) the number and aggregate Principal Balances of the Mortgage Loans
in each Loan Group as to which the minimum monthly payment is delinquent to
30-59 days, 60-89 days and 90 or more days, respectively, as of the end of
the Collection Period;
(xii) the book value of any real estate which is acquired by the Trust
through foreclosure or grant of deed in lieu of foreclosure;
(xiii) the amount of any draws on the Policy; and
(xiv) the amount on deposit in each Spread Account and the amount on
deposit in each Simple Interest Excess Sub-Account.
In the case of information furnished pursuant to clauses (ii), (iii) in
respect of the amount of interest included in such payment, (iv) and (viii)
above, the amounts shall be expressed as a dollar amount per Note with a $1,000
denomination.
Each year commencing in 1999, the Master Servicer will be required to
forward to the Indenture Trustee a statement containing the information set
forth in clauses (iii) and (vi) above aggregated for such calendar year.
COLLECTION AND OTHER SERVICING PROCEDURES ON MORTGAGE LOANS
The Master Servicer will make reasonable efforts to collect all payments
called for under the Mortgage Loans and will, consistent with the Sale and
Servicing Agreement, follow 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
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Loans. Consistent with the above, the Master Servicer may in its discretion
waive any late payment charge or any assumption or other fee or charge that may
be collected in the ordinary course of servicing the Mortgage Loans.
With respect to the Mortgage Loans, the Master 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 Master Servicer's
policies with respect to the home equity mortgage loans it owns or services and
the terms of the Sale and Servicing Agreement. In accordance with the terms of
the Sale and Servicing Agreement, the Master Servicer may consent under certain
circumstances to the placing of a subsequent senior lien in respect of a
Mortgage Loan.
HAZARD INSURANCE
The Master Servicer will cause to be maintained for each Mortgage Loan fire
and hazard insurance with extended coverage customary in the area where the
Mortgaged Property is located in an amount which is at least equal to the lesser
of (i) the outstanding Principal Balance on the Mortgage Loan and any related
senior lien(s); and (ii) the maximum insurable value of the improvements
securing the Mortgage Loan. Generally, if the Mortgaged Property is in an area
identified in the Federal Register by the Flood Emergency Management Agency as
FLOOD ZONE "A", such flood insurance has been made available and the Master
Servicer determines that such insurance is necessary in accordance with accepted
mortgage servicing practices of prudent lending institutions, the Master
Servicer will cause to be purchased a flood insurance policy with a generally
acceptable insurance carrier, in an amount representing coverage not less than
the lesser of (a) the outstanding Principal Balance of the Mortgage Loan and any
related senior lien(s), if any, or (b) the maximum amount of insurance available
under the National Flood Insurance Act of 1968, as amended. Any amounts
collected by the Master Servicer under any such policies (other than amounts to
be applied to the restoration or repair of the Mortgaged Property, or to be
released to the borrower in accordance with customary mortgage servicing
procedures) will be deposited in the related Collection Account, subject to
retention by the Master Servicer to the extent such amounts constitute servicing
compensation or to withdrawal pursuant to the Sale and Servicing Agreement.
In the event that the Master Servicer obtains and maintains a blanket
policy as provided in the Sale and Servicing Agreement insuring against fire and
hazards of extended coverage on all of the Mortgage Loans then, to the extent
such policy names the Master Servicer or its designee as loss payee and provides
coverage in an amount equal to the aggregate unpaid principal balance of the
Mortgage Loans without coinsurance, and otherwise complies with the requirements
of the first paragraph of this subsection, the Master Servicer will be deemed
conclusively to have satisfied its obligations with respect to fire and hazard
insurance coverage.
REALIZATION UPON DEFAULTED MORTGAGE LOANS
The Master Servicer will foreclose upon or otherwise comparably convert to
ownership Mortgaged Properties securing such of the Mortgage Loans as come into
default when, in accordance with applicable servicing procedures under the Sale
and Servicing Agreement, no satisfactory arrangements can be made for the
collection of delinquent payments. In connection with such foreclosure or other
conversion, the Master 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 Master Servicer will not be required to
expend its own funds in connection with foreclosure or other conversion,
correction of default on a related senior mortgage loan or restoration of any
property unless, in its sole judgment, such foreclosure, correction or
restoration will increase Net Liquidation Proceeds. The Master Servicer will be
reimbursed out of Liquidation Proceeds for advances of its own funds as
liquidation expenses before any Net Liquidation Proceeds are distributed to
Noteholders or the Transferor.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
With respect to each Collection Period, the Master Servicer will receive
from interest collections in respect of the Mortgage Loans a portion of such
interest collections as a monthly Servicing Fee in the amount equal to 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 as of the Cut-Off
Date for the first Collection Period). All
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assumption fees, late payment charges and other fees and charges, to the extent
collected from borrowers, will be retained by the Master Servicer as additional
servicing compensation.
Not later than five Business Days prior to each Payment Date, the Master
Servicer is required to remit to the Indenture Trustee, without any right of
reimbursement, in respect of each Loan Group, an amount equal to the sum of
(i) the lesser of (a) any Prepayment Interest Shortfalls on Mortgage Loans in
such Loan Group with respect to the related Collection Period and (b) the
aggregate Servicing Fee received by the Master Servicer in respect of such Loan
Group in the most recently ended Collection Period, and (ii) the lesser of
(a) Net Simple Interest Shortfalls, if any, for such Loan Group for such
Collection Period, and (b) the amount remaining, if any, of the aggregate
Servicing Fee received in respect of such Loan Group in the most recently ended
Collection Period after application thereof as provided in clause (i) hereof.
However, such amounts will be in addition to any Monthly Advances made on such
date in respect of Net Simple Interest Shortfalls. With respect to each Mortgage
Loan as to which a prepayment in full was received during the related Collection
Period, the "Prepayment Interest Shortfall" is the excess, if any, of 30 days
interest on the Principal Balance of such Mortgage Loan at the Net Loan Rate
over the amount of interest actually paid by the related Mortgagor in connection
with such principal prepayment.
The Master Servicer will pay certain ongoing expenses associated with the
Trust and incurred by it in connection with its responsibilities under the Sale
and Servicing Agreement. In addition, the Master Servicer will be entitled to
reimbursement for certain expenses incurred by it in connection with defaulted
Mortgage Loans and in connection with the restoration of Mortgaged Properties,
such right of reimbursement being prior to the rights of Noteholders to receive
any related Net Liquidation Proceeds.
EVIDENCE AS TO COMPLIANCE
The Sale and Servicing Agreement provides for delivery on or before May 31
in each year, beginning on May 31, 1999, to the Indenture Trustee, the Rating
Agencies and the Insurer of an annual statement signed by an officer of the
Master Servicer to the effect that the Master Servicer has fulfilled its
material obligations under the Sale and Servicing Agreement throughout the
preceding fiscal year, except as specified in such statement.
CERTAIN MATTERS REGARDING THE MASTER SERVICER
The Sale and Servicing Agreement provides that the Master Servicer may not
resign from its obligations and duties 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 subsidiaries or affiliates or (ii) upon the satisfaction of the
following conditions: (a) the Master Servicer has proposed a successor Master
Servicer to the Indenture Trustee and the Insurer in writing and such proposed
successor Master Servicer is reasonably acceptable to the Indenture Trustee; (b)
the Rating Agencies have confirmed to the Indenture Trustee and the Insurer that
the appointment of such proposed successor Master Servicer as the Master
Servicer will not result in the reduction or withdrawal of the then current
rating of the Notes; and (c) such proposed successor Master Servicer is
acceptable to the Insurer. No such resignation will become effective until the
Indenture Trustee or a successor Master Servicer has assumed the Master
Servicer's obligations and duties under the Sale and Servicing Agreement.
The Master Servicer may perform any of its duties and obligations under the
Sale and Servicing Agreement through one or more subservicers or delegates,
which may be affiliates of the Master Servicer. Notwithstanding any such
arrangement, the Master Servicer will remain liable and obligated to the
Indenture Trustee, the Owner Trustee, the Noteholders and the Insurer for the
Master Servicer's duties and obligations under the Sale and Servicing Agreement,
without any diminution of such duties and obligations and as if the Master
Servicer itself were performing such duties and obligations.
Any person into which, in accordance with the Sale and Servicing Agreement,
Provident or the Master Servicer may be merged or consolidated or any person
resulting from any merger or consolidation to which Provident or the Master
Servicer is a party, or any person succeeding to the business of Provident or
the Master Servicer, will be the successor to the Master Servicer under the Sale
and Servicing Agreement.
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The Sale and Servicing Agreement provides that the Master Servicer will
indemnify the Trust, the Indenture Trustee, the Insurer and the Owner Trustee
from and against any loss, liability, expense, damage or injury suffered or
sustained as a result of the Master Servicer's actions or omissions in
connection with the servicing and administration of the Mortgage Loans which are
not in accordance with the provisions of the Sale and Servicing Agreement. In
the event of an Event of Servicing Termination (as defined below) resulting in
the assumption of servicing obligations by a successor Master Servicer, the
successor Master Servicer will indemnify the Transferor, the Indenture Trustee,
the Owner Trustee and the Trust for any losses, claims, damages and liabilities
arising from the successor Master Servicer's actions or omissions in connection
with the servicing and administration of the Mortgage Loans which are not in
accordance with the provisions of the Sale and Servicing Agreement. The Sale and
Servicing Agreement provides that neither the Transferor nor the Master Servicer
nor their directors, officers, employees or agents will be under any other
liability to the Trust, the Indenture Trustee, the Owner Trustee, the
Noteholders or any other person for any action taken or for refraining from
taking any action pursuant to the Sale and Servicing Agreement. However, neither
the Transferor nor the Master Servicer will be protected against any liability
which would otherwise be imposed by reason of willful misconduct, bad faith or
gross negligence of the Transferor or the Master Servicer in the performance of
its duties under the Sale and Servicing Agreement or by reason of reckless
disregard of its obligations thereunder. In addition, the Sale and Servicing
Agreement provides that the Master Servicer will not be under any obligation to
appear in, prosecute or defend any legal action which is not incidental to its
servicing responsibilities under the Sale and Servicing Agreement and which in
its opinion may expose it to any expense or liability. The Master Servicer may,
in its sole discretion, undertake any such legal action which it may deem
necessary or desirable with respect to the Sale and Servicing Agreement and the
rights and duties of the parties thereto and the interest of the Noteholders and
the Insurer thereunder.
EVENTS OF SERVICING TERMINATION
"Events of Servicing Termination" will consist of: (i)(A) any failure by
the Master Servicer to make any Monthly Advance, or (B) any other failure by the
Master Servicer to deposit in a Collection Account or Distribution Account any
deposit required to be made under the terms of the Sale and Servicing Agreement
which continues unremedied for two Business Days after the giving of written
notice of such failure to the Master Servicer by the Indenture Trustee or to the
Master Servicer and the Indenture Trustee by the Insurer or by the Holders of
Notes evidencing not less than 25% of the aggregate Note Principal Balance;
(ii) any failure by the Master Servicer duly to observe or perform in any
material respect any other of its covenants or agreements in the Sale and
Servicing Agreement which, in each case, materially and adversely affects the
interests of the Noteholders or the Insurer and continues unremedied for
30 days after the giving of written notice of such failure to the Master
Servicer by the Indenture Trustee, or to the Master Servicer and the Indenture
Trustee by the Insurer or Noteholders evidencing not less than 25% of the
aggregate Note Principal Balance; (iii) certain events of insolvency,
readjustment of debt, marshalling of assets and liabilities or similar
proceedings relating to the Master Servicer and certain actions by the Master
Servicer indicating insolvency, reorganization or inability to pay its
obligations ("Insolvency Events"); or (iv) certain loss or delinquency tests or
certain financial covenants set forth in the Sale and Servicing Agreement are
not met. Under certain other circumstances, the Indenture Trustee shall, at the
direction of the Insurer or may, with the consent of the Insurer, or the holders
of Notes evidencing at least 51% of the aggregate Note Principal Balance may
(with the consent of the Insurer so long as there is no default by the Insurer
in the performance of its obligations under the Policy) deliver written notice
to the Master Servicer terminating all the rights and obligations of the Master
Servicer under the Sale and Servicing Agreement.
Upon the occurrence and continuation of the event described in clause (i)
(A) above, if any Monthly Advance is not made by 4:00 P.M., New York City time,
on the Business Day following written notice to the Master Servicer of such
event, the Indenture Trustee will, unless the Insurer instructs otherwise and no
Insurer Default exists and is continuing, immediately terminate the rights and
obligations of the Master Servicer under the Sale and Servicing Agreement and
the Indenture Trustee, or any other successor Master Servicer appointed in
accordance with the Sale and Servicing Agreement, will make such Monthly
Advance, in either case, as the successor Master Servicer.
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Notwithstanding the foregoing, a delay in or failure of performance
referred to under clause (i) or (ii) above for a period of ten or 30 Business
Days, respectively, 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 Master 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
Master Servicer shall not be relieved from using its best efforts to perform its
obligations in a timely manner in accordance with the terms of the Sale and
Servicing Agreement and the Master Servicer shall provide the Indenture Trustee
and the Noteholders prompt notice of 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
Indenture Trustee shall at the direction of the Insurer or may, with the consent
of the Insurer, or Noteholders evidencing an aggregate, undivided interest in
the Trust of at least 51% of the aggregate Note Principal Balance with the
consent of the Insurer, may terminate all of the rights and obligations of the
Master Servicer under the Sale and Servicing Agreement and in and to the
Mortgage Loans, whereupon the Indenture Trustee will succeed to all the
responsibilities, duties and liabilities of the Master Servicer under the Sale
and Servicing Agreement and will be entitled to similar compensation
arrangements. In the event that the Indenture Trustee would be obligated to
succeed to the duties and obligations of the Master Servicer but is unwilling or
unable so to act, it may appoint, or petition a court of competent jurisdiction
for the appointment of, a housing and home finance institution or other mortgage
loan or home equity loan servicer with all licenses and permits required to
perform its obligations under the Sale and Servicing Agreement and having a net
worth of at least $15,000,000 and acceptable to the Insurer to act as successor
to the Master Servicer under the Sale and Servicing Agreement. Pending such
appointment, the Indenture 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 Master Servicer would otherwise have received (or such
lesser compensation as the Indenture Trustee and such successor may agree). A
receiver or conservator for the Master Servicer may be empowered to prevent the
termination and replacement of the Master Servicer where the only Event of
Servicing Termination that has occurred is an Insolvency Event.
EVENTS OF DEFAULT UNDER THE INDENTURE
"Events of Default" under the Indenture include:
(i) a default in the payment of any interest or principal payment when
the same becomes due and payable and continuance of such default for a
period of five days;
(ii) failure on the part of the Indenture Trustee to perform in any
material respect any covenant or agreement under the Indenture (other than
a covenant covered in clause (i) hereof) or the breach of a representation
or warranty of the Indenture Trustee, which continues for a period of
thirty days after notice thereof is given; and
(iii) certain events of bankruptcy, insolvency, receivership or
liquidation of the Trust.
REMEDIES ON EVENT OF DEFAULT UNDER THE INDENTURE
If an Event of Default under the Indenture has occurred and is continuing,
either the Indenture Trustee or the Noteholders representing a majority of the
then outstanding principal amount of the Notes may declare the principal amount
of the Notes due and payable immediately. Such a declaration may be rescinded by
the Noteholders representing a majority of the then outstanding principal amount
of the Notes.
If the principal of the Notes has been declared due and payable as
described in the preceding paragraph, the Indenture Trustee may elect not to
liquidate the assets of the Trust provided that the assets are generating
sufficient cash to pay interest and principal as it becomes due and payable to
the Noteholders.
However, the Indenture Trustee may not sell or otherwise liquidate the
assets of the Trust following an Event of Default unless (a) the holders of 100%
of the Notes and the Insurer consent to such sale, or (b) the proceeds of such
sale or liquidation are sufficient to pay all amounts due and owing to the
Noteholders and the Insurer, or (c) the Indenture Trustee determines that the
assets of the Trust would not be sufficient on an ongoing
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basis to make all payments on the Notes as they become due and payable and the
Indenture Trustee obtains the consent of the holders of 66 2/3% of the aggregate
Note Principal Balance of the Notes.
CERTAIN MATTERS REGARDING THE INDENTURE TRUSTEE AND THE OWNER TRUSTEE
Neither the Indenture Trustee nor any director, officer or employee of the
Indenture Trustee will be under any liability to the Trust or the Noteholders
for taking any action or for refraining from the taking of any action in good
faith pursuant to the Indenture, or for errors in judgment; provided, that none
of the Indenture Trustee or any director, officer or employee thereof will be
protected against any liability that would otherwise be imposed on it by reason
of willful malfeasance, bad faith or negligence in the performance of its duties
or by reason of its reckless disregard of its obligations and duties under the
Indenture. Subject to certain limitations set forth in the Indenture, the
Indenture Trustee and any director, officer, employee or agent thereof will be
indemnified by the Trust and held harmless against any loss, liability or
expense incurred in connection with any of its duties under the Agreements other
than any loss, liability or expense incurred by reason of its own willful
malfeasance, bad faith or negligence in the performance of its duties under the
Indenture, or by reason of its reckless disregard of its obligations and duties
under the Indenture. All persons into which the Indenture Trustee may be merged
or with which it may be consolidated, or any person resulting from such merger
or consolidation, will be the successor to the Indenture Trustee under the
Indenture.
The Owner Trustee, the Indenture Trustee and any of their respective
affiliates may hold Notes in their own names or as pledgees. For the purpose of
meeting the legal requirements of certain jurisdictions, the Owner Trustee and
the Indenture Trustee acting jointly (or in some instances, the Owner Trustee or
the Indenture Trustee acting alone) will have the power to appoint co-trustees
or separate trustees of all or any part of the Trust. In the event of such an
appointment, all rights, powers, duties and obligations conferred or imposed
upon the Owner Trustee by the Sale and Servicing Agreement and the Trust
Agreement and the Indenture Trustee by the Indenture will be conferred or
imposed upon the Owner Trustee and the Indenture Trustee, respectively, and in
each such case such separate trustee or co-trustee jointly, or, in any
jurisdiction in which the Owner Trustee or Indenture Trustee will be incompetent
or unqualified to perform certain acts, singly upon such separate trustee or
co-trustee who will exercise and perform such rights, powers, duties and
obligations solely at the direction of the Owner Trustee or the Indenture
Trustee, respectively.
The Owner Trustee may resign at any time, in which event the Indenture
Trustee will be obligated to appoint a successor thereto acceptable to the
Insurer. The Indenture Trustee may also remove the Owner Trustee if it ceases to
be eligible to continue as such under the Trust Agreement or becomes legally
unable to act or becomes insolvent. Any resignation or removal of the Owner
Trustee and appointment of a successor thereto will not become effective until
acceptance of the appointment by such successor.
DUTIES OF THE OWNER TRUSTEE AND INDENTURE TRUSTEE
The Owner Trustee will make no representations as to the validity or
sufficiency of the Trust Agreement, the Notes, or of any Mortgage Loans or
related documents, and will not be accountable for the use or application by
Provident or the Master Servicer of any funds paid to Provident or the Master
Servicer in respect of the Notes, or the Mortgage Loans, or the investment of
any monies by the Master Servicer before such monies are deposited into the
Collection Accounts or the Distribution Accounts. The Owner Trustee will be
required to perform only those duties specifically required of it under the
Trust Agreement. Generally, those duties will be limited to the receipt of the
various certificates, reports or other instruments required to be furnished to
the Owner Trustee under the Trust Agreement, in which case it will only be
required to examine them to determine whether they conform to the requirements
of the Trust Agreement.
The Indenture Trustee will make no representations as to the validity or
sufficiency of the Indenture, the Notes (other than the execution and
authentication thereof) or of any Mortgage Loans or related documents, and will
not be accountable for the use or application by Provident or the Master
Servicer of any funds paid to Provident or the Master Servicer in respect of the
Notes or the Mortgage Loans, or the use or investment of any monies by the
Master Servicer before such monies are deposited into a Collection Account or a
Distribution Account. So long as no Event of Default has occurred and is
continuing, the Indenture Trustee will be required to perform only those duties
specifically required of it under the Indenture. Generally, those duties will be
limited to
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the receipt of the various certificates, reports or other instruments required
to be furnished to the Indenture Trustee under the Indenture, in which case it
will only be required to examine them to determine whether they conform to the
requirements of the Indenture. The Indenture Trustee will not be charged with
knowledge of a failure by the Master Servicer to perform its duties under the
Trust Agreement or Sale and Servicing Agreement which failure constitutes an
Event of Default unless the Indenture Trustee obtains actual knowledge of such
failure as will be specified in the Indenture.
AMENDMENT
The Sale and Servicing Agreement may be amended from time to time by the
parties thereto and with the consent of the Insurer, but without the consent of
the Noteholders, to cure any ambiguity, to correct or supplement any provisions
therein which may be inconsistent with any other provisions of such Agreement,
to add to the duties of the Transferor or the Master Servicer or to add or amend
any provisions of such Agreement as required by the Rating Agencies in order to
maintain or improve any rating of the Notes (it being understood that, after
obtaining the ratings in effect on the Closing Date, none of the Transferor, the
Depositor, the Indenture Trustee, the Owner Trustee or the Master 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 such Agreement
which shall not be inconsistent with the provisions of such Agreement, provided
that such action will not, as evidenced by an opinion of counsel, materially and
adversely affect the interests of any Noteholder or the Insurer; provided, that
any such amendment will not be deemed to materially and adversely affect the
Noteholders 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 Notes. The Sale and Servicing Agreement may also be amended from time to
time by the Transferor, the Depositor, the Master Servicer, the Owner Trustee
and the Indenture Trustee, with the consent of Noteholders evidencing an
aggregate, undivided interest in the Trust of at least 51% of the aggregate Note
Principal Balance and the Insurer for the purpose of adding any provisions to or
changing in any manner or eliminating any of the provisions of the Sale and
Servicing Agreement or of modifying in any manner the rights of the Noteholders,
provided that no such amendment will (i) reduce in any manner the amount of, or
delay the timing of, collections of payments on the Notes or payments under the
Policy which are required to be made on any Note without the consent of the
holder of such Note and the Insurer or (ii) reduce the aforesaid percentage
required to consent to any such amendment, without the consent of the holders of
all Notes then outstanding.
The Indenture provides that, without the consent of the Holders of any
Notes, but with the consent of the Insurer and prior notice to the Trust and the
Indenture Trustee, when authorized by a request of the Trust pursuant to the
Indenture, at any time and from time to time, may enter into one or more
supplemental indentures (which will conform to the provisions of the Trust
Indenture Act of 1939, as amended (the "TIA"), as in force at the date of the
execution thereof), in form satisfactory to the Indenture Trustee, for any of
the following purposes: (a) to correct or amplify the description of any
property at any time subject to the lien of the Indenture, or better to assure,
convey and confirm unto the Indenture Trustee any property subject or required
to be subjected to the lien of the Indenture, or to subject to the lien of the
Indenture additional property; (b) to evidence the succession, in compliance
with the applicable provisions of the Indenture, of another entity to the Trust,
and the assumption by any such successor of the covenants of the Trust contained
in the Notes or the Indenture; (c) to add to the covenants of the Trust for the
benefit of the Holders of the Notes, or to surrender any right or power
conferred upon the Trust in the Indenture; (d) to convey, transfer, assign,
mortgage or pledge any property to or with the Indenture Trustee; (e) to cure
any ambiguity, to correct or supplement any provision in the Indenture or in any
supplemental indenture that may be inconsistent with any other provision in the
Indenture or in any supplemental indenture; (f) to make any other provisions
with respect to matters or questions arising under the Indenture or in any
supplemental indenture; provided, that such action will not materially and
adversely affect the interests of the Noteholders or the Insurer; (g) to
evidence and provide for the acceptance of the appointment under the Indenture
by a successor trustee with respect to the Notes and to add to or change any of
the provisions of the Indenture as will be necessary to facilitate the
administration of the trusts thereunder by more than one trustee, pursuant to
the requirements of the Indenture; or (h) to modify, eliminate or add to the
provisions of the Indenture to such extent as will be necessary to effect the
qualification of the Indenture under the TIA or under any similar federal
statute enacted after the date of the Indenture and to add to the Indenture such
other provisions as may be expressly required by the TIA; provided, however,
that no such supplemental indentures will be entered into unless the
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Indenture Trustee shall have received an Opinion of Counsel to the effect that
entering into such supplemental indenture will not have any material adverse tax
consequences to the Noteholders.
The Indenture also provides that the Issuer and the Indenture Trustee, when
authorized by a written request of the Trust, also may, with prior notice to the
Insurer and each Rating Agency and with the consent of the Insurer and the
Holders of Notes affected thereby representing not less than a majority of the
aggregate Note Principal Balance thereof, enter into a supplemental indenture
for the purpose of adding any provisions to, or changing in any manner or
eliminating any of the provisions of, the Indenture or of modifying in any
manner the rights of the Noteholders thereunder; provided, that no such
supplemental indenture may, without the consent of the Holder of each Note
affected thereby: (a) change the date of payment of any installment of principal
of or interest on any Note, or reduce the principal amount thereof or the
interest rate thereon, change the provisions of the Indenture relating to the
application of collections on, or the proceeds of the sale of, the corpus of the
Trust to payment of principal of or interest on the Notes, or change any place
of payment where, or the coin or currency in which, any Note or the interest
thereon is payable, or impair the right to institute suit for the enforcement of
the provisions of the Indenture requiring the application of funds available
therefor to the payment of any such amount due on the Notes on or after the
respective dates such amounts become due; (b) reduce the percentage of the Note
Principal Balances of the Notes, the consent of the Holders of which is required
for any such supplemental indenture, or the consent of the Holders of which is
required for any waiver of compliance with certain provisions of the Indenture
or certain defaults thereunder and their consequences provided for in the
Indenture; (c) modify or alter the provisions of the proviso to the definition
of the term "Outstanding" in the Indenture or modify or alter the exception in
the definition of the term "Holder" therein; (d) reduce the percentage of the
Note Principal Balances of the Notes required to direct the Indenture Trustee to
direct the Trust to sell or liquidate the corpus of the Trust pursuant to the
Indenture; (e) modify any provision of the amendment provisions of the Indenture
except to increase any percentage specified in the Indenture or to provide that
certain additional provisions of the Indenture or the other Agreements cannot be
modified or waived without the consent of the Holder of each Note affected
thereby; (f) modify any of the provisions of the Indenture in such manner as to
affect the calculation of the amount of any payment of interest or principal due
on any Note on any Payment Date (including the calculation of any of the
individual components of such calculation); or (g) permit the creation of any
lien ranking prior to or on a parity with the lien of the Indenture with respect
to any part of the Trust Estate or, except as otherwise permitted or
contemplated in the Indenture, terminate the lien of the Indenture on any
property at any time subject thereto or deprive the Holder of any Note of the
security provided by the lien of the Indenture; and provided, further, that such
action will not, as evidenced by an opinion of counsel, cause the Trust to be
subject to an entity level tax.
TERMINATION; RETIREMENT OF THE NOTES
The Trust will terminate on the Payment Date following the later of (A)
payment in full of all amounts owing to the Insurer and (B) the earliest of (i)
the Payment Date on which the aggregate Note Principal Balance has been reduced
to zero, (ii) the final payment (or other liquidation) of the last Mortgage Loan
in the Trust or the disposition of all property acquired upon foreclosure or by
deed in lieu of foreclosure of any Mortgage Loan, (iii) the optional transfer to
the Transferor of all of the Mortgage Loans, as described below and (iv) the
Payment Date in December 2028.
The Mortgage Loans in each Loan Group will be subject to an optional
transfer to the owner of the related Transferor Interest on any Payment Date
after the aggregate Note Principal Balance of the related Group is reduced to an
amount less than 5% of the Original Note Principal Balance of, with respect to
Group 1, the Class A-1 Notes, and with respect to Group 2, the Class A-2 and
Class A-3 Notes and all amounts due and owing to the Insurer in respect of such
Group, including unreimbursed draws on the Policy, together with interest
thereon, as provided under the Insurance Agreement, have been paid. The transfer
price will be equal to the sum of the aggregate Note Principal Balance of the
related Group and accrued and unpaid interest thereon through the day preceding
such transfer. In no event, however, will the Trust created by the Trust
Agreement continue for more than 21 years after the death of certain individuals
named in the Sale and Servicing Agreement. Written notice of termination of the
Sale and Servicing Agreement will be given to each Noteholder, and the final
payment will be made only upon surrender and cancellation of the Notes at an
office or agency appointed by the Indenture Trustee which will be specified in
the notice of termination.
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THE INDENTURE TRUSTEE
The Chase Manhattan Bank, a New York banking corporation with its principal
place of business in New York, has been named Indenture Trustee pursuant to the
Sale and Servicing Agreement and the Indenture.
The commercial bank or trust company serving as Indenture Trustee may own
Notes and have normal banking relationships with the Master Servicer, the
Transferor and the Insurer and/or their affiliates.
The Indenture Trustee may resign at any time, in which event the Trust will
be obligated to appoint a successor Indenture Trustee, with the consent of the
Insurer, which consent shall not be unreasonably withheld. The Insurer may also
remove the Indenture Trustee if the Indenture Trustee ceases to be eligible to
continue as such under the Sale and Servicing Agreement or if the Indenture
Trustee becomes insolvent. Upon becoming aware of such circumstances, the Trust
will be obligated to appoint a successor Indenture Trustee, as approved by the
Insurer. Any resignation or removal of the Indenture Trustee and appointment of
a successor Indenture Trustee will not become effective until acceptance of the
appointment by the successor Indenture Trustee.
No holder of a Note will have any right under the Sale and Servicing
Agreement to institute any proceeding with respect to the Sale and Servicing
Agreement unless the Insurer has consented in writing to the institution of such
proceeding and such holder previously has given to the Indenture Trustee written
notice of default and unless Noteholders evidencing an aggregate, undivided
interest in the Trust of at least 51% of the aggregate Note Principal Balance
have made written requests upon the Indenture Trustee to institute such
proceeding in its own name as Indenture Trustee thereunder and have offered to
the Indenture Trustee reasonable indemnity and the Indenture Trustee for
60 days has neglected or refused to institute any such proceeding. The Indenture
Trustee will be under no obligation to exercise any of the trusts or powers
vested in it by the Sale and Servicing 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 Noteholders, unless such Noteholders have offered to the Indenture Trustee
reasonable security or indemnity against the costs, expenses and liabilities
which may be incurred therein or thereby and the Insurer has consented to such
action, which consent shall not be unreasonably withheld.
THE AUCTION AGENT
Bankers Trust Company, a New York banking corporation, will act as auction
agent (the "Auction Agent") with respect to the Class A-3 Notes pursuant to an
agreement (the "Auction Agent Agreement") dated as of December 1, 1998 between
the Indenture Trustee and the Auction Agent.
DESCRIPTION OF THE PURCHASE AGREEMENT
The Mortgage Loans will be purchased by the Depositor from Provident
pursuant to the Purchase Agreement. Pursuant to the Sale and Servicing
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.
In the Purchase Agreement, Provident will make representations and
warranties similar to those representations and warranties made by Provident in
the Sale and Servicing Agreement. In the event of a breach of any such
representations and warranties which has a material adverse effect on the
interests of the Noteholders or the Insurer, Provident will be required to
repurchase or substitute for the Mortgage Loans as described herein under
"DESCRIPTION OF THE NOTES--Assignment of Mortgage Loans."
Provident has also agreed to indemnify the Depositor and the Trust from and
against certain losses, liabilities and expenses (including reasonable
attorneys' fees) suffered or sustained pursuant to the Purchase Agreement.
USE OF PROCEEDS
The net proceeds to be received from the sale of the Notes will be applied
by the Depositor towards the purchase of the Mortgage Loans from Provident.
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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 Notes, is based on the
provisions of the Internal Revenue Code of 1986, as amended (the "Code"), the
Treasury Regulations thereunder, and published rulings and court decisions in
effect as of the date hereof, all of which are subject to change, possibly
retroactively. This discussion does not address every aspect of the U.S. federal
income tax laws which may be relevant to Note Owners in light of their personal
investment circumstances or to certain types of Note Owners subject to special
treatment under the U.S. federal income tax laws (for example, banks and life
insurance companies). Accordingly, investors should consult their tax advisors
regarding U.S. federal, state, local, foreign and any other tax consequences to
them of investing in the Notes.
CHARACTERIZATION OF THE NOTES AS INDEBTEDNESS
Based on the application of existing law to the facts as set forth in the
Agreements and other relevant documents and assuming compliance with the terms
of the Agreements as in effect on the date of issuance of the Notes, Brown &
Wood LLP, special tax counsel to the Trust ("Tax Counsel") and counsel to the
Underwriters, is of the opinion that (i) the Notes will be treated as debt
instruments for federal income tax purposes as of such date and (ii) the Trust
will not be characterized as an association (or publicly traded partnership)
taxable as a corporation or as a taxable mortgage pool within the meaning of
Section 7701(i) of the Code. Accordingly, upon issuance, the Notes will be
treated as "Debt Securities" as described in the Prospectus. See "CERTAIN
FEDERAL INCOME TAX CONSIDERATIONS" in the Prospectus.
The Transferor and the Noteholders express in the Sale and Servicing
Agreement their intent that, for applicable tax purposes, the Notes will be
indebtedness secured by the Mortgage Loans. The Transferor and the Noteholders,
by accepting the Notes, and each Note Owner by its acquisition of a beneficial
interest in a Note, have agreed to treat the Notes as indebtedness for U.S.
federal income tax purposes. However, because different criteria are used to
determine the non-tax accounting characterization of the transaction, the
Transferor intends to treat this transaction as a sale of an interest in the
Principal Balances of the Mortgage Loans for financial accounting and certain
regulatory purposes.
In general, whether for U.S. federal income tax purposes a transaction
constitutes a sale of property or loan, the repayment of which is secured by
property, is a question of fact, the resolution of which is based upon the
economic substance of the transaction rather than its form or the manner in
which it is labeled. While the Internal Revenue Service (the "IRS") and the
courts have set forth several factors to be taken into account in determining
whether the substance of a transaction is a sale of property or a secured loan,
the primary factor in making this determination is whether the transferee has
assumed the risk of loss or other economic burdens relating to the property and
has obtained the benefits of ownership thereof. Tax Counsel has analyzed and
relied on several factors in reaching its opinion that the weight of the
benefits and burdens of ownership of the Mortgage Loans has been retained by the
Transferor and has not been transferred to the Note Owners.
In some instances, courts have held that a taxpayer is bound by the
particular form it has chosen for a transaction, even if the substance of the
transaction does not accord with its form. Tax Counsel has advised that the
rationale of those cases will not apply to this transaction, because the form of
the transaction as reflected in the operative provisions, of the documents
either accords with the characterization of the Notes as debt or otherwise makes
the rationale of those cases inapplicable to this situation.
TAXATION OF INTEREST INCOME OF NOTE OWNERS
Assuming that the Note Owners are holders of debt obligations for U.S.
federal income tax purposes, the Notes generally will be taxable as Debt
Securities. See "CERTAIN FEDERAL INCOME TAX CONSIDERATIONS" in the Prospectus.
While it is not anticipated that the Notes will be issued at a greater than
de minimis discount, under Treasury regulations (the "OID Regulations") it is
possible that the Notes could nevertheless be deemed to have been issued with
original issue discount ("OID") if the interest were not treated as
unconditionally payable under the OID Regulations. If such regulations were to
apply, all of the taxable income to be recognized with respect to the
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Notes would be includible in income of Note 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 Notes are in fact issued at a greater than de minimis discount or are
treated as having been issued with OID under the OID Regulations. For purposes
of calculating OID, it is likely that the Notes will be treated as Pay-Through
Securities.
POSSIBLE CLASSIFICATION OF THE TRUST AS A PARTNERSHIP OR ASSOCIATION TAXABLE AS
A CORPORATION
The opinion of Tax Counsel is not binding on the courts or the IRS. It is
possible that the IRS could assert that for purposes of the Code, the
transaction contemplated by this Prospectus with respect to the Notes
constitutes a sale of the Mortgage Loans (or an interest therein) to the Note
Owners and that the proper classification of the legal relationship between the
Transferor and the Note Owners resulting from this transaction is that of a
partnership (including a publicly traded partnership), a publicly traded
partnership treated as a corporation, or an association taxable as a
corporation. Since Tax Counsel has advised that the Notes will be treated as
indebtedness in the hands of the Noteholders for U.S. federal income tax
purposes, the Transferor will not attempt to comply with U.S. federal income tax
reporting requirements applicable to partnerships or corporations as such
requirements would apply if the Notes were treated as indebtedness.
If it were determined that this transaction created an entity classified as
a corporation (including a publicly traded partnership taxable as a
corporation), the Trust would be subject to U.S. federal income tax at corporate
income tax rates on the income it derives from the Mortgage Loans, which would
reduce the amounts available for payment to the Note Owners. Cash payments to
the Note Owners generally would be treated as dividends for tax purposes to the
extent of such corporation's earnings and profits. If the transaction were
treated as creating a partnership between the Note Owners and the Transferor,
the partnership itself would not be subject to U.S. federal income tax (unless
it were to be characterized as a publicly traded partnership taxable as a
corporation); rather, the Transferor and each Note Owner would be taxed
individually on their respective distributive shares of the partnership's
income, gain, loss, deductions and credits. The amount and timing of items of
income and deductions of the Note Owner could differ if the Notes were held to
constitute partnership interests rather than indebtedness.
POSSIBLE CLASSIFICATION AS A TAXABLE MORTGAGE POOL
In relevant part, Section 7701(i) of the Code provides that any entity (or
a portion of an entity) that is a "taxable mortgage pool" will be classified as
a taxable corporation and will not be permitted to file a consolidated U.S.
federal income tax return with another corporation. Subject to a grandfather
provision for existing entities, any entity (or a portion of any entity) will be
a taxable mortgage pool if (i) substantially all of its assets consist of debt
instruments, more than 50% of which are real estate Mortgages (ii) the entity is
the obligor under debt obligations with two or more maturities, and (iii) under
the terms of the entity's debt obligations (or an underlying arrangement),
payments on such debt obligations bear a relationship to the debt instruments
held by the entity.
Assuming that all of the provisions of the Agreements, as in effect on the
date of issuance, are complied with, Tax Counsel is of the opinion that the
arrangement created by the Agreements will not be a taxable mortgage pool under
Section 7701(i) of the Code because only one maturity of indebtedness has been
issued and secured by the mortgage loans of each loan group of the Trust.
The opinion of Tax Counsel is not binding on the IRS or the courts. If the
IRS were to contend successfully (or future regulations were to provide) that
the arrangement created by the Agreements is a taxable mortgage pool, such
arrangement would be subject to U.S. federal corporate income tax on its taxable
income generated by ownership of the Mortgage Loans. Such a tax might reduce
amounts available for payments to Note Owners. The amount of such a tax would
depend upon whether payments to Note Owners would be deductible as interest
expense in computing the taxable income of such an arrangement as a taxable
mortgage pool.
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FOREIGN INVESTORS
In general, subject to certain exceptions, interest (including OID) paid on
a Note to a nonresident alien individual, foreign corporation or other
non-United States person is not subject to U.S. federal income tax, provided
that such interest is not effectively connected with a trade or business of the
recipient in the United States and the Note Owner provides the required foreign
person information certification. See "CERTAIN FEDERAL INCOME TAX
CONSIDERATIONS--Tax Treatment of Foreign Investors" in the Prospectus.
If the interests of the Note Owners were deemed to be partnership
interests, the partnership, if it were considered to be engaged in a U.S. trade
or business, would be required, on a quarterly basis, to pay withholding tax
equal to the product, for each foreign partner, of such foreign partner's
distributive share of "effectively connected" income of the partnership
multiplied by the highest rate of tax applicable to that foreign partner. In
addition, such foreign partner would be subject to branch profits tax. Each
non-foreign partner would be required to certify to the partnership that it is
not a foreign person. The tax withheld from each foreign partner would be
credited against such foreign partner's U.S. income tax liability.
If the Trust were taxable as a corporation, payments to foreign persons, to
the extent treated as dividends (or if the Trust were characterized as a
partnership that was not engaged in a trade or business, all interest payments),
would generally be subject to withholding at the rate of 30%, unless such rate
were reduced by an applicable tax treaty.
If, contrary to the opinion of Tax Counsel, the Notes are recharacterized
as equity interests in a partnership, or in an association or publicly traded
partnership taxable as a corporation, any taxes required to be so withheld will
be treated for all purposes of the Notes and the Policy as having been paid to
the related Noteholder.
BACKUP WITHHOLDING
Certain Note Owners may be subject to backup withholding at the rate of 31%
with respect to interest paid on the Notes if the Note Owners, upon issuance,
fail to supply the Indenture Indenture Trustee or his broker with his taxpayer
identification number, furnish an incorrect taxpayer identification number, fail
to report interest, dividends, or other "reportable payments" (as defined in the
Code) property, or, under certain circumstances, fail to provide the Indenture
Indenture Trustee or his broker with a certified statement, under penalty of
perjury, that he is not subject to backup withholding.
The Indenture Indenture Trustee will be required to report annually to the
IRS, and to each Noteholder of record, the amount of interest paid (and OID
accrued, if any) on the Notes (and the amount of interest withheld for U.S.
federal income taxes, if any) for each calendar year, except as to exempt
holders (generally, holders that are corporations, certain tax-exempt
organizations or nonresident aliens who provide certification as to their status
as nonresidents). As long as the only "Noteholder" of record is Cede, as nominee
for DTC, Note Owners and the IRS will receive tax and other information
including the amount of interest paid on the Notes from Participants and
Indirect Participants rather than from the Indenture Indenture Trustee. (The
Indenture Indenture Trustee, however, will respond to requests for necessary
information to enable Participants, Indirect Participants and certain other
persons to complete their reports.) Each non-exempt Note Owner will be required
to provide, under penalty of perjury, a certificate on IRS Form W-9 containing
his or her name, address, correct federal taxpayer identification number and a
statement that he or she is not subject to backup withholding. Should a
nonexempt Note Owner fail to provide the required certification, the
Participants or Indirect Participants (or the Paying Agent) will be required to
withhold 31% of the interest (and principal) otherwise payable to the holder,
and remit the withheld amount to the IRS as a credit against the holder's
Federal income tax liability.
Final regulations dealing with backup withholding and information reporting
on income paid to a foreign person and related matters (the "New Withholding
Regulations") were published in the Federal Register on October 14, 1997. In
general, the New Withholding Regulations do not significantly alter the
substantive withholding and information reporting requirements, but do unify
current certification procedures and forms and clarify reliance standards. The
New Withholding Regulations generally will be effective for payments made after
December 31, 1999, subject to certain transition rules. The discussion set forth
above does not take the New Withholding Regulations into account. Prospective
Note Owners are strongly urged to consult their own tax advisor with respect to
the New Withholding Regulations.
S-74
<PAGE>
TAX-EXEMPT ENTITIES
A tax-exempt Note Owner may be subject to less favorable tax treatment
because an interest in a partnership may generate "unrelated business taxable
income" and thereby subject the Note Owner to the "unrelated business, taxable
income" provisions of the Code.
STATE TAXES
Except as described below, Provident makes no representations regarding the
tax consequences of purchase, ownership or disposition of the Notes under the
tax laws of any state. Investors considering an investment in the Notes should
consult their own tax advisors regarding such tax consequences.
All investors should consult their own tax advisors regarding the Federal,
state, local, foreign or any other income tax consequences of the purchase,
ownership and disposition of the Notes.
OHIO STATE TAX CONSEQUENCES
The following is a summary of the material Ohio tax consequences to the
Trust and of the purchase, ownership and disposition of the Notes. This
discussion does not address every aspect of the Ohio tax laws that may be
relevant to Noteholders in light of their specific circumstances or their
special treatment under the Ohio tax laws. Therefore, prospective investors are
urged to consult their own tax advisors in determining the Ohio tax consequences
to them as a result of purchasing and owning the Notes.
The following summary is based upon existing provisions of the Ohio Revised
Code pertaining to Ohio taxation, the administrative rules promulgated
thereunder, relevant judicial rulings and administrative decisions and
pronouncements, all of which are subject to change, which change may be
retroactive. There are no Ohio authorities addressing similar transactions or
involving a Trust that issues interests with terms similar to those of the Notes
and no ruling addressing the matters discussed herein will be sought from Ohio
tax officials. Accordingly, there can be no assurance that such officials will
agree with this summary.
Except as noted below, in the opinion of Keating, Muething & Klekamp,
P.L.L., special Ohio tax counsel ("Ohio Tax Counsel"), the Trust will not be
subject to the Ohio personal income tax, Ohio corporate franchise tax, or the
Ohio tax on dealers in intangibles as those taxes generally do not apply to the
type of Trust used in this transaction. Furthermore, unless the Noteholders are
Ohio residents or are otherwise subject to the Ohio personal income tax, Ohio
corporate franchise tax, or the Ohio tax on dealers in intangibles, the
Noteholders will not be subject to the foregoing taxes solely as a result of
purchasing and owning the Notes.
For purposes of determining Ohio taxable income, Ohio has adopted the Code
and the regulations thereunder. Therefore, the Ohio tax consequences to the
Noteholders who are Ohio residents or are otherwise subject to the Ohio personal
income tax, Ohio corporate franchise tax, or the Ohio tax on dealers in
intangibles, will be the same as the tax consequences to the Noteholders for
federal income tax purposes. Accordingly, the stated interest on the Notes will
be taxable as ordinary interest income, and a gain or loss on the sale or
disposition of the Notes will be capital gain or loss. See "CERTAIN FEDERAL
INCOME TAX CONSEQUENCES" in this Prospectus Supplement.
Effective generally for tax years beginning on or after January 1, 1998, an
Ohio tax may be levied on a "qualifying investor's" distributive share of the
Ohio apportioned income of a "qualifying pass-through entity." As described in
"CERTAIN FEDERAL INCOME TAX CONSEQUENCES--Possible Classification of the Trust
as a Partnership or Association Taxable as a Corporation" in this Prospectus
Supplement, if the transaction is recharacterized as creating a partnership,
then the Trust may be subject to the Ohio tax on qualifying pass-through
entities if the Notes were held by any qualifying investors. A "qualifying
investor," in general, is an individual or entity not otherwise subject to the
Ohio personal income, Ohio corporate franchise, or Ohio dealers in intangible
taxes. A "qualifying pass-through entity" is defined as, among other things, a
partnership. Thus, in the event that the transaction is characterized as a
partnership for federal income tax purposes, Ohio tax counsel believes that Ohio
tax officials would likely treat the Trust as a partnership for Ohio tax
purposes and, therefore, as a qualifying pass-through entity. The result of this
is that if the Trust has non-individual qualifying investors as Noteholders, the
Trust will pay an 8.5% entity level tax on the net sum of such Noteholders'
distributive share of the Trust's income apportioned to Ohio. If the Trust has
individual qualifying investors as Noteholders, it will be required to withhold
5% of the net sum of such individual Noteholders' distributive share of the
Trust's income
S-75
<PAGE>
apportioned to Ohio. The amount of tax paid or withheld may be claimed as a
credit against the qualifying investor's Ohio franchise or income tax liability
in an amount equal to the qualifying investor's proportionate share of the
lesser of the tax due or paid.
ERISA CONSIDERATIONS
GENERAL
The Employee Retirement Income Security Act of 1974, as amended ("ERISA")
and Section 4975 of the Code impose certain restrictions on employee benefit
plans subject to ERISA or plans or arrangements subject to Section 4975 of the
Code ("Plans") and on persons who are parties in interest or disqualified
persons ("parties in interest") with respect to such Plans. Certain employee
benefit plans, such as governmental plans and church plans (if no election has
been made under section 410(d) of the Code), are not subject to the restrictions
of ERISA, and assets of such plans may be invested in the Offered Securities
without regard to the ERISA considerations described below, subject to other
applicable Federal and state law. However, any such governmental or church plan
which is qualified under section 401(a) of the Code and exempt from taxation
under section 501(a) of the Code is subject to the prohibited transaction rules
set forth in section 503 of the Code. Any Plan fiduciary which proposes to cause
a Plan to acquire any of the Notes should consult with its counsel with respect
to the potential consequences under ERISA, and the Code, of the Plan's
acquisition and ownership of the Notes. See "ERISA Considerations" in the
Prospectus. Investments by Plans are also subject to ERISA's general fiduciary
requirements, including the requirement of investment prudence and
diversification and the requirement that a Plan's investments be made in
accordance with the documents governing the Plan.
PROHIBITED TRANSACTIONS
GENERAL
Section 406 of ERISA prohibits parties in interest with respect to a Plan
from engaging in certain transactions (including loans) involving a Plan and its
assets unless a statutory or administrative exemption applies to the
transaction. Section 4975 of the Code imposes certain excise taxes (or, in some
cases, a civil penalty may be assessed pursuant to section 502(i) of ERISA) on
parties in interest which engage in non-exempt prohibited transactions.
PLAN ASSET REGULATION
The United States Department of Labor ("Labor") has issued final
regulations concerning the definition of what constitutes the assets of a Plan
for purposes of ERISA and the prohibited transaction provisions of the Code (the
"Plan Asset Regulation"). The Plan Asset Regulation describes the circumstances
under which the assets of an entity in which a Plan invests will be considered
to be "plan assets" such that any person who exercises control over such assets
would be subject to ERISA's fiduciary standards. Under the Plan Asset
Regulation, generally when a Plan invests in another entity, the Plan's assets
do not include, solely by reason of such investment, any of the underlying
assets of the entity. However, the Plan Asset Regulation provides that, if a
Plan acquires an "equity interest" in an entity that is neither a
"publicly-offered security" (as defined therein) nor a security issued by an
investment company registered under the Investment Company Act of 1940, the
assets of the entity will be treated as assets of the Plan investor unless
certain exceptions apply. If the Notes were deemed to be equity interests and no
statutory, regulatory or administrative exemption applies, the Trust could be
considered to hold plan assets by reason of a Plan's investment in the Notes.
Such plan assets would include an undivided interest in any assets held by the
Trust. In such an event, the Master Servicer and other persons, in providing
services with respect to the Trust's assets, may be parties in interest with
respect to such Plans, subject to the fiduciary responsibility provisions of
Title I of ERISA, including the prohibited transaction provisions of
Section 406 of ERISA, and Section 4975 of the Code with respect to transactions
involving the Trust's assets. Under the Plan Asset Regulation, the term "equity
interest" is defined as any interest in an entity other than an instrument that
is treated as indebtedness under "applicable local law" and which has no
"substantial equity features." Although the Plan Asset Regulation is silent with
respect to the question of which law constitutes "applicable local law" for this
purpose, Labor has stated that these determinations should be made under the
state law governing interpretation of the instrument in question. In the
preamble to the Plan Asset Regulation,
S-76
<PAGE>
Labor declined to provide a precise definition of what features are equity
features or the circumstances under which such features would be considered
"substantial," noting that the question of whether a plan's interest has
substantial equity features is an inherently factual one, but that in making a
determination it would be appropriate to take into account whether the equity
features are such that a Plan's investment would be a practical vehicle for the
indirect provision of investment management services. Brown & Wood LLP has
rendered its opinion that the Notes will be classified as indebtedness for tax
purposes and the Depositor believes that the Notes will be classified as
indebtedness without substantial equity features for ERISA purposes. However, if
the Notes are deemed to be equity interests in the Trust and no statutory,
regulatory or administrative exemption applies, the Trust could be considered to
hold plan assets by reason of a Plan's investment in the Notes.
REVIEW BY PLAN FIDUCIARIES
Any Plan fiduciary considering whether to purchase any Notes on behalf of a
Plan should consult with its counsel regarding the applicability of the
fiduciary responsibility and prohibited transaction provisions of ERISA and the
Code to such investment. Among other things, before purchasing any Notes, a
fiduciary of a Plan should make its own determination as to whether the Trust,
as obligor on the Notes, is a party in interest with respect to the Plan, the
availability of the exemptive relief provided in the Plan Asset Regulations and
the availability of any other prohibited transaction exemptions. Purchasers
should analyze whether the decision may have an impact with respect to purchases
of the Notes.
LEGAL INVESTMENT CONSIDERATIONS
Although, as a condition to their issuance, the Notes will be rated in the
highest rating category of the Rating Agencies, the Notes will not constitute
"mortgage related securities" for purposes of the Secondary Mortgage Market
Enhancement Act of 1984 ("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 Notes, 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
(the "Underwriting Agreement"), among the Depositor and the Underwriters named
below (the "Underwriters"), the Depositor has agreed to sell to the
Underwriters, and each of the Underwriters has severally agreed to purchase from
the Depositor the principal amount of Notes set forth below opposite their
respective names.
<TABLE>
<CAPTION>
UNDERWRITER CLASS A-1 CLASS A-2 CLASS A-3
- ---------------------------------------------------------------- ------------ ------------ ------------
<S> <C> <C> <C>
Lehman Brothers Inc............................................. $ 50,000,000 $ 30,000,000 $ 11,575,000
Prudential Securities Incorporated.............................. $ 50,000,000 $ 30,000,000 $ 11,575,000
------------ ------------ ------------
Total...................................................... $100,000,000 $ 60,000,000 $ 23,150,000
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
In the Underwriting Agreement, the Underwriters have agreed, subject to the
terms and conditions set forth therein, to purchase all the Notes offered hereby
if any of the Notes are purchased.
The Depositor has been advised by the Underwriters that they propose
initially to offer the Notes to the public in Europe and the United States at
the underwriting price set forth herein and to certain dealers at such, price,
less a discount not in excess of 0.210% of the Note denominations. The
Underwriters may allow and such dealers may reallow a discount not in excess of
0.105% of the Note denominations to certain other dealers. After the initial
public offering, the public offering price, such concessions and such discounts
may be changed.
The Depositor has been advised by the Underwriters that they presently
intend to make a market in the Notes offered hereby; however, the Underwriters
are not obligated to do so, any market-making may be discontinued at any time,
and there can be no assurance that an active public market for the Notes will
develop.
Until the payment of the Notes is completed, rules of the Commission may
limit the ability of the Underwriters and certain selling group members to bid
for and purchase the Notes. As an exception to these
S-77
<PAGE>
rules, the Underwriters are permitted to engage in certain transactions that
stabilize the price of the Notes. Such transactions consist of bids or purchases
for the purpose of pegging, fixing or maintaining the price of the Notes.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases.
Neither the Depositor nor any of the Underwriters makes any representation
or prediction as to the direction or magnitude of any effect that the
transactions described above may have on the prices of the Notes. In addition,
neither the Depositor nor any of the Underwriters makes any representation that
the Underwriters will engage in such transactions or that such transactions,
once commenced, will not be discontinued without notice.
The Underwriting Agreement provides that the Depositor will indemnify the
Underwriters against certain civil liabilities, including liabilities under the
Securities Act of 1933, as amended.
The Depositor is an affiliate of Lehman Brothers Inc.
LEGAL MATTERS
Certain legal matters with respect to the Notes will be passed upon for the
Depositor by Brown & Wood LLP, New York, New York and for the Underwriters by
Brown & Wood LLP, New York, New York. Certain legal matters will be passed upon
for Provident by Keating, Muething & Klekamp, P.L.L., Cincinnati, Ohio. Certain
legal matters will be passed upon for the Insurer by Kutak Rock, Omaha,
Nebraska.
EXPERTS
The consolidated balance sheets of MBIA Insurance Corporation and
Subsidiaries as of December 31, 1997 and December 31, 1996 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, 1997,
incorporated by reference in this Prospectus Supplement, have been incorporated
herein in reliance on the report of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of that firm as experts in accounting and
auditing.
RATINGS
It is a condition to issuance that the Notes be rated "AAA" by Standard &
Poor's and "Aaa" by Moody's.
A securities rating addresses the likelihood of the receipt by Noteholders
of payments on the Mortgage Loans. The rating takes into consideration the
characteristics of the Mortgage Loans and the structural, legal and tax aspects
associated with the Notes. The ratings on the Notes do not, however, constitute
statements regarding the likelihood or frequency of prepayments on the Mortgage
Loans or the possibility that Noteholders might realize a lower than anticipated
yield.
The ratings assigned to the Notes will depend primarily upon the
creditworthiness of the Insurer. Any reduction in a rating assigned to the
financial strength of the Insurer below the ratings initially assigned to the
Notes may result in a reduction of one or more of the ratings assigned to the
Notes.
The ratings assigned to the Notes do not address the likelihood of the
payment of any LIBOR Carryover.
A securities rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning rating
organization. Each securities rating should be evaluated independently of
similar ratings on different securities.
S-78
<PAGE>
INDEX OF DEFINED TERMS
<TABLE>
<CAPTION>
TERM PAGE
- ---------------------------------------------------------------------------------------------------------- ------
<S> <C>
Additional Balance........................................................................................ S-21
Adjustment Date........................................................................................... S-22
Agreements................................................................................................ S-15
All Hold Rate............................................................................................. II-1
Alternative Principal Payment............................................................................. S-55
Amortization Period....................................................................................... S-21
Assignment Event.......................................................................................... S-47
Auction................................................................................................... II-1
Auction Agent............................................................................................. S-71
Auction Agent Agreement................................................................................... S-71
Auction Agent Fee......................................................................................... II-1
Auction Agent Fee Rate.................................................................................... II-1
Auction Date.............................................................................................. II-1
Auction Period............................................................................................ II-1
Auction Procedures........................................................................................ II-1
Auction Rate.............................................................................................. II-1
Authorized Denominations.................................................................................. II-1
Available Notes........................................................................................... II-7
Average Portfolio Balance................................................................................. S-19
Balloon Loans............................................................................................. S-32
beneficial owner.......................................................................................... S-43
Bid....................................................................................................... II-5
Bid Auction Rate.......................................................................................... II-7
Bidder.................................................................................................... II-6
BIF....................................................................................................... S-49
Billing Cycle............................................................................................. S-22
Book-Entry Notes.......................................................................................... S-43
Broker-Dealer Agreement................................................................................... II-2
Broker-Dealer Fee Rate.................................................................................... II-2
Broker-Dealer Fee......................................................................................... II-2
Broker-Dealer............................................................................................. II-2
Business Day.............................................................................................. S-52
Buyer's Broker-Dealer..................................................................................... III-1
Cedelbank Participants.................................................................................... S-44
Cedelbank................................................................................................. S-43
Charge-Offs............................................................................................... S-19
Civil Relief Act Interest Shortfalls...................................................................... S-54
Class A-1 Investor Floating Allocation percentage......................................................... S-51
Class A-1 Investor Interest Collections................................................................... S-51
Class A-1 Note Rate....................................................................................... S-54
Class A-1 Notes........................................................................................... S-42
Class A-2 Note Rate....................................................................................... S-54
Class A-2 Notes........................................................................................... S-42
Class A-2/A-3 Investor Floating Allocation Percentage..................................................... S-51
Class A-2/A-3 Investor Interest Collections............................................................... S-51
Class A-3 Formula Rate.................................................................................... S-54
Class A-3 Note Rate....................................................................................... S-54
Class A-3 Notes........................................................................................... S-42
Closed-End Loans.......................................................................................... S-22
Closing Date.............................................................................................. S-54
CLTV...................................................................................................... S-24
</TABLE>
S-79
<PAGE>
<TABLE>
<CAPTION>
TERM PAGE
- ---------------------------------------------------------------------------------------------------------- ------
<S> <C>
CMAC...................................................................................................... S-13
Code...................................................................................................... S-72
Collection Account........................................................................................ S-49
Collection Period......................................................................................... S-52
Combined Loan-to-Value Ratio.............................................................................. S-24
Cooperative............................................................................................... S-44
Credit Limit Utilization Ratio............................................................................ S-24
Credit Limit.............................................................................................. S-17
Credit Line Agreements.................................................................................... S-21
Cut-Off Date Loan Group 1 Principal Balance............................................................... S-23
Cut-Off Date Loan Group 1 Sample Pool Balance............................................................. S-31
Cut-Off Date Loan Group 2 Initial Principal Balance....................................................... S-32
Cut-Off Date Loan Group 2 Initial Sample Pool Balance..................................................... S-40
Cut-Off Date Pool Principal Balance....................................................................... S-15
Cut-Off Date Principal Balance............................................................................ S-15
Cut-Off Date.............................................................................................. S-23
Defective Mortgage Loans.................................................................................. S-48
Deficiency Amount......................................................................................... S-59
Definitive Note........................................................................................... S-43
Depositor................................................................................................. S-16
Determination Date........................................................................................ S-49
Distribution Account...................................................................................... S-49
Draw...................................................................................................... S-21
Draw Period............................................................................................... S-21
DTC....................................................................................................... S-43
DTC Services.............................................................................................. S-46
Due Date.................................................................................................. S-22
Eligible Account.......................................................................................... S-49
Eligible Substitute Mortgage Loan......................................................................... S-47
equity interest........................................................................................... S-76
ERISA Council............................................................................................. S-77
ERISA..................................................................................................... S-76
Euroclear Operator........................................................................................ S-44
Euroclear Participants.................................................................................... S-44
Euroclear................................................................................................. S-43
European Depositaries..................................................................................... S-43
Events of Default......................................................................................... S-67
Events of Servicing Termination........................................................................... S-66
Existing Noteholder Registry.............................................................................. II-2
Existing Noteholder....................................................................................... II-2
FDIC...................................................................................................... S-71
Final Payment Date........................................................................................ S-59
Finance Charge............................................................................................ S-22
Financial Intermediary.................................................................................... S-43
Fiscal Agent.............................................................................................. S-58
GAAP...................................................................................................... S-14
Global Securities......................................................................................... I-1
Group 1................................................................................................... S-42
Group 1 Closed-End Loans.................................................................................. S-23
Group 1 Loans............................................................................................. S-21
Group 1 Net Funds Cap..................................................................................... S-54
Group 1 Revolving Credit-Line Loans....................................................................... S-23
Group 1 Sample Pool....................................................................................... S-31
</TABLE>
S-80
<PAGE>
<TABLE>
<CAPTION>
TERM PAGE
- ---------------------------------------------------------------------------------------------------------- ------
<S> <C>
Group 1 Spread Account.................................................................................... S-56
Group 1 Transferor Interest............................................................................... S-42
Group 2................................................................................................... S-42
Group 2 Initial Closed-End Loans.......................................................................... S-32
Group 2 Initial Loans..................................................................................... S-21
Group 2 Initial Revolving Credit-Line Loans............................................................... S-32
Group 2 Initial Sample Pool............................................................................... S-40
Group 2 Net Funds Cap..................................................................................... S-54
Group 2 Spread Account.................................................................................... S-56
Group 2 Transferor Interest............................................................................... S-42
Guaranteed Principal Amount............................................................................... S-59
Hold Order................................................................................................ II-5
Indenture................................................................................................. S-42
Indenture Trustee......................................................................................... S-42
Index..................................................................................................... S-22
Industry.................................................................................................. S-46
Initial Period............................................................................................ II-2
Insolvency Events......................................................................................... S-66
Insured Payment........................................................................................... S-59
Interest Collections...................................................................................... S-51
Interest Period........................................................................................... S-54
Invested Amount........................................................................................... S-42
Investor Interest Collections............................................................................. S-51
Investor Loss Amount...................................................................................... S-52
Investor Principal Collections............................................................................ S-51
IRS....................................................................................................... S-72
Labor..................................................................................................... S-76
LIBOR Business Day........................................................................................ S-55
LIBOR Carryover........................................................................................... S-54
LIBOR Determination Date.................................................................................. II-2
Liquidated Mortgage Loan.................................................................................. S-52
Liquidation Loss Amount................................................................................... S-52
Liquidation Proceeds...................................................................................... S-51
Loan Group................................................................................................ S-5
Loan Group 1.............................................................................................. S-21
Loan Group 2.............................................................................................. S-21
Loan Group Balance........................................................................................ S-51
Loan Groups............................................................................................... S-21
Loan Rate................................................................................................. S-23
London Banking Day........................................................................................ II-2
Loss Payee Clause......................................................................................... S-17
Managed Amortization Period............................................................................... S-55
Margin.................................................................................................... S-22
Market Agent.............................................................................................. II-2
Master Servicer........................................................................................... S-16
Maximum Auction Rate...................................................................................... II-2
Maximum Principal Payment................................................................................. S-55
MBIA Inc.................................................................................................. S-13
Minimum Transferor Interest............................................................................... S-49
Money Rates............................................................................................... S-22
Monthly Advance........................................................................................... S-49
Mortgage Clause........................................................................................... S-17
Mortgage Files............................................................................................ S-46
</TABLE>
S-81
<PAGE>
<TABLE>
<CAPTION>
TERM PAGE
- ---------------------------------------------------------------------------------------------------------- ------
<S> <C>
Mortgage Loan Schedule.................................................................................... S-46
Mortgage Notes............................................................................................ S-22
Mortgage Pool............................................................................................. S-21
Net Liquidation Proceeds.................................................................................. S-51
Net Simple Interest Excess................................................................................ S-50
Net Simple Interest Shortfall............................................................................. S-50
New Witholding Regulations................................................................................ S-74
Nonrecoverable Advance.................................................................................... S-50
Note Initial Rate Adjustment Date......................................................................... II-2
Note Initial Rate......................................................................................... II-2
Note Owners............................................................................................... S-43
Note Principal Balance.................................................................................... S-42
Note Rate................................................................................................. II-2
Note...................................................................................................... II-1
Notes..................................................................................................... S-42
Noteholder................................................................................................ S-43
Notice.................................................................................................... S-59
Ohio Tax Counsel.......................................................................................... S-75
OID....................................................................................................... S-72
OID Regulations........................................................................................... S-72
One-Month LIBOR........................................................................................... II-2
One-Month Index Maturity.................................................................................. II-2
One-Year Draw Period Loans................................................................................ S-21
Order..................................................................................................... II-6
Original Group 1 Invested Amount.......................................................................... S-42
Original Group 2 Invested Amount.......................................................................... S-42
Original Note Principal Balance........................................................................... S-42
Owner Trustee............................................................................................. S-42
Owner..................................................................................................... S-59
parties in interest....................................................................................... S-76
Paying Agent.............................................................................................. S-56
Payment Date.............................................................................................. S-52
Person.................................................................................................... II-3
Plan Asset Regulation..................................................................................... S-76
Plans..................................................................................................... S-76
Pool Balance.............................................................................................. S-15
Pool Factor............................................................................................... S-60
Potential Noteholder...................................................................................... II-3
Preference Amount......................................................................................... S-59
Pre-Funding Account....................................................................................... S-57
Prepayment Interest Shortfall............................................................................. S-65
Prime Rate................................................................................................ S-22
Principal Balance......................................................................................... S-51
Principal Collections..................................................................................... S-51
Provident................................................................................................. S-16
Purchase Agreement........................................................................................ S-16
Rapid Amortization Event.................................................................................. S-57
Rapid Amortization Period................................................................................. S-57
Rate Adjustment Date...................................................................................... II-3
Rate Determination Date................................................................................... II-3
Record Date............................................................................................... S-52
Reference Bank Rate....................................................................................... S-54
Reference Banks........................................................................................... II-3
</TABLE>
S-82
<PAGE>
<TABLE>
<CAPTION>
TERM PAGE
- ---------------------------------------------------------------------------------------------------------- ------
<S> <C>
Related Documents......................................................................................... S-46
Relevant Depositary....................................................................................... S-43
remaining principal amount................................................................................ II-9
Revolving Credit-Line Loans............................................................................... S-21
Rules..................................................................................................... S-43
SAIF...................................................................................................... S-49
Sale and Servicing Agreement.............................................................................. S-15
Sample Pool Group 1 Loans................................................................................. S-31
Sample Pool Group 2 Initial Loans......................................................................... S-40
SAP....................................................................................................... S-14
Scheduled Principal Collections Payment Amount............................................................ S-55
Sell Order................................................................................................ II-5
Seller.................................................................................................... S-16
Seller's Broker-Dealer.................................................................................... III-1
Servicing Advance......................................................................................... S-50
Servicing Fee Rate........................................................................................ S-64
Simple Interest Excess Sub-Account........................................................................ S-50
Simple Interest Excess.................................................................................... S-50
Simple Interest Qualifying Loan........................................................................... S-50
Simple Interest Shortfall................................................................................. S-50
SMMEA..................................................................................................... S-77
Spread Account Requirement................................................................................ S-56
Spread Accounts........................................................................................... S-56
Submitted Bid............................................................................................. II-7
Submitted Hold Order...................................................................................... II-7
Submitted Orders.......................................................................................... II-7
Submitted Sell Order...................................................................................... II-7
Subsequent Mortgage Loans................................................................................. S-41
Sufficient Bids........................................................................................... II-7
Systems................................................................................................... S-46
Tax Council............................................................................................... S-72
Telerate Screen Page 3750................................................................................. S-54
Ten-Year Draw Period Loans................................................................................ S-21
Terms and Conditions...................................................................................... S-45
TIA....................................................................................................... S-69
Transfer Date............................................................................................. S-48
Transfer Deficiency....................................................................................... S-47
Transfer Deposit Amount................................................................................... S-47
Transferor................................................................................................ S-16
Transferor Interests...................................................................................... S-42
Transferor Principal Collections.......................................................................... S-51
Trust..................................................................................................... S-15
Trust Agreement........................................................................................... S-42
U.S. Person............................................................................................... I-3
Underwriting Agreement.................................................................................... S-77
Underwriters.............................................................................................. S-77
Year 2000 Problems........................................................................................ S-46
</TABLE>
S-83
<PAGE>
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<PAGE>
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered Home Equity
Loan Asset-Backed Notes, Series 1998-A (the "Global Securities") will be
available only in book-entry form. Investors in the Global Securities may hold
such Global Securities through any of DTC, Cedelbank or Euroclear. The Global
Securities will be tradeable as home market instruments in both the European and
U.S. domestic markets. Initial settlement and all secondary trades will settle
in same-day funds.
Secondary market trading between investors holding Global Securities
through Cedelbank and Euroclear will be conducted in the ordinary way in
accordance with their normal rules and operating procedures and in accordance
with conventional eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors holding Global Securities
through DTC will be conducted according to the rules and procedures applicable
to U.S. corporate debt obligations and prior Home Equity Loan Asset-Backed Notes
issues.
Secondary cross-market trading between Cedelbank or Euroclear and DTC
Participants holding Notes will be effected on a delivery-against-payment basis
through the respective Depositaries of Cedelbank and Euroclear (in such
capacity) and as DTC Participants.
Non-U.S. holders (as described below) of Global Securities will be subject
to U.S. withholding taxes unless such holders meet certain requirements and
deliver appropriate U.S. tax documents to the securities clearing organizations
or their participants.
INITIAL SETTLEMENT
All Global Securities will be held in book-entry form by DTC in the name of
Cede & Co. as nominee of DTC. Investors' interests in the Global Securities will
be represented through financial institutions acting on their behalf as direct
and indirect Participants in DTC. As a result, Cedelbank and Euroclear will hold
positions on behalf of their participants through their respective Depositaries,
which in turn will hold such positions in accounts as DTC Participants.
Investors electing to hold their Global Securities through DTC will follow
the settlement practices applicable to prior Home Equity Loan Asset-Backed Notes
issues. Investor securities custody accounts will be credited with their
holdings against payment in same-day funds on the settlement date.
Investors electing to hold their Global Securities through Cedelbank or
Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global security
and no "lock-up" or restricted period. Global Securities will be credited to the
securities custody accounts on the settlement date against payment in same-day
funds.
SECONDARY MARKET TRADING
Since the purchaser determines the place of delivery, it is important to
establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
Trading between DTC Participants. Secondary market trading between DTC
Participants will be settled using the procedures applicable to prior Home
Equity Loan Asset-Backed Notes issues in same-day funds.
Trading between Cedelbank and/or Euroclear Participants. Secondary market
trading between Cedelbank Participants or Euroclear Participants will be settled
using the procedures applicable to conventional eurobonds in same-day funds.
Trading between DTC seller and Cedelbank or Euroclear purchaser. When
Global Securities are to be transferred from the account of a DTC Participant to
the account of a Cedelbank Participant or a Euroclear Participant, the purchaser
will send instructions to Cedelbank or Euroclear through a Cedelbank Participant
or Euroclear Participant at least one business day prior to settlement.
Cedelbank or Euroclear will instruct the
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respective Depositary, as the case may be, to receive the Global Securities
against payment. Payment will include interest accrued on the Global Securities
from and including the last coupon payment date to and excluding the settlement
date, on the basis of the actual number of days in such accrual period and a
year assumed to consist of 360 days. For transactions selling on the 31st of the
month, payment will include interest accrued to and excluding the first day of
the following month. Payment will then be made by the respective Depositary of
the DTC Participant's account against delivery of the Global Securities. After
settlement has been completed, the Global Securities will be credited to the
respective clearing system and by the clearing system, in accordance with its
usual procedures, to the Cedelbank Participant's or Euroclear Participant's
account. The securities credit will appear the next day (European time) and the
cash debt will be back-valued to, and the interest on the Global Securities will
accrue from, the value date (which would be the preceding day when settlement
occurred in New York). If settlement is not completed on the intended value date
(i.e., the trade fails), the Cedelbank or Euroclear cash debt will be valued
instead as of the actual settlement date.
Cedelbank Participants and Euroclear Participants will need to make
available to the respective clearing systems the funds necessary to process
same-day funds settlement. The most direct means of doing so is to preposition
funds for settlement, either from cash on hand or existing lines of credit, as
they would for any settlement occurring within Cedelbank or Euroclear. Under
this approach, they may take on credit exposure to Cedelbank or Euroclear until
the Global Securities are credited to their accounts one day later.
As an alternative, if Cedelbank or Euroclear has extended a line of credit
to them, Cedelbank Participants or Euroclear Participants can elect not to
preposition funds and allow that credit line to be drawn upon the finance
settlement. Under their procedure, Cedelbank Participants or Euroclear
Participants purchasing Global Securities would incur overdraft charges for one
day, assuming they cleared the overdraft when the Global Securities were
credited to their accounts. However, interest on the Global Securities would
accrue from the value date. Therefore, in many cases the investment income on
the Global Securities earned during that one-day period may substantially reduce
or offset the amount of such overdraft charges, although this result will depend
on each Cedelbank Participant's or Euroclear Participant's particular cost of
funds.
Since the settlement is taking place during New York business hours, DTC
Participants can employ their usual procedures for sending Global Securities to
the respective European Depositary for the benefit of Cedelbank Participants or
Euroclear Participants. The sale proceeds will be available to the DTC seller on
the settlement date. Thus, to the DTC Participants a cross-market transaction
will settle no differently than a trade between two DTC Participants.
Trading between Cedelbank or Euroclear Seller and DTC Purchaser. Due to
time zone differences in their favor, Cedelbank Participants and Euroclear
Participants may employ their customary procedures for transactions in which
Global Securities are to be transferred by the respective clearing system,
through the respective Depositary, to a DTC Participant. The seller will send
instructions to Cedelbank or Euroclear through a Cedelbank Participant or
Euroclear Participant at least one business day prior to settlement. In these
cases Cedelbank or Euroclear will instruct the respective Depositary, as
appropriate, to deliver the Global Securities to the DTC Participant's account
against payment. Payment will include interest accrued on the Global Securities
from and including the last coupon payment to and excluding the settlement date
on the basis of the actual number of days in such accrual period and a year
assumed to consist of 360 days. For transactions settling on the 31st of the
month, payment will include interest accrued to and excluding the first day of
the following month. The payment will then be reflected in the account of the
Cedelbank Participant or Euroclear Participant the following day, and receipt of
the cash proceeds in the Cedelbank Participant's or Euroclear Participant's
account would be back-valued to the value date (which would be the preceding
day, when settlement occurred in New York). Should the Cedelbank Participant or
Euroclear Participant have a line of credit with its respective clearing system
and elect to be in debt in anticipation of receipt of the sale proceeds in its
account, the back-valuation will extinguish any overdraft incurred over that
one-day period. If settlement is not completed on the intended value date (i.e.,
the trade fails), receipt of the cash proceeds in the Cedelbank Participant's or
Euroclear Participant's account would instead be valued as of the actual
settlement date.
Finally, day traders that use Cedelbank or Euroclear and that purchase
Global Securities from DTC Participants for delivery to Cedelbank Participants
or Euroclear Participants should note that these trades would
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automatically fail on the sale side unless affirmative action were taken. At
least three techniques should be readily available to eliminate this potential
problem:
(a) borrowing through Cedelbank or Euroclear for one day (until the
purchase side of the day trade is reflected in their Cedelbank or Euroclear
accounts) in accordance with the clearing system's customary procedures;
(b) borrowing the Global Securities in the U.S. from a DTC Participant
no later than one day prior to settlement, which would give the Global
Securities sufficient time to be reflected in their Cedelbank or Euroclear
account in order to settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of the trade
so that the value date for the purchase from the DTC Participant is at
least one day prior to the value date for the sale to the Cedelbank
Participant or Euroclear Participant.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of Global Securities holding securities through
Cedelbank or Euroclear (or through DTC if the holder has an address outside the
U.S.) will be subject to the 30% U.S. withholding tax that generally applies to
payments of interest (including original issue discount) on registered debt
issued by U.S. Persons, unless (i) each clearing system, bank or other financial
institution that holds customers' securities in the ordinary course of its trade
or business in the chain of intermediaries between such beneficial owner and the
U.S. entity required to withhold tax complies with applicable certification
requirements and (ii) such beneficial owner takes one of the following steps to
obtain an exemption or reduced tax rate:
Exemption for non-U.S. Persons (Form W-8). Beneficial owners of Global
Securities that are non-U.S. Persons can obtain a complete exemption from the
withholding tax by filing a signed Form W-8 (Certificate of Foreign Status). If
the information shown on Form W-8 changes, a new Form W-8 must be filed within
30 days of such change.
Exemption for non-U.S. Persons with effectively connected income (Form
4224). A non-U.S. Person, including a non-U.S. corporation or bank with a U.S.
branch, for which the interest income is effectively connected with its conduct
of a trade or business in the United States, can obtain an exemption from the
withholding tax by filing Form 4224 (Exemption from Withholding of Tax on Income
Effectively Connected with the Conduct of a Trade or Business in the United
States).
Exemption or reduced rate for non-U.S. Persons resident in treaty countries
(Form 1001). Non-U.S. Persons that are Note Owners residing in a country that
has a tax treaty with the United States can obtain an exemption or reduced tax
rate (depending on the treaty terms) by filing Form 1001 (Ownership, Exemption
or Reduced Rate Note). If the treaty provides only for a reduced rate,
withholding tax will be imposed at that rate unless the filer altenatively files
Form W-8. Form 1001 may be filed by the Note Owners or his agent.
Exemption for U.S. Persons (Form W-9). U.S. Persons can obtain a complete
exemption from the withholding tax by filing Form W-9 (Payer's Request for
Taxpayer Identification Number and Certification).
U.S. Federal Income Tax Reporting Procedure. The Note Owner of a Global
Security or, in the case of a Form 1001 or a Form 4224 filer, his agent, files
by submitting the appropriate form to the person through whom it holds (the
clearing agency, in the case of persons holding directly on the books of the
clearing agency). Form W-8 and Form 1001 are effective for three calendar years
and Form 4224 is effective for one calendar year.
The term "U.S. Person" means (i) a citizen or resident of the United
States, (ii) a corporation or partnership organized in or under the laws of the
United States or any political subdivision thereof, (iii) an estate the income
of which is includible in gross income for United States tax purposes,
regardless of its source, or (iv) a trust if a court within the United States is
able to exercise primary supervision over the administration of the trust and
one or more United States trustees have authority to control all substantial
decisions of the trust. This summary does not deal with all aspects of U.S.
Federal income tax withholding that may be relevant to foreign holders of the
Global Securities. Investors are advised to consult their own tax advisors for
specific tax advice concerning their holding and disposing of the Global
Securities.
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ANNEX II
AUCTION PROCEDURES
The following description of the Auction Procedures applies to the
Class A-3 Notes. The term "Note," as used in this Annex, refers to the
Class A-3 Notes, and the term "Noteholder" refers to Noteholders holding the
Class A-3 Notes.
DEFINITIONS
Capitalized terms used herein and not otherwise defined have the meanings
ascribed in the accompanying Prospectus and Prospectus Supplement. Additionally,
the following terms have the meanings ascribed to them:
"All Hold Rate" means for any Interest Period ninety percent (90%) of
One-Month LIBOR for such period.
"Auction" means the implementation of the Auction Procedures on an Auction
Date.
"Auction Agent" means Bankers Trust Company, a New York banking
corporation, or any successor appointed under the Auction Agent Agreement.
"Auction Agent Agreement" means the Auction Agent Agreement, dated
December 30, 1998 among The Provident Bank, The Chase Manhattan Bank, as
Indenture Trustee under the Sale and Servicing Agreement, and Bankers Trust
Company, as Auction Agent.
"Auction Agent Fee" means for each Interest Period, commencing on the
Closing Date, the amount equal to the product of (i) the Auction Agent Fee Rate
times (ii) a fraction, the numerator which is the number of days in such
Interest Period and the denominator of which is 360, times (iii) the aggregate
principal amount of Class A-3 Notes outstanding at the close of business on the
last day of the month immediately preceding the applicable Payment Date.
"Auction Agent Fee Rate" means the per annum rate equal to the sum of (i)
the Broker-Dealer Fee Rate for such Accrual Period and (ii) 0.01%.
"Auction Date" means the Business Day immediately preceding the first day
of each Auction Period, commencing January 22, 1999 other than:
(A) each Auction Period commencing after the ownership of the Notes is
no longer maintained in Book-Entry Form by the Depository;
(B) each Auction Period commencing after and during the continuance of
an Insurer Default; or
(C) each Auction Period commencing less than two Business Days after
the cure or waiver of an Insurer Default.
Notwithstanding the foregoing, the Auction Date for one or more Auction Periods
may be changed pursuant to the Auction Agent Agreement, as described herein.
"Auction Period" means after the Initial Period, the period during which
any Note Rate established for the Class A-3 Notes applies, which shall be the
period commencing on each Payment Date, other than the Payment Date in
September, October, November or December of any year, and shall continue through
the day immediately preceding the next Payment Date. The Auction Period relating
to the Auction Date in September of any year, shall commence on the Payment Date
in September of such year and shall continue through the day immediately
preceding the Payment Date in January of the following year.
"Auction Procedures" means the procedures set forth in the Sale and
Servicing Agreement, and described herein by which the Auction Rate is
determined.
"Auction Rate" means the rate of interest per annum that results from the
implementation of the Auction Procedures.
"Authorized Denominations" means $25,000 and any integral multiple in
excess thereof.
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"Broker-Dealer" means Lehman Brothers Inc. or any other broker or dealer
(each as defined in the Securities Exchange Act of 1934, as amended), commercial
bank or other entity permitted by law to perform the functions required of a
Broker-Dealer set forth in the Auction Procedures that (a) is a Participant (or
an affiliate of a Participant), (b) has been appointed as such by the
Transferor, with the consent of the Market Agent and (c) has entered into a
Broker-Dealer Agreement that is in effect on the date of reference.
"Broker-Dealer Agreement" means the Broker-Dealer Agreement, dated
December 30, 1998 between the Auction Agent and the Broker-Dealer.
"Broker-Dealer Fee" means the portion of the Auction Agent Fee paid to the
Broker-Dealer pursuant to the Broker-Dealer Agreement.
"Broker-Dealer Fee Rate" means the rate at which the fee payable to the
Broker-Dealer is determined.
"Business Day" means any day other than (i) a Saturday or Sunday or (ii) a
day on which banking institutions in the States of New York or Ohio are
authorized or obligated by law or executive order to be closed.
"Existing Noteholder" means (i) with respect to and for the purpose of
dealing with the Auction Agent in connection with an Auction, a Person who is a
Broker-Dealer listed in the Existing Noteholder Registry at the close of
business on the Business Day immediately preceding such Auction and (ii) with
respect to and for the purpose of dealing with the Broker-Dealer in connection
with an Auction, a Person who is a beneficial owner of any Note.
"Existing Noteholder Registry" means the registry of Persons who are owners
of the Class A-3 Notes maintained by the Auction Agent as provided in the
Auction Agent Agreement.
"Initial Period" means the period commencing on the Closing Date and
continuing through January 24, 1999.
"Interest Period" means with respect to any Payment Date, the period from
the Payment Date in the month preceding the month of such Payment Date through
the day before such Payment Date.
"LIBOR Determination Date" means for any Auction Period the first date
which is both a Business Day and a London Banking Day immediately prior to the
commencement of such Auction Period.
"London Banking Day" means any Business Day on which dealings in deposits
in United States dollars are transacted in the London interbank market.
"Market Agent" means Lehman Brothers Inc.
"Maximum Auction Rate" means (A) One-Month LIBOR plus 1.00% (if the ratings
assigned by the Rating Agencies to the Class A-3 Notes are "AAA", "AAA" and
"Aaa" or better), (B) One-Month LIBOR plus 1.25% (if the ratings assigned by the
Rating Agencies to the Class A-3 Notes are "AA", "AA" or "Aa" or better),
(C) One-Month LIBOR plus 2.00% (if the ratings assigned by the Rating Agencies
to the Auction Rate Notes are "A", "A" or "A" or better) or (D) One-Month LIBOR
plus 3.50% (if any one of the ratings assigned by the Rating Agencies to the
Class A-3 Notes is less than "A", "A" or "A". For purposes of the Auction Agent
and the Auction Procedures, the ratings referred to in this definition shall be
the last rating of which the Auction Agent and the Indenture Trustee have been
given notice pursuant to the Auction Agent Agreement.
"Note Initial Rate" means 5.75% per annum.
"Note Rate" means initially the Note Initial Rate until the first Auction
Date at which time the Note Rate will be reset pursuant to the Auction
Procedure, which in no event shall exceed the Group 2 Net Funds Cap.
"One-Month LIBOR" means the London interbank offered rate for deposits in
U.S. dollars having a maturity of one month commencing on the related LIBOR
Determination Date (the "One-Month Index Maturity") which appears on Telerate
Page 3750 as of 11:00 a.m., London time, on such LIBOR Determination Date. If
such rate does not appear on Telerate Page 3750, the rate for that day will be
determined on the basis of the rates at which deposits in U.S. dollars, having
the One-Month Index Maturity and in a principal amount of not less than
U.S. $1,000,000, are offered at approximately 11:00 a.m., London time, on such
LIBOR Determination Date to prime banks in the London interbank market by the
Reference Banks. The Auction Agent will request the
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principal London office of each of such Reference Banks to provide a quotation
of its rate. If at least two such quotations are provided, the rate for that day
will be the arithmetic mean of the quotations. If fewer than two quotations are
provided, the rate for that day will be the arithmetic mean of the rates quoted
by major banks in New York City, selected by the Auction Agent, at approximately
11:00 a.m., New York City time, on such LIBOR Determination Date for loans in
U.S. dollars to leading European banks having the One-Month Index Maturity and
in a principal amount equal to an amount of not less than U.S. $1,000,000;
provided that if the banks selected as aforesaid are not quoting as mentioned in
this sentence, One-Month LIBOR in effect for the applicable Auction Period will
be One-Month LIBOR in effect for the previous Auction Period.
"Person" means any individual, corporation, estate, partnership, limited
liability company, joint venture, association, joint stock company, trust
(including any beneficiary thereof), unincorporated organization or government
or any such agency or political subdivision thereof.
"Potential Noteholder" means any Person (including an Existing Noteholder
that is (i) a Broker-Dealer when dealing with the Auction Agent and (ii) a
potential beneficial owner when dealing with a Broker-Dealer) who may be
interested in acquiring Class A-3 Notes (or, in the case of an Existing
Noteholder thereof, an additional principal amount of Class A-3 Notes).
"Rate Adjustment Date" means the date on which Note Rate is effective and
means, with respect to each such Note, the date of commencement of each Auction
Period.
"Rate Determination Date" means the Auction Date, or if no Auction Date is
applicable, the Business Day immediately preceeding the date of commencement of
an Auction Period.
"Reference Banks" means leading banks selected by the Auction Agent and
engaged in transactions in Eurodollar deposits in the international Eurocurrency
market.
EXISTING NOTEHOLDERS AND POTENTIAL NOTEHOLDERS
Participants in each Auction will include: (i) Existing Noteholders as of
the close of business on the Business Day preceding each Auction Date according
to the records of the Auction Agent; and (ii) Potential Noteholders.
See"--Broker-Dealer."
By purchasing a Class A-3 Note, whether in an Auction or otherwise, each
prospective purchaser of the Class A-3 Notes or its Broker-Dealer must agree and
will be deemed to have agreed: (i) to participate in Auctions on the terms
described herein; (ii) so long as the beneficial ownership of the Class A-3
Notes is maintained in Book-Entry Form to sell, transfer or otherwise dispose of
the Class A-3 Notes only pursuant to a Bid (as defined below) or a Sell Order
(as defined below) in an Auction, or to or through a Broker-Dealer, provided
that in the case of all transfers other than those pursuant to an Auction, the
Existing Noteholder of the Class A-3 Notes so transferred, its Participant or
Broker-Dealer advises the Auction Agent of such transfer; (iii) to have its
beneficial ownership of the Class A-3 Notes maintained at all times in
Book-Entry Form for the account of its Participant, which in turn will maintain
records of such beneficial ownership, and to authorize such Participant to
disclose to the Auction Agent such information with respect to such beneficial
ownership as the Auction Agent may request; (iv) that a Sell Order placed by an
Existing Noteholder will constitute an irrevocable offer to sell the principal
amount of the Class A-3 Note specified in such Sell Order; (v) that a Bid placed
by an Existing Noteholder will constitute an irrevocable offer to sell the
principal amount of the Class A-3 Notes specified in such Bid if the rate
specified in such Bid is greater than, or in some cases equal to, the Note Rate
determined as described herein; and (vi) that a Bid placed by a Potential
Noteholder will constitute an irrevocable offer to purchase the amount, or a
lesser principal amount, of the Class A-3 Notes specified in such Bid if the
rate specified in such Bid is, respectively, less than or equal to the Note
Rate, determined as described herein.
The principal amount of the Class A-3 Notes purchased or sold may be
subject to proration procedures on the Auction Date. Each purchase or sale of
the Class A-3 Notes on the Auction Date will be made for settlement on the first
day of the Auction Period immediately following such Auction Date at a price
equal to 100% of the principal amount thereof, plus accrued but unpaid interest
thereon. The Auction Agent is entitled to rely upon the terms of any Order
submitted to it by a Broker-Dealer.
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Auction Agent
Bankers Trust Company, a New York banking corporation, will be appointed as
Auction Agent to serve as agent for the Trust in connection with Auctions. The
Indenture Trustee will enter into the Auction Agent Agreement with Bankers Trust
Company as the Auction Agent. Any Substitute Auction Agent will be (i) a bank,
national banking association or trust company duly organized under the laws of
the United States of America or any state or territory thereof having its
principal place of business in the Borough of Manhattan, New York, or such other
location as approved by the Indenture Trustee and the Market Agent in writing
and having a combined capital stock or surplus of at least $50,000,000, or
(ii) a member of the National Association of Securities Dealers, Inc. having a
capitalization of at least $50,000,000, and, in either case, authorized by law
to perform all the duties imposed upon it under the Auction Agent Agreement and
approved by the Insurer in writing. The Auction Agent may at any time resign by
giving at least 90 days' notice to the Indenture Trustee, the Insurer and the
Market Agent. The Auction Agent may be removed at any time by the Indenture
Trustee upon the written direction of the Insurer, or, with the consent of the
Insurer, the Noteholders holding 66 2/3% of the aggregate principal amount of
the Class A-3 Notes then outstanding, by an instrument signed by the Insurer or
such Noteholders or their attorneys and filed with the Auction Agent, the
Indenture Trustee and the Market Agent upon at least 90 days' notice. Neither
resignation nor removal of the Auction Agent pursuant to the preceding two
sentences will be effective until and unless a Substitute Auction Agent has been
appointed, has been approved in writing by the Insurer and has accepted such
appointment. If required by the Insurer, Noteholders holding 66 2/3% of the
aggregate principal amount of the Class A-3 Notes then outstanding or by the
Market Agent, a Substitute Auction Agent Agreement shall be entered into with a
Substitute Auction Agent. Notwithstanding the foregoing, the Auction Agent may
terminate the Auction Agent Agreement if, within 25 days after notifying the
Indenture Trustee, the Insurer and the Market Agent in writing that it has not
received payment of any Auction Agent Fee due it in accordance with the Auction
Agent Agreement, the Auction Agent does not receive such payment.
If the Auction Agent should resign or be removed or be dissolved, or if the
property or affairs of the Auction Agent shall be taken under the control of any
state or federal court or administrative body because of bankruptcy or
insolvency, or for any other reason, the Indenture Trustee, at the direction of
the Transferor and the Insurer (after receipt of a certificate from the Market
Agent confirming that any proposed Substitute Auction Agent meets the
requirements described in the immediately preceding paragraph above), shall use
its best commercial efforts to appoint a Substitute Auction Agent.
The Auction Agent is acting as agent for the Trust in connection with
Auctions. In the absence of bad faith, negligent failure to act or negligence on
its part, the Auction Agent will not be liable for any action taken, suffered or
omitted or any error of judgment made by it in the performance of its duties
under the Auction Agent Agreement and will not be liable for any error of
judgment made in good faith unless the Auction Agent will have been negligent in
ascertaining (or failing to ascertain) the pertinent facts.
The Indenture Trustee remit the Auction Agent Fee to the Auction Agent on
each Payment Date and will reimburse the Auction Agent upon its request for all
reasonable expenses, disbursements and advances incurred or made by the Auction
Agent in accordance with any provision of the Auction Agent Agreement or the
Broker-Dealer Agreement (including the reasonable compensation and the expenses
and disbursements of its agents and counsel). The Trust will indemnify and hold
harmless the Auction Agent for and against any loss, liability or expense
incurred without negligence or bad faith on the Auction Agent's part, arising
out of or in connection with the acceptance or administration of its agency
under the Auction Agent Agreement and the Broker-Dealer Agreement, including the
reasonable costs and expenses (including the reasonable fees and expenses of its
counsel) of defending itself against any such claim or liability in connection
with its exercise or performance of any of its respective duties thereunder and
of enforcing this indemnification provision; provided that the Trust will not
indemnify the Auction Agent as described in this paragraph for any fees and
expenses incurred by the Auction Agent in the normal course of performing its
duties under the Auction Agent Agreement and under the Broker-Dealer Agreements,
such fees and expenses being payable as described above.
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Broker-Dealer
Existing Noteholders and Potential Noteholders may participate in Auctions
only by submitting orders (in the manner described below) through a
Broker-Dealer.
The Broker-Dealer is entitled to a Broker-Dealer Fee on each Payment Date,
which is payable by the Auction Agent from monies received from the Indenture
Trustee.
AUCTION PROCEDURES
General
Pursuant to the Auction Agent Agreement, Auctions to establish the Auction
Rate for the Class A-3 Notes issued by the Trust will be held on each applicable
Auction Date, except as described below, by application of the Auction
Procedures described herein.
The Auction Agent will calculate the Maximum Auction Rate, the All Hold
Rate and One-Month LIBOR on each Auction Date. The Indenture Trustee will
calculate and, no later than the Business Day preceding each Auction Date, will
report to the Auction Agent in writing, the Group 2 Net Funds Cap. If the
Class A-3 Notes are no longer maintained in Book-Entry Form, the Indenture
Trustee will calculate the Maximum Auction Rate and the Group 2 Net Funds Cap on
the Business Day immediately preceding the first day of each Interest Period. If
an Insurer Default has occurred, the Indenture Trustee will calculate the
Maximum Auction Rate on the Rate Determination Date for (i) each Auction Period
commencing after the occurrence and during the continuance of such Insurer
Default and (ii) any Auction Period commencing less than two Business Days after
the cure of any Insurer Default. The Auction Agent will determine One-Month
LIBOR for each Auction Period other than the Initial Period for the Class A-3
Notes; provided, that if the ownership of the Notes is no longer maintained in
Book-Entry Form, or if an Insurer Default has occurred, then the Indenture
Trustee will determine One-Month LIBOR for each such Auction Period. The
determination by the Indenture Trustee or the Auction Agent, as the case may be,
of One-Month LIBOR will (in the absence of manifest error) be final and binding
upon the Noteholders and all other parties. If calculated or determined by the
Auction Agent, the Auction Agent will promptly advise the Indenture Trustee of
One-Month LIBOR.
Submission of Orders
So long as the ownership of the Class A-3 Notes is maintained in Book-Entry
Form, an Existing Noteholder may sell, transfer or otherwise dispose of
Class A-3 Notes only pursuant to a Bid or Sell Order (as hereinafter defined)
placed in an Auction only through a Broker-Dealer, provided that, in the case of
all transfers other than pursuant to Auctions, such Existing Noteholder, its
Broker-Dealer or its Participant advises the Auction Agent of such transfer.
Auctions for the Class A-3 Notes will be conducted on each applicable Auction
Date, if there is an Auction Agent on such Auction Date, in the following
manner.
Prior to the Submission Deadline (defined as 1:00 p.m., eastern time, on
any Auction Date or such other time on any Auction Date by which Broker-Dealers
are required to submit Orders to the Auction Agent as specified by the Auction
Agent from time to time) on each Auction Date relating to a Note:
(a) each Existing Noteholder may submit to a Broker-Dealer by
telephone or otherwise information as to: (i) the principal amount of
Class A-3 Notes held by such Existing Noteholder which such Existing
Noteholder desires to continue to hold without regard to the Note Rate for
the next succeeding Auction Period (a "Hold Order"); (ii) the principal
amount of Class A-3 Notes which such Existing Noteholder offers to sell if
the Note Rate for the next succeeding Auction Period will be less than the
rate per annum specified by such Existing Noteholder (a "Bid"); and/or
(iii) the principal amount of Class A-3 Notes held by such Existing
Noteholder which such Existing Noteholder offers to sell without regard to
the Note Rate for the next succeeding Auction Period (a "Sell Order"); and
(b) the Broker-Dealer may contact Potential Noteholders to determine
the principal amount of Class A-3 Notes which each such Potential
Noteholder offers to purchase, if the Note Rate for the next succeeding
Auction Period will not be less than (and in some cases equal to) the rate
per annum specified by such Potential Noteholder (also a "Bid").
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Each Hold Order, Bid and Sell Order will be an "Order." Each Existing
Noteholder and each Potential Noteholder placing an Order is referred to as a
"Bidder."
Subject to the provisions described below under "Validity of Orders," a Bid
by an Existing Noteholder will constitute an irrevocable offer to sell: (i) the
principal amount of Class A-3 Notes specified in such Bid if the Note Rate will
be less than the rate specified in such Bid, (ii) such principal amount or a
lesser principal amount of Class A-3 Notes to be determined as described below
in "Acceptance and Rejection of Orders," if the Note Rate will be equal to the
rate specified in such Bid or (iii) such principal amount or a lesser principal
amount of the Class A-3 Notes to be determined as described below under
"Acceptance and Rejection of Orders," if the Note Rate is less than the rate
specified in such Bid and Sufficient Bids (as defined below) have not been made.
Subject to the provisions described below under "Validity of Orders," a
Sell Order by an Existing Noteholder will constitute an irrevocable offer to
sell: (i) the principal amount of the Class A-3 Notes specified in such Sell
Order or (ii) such principal amount or a lesser principal amount of Class A-3
Notes as described below under "Acceptance and Rejection of Orders," if
Sufficient Bids have not been made.
Subject to the provisions described below under "Validity of Orders," a Bid
by a Potential Noteholder will constitute an irrevocable offer to purchase: (i)
the principal amount of the Class A-3 Notes specified in such Bid if the Note
Rate will be higher than the rate specified in such Bid or (ii) such principal
amount or a lesser principal amount as described below in "Acceptance and
Rejection of Orders," if the Note Rate is equal to the rate specified in such
Bid.
The Broker-Dealer will submit in writing to the Auction Agent prior to the
Submission Deadline on each Auction Date all Orders obtained by such
Broker-Dealer and will specify with respect to each such Order: (i) the name of
the Bidder placing such Order; (ii) the aggregate principal amount that is the
subject of such order; (iii) to the extent that such Bidder is an Existing
Noteholder: (a) the principal amount of the Class A-3 Notes subject to any Hold
Order placed by such Existing Noteholder; (b) the principal amount subject to
any Bid placed by such Existing Noteholder and the rate specified in such Bid;
and (c) the principal amount subject to any Sell Order placed by such Existing
Noteholder, and (iv) to the extent such Bidder is a Potential Noteholder, the
rate specified in such Potential Noteholder's Bid.
If any rate specified in any Bid contains more than three figures to the
right of the decimal point, the Auction Agent will round such rate up to the
next highest one-thousandth (.001) of one percent.
If an Order or Orders covering the Class A-3 Notes held by any Existing
Noteholder are not submitted to the Auction Agent prior to the Submission
Deadline, the Auction Agent will deem a Hold Order to have been submitted on
behalf of such Existing Noteholder covering the principal amount of Class A-3
Notes held by such Existing Noteholder and not subject to an Order submitted to
the Auction Agent.
Neither the Transferor, the Indenture Trustee nor the Auction Agent will be
responsible for any failure of the Broker-Dealer to submit an Order to the
Auction Agent on behalf of any Existing Noteholder or Potential Noteholder.
An Existing Noteholder may submit multiple Orders, of different types and
specifying different rates, in an Auction with respect to Class A-3 Notes then
held by such Existing Noteholder. An Existing Noteholder that offers to purchase
additional Class A-3 Notes is, for purposes of such offer, treated as a
Potential Noteholder.
Any Bid specifying a rate higher than the Maximum Auction Rate will (i) be
treated as a Sell Order if submitted by an Existing Noteholder and (ii) not be
accepted if submitted by a Potential Noteholder.
Validity of Orders
If any Existing Noteholder submits through the Broker-Dealer to the Auction
Agent one or more Orders covering in the aggregate more than the principal
amount of the Class A-3 Notes held by such Existing Noteholder, such Orders will
be considered valid as follows and in the order of priority described below.
Hold Orders. All Hold Orders will be considered valid, but only up to the
aggregate principal amount of the Class A-3 Notes held by such Existing
Noteholder.
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<PAGE>
Bids. Any Bid will be considered valid up to an amount equal to the excess
of the principal amount of the Class A-3 Notes held by such Existing Noteholder
over the aggregate principal amount of the Class A-3 Notes, subject to any Hold
Orders referred to above. Subject to the preceding sentence, if multiple Bids
with the same rate are submitted on behalf of such Existing Noteholder and the
aggregate principal amount of Class A-3 Notes subject to such Bids is greater
than such excess, such Bids will be considered valid up to an amount equal to
such excess. Subject to the two preceding sentences, if more than one Bid with
different rates are submitted on behalf of such Existing Noteholder, such Bids
will be considered valid first in the ascending order of their respective rates
until the highest rate is reached at which such excess exists and then at such
rate up to the amount of such excess. In any event, the aggregate principal
amount of Class A-3 Notes, if any, subject to Bids not valid under the
provisions described above will be treated as the subject of a Bid by a
Potential Noteholder at the rate therein specified.
Sell Orders. All Sell Orders will be considered valid up to an amount equal
to the excess of the principal amount of Class A-3 Notes held by such Existing
Noteholder over the aggregate principal amount of Notes subject to valid Hold
Orders and valid Bids as referred to above.
If more than one Bid for a Class A-3 Note is submitted on behalf of any
Potential Noteholder, each Bid submitted will be a separate Bid with the rate
and principal amount therein specified. Any Bid or Sell Order submitted by an
Existing Noteholder covering an aggregate principal amount of Class A-3 Notes
not equal to an Authorized Denomination or an integral multiple thereof will be
rejected and will be deemed a Hold Order. Any Bid submitted by a Potential
Noteholder covering an aggregate principal amount of Class A-3 Notes not equal
to an Authorized Denomination or an integral multiple thereof will be rejected.
Any Order submitted in an Auction by the Broker-Dealer to the Auction Agent
prior to the Submission Deadline on any Auction Date will be irrevocable.
A Hold Order, a Bid or a Sell Order that has been determined valid pursuant
to the procedures described above is referred to as a "Submitted Hold Order," a
"Submitted Bid" and a "Submitted Sell Order," respectively (collectively,
"Submitted Orders").
Determination of Sufficient Bid and Bid Auction Rate
Not earlier than the Submission Deadline on each Auction Date, the Auction
Agent will assemble all valid Submitted Orders and will determine:
(a) the excess of the total principal amount of Class A-3 Notes over the
sum of the aggregate principal amount of such Notes subject to Submitted Hold
Orders (such excess being hereinafter referred to as the "Available Notes"); and
(b) from such Submitted Orders whether the aggregate principal amount of
Class A-3 Notes subject to Submitted Bids by Potential Noteholders specifying
one or more rates equal to or lower than the Maximum Auction Rate exceeds or is
equal to the sum of (i) the aggregate principal amount of Class A-3 Notes
subject to Submitted Bids by Existing Noteholders specifying one or more rates
higher than the Maximum Auction Rate and (ii) the aggregate principal amount of
Class A-3 Notes subject to Submitted Sell Orders (in the event such excess or
such equality exists other than because all of the Class A-3 Notes are subject
to Submitted Hold Orders, such Submitted Bids by Potential Noteholders above
will be hereinafter referred to collectively as "Sufficient Bids"); and
(c) if Sufficient Bids exist, the "Bid Auction Rate," which will be the
lowest rate specified in such Submitted Bids such that if:
(i) each such Submitted Bid from Existing Noteholders of such Note
specifying such lowest rate and all other Submitted Bids from Existing
Noteholders of such Note specifying lower rates were rejected (thus
entitling such Existing Noteholders to continue to hold the principal
amount of Class A-3 Notes subject to such Submitted Bids); and
(ii) each such Submitted Bid from Potential Noteholders of such
Class A-3 Note specifying such lowest rate and all other Submitted Bids
from Potential Noteholder specifying lower rates, were accepted,
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the result would be that such Existing Noteholders described in subparagraph
(c)(i) above would continue to hold an aggregate principal amount of Notes
which, when added to the aggregate principal amount of Class A-3 Notes to be
purchased by such Potential Noteholders described in this subparagraph
(c)(ii) would equal not less than the Available Notes.
Determination of Auction Rate and Note Rate, Notice
Promptly after the Auction Agent has made the determinations described
above, the Auction Agent is to advise the Indenture Trustee in writing of the
Group 2 Net Funds Cap, the Maximum Auction Rate, the All Hold Rate and the
components thereof on the Auction Date, and based on such determinations, the
Auction Rate for the next succeeding Auction Period as follows:
(a) if Sufficient Bids exist, that the Auction Rate for the next succeeding
Auction Period will be equal to the Bid Auction Rate so determined;
(b) if Sufficient Bids do not exist (other than because all of the Notes
are subject to Submitted Hold Orders), that the Auction Rate for the next
succeeding Auction Period will be equal to the Maximum Auction Rate; or
(c) if all the Class A-3 Notes are subject to Submitted Hold Orders, that
the Auction Rate for the next succeeding Auction Period will be equal to the All
Hold Rate.
Promptly after the Auction Agent has determined the Auction Rate, the
Auction Agent will determine and advise the Indenture Trustee in writing of the
Note Rate, which rate will be the lesser of (a) the Auction Rate and (b) the
Group 2 Net Funds Cap.
Acceptance and Rejection of Orders
Existing Noteholders will continue to hold the principal amount of
Class A-3 Notes that are subject to Submitted Hold Orders. If the Group 2 Net
Funds Cap is equal to or greater than the Bid Auction Rate and if Sufficient
Bids, as described above under "Determination of Sufficient Bids and Bid Auction
Rate," have been received by the Auction Agent, the Bid Auction Rate will be the
Note Rate, and Submitted Bids and Submitted Sell Orders will be accepted or
rejected and the Auction Agent will take such other action as provided in the
Auction Agent Agreement and described below under "Sufficient Bids."
If the Group 2 Net Funds Cap is less than the Auction Rate, the Note Rate
will be the Group 2 Net Funds Cap. If the Auction Agent has not received
Sufficient Bids as described above under "Determination of Sufficient Bids and
Bid Auction Rate" (other than because all of the Notes are subject to Submitted
Holds Orders), the Note Rate will be the lesser of the Maximum Auction Rate or
the Group 2 Net Funds Cap. In any of the cases described above in this
paragraph, Submitted Orders will be accepted or rejected and the Auction Agent
will take such other action as described below under "Insufficient Bids."
Sufficient Bids. If Sufficient Bids have been made with a respect to the
Class A-3 Notes and the Group 2 Net Funds Cap is equal to or greater than the
Bid Auction Rate (in which case the Note Rate shall be the Bid Auction Rate),
all Submitted Sell Orders will be accepted and, subject to the denomination
requirements described below, Submitted Bids will be accepted or rejected as
follows in the following order of priority and all other Submitted Bids will be
rejected:
(a) Existing Noteholders' Submitted Bids specifying any rate that is
higher than the Note Rate will be accepted, thus requiring each such
Existing Noteholder to sell the aggregate principal amount of Class A-3
Notes subject to such Submitted Bids;
(b) Existing Noteholders' Submitted Bids specifying any rate that is
lower than the Note Rate will be rejected, thus entitling each such
Existing Noteholder to continue to hold the aggregate principal amount of
Notes subject to such Submitted Bids;
(c) Potential Noteholders' Submitted Bids specifying any rate that is
lower than (or in some cases, equal to) the Note Rate will be accepted;
(d) Each Existing Noteholder's Submitted Bid specifying a rate that is
equal to the Note Rate will be rejected, thus entitling such Existing
Noteholder to continue to hold the aggregate principal amount of
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Class A-3 Notes subject to such Submitted Bid, unless the aggregate
principal amount of Class A-3 Notes subject to such Submitted Bids will be
greater than the principal amount of Class A-3 Notes (the "remaining
principal amount") equal to the excess of the Available Notes over the
aggregate principal amount of Class A-3 Notes subject to Submitted Bids
described in subparagraphs (b) and (c) above, in which event such Submitted
Bid of such Existing Noteholder will be rejected in part and such Existing
Noteholder will be entitled to continue to hold the principal amount of
Class A-3 Notes subject to such Submitted Bid, but only in an amount equal
to the aggregate principal amount of Class A-3 Notes obtained by
multiplying the remaining principal amount by a fraction, the numerator of
which will be the principal amount of Notes held by such Existing
Noteholder subject to such Submitted Bid and the denominator of which will
be the sum of the principal amount of Class A-3 Notes subject to such
Submitted Bids made by all such Existing Noteholders that specified a rate
equal to the Note Rate; and
(e) Each Potential Noteholder's Submitted Bid specifying a rate that
is equal to the Note Rate will be accepted, but only in an amount equal to
the principal amount of Class A-3 Notes obtained by multiplying the excess
of the aggregate principal amount of Available Notes over the aggregate
principal amount of Class A-3 Notes subject to Submitted Bids described in
subparagraphs (b), (c) and (d) above by a fraction, the numerator of which
will be the aggregate principal amount of Class A-3 Notes subject to such
Submitted Bid and the denominator of which will be the sum of the principal
amount of Class A-3 Notes subject to Submitted Bids made by all such
Potential Noteholders that specified a rate equal to the Note Rate.
Insufficient Bids. If Sufficient Bids have not been made with respect to
the Class A-3 Notes (other than because all of the Notes are subject to
Submitted Hold Orders) or if the Group 2 Net Funds Cap is less than the Bid
Auction Rate (in which case the Note Rate shall be the Group 2 Net Funds Cap),
subject to the denomination requirements described below, Submitted Orders will
be accepted or rejected as follows in the following order of priority and all
other Submitted Bids will be rejected:
(a) Existing Noteholders' Submitted Bids specifying any rate that is
equal to or lower than the Note Rate will be rejected, thus entitling such
Existing Noteholders to continue to hold the aggregate principal amount of
Class A-3 Notes subject to such Submitted Bids;
(b) Potential Noteholders' Submitted Bids specifying any rate that is
equal to or lower than the Note Rate will be accepted, and specifying any
rate that is higher than the Note Rate will be rejected; and
(c) each Existing Noteholder's Submitted Bid specifying any rate that
is higher than the Note Rate and the Submitted Sell Order of each Existing
Noteholder will be accepted, thus entitling each Existing Noteholder that
submitted any such Submitted Bid or Submitted Sell Order to sell such
Class A-3 Notes subject to such Submitted Bid or Submitted Sell Order, but
in both cases only in an amount equal to the aggregate principal amount of
Class A-3 Notes obtained by multiplying the aggregate principal amount of
Class A-3 Notes subject to Submitted Bids described in subparagraph
(b) above by a fraction, the numerator of which will be the aggregate
principal amount of Class A-3 Notes held by such Existing Noteholder
subject to such Submitted Bid or Submitted Sell Order and the denominator
of which will be the aggregate principal amount of Class A-3 Notes subject
to all such Submitted Bids and Submitted Sell Orders.
All Hold Orders. If all Class A-3 Notes are subject to Submitted Hold
Orders, all Submitted Bids will be rejected.
Authorized Denominations Requirement. If, as a result of the procedures
described above regarding Sufficient Bids and Insufficient Bids, any Existing
Noteholder would be entitled or required to sell, or any Potential Noteholder
would be entitled or required to purchase, a principal amount of Class A-3 Notes
that is not equal to an Authorized Denomination or an integral multiple thereof,
the Auction Agent will, in such manner as in its sole discretion it will
determine, round up or down the principal amount of Class A-3 Notes to be
purchased or sold by any Existing Noteholder or Potential Noteholder so that the
principal amount of Class A-3 Notes purchased or sold by each Existing
Noteholder or Potential Noteholder will be equal to an Authorized Denomination
or an integral multiple in excess thereof. If, as a result of the procedures
described above regarding Insufficient Bids, any Potential Noteholder would be
entitled or required to purchase less than a principal amount of Class A-3 Notes
equal to an Authorized Denomination or any integral multiple thereof, the
Auction Agent will, in such manner as in its sole discretion it will determine,
allocate Class A-3 Notes for purchase among
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Potential Noteholders so that only Class A-3 Notes in an Authorized Denomination
or any integral multiples in excess thereof are purchased by any Potential
Noteholder, even if such allocation results in one or more of such Potential
Noteholders not purchasing any Class A-3 Notes.
Based on the results of each Auction, the Auction Agent is to determine the
aggregate principal amount of Class A-3 Notes to be purchased and the aggregate
principal amount of Class A-3 Notes to be sold by Potential Noteholders and
Existing Noteholders on whose behalf the Broker-Dealer submitted Bids or Sell
Orders and to the extent that such aggregate principal amount of the Class A-3
Notes to be sold differs from such aggregate principal amount of Class A-3 Notes
to be purchased, determine to which other Broker-Dealer or Broker-Dealers acting
for one or more purchasers such Broker-Dealer will deliver, or from which
Broker-Dealers acting for one or more sellers such Broker-Dealer will receive,
as the case may be, Class A-3 Notes.
Any calculation by the Auction Agent (or the Indenture Trustee, if
applicable) of the Note Rate, One-Month LIBOR, the All Hold Rate, the Group 2
Net Funds Cap and the Maximum Auction Rate will, in the absence of manifest
error, be binding on all other parties.
At any time when a scheduled Auction is not being held, interest will
accrue on the Class A-3 Notes at the Maximum Auction Rate for the applicable
period.
Settlement Procedures
The Auction Agent is required to advise the Broker-Dealer of the Note Rate
for the Class A-3 Notes for the next Auction Period and, whether the Bids or
Sell Orders were accepted or rejected, in whole or in part by telephone not
later than 3:00 pm., eastern time, on the Auction Date. The Broker-Dealer is
required to then advise such Bidder of the applicable Note Rate for the next
Interest Period and, if such Order was a Bid or a Sell Order, whether such Bid
or Sell Order was accepted or rejected, in whole or in part, confirm purchases
and sales with each Existing Noteholder or Potential Noteholder as the case may
be, purchasing or selling Class A-3 Notes as a result of the Auction and advise
each Existing Noteholder or Potential Noteholder as the case may be, purchasing
or selling Class A-3 Notes as a result of the Auction to give instructions to
its Participant to pay the purchase price against delivery of such Class A-3
Notes or to deliver such Class A-3 Notes against payment therefor, as
appropriate. Pursuant to the Auction Agent Agreement, the Auction Agent is to
record each transfer of Class A-3 Notes on the Existing Noteholders Registry to
be maintained by the Auction Agent.
In accordance with DTC's normal procedures, on the Business Day after the
Auction Date, the transactions described above will be executed through DTC, so
long as DTC is the Depository, and the accounts of the respective Participants
at DTC will be debited and credited and the Class A-3 Notes delivered as
necessary to effect the purchases and sales of the Class A-3 Notes as determined
in the Auction. Purchasers are required to make payment through their
Participants in same-day funds to DTC against delivery through their
Participants. DTC will make payment in accordance with its normal procedures,
which now provide for payment against delivery by its Participants in
immediately available funds.
If any Existing Noteholder selling Class A-3 Notes in an Auction fails to
deliver such Notes, the Broker-Dealer may deliver to any person that was to have
purchased Class A-3 Notes in such Auction a principal amount of Class A-3 Notes
that is less than the principal amount of Class A-3 Notes that otherwise was to
be purchased by such person but in any event equal to an Authorized Denomination
or any integral multiple thereof. In such event, the principal amount of Class
A-3 Notes to be delivered will be determined by the Broker-Dealer. Delivery of
such lesser principal amount of Class A-3 Notes will constitute good delivery.
Neither the Indenture Trustee nor the Auction Agent will have any responsibility
or liability with respect to the failure of a Potential Noteholder, Existing
Noteholder or the Broker-Dealer or Participant to deliver the principal amount
of Class A-3 Notes or to pay for the Class A-3 Notes purchased or sold pursuant
to an Auction or otherwise. For a further description of the settlement
procedures, see "SETTLEMENT PROCEDURES" attached hereto as Annex III.
INDENTURE TRUSTEE NOT RESPONSIBLE FOR AUCTION AGENT, MARKET AGENT AND
BROKER-DEALERS
The Indenture Trustee shall not be liable or responsible for the actions of
or failure to act by the Auction Agent, Market Agent or the Broker-Dealer under
the Sale and Servicing Agreement, the Auction Agent Agreement, or any
Broker-Dealer Agreement. The Indenture Trustee may conclusively rely upon any
information
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required to be furnished by the Auction Agent, the Market Agent or any
Broker-Dealer without undertaking any independent review or investigation of the
truth or accuracy of such information.
CHANGES IN THE AUCTION DATE
The Market Agent, with the consent of the Transferor and the Insurer, may
specify an earlier Auction Date (but in no event more than five Business Days
earlier) than the Auction Date that would otherwise be determined in accordance
with the definition of "Auction Date" with respect to one or more specified
Auction Periods in order to conform with then current market practice with
respect to similar securities or to accommodate economic and financial factors
that may affect or be relevant to the day of the week constituting an Auction
Date and the interest rate borne on the Class A-3 Notes. The Transferor will not
consent to such change in the Auction Date unless the Transferor will have
received from the Market Agent not less than three days no more than 20 days
prior to the effective date of such change a written request for consent
together with a certificate demonstrating the need for change in reliance on
such factors. The Market Agent will provide notice of its determination to
specify an earlier Auction Date for one or more Auction Periods by means of a
written notice delivered at least 10 days prior to the proposed changed Auction
Date to the Indenture Trustee, the Auction Agent, the Transferor, the Insurer,
the Rating Agencies and the Depository.
The changes in Auction terms described above may be made with respect to
any Authorized Denomination of Class A-3 Notes. In connection with any change in
Auction terms described above, the Auction Agent is to provide such further
notice to such parties as is specified in the Auction Agent Agreement.
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ANNEX III
SETTLEMENT PROCEDURES
The following description of Settlement Procedures applies to the
Class A-3 Notes. Capitalized terms used herein and not otherwise defined have
the meanings ascribed thereto in Annex II and the accompanying Prospectus
Supplement.
(a) Not later than 3:00 p.m. if the Note Rate for the Class A-3 Notes is
the Auction Rate or (2) 4:00 p.m. if the Note Rate for the Class A-3 Notes is
the Group 2 Net Funds Cap, the Auction Agent is to notify by telephone each
Broker-Dealer that participated in the Auction held on such Auction Date and
submitted an Order on behalf of an Existing Noteholder or Potential Noteholder
of:
(i) the Note Rate fixed for the Class A-3 Notes for the next Auction
Period;
(ii) whether there were Sufficient Bids in such Auction;
(iii) if such Broker-Dealer (a "Seller's Broker-Dealer") submitted
Bids or Sell Orders on behalf of an Existing Noteholder, whether such Bid
or Sell Order was accepted or rejected, in whole or in part, and the
principal amount of Class A-3 Notes, if any, to be sold by such Existing
Noteholder;
(iv) if such Broker-Dealer (a "Buyer's Broker-Dealer") submitted a
Bid on behalf of a Potential Noteholder, whether such Bid was accepted or
rejected, in whole or in part, and the principal amount of Class A-3 Notes,
if any, to be purchased by such Potential Noteholder;
(v) if the aggregate amount of Class A-3 Notes to be sold by all
Existing Noteholders on whose behalf such Seller's Broker-Dealer submitted
Bids or Sell Orders exceeds the aggregate principal amount of Class A-3
Notes to be purchased by all Potential Noteholders on whose behalf such
Buyer's Broker-Dealer submitted a Bid, the name or names of one or more
Buyer's Broker-Dealers and the name of the Participant, if any, of each
such Buyer's Broker-Dealer acting for one or more purchasers of such excess
principal amount of Class A-3 Notes and the principal amount of Class A-3
Notes to be purchased from one or more Existing Noteholders on whose behalf
such Seller's Broker-Dealer acted by one or more Potential Noteholders on
whose behalf each of such Buyer's Broker-Dealers acted;
(vi) if the principal amount of Class A-3 Notes to be purchased by
all Potential Noteholders on whose behalf such Buyer's Broker-Dealer
submitted a Bid exceeds the amount of Class A-3 Notes to be sold by all
Existing Noteholders on whose behalf such Seller's Broker-Dealer submitted
a Bid or a Sell Order, the name or names of one or more Seller's
Broker-Dealers (and the name of the Participant, if any, of each such
Seller's Broker-Dealer) acting for one or more sellers of such excess
principal amount of Class A-3 Notes and the principal amount of Class A-3
Notes to be sold to one or more Potential Noteholders on whose behalf such
Buyer's Broker-Dealer acted by one or more Existing Noteholder on whose
behalf each of such Seller's Broker-Dealers acted; and
(vii) the Auction Date for the next succeeding Auction.
(b) On each Auction Date, each Broker-Dealer that submitted an Order on
behalf of any Existing Noteholder or Potential Noteholder is to:
(i) advise each Existing Noteholder and Potential Noteholder on whose
behalf such Broker-Dealer submitted a Bid or Sell Order in the Auction on
such Auction Date whether such Bid or Sell Order was accepted or rejected,
in whole or in part;
(ii) in the case of a Broker-Dealer that is a Buyer's Broker-Dealer,
advise each Potential Noteholder on whose behalf such Buyer's Broker-Dealer
submitted a Bid that was accepted, in whole or in part, to instruct such
Potential Noteholder's Participant to pay to such Buyer's Broker-Dealer (or
its Participant) through the Depository the amount necessary to purchase
the principal amount of the Class A-3 Notes to be purchased pursuant to
such Bid against receipt of such Class A-3 Notes together with accrued
interest;
(iii) in the case of a Broker-Dealer that is a Seller's
Broker-Dealer, instruct each Existing Noteholder on whose behalf such
Seller's Broker-Dealer submitted a Sell Order that was accepted, in whole
or in part, or a Bid that was accepted, in whole or in part, to instruct
such Existing Noteholder's Participant to deliver
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to such Seller's Broker-Dealer (or its Participant) through the Depository
the principal amount of the Class A-3 Notes to be sold pursuant to such
Order against payment therefor;
(iv) advise each Existing Noteholder on whose behalf such
Broker-Dealer submitted an Order and each Potential Noteholder on whose
behalf such Broker-Dealer submitted a Bid of the Note Rate for the next
Auction Period;
(v) advise each Existing Noteholder on whose behalf such
Broker-Dealer submitted an Order of the next Auction Date; and
(vi) advise each Potential Noteholder on whose behalf such
Broker-Dealer submitted a Bid that was accepted, in whole or in part, of
the next Auction Date.
(c) On the basis of the information provided to it pursuant to paragraph
(a) above, each Broker-Dealer that submitted a Bid or Sell Order in an Auction
is required to allocate any funds received by it in connection with such Auction
pursuant to paragraph (b)(ii) above, and any Class A-3 Notes received by it in
connection with such Auction pursuant to paragraph (b)(iii) above, among the
Potential Noteholders, if any, on whose behalf such Broker-Dealer submitted
Bids, the Existing Noteholder, if any, on whose behalf such Broker-Dealer
submitted Bids or Sell Orders in such Auction, and any Broker-Dealers identified
to it by the Auction Agent following such Auction pursuant to paragraph
(a)(v) or (a)(vi) above.
(d) On each Auction Date:
(i) each Potential Noteholder and Existing Noteholder with an Order
in the Auction on such Auction Date will instruct its Participant as
provided in (b)(ii) or (b)(iii) above, as the case may be;
(ii) each Seller's Broker-Dealer that is not a Participant of the
Depository will instruct its Participant to deliver such Class A-3 Notes
through the Depository to a Buyer's Broker-Dealer (or its Participant)
identified to such Seller's Broker-Dealer pursuant to (a)(v) above against
payment therefor; and
(iii) each Buyer's Broker-Dealer that is not a Participant in the
Depository will instruct its Participant to pay through the Depository to
Seller's Broker-Dealer (or its Participant) identified following such
Auction pursuant to (a)(vi) above the amount necessary to purchase the
Class A-3 Notes to be purchased pursuant to (b)(ii) above against receipt
of such Notes.
(e) On the Business Day following each Auction Date:
(i) each Participant for a Bidder in the Auction on such Auction Date
referred to in (d)(i) above will instruct the Depository to execute the
transactions described under (b)(ii) or (b)(iii) above for such Auction,
and the Depository will execute such transactions;
(ii) each Seller's Broker-Dealer or its Participant will instruct the
Depository to execute the transactions described in (d)(ii) above for such
Auction, and the Depository will execute such transactions; and
(iii) each Buyer's Broker-Dealer or its Participant will instruct the
Depository to execute the transactions described in (d)(iii) above for such
Auction, and the Depository will execute such transactions.
(f) If an Existing Noteholder selling Class A-3 Notes in an Auction fails
to deliver such Notes (by authorized book-entry), a Broker-Dealer may deliver to
the Potential Noteholder on behalf of which it submitted a Bid that was accepted
a principal amount of Class A-3 Notes that is less than the principal amount of
Class A-3 Notes that otherwise was to be purchased by such Potential Noteholder.
In such event, the principal amount of Class A-3 Notes to be so delivered will
be determined solely by such Broker-Dealer (but only in Authorized
Denominations). Delivery of such lesser principal amount of Class A-3 Notes will
constitute good delivery. Notwithstanding the foregoing terms of this paragraph
(f), any delivery or nondelivery of Class A-3 Notes which will represent any
departure from the results of an Auction, as determined by the Auction Agent,
will be of no effect unless and until the Auction Agent will have been notified
of such delivery or nondelivery in accordance with the provisions of the Auction
Agent Agreement and the Broker-Dealer Agreements. Neither the Indenture Trustee
nor the Auction Agent will have any responsibility or liability with respect to
the failure of a Potential Noteholder, Existing Noteholder or their respective
Broker-Dealer or Participant to take delivery of or deliver, as the case may be,
the principal amount of the Notes purchased or sold pursuant to an Auction or
otherwise.
III-2
<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 and/or loans of which the proceeds have been applied to the
purchase of the related Mortgaged Property (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.
Purchases of Private Securities for a Series by the Seller or the Depositor
will be made in secondary market transactions, not from the issuer of such
Private Securities or any affiliate thereof. See "The Trust Funds--Private
Securities" herein.
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 15, 1997
<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: Midwest Regional Office, Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661; and Northeast Regional Office, 7 World
Trade Center, Suite 1300, New York, New York 10048. 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. In
addition, the Securities and Exchange Commission (the "Commission") maintains a
Web site at http://www.sec.gov containing reports, proxy and information
statements and other information regarding registrants, including the Depositor,
that file electonically with the Commission.
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.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents filed with respect to each Trust pursuant to Sections 13(a),
13(c), 14 and 15(d) of the Securities Exchange Act of 1934, as amended,
subsequent to the date of any Prospectus Supplement and prior to the termination
of any offering of Securities shall be deemed to be incorporated by reference
into such Prospectus Supplement and this Prospectus. Any statement contained in
a document incorporated or deemed to be incorporated by reference in any
Prospectus Supplement or in this Prospectus shall be deemed to be modified or
superseded for purposes of such Prospectus Supplement and this Prospectus to the
extent that a statement contained in any Prospectus Supplement or in this
Prospectus modifies or supersedes such statement. Any statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute part of any Prospectus Supplement.
The Depositor on behalf of any Trust Fund will provide, without charge to
each person to whom this Prospectus is delivered, on the written or oral request
of such person, a copy of any or all of the documents referred to above that
have been or may be incorporated by reference in this Prospectus (not including
exhibits to the information that is incorporated by reference unless such
exhibits are specifically incorporated by reference into the information that
this Prospectus incorporates). Such requests should be directed to Corporate
Secretary, Lehman ABS Corporation, Three World Financial Center, New York, New
York 10285 (telephone: 212-526-7000).
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.
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SECURITIES OFFERED................. Asset-Backed Certificates (the "Certificates") and Asset-Backed Notes
(the "Notes"). Certificates are issuable from time to time in Series
pursuant to a Pooling and Servicing Agreement or Trust Agreement.
Each Certificate of a Series will evidence an interest in the Trust
Fund for such Series, or in an Asset Group specified in the related
Prospectus Supplement. Notes are issuable from time to time in
Series pursuant to an Indenture. Each Series of Securities will
consist of one or more Classes, one or more of which may be Classes
of Compound Interest Securities, Planned Amortization Class ("PAC")
Securities, Variable Interest Securities, Zero Coupon Securities,
Principal Only Securities, Interest Only Securities, Participating
Securities, Senior Securities or Subordinate Securities. Each Class
may differ in, among other things, the amounts allocated to and the
priority of principal and interest payments, Final Scheduled
Distribution Dates, Distribution Dates and interest rates. The
Securities of each Class will be issued in fully registered form in
the denominations specified in the related Prospectus Supplement. If
so specified in the related Prospectus Supplement, the Securities or
certain Classes of such Securities offered thereby may be available
in book-entry form only.
DEPOSITOR.......................... Lehman ABS Corporation (the "Depositor") was incorporated in the State
of Delaware on January 29, 1988, and is a wholly-owned, special
purpose subsidiary of Lehman Commercial Paper Inc. ("LCPI"), which
itself is a wholly-owned subsidiary of Lehman Brothers Inc. ("Lehman
Brothers"), which is a wholly-owned subsidiary of Lehman Brothers
Holdings Inc. ("Holdings"). None of Lehman Brothers, LCPI, Holdings
nor any other affiliate of the Depositor, the Servicer, the Trustee
or the Seller has guaranteed or is otherwise obligated with respect
to the Securities of any Series. See "THE DEPOSITOR."
INTEREST PAYMENTS.................. Interest payments on the Securities of a Series entitled by their
terms to receive interest will be made on each Distribution Date, to
the extent set forth in, and at the applicable rate specified in (or
determined in the manner set forth in), the related Prospectus
Supplement. The interest rate on Securities of a Series may be
variable or change with changes in the rates of interest on the
related 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 Supplement. See "DESCRIPTION OF THE SECURITIES-- Payments
of Interest."
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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 than the amount or percentage
specified in the related Prospectus Supplement. See "DESCRIPTION OF
THE SECURITIES--Optional Purchase or Termination."
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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 secondary market
transactions, not from the issuer of such Private Securities or an
affiliate thereof, or, in the case of Loans, 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 and/or loans
of which the proceeds have been applied to the purchase of the
related Mortgaged Property (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 in the
related Prospectus Supplement; (d) the percentage (by principal
balance as of the Cut-off Date) of Loans that accrue interest at
adjustable
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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 (a) offered and distributed to the public pursuant
to an effective registration statement or (b) purchased in a
transaction not involving any public offering from a person who is
not an affiliate of the issuer of such securities at the time of
sale (nor an affiliate thereof at any time during the three
preceding months); provided a period of three years has elapsed
since the later of the date the securities were acquired from the
issuer or an affiliate thereof. 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
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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 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.
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B. INSURANCE.................. If stated in the related Prospectus Supplement, Enhancement for a
Series may consist of special hazard insurance policies, bankruptcy
bonds and other types of insurance supporting payments on the
Securities.
C. RESERVE FUNDS.............. If stated in the Prospectus Supplement, the Depositor may deposit
cash, a letter or letters of credit, short-term investments, or other
instruments acceptable to the Rating Agency in one or more reserve
funds to be established in the name of the Trustee (each, a "Reserve
Fund"), which will be used, as specified in such Prospectus
Supplement, by the Trustee to make required payments of principal of
or interest on the Securities of such Series, to make adequate
provision for future payments on such Securities or for any other
purpose specified in the Agreement, with respect to such Series, to
the extent that funds are not otherwise available. In the
alternative or in addition to such deposit, a Reserve Fund for a
Series may be funded through application of all or a portion of the
excess cash flow from the Primary Assets for such Series, to the
extent described in the related Prospectus Supplement.
D. MINIMUM PRINCIPAL
PAYMENT AGREEMENT........ If stated in the Prospectus Supplement relating to a Series of
Securities, the Depositor will enter into a minimum principal payment
agreement (the "Minimum Principal Payment Agreement") with an entity
meeting the criteria of the Rating Agency, pursuant to which such
entity will provide funds in the event that aggregate principal
payments on the Primary Assets for such Series are not sufficient to
make certain payments, as provided in the related Prospectus
Supplement. See "ENHANCEMENT--Minimum Principal Payment Agreement."
E. DEPOSIT AGREEMENT.......... If stated in the Prospectus Supplement, the Depositor and the Trustee
will enter into a guaranteed investment contract or an investment
agreement (the "Deposit Agreement") pursuant to which all or a
portion of amounts held in the Collection Account, the Distribution
Account or in any Reserve Fund will be invested with the entity
specified in such Prospectus Supplement. The Trustee will be
entitled to withdraw amounts so invested, plus interest at a rate
equal to the Assumed Reinvestment Rate, in the manner specified in
the Prospectus Supplement. See "ENHANCEMENT--Deposit Agreement."
SERVICING.......................... The Servicer will be responsible for servicing, managing and making
collections on the 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
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certain additional compensation. See "SERVICING OF LOANS--Servicing
Compensation and Payment of Expenses" herein.
FEDERAL INCOME
TAX CONSIDERATIONS
A. DEBT SECURITIES
AND REMIC
RESIDUAL SECURITIES ..... If (i) an election is made to treat all or a portion of a Trust Fund
for a Series as a "real estate mortgage investment conduit" (a
"REMIC") or (ii) so provided in the related Prospectus Supplement, a
Series of Securities will include one or more Classes of taxable
debt obligations under the Internal Revenue Code of 1986, as amended
(the "Code"). Stated interest with respect to such Classes of
Securities will be reported by a Holder in accordance with the
Holder's method of accounting except that, in the case of Securities
constituting "regular interests" in a REMIC ("Regular Interests"),
such interest will be required to be reported on the accrual method
regardless of a Holder's usual method of accounting. Securities that
are Compound Interest Securities, Zero Coupon Securities or Interest
Only Securities will, and certain other Classes of Securities may,
be issued with original issue discount that is not de minimis. In
such cases, the Holder will be required to include original issue
discount in gross income as it accrues, which may be prior to the
receipt of cash attributable to such income. If a Security is issued
at a premium, the holder may be entitled to make an election to
amortize such premium on a constant yield method.
In the case of a REMIC election, a Class of Securities may be treated
as REMIC "residual interests" ("Residual Interests"). A holder of a
Residual Interest will be required to include in its income its pro
rata share of the taxable income of the REMIC. In certain
circumstances, the holder of a Residual Interest may have REMIC
taxable income or tax liability attributable to REMIC taxable income
for a particular period in excess of cash distributions for such
period or have an after-tax return that is less than the after-tax
return on comparable debt instruments. In addition, a portion (or,
in some cases, all) of the income from a Residual Interest (i)
except in certain circumstances with respect to a Holder classified
as a thrift institution under the Code, may not be subject to offset
by losses from other activities, (ii) for a 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,
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unless otherwise specified in the related Prospectus Supplement,
will be reported by the Trustee on an accrual basis, which may be
prior to the receipt of cash associated with such income. The holder
of a Pass-Through Security must include in income its share of all
income of the Trust Fund to the extent such income is allocable to
it and may, subject to certain limitations for individual Holders,
deduct its share of all expenses of the Trust Fund. See "CERTAIN
FEDERAL INCOME TAX CONSIDERATIONS."
C. OWNER TRUST
SECURITIES............... If so specified in the Prospectus Supplement, the Trust Fund will be
treated as a partnership for purposes of federal and state income tax.
Each Noteholder, by the acceptance of a Note of a given series, will
agree to treat such Note as indebtedness, and each
Certificateholder, by the acceptance of a Certificate of a given
series, will agree to treat the related Trust as a partnership in
which such Certificateholder is a partner for federal income and
state tax purposes. Alternative characterizations of such Trust and
such Certificates are possible, but would not result in materially
adverse tax consequences to Certificateholders. See "CERTAIN FEDERAL
INCOME TAX CONSIDERATIONS."
ERISA CONSIDERATIONS............... A fiduciary of any employee benefit plan subject to the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), or the
Code should carefully review with its own legal advisors whether the
purchase or holding of Securities could give rise to a transaction
prohibited or otherwise impermissible under ERISA or the Code. See
"ERISA CONSIDERATIONS."
LEGAL INVESTMENT................... Unless otherwise specified in the related Prospectus Supplement,
Securities of each Series offered by this Prospectus and the related
Prospectus Supplement will not constitute "mortgage related
securities" under the Secondary Mortgage Market Enhancement Act of
1984 ("SMMEA"). Investors whose investment authority is subject to
legal restrictions should consult their own legal advisors to
determine whether and to what extent the Securities constitute legal
investments for them. See "LEGAL INVESTMENT."
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."
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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 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.
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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.
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
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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.
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 secondary market transactions, not from the
issuer of such Private Securities or an affiliate thereof, or, in the case of
the Loans, 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.
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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.
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.
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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.
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
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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.
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 (a) offered and distributed to the public pursuant to
an effective registration statement or (b) purchased in a transaction not
involving any public offering from a person who is not an affiliate of the
issuer of such securities at the time of sale (nor an affiliate thereof at any
time during the three preceding months); provided a period of three years has
elapsed since the later of the date the securities were acquired from the issuer
or an affiliate thereof. 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.
All purchases of Private Securities for a Series by the Seller or the
Depositor will be made in secondary market transactions, not from the issuer of
such Private Securities or any affiliate thereof. As a result, no such purchases
of Private Securities offered and distributed to the public pursuant to an
effective registration statement will be made by the Seller or Depositor for at
least ninety days after the initial issuance of such Private Securities.
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
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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 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
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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.
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;
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(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
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
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(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.
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.
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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 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
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not adversely affect in any material respect the interests of any Holders of
such Series, as evidenced by an opinion of counsel. Any such amendment except
pursuant to clause (vi) of the preceding sentence shall be deemed not to
adversely affect in any material respect the interests of any Holder if the
Trustee receives written confirmation from each Rating Agency rating such
Securities that such amendment will not cause such Rating Agency to reduce the
then current rating thereof. Unless otherwise specified in the Prospectus
Supplement, the Agreement for each Series may also be amended by the Trustee,
the Servicer, if applicable, and the Depositor with respect to such Series with
the consent of the Holders possessing not less than 66 2/3% of the aggregate
outstanding principal amount of the Securities of such Series or, if only
certain Classes of such Series are afffected by such amendment, 66 2/3% of the
aggregate outstanding principal amount of the Securities of each Class of such
Series affected thereby, for the purpose of adding any provisions to or changing
in any manner or eliminating any of the provisions of such Agreement or
modifying in any manner the rights of Holders of such Series; provided, however,
that no such amendment may (a) reduce the amount or delay the timing of payments
on any Security without the consent of the Holder of such Security; or
(b) reduce the aforesaid percentage of the aggregate outstanding principal
amount of Securities of each Class, the Holders of which are required to consent
to any such amendment without the consent of the Holders of 100% of the
aggregate outstanding principal amount of each Class of Securities affected
thereby.
VOTING RIGHTS
The related Prospectus Supplement will set forth the method of determining
allocation of voting rights with respect to a Series.
LIST OF HOLDERS
Upon written request of three or more Holders of record of a Series for
purposes of communicating with other Holders with respect to their rights under
the Agreement, which request is accompanied by a copy of the communication which
such Holders propose to transmit, the Trustee will afford such Holders access
during business hours to the most recent list of Holders of that Series held by
the Trustee.
No Agreement will provide for the holding of any annual or other meeting of
Holders.
REMIC ADMINISTRATOR
For any Series with respect to which a REMIC election is made, preparation
of certain reports and certain other administrative duties with respect to the
Trust Fund may be performed by a REMIC administrator, who may be an affiliate of
the Depositor.
TERMINATION
Pooling and Servicing Agreement; Trust Agreement. The obligations created
by the Pooling and Servicing Agreement or Trust Agreement for a Series will
terminate upon the distribution to Holders of all amounts distributable to them
pursuant to such Agreement after the earlier of (i) the later of (a) the final
payment or other liquidation of the last Primary Asset remaining in the Trust
Fund for such Series and (b) the disposition of all property acquired upon
foreclosure or deed in lieu of foreclosure or repossession in respect of any
Primary Asset or (ii) the repurchase, as described below, by the Servicer or
other entity specified in the related Prospectus Supplement from the Trustee for
such Series of all Primary Assets and other property at that time subject to
such Agreement. The Agreement for each Series permits, but does not require, the
Servicer or other entity specified in the related Prospectus Supplement to
purchase from the Trust Fund for such Series all remaining Primary Assets at a
price equal to, unless otherwise specified in the related Prospectus Supplement,
100% of the aggregate Principal Balance of such Primary Assets plus, with
respect to any property acquired in respect of a Primary Asset, if any, the
outstanding Principal Balance of the related Primary Asset at the time of
foreclosure, less, in either case, related unreimbursed Advances (in the case of
the Primary Assets, only to the extent not already reflected in the computation
of the aggregate Principal Balance of such Primary Assets) and unreimbursed
expenses (that are reimbursable pursuant to the terms of the Pooling and
Servicing Agreement) plus, in either 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
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REMIC under the Code, the repurchase price may equal the greater of (a) 100% of
the aggregate Principal Balance of such Primary Assets, plus accrued interest
thereon at the applicable net rates on the Primary Assets through the last day
of the month of such repurchase and (b) the aggregate fair market value of such
Primary Assets plus the fair market value of any property acquired in respect of
a Primary Asset and remaining in the Trust Fund. The exercise of such right will
effect early retirement of the Securities of such Series, but such entity's
right to so purchase is subject to the aggregate Principal Balance of the
Primary Assets at the time of repurchase being less than a fixed percentage, to
be set forth in the related Prospectus Supplement, of the aggregate Principal
Balance of the Primary Assets as of the Cut-off Date. In no event, however, will
the trust created by the Agreement continue beyond the expiration of 21 years
from the death of the last survivor of certain persons identified therein. For
each Series, the Servicer or the Trustee, as applicable, will give written
notice of termination of the Agreement to each Holder, and the final
distribution will be made only upon surrender and cancellation of the Securities
at an office or agency specified in the notice of termination. If so provided in
the related Prospectus Supplement for a Series, the Depositor or another entity
may effect an optional termination of the Trust Fund under the circumstances
described in such Prospectus Supplement. See "DESCRIPTION OF THE
SECURITIES--Optional 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 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
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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 of a
right of redemption would defeat the title of any purchaser at a foreclosure
sale, or of any purchaser from the lender subsequent to foreclosure or sale
under a deed of trust. Consequently the practical effect of a right of
redemption is to force the lender to retain the property and pay the expenses of
ownership until the redemption period has run. In some states, there is no right
to redeem property after a trustee's sale under a deed of trust.
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JUNIOR MORTGAGES; RIGHTS OF SENIOR MORTGAGES
The mortgage loans 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.
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
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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 originate loans and who fail to comply
with the provisions of the law. In some cases, this liability may affect
assignees of the loans.
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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.
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
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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.
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,
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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 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.
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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 LLP, 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.
As used herein, the term "U.S. Person" means a citizen or resident of the
United States, a corporation or partnership (including an entity treated as a
partnership or corporation for federal income tax purposes) created or organized
in or under the laws of the United States, any State thereof or the District of
Columbia (other than a partnership that is not treated as a United States,
person under any applicable Treasury regulations), an estate whose income is
subject to U.S. federal income tax regardless of its source of income, or a
trust if a court within the United States is able to exercise primary
supervision of the administration of the trust and one or more United States
persons have the authority to control all substantial decisions of the trust.
Notwithstanding the preceding sentence, to the extent provided in regulations,
certain trusts in existence on August 20, 1996 and treated as United States
persons prior to such date that elect to continue to be treated as United States
persons shall be considered U.S. persons as well.
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 LLP will have advised
the Depositor that: (i) 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
(ii) Securities held by a real estate investment trust will constitute "real
estate assets" within the meaning of Code section 856(c) 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).
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
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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 and
specifically state that the calculation of OID accrual provided for does not
apply to instruments subject to Code Section 1272(a)(6) such as REMIC regular
interests.
In general, OID, if any, will equal the difference between the stated
redemption price at maturity of a Debt Security and its issue price. A holder of
a Debt Security must include such OID in gross income as ordinary interest
income as it accrues under a method taking into account an economic accrual of
the discount. In general, 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
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the Debt Security. Holders generally must report de minimis OID pro rata as
principal payments are received, and such income will be capital gain if the
Debt Security is held as a capital asset. However, accrual method holders may
elect to accrue all de minimis OID as well as market discount under a constant
interest method.
Debt Securities may provide for interest based on a qualified variable
rate. Under the OID Regulations, interest is treated as payable at a qualified
variable rate and not as contingent interest if, generally, (i) such interest is
unconditionally payable at least annually, (ii) the issue price of the debt
instrument does not exceed the total noncontingent principal payments and (iii)
interest is based on a "qualified floating rate," an "objective rate," or a
combination of "qualified floating rates" that do not operate in a manner that
significantly accelerates or defers interest payments on such Debt Security. In
the case of Compound Interest Securities, certain Interest Weighted Securities,
and certain of the other Debt Securities, none of the payments under the
instrument will be considered qualified stated interest, and thus the aggregate
amount of all payments will be included in the stated redemption price.
The holder of a Debt Security issued with OID must include in gross income,
for all days during its taxable year on which it holds such Debt Security, the
sum of the "daily portions" of such original issue discount. The amount of OID
includible in income by a holder will be computed by allocating to each day
during a taxable year a pro rata portion of the original issue discount that
accrued during the relevant accrual period. In the case of a Debt Security that
is not a Regular Interest Security and the principal payments on which are not
subject to acceleration resulting from prepayments on the Loans, the amount of
OID includible in income of a Holder for an accrual period (generally the period
over which interest accrues on the debt instrument) will equal the product of
the yield to maturity of the Debt Security and the adjusted issue price of the
Debt Security, reduced by any payments of qualified stated interest. The
adjusted issue price is the sum of its issue price plus prior accruals or OID,
reduced by the total payments made with respect to such Debt Security in all
prior periods, other than qualified stated interest payments.
The amount of OID to be included in income by a holder of a debt
instrument, such as certain Classes of the Debt Securities, that is subject to
acceleration due to prepayments on other debt obligations securing such
instruments (a "Pay-Through Security"), is computed by taking into account the
anticipated rate of prepayments assumed in pricing the debt instrument (the
"Prepayment Assumption"). The amount of OID that will accrue during an accrual
period on a Pay-Through Security is the excess (if any) of the sum of (a) the
present value of all payments remaining to be made on the Pay-Through Security
as of the close of the accrual period and (b) the payments during the accrual
period of amounts included in the stated redemption price of the Pay-Through
Security, over the adjusted issue price of the Pay-Through Security at the
beginning of the accrual period. The present value of the remaining payments is
to be determined on the basis of three factors: (i) the original yield to
maturity of the Pay-Through Security (determined on the basis of compounding at
the end of each accrual period and properly adjusted for the length of the
accrual period), (ii) events which have occurred before the end of the accrual
period and (iii) the assumption that the remaining payments will be made in
accordance with the original Prepayment Assumption. The effect of this method is
to increase the portions of OID required to be included in income by a Holder to
take into account prepayments with respect to the Loans at a rate that exceeds
the Prepayment Assumption, and to decrease (but not below zero for any period)
the portions of original issue discount required to be included in income by a
Holder of a Pay-Through Security to take into account prepayments with respect
to the Loans at a rate that is slower than the Prepayment Assumption. Although
original issue discount will be reported to Holders of Pay-Through Securities
based on the Prepayment Assumption, no representation is made to Holders that
Loans will be prepaid at that rate or at any other rate.
The Depositor may adjust the accrual of OID on a Class of Regular Interest
Securities (or other regular interests in a REMIC) in a manner that it believes
to be appropriate, to take account of realized losses on the Loans, although the
OID Regulations do not provide for such adjustments. If the Internal Revenue
Service were to require that OID be accrued without such adjustments, the rate
of accrual of OID for a Class of Regular Interest Securities could increase.
Certain classes of Regular Interest Securities may represent more than one
class of REMIC regular interests. Unless the applicable Prospectus Supplement
specifies otherwise, the Trustee intends, based on the OID Regulations, to
calculate OID on such Securities as if, solely for the purposes of computing
OID, the separate regular interests were a single debt instrument.
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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 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 Depositor intends to take the
position that all of the income derived from an Interest Weighted Security
should be treated as OID and that the amount and rate of accrual of such OID
should be calculated by treating the Interest Weighted Security as a Compound
Interest Security. However, in the case of Interest Weighted Securities that are
entitled to some payments of principal and that are Regular Interest Securities
the Internal Revenue Service could assert that income derived from an Interest
Weighted Security should be calculated as if the Security were a security
purchased at a premium equal to the excess of the price paid by such holder for
such Security over its stated principal amount, if any. Under this approach, a
holder would be entitled to amortize such premium only if it has in effect an
election under Section 171 of the Code with respect to all taxable debt
instruments held by such holder, as described below. Alternatively, the Internal
Revenue Service could assert that an Interest Weighted Security should be
taxable under the rules governing bonds issued with contingent payments. Such
treatment may be more likely in the case of Interest Weighted Securities that
are Stripped Securities as described below. See "--Tax Status as a Grantor
Trust--Discount or Premium on Pass-Through Securities."
Variable Rate Debt Securities. In the case of Debt Securities bearing
interest at a rate that varies directly, according to a fixed formula, with an
objective index, it appears that (i) the yield to maturity of such Debt
Securities and (ii) in the case of Pay-Through Securities, the present value of
all payments remaining to be made on such Debt Securities, should be calculated
as if the interest index remained at its value as of the issue date of such
Securities. Because the proper method of adjusting accruals of OID on a variable
rate Debt Security is uncertain, holders of variable rate Debt Securities should
consult their own tax advisers regarding the appropriate treatment of such
Securities for federal income tax purposes.
Market Discount. A purchaser of a Security may be subject to the market
discount rules of Sections 1276-1278 of the Code. A Holder that acquires a Debt
Security with more than a prescribed de minimis amount of "market discount"
(generally, the excess of the principal amount of the Debt Security over the
purchaser's purchase price) will be required to include accrued market discount
in income as ordinary income in each month, but limited to an amount not
exceeding the principal payments on the Debt Security received in that month
and, if the Securities are sold, the gain realized. Such market discount would
accrue in a manner to be provided in Treasury regulations but, until such
regulations are issued, such market discount would in general accrue either (i)
on the basis of a constant yield (in the case of a Pay-Through Security, taking
into account a prepayment assumption) or (ii) in the ratio of (a) in the case of
Securities (or in the case of a Pass-Through Security, as set forth below, the
Loans underlying such Security) not originally issued with original issue
discount, stated interest payable in the relevant period to total stated
interest remaining to be paid at the beginning of the period or (b) in the case
of Securities (or, in the case of a Pass-Through Security, as described below,
the Loans underlying such Security) originally issued at a discount, OID in the
relevant period to total OID remaining to be paid.
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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.
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. Regulations concerning the amortization of premium have
been proposed, but those proposed regulations excluded Pay-Through Securities
from their application and no regulations addressing the computation of premium
accrual on securities similar to the Securities have been issued or proposed.
However, 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 LLP, special counsel to the
Depositor, if one or more REMIC elections are made with respect to a Series of
Securities, then for each REMIC created under 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 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 (ii) Securities held by a real estate investment trust will constitute "real
estate assets" within the meaning of Code Section 856(c), and income with
respect to the Securities will be considered "interest on obligations secured by
mortgages on real
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property or on interests in real property" within the meaning of Code
Section 856(c) (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) or (ii) above, then a Security will qualify for the tax
treatment described in (i) or (ii) in the proportion that such REMIC assets are
qualifying assets. If multiple REMIC elections are made, the REMICs, in general,
will be treated as one REMIC for purposes of applying the foregoing tests.
REMIC EXPENSES; SINGLE CLASS REMICS
As a general rule, all of the expenses of a REMIC will be taken into
account by holders of the Residual Interest Securities. In the case of a "single
class REMIC," however, the expenses will be allocated, under Treasury
regulations, among the holders of the Regular Interest Securities and the
holders of the Residual Interest Securities on a daily basis in proportion to
the relative amounts of income accruing to each Holder on that day. In the case
of a holder of a Regular Interest Security who is an individual or a
"pass-through interest holder" (including certain pass-through entities but not
including real estate investment trusts), such expenses will be deductible only
to the extent that such expenses, plus other "miscellaneous itemized deductions"
of the Holder, exceed 2% of such Holder's adjusted gross income. In addition,
the amount of itemized deductions otherwise allowable for the taxable year for
an individual whose adjusted gross income exceeds an applicable amount (which
amount is adjusted annually for inflation) 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
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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.
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
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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.
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. 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."
The Small Business Job Protection Act of 1996 has eliminated the special
rule permitting Section 593 institutions ("thrift institutions") to use net
operating losses and other allowable deductions to offset their excess inclusion
income from REMIC residual certificates that have "significant value" within the
meaning of the REMIC Regulations, effective for taxable years beginning after
December 31, 1995, except with respect to residual certificates continuously
held by a thrift institution since November 1, 1995.
In addition, the Small Business Job Protection Act of 1996 provides three
rules for determining the effect on excess inclusions on the alternative minimum
taxable income of a residual holder. First, alternative minimum taxable income
for such residual holder is determined without regard to the special rule that
taxable income cannot be less than excess inclusions. Second, a residual
holder's alternative minimum taxable income for a tax year cannot be less than
the excess inclusions for the year. Third, the amount of any alternative minimum
tax net operating loss deductions must be computed without regard to any excess
inclusions. These rules are effective for tax years beginning after
December 31, 1986, unless a residual holder elects to have such rules apply only
to tax years beginning after August 20, 1996.
Furthermore, the Small Business Job Protection Act of 1996, as part of the
repeal of the bad debt reserve method for thrift savings associations, repealed
the application of Code section 593 (d) to any taxable year beginning after
December 31, 1995.
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
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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
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 the Internal Revenue Service recently finalized
regulations which provide that a Residual Interest acquired after January 3,
1995 cannot be marked-to-market.
ADMINISTRATIVE MATTERS
The REMIC's books must be maintained on a calendar year basis and the REMIC
must file an annual federal income tax return. The REMIC will also be subject to
the procedural and administrative rules of the Code applicable to partnerships,
including the determination of any adjustments to, among other things, items of
REMIC income, gain, loss, deduction, or credit, by the 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 LLP, 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, the amount of itemized
deductions otherwise allowable for the taxable year for an individual whose
adjusted gross income exceeds an applicable amount (which amount is adjusted
annually for inflation) 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 minimi
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, it is unclear whether the Code specifically covers
instruments such as the Stripped Securities which technically represent
ownership interests in the underlying Loans, rather than being debt instruments
"secured by" those loans but the Taxpayer Relief Act of 1997 provides that for
tax years beginning after August 5, 1997, a prepayment assumption should be used
for a pool of debt instruments the yield on which may be effected by reason of
prepayments. Nevertheless, it is believed that the Cash Flow Bond Method is a
reasonable method of reporting income for such Securities, and it is expected
that OID will be reported on that basis unless otherwise specified in the
related Prospectus Supplement. In applying the calculation to Pass-Through
Securities, the Trustee will treat all payments to be received by a holder with
respect to the underlying Mortgage Loans as payments on a single installment
obligation. The Internal Revenue Service could, however, assert that original
issue discount must be calculated separately for each Loan underlying a
Security.
Under certain circumstances, if the Loans prepay at a rate faster than the
Prepayment Assumption, the use of the Cash Flow Bond Method may accelerate a
Holder's recognition of income. If, however, the Mortgage Loans prepay at a rate
slower than the Prepayment Assumption, in some circumstances the use of this
method may decelerate a Holder's recognition of income. The Taxpayer Relief Act
of 1997 also extended the rule that payments received in retirement of a debt
instrument are treated as amounts received in exchange therefor, to debt
instruments issued by natural persons. It is unclear whether this rule would
cause losses on Pay-Through Securities resulting from prepayments to be treated
as capital losses.
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
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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.
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 may be considered to
represent "real estate assets" within the meaning of Section 856(c) 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) 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. The Taxpayer Relief Act of 1997 reduces the maximum rates on long-term
capital gains recognized on capital assets held by individual taxpayers for more
than eighteen months as of the date of disposition (and would further reduce the
maximum rates on such gains in the year 2001 and therafter for certain
individual taxpayers who meet specified conditions). Prospective investors
should consult their own tax advisor concerning these tax law changes.
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). On October 6,
1997, the Treasury Department issued new regulations (the "New Withholding
Regulations") which make certain modifications to the backup withholding and
information reporting rules described above. The New Withholding Regulations
will generally be effective for payments made after December 31, 1998, subject
to
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certain transition rules. Holders should consult their tax advisers as to their
current qualification for exemption from backup withholding and the procedure
for obtaining the exemption, as well as any future changes as a result of the
New Withholding Regulations.
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.
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."
In addition, prospective Foreign Investors are strongly urged to consult
their own tax advisors with respect to the New Withholding Regulations. See
"Miscellaneous Tax Aspects--Backup Withholding".
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TAX CHARACTERIZATION OF THE TRUST AS A PARTNERSHIP
Brown & Wood LLP, 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.
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.
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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 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. In addition, prospective
Foreign Holders are strongly urged to consult their own tax advisors with
respect to the New Withholding Regulations. See "Miscellaneous Tax
Aspects--Backup Withholding".
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.
In addition, prospective investors are strongly urged to consult their own
tax advisors with respect to the New Withholding Regulations. See "Miscellaneous
Tax Aspects--Backup Withholding".
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, certain tax-exempt entities (including pension funds)
would earn "unrelated business taxable income" if the instrument they purchased
was subordinated to an instrument properly treated as debt, income to foreign
holders generally would be subject to U.S. tax and U.S. tax
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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.
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.
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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. Pursuant to final Treasury regulations issued May
9, 1997 under Section 708 of the Code, a sale or exchange of 50 percent or more
of the capital and profits in the Trust Fund within a 12-month period would
cause a deemed contribution of assets of the Trust Fund (the "old partnership")
to a new partnership (the "new partnership") in exchange for interests in the
new partnership. Such interests would be deemed distributed to the partners of
the old partnership in liquidation thereof, which would not constitute a sale or
exchange.
Disposition of Certificates. Generally, capital gain or loss will be
recognized on a sale of Certificates in an amount equal to the difference
between the amount realized and the seller's tax basis in the Certificates sold.
A Certificateholder's tax basis in a Certificate will generally equal the
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
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
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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 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
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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. In addition, prospective investors are strongly urged to consult their
own tax advisors with respect to the New Withholding Regulations. See
"Miscellaneous Tax Aspects--Backup Withholding".
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. In addition, prospective investors are
strongly urged to consult their own tax advisors with respect to the New
Withholding Regulations. See "Miscellaneous Tax Aspects--Back Withholding".
FASIT SECURITIES
General
The FASIT provisions of the Code were enacted by the Small Business Job
Protection Act of 1996 and create a new elective statutory vehicle for the
issuance of mortgage-backed and asset-backed securities. Although the FASIT
provisions of the Code became effective on September 1, 1997, no Treasury
regulations or other administrative guidance has been issued with respect to
those provisions. Accordingly, definitive guidance cannot be provided with
respect to many aspects of the tax treatment of FASIT Securityholders. Investors
also should note that the FASIT discussion contained herein constitutes only a
summary of the federal income tax consequences to holders of FASIT Securities.
With respect to each Series of FASIT Securities, the related Prospectus
Supplement will provide a detailed discussion regarding the federal income tax
consequences associated with the particular transaction.
FASIT Securities will be classified as either FASIT Regular Securities,
which generally will be treated as debt for federal income tax purposes, or
FASIT Ownership Securities, which generally are not treated as debt for such
purposes, but rather as representing rights and responsibilities with respect to
the taxable income or loss of the related Series FASIT. The Prospectus
Supplement for each Series of Securities will indicate whether one or more FASIT
elections will be made for that Series and which Securities of such Series will
be designated as Regular Securities, and which, if any, will be designated as
Ownership Securities.
Qualification as a FASIT
The Trust Fund underlying a Series (or one or more designated pools of
assets held in the Trust Fund) will qualify under the Code as a FASIT in which
the FASIT Regular Securities and the FASIT Ownership Securities will constitute
the "regular interests" and the "ownership interests," respectively, if (i) a
FASIT election is in
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effect, (ii) certain tests concerning (A) the composition of the FASIT's assets
and (B) the nature of the Securityholders' interests in the FASIT are met on a
continuing basis, and (iii) the Trust Fund is not a regulated investment company
as defined in Section 851(a) of the Code.
Asset Composition
In order for a Trust Fund (or one or more designated pools of assets held
by a Trust Fund) to be eligible for FASIT status, substantially all of the
assets of the Trust Fund (or the designated pool) must consist of "permitted
assets" as of the close of the third month beginning after the closing date and
at all times thereafter (the "FASIT Qualification Test"). Permitted assets
include (i) cash or cash equivalents, (ii) debt instruments with fixed terms
that would qualify as REMIC regular interests if issued by a REMIC (generally,
instruments that provide for interest at a fixed rate, a qualifying variable
rate, or a qualifying interest-only ("IO") type rate, (iii) foreclosure
property, (iv) certain hedging instruments (generally, interest and currency
rate swaps and credit enhancement contracts) that are reasonably required to
guarantee or hedge against the FASIT's risks associated with being the obligor
on FASIT interests, (v) contract rights to acquire qualifying debt instruments
or qualifying hedging instruments, (vi) FASIT regular interests, and
(vii) REMIC regular interests. Permitted assets do not include any debt
instruments issued by the holder of the FASIT's ownership interest or by any
person related to such holder.
Interests in a FASIT
In addition to the foregoing asset qualification requirements, the
interests in a FASIT also must meet certain requirements. All of the interests
in a FASIT must belong to either of the following: (i) one or more classes of
regular interests or (ii) a single class of ownership interest that is held by a
fully taxable domestic C corporation. In the case of Series that include FASIT
Ownership Securities, the ownership interest will be represented by the FASIT
Ownership Securities.
A FASIT interest generally qualifies as a regular interest if (i) it is
designated as a regular interest, (ii) it has a stated maturity no greater than
thirty years, (iii) it entitles its holder to a specified principal amount, (iv)
the issue price of the interest does not exceed 125% of its stated principal
amount, (v) the yield to maturity of the interest is less than the applicable
Treasury rate published by the Service plus 5%, and (vi) if it pays interest,
such interest is payable at either (a) a fixed rate with respect to the
principal amount of the regular interest or (b) a permissible variable rate with
respect to such principal amount. Permissible variable rates for FASIT regular
interests are the same as those for REMIC regular interests (i.e., certain
qualified floating rates and weighted average rates). See "Certain Federal
Income Tax Consequences--Taxation of Debt Securities--Variable Rate Debt
Securities."
If a FASIT Security fails to meet one or more of the requirements set out
in clauses (iii), (iv), or (v), but otherwise meets the above requirements, it
may still qualify as a type of regular interest known as a "High-Yield
Interest." In addition, if a FASIT Security fails to meet the requirement of
clause (vi), but the interest payable on the Security consists of a specified
portion of the interest payments on permitted assets and that portion does not
vary over the life of the Security, the Security also will qualify as a
High-Yield Interest. A High-Yield Interest may be held only by domestic C
corporations that are fully subject to corporate income tax ("Eligible
Corporations"), other FASITs, and dealers in securities who acquire such
interests as inventory, rather than for investment. In addition, holders of
High-Yield Interests are subject to limitations on offset of income derived from
such interest. See "Federal Income Tax Consequences--FASIT Securities--Tax
Treatment of FASIT Regular Securities--Treatment of High-Yield Interests."
Consequences of Disqualification
If a Series FASIT fails to comply with one or more of the Code's ongoing
requirements for FASIT status during any taxable year, the Code provides that
its FASIT status may be lost for that year and thereafter. If FASIT status is
lost, the treatment of the former FASIT and the interests therein for federal
income tax purposes is uncertain. The former FASIT might be treated as a grantor
trust, as a separate association taxation as a corporation, or as a partnership.
The FASIT Regular Securities could be treated as debt instruments for federal
income tax purposes or as equity interests. Although the Code authorizes the
Treasury to issue regulations that address situations where a failure to meet
the requirements for FASIT status occurs inadvertently and in good
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faith, such regulations have not yet been issued. It is possible that
disqualification relief might be accompanied by sanctions, such as the
imposition of a corporate tax on all or a portion of the FASIT's income for the
period of time in which the requirements for FASIT status are not satisfied.
Tax Treatment of FASIT Regular Securities
General. Payments received by holders of FASIT Regular Securities
generally should be accorded the same tax treatment under the Code as payments
received on other taxable corporate debt instruments and on REMIC Regular
Securities. As in the case of holders of REMIC Regular Securities, holders of
FASIT Regular Securities must report income from such Securities under an
accrual method of accounting, even if they otherwise would have used the cash
receipts and disbursements method. Except in the case of FASIT Regular
Securities issued with original issue discount or acquired with market discount
or premium, interest paid or accrued on a FASIT Regular Security generally will
be treated as ordinary income to the Securityholder and a principal payment on
such Security will be treated as a return of capital to the extent that the
Securityholder's basis is allocable to that payment. FASIT Regular Securities
issued with original issue discount or acquired with market discount or premium
generally will treat interest and principal payments on such Securities in the
same manner described for REMIC Regular Securities. See "Federal Income Tax
Consequences--Taxation of Debt Securities," "--Market Discount," and "--Premium"
above. High-Yield Securities may be held only by fully taxable domestic C
corporations, other FASITs, and certain securities dealers. Holders of
High-Yield Securities are subject to limitations on their ability to use current
losses or net operating loss carryforwards or carrybacks to offset any income
derived from those Securities.
If a FASIT Regular Security is sold or exchanged, the Securityholder
generally will recognize gain or loss upon the sale in the manner described
above for REMIC Regular Securities. See "Certain Federal Income Tax
Consequences--Sale or Exchange." In addition, if a FASIT Regular Security
becomes wholly or partially worthless as a result of Default and Delinquencies
on the underlying Assets, the holder of such Security should be allowed to
deduct the loss sustained (or alternatively be able to report a lesser amount of
income). However, the timing and character of such losses in income are
uncertain. See "Federal Income Tax Consequences--Taxation of Debt
Instruments--Effects of Default and Delinquencies."
FASIT Regular Securities held by a REIT will qualify as "real estate
assets" within the meaning of section 856(c)(5) of the Code, and interest on
such Securities will be considered Qualifying REIT Interest to the same extent
that REMIC Securities would be so considered. FASIT Regular Securities held by a
Thrift Institution taxed as a "domestic building and loan association" will
represent qualifying assets for purposes of the qualification requirements set
forth in Code Section 7701(a)(19) to the same extent that REMIC Securities would
be so considered. See "Certain Federal Income Tax Consequences--Taxation of Debt
Securities--Status as Real Property Loans." In addition, FASIT Regular
Securities held by a financial institution to which Section 585 of the Code
applies will be treated as evidences of indebtedness for purposes of Section
582(c)(1) of the Code. FASIT Securities will not qualify as "Government
securities" for either REIT or RIC qualification purposes.
Treatment of High-Yield Interests
High-Yield Interests are subject to special rules regarding the eligibility
of holders of such interests, and the ability of such holders to offset income
derived from their FASIT Security with losses. High-Yield Interests may be held
only by Eligible Corporations, other FASITs, and dealers in securities who
acquire such interests as inventory. If a securities dealer (other than an
Eligible Corporation) initially acquires a High-Yield Interest as inventory, but
later begins to hold it for investment, the dealer will be subject to an excise
tax equal to the income from the High-Yield Interest multiplied by the highest
corporate income tax rate. In addition, transfers of High-Yield Interests to
disqualified holders will be disregarded for federal income tax purposes, and
the transferor still will be treated as the holder of the High-Yield Interest.
The holder of a High-Yield Interest may not use non-FASIT current losses or
net operating loss carryforwards or carrybacks to offset any income derived from
the High-Yield Interest, for either regular federal income tax purposes or for
alternative minimum tax purposes. In addition, the FASIT provisions contain an
anti-abuse rule that imposes corporate income tax on income derived from a FASIT
Regular Security that is held by a
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pass-through entity (other than another FASIT) that issues debt or equity
securities backed by the FASIT Regular Security and that have the same features
as High-Yield Interests.
Tax Treatment of FASIT Ownership Securities
A FASIT Ownership Security represents the residual equity interest in a
FASIT. As such, the holder of a FASIT Ownership Security determines its taxable
income by taking into account all assets, liabilities, and items of income,
gain, deduction, loss, and credit of a FASIT. In general, the character of the
income to the holder of a FASIT Ownership Interest will be the same as the
character of such income to the FASIT, except that any tax-exempt interest
income taken into account by the holder of a FASIT Ownership Interest is treated
as ordinary income. In determining that taxable income, the holder of a FASIT
Ownership Security must determine the amount of interest, original issue
discount, market discount, and premium recognized with respect to the FASIT's
assets and the FASIT Regular Securities issued by the FASIT according to a
constant yield methodology and under an accrual method of accounting. In
addition, holders of FASIT Ownership Securities are subject to the same
limitations on their ability to use losses to offset income from their FASIT
Security as are the holders of High-Yield Interests. See "Federal Income Tax
Consequences--FASIT Securities--Tax Treatment of FASIT Regular
Securities--Treatment of High-Yield Interests."
Rules similar to the wash sale rules applicable to REMIC Residual
Securities also will apply to FASIT Ownership Securities. Accordingly, losses on
dispositions of a FASIT Ownership Security generally will be disallowed where,
within six months before or after the disposition, the seller of such Security
acquires any other FASIT Ownership Security or, in the case of a FASIT holding
mortgage assets, any interest in a Taxable Mortgage Pool, that is economically
comparable to a FASIT Ownership Security. In addition, if any security that is
sold or contributed to a FASIT by the holder of the related FASIT Ownership
Security was required to be marked-to-market under Code section 475 by such
holder, then section 475 will continue to apply to such securities, except that
the amount realized under the mark-to-market rules will be the greater of the
securities' value under present law or the securities' value after applying
special valuation rules contained in the FASIT provisions. Those special
valuation rules generally require that the value of debt instruments that are
not traded on an established securities market be determined by calculating the
present value of the reasonably expected payments under the instrument using a
discount rate of 120% of the applicable Federal rate, compounded semiannually.
The holder of a FASIT Ownership Security will be subject to a tax equal to
100% of the net income derived by the FASIT from any "prohibited transactions."
Prohibited transactions include (i) the receipt of income derived from assets
that are not permitted assets, (ii) certain dispositions of permitted assets,
(iii) the receipt of any income derived from any loan originated by a FASIT, and
(iv) in certain cases, the receipt of income representing a servicing fee or
other compensation. Any Series for which a FASIT election is made generally will
be structured in order to avoid application of the prohibited transaction tax.
Backup Withholding, Reporting and Tax Administration
Holders of FASIT Securities will be subject to backup withholding to the
same extent holders of REMIC Securities would be subject. See "Certain Federal
Income Tax Consequences--Miscellaneous Tax Aspects--Backup Withholding." For
purposes of reporting and tax administration, holders of record of FASIT
Securities generally will be treated in the same manner as holders of REMIC
Securities.
DUE TO THE COMPLEXITY OF THE FEDERAL INCOME TAX RULES APPLICABLE TO
SECURITYHOLDERS AND THE CONSIDERABLE UNCERTAINTY THAT EXISTS WITH RESPECT TO
MANY ASPECTS OF THOSE RULES, POTENTIAL INVESTORS SHOULD CONSULT THEIR OWN TAX
ADVISORS REGARDING THE TAX TREATMENT OF THE ACQUISITION, OWNERSHIP, AND
DISPOSITION OF THE SECURITIES.
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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.
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
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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 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
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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").
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.
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
Depositor by Brown & Wood LLP, New York, New York.
ADDITIONAL INFORMATION
Copies of the Registration Statement of which this Prospectus forms a part
and the exhibits thereto are on file at the offices of the Securities and
Exchange Commission in Washington, D.C. Copies may be obtained at rates
prescribed by the Commission upon request to the Commission, and may be
inspected, without charge, at the offices of the Commission, 450 Fifth Street,
N.W., Washington, D.C. See "Available Information."
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
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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 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
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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.
"Due Date" means each date, as specified in the related Prospectus
Supplement for a Series, on which any payment of principal or interest is due
and payable by the obligor on any Primary Asset pursuant to the terms thereof.
"Eligible Investments" means any one or more of the obligations or
securities described as such in the related Agreement.
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"Enhancement" means the enhancement for a Series, if any, specified in the
related Prospectus Supplement.
"Enhancer" means the provider of the Enhancement for a Series specified in
the related Prospectus Supplement.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Escrow Account" means an account, established and maintained by the
Servicer for a 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.
"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.
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"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 and/or loans of which the proceeds have been applied to the
purchase of the related Mortgaged Property, in each case 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.
"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.
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"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.
"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
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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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$183,150,000
PROVIDENT BANK HOME EQUITY
LOAN TRUST 1998-A
Home Equity Loan
Asset-Backed Notes,
Series 1998-A
The Provident Bank,
as Seller, Transferor and Master Servicer
Lehman ABS Corporation,
as Depositor
_____________________________________________
PROSPECTUS SUPPLEMENT
December 28, 1998
_____________________________________________
LEHMAN BROTHERS
PRUDENTIAL SECURITIES INCORPORATED
